Robinson Wall Street Journal Op. Ed. Puts the Spotlight on Unwitting U.S. Investor Funding of Global Bad Actors’

(Washington, D.C.): Today’s Wall Street Journal features an important op.ed. entitled “Are You Investing in Rogue States?” by Casey Institute Chairman Roger Robinson. In it, Mr. Robinson summarizes the findings — and proposed remedies — of the Casey Institute’s five-year “Capital Markets Transparency Initiative” (CMTI).

This essay offers international institutional and individual investors, and U.S. and allied policy-makers, a much-needed analysis of a major new national security and human rights challenge: the penetration of American and foreign capital markets by global “bad actors” and those foreign firms and governments that partner with them. Such actors include those involved in proliferation, terrorism, technology theft, espionage, arms smuggling, religious persecution and slave-trading and genocide.

Mr. Robinson and the CMTI have urged that the response to this challenge be as non- disruptive and market-oriented as possible. Toward that end, their focus has been on the prudent strengthening of SEC disclosure and transparency requirements. This would ensure that investors are properly apprized of the nature of the “material risks” associated with prospective investments in foreign securities — including the possibility that their business operations and/or partners in rogue states could inspire official U.S. sanctions, divestment campaigns, negative publicity or coordinated opposition to share or bond offerings.

Thanks to Representative Frank Wolf (R-VA), Acting SEC Chairman Laura Unger and the Commission’s professional staff, the Securities and Exchange Commission has recognized and responded to the need for such improved transparency. On 8 May, the SEC adopted new guidelines that are already having an impact on would-be foreign registrants that have problematic ties to rogue states.

It now falls to the Bush Administration to respond to what former National Security Advisor William P. Clark has termed “a new front in U.S. national security policy” by establishing an interagency capital markets working group — co-chaired by Treasury and NSC — that could be called the Committee on Foreign Financing and Borrowing (COFFAB). This interagency body (modeled after the Committee on Foreign Investment in the U.S. and informed by the skills and expertise of the Departments of Justice, Defense, State and CIA) could, in those rare instances when it is convened, review what the SEC has called “complex issues involving national security, human rights and religious freedom.”

In May, the People’s Republic of China decided not to bring a sovereign bond offering to New York. Despite record profitability, the stock of Canada’s Talisman Energy Inc. is trading at a sizable discount. And last week, Russia’s Lukoil announced that it would not proceed with its long-planned listing on Wall Street.

What do they have in common? All three are doing business in rogue states currently subject to U.S. sanctions, which surely constitutes “material risk” for American investors. Indeed, among those seeking to raise capital in our markets are weapons-proliferating firms and governments and companies partnering with terrorist-sponsoring and human-rights abusing regimes.

Unwitting Investors

Until recently, the Securities and Exchange Commission appeared dismissive of the risks of such “bad actors” funding their activities with the unwitting help of American investors and portfolio managers. But spurred by a succession of foreign securities that have lost value as a result of divestment campaigns, the prospect of official economic sanctions, negative media attention, and coordinated opposition to initial public offerings, the SEC has changed its tune.

A recent letter from acting SEC Chairman Laura Unger to Congress says the agency will promote enhanced disclosure requirements in keeping with its core regulatory mandate — ensuring transparency of material information so as to enable individual and institutional investors to make more informed decisions.

For starters, the SEC intends to end the disparity between U.S. and foreign firms seeking to access our capital markets by henceforth requiring all foreign registrants to file electronically on the Edgar system. This step alone will make a profound difference in the ability of investors to understand the identity and global activities of prospective investment candidates.

Second, the SEC staff will seek to review all filings of, and demand more information from, foreign companies doing material business in countries under U.S. sanctions regimes “or with persons or entities in those countries.”

Finally, the SEC pledged to cooperate with appropriate U.S. governmental agencies, including the Treasury Department’s Office of Foreign Assets Control (OFAC), to help ensure enforcement of existing U.S. sanctions. It intends to bring to OFAC’s attention information in registration statements of foreign companies that have material business dealings with countries subject to OFAC-administered sanctions. The SEC also expressed its support for the formation of an executive branch interagency working group on Sudan. Such an entity could potentially review other questionable foreign registrants that may have run afoul of important U.S. national security, human-rights and religious-freedom concerns.

“Our aim is to make available to investors additional information about situations in which the material proceeds of an offering could — however indirectly — benefit countries, governments, or entities that, as a matter of U.S. foreign policy, are off-limits to U.S. companies,” Ms. Unger wrote.

Critics might say these initiatives represent a slippery slope toward capital controls and the politicization of the globally dominant U.S. capital markets, both of which could spook foreign firms or governments into raising funds elsewhere. They charge the measures could be part of an SEC design to tighten “extraterritorial” U.S. sanctions and penalize uncooperative foreign firms and governments. And they argue the initiatives will retard reform in China, Russia and other emerging-market economies by inhibiting their entry to the U.S. capital markets. None of these concerns stands up to close scrutiny.

The “slippery slope” charge is nothing more than unjustified speculation. The SEC, in a manner consistent with its traditional, apolitical oversight role, has simply responded to a change in the nature of market risk.
Politically sensitive calculations have been factors in the markets for some time. The nuclear accident at Three Mile Island, for example, elevated the importance of environmental risk factors in the markets. Other “socially responsible” investment guidelines have caused many state public pension funds to eschew stocks issued by tobacco, gun and alcohol concerns. The divestment campaign directed against South African apartheid is, to many, a model for the current market activism aimed at the genocide-, slavery-, and terrorist-sponsoring Sudanese government — and the foreign oil companies like Talisman whose investments are providing the Khartoum regime with economic life-support.

As to the questions of “extraterritoriality,” the SEC has not taken these steps for the purpose of subtly tightening U.S. sanctions or any other political rationale. Extraterritoriality implies that foreign companies will be penalized for activities inconsistent with U.S. foreign policy. This is not the case. Rather, the SEC is seeking to protect investors in our domestic markets against bona fide material risks. How can that legitimate, and indeed necessary, function of an American regulatory agency constitute inappropriate extraterritorial reach?

And regarding the argument that these measures will somehow stifle reform efforts in China, Russia and other nations, just the opposite is true. They should discourage China, for example, from seeking to prop up People’s Liberation Army-affiliated firms and other dubious state-owned entities in our markets, while civilian entities engaged in transparent and constructive entrepreneurial activity should be able to attract global investors. That’s a formula for catalyzing free-market and political reform in China and elsewhere.

To be sure, things could be different in the event other executive branch agencies prove less responsive than the SEC to the danger posed by global bad actors in our capital markets. Under those circumstances, members of Congress and private-sector activists may in the future seek targeted capital-market sanctions in response to egregious developments abroad. Such efforts will likely be influenced by a growing awareness on Capitol Hill and among nongovernmental groups of this potent new source of U.S. foreign-policy leverage and a recognition that it can be exploited largely without the collateral damage to U.S. interests (harm to exports and jobs) inflicted by trade sanctions.

But this prospect could be considerably mitigated — and the vitality and competitiveness of our capital markets safeguarded — were the Bush administration to take the lead in establishing an interagency capital markets working group, perhaps called the Committee on Foreign Financing and Borrowing. Such a group, on the rare occasions when it is convened, could review what the SEC calls “complex issues involving national security, human rights and religious freedom” by drawing upon federal agencies with the necessary skills and expertise to evaluate them.

New Concerns

Finally, state and allied governments and public and private fund managers would be well-advised to expand their risk assessments to include national security, human-rights and religious-persecution concerns. Some state treasurers, like California’s Phil Angelides, already have such a process of expanded risk assessment underway, but much work remains to be done

Harvey Pitt, President Bush’s SEC chairman-designate, should endorse the strengthened investor protection measures recommended by the SEC’s professional staff. After all, in the information age, American investors will have a “need to know” what prospective international fund-raisers will do with their dollars. We will, moreover, expect the SEC, and the U.S. government more generally, to ensure that the information required to make prudent investment decisions is readily available.

By Roger W. Robinson Jr., chairman of the William J. Casey Institute of the Center for Security Policy, and former senior director of international economic affairs at the National Security Council under President Reagan.