Capital Markets Transparency and
Security: The Nexus Between U.S.-China Security Relations and
America's Capital Markets
INTRODUCTION
Higher risk foreign companies and governments that have come to be known as
global "bad actors" are increasingly seeking to fund activities inimical
to the security interests and fundamental values of our nation in the U.S.
debt and equity markets.1 Traditionally, "bad
actors" have often been viewed as those foreign governments that are known
proliferators of weapons of mass destruction, sponsors of terrorism, human
rights abusers or religious persecutors. With respect to companies, the list
would likely include firms owned or managed by potentially hostile national
militaries; intelligence or technology-theft front companies; and funding vehicles
for organized crime-affiliated firms or money launderers.2
In the subtle, complex world of global finance, however, such lists or definitions
do not adequately capture the nuances of this rapidly emerging 21st century
national security challenge. Indeed, the ability of global "bad actors" --
on occasion with the assistance of their investment banks -- to establish affiliates,
subsidiaries, off-shore funding mechanisms and other means to obfuscate unsavory
business operations while simultaneously accessing the international debt and
equity markets makes it considerably more difficult to identify wrong-doers
and develop appropriate policy responses. In an age of "globalization," when
the activities of -- and financial markets available to -- multinational firms
are not limited by national boundaries, this challenge is further exacerbated.
An expanded definition of "bad actors," therefore, that identifies
global companies that aid and abet rogue nations, human rights abusers and
other potential adversaries is urgently required. In addition to those cited
above, "bad actors" should also include those companies -- or their
subsidiaries, affiliates and/or parent company -- that help underwrite egregious
offenses of terrorist-sponsoring nations, countries that abuse human rights
or religious freedoms and proliferators of weapons of mass destruction. For
example, as long as Iran continues to be designated by the U.S. Department
of State as a terrorist-sponsoring nation, a foreign energy company doing business
with Tehran should warrant concern (and disclose this material risk) under
this expanded definition due to the revenue-generating nature of its activities.3 Similarly,
were the government of Iran -- or its state-owned firms or military-connected
companies -- to seek access to the global debt and equity markets, a more exacting
review would be merited.
Historically, the United States has sought to distance its epicenter of political
power in Washington from its financial center in New York. It is not difficult,
however, to find occasions when financial considerations have been subordinated
to U.S. foreign policy objectives. For example, the former Soviet Union was
not able to offer securities in the U.S. capital markets at any point in its
history.4 Similarly, no one on Wall Street
would have considered underwriting a German or Japanese sovereign bond during
World War II. More recently, those companies that have been identified as playing
a role in the Holocaust have been subjected to severe public criticism and
some have been made to pay compensation for their activities.5
These precedents point to a guiding principle relevant to an evaluation of
U.S. capital markets security.6 Specifically,
Americans have, in the past, been loathe to help finance foreign governments
or companies that seek to contravene this nation's vital security interests
or fundamental values. Taken one step further, this argument may also apply
to those companies whose operations -- and associated revenue streams -- help
enable the malevolent behavior of potential adversaries of the United States.7
China represents an important case study for the burgeoning field of capital
markets security. A U.S. policy of engagement has presented Beijing with an
unprecedented opportunity to help underwrite its global activities and prop-up
its faltering domestic economy by recruiting Western investors to finance both
its government -- via sovereign debt offerings -- and its state-owned enterprises.
Regrettably, several of the "bad actors" that have been identified
in the U.S. capital markets to date are Chinese entities.
There are two primary reasons for this phenomenon. First, China and its companies
are actively seeking to engage those countries that the U.S. has deemed to
be national security or human rights abusers. Indeed, China has extensive business
and political ties to countries under U.S. sanctions regimes including Iran,
Iraq, Sudan, Cuba, Pakistan and North Korea. Second, China is one of the world's
leading "emerging market" economies. Put simply, rogue nations (and
their companies) such as North Korea and Sudan cannot access the global debt
and equity markets. It should therefore come as no surprise that a number of
the examples cited in this report involve Chinese, or Chinese-affiliated, entities.
Three areas of study have emerged from the intersection of the U.S. capital
markets and national security, human rights and religious freedom: 1) a broader
examination of "bad actors" in the markets; 2) operational processes
related to the global debt and equity markets; and 3) the potential use of
capital markets leverage as a future U.S. policy instrument. Before proceeding
with these areas of consideration, however, a brief review of China's current
financial requirements may illuminate why the PRC is so active in the global
capital markets as well as help demonstrate the potential effectiveness of
exercising financial leverage vis a vis that country, should the need ever
arise.