States Screen Stocks for Ties to Terrorism

State and municipal officials fearful of becoming unwitting supporters of global terrorism are seeking ways to screen their stock investments.

Pennsylvania, California and the city of New York are reviewing a new product called the Global Security Risk Monitor that identifies 260 firms doing business in six countries--Iraq, Iran, Sudan, Syria, Libya and North Korea--identified by the State Department as sponsors of terrorism, some of them suppliers of weapons.

Though the U.S. government has published a financial blacklist of 210 alleged terrorists or terrorist-financing organizations, officials at the National Assn. of State Auditors, Comptrollers and Treasurers said they want to go further to ensure their investments are not going into the coffers of Al Qaeda or other groups.

“No Americans want to see our pension moneys go to companies supporting terrorism,” said Pennsylvania State Treasurer Barbara Hafer, president of the national association and overseer of state retirement funds worth more than $90 billion. “It is complex, but if we can set up the [screening] system, we can send a very large message to people that we don’t like what they are doing.”

The monitor is produced by the Investor Responsibility Research Center and the Conflict Securities Advisory Board, a Washington group headed by Roger Robinson, a former National Security Council official. Washington-based IRRC, a 30-year-old research firm specializing in corporate governance, produced a similar list used during the successful South Africa divestiture campaign.

State and local officials have taken the lead in shareholder divestiture campaigns aimed at tobacco companies and Swiss banks accused of collaborating with the Nazis.

Because it is global and covert, terrorism is far more complex than earlier targets of shareholder divestiture campaigns, such as those aimed at South Africa’s apartheid regime or the military government in Myanmar, formerly known as Burma. An antiterrorism investment movement could pose a serious threat to corporate reputations already battered by a spate of scandals.

David DeRosa, president of Connecticut-based DeRosa Research & Trading Inc., said a company selling “Coca-Cola in the Sudan” shouldn’t face a problem. “On the other hand, if you’re selling electronics or something that’s of a critical nature, your company could wind up becoming an investment leper.”

The IRRC will not disclose the firms on its global security list. However, Germany’s Siemens, Japan’s Mitsubishi Corp. and Houston-based energy giant Conoco Inc. reportedly are named. U.S. firms account for just 15% of the total, which is not surprising because the U.S. government already has economic sanctions against the suspect countries.

Background Checks

Robinson said his firm is not advocating shareholder divestiture but simply providing investors with the information to make an informed choice. The monitor includes background on company operations, a political and economic snapshot of the targeted countries and an assessment of the security risks of key industries such as energy and telecommunications. None of the companies is accused of illegal activities.

“Getting ahead of these potential blows to the share value of portfolio companies is what risk management is all about,” he said.

California State Treasurer Phil Angelides said he has asked the California Public Employees’ Retirement System, known as CalPERS, and the California State Teachers’ Retirement System, or CalSTRS, to evaluate the monitor and “see if it raises any issues in our portfolio.” The treasurer is on the boards of both funds, which are among the nation’s largest, with portfolios of about $250 billion.

At the urging of Angelides, CalPERS this year adopted standards that for the first time linked investment decisions to nonfinancial issues such as political stability and human-rights protections. Under the new policy, CalPERS will not invest in Thailand, Indonesia, Malaysia or China.

Angelides said security issues were not included in that review because the state couldn’t get enough information about the funding sources for the global terrorism network.

“If the federal government wants to facilitate global investment, it must also provide the tools to protect American investors against unknowing actions that could threaten our society and our country,” he said.

Congress also has threatened to jump into the fray. Sen. Robert C. Byrd (D-W.Va.) has proposed legislation requiring companies that want to access the U.S. capital markets to disclose financial dealings of more than $10,000 with countries that sponsor terrorism. The Senate Select Intelligence Committee has approved a provision by Sen. Fred Thompson (R-Tenn.) that would require U.S. intelligence agencies to investigate whether foreign groups involved in the “proliferation of weapons of mass destruction” are raising money in U.S. capital markets.

Drawing the Line

Though the U.S. has restricted business with a few nations over the years, it traditionally has kept its capital markets open to foreign firms that meet its investment standards.

U.S. officials and financiers fear that casting too wide a net will frighten away global investors and further weaken a stock market already battered by the technology collapse and corporate scandals. Companies could take their business to other stock markets, and foreign governments could retaliate by banning U.S. firms from their markets.

The problem, analysts said, is knowing where to draw the line in an economy in which companies are global, capital flows like water across borders and the ownership of assets can easily be obscured through dummy corporations. Even when U.S. firms are barred from trading with countries such as Sudan, Libya or Iraq, there often are exceptions made for providing food or medical products.

“I may choose not to invest in Korean construction companies with an operation in the Sudan--that’s easy,” said Mark Headley, president of San Francisco-based Matthews Asia Funds. “But does that mean you don’t own any international oil companies? Does that mean you can’t own IBM or you can’t own Procter & Gamble?”

Executives doing business in the targeted countries said they are legitimately bringing badly needed development to impoverished nations.

Paula Davis, a spokeswoman for Siemens, which has sold telecom, power equipment and medical supplies in Iraq, Syria and Iran, said the firm is “in full compliance with pertinent U.S. and [European Union] laws as well as sanctions and restrictions imposed by the United Nations.”

Conoco Chairman Archie Dunham has pushed for eliminating U.S. sanctions on those oil-rich Persian Gulf countries, arguing that they only benefit foreign competitors that are happy to fill the void.

Sondra Fowler, a Conoco spokeswoman, said the company’s business in those countries is “minimal” and did not pose a risk to investors. In 1995, the Clinton administration imposed a ban on business with Iran, forcing Conoco to abandon a $2-billion oil deal later taken over by the French. But a British subsidiary of Conoco has done consulting work for Iran’s state-owned oil company. The company was forced to abandon its oil concessions in Libya when the Reagan administration imposed sanctions in 1986 but hopes to reassert control if the sanctions are lifted.

Lack of Clear Evidence

The lack of a clear distinction between the good guys and the bad guys is what frustrates state officials. Since Sept. 11, Hafer has met with officials from the General Accounting Office, the Treasury Department and the Securities and Exchange Commission but said she hasn’t been able to “get to second base” on the issue of how--or whether--they should be screening out companies with terrorist connections.

Deputy Assistant Treasury Secretary Rob Nichols said the government welcomes the efforts by the state treasurers to weed out questionable holdings from their portfolios. But he said the U.S. government can expand the blacklist only when there is “clear, credible and convincing information” that a person is a “terrorist or financier of terrorism.”

SEC spokesman John Nester said companies listing in U.S. capital markets are not specifically required to disclose business operations in countries accused of terrorism or human-rights violations but must notify investors of anything that would present a “material risk.” That would include having a large plant or major supplier in a rogue nation that could be the target of a U.S. attack or trade embargo.

With threats of another terrorist attack becoming a regular occurrence, companies ignore these investor concerns at their peril, warned Stephen Davis, president of Davis Global Advisors, a Boston-based firm specializing in global corporate governance.

“What’s clear is anyone in the investing community is going to be very skittish about the prospect of a newspaper story linking the fund’s investments to any company involved in terror,” he said. “That’s something that’s got to give fund managers nightmares.”

Take Canada’s Talisman Energy Inc., which has come under fire for its involvement in the Greater Nile Petroleum Operating Co. in Sudan. That project is a major source of revenue for the Sudanese government, which is accused of harboring terrorists and waging a religious war in which millions were killed over the last two decades. In 1997, the U.S. imposed a ban on U.S. companies trading with Sudan and froze all government assets.

The U.S. has refused to bar Talisman from the U.S. stock market, but a divestiture campaign led by congressional critics, church leaders and human-rights groups has shaved as much as $10 off the company’s share price, said Brian Prokop, an energy analyst at Calgary’s Peters & Co. CalPERS and TIAA-CREF, the giant teacher’s retirement fund, were among those that sold their Talisman stock in 1999.

Though the Greater Nile project has been a profitable venture, Talisman officials are entertaining bids. The Indian government last week approved a $750-million offer by the state-run Oil & Natural Gas Corp. for the Canadian company’s 25% share of the Sudan project, but Talisman has not confirmed whether the deal has been finalized.

Any company buying into Sudan must weigh the financial gains against the possibility of a terrorism or human-rights-related backlash in the U.S capital markets, Prokop said.

“If you get denied access to the U.S. capital markets, and if it’s not perceived as too much of an ouch, then it might be worth the risk,” he said. “But for the smarter companies, if you can avoid it, you certainly would. You would be looking for other places that may have equal risk but may not have the same perceptual risk.”