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Capital punishment

The Sudan Peace Act disappeared in the upside-down world of diplomacy post,September 11. But does the threat of capital markets sanctions have a future as a policy weapon for the U.S.?

The Sudan Peace Act disappeared in the upside-down world of diplomacy post,September 11. But does the threat of capital markets sanctions have a future as a policy weapon for the U.S.?

By Jenny Anderson
November 2001
Institutional Investor Magazine

Late on the afternoon of Thursday, September 20, Colorado Representative Tom Tancredo got an urgent call from the vice chairman of the House International Relations Committee, Christopher Smith. Fellow Republican Smith wanted Tancredo to drop whatever he was doing and run over to the Capitol to put forward a motion to vote the Sudan Peace Act, overwhelmingly approved in separate versions by the House and Senate, on to conference. The House bill condemns that country's bloody civil war, offers humanitarian relief and authorizes the State Department to investigate war crimes and crimes against humanity, including genocide and slavery, in the African state. Significantly, it also bars companies involved in the oil business in Sudan from raising money in the U.S. capital markets; it would actually delist those now traded. Moreover, the bill would force foreign companies trading on U.S. markets to disclose any "material" activities in Sudan to the Securities and Exchange Commission.

Tancredo, who had sponsored the bill, rushed over to the well of the House from the Cannon House office building and took the floor. But just as he was about to introduce his motion, he was interrupted by a messenger from the House leadership. The Sudan Peace Act, Tancredo was curtly informed, would be shelved and the motion canceled for political reasons.

"I didn,t really feel like I was in control of the process," Tancredo confides.

That's not an uncommon feeling since the September 11 terrorist attacks. U.S. lives have been turned topsy-turvy. So, too, has American foreign policy: Enemies have become friends, pariahs pals, as the world's remaining superpower struggles to build a broad coalition to pursue its war on terror. Suddenly, Sudan is a U.S. ally, supposedly whispering confidences about terrorists it once harbored. And the Sudan Peace Act is on indefinite hold.

But the controversial ideas introduced by the act , capital markets sanctions and wide-ranging disclosure , are very much alive. To proponents, they are new diplomatic and political weapons too powerful to be ignored in a world where terrorism as well as human rights abuses are all too common. As Senator Fred Thompson, who sits on the Senate Finance and Select Committees on Intelligence, said in an interview with Institutional Investor: "I don,t think that it makes any sense at all for us to say that we are serious about terrorism and proliferation to the extent that we are willing to place substantial burdens on the banking industry to stop money laundering and the flow of terrorist money on the one hand and allow them the benefits of our capital markets to raise funds on the other. It makes no logical sense at all."

Such talk makes Wall Street nervous. "Capital markets sanctions won,t help the government turn around the situation in Sudan, and it sets a terrible precedent," contends Steve Judge, vice president of government affairs at the Securities Industry Association, Wall Street's main trade association and lobbying nexus. "We don,t know where this ends up. It,s something this country has never done. These markets are the most open and accessible in the world, and we should not limit that in any way."

The Sudan Peace Act is an extraordinary piece of legislation, in several ways. Start with its history. Introduced in 1999, it was buried in 2000 and resurrected in 2001. Pushing it has been been an improbable bipartisan coalition of interest groups on the left and right. Sponsored in the House by Coloradan Tancredo, it was introduced in the Senate by Republican Bill Frist of Tennessee. The House bill passed in June by a resounding 422-to-2; the Senate version received unanimous consent in July.

All that remained to be done in September was to iron out differences between the House and Senate versions in conference. Not that it was going to be easy. Tucked into the House version were controversial provisions, offered by Alabama Republican Spencer Bachus, that gave the president the power to punish foreign companies doing business in Sudan; U.S. businesses were already barred from operating in Sudan under sanctions imposed by the Clinton administration in 1997. The Senate version, however, did not include the capital market sanctions.

The House's Sudan Peace Act stipulated that securities issued by companies involved in oil or gas development in Sudan could not be traded in the U.S. It also required companies to disclose the nature of their business in Sudan, including their relationship with the government, headed by Lieutenant-General Omar Hassan Ahmad al-Bashir, who has waged a vicious war on the non-Muslim population in southern Sudan. Moreover, companies had to spell out how any money raised in the U.S. would be used in Sudan. Failure to do any of these things would lead to sanctions against the offenders in the form of a strict prohibition against their issuing debt or equity in the U.S.

If a conference version of the bill had survived with Bachus's provisions intact, the consequences could have been dire for certain businesses. Two big oil and gas companies , Canada's Talisman Energy and China,s PetroChina Co. , would have had to delist from the New York Stock Exchange. PetroChina last year raised $2.9 billion on the New York and Hong Kong stock exchanges in an IPO led by Goldman, Sachs & Co. Talisman has raised $775 million on U.S. markets, all debt, since 1995.

"I am a free-market guy, but the capital markets do not have to be morally bankrupt," says Bachus. He argues that it makes little sense to allow foreign companies to raise money in the U.S. to conduct business in countries where American companies are prohibited from operating.

Predictably, in late summer and early September, Wall Street's investment banks were lobbying furiously behind the scenes to quash the House version of the act. Bankers say privately that the sanctions would be ineffective in moderating Sudan's conduct and that companies affected would simply take their business elsewhere, hurting U.S. capital markets. Most important, they fear that the Sudanese Peace Act might set a precedent that could be applied more broadly, for instance to a country like China, which has been criticized roundly for weapons proliferation, not to mention suppression of Tibet. And China, with its enormous financing needs, represents big business for Wall Street. Moreover, many argue that the most effective way to change a country's behavior is to pull it into the world's economic community, not to push it away.

The Bush administration had been in Wall Street,s corner and is ideologically opposed to sanctions. But it would have found it difficult to oppose the bill publicly because of its broad support. The legislation enjoyed the strong backing of Bush's allies on the religious right as well as the overwhelming endorsement of the Congressional Black Caucus, forming a bipartisan coalition of a sort rarely seen.

"We formed a holy alliance for good," says Democratic Representative Donald Payne of New Jersey, a member of the Congressional Black Caucus and a co-sponsor of the House bill. "When you say you would have had to withdraw from any capital formation in the U.S., it would have changed policy in Sudan."

A number of senators who had opposed capital markets sanctions before and would likely have been on the conference committee , including Democrats John Kerry of Massachusetts and Russell Feingold of Wisconsin , had endorsed the Bachus measures, meaning that the conference version could well have passed with the sanctions intact. Senator Feingold said he would support the bill with capital markets sanctions as long as the administration did not explicitly threaten to veto it.

But with Sudan now a U.S. ally, the legislation appears to be all but dead, at least for the 107th Congress. However, that isn,t likely to be the last word on capital markets sanctions or increased disclosure. If anything, the September 11 attacks could give new life to the concepts. After all, Congress has passed a raft of antiterrorism measures, and the president needs real tools , sticks as well as carrots , to encourage cooperation.

"In the war on terrorism, just about any policy that seems to be helpful will be on the table," suggests Joanne Thornton, director of research at the Schwab Washington Research Group. "The Sudan Peace Act was pulled for the time being because Sudan is seen to be helpful right now. But if countries aren,t helpful, the capital markets debate will be revived."

Certainly, a core group of legislators has endorsed the notion of sanctions and is looking for ways to apply them. Tancredo was himself initially against adding sanctions to his bill because he doubted that they,d be effective. Ironically, when he saw how much pain the prospect of sanctions seemed to cause Wall Street, he concluded that they must have real bite and therefore changed his mind. "The reaction on the part of the financial community is such that the sanctions are as scary to them as they are to Sudanese President al-Bashir, and, therefore, they have a great potential to be powerful tool in our fight against terrorism," he says.

As a strong supporter of sanctions, Tennessee Republican Thompson tried last year to link "permanent" normal U.S. trade relations with China to capital markets sanctions against Beijing if it failed to comply with Washington's demands to help curtail weapons proliferation. Last month, responding to the September 11 attacks, Thompson wrote to Securities and Exchange Commission chairman Harvey Pitt, "We should limit access to our capital markets with regard to terrorists and those who support them."

Of course, not everyone agrees. New Jersey Democratic Senator Jon Corzine, who was co-chairman of Goldman Sachs until early 1999, doubts the value of sanctions. But he is amenable to increasing disclosure. "Foreign policy decisions and diplomatic negotiations should be managed by the State Department," he says. "The public disclosure element of doing business is probably as good a discipline as you need in this process." Former national security adviser Sandy Berger, a senior adviser to Lehman Brothers, agrees with this stance: "I don,t think that [sanctions are] very effective except in driving capital formation to Europe."

Roger Robinson, CEO of Conflict Advisory Group, a national security consulting agency (and also head of the conservative William J. Casey Institute), likewise favors disclosure but insists that more may be necessary. "There will be egregious or extreme security-related circumstances," he says, "where disclosure alone could prove an inadequate remedy."

The U.S. certainly has not refrained from using economic sanctions of one sort or another in the past. Generally imposed by executive order of the president, they have ranged from a full trade embargo to import or export restrictions. Currently, the U.S. has sanctions against North Korea (implemented in 1950 and eased in 2000), Cuba (1963), Libya (1986), Iran (1987), Iraq (1990) and a number of other countries , including Sudan. Washington has frozen the U.S. assets of the Sudanese government and banned both the export of U.S. goods to Sudan and the import of Sudanese goods to the U.S.

The effectiveness of sanctions has been long debated. Fidel Castro remains in power after more than 40 years; Saddam Hussein has withstood a decade of economic sanctions. The same human rights advocates who champion capital markets sanctions generally oppose trade sanctions, on the grounds that the latter hurt ordinary citizens of targeted countries while doing little to induce governments to mend their ways.

Because the U.S. already had sanctions against Sudan, human rights and religious-freedom groups had to look outside the standard menu of economic tools to compel the government to stop its 18-year campaign against non-Muslims in the southern part of the country. The war has been horrific by any measure: more than 2 million dead, more than 5 million displaced. "It is the most destructive civil conflict in half a century," says Eric Reeves, an English professor at Smith College and a leading activist who testified before Congress in favor of capital markets sanctions in early 2000.

One obvious pressure point is oil. The Khartoum government has admitted that it uses oil revenues to fund the war. Cause and effect were clear to the activists: If Washington denied foreign oil companies operating in Sudan access to U.S. capital markets, they would have to pay a good deal more to raise funds because they would be considered significantly riskier. Indeed, the president of Talisman Energy, James Buckee, told Toronto's Globe and Mail in June: "I don,t think anybody could afford not to have access to U.S. capital markets. No asset is more valuable than that." Facing such sanctions, companies like his might well consider abandoning Sudan altogether, meaning less revenue for Khartoum. Perhaps it would then consider making peace. So the theory goes.

Wall Street, however, adamantly opposed the sanctions. Lobbyists argued that they would be ineffectual because they would simply send companies scurrying to the London or Tokyo markets, and that they could set a dangerous precedent. Companies already risk their reputations , and all-important brand names , when they do business in a pariah country whose government tramples on human rights or sponsors terrorism, pointed out financiers.

The pro-sanctions crowd disagrees. "Just because Sudan may be able to pump oil even if we impose capital markets sanctions, we should do it for two reasons," says Representative Tancredo. "Because it has the potential to affect the outcome of the war and because it is right." If other markets want to help fund terrorists, he and others say, the blood will be on their hands. Moreover, the Sudan legislation sets the bar high on what is required to trigger sanctions, they say, so it would not be easy to apply the precedent elsewhere.

In any event, say some, not that much money is at stake for Wall Street. "Look at the numbers," says Senator Thompson. "This is not going to materially harm Wall Street in any way, and if it is, we are in worse shape than I thought. It's a business deal and I am very much pro-business until it runs headlong into national security. If the World Trade Center doesn,t bring that graphically home, I don,t know what will."

For some on Capitol Hill, the idea of setting a precedent with the Sudan Peace Act is not such a bad thing, especially in light of the terrorist attacks. "It's a precedent whether you do it or don,t do it," says Bachus.

As the debate on the use of sanctions against Sudan was going back and forth at the end of summer, momentum appeared to shift toward the House version. Democratic Representative Payne and Republican Tancredo were set to meet with key Republican Senators to discuss a compromise on sanctions. They intended to propose that the president be given the right to defer sanctions for six months. Payne now says that he believes this compromise "would have won."

September 11 changed all that. The administration persuaded the House leadership to pull the Sudan Peace Act. Sources say Bush didn,t want to veto a bill that had such widespread support, and he was trying to get Sudan to cooperate in the war on terror.

Capitol Hill sources expect any further debate to center on improved disclosure standards. This issue has already created consternation. On May 8 the then,acting head of the SEC, Laura Unger, responded to a letter from Republican Congressman Frank Wolf of Virginia, who had requested an SEC investigation against Talisman and PetroChina for possible violations of SEC reporting and disclosure regulations. Unger's response signified a subtle but significant policy shift at the SEC: "Because of the complex issues involving national security, human rights and religious freedom that have been raised in connection with countries subject to U.S. economic sanctions, our staff has decided that it will attempt to review all registration statements filed by foreign companies which reflect material business dealings with governments of countries subject to U.S. economic sanctions administered by [the Office of Foreign Asset Control], or with persons or entities in those countries." Previously, a foreign firm would not have had to disclose its "material" business in countries under OFAC-administered sanctions; Unger,s letter set a precedent by applying disclosure standards to all such countries.

Advocates for disclosure like Robinson were cheered. But it's unclear whether SEC chairman Pitt, who took office in August, will continue in Unger's direction. He would not comment.

Certainly, business representatives have lobbied against such disclosure. In a letter to Pitt, William Reinsch, president of the National Foreign Trade Council, expressed concern that disclosure would drive business away from the U.S. and that the definition of "material" would "include all business conducted in countries subject to OFAC-administered sanctions, however immaterial to the financial outlook and profitability of the company." Reinsch reportedly met with Pitt in late summer and left the meeting "reassured."

Robinson and fellow human rights advocates have intensified their efforts to build congressional support for more stringent disclosure , specifically, that companies reveal any business, not just material business. "U.S. firms can,t do any business, so the threshold for disclosure should reasonably be any business on the part of the foreign firm or entity," says Robinson.

Senator Thompson agrees. He wrote to Pitt on October 11 that "most, if not all, U.S. investors would not want to invest in foreign companies that may indirectly provide financial support for acts of terrorism or proliferation. As a result, the fact that a foreign company does business with countries or individuals subject to U.S. sanctions should be considered material and subject to disclosure by all foreign registrants." The SEC does not comment on congressional correspondence.

Legislation on disclosure now appears likely this year. Winning support for capital markets sanctions will be tougher. "The industrial and business community kind of runs the country," points out Representative Payne, "and it doesn,t want to see the policies of government interfere with its capitalism." Neither the administration nor the Treasury has taken a public stand on sanctions since the Sudan Peace Act was shelved. Yet much has changed since September 11 in favor of strong measures, like sanctions.

An administration that came into office espousing laissez-faire economics has embraced market intervention with neo-Keynesian gusto. It once championed a new isolationism and decried nation-building; now it must preside over a multinational coalition while it proclaims the need to rebuild Afghanistan. And Sudan, once an enemy, has become a partner, if not a friend.

Stranger things than increasing disclosure , or applying sanctions , are happening. And the case for both could prove hard to oppose politically. As Representative Bachus says, "If capital markets sanctions can save our men and women in uniform from putting their lives at risk, that's a better option."