Terrorism’s business partners

In the wake of recent bombings in London and Egypt confirming the vulnerability of even relatively vigilant societies to Islamofascist terrorism, the question occurs: Are we serious about fighting this menace with every instrument at our disposal?

A Loopy Loophole

A test of the seriousness of the U.S. Senate will be offered as soon as tomorrow. Senators will be asked to choose between two amendments to the defense authorization bill (S.1042) bearing on one of this country’s most powerful and yet largely unutilized tools: Denying U.S. investment capital, technology and other commercial benefits to state-sponsors of terror.

To be sure, successive administrations have imposed economic and trade sanctions on terrorist-sponsoring states like Iran, Libya, Sudan, Cuba, Syria and North Korea. Existing law – notably, the International Emergency Economic Powers Act (IEEPA) – grants the President the authority to bar U.S. companies from doing business with nations that do business with terrorists.

Unfortunately, there is a loophole in the law, a loophole some American firms have used to circumvent and undermine U.S. sanctions. By establishing an offshore subsidiary, these companies have proceeded to engage in commerce with sanctioned states even though the parent is prohibited from doing so.

In some cases, the affront to the letter and spirit of the law has been egregious. Front companies amounting to little more than an offshore post office box have been created to perform end-runs around official efforts to stem the money flowing to those who are trying to kill us.

Bipartisan ‘Outrage’

This practice has properly inspired bipartisan outrage in the Senate. Last week, two Senators – Frank Lautenberg, Democrat of New Jersey, and Maine Republican Susan Collins, who chairs the Senate Governmental Affairs Committee – expressed incredulity and anger at this flouting of the law and outdid each other offering amendments intended to put an end to it.

Sen. Lautenberg told his colleagues: "President Bush has made the statement that money is the lifeblood of terrorist operations. He could not be more right. Amazingly, some of our corporations are providing revenue to terrorists by doing business with these rogue regimes. My amendment is simple. It closes a loophole in the law that allows this to happen, that allows American companies to do business with enemies of ours."

For her part, Sen. Collins declared: "The allegations are that these foreign subsidiaries are formed and incorporated overseas for the specific purpose of bypassing U.S. sanctions laws that prohibit American corporations from doing business with terrorist-sponsoring nations such as Syria and Iran. There is no doubt that this practice cannot be allowed to continue….The examples that we have heard, where American firms simply create new shell corporations to execute transactions that they themselves are prohibited from engaging in, are truly outrageous."

Replacing One Loophole with Another?

If the two Senators have a shared determination to stop U.S. companies from using foreign subsidiaries to engage in such "truly outrageous" behavior, they part company over how to do that. The Lautenberg amendment would explicitly amend IEEPA to ensure that foreign subsidiaries controlled or fifty-one percent or more owned by American businesses are bound by the same sanctions regimes as are the parent companies.

Citing State Department concerns about the impact such an "extraterritorial" extension of U.S. law would have on American foreign investments and this country’s relations with its allies, Sen. Collins has offered an alternative to the Lautenberg language. The Collins amendment would seek to penalize individuals or entities who evade IEEPA sanctions – if they are "subject to the jurisdiction of the United States." This is merely a restatement of existing regulations.

The problem with this formulation is that, in the process of purportedly closing one loophole, it would appear to create new ones. As Sen. Collins told the Senate: "Some truly independent foreign subsidiaries are incorporated under the laws of the country in which they do business and are subject to that country’s laws, to that legal jurisdiction. There is a great deal of difference between a corporation set up in a day, without any real employees or assets, and one that has been in existence for many years and that gets purchased, in part, by a U.S. firm."

It is a safe bet that every foreign subsidiary of a U.S. company doing business with terrorist states will claim it is one of the ones Sen. Collins would allow to continue enriching our enemies, not one prohibited from doing so. If the Senate is serious about truly closing this loophole, it must adopt the Lautenberg Amendment.

The Bottom Line

The Lautenberg amendment will not, by itself, win the war on terror. It is evidence of our seriousness of purpose, however. Flouting American law in ways that undermine the financial front in that war is not only, as Sen. Collins puts it, "outrageous"; it is hazardous to our health. And, as the most recent attacks in Europe and the Middle East underscore, not just our health but that of others – including those in whose countries such foreign subsidiaries operate.

Adoption of the Lautenberg amendment will have one other salutary effect. It would also require the Securities and Exchange Commission to ensure that shareholders are made aware if publicly traded companies own at least 10 percent of a foreign company doing business in violation of U.S. sanctions on state-sponsors of terror. Such transparency would enable American investors to demonstrate their seriousness about this war, too, by divesting the stocks of such companies who partner with our enemies.