Capital Markets Transparency and
Security: The Nexus Between U.S.-China Security Relations and
America's Capital Markets
Endnotes
1. The term "bad actors" is a colloquialism used by a number of observers
that has come to represent those foreign governments whose policies -- as well
as those foreign companies whose international activities -- may conflict with
U.S. national security, human rights and/or religious freedom concerns, thereby
posing material risks to investors. The term should not be construed to indicate
a value judgement or a determination of which foreign entities should or should
not have access to the U.S. capital markets. It is rather a catch-all phrase
designed to capture a diverse group of higher risk foreign governments and
firms.
2. Testimony of Roger W. Robinson Jr., former Senior Director of International
Economic Affairs at the National Security Council, before the Senate Banking
Subcommittee on Financial Institutions, November 5, 1997.
3. Testimony of former Undersecretary of State for Policy, Peter Tarnoff, before
the Senate Banking Committee, October 11, 1995:
Former Undersecretary of State for Policy, Peter Tarnoff, underscored the nexus
between seemingly benign business activities and U.S. national security interests
in testimony before the Senate Banking Committee in 1995. He testified: "A
straight line links Iran's oil income and its ability to sponsor terrorism,
build weapons of mass destruction and acquire sophisticated armaments. Any
government or private company that helps Iran expand its oil must accept that
it is contributing to this menace."
4. The former Soviet Union was, however, able to access other international
debt markets -- but not until about 1987. From 1987 through 1991, the Soviet
government raised a total of only $1.8 billion through bond offerings in currencies
including the yen, lira, Swiss franc, Austrian schilling, deutschmark, British
pound and French franc. It is interesting to note that it was primarily the
institutional investors from each of these countries that underwrote these
offerings. While it is difficult to determine if any of this debt was ultimately
purchased by U.S. investors, it is historically significant that the United
States, for all intents and purposes, denied access to our capital markets
as a source of funding for the Soviet Union.
5. Roger W. Robinson Jr., "Financial Sanctions: How Might They Be Used
Against Proliferators?" (Prepared for the Nonproliferation Policy Education
Center, 1997):
In a December 1996 letter to William McDonough, President of the New York Federal
Reserve, attorneys for a group of Holocaust survivors stated, "No [foreign]
banking institution should be permitted the privilege of conducting business
in this country which has committed and participated in the commission of violations
of international law."
6. Capital markets security may be broadly defined as the nexus between foreign
fundraising activities in the U.S. capital markets and traditional national
security concerns.
7. Senator Sam Brownback, "Investing in Terror," Washington Times,
November 3, 1997:
In a Washington Times editorial linking the revenue-generating activities of
those foreign energy firms doing business with Iran to that country's nuclear
and ballistic missile programs, Senator Sam Brownback stated, "American
investors should not fund Iranian ballistic and nuclear missile development.
And yet, that is essentially the deal that the Russian company Gazprom will
be offering to unsuspecting American investors when it launches a new convertible
bond this month...We should not stand by and watch U.S. retirement dollars
bankroll an enterprise that subsidizes barbarism in the Middle East and is
a threat to world peace. Trading peace for profit is a lousy investment."
8. "China's Money Mess," Business Week, March 12, 2001.
9. "China's Capital Flight Reaches U.S. $20B a Year," China Online
News, January 22, 2001.
10. Lester J. Gesteland, "No Turning Back: China's Privatization Trend
Irreversible, Report States," China Online News, January 1, 2001.
11. James Kynge, "China's Fraught Fiscal Future," Financial Times,
January 11, 2000.
12. "China's Economy: Red Alert," Economist, October 24, 1998.
13. James Kynge, "China's Fraught Fiscal Future," Financial Times,
January 11, 2000.
14. "Risky Business: New Study Spots Financial Danger on China's Business
Horizon," China Online News, November 10, 2000.
15. Ibid.
16. Raymond Li, "Rising Financial Risk Raises Concern," South China
Morning Post, November 14, 2000.
17. Ibid.
18. Dilip K. Das, "Reforming the Financial Sector in China," Journal
of Commerce, October 13, 1999; "The Longer March," Economist, September
30, 2000; and "China's State-Owned Enterprises. Beijing Rules," Economist,
May 3, 1997.
19. "China's Economy: Red Alert," Economist, October 24, 1998:
This lending pattern to SOE"s compounds other capital deficiencies in
China. At this writing, China's "big four" banks are responsible
for providing some 80% of the development capital in China. By continuing to
lend to inefficient, loss-generating SOE"s, the banks reduce the pool
of available capital for entrepreneurial and other profit-generating ventures.
20. "China's Other Potential Banking Crisis," Stratfor Global Intelligence
Update, September 28, 2000.
21. Ibid.
22. Ibid.
23. Ibid.
24. Ibid.
25. Ibid.
26. David Holley, "China's Thirst for Oil Fuels Competition," Los
Angeles Times, July 28, 1997.
27. "China Imports Up Remarkably," Asiainfo Daily China News, January
23, 2001.
28. "Huge Increase in China Oil Imports Predicted," Houston Chronicle,
March 21, 2000.
29. Ibid.
30. Jamila Zhou, "Mainland to Spend 120B Yuan on Oilfields Development," South
China Morning Post, November 27, 2000.
31. "A Profile of China's Oil Industry," Asia Pulse, August 12, 1999.
32. S. Enders Wimbush, "Energy and Strategy: 2001," National Security
Forum Review, Spring 2001:
According to Mr. Wimbush, "China is creating a strategic petroleum reserve
and is building a fleet of super-tankers for Iran that will transport energy
to China."
33. "China's Congress Calls for National Oil Reserve," Stratfor Global
Intelligence Update, March 10, 2000.
34. "A Profile of China's Oil Industry," Asia Pulse, August 12, 1999.
35. S. Enders Wimbush, "Energy and Strategy: 2001," National Security
Forum Review, Spring 2001.
36. David Holley, "China's Thirst for Oil Fuels Competition," Los
Angeles Times, July 28, 1997:
Although Venezuela is currently not under U.S. sanctions, the country has nevertheless
taken steps to curtail political freedoms since the election of Hugo Chavez
in 1998. China has extensive energy-related and political ties to that country.
According to the Los Angeles Times, "CNPC made an unusual foray into Latin
American oil production, bidding a total of $359 million for rights in two
marginal Venezuelan fields that are producing only small quantities of oil
but could yield more by the use of advanced technology."
37. A primary impetus for this international energy development activity may
be China's reluctance to rely upon the oil spot market. Such a policy could
be due to Beijing's concern that any future conflict with Western countries
could lead to energy-related retaliation. Rather than assume this political
risk, China prefers to have a physical "flag in the ground" in major
oil producing nations often shunned by the West (e.g., Iran, Iraq, Sudan, etc.).
Not surprisingly, several of these countries have been reported to be major
recipients of Chinese arms-related exports and technologies.
38. James Kynge, "China's Fraught Fiscal Future," Financial Times,
January 11, 2000.
39. Lester J. Gesteland, "No Turning Back: China's Privatization Trend
Irreversible, Report States," January 1, 2001:
In addition to raising concerns with respect to Beijing's financial stability,
this report underscores the government's need to keep faltering SOE"s
afloat. The current pension shortfalls would be significantly increased in
the event that millions of SOE employees were to be laid off in the course
of "restructuring."
40. Raymond Li, "Rising Financial Risk Raises Concern," South China
Morning Post, November 14, 2000.
41. James Kynge, "China's Fraught Fiscal Future," Financial Times,
January 11, 2000.
42. Ibid:
According to Dong Tao of Credit Suisse First Boston, "China has one of
the weakest revenue streams in the world. It is in a similar state to Russia."
43. Ibid.
44. Al Santoli, China Reform Monitor, February 16, 2001.
45. "Money In, Money Our," Economist, October 23, 1999; and "China's
Private Surprise," Economist, June 19, 1999:
While, officially, the numbers only suggest a year-on-year drop-off in foreign
direct investment (FDI) in China of 10% in 1999, this figure ignores accounting
anomalies. Specifically, much of the FDI in 1999 represented funds that had
already been committed. Similarly, a significant percentage of "new" FDI
is actually accounted for by Western firms taking over projects initiated by
multinational counterparts as more and more firms downscale -- or cease altogether
-- operations in China. In this sense, "updated" FDI figures are
actually counting for a second time investments that have already been factored
into statistical analyses. Moreover, FDI also includes monies recycled from
China through Hong Kong and back to the mainland.
46. "China's Capital Flight Reaches U.S. $20B a Year," China Online
News, January 22, 2001; and Peter Zhang, "Why China is Still an Economic
Pygmy," The New Australian, December 12, 2000.
47. Lester J. Gesteland, "No Turning Back: China's Privatization Trend
Irreversible, Report States," January 1, 2001.
48. Ibid.
49. Peter Zhang, "Why China is Still an Economic Pygmy," The New
Australian, December 12, 2000:
As of now, China is the recipient of roughly 10 percent of global foreign direct
investment.
50. WTO, it can be argued, will likely be an effective instrument in helping
to "recapitalize" China. The political and market legitimacy WTO
membership provides as well as the stringent requirements for systemic change
within China should stimulate increased Western foreign direct investment and
make available venture and other infusions of capital. Moreover, the WTO process
provides defacto legitimacy for China's hybrid economy. This new status should
also translate into greater access to the global capital markets for Chinese
state-owned and other firms. Recent reports indicate, however, that China could
possibly renege on some of its key WTO commitments.
51. James Kynge, "China's Fraught Fiscal Future," Financial Times,
January 11, 2000.
52. Ibid:
The importance of this market -- and the extent to which it remains underdeveloped
-- was also noted by Song Fengming of China's Tsinghau University: "We
don't have a proper Treasury market. We don't have a Treasury Bills auction
system. We must build up a modern capital market system as soon as possible."
53. "China's Money Mess," Business Week, March 12, 2000:
The judgement handed down by a recent Business Week report was less forgiving. "The
government is simultaneously trying to improve the quality of publicly listed
companies and tame China's stock markets, which are less a productive channel...than
a vent for the pent-up national passion for gambling and a prop for state companies."
54. "China's Money Mess," Business Week, March 12, 2001.
55. "Risky Business: New Study Spots Financial Danger on China's Business
Horizon," China Online News, November 10, 2000.
56. Ibid.
57. Al Santoli, China Reform Monitor, March 12, 2001.
58. Source: Bloomberg Financial Services, Country Debt Printout.
59. Al Santoli, China Reform Monitor, March 12, 2001; and "The Year Of
The Living Dead," Stratfor Global Intelligence Update, August 3, 2000:
Following the default and subsequent closing of Guandong Investment and Trust
Corporation in 1998, many of the country's 240 ITIC's have been shunned by
international investors. Shortfalls in foreign capital and unwise property
speculation have left many ITIC's under severe financial strain. This raises
an interesting dilemma for the government. If it allows additional ITIC's to
fail (thereby resulting in substantial losses for foreign investors), it may
lead many of these investment groups to face troubling liquidity shortfalls.
If the government props up these faltering companies, it will siphon off development
capital while not addressing systemic inefficiencies. At this time, Beijing
has decided to restructure this sector and is seeking to consolidate the industry
into 40 firms, but faces the prospect of undermining successful firms by burdening
them with the debt and other problems of the faltering ITIC's.
60. Bloomberg Financial Services, Country Debt Printout
61. Ibid:
A review of the lead managers for these Chinese debt offerings reads like a "Who's
Who" list of Wall Street. They include: Goldman Sachs, Merrill Lynch,
Morgan Stanley, JP Morgan, Lehman Brothers, Banker's Trust, ING Barings, Credit
Suisse First Boston, etc.
62. James Kynge, "China Eyes More Infrastructure Bonds," Financial
Times, March 1, 1999.
63. Irrespective of China's control of Hong Kong, institutional investors distinguish
between mainland and Hong Kong companies when evaluating risk. Once a Chinese
SOE has created a Hong Kong subsidiary, it has, to many in the markets, separated
itself from the "country of risk" concerns associated with mainland
Chinese firms. Inexplicably, where a company is incorporated often matters
more than ownership structure to many fund managers.
64. Joe Leahy, "HK's" Record Run of IPO's Set to Continue," Financial
Times, January 3, 2001:
According to the Financial Times, "H-Shares" are "mainland enterprises
listed in Hong Kong." "Red chips" are "the Hong-Kong-listed
investment vehicle of mainland entities."
65. Credit Lyonnais Securities Asia, "Is Red for Go?," June, 1997.
66. Ibid.
67. For a detailed review of the financial and bureaucratic problems facing
many of China's SOE"s, please see: John Pomfret, "Legacy of Socialism
Keeps China's State Firms in Red," Washington Post, June 20, 2001.
68. Joe Leahy, "HK's" Record Run of IPO's Set to Continue," Financial
Times, January 3, 2001; and Ibid:
By comparison, in 1996, Chinese listings in Hong Kong netted roughly $3 billion.
69. Joe Leahy, "HK's" Record Run of IPO's Set to Continue," Financial
Times, January 3, 2001.
70. Ibid.
71. Kenneth Wong, "Initial PetroChina Trading Sputters; Goldman Sachs
Bolsters Prospects," Wall Street Journal Interactive Edition, April 10,
2000.
72. Edwin Chan, "Investors Like Global China IPO's, But 50 of Them?," Reuters,
March 12, 2001.
73. Roger W. Robinson Jr., "Financial Sanctions: How Might They Be Used
Against Proliferators?" (Prepared for the Nonproliferation Policy Education
Center, 1997):
For the purposes of this report, Japan will be considered part of "Western
securities markets," due primarily to the depth of Japanese markets and
the size of its economy.
74. Testimony of Roger W. Robinson Jr., former Senior Director of International
Economic Affairs at the National Security Council, before Senate Banking Subcommittee
on Financial Institutions, November 5, 1997.
75. Roger Robinson, "Moscow's Shell Game," Washington Post, July
23, 1991:
These banks include Moscow Narodny Bank, Ltd (United Kingdom); Banque Commerciale
pour l'Europe du Nord SA (Paris); Ost-West Handelsbank AG (Frankfurt); Donaubank
AG (Vienna); and East-West United Bank SA (Luxembourg).
76. Ibid:
By transferring the credit risk associated with interbank deposits to the banks,
Moscow realized a two-fold benefit. First, Russia's sovereign credit rating
would have probably been negatively affected had it assumed proper repayment
responsibility of Western commercial bank deposits in Soviet-owned banks. More
importantly, the Western deposits were manipulated by creative accounting to
appear as Soviet assets when assessing Moscow's sovereign credit rating.
77. For example, SOE"s that would normally face greater investor scrutiny
due to concerns with respect to their financial strength, efficiency and global
activities are able to create seemingly "healthy" subsidiaries by
transferring profitable divisions and projects. Although the parent company
maintains ownership (and, thereby, control over operations and assets), investors
only see part of the picture -- notably a profitable, commercial firm. In this
manner, hundreds -- even thousands -- of otherwise unmarketable SOE"s
could be transformed into capital-attracting, listed entities.
78. Testimony of Roger W. Robinson Jr., former Senior Director of International
Economic Affairs at the National Security Council, before the Senate Banking
Subcommittee on Financial Institutions, November 5, 1997:
As Roger Robinson stated during Congressional testimony in 1997, "The
ultimate prize for [higher risk, questionable foreign entities], however, is
access to the American [capital markets]."
79. Roger W. Robinson Jr., "Financial Sanctions: How Might They Be Used
Against Proliferators?" (Prepared for the Nonproliferation Policy Education
Center, 1997).
80. Ibid.
81. The William J. Casey Institute, "Tour díHorizon: Casey Institute's
Robinson Explores Financial Implications of Geopolitical Developments," May
2, 1996:
As Casey Institute Chairman Roger Robinson observed in 1996, "The traditional
firewall between breaking geopolitical developments and the markets will be
breached with increasing frequency and violence in the period ahead. Accordingly,
normal commercial and economic "due diligence" concerning international
projects, transactions and trading activities will, in many cases, no longer
be adequate to ensure the level of investor and/or lender confidence and security
deemed necessary."
82. The William J. Casey Institute, "If You Liked the Rigging of the Lebed
Dismissal, You'll Love the Rigging of the Global Credit and Securities Markets," October
17, 1996.
83. Ibid.
84. The William J. Casey Institute, "Russian Bondage: Moscow's Financial
Breakout Gets Underway with Wildly Oversubscribed Eurobond Sale," November
26, 1996.
85. Ibid.
86. Ibid.
87. The William J. Casey Institute, "If You Liked the Rigging of the Lebed
Dismissal, You'll Love the Rigging of the Global Credit and Securities Markets," October
17, 1996:
Indeed, recent history is rife with bailouts of this nature, including the
Mexican financial crisis of the early 1990's and the emerging market crisis
in 1997-98.
88. "Iran Plans $300M Debut Eurobond," Financial Times, October 21,
1999.
Interestingly, Iran is reportedly planning to issue a $300 billion Eurobond
in the near future. Proponents of the offering will likely make several of
the same arguments referenced above. Unlike Russia, however, Iran is currently
under U.S. sanctions -- which raises the question of whether U.S. entities
will be allowed by law to hold Iranian debt in portfolio.
89. Bloomberg Financial Services, Country Debt Printout.
90. The William J. Casey Institute, "The Debate Begins Over Russia's Financial
Breakout; Where Will it End for U.S. Taxpayer Interests?," November 4,
1996.
91. To our knowledge, the Casey Institute remains the only non-profit policy
group in the country that is exclusively monitoring the nexus between national
security- and human rights-related risk considerations and the capital markets.
It is likewise the only non-governmental organization that has produced numerous
publications with respect to the potential use of capital markets leverage
and the need for expanded disclosure requirements and "due diligence risk" assessments.
92. The William J. Casey Institute, "Insight Magazine Breaks The Code:
Chinese Penetration of U.S., Global Financial Markets Has Strategic Implications," May
3, 1997; and The William J. Casey Institute, "USA Today Illuminates Case
for Urgent Action to Halt Chinese Bondage," May 16, 1997.
93. The William J. Casey Institute, "Insight Magazine Breaks The Code:
Chinese Penetration of U.S., Global Financial Markets Has Strategic Implications," May
3, 1997.
94. Bloomberg Financial Services, Country Debt Printout.
95. James Hackett, "Financing China's Red Army," Washington Times,
December 13, 1999.
96. J. Michael Waller, "China Cashes In," Insight Magazine, January
14, 2000.
According to Representative Chris Cox, "When you go to governments that
are as opaque, nontransparent, as the government of the People's Republic of
China, where so much of enterprise is state-run, where accounting is as much
creativity as hard figures, I think people are essentially lending money to
the state of China, the communist government of China, on the brand name and
on the expectation that they will somehow pay it back..."
97."PLA Business Activities Fraught With Abuses," Financial Times
Asia Intelligence Wire, November 1, 1998.
98. AFL-CIO Report, "China's People's Liberation Army: Where to Find PLA
Companies in America, What Products the PLA Sells in America and Who are the
PLA's Customers," 1997.
99. Eduardo Lachica, "Deutch Report Says Borrowers Pose a National Security
Risk," Wall Street Journal Asia, July 12, 1999.
100. AFL-CIO Report, "China's People's Liberation Army: Where to Find
PLA Companies in America, What Products the PLA Sells in America and Who are
the PLA's Customers," 1997.
101. Henry Sokolski, "A Tale of Three Firms," Weekly Standard, February
24, 1997.
102. AFL-CIO Report, "China's People's Liberation Army: Where to Find
PLA Companies in America, What Products the PLA Sells in America and Who are
the PLA's Customers," 1997.
103. Ibid.
104. The William J. Casey Institute, "Dangerous Upshot of Clinton-Gore's
China Bonding: Strategic Penetration of U.S. Investment Portfolios," April
1, 1997.
105. Peter Schweizer, "You, Too, May Be Funding China's Army," USA
Today, May 14, 1997.
106. John Berlau, "Chinese Army's Ties to U.S. Money," Investor's
Business Daily, July 27, 1999.
107. U.S. House of Representative Select Committee, "U.S. National Security
and Military/Commercial Concerns With the People's Republic of China," May
25, 1999 (Volume 1, p. 22).
108. Stephen Fidler, "China 'Princelings' in Web of Espionage," Financial
Times, May 26, 1999.
109. Charles De Trenck, et.al., Red Chips and the Globalization of China's
Enterprises (Hong Kong: Asia 2000 Limited, 1998).
110. Ibid.
111. Ibid.
112. John Berlau, "A New Type of Calpers Effect: Funds' Investments in
Chinese Companies Raise Red Flags," Investor's Business Daily, September
7, 1999.
113. AFL-CIO Report, "China's People's Liberation Army: Where to Find
PLA Companies in America, What Products the PLA Sells in America and Who are
the PLA's Customers," 1997.
114. Stephen Fidler, "China 'Princelings' in Web of Espionage," Financial
Times, May 26, 1999.
115. Ed Timperlake and William Triplett, Year Of The Rat (Washington D.C.:
Regnery Publishing, Inc., 1998).
116. Correspondence from Representative Spencer Bachus to Texas State Representative
Suzanna Gratia Hupp, October 12, 1999.
117. John Berlau, "Chinese Army's Ties to U.S. Money," Investor's
Business Daily, July 27, 1999.
118. Ibid.
119. William Gertz, "China Secretly Shipping Cuba Arms," Washington
Times, June 12, 2001.
120. John Berlau, "Chinese Army's Ties to U.S. Money," Investor's
Business Daily, July 27, 1999.
121. Correspondence from Representative Spencer Bachus to Texas State Representative
Suzanna Gratia Hupp, October 12, 1999.
122. Source: Thompson Financial Services.
123. Correspondence from Representative Spencer Bachus to Texas State Representative
Suzanna Gratia Hupp, October 12, 1999.
124. Testimony of Roger W. Robinson Jr., former Senior Director of International
Economic Affairs at the National Security Council, before the Senate Banking
Subcommittee on Financial Institutions, November 5, 1997.
125. Peter Schweizer, "You, Too, May Be Funding China's Army," USA
Today, May 14, 1997.
126. "Wall Street Firms Urged Not to Help Finance Chinese Dam," Bloomberg,
May 6, 1999.
127. Edwin Chan, "Investors Like Global China IPO's, But 50 of Them?," Reuters,
March 12, 2001.
128. U.S. House of Representative Select Committee, "U.S. National Security
and Military/Commercial Concerns With the People's Republic of China," May
25, 1999 (Volume 1, p. 57).
129. Commission to Assess the Organization of the Federal Government to Combat
the Proliferation of Weapons of Mass Destruction, "Combating Proliferation
of Weapons of Mass Destruction," July 14, 1999 (pp. 77-78).
130. The William J. Casey Institute, "Key Commission Reports, Rep. Bachus
Call for Security-Minded Surveillance of U.S. Capital Markets: Possible Next
Steps," July 30, 1999.
131. Ibid.
132. Former Senator Lauch Faircloth and former Representative Gerald Solomon, "U.S.
Market Securities Act of 1997" (S.1315).
133. Ibid.
134. For a detailed history of this case study, please see the Institute for
International Economics' "Case Studies in Economic Sanctions, Cases 62-2
and 85-1." (http://iie.com/topics/sanctions/southafrica1.htm)
This form of financial leverage has been consciously undermined by multinational
firms, financial institutions and, indeed, an international community that
often resists participation in U.S.-led attempts to pressure governments engaged
in egregious national security and/or human rights abuses. For example, following
the South Africa campaign, many institutional investors constructed policies
prohibiting "social investing," (i.e., the use of investment policy
to advance social concerns). Influential companies and business coalitions
have likewise been effective in lobbying those in government to dismantle or
neutralize economic sanctions and other financial penalties as a policy option.
When sanctions are levied, the willingness of those firms in the EU, Asia and
elsewhere to continue doing business with the targeted government(s) undermines
the leverage brought to bear.
135. Correspondence from Senator Sam Brownback to President William Clinton,
October 3, 1997.
136. Correspondence from former Senator Alfonse D'Amato and Representative
Benjamin Gilman to President William Clinton, October 1, 1997.
137. Robert Greenberger and Laurie Lande, "Russia's Gazprom Appears Vulnerable
to U.S. Pressure Over Iranian Gas Deal," Wall Street Journal, October
17, 1997:
One such option would be to freeze the U.S. assets of the violating firm. Interestingly,
Total had given this matter careful consideration prior to signing the contracts.
Anticipating a forceful U.S. response, the company reportedly liquidated its
U.S. assets prior to finalizing the deal.
138. Correspondence from former Senator Alfonse D'Amato and Representative
Benjamin Gilman to President William Clinton, October 1, 1997.
139. Ibid; and Steve Erlanger, "Clinton Hesitates to Punish Nations for
Iran Oil Deals," New York Times, March 21, 1998.
140. According to public reports at the time, Gazprom was slated to raise some
$1 billion from its bond offering. It was later determined, however, that the
company intended to attract roughly $3 billion. The company eventually raised
in the range of this latter amount in the European syndicate loan market on
less advantageous terms in the wake of the U.S. controversy.
141. Correspondence from Senator Alfonse D'Amato and Representative Benjamin
Gilman to Vice President Al Gore, October 8, 1997.
142. Correspondence from Senators Sam Brownback and Jon Kyl to Senators Alfonse
D'Amato and Paul Sarbanes, October 8, 1997:
In addition to the proliferation concerns cited in the Brownback and Kyl letter,
Russia's assistance in the development of two nuclear reactors in Iran was
also a contentious matter at that time.
143. Ibid.
144. George Gedda, "U.S. Reviewing Russia Oil Company," Associated
Press, October 16, 1997:
"U.S. government lawyers are looking into the efforts of a giant Russian
energy company to raise money in the U.S. and other financial markets."
145. Robert Greenberger and Laurie Lande, "Russia's Gazprom Appears Vulnerable
to U.S. Pressure Over Iranian Gas Deal," Wall Street Journal, October
17, 1997:
Capital markets leverage was, however, considered at the time of ILSA's drafting.
According to the Wall Street Journal, "However, an earlier draft [of ILSA]
would have barred offending companies from U.S. financial markets. That sanction
was replaced by narrower penalties after heavy lobbying by the U.S. banking
industry, led by Citibank's Citicorp."
146. The Center for Security Policy, "Sen. D'Amato's Committee Serves
Notice on Those Who Aid and Abet U.S. Adversaries: No Fund-Raising on American
Capital Markets," October 30, 1997.
147. Ibid.
148. Ibid.
149. Ibid.
150. Ibid.
151. Ibid.
152. Ibid.
153. Ibid.
154. The William J. Casey Institute, "Tilt: Heritage Panel, Casey Institute's
Robinson Warned Last Month of Unsustainability of IMF's Russia Rescue Effort," August
14, 2000.
155. Steven Erlanger, "Russian Partner in Iran Deal Postpones Its Bond
Offering," New York Times, November 12, 1997.
156. "Giant Oil Deal Moves China Onto World Stage," Asia Times, June
6, 1997; and John Berlau, "Is China Stock a Security Risk?," Investor's
Business Daily, October 5, 1999:
At the time, CNPC had contracted to develop the estimated one billion barrel
al-Ahdab oil fields in Southern Iraq. The company's Chairman, Zhou Yong-kang,
said at the signing in Baghdad that "[CNPC] would finance part of the
project, while international investors would be tapped for the rest." According
to the report, CNPC was also seeking to help develop Iraq's Halfaya fields
estimated to hold some five billion barrels of oil. Energy industry newsletter
reports indicate that CNPC was also seeking a foothold in Iran at that time: "CNPC
plans to build a 1000 kilometer pipeline from Kazakstan to Iran, tapping the
gradually opening Iranian oil market."
157. Correspondence from Representative Frank Wolf to SEC Chairman Arthur Levitt,
September 30, 1997:
Representative Frank Wolf provided a detailed assessment of CNPC's activities
in Sudan in his correspondence to SEC Chairman Arthur Levitt. "CNPC, China's
state-owned oil company, is heavily involved in financing and constructing
an oil pipeline and oil production -- both upstream and downstream -- in the
African country of Sudan."
158. Ian Johnson, "China Cuts Sudan a Deal on Nile Oil Project." Wall
Street Journal, December 20, 1999.
159. Freedom House, Center for Religious Freedom, "Sudan Campaign of Conscious
Brochure 2001.î
160. Ibid.
161. Ibid.
162. Freedom House, Center for Religious Freedom, "Sudan Campaign of Conscious
Brochure 2001."
163. Correspondence from Representative Frank Wolf to NYSE Chairman Richard
Grasso, September 23, 1997.
164. U.S. Department of State, "Patterns of Global Terrorism, 2000,î April,
2001.
165. Correspondence from Rabbi David Saperstein, former Chairman, U.S. Commission
on International Religious Freedom to President William Clinton, October 22,
1999:
As the U.S. Commission on International Religious Freedom wrote to President
Clinton in October, 1999, "Revenues from the pipeline would insulate the
Khartoum government from the impact of economic sanctions, and thus undermine
the peace process. Flush with new oil money, the National Islamic Front would
have little incentive to engage in negotiations."
166. John Berlau, "Is China Stock a Security Risk?," Investor's Business
Daily, October 5, 1999.
167. "Exploiting Sudan's Agony." The Washington Post, November 15,
1999.
168. The William J. Casey Institute, "China Petroleum's IPO Would Provide
Economic and Military Life-Support for Terrorist- and Slavery-Sponsoring Sudan." September
24, 1999.
169. Ibid.
170. Ibid.
171. Correspondence from Representative Frank Wolf to NYSE Chairman Richard
Grasso, September 23, 1997; and Correspondence from Representative Frank Wolf
to SEC Chairman Arthur Levitt, September 30, 1997:
In his letter to Chairman Grasso, Wolf wrote, "I believe this company
at this time would be inappropriate and am writing to urge you to delay this
listing." The Congressman went further in his correspondence with the
SEC: "I have some serious concerns about CNPC and wanted to bring them
to your attention in hope that the SEC will take a careful look at whether
this company should be allowed access to our capital markets. It could have
serious national security implications for the U.S. and could lead to the death
of tens of thousands more people in the country of Sudan."
172. Eduardo Lachica, "U.S. Religious Task Force to Scrutinize CNPC's
Stock Offer for Sudanese Ties," Wall Street Journal Asia, December 22,
1999:
The Commission later established a "Capital Markets Task Force," the
first official markets-related entity of its kind. The mandate of the task
force was, among other duties, to study capital markets security more broadly
and monitor the CNPC/PetroChina stock offering.
173. Correspondence from Rabbi David Saperstein, Chairman, U.S. Commission
on International Religious Freedom to President William Clinton, October 22,
1999.
174. Eduardo Lachica and Peter Wonacott, "China National Petroleum Revises
Sudan Venture for U.S. Investors," Wall Street Journal Asia, November
3, 1999.
175. David Ottaway, "Chinese Fought on NYSE Listing," Washington
Post, January 27, 2000:
David Ottaway of the Washington Post also commented on the opaque nature of
this maneuver, stating, "The most important [CNPC step to blunt the U.S.
religious and human rights campaign] was to create a separate company, PetroChina...that
will operate inside China only." This 27 January article also marked the
first time that press accounts estimated IPO proceeds to be in the range of
$5 billion -- down from an originally-targeted $10 billion (July, 1999) and
$7 billion according to reports in December, 1999.
176. John Berlau, "Chinese Oil Firm's Listing on NYSE Faces Fight Due
to Terrorist Links," Investor's Business Daily, March 10, 2000; and "China
CNPC to Postpone IPO Roadshow Until Feb.," Dow Jones, January 26, 2000:
Interestingly, the CNPC/PetroChina affair was generating scores of mainstream
press reports internationally on a monthly basis by February 2000. Although
it had been some three months since PetroChina was created, many press items
still referred to the IPO as "CNPC's." For example, on Wednesday,
January 26, the Dow Jones reported that "China National Petroleum Corporation
has postponed the road show for its initial public offering...î While
the name "PetroChina" was used with greater frequency in the weeks
before the IPO, many members of the press still use the two names interchangeably.
177. Jane Lampman, "Battle Against Oppression Abroad Turns to Wall Street," Christian
Science Monitor, March 3, 2000:
Jane Lampman of the Christian Science Monitor documented the new capital markets
focus of religious, human rights and national security public policy organizations: "Now
a coalition of religious and human rights groups in the United States is targeting
the money trail in an effort to stop what they believe is a war of genocide
in [Sudan]. It is part of an emerging strategy to focus on Wall Street as a
way to curb religious persecution and other human rights abuses around the
world. It is winning allies in Congress and the national-security community
concerned about the rising risks of global "bad actors" tapping the
US financial markets...Now the religious and human-rights groups are exploring
a new kind of sanctions - which focus not just on stock portfolios but capital
markets."
178. Correspondence from religious and civic leaders to President William Clinton,
December 9, 1999:
The letter went on to forcefully question the credibility of CNPC's creation
of PetroChina. "Reportedly, CNPC and its investment bank, Goldman Sachs,
will shortly seek to avoid the Executive Order and public censure by a "restructuring" scheme
purporting to withhold IPO funds from CNPC's commitment in Sudan, Iraq and
other terrorist states. The fungibility of money and the scale of CNPC's activities
in Sudan thoroughly undermine the credibility of this contrivance."
179. Ho Swee Lin and James Kynge, "Chinese Oil Group Seeks $7bn IPO in
New Year," Financial Times, December 23, 1999; and Ho Swee Lin and James
Kynge, "Investors to Tread Warily in China Oilfields," Financial
Times, December 23, 1999:
It should likewise be noted that in December and January a number of financial
issues were raised with respect to the now-PetroChina offering. Chief among
these were reports that IPO proceeds were to be earmarked for "debt repayment
and severance package repayment" rather than exploration and other revenue-enhancing
projects. The concerns were sufficiently serious that the Chinese Minster whose
division was in charge of CNPC was forced to clarify publically CNPC/PetroChina's
use of funds. It has been speculated that more in depth financial reviews of
PetroChina were catalyzed by the broad array of reports addressing the company's
IPO.
180. "China CNPC to Postpone IPO Roadshow Until Feb.," Dow Jones,
January 26, 2000; and Ho Swee Lin, "US Regulator Holds Up Chinese Oil
IPO," Financial Times, February 3, 2000.
181. The William J. Casey Institute, "Human Rights and Religious Leaders
Urge Hundreds of Pension and Mutual Funds to Forego Imminent PetroChina IPO
on NYSE," January 28, 2000.
182. Correspondence from religious and civic leaders to U.S. State Treasurers
and pension and mutual funds, January 24, 2000.
183. Ibid.
184. David Ottoway, "Chinese Fought on NYSE Listing," Washington
Post, January 27, 2000.
185. Ibid.
186. Given their size and importance within the industry, CalPERS and TIAA-CREF
are often said to play an influential role in the investment strategies of
other U.S. public pension funds.
187. Ho Swee Lin, "Investors Lukewarm on PetroChina," Financial Times,
March 31, 2000:
According to the Financial Times, "Failure for the offer would have depressed
the outlook for the many other state-owned enterprises queuing up for international
funds."
188. David Ottoway, "Chinese Fought on NYSE Listing," Washington
Post, January 27, 2000.
189. International Campaign for Tibet, "Controversial Chinese NYSE Listing
Opposed by Tibetan Advocacy Group," February 15, 2000; The William J.
Casey Institute, "AFL-CIO Joins Effort to Block PetroChina's Bid to Penetrate
U.S. Capital Markets," March 1, 2000; and James CO, "AFL-CIO Flexes
Muscle Against China IPO," USA Today, March 10, 2000:
According to a press release by the Campaign for Tibet, "PetroChina is
now looking for Americans and their capital to finance the further exploitation
of the Tibetan Plateau." Similarly, citing human rights, corporate governance,
ethical issues and potential lay-offs, the AFL-CIO press release announcing
its opposition on March 1, 2000 stated, "The PetroChina IPO has many risky
financial holes, and they are covered in an intricate patchwork of human rights
and environmental violations."
190. Stephan Fidler and John Labate, "Left and Right Unite in Protest
Over PetroChina Offering," Financial Times, March 21, 2000:
The Financial Times provided a preview of the activities of the new members
of the Coalition: "Arthur Levitt, Chairman of the Securities and Exchange
Commission, should expect to be bombarded by e-mail from thousands of students
this week."
191. Phyliss Plitch, "On Eve of PetroChina Roadshow, Questions Swirl Around
IPO," Dow Jones, March 10, 2000:
As Bill Patterson, Director of AFL-CIO's Office of Investment proclaimed, "We
have yet to talk to a pension fund that it going near [the PetroChina IPO].
My sense is that the marketing universe for Goldman [Sachs] is shrinking."
192. Correspondence from U.S. Congressmen to President William Clinton, April
3, 2000.
193. Correspondence from U.S. Congressmen to President William Clinton, March
31, 2000.
194. Correspondence from Senator Sam Brownback to SEC Chairman Arthur Levitt,
March 17, 2000; Correspondence from Representative Spencer Bachus to SEC Chairman
Arthur Levitt, March 16, 2000; and Correspondence from Representatives Spencer
Bachus and Michael Oxley to SEC Chairman Arthur Levitt, March 7, 2000.
195. "PetroChina Files for U.S. IPO," Reuters, February 29, 2000.
196. The William J. Casey Institute, "PetroChina Prospectus Only Intensifies
Concerns About IPO," March 10, 2000.
197. Correspondence from Representative Frank Wolf to Acting SEC Chairman Laura
Unger, March 8, 2001:
Rep. Wolf's correspondence quoted a letter from Richard Newcomb, Director of
the Office of Foreign assets Control, to U.S. Senators with respect to the
use of U.S. capital markets proceeds in Sudan-related projects. According to
that letter, "Section 2(d) [of the 1997 Executive Order effecting sanctions
against Sudan] would prohibit U.S. persons from contracting to underwrite or
purchase shares in a new public offering[s] if the proceeds were for use to
support a project in Sudan after the effective date of the Order."
198. The William J. Casey Institute, "PetroChina Prospectus Only Intensifies
Concerns About IPO," March 10, 2000.
199. Mark Landler, "China's No. 1 Oil Company Goes Public With a Whimper," New
York Times, April 8, 2000.
200. Ibid; Ho Swee Lin, "Chinese Oil Producer Hopes to Raise Up to $7bn
Through IPO; and William J. Casey Institute, "Casey's Robinson Testifies
Before California Legislature on Prospect of Global "Bad Actors" Penetrating
State Portfolios," January 14, 2000:
It was eventually learned that PetroChina's initial public offering would be
priced at a price/earnings (p/e) ratio in the range of 8 to 1. A company's
p/e area is a determining factor in the pricing of an offering and, therefore,
the total proceeds raised. Put another way, by adjusting the p/e ratio, a firm
can increase or decrease in scale its initial public offering. The importance
of this cut-back in expectations by the firm was captured by the Casey Institute
at the time: "According to the Financial Times of 12 January [2000], the
price-earnings (p/e) ratio of the prospective offering is anticipated to be
in the range of 10 times expected Year 2000 earnings for the parent company.
While such a p/e ratio falls into line with some high-tech and other recent
IPO's, a ratio of this nature falls well short of that of most global energy
companies, which are, according to a Bloomberg energy industry composite, priced
on average at 26 times earnings. Evidently, this sort of deal sweetening is
deemed essential to market an increasingly controversial offering."
201. Kenneth Wong, "Initial PetroChina Trading Sputters; Goldman Sachs
Bolsters Prospects," Wall Street Journal Interactive Edition, April 10,
2000.
202. The William J. Casey Institute, "Broad-Based Coalition Plays Pivotal
Role in PetroChina's IPO -- and Market's Bleak View of Chinese State-Owned
Enterprises," April 13, 2000.
203. Ho Swee Lin, "Investors Lukewarm on PetroChina," Financial Times,
March 31, 2000:
"Response from U.S. institutional investors was said to be particularly
poor, reflecting rising opposition to PetroChina after allegations linked it
with terrorist funding in Sudan..."
204. Ibid:
"It is understood that several "red chips" - the HK-listed window
companies of mainland enterprises - were corralled into taking stakes as China
moved to ensure the offering went smoothly."
205. Peter Wonacott and Eduardo Lachica, "PetroChina Recruits Several
Allies in Hong Kong as Investors in Issue," Wall Street Journal Interactive,
March 22, 2000.
206. Interview with Dr. Eric Reeves, Professor, Smith College, May 10, 2001:
The bulk of the information provided in this section was contributed by Dr.
Reeves during an interview by the author. Dr. Reeves is one of the world's
foremost authorities on Sudan and related capital markets leverage. His single-minded
efforts against those foreign oil companies that have been deemed complicit
in the horrors of Sudan (due to the revenue-generating role their activities
play for the Khartoum government) have been noteworthy and effective. In taking
an extended sabbatical from his teaching duties at Smith College to raise the
visibility and priority accorded Sudan and wage an effective divestment campaign
against Talisman Energy and CNPC/PetroChina, Dr. Reeves has advanced the future
use of capital markets leverage. He has published extensively on this subject
and testified before a number of Congressional committees and non-governmental
organizations.
207. Christian Aid [UK], "The Scorched Earth: Oil and War in Sudan." March,
2001 (pp.1-5).
208. Talisman Energy, "Corporate Social Responsibility Report 2000," April,
2001.
209. Ibid.
210. "Exploiting Sudan's Agony." The Washington Post, November 15,
1999:
As the Washington Post editorial opined in 1999, "Talisman Energy Inc.,
the Canadian company that operates the new pipeline, has rightly become the
target of a divestment campaign."
211. Dr. Eric Reeves, "As in South Africa, It's Time to Let Our Wallets
Do the Talking," The Los Angeles Times, August 30, 1999.
212. Dr. Eric Reeves, "Rapacious Instincts in Sudan." The Nation,
June 4, 2000.
213. Steven Chase, "Talisman Head Mounts Defense of Sudan Project." The
Globe and Mail, November 19, 1999.
214. Minister of Foreign Affairs [Canada], "Human Security in Sudan: The
Report of a Canadian Assessment Mission," January 2000 (p.65).
215. Paul Waldie and Charlie Gillis, "Talisman to Embark on Share BuyBack:
Buckee Admits Sudanese Operations Have Hurt Stock Price," National Post,
December 15, 1999.
216. Talisman Energy Inc. News Release, "Talisman Renews Normal Course
Issuer Bid," February 28, 2001.
217. Interview with Dr. Eric Reeves, Professor, Smith College, May 10, 2001.
218. Ibid.
219. Ibid.
220. Paul Waldie and Charlie Gillis, "Talisman to Embark on Share BuyBack:
Buckee Admits Sudanese Operations Have Hurt Stock Price," National Post,
December 15, 1999.
221. Interview with Dr. Eric Reeves, Professor, Smith College, May 10, 2001:
Put another way, if Talisman was trading at an average multiple of four times
per share cash flow for 2001, the current stock price should be moving toward
$88 Canadian -- roughly $19 Canadian more than its level at this time. Similarly,
if Mr. Buckee's multiple of five were employed, the stock could be determined
to be trading in the range of $51 Canadian more than its level at this writing.
222. Talisman Energy Inc. News Release, "Talisman Announces Dividend Sixty
Cents Per Share Annualized," May 1, 2001.
223. Interview with Dr. Eric Reeves, Professor, Smith College, May 10, 2001.
224. Elizabeth Neuffer, "Critics Decry Oil Investors' Link to Sudan War," Boston
Globe, March 26, 2001; Karl Vick, "Oil Money is Fueling Sudan's War; New
Arms Used to Drive Southerners From Land," Washington Post, June 11, 2001;
and "Fidelity Urged to Divest Talisman Stake," Boston Globe, April
27, 2001.
225. Stacey Mattingly, "Calls for Capital Market Sanctions Intensify Sudan
Debate," Newsroom Online, April 10, 2001.
226. The "demand side" may be loosely defined as any U.S. entity
that purchases foreign securities. Although individual investors fall into
this category, the bulk of U.S. demand is made up of large institutional investors
(e.g., pension and mutual funds, insurance companies, hedge funds, banks and
other financial institutions, etc.). These entities wield immense purchasing
power and, indeed, have the ability to help shape not just the U.S. capital
markets, but international exchanges as well.
227. "American Depository Receipts - Over the Odds," Economist, January
15, 2000.
228. JPMorgan, "The ADR Reference Guide." (ADR.com)
229. Simon Beck, "China Shares Probe Sought," South China Morning
Post, October 12, 1997.
230. Testimony of Randolf Quon, before Senate Banking Subcommittee on Financial
Institutions, November 5, 1997; and The William J. Casey Institute, "Will
China's Latest Bond Offering Penetrate U.S. Markets, Institutional Portfolios
Through a 'Backdoor'?," December 9, 1998:
Rule 144 (a) is designed to protect investors from the risks associated with
purchasing unregulated overseas securities. This exemption assumes that QIB's
are either able to access more information about these companies than individual
investors or are more adept at assessing the risks involved in purchasing unregulated
securities. Both of these assumptions are flawed in some respects. If there
is little information available regarding a foreign company and/or its securities
are offered through an exchange that does not require adequate disclosure,
QIB's may find it difficult to make an informed investment decision. More to
the point, QIB's may end up funding "bad actors" and others seeking
to avoid U.S. disclosure requirements. Similarly, risk is measured in a number
of different ways. The belief that QIB's are more secure from the potential
dangers of unregistered securities discounts unduly the likelihood that these
risks may not be adequately disclosed under foreign regulations. Put simply,
it is difficult to evaluate risks if those risks (including national security,
human rights and/or religious freedom concerns) have not been properly identified.
231. Even without taking advantage of Rule 144 (a), foreign firms and governments
can access U.S. demand. Specifically, foreign securities can be marketed to
all U.S. investors by off-shore entities (as long as that "middle man" entity
was not the issuer or affiliated with the offering). An example could be useful.
A Chinese sovereign debt offering could be purchased by a U.S. off-shore institution
located in the Bahamas through Regulation S. The Chinese debt -- which has
not met SEC levels of disclosure or utilized the 144 (a) exemption for QIB's
-- could then be sold to U.S. investors without restrictions following a forty
day "seasoning period." Although in practice this rarely occurs due
to the relative illiquidity of the market (i.e., it is difficult to resell
the paper), this nevertheless raises an important question: namely, if the
risk to non-QIB's is sufficiently great to merit regulatory protection from
unregistered foreign securities, how has that risk been mitigated over the
course of that forty-day period?
232. Testimony of Randolf Quon, before Senate Banking Subcommittee on Financial
Institutions, November 5, 1997.
233. The William J. Casey Institute, "Will China's Latest Bond Offering
Penetrate U.S. Markets, Institutional Portfolios Through a 'Backdoor'?," December
9, 1998.
234. Ibid:
As the William J. Casey Institute noted at the time of the offering, "In
contrast with SEC procedures, Luxembourg...requires, according to one Wall
Street insider, 'form over substance.'"
235. Sarah McBride, "MSCI to Add Red-Chip Firms to its Indexes," Wall
Street Journal Asia, March 19, 2000.
236. Ibid.
237. Untitled CalPERS Report to the Joint Legislative Audit Committee of California,
Summer 2000:
CalPERS' extensive report to the Joint Legislative Audit Committee of California
was prepared following January 5, 2000 Committee hearings regarding State Senator
Ray Haynes' request for a security-minded audit of the CalPERS system to determine
the extent to which CalPERS had invested in PLA-affiliated companies. (See
Appendix 5.)
238. Ibid.
239. This "exchange bias" is likely related to the nature -- and
extent -- of disclosure required of firms seeking to list on a specific foreign
exchange.
240. Correspondence from William J. Casey Institute Chairman Roger Robinson
to Ms. Rosalind Hewsenian, Managing Director, Wilshire Associates, March 13,
2001.
241. J. Michael Waller, "China Cashes In," Insight Magazine, December
24, 1999.
242. Commission to Assess the Organization of the Federal Government to Combat
the Proliferation of Weapons of Mass Destruction, "Combating Proliferation
of Weapons of Mass Destruction," July 14, 1999 (pgs. 77-78).
243. John Berlau, "Chinese Army Ties to U.S. Money: Do California Pension's
Investments Risk Retirements?," July 27, 1999.
244. Peter Wonacott, "Sinopec's Ties to Sudan May Hurt Its $3.5 Billion
Global Stock Issue," Wall Street Journal, October 11, 2000.
245. Ibid:
It is, naturally, easier to transfer assets to a rival energy firm that is
already engaged in Sudan when both entities are owned by the same government.
246. Ibid.
247. Ibid:
Wonacott went on to remark: "Sinopec's removal of Sudanese operations
marked a more radical attempt [than that of PetroChina] to distance itself
from the controversial country."
248. The William J. Casey Institute, "Sinopec Comes to Market as China
Taps Unsuspecting U.S. Investors for Funds to Support Nefarious Activities," October
19, 2000.
249. Correspondence from Elliott Abrams, Chairman, U.S. Commission on International
Religious Freedom to David Martin, SEC Director of Corporation Finance, October
20, 2000.
250. The William J. Casey Institute, "Sinopec Comes to Market as China
Taps Unsuspecting U.S. Investors for Funds to Support Nefarious Activites," October
19, 2000:
Sinopec also had inked contracts with Iraq to develop some 24 oilfields upon
the lifting of U.N. sanctions.
251. The William J. Casey Institute, "Insult to Injury: Sinopec's Iranian
Deal Constitutes Apparent ILSA Violation," January 16, 2001; Campion Walsh, "Untitled," Dow
Jones Wire Service, January 16, 2001; and "U.S. to Investigate Oil Pact
Between Sinopec and Iran," Bloomberg News, January 19, 2001:
Within days of the announcement, Chinese and Sinopec officials sought to minimize
the potential fall-out of the agreement. A Bloomberg Financial article reported
the Chinese claim that the agreement was between China PetroChemical (Sinopec's
parent) and Iran and therefore should not implicate "its listed unit." This
claim was contradicted by Beijing's China Daily, which reported that "Sinopec
Group, one of China's largest oil companies, signed an agreement with National
Iranian Oil Company." China went on to suggest that the contract did not
technically violate ILSA as the venture entailed engineering and technical
exchanges rather than monetary exchanges.
252. Campion Walsh, "China Firm's Oil Deal May Revive US Sanctions on
Iran," Dow Jones News Wire, January 17, 2001.
253. Correspondence from Representatives Spencer Bachus and Dennis Kucinich
to state treasurers and attorney generals, August 3, 1999.
254. David Ottaway, "Chinese Fought on NYSE Listing," Washington
Post, January 27, 2000.
As Nina Shea of Freedom House stated plainly, "But if American companies
can't invest in Sudan, why should we be capitalizing companies who do it?"
255. Notwithstanding a promised divestment campaign, the precedent set by Talisman,
ongoing non-governmental action, significant Congressional attention and the
publically-announced decisions by leading financial institutions to eschew
the stock, PetroChina chose not to disclose these and other possible material
risks associated with the connection of its parent company to Sudan. It similarly
did not alert investors to the circumstances surrounding its rather hasty establishment
or describe how CNPC incurred the roughly $15 billion of debt ultimately transferred
to PetroChina.
256. Correspondence from Representative Frank Wolf to Acting SEC Chairman Laura
Unger, April 2, 2001.
257. Ibid.
258. The SEC determined that several of the "expanded disclosure requirements" sought
by Rep. Wolf included information already required by the SEC from foreign
firms. In affirming the existence of these new, material risk factors, however,
the SEC acknowledged that the disclosure process was not sufficiently registering
these risks. Put another way, the information required was not necessarily
presented in such a way sufficient to alert investors to these new material
political risks.
259. Edward Alden, "Watchdog Chief to Inherit Disclosure Bombshell," Financial
Times, May 11, 2001.
260. Correspondence from Acting SEC Chairman Laura Unger to Representative
Frank Wolf, May 8, 2001:
David Martin, the SEC's Director of Corporation Finance, provided a more detailed
review of materiality and the SEC's role in accounting for risk in the marketplace
in a ten-page memorandum attached to Ms. Unger's letter. (See Appendix 6.)
261. Roger Robinson, Draft Wall Street Journal Editorial, "SEC Expands
Investor Protection," May 30, 2001:
Mr. Robinson's editorial was published in the Wall Street Journal on July 6,
2001 under the title "Are You Investing in Rogue States?" It was
also published in the European and Asian editions of the Journal some days
later.
262. These disclosure reviews will not affect U.S. corporations, which are,
in most cases, prohibited by law from doing business in the U.S.-sanctioned
countries cited by the SEC.
263. Correspondence from Acting SEC Chairman Laura Unger to Representative
Frank Wolf, May 8, 2001.
264. Evelyn Iritani, "SEC Raises Watch on Foreign Firms for Political
Risks," Los Angeles Times, May 14, 2001.
265. As referenced earlier, China has signed energy contracts with a number
of countries under U.S. sanctions regimes over the past two years. Moreover,
the government has, at least in the case of Sudan, made financial commitments
to rogue governments. (See page 26.)
266. An example may be instructive. Roughly 150 foreign entities applied for
U.S. capital markets access last year. Relatively few of these had links to
U.S.-sanctioned countries that would trigger SEC review under the new process.
Possibly three or four of these entities could raise sufficiently complex issues
as to merit interagency review. Even this number might be reduced assuming
that the new SEC disclosure requirements would give pause to future "bad
actors" considering fundraising in the U.S. capital markets. This kind
of notional scenario is unlikely to "cast a pall" over the markets.
Moreover, using the Committee on Foreign Investment in the U.S. (CFIUS) as
a model would indicate that such an interagency working group would only have
the authority to recommend that a foreign entity be denied access to our markets.
267. "Total Madness," Wall Street Journal Europe, October 6, 1997.
Interestingly, the Wall Street Journal offered an opinion regarding the question
of "extraterritoriality" in a 1997 editorial that considered the
controversial violation of ILSA by France's Total, Gazprom and Malaysia's Petronas.
According to the Journal, "In fact, a lot of laws all over the globe are
extraterritorial in the sense of exacting punishment when foreign interests
conflict with some domestic interest. [Former Senator] D'Amato seeks to curb
access to the U.S. market and U.S. financial resources by firms investing large
amounts of money in Iran's energy sector. It has the sole and explicit aim
of denying Iran funds to develop weapons of mass destruction. Whether that
is "extraterritorial" we'll leave to the lawyers to decide but French
law is not free of extraterritoriality in some similar sense either."
268. John Berlau, "Chinese Oil Firm's Listing on NYSE Faces Fight Due
to Terrorist Links," Investor's Business Daily, March 10, 2000.
269. John Labate and Stephen Fidler, "Sudan Ties Jeopardize Chinese Oil
Listing," Financial Times, October 6, 1999:
Alan Hevisi, Comptroller of New York City, underscored the importance of political
risk factors in a letter to Talisman CEO James Buckee in September 1999: "As
long-term investors, [New York City Employees Retirement System] believes a
company that is cavalier about its moral and social responsibility represents
an unacceptable risk. The expanding divestment campaign against Talisman for
alleged complicity in the horrors in Sudan is just one indication of that risk."
270. The development of environmental risk in the markets may prove to be a
constructive analogy. Following the Three Mile Island nuclear accident in 1979,
environmental issues began to be identified by the markets as representing
more serious financial risks. Over the past two decades, a number of institutional
investors have created methodologies to account for this risk. By so doing,
they have altered the perception of firms that are considering environmentally-sensitive
projects. Put simply, firms are forced to weigh the costs of market backlash
against the gains of pursuing the business activity in question.
271. Economist, "A Long Arm for Securities Law: A New Move to Use Securities
Disclosure to Enforce Sanctions Abroad," May 19, 2001.
272. John Berlau, "Chinese Army Ties to U.S. Money: Do California Pension's
Investments Risk Retirements?," July 27, 1999:
"IBD has learned that some of the funding for companies believed to have
connections with Chinese military or intelligence operations have come from America's
largest public pension fund [CalPERS]."
273. Thomas Olson, "Pennsylvania Pensions Bankrolling Violence," Pittsburgh
Tribune-Review, January 21, 2001; and Correspondence from CalPERS consultants
Vienna, Gregor & Associates to Mark Esper, U.S. Senate Committee on Governmental
Affairs, March 6, 2001:
This type of scrutiny has also surfaced in Arkansas, Colorado, Iowa, Massachusetts,
New Jersey, New York, Tennessee and Texas.
274. An examination of those actions undertaken in California should be considered
in the context of a broader determination of the role played by institutional
investors in the capital markets. Although it is beyond the scope of this report,
many of the steps taken by CalPERS, the state auditor and others in California
are of interest. In short, rather than accepting the possibility that CalPERS
may be unwittingly helping fund companies of security and human rights concern
and evaluating remedies, the pension system chose, at key junctures, to deny
that any problems existed.
275. CalPERS News Release, "Investment Chairman Issues Objections to Erroneous,
Misleading Article Published in Investor's Business Daily," July 27, 1999.
276. Correspondence from CalPERS consultants Vienna, Gregor & Associates
to Mark Esper, U.S. Senate Committee on Governmental Affairs, March 6, 2001:
Inviting Mr. Esper to speak at a symposium, the letter stated, "The [CalPERS]
Board of Administration would benefit from hearing your views on U.S. investors
with investments in foreign companies, particularly those that may pose national
security concerns for the United States Government."
277. CalPERS drafted a "white paper" outlining legislation for the
California state legislature that called on the federal government to determine
those foreign entities that constitute a national security risk. (See Appendix
7.)
278. Interview with CalPERS government affairs office.
279. Correspondence from Casey Institute Chairman Roger Robinson to Ms. Rosalind
Hewsenian, Managing Director, Wilshire Associates, March 13, 2001.
280. Correspondence from Casey Institute Chairman Roger Robinson to Public
Pension Fund Boards of Directors, April 10, 2001.
281. Commission to Assess the Organization of the Federal Government to Combat
the Proliferation of Weapons of Mass Destruction, "Combating Proliferation
of Weapons of Mass Destruction," July 14, 1999 (pgs. 77-78):
According to the report, "Access to U.S. capital markets, access to U.S.
technologies, financial assistance, and influence in international financial
institutions are among the wide range of economic levers that could be used
as carrots or sticks as part of an overall strategy to combat proliferation."
282. Thomas Catan and Joshua Chaffin, "U.S. Markets 'Could Be Foreign
Policy Tool,'" Financial Times, May 24, 2000; and Evelyn Iritani, "Curbs
Urged on Foreign Firms' Wall Street Access," Los Angeles Times, February
13, 2000:
A Los Angeles Times article which also appeared during the PetroChina controversy
headlined a similar assessment: "Curbs Urged on Foreign Firms' Wall Street
Access."
283. It may be argued that the federal government's unwillingness to take action
regarding the highly controversial and public PetroChina controversy helped
catalyze legislation involving capital markets sanctions.
284. Edward Alden, "U.S. Legislators Want Markets to Sway Sudan," Financial
Times, November 2, 2000.
285. Report of the U.S. Commission on International Religious Freedom, May
1, 2000 (www.uscirf.gov).
286. Sebastian Mallaby, "Taking Foreign Policy Private," The Washington
Post, May 29, 2000.
287. The Senate did not have sufficient time to consider the statute prior
to the end of the 106th session.
288. Edward Alden, "U.S. Legislators Want Markets to Sway Sudan," Financial
Times, November 2, 2000:
The prospective impact of financial sanctions of this type was noted by the
financial press. As the Financial Times observed, ì...if enacted, [the
legislation] would effectively de-list from the New York Stock Exchange companies
doing business with the Sudanese regime."
289. Senator William Frist, "The Sudan Peace Act" (S. 1453, passed
by U.S. House of Representatives on October 24, 2000):
The Sudan Peace Act, introduced in the Senate by Senator Bill Frist, contained
language that interpreted President Clinton's 1997 Executive Order as including
capital markets sanctions against oil companies operating in Sudan. This language
was removed prior to the bill's release from the Senate Foreign Relations Committee,
upon which the Sudan Peace Act passed the Senate. Upon reaching the House of
Representatives, the language was returned to the bill in the form of a "sense
of Congress" and passed by the House of Representative on October 24,
2000.
290. Representative Spencer Bachus, Amendment to the Sudan Peace Act (H.R.
2052), "Prohibition on Trading in U.S. Capital Markets," June 14,
2001.
291. Eventually fifteen Senators from across the aisle co-sponsored the legislation.
It was deemed to be sufficiently important that former National Security Advisor "Sandy" Berger
and others in the Administration reportedly met with Senator Thompson on at
least one occasion to discuss the legislation and, presumably, China's proliferation
activities more broadly.
292. Senator Fred Thompson, "Summary of The China Nonproliferation Act," May,
2000.
293. Bill Gertz, "Senator Ties China's Behavior to U.S. Trade," Washington
Times, March 4, 2000.
294. U.S. Senate Foreign Relations Committee, Draft Legislation entitled: "Chinese
State Desubsidization Act of 2001," May, 2001:
A version of this bill, entitled the "China Free Enterprise Act of 2001,î was
introduced in the Senate in August, 2001. Likely due, at least in part, to
the August recess and September terrorist attack against the U.S., no action
has yet been taken on this legislation. Unfortunately, it was not possible
prior to the release of this report to examine fully the similarities between
the draft legislation and the final bill or the prospective impact of the China
Free Enterprise Act.
295. Ibid.
296. Ibid.
297. It should be noted that most advocates of the selective use of capital
markets leverage would prefer a case by case approach rather than a broad prohibition
of the type sought by the sponsors of the bill.
298. It should be noted, however, that Wall Street is considered the most advanced
financial center in the world. Much like any other industry, if a firm is forced
to turn to lesser players in the global markets there are likely losses in
efficiency, expertise and, specific to the sale of securities, the placement
or marketing of the financial instrument. All of these -- as well as the potentially
higher costs of funds in other markets -- could be involved in even the temporary
loss of access to the U.S. capital markets.
299. Like most economic indicators, investment figures of the type required
for this report change regularly and are subject to shifting market conditions.
For example, were Asia to experience another precipitous economic downturn,
the markets would respond and U.S. fund managers would likely reduce their
exposure to Asian securities accordingly.
300. The International Federation of Stock Exchanges (www.fibv.com):
This determination excludes the market capitalization of those foreign firms
that have been listed on the exchange(s) referenced. This was likely done by
IFSE to reduce the risk of "double counting" those firms listed on
multiple exchanges.
301. Ibid.
302. Ibid:
This figure does not include capital raised in secondary offerings by those
domestic firms already listed on the exchange(s) referenced.
303. Ibid.
304. Source: Bloomberg Financial Services, Country Debt Printout.
305. Ibid.
306. These estimates were based on composite interviews with economists and
other financial market experts, including an official at the Securities and
Exchange Commission.
307. It bears repeating that the decision to float bonds in a specific market
reflects both the view that the chosen market will produce greater proceeds
at a lower borrowing cost and an objective of tapping investors from that market.
308. Kleiman International Consultants, Inc., "Analysis of U.S. Institutional
Involvement in Global Financial Markets," June 4, 2001:
According to Investment Company Institute data supplied by Ms. Elizabeth Morrissey,
Managing Partner, the combined assets of all open-end mutual funds -- the most
common mutual funds -- in some 36 countries was roughly $12 trillion as of
September 30, 2000. As of that same date, the assets of U.S. open-end mutual
funds was some $7.3 trillion. Accordingly, U.S. mutual funds account for roughly
65 percent of the mutual fund market worldwide.
309. Ibid:
MSCI released a revised version of its All Country World Index in May, 2001,
in which China accounts for 0.26 percent.
310. Ibid.
311. Ibid:
Based on this estimated market capitalization, it is reasonable to assume that
global investors are currently holding roughly $47 billion in equity of those
Chinese companies listed on the MSCI.
312. Ibid.
313. Ibid.
314. Ibid.
315. Ibid.
316. There is surprisingly little information available regarding the "demand
markets" for global securities. Despite extensive research, including
a number of appropriate web-sites (i.e., the Federal Reserve, World Bank, etc.)
and interviews with noted economists and financial consultants, many of the
statistics required to provide a clear indication of global investing patterns
remained elusive. This may be due, at least in part, to the voluntary reporting
requirements for institutional investors and, until now, the absence of a substantive
reason to conduct such a survey.
317. The William J. Casey Institute, "Newsroom Online Sets Parameters
for Global Debate on Efficacy of Capital Markets Sanctions," April 13,
2001.
318. Roger W. Robinson Jr., "Financial Sanctions: How Might They Be Used
Against Proliferators?" (Prepared for the Nonproliferation Policy Education
Center, 1997).
319. The PetroChina precedent is troubling in this connection. Treasury's Office
of Foreign Asset Control ruled that if there were U.S. investor proceeds diverted
to the activities of PetroChina's parent company in Sudan, a violation of U.S.
law could be cited. Put another way, irrespective of the fungibility of money,
as long as a foreign firm claims that U.S. investor proceeds would not be used
in U.S.-sanctioned countries, the firm could raise funds in the U.S. markets.
320. The William J. Casey Institute, "Fed Chairman Greenspan Takes Aim
at Use of Capital Markets Leverage to Protect U.S. Security Interests -- and
Misses," July 20, 2000.
321. Correspondence from President William Clinton to USCIRF Chairman Elliott
Abrams, December 19, 2000.
322. Although the denial of the U.S. debt and equity markets would presumably
dampen U.S. demand, the depth of the American financial system makes it likely
that the foreign firm could still attract U.S. investors through an overseas
exchange. For example, despite substantial public opposition to PetroChina,
there are still a number of U.S. entities that hold this company in portfolio.
For the most part those are private funds that, unlike the more politically-sensitive
public pension systems, are less vulnerable to public pressure.
323. This would include those U.S.-owned financial firms and subsidiaries that
operate overseas. For example, if Lehman Brothers Asia were majority owned
by its U.S. parent, it would be unable to hold the stock of the targeted foreign
firm, even were that firm to list on an Asian exchange.
324. Presumably, Chinese sovereign debt would likewise be limited to foreign
markets in such a scenario.
325. Lily Nguyen, "Talisman CEO Says He'll Take NYSE Over Sudan," The
Globe and Mail, June 18, 2001.
326. Ibid.
327. The William J. Casey Institute, "Senate" Approval of PNTR Sets
Stage for China to Renew Its Penetrations of the U.S. Bond Market," September
20, 2000.
328. Correspondence from USCIRF Chairman Elliott Abrams to President William
Clinton, November 1, 2000:
In its attachment to the President, the USCIRF went on to state, "Moreover,
it is troubling that the proceeds of such an offering might end up supporting
further religious persecution ñ for example, in the purchase of police
supplies or surveillance equipment or payment of security force salaries. The
sale of sovereign bonds is starkly different from the trading of goods or even
the sale of debt or equity securities by a Chinese corporation. It results
in the direct transfer of cash into the hands of the government, without any
constraints on the use of that cash whatsoever. Also, the value of the sale
to China lies not only in the cash received, but also in collateral benefits,
most particularly: 'benchmarking.' That is, the sale provides empirical information
about market conditions to set the terms for and otherwise facilitate future
offerings, not only by the government but also by Chinese corporations generally.
Indeed, the sale may be serving in the mind of the Chinese government as the
vanguard of a much larger post-PNTR campaign to raise capital for economic
expansion and modernization. China's need for capital is massive, particularly
as measured against its goal of doubling the GDP in ten years. Thus, the significance
of the upcoming offering goes far beyond that of a single transaction."
329. Dow Jones Wire, November 6, 2000.
330. Roger Robinson, "Casey Institute E-mail Analysis," November
27, 2000.
331. It should be noted that in order to impose capital markets sanctions,
both the authority of the U.S. Congress and the President would be required
(barring an Executive Order). It is, therefore, difficult to envision the frequent
use of such sanctions.