Testimony of 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 before the U.S. Commission on International Religious Freedom
Russell Senate Office Building
15 February 2000
Mr. Chairman, it is a privilege to appear before you and the other Commission members on arguably one of the most compelling and empowering public policy issues of our time: The monitoring of prospective and existing foreign debt and equity offerings in the U.S. capital markets to help ensure that those engaged in — or aiding — religious persecution and other human rights and national security abuses are not rewarded or unwittingly underwritten by American private and institutional investors and portfolio managers. Over the past twenty-five years, I have had the opportunity to examine how potential adversaries of the United States fund themselves and their global activities. This focus began during my career as a Vice President in the International Department of the Chase Manhattan Bank with responsibilities for the bank’s loan portfolios in the former Soviet Union, Eastern and Central Europe, and Yugoslavia. It took on a more security-minded emphasis in my position as Senior Director of International Economic Affairs at the National Security Council under President Reagan. In addition to private consulting activities, I hold the Casey Chair at the William J. Casey Institute of the Center for Security Policy, a non-profit policy group which addresses, among other issues, the nexus between national security and global finance.
In the interest of time, I will move directly to the issues before the Commission. Over the past two decades, emerging market countries and companies have increasingly looked to the private capital markets (i.e. the issuing of stocks and bonds) for larger-scale funding and away from their traditional reliance on syndicated commercial bank loans and Western government financing vehicles. Regrettably, the level of disclosure and transparency required of these foreign governments and firms has been inadequate both in comparison to that demanded of U.S. firms in our markets as well as with regard to the ability of prospective U.S. investors to understand the true identity, affiliations and activities of many of these entities.
As a result of these disclosure-oriented shortfalls, numerous global "bad actors" have already successfully penetrated — or are planning to enter — our capital markets, among them religious persecutors (or corporate entities facilitating such persecution), human rights abusers, potentially hostile militaries, technology-theft and intelligence-related front companies, proliferators, arms smugglers, money launderers and foreign firms assisting (directly or indirectly) terrorist-sponsoring regimes. More often than not, the same foreign governments and firms engaged in, or facilitating, national security-related abuses are likewise responsible for human rights violations and the suppression of religious freedoms. Such is the case with regard to foreign companies partnering with the terrorist-, slavery- and genocide-sponsoring Khartoum regime.
The Commission is fully aware of the ill-considered 25% stake held by Talisman Energy Inc. of Canada in Sudan’s Greater Nile Petroleum Operating Company and the even larger 40% equity position of China National Petroleum Company (CNPC) in this oil development consortium. Indeed, one of the challenges which the Commission faces is to evaluate the credibility and effectiveness of the Sudan-related "firewall" reportedly constructed by CNPC’s subsidiary, "PetroChina" (in which CNPC maintains an 85% -90% equity stake according to press accounts), to ensure that funds raised in the U.S. capital markets will not be diverted to the parent company’s operations in Sudan. PetroChina is expected to list on the New York Stock Exchange and proceed with a $5-7 billion initial public offering (IPO) in the next several weeks. This would be one of the largest IPO’s in the history of the New York Stock Exchange and China’s largest equity offering.
The Capital Markets Transparency Initiative
Mr. Chairman, I know you and the other Commission members share my view that it would be counterproductive to advocate or institute leverage-orientated policy tools which would impede the free flow of capital into and out of our debt and equity markets, function as capital controls or stimulate undue government intervention in the markets. Nevertheless, it is only prudent that the U.S. investor community be equipped with the information needed — in prospectuses and other disclosure-related documentation — to make purchasing decisions vis a vis foreign securities that are consistent not only with their financial goals and expectations, but with their most coveted values and perceptions of our national security interests.
Accordingly, the Casey Institute and my personal efforts over the past four years in this emerging national security and human rights policy portfolio have been narrowly dedicated to: 1) strengthening disclosure and reporting requirements with regard to foreign entities already in — or seeking to enter — our capital markets; 2) recommending the voluntary integration of these material non-financial considerations into the "due diligence" process performed by U.S. private and public portfolio managers; and 3) urging the temporary denial of access to the U.S. capital markets in the event of egregious national security and human rights abuses until such time as these abuses are redressed or remedied. Putting aside for a moment the moral and security dimensions of this matter, I use the term "material" with regard to these non-financial concerns because of the advent of South African apartheid-type divestment campaigns and the prospect of economic sanctions against proliferators or other offenders which could impact adversely on the value of foreign equity and debt holdings (e.g. the Talisman case).
Financial Versus Trade Sanctions
As a public policy tool to help catalyze positive change or penalize wrong-doing, greater scrutiny of foreign entrants to the U.S. capital markets offers distinct advantages over measures in the trade portfolio. For example, in the event of blatant religious persecution overseas, where sanctions are deemed an appropriate response, targeted actions in the capital markets are likely to produce considerably less collateral damage to U.S. exporters, workers, consumers, and interests than trade-related sanctions. This is primarily because the use of trade sanctions — which are in the process of being eviscerated by Congressional legislation and increasing pressure from the business community on the Executive Branch not to implement them — often result in the loss of valuable U.S. exports and jobs. Such sanctions can also be undermined by so-called "foreign availability" (or the ability of other foreign companies to step in and supply the same product) and constrain potentially useful people-to-people contact and other forms of bridge-building with potential adversaries or competitor nations.
While there are no cost-free solutions to the sanctions dilemma, putting at risk unfettered access to the U.S. capital markets in the case of foreign religious persecutors, and those that aid them, would likely result in higher costs of borrowing and equity fund-raising for offenders in other global markets and could, over time, limit the actual amount of capital which could be attracted. In addition, a clear indication that the activities of foreign borrowers and equity fund-raisers — and those of their senior managers and affiliates and subsidiaries — are being scrutinized by U.S. investors, could well catalyze positive change in the behavior of past or prospective offenders.
Mr. Chairman, it is inevitable in the Internet age that American investors will increasingly insist on a better understanding of to whom their money is going and its end-use. This is especially the case with respect to publically-managed portfolios in the fifty states. The possibility, and even likelihood, that strengthened discipline and transparency in our financial markets can ultimately bring about desired reforms in emerging market economies (such as those of China and Russia) cannot be sufficiently underscored.
Finally, this carefully-crafted, non-disruptive capital markets initiative provides an opportunity for those committed to religious freedom to express themselves in a concrete manner that sends a potent message to — and potentially can inflict a serious cost upon — those engaged in religious persecution and other human rights and national security abuses. Moreover, such a "grass roots" and state-level initiative has the following attributes: 1) It does not require undue government intervention in the marketplace; 2) it, more often than not, would not impact adversely on U.S. exports, jobs or people-to-people contact; 3) it would usefully incorporate relevant non-financial factors into the "due diligence" risk assessments of portfolio managers throughout the country; and 4) it is a selective, voluntary approach which avoids capital controls and impediments to the free flow of capital.
For these and other reasons, I commend the Commission for its early leadership in this important new public policy arena.