[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
INVESTMENTS TIED TO GENOCIDE:
SUDAN DIVESTMENT AND BEYOND
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HEARING
BEFORE THE
SUBCOMMITTEE ON
INTERNATIONAL MONETARY
POLICY AND TRADE
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
NOVEMBER 30, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-167
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U.S. GOVERNMENT PRINTING OFFICE
63-125 PDF WASHINGTON : 2010
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
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Washington, DC 20402-0001
HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on International Monetary Policy and Trade
GREGORY W. MEEKS, New York, Chairman
LUIS V. GUTIERREZ, Illinois GARY G. MILLER, California
MAXINE WATERS, California EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina RON PAUL, Texas
GWEN MOORE, Wisconsin DONALD A. MANZULLO, Illinois
ANDRE CARSON, Indiana MICHELE BACHMANN, Minnesota
STEVE DRIEHAUS, Ohio ERIK PAULSEN, Minnesota
GARY PETERS, Michigan
DAN MAFFEI, New York
C O N T E N T S
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Page
Hearing held on:
November 30, 2010............................................ 1
Appendix:
November 30, 2010............................................ 29
WITNESSES
Tuesday, November 30, 2010
Cohen, Eric, Chairperson, Investors Against Genocide............. 7
Kanzer, Adam M. Esq., Managing Director and General Counsel,
Domini Social Investments LLC.................................. 9
Melito, Thomas, Director, International Affairs and Trade, U.S.
Government Accountability Office............................... 5
Williamson, Richard S., former Special Envoy to Sudan............ 11
APPENDIX
Prepared statements:
Cohen, Eric.................................................. 30
Kanzer, Adam M. Esq.......................................... 57
Melito, Thomas............................................... 69
Williamson, Richard S........................................ 86
INVESTMENTS TIED TO GENOCIDE:
SUDAN DIVESTMENT AND BEYOND
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Tuesday, November 30, 2010I03
U.S. House of Representatives,
Subcommittee on International
Monetary Policy and Trade,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2 p.m., in
room 2128, Rayburn House Office Building, Hon. Gregory W. Meeks
[chairman of the subcommittee] presiding.
Members present: Representatives Meeks, Driehaus, Maffei;
Miller of California and Paulsen.
Also present: Representatives Capuano, McGovern, and Lee of
California.
Chairman Meeks. This hearing of the Subcommittee on
International Monetary Policy and Trade will come to order.
We will have opening statements. And, without objection,
all members' opening statements will be made a part of the
record.
We are waiting for the arrival--I want to note that he is
going to appear shortly--of the ranking member, Mr. Miller, but
we will begin so that we can hear the testimony of our
witnesses and get opening statements in prior to us having a
vote.
But before I begin, let me first--I would like to thank the
ranking member, Mr. Miller, for working with me to organize
this critical hearing on the humanitarian crisis in Darfur and
for exploring how we can better empower our capital markets to
contribute to making a positive change in this crisis.
And I also want to take note of Mr. Capuano, who is here
with us today. He is one of the most committed Members of
Congress on this issue especially. And I want to thank you for
your dedication and for your commitment in this area.
Here is Mr. Miller.
So we are happy to have you with us today. And later on, we
will be asking for unanimous consent to allow Mr. Capuano to
have an opening statement.
I was just saying, Mr. Miller, I wanted to thank you for
all of your help, for your commitment, and always your
partnership in organizing and bringing this together, and also
for your commitment in this very important issue and area. I
thank you.
And I also want to thank all of the witnesses, even prior
to your testimony, for being here today and agreeing to
testifying before Congress.
The Sudan has been in conflict, as many of you know, for
many of the past 54 years since it achieved its independence.
And civil wars have caused millions to die from violence and
hunger, displaced millions more, and often destabilize the
whole region, with neighbors that include Chad, Libya, Egypt,
Eritrea, Ethiopia, Kenya, Uganda, the Central African Republic,
and the Democratic Republic of Congo, all of which have been
caught up in Sudan's civil wars and famines.
This is also a priority for reasons of our own national
security. Whether because it is the largest country in Africa
and a major producer of oil and other natural resources, a
source of conflict with millions of weapons in circulation, a
government accused of war crimes and genocide, or because of
its porous borders, Sudan is not a country that any American
can ignore, and one that the United States Government monitors
very closely.
In 2007, Congress passed the Sudan Accountability and
Divestment Act, or SADA. SADA helped empower a growing movement
by authorizing States and investment managers to formally
establish a policy to divest from or prohibit investment in
companies that are seen as supporting the Government of
Khartoum. In particular, SADA gave investment managers safe
harbor from prosecution if they decided to divest from
countries that conflict with such a policy. Surveys show that
nearly all Americans support such initiatives and do not want
their investments supporting genocide in any way.
As Mr. Melito will testify, a recent GAO study found that
SADA and other such initiatives at the State level have led to
an outflow of American capital from the targeted companies and
Sudan in general. What is more, targeted companies have indeed
been prevented from government contracting opportunities.
As we engage in the discussion today, it will matter also
to explore what happens when American investors and companies
exit such regions and whether less scrupulous players enter and
merely make matters worse. While we want to keep up the
pressure on American capital to not contribute to supporting
governments that would allow atrocities such as the situation
in Darfur, there is also no doubt that American companies
generally operate with a higher ethical standard and
understanding of civic engagement than do many other companies
from around the world.
As we discuss and debate the merits of speaking with our
wallet and empowering investors to direct their savings away
investments that conflict with their values, we must also be
mindful to consider what happens in the absence of American
capital and companies, what we do to mitigate unintended
consequences, and how we can also empower these same companies
and investors to re-engage when the situation on the ground
improves, looking at it from a wholistic point of view.
And I know that we are going to have some interesting
testimony and some enlightening questions to come in this
matter. So, again, let me thank the witnesses for being here to
testify. I look forward to hearing your testimony and having
the opportunity to ask you some questions in a very short
while.
And I now will turn it over, I yield to my friend, the
ranking member, Mr. Miller, for an opening statement.
Mr. Miller of California. Thank you, Chairman Meeks, for
holding this hearing today.
It is interesting to focus on what impact the effectiveness
of the Sudan Accountability and Divestment Act of 2007 had on
the divestment of assets from Sudan and how that affected the
country and government regime.
I thank the witnesses for being here today. It is very nice
of you to all show up. I really look forward to the testimony.
We have a very brief period of time for you to speak, but I
know you have a lot to say, and I hope you will make that
concise so we can get as much as we can on the record.
Appropriately, this body is concerned with the actions and
policies pursued by the Government of Sudan. The people of
Sudan have long suffered through civil war and economic
hardship while policies of the government have led to
widespread human rights abuses and genocide in the Darfur
region.
For this reason, in 2007 this House unanimously passed the
Sudan Accountability and Divestment Act--and it is nice to say
``unanimous;'' when we do something like that on a bipartisan
approach, it is very nice to see, because that means what we
were dealing with was very important and we were trying to have
a significant impact--allowing State and local governments to
divest their assets from companies with business operations in
Sudan.
While the law is only a few years old, I am interested in
hearing the panelists' thoughts on the effectiveness of
divestment and whether the policy has any hope of effecting a
sustainable change in the region.
Again, Mr. Chairman, thank you for holding this hearing. We
have widespread support for this, for what we have done in the
past, and I am looking forward to hearing the testimony.
I yield back the balance of my time.
Chairman Meeks. I now ask unanimous consent to allow Mr.
Capuano to have an opening statement.
Mr. Miller of California. We need to debate who is
speaking, but I guess we will allow him to go ahead and talk.
Mr. Capuano. Thank you, Mr. Chairman.
I just want to be very brief myself. I want to thank the
chairman and ranking member for having this meeting, and to
make it clear to anybody who might be listening what this is
about.
This is not about Sudan, per se. To me, it is not. It is
not about civil wars. This is about genocide, clear and simple.
There is a difference between a civil war and a genocide. A
civil war is when two equal parties have disagreements and bad
things happen. A genocide is when an innocent, unarmed
population is massacred, particularly, in this case, by its own
government. So that is what this is about, to me.
And this particular hearing is to determine how well, if at
all, our law has worked, where the holes might be, what we
might be able to do to close them up, to see if the action we
took is sufficient and if it is having any impact. And I think
that is the way it should be.
And I also want to underscore exactly what Mr. Miller said.
I have not met anybody in this Congress or anywhere who is in
favor of genocide. Every good human being--not Democrat, not
Republican, not even American--every good human being should
stand as tall as they can against genocide anywhere in the
world, whether it be people next door to us or people we will
probably never meet. And that is what this is about. It is
about being a human being and being responsible to our fellow
human beings.
And, again, I want to thank the chairman and the ranking
member.
I particularly want to thank the chairman for the kindest
words that have ever been spoken by a Yankees fan to a Red Sox
fan. And I just want to return the favor. You have done a great
job, Mr. Meeks, and I appreciate very, very much your
leadership on this issue and so many other things.
Thank you.
Chairman Meeks. Now I yield to Mr. Paulsen for an opening
statement.
Mr. Paulsen. Thank you, Mr. Chairman.
I also want to thank the chairman and the ranking member
for holding the hearing today and for your leadership on this
issue, as well.
Some of my constituents, especially a group of students
from Edina High School who have been part of a group called
STAND, have been very vocal and concerned about issues
surrounding Sudan and genocide in particular. And these
students have been active in informing the community on the
crisis in Sudan. And I also became a member of, actually, the
Sudan Caucus at their urging.
As we approach the 3-year anniversary now of the Sudan
divestment legislation being signed into law, I believe it is
important for us to examine the impact that the legislation has
had on the situation in Sudan. And while the upcoming
referendum on southern Sudanese independence will be extremely
telling, Sudan is far from where we would like it to be. And I
would hope that this hearing can provide some insight on how we
can have a more effective policy toward Sudan.
I am also interested in hearing, in particular, the effects
the legislation have had over the last 3 years. I was a strong
proponent of the Iran divestment legislation that, of course,
passed Congress, and I am interested to see how the lessons
from Sudan can also be applied to Iran.
I want to thank the witnesses for being here today, and I
look forward to your testimony.
Thank you, Mr. Chairman. I yield back.
Chairman Meeks. I now ask unanimous consent to allow Mr.
McGovern to speak for purposes of an opening statement.
Mr. McGovern. I appreciate it. Thank you, Mr. Chairman.
And I want to thank those who are here to testify.
This is an important hearing. So many States, like my home
State of Massachusetts, and public and private institutions are
reviewing their investment funds and portfolios and looking for
ways to ensure that they do not directly or inadvertently
invest in companies whose activities and capital help enrich
genocidal regimes.
A little over 2 years ago, in September 2008, the then-
Congressional Human Rights Caucus, in coordination with the
House Sudan Caucus, held a hearing to explore genocide-free
investing: who was successful at managing such investment
portfolios; what were the reasons that other investment
companies gave for not carrying out this type of scrutiny of
their own portfolios; what type of guidance for investment
managers might be helpful; and whether obstacles existed in
laws or regulations that inhibited firms from making sure that
their investment portfolios were genocide-free. Today's hearing
more formally builds on that earlier hearing, and I look
forward to hearing from the witnesses.
And let me finally say--and I want to associate myself with
the remarks of my colleague from Massachusetts, Mr. Capuano. We
are talking about genocide here. And what frustrates me is
sometimes when you hear people say, that is something for
governments to deal with. Yes, it is something for governments
to deal with, but it is something for financial institutions
and businesses to deal with, as well. Those who knowingly
continue to invest in ways that help enrich genocidal regimes
are, in essence, complicit. There is no excuse. And if you want
to stop genocide, then you have to stop the investments in
these genocidal regimes.
I tried to go to Darfur. The Sudanese Government wouldn't
give me a visa to go, wouldn't allow me in the country. So I
went and I visited the camps, refugee camps, in Chad, along the
Sudanese border. It breaks your heart. And the stories that I
heard, I can't even describe how horrific they were.
And I sit here frustrated that the world community has not
done enough to stop the killing that goes on in places like
Sudan, and we need to figure out a way to do it. And we are all
in this, not just governments but the private sector, as well.
And so I appreciate your being here and look forward to your
testimony. Thank you.
Thank you, Mr. Chairman.
Chairman Meeks. Thank you.
And, with that, I am going to forgo formal introductions,
because I want to make sure that we have as much time as we
possibly can with the testimony and questions prior to any
votes being called.
So I will start with Mr. Thomas Melito, who is a Director
of International Affairs and Trade at the United States
Government Accountability Office.
Welcome, Mr. Melito.
STATEMENT OF THOMAS MELITO, DIRECTOR, INTERNATIONAL AFFAIRS AND
TRADE, U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Melito. Thank you, Mr. Chairman. I am pleased to be
here to discuss our work regarding the Sudan Accountability and
Divestment Act.
My testimony is based on our report which was released in
September. I will focus on three topics: first, actions that
U.S. States and investment companies have taken regarding their
Sudan-related assets; second, the factors that these entities
considered in determining whether to divest; and, third,
compliance with the Act's contract prohibition provision.
Regarding the first topic, we found that State fund
managers have divested or frozen about $3.5 billion in assets
primarily related to Sudan. Thirty-five U.S. States have
enacted legislation or adopted policies affecting their Sudan-
related investments. State fund managers we surveyed cited
compliance with these laws and policies as their primary reason
for divestment.
U.S.-based investment companies have also sold Sudan-
related shares. Our analysis shows that the value of U.S.
holdings in six key foreign companies fell by nearly 60
percent, or about $8.5 billion, from March 2007 to December
2009. We have found that this decline in Sudan-related holdings
cannot be accounted for solely by changes in share price,
indicating that these investors, on net, sold shares.
Investment companies generally stated that they adjusted their
Sudan-related shares for normal business reasons, such as
maximizing shareholder value.
Regarding the second topic, we found that U.S. investors
generally considered three issues when determining whether to
divest from companies tied to Sudan: first, fiduciary
responsibility; second, the difficulty in identifying operating
companies with ties to Sudan; and, third, the possible effects
of divestment on operating companies and the Sudanese people.
In terms of fiduciary responsibility, both State fund
managers and private investment companies told us that any
decision to divest needs to take into consideration their duty
to act solely and prudently in the best interest of the client.
However, investment companies that consider themselves socially
responsible maintain that divesting from Sudan is consistent
with fiduciary responsibility as long as the alternative
equities chosen can compete financially.
Regarding the identification of operating companies with
ties to Sudan, the Act requires that, before divesting,
responsible entities must use credible information to identify
which companies have prohibited business operations. State fund
managers we surveyed rely heavily on private-sector lists of
operating companies with business ties in Sudan. However, our
analysis of three available lists indicates that they differ
significantly from one another, finding that of the over 250
companies identified on one or more of these lists, only 15
appeared on all three.
Representatives from the organizations that created these
lists told us that obtaining information on operating companies
with business ties to Sudan is difficult. They also said they
would consider an SEC disclosure filing by operating companies
to be a particularly reliable source of information. However,
Federal securities laws do not require companies specifically
to disclose operations in countries designated as state
sponsors of terrorism.
The SEC has suggested to companies that any operations they
have in state sponsors of terrorism might be considered
material and that investors would consider this information
important in making investment decisions. However, in their
correspondence with the SEC, companies have raised concerns
about these instructions.
Regarding the possible effects of divestment, some
companies that have ceased operating in Sudan warned of a
negative effect on both companies and people. Because of these
concerns, some investors and advocacy groups have shifted their
focus towards engagement, viewing divestment as a last resort.
U.S. States have also endorsed engagement as a viable
alternative to divestment, with 19 of the 25 States whose laws
or policies require divestment also encouraging or requiring
engagement.
Regarding the third topic, we found that the U.S.
Government has complied with the Federal contract prohibition
provisions of SADA. We did identify one company that received a
Federal contract and which also had prohibited business
operations in Sudan. However, the contract was administered
under simplified acquisition procedures that do not require
SADA certification.
In addition, we found that the U.S. Government had awarded
more than 700 contracts to affiliates and subsidiaries of
companies identified as having prohibited business ties to
Sudan. However, SADA does not restrict Federal contracting with
these affiliates and subsidiaries if they certify that they do
not have prohibited business operations in Sudan.
In our report, we recommended that the SEC consider issuing
a rule requiring companies that trade on U.S. exchanges to
disclose their business operations related to Sudan as well as
possibly other U.S.-designated state sponsors of terrorism.
Mr. Chairman, this concludes my statement.
[The prepared statement of Director Melito can be found on
page 69 of the appendix.]
Chairman Meeks. Thank you very much.
Now, I will go to Mr. Eric Cohen, who is the chairperson of
Investors Against Genocide.
Mr. Cohen, thank you for your work.
STATEMENT OF ERIC COHEN, CHAIRPERSON, INVESTORS AGAINST
GENOCIDE
Mr. Cohen. Thank you, Chairman Meeks, Ranking Member
Miller, and members of the subcommittee. Thank you for the
opportunity to discuss the need to empower individual investors
to choose investments aligned with their desire to avoid
connections to genocide.
For the last 4 years, Investors Against Genocide has been
asking financial institutions to better serve shareholders by
making an effort to avoid investments in companies that are
known to substantially contribute to genocide or crimes against
humanity. We term this approach to investment ``genocide-free
investing.''
Our experience highlights two problems. First, although
U.S. sanctions against Sudan prevent U.S. companies from
operating in Sudan's oil industry, American financial
institutions have been major investors in foreign oil companies
that help the Government of Sudan fund its campaign of genocide
and crimes against humanity in Darfur. For example, in the last
few years, well-known financial institutions such as Fidelity,
Franklin Templeton, and JP Morgan have each had investments in
PetroChina alone worth over $1 billion.
Second, research shows that the vast majority of Americans
are opposed to having their hard-earned savings tied to
genocide. Nonetheless, because most individuals entrust their
savings to mutual funds, millions of Americans are investing
unknowingly, inadvertently, and against their will in companies
funding genocide.
Addressing this problem will have enduring value not only
for the continuing crisis in Sudan but also for humanitarian
crises in the future. Our recommendations are focused on
financial institutions becoming more transparent and providing
customers with the material information needed to make informed
choices.
Our recommendations are based on the following
observations.
First, according to market research, 88 percent of
Americans don't want to be connected through their savings to
egregious human rights abuses. Copies of these studies are
included in my written testimony. This preference for genocide-
free investing has been further demonstrated in the marketplace
by strong support for shareholder proposals addressing
genocide-free investing and by the action of States, colleges,
and Congress to support divestment from Sudan.
Second, current reporting requirements for funds provide no
insight into the funds' human rights policy, depriving
investors of material facts needed to identify funds with
connections to the worst human rights abuses and preventing
investors from making informed choices among investment
options. Funds' investment policies on human rights, if they
exist, are rarely disclosed or only vaguely referenced. Few
investors take on the onerous task of researching fund holdings
and determining which companies have ties to genocide so that
they can avoid these companies. Instead, most investors simply
trust their investment company to make sound choices on their
behalf.
Third, financial institutions, in general, resist
shareholder requests to restrict their investments, even in the
case of genocide--the ultimate crime against humanity.
Fourth, through these investments in foreign companies,
financial firms conflict with and weaken the effect of U.S.
sanctions that block U.S. companies from doing business while
U.S. mutual funds make investments that support their
unrestricted foreign competitors. For example, ExxonMobil is
precluded from supporting the Government of Sudan by helping in
its oil industry, but U.S. mutual funds invest billions of
dollars in PetroChina, ExxonMobil's foreign competitor.
Investors Against Genocide has developed specific
legislative recommendations, detailed in the written testimony,
that would provide useful guidance for financial institutions
regarding human rights abuses without limiting their ability to
make the investments they choose. Most importantly, the
recommendations would make it easier for individual investors
to be able to choose to avoid connections to the worst human
rights abuses.
Regulations should establish a standard framework for
genocide-free investing and require funds to use simple
language to disclose whether they have implemented or chosen
not to implement the framework.
Regulations should establish transparency and disclosure
rules so that small investors and the investment marketplace
can more readily understand the policies of funds and
investment companies with regard to investments in companies
tied to serious human rights abuses.
Regulations should ensure that there is no conflict between
fiduciary responsibility and avoiding investments in companies
tied to genocide or crimes against humanity. SADA provided a
model for the case of Sudan that should be generalized to apply
to future humanitarian crises without requiring an act of
Congress for each crisis.
It has been over 12 years since the U.S.-imposed sanctions
on Sudan and noted serious human rights abuses, and 6 years
since Congress declared Darfur a genocide, and yet most
financial institutions are still investing in the worst
companies funding the genocide. And through the fund offerings
of these investment firms, millions of Americans are caught in
the web of these problem investments.
Long-term inaction by financial institutions highlights the
need for Congress to help empower Americans to make investment
choices that are in line with their personal values. If it is
important enough for the U.S. Government to impose sanctions
related to human rights that prevent American companies from
doing business in a country, then the funds in which America
saves should have an extra level of due diligence and
disclosure regarding their related investments.
Small improvements in disclosure and transparency rules
related to human rights abuses can have a big effect. By
acting, Congress will help investors be able to choose to avoid
connections now and in the future to the worst human rights
abuses: genocide and crimes against humanity.
Thank you.
[The prepared statement of Mr. Cohen can be found on page
30 of the appendix.]
Chairman Meeks. Thank you for your testimony.
We will move on to Mr. Adam Kanzer, who is the managing
director and general counsel of Domini Social Investment, LLC.
STATEMENT OF ADAM M. KANZER, ESQ., MANAGING DIRECTOR AND
GENERAL COUNSEL, DOMINI SOCIAL INVESTMENTS LLC
Mr. Kanzer. Thank you very much. It is an honor to address
this committee and to share Domini's perspective on investor
and regulatory responses to the genocide in Darfur.
Domini Social Investments is an investment advisor based in
New York. We manage funds for individual and institutional
mutual fund investors who incorporate social and environmental
standards into their investment decisions.
We believe investors have an affirmative obligation to
respect human rights and to seek to do no harm. Domini seeks to
meet this obligation by implementing a comprehensive set of
social and environmental standards to guide our investment
decisions.
Addressing genocide is first and foremost a moral
imperative, but it is also an appropriate concern for
fiduciaries who see their role as exclusively focused on
financial concerns. Companies that operate in conflict zones
such as Sudan take on a variety of operational, reputational,
and legal risks, including risk to their license to operate.
There are also systemic socioeconomic risks presented.
Investment policies to address genocide are both warranted
and achievable and can influence corporate behavior. Investors
have other tools as well, and direct engagement with portfolio
holdings is a critically important and effective strategy for
addressing corporate human rights performance.
In discussions about the Sudan Accountability and
Divestment Act, emphasis has been placed on the word
``divestment.'' I would encourage you, however, to focus on the
word ``accountability.'' Investors cannot hold companies
accountable without data. I would therefore like to focus today
on the need for mandatory corporate human rights disclosure.
We strongly endorse the GAO's recommendation that the SEC
require companies to disclose their business operations related
to Sudan, and encourage Congress to take the recommendation a
few steps further.
Domini utilizes a targeted model of divestment and
engagement. A company's connection to Sudan is merely the first
step in our analysis and is insufficient to gauge how a company
is meeting its human rights obligations. We need information to
distinguish between companies that are helping to finance human
rights abuses and those that are contributing to solutions.
Appropriate disclosure should also highlight key areas for
corporate executives to manage and measure.
To foster business respect for human rights, Professor John
Ruggie, the U.N. Secretary-General's Special Representative for
Business and Human Rights, states that governments should
encourage and, where appropriate, require business enterprises
to provide adequate communication on their human rights
performance. This is an element of the state's duty to protect
against human rights abuses, one of the three pillars of the
``protect, respect, and remedy'' framework adopted by the U.N.
Human Rights Council in 2008.
In the United States, however, corporations are not
required to disclose their human rights policies, procedures,
or performance unless corporate counsel determines that such
issues present material risk to the company.
The materiality standard has failed to provide investors
with necessary information about corporate human rights
performance in any area of the world, including Sudan, for
several reasons. First, although materiality is an objective
standard, in practice materiality is in the eye of the
beholder: the corporation.
Second, the materiality standard is generally interpreted
as financial risks to the issuer, not to stakeholders affected
by corporate activity. So-called externalities, including human
rights abuses, are generally not reported.
And, third, materiality is a broad, ambiguous concept.
Companies are often uncertain whether an emerging risk should
be disclosed and, if it is material, how it should be
disclosed. In Domini's experience, it is rare to find any human
rights data in securities filings. Management's incentives,
particularly during a global divestment campaign, are to
disclose as little as possible. As noted by the GAO, companies
have generally resisted the SEC's instructions to disclose and,
at times, have refused to disclose information about their ties
to Sudan. There appears to be no meaningful sanction for these
companies.
The status quo falls short of Professor Ruggie's
recommendation that the state encourage or require corporate
reporting and provide clarity about these obligations. A
mandatory set of tailored indicators--including human rights
policies, due diligence procedures, risks identified, and
performance reports--would provide investors with reliable,
consistent, comparable, and relevant information to make
prudent investment decisions and monitor corporate human rights
performance and would further our government's policy goals in
Sudan and its duty to protect against human rights abuses.
In addition, if investors are to help avert the next
Darfur, we need disclosure requirements that apply to
corporations wherever they operate around the world.
Thank you again for this opportunity. You will find
additional recommendations and details in my written testimony.
I look forward to your questions.
[The prepared statement of Mr. Kanzer can be found on page
57 of the appendix.]
Chairman Meeks. Thank you very, very much.
And last, but far from least, we have Mr. Richard S.
Williamson, who is the former special envoy to Sudan.
STATEMENT OF RICHARD S. WILLIAMSON, FORMER SPECIAL ENVOY TO
SUDAN
Mr. Williamson. Thank you, Chairman Meeks, Congressman
Miller, and other members of the subcommittee.
During 30 years in various diplomatic posts, I have been a
skeptic of economic sanctions and divestiture campaigns. They
are blunt instruments, difficult to quantify. They have
collateral damage to innocents. And regimes most often hunker
down and endure, giving people a sense of having taken action
but not getting the desired results.
Having said that, I strongly support the continued
application and strengthening of the Sudan Accountability and
Divestment Act. I am not an expert on the intricacies or
application of SADA, but I would like to make a few comments
about the situation in Sudan which frames this debate.
We are approaching the north-south referendum on January
9th. This follows the longest civil war in Africa, in which
over 2 million died and 4 million people were displaced. The
CPA, the Comprehensive Peace Agreement, largely negotiated by
the United States 6 years ago, put an end to the worst
fighting. And there is hopes that the referendum, which will
give the south a chance to determine whether to have
independence or remain part of Sudan, will be successful.
Having said that, there are many significant areas that
have not been adequately addressed, particularly the contested
border areas, Abyei, oil revenue, citizenship, freedom of
movement, and treaties. Neighbors and China have begun to tilt
their behavior, hedge their bets, with the possibility of
independence. There are no observers who disagree that the will
of the people will be independent.
However, the post-referendum commission, which is dealing
with these difficult issues, reflects a pattern used by the
Government of Sudan over the last decades of developing an
elaborate machinery, followed by extensive discussions,
deliberations, delay, eventually for denial. The point is, more
will need to be done after the referendum during the 6-month
period to independence. And this is not the time to look at
just incentives, but coercive pressure is necessary, tied to
concrete steps.
With respect to Darfur, as you well know, and the target of
this particular law, we have had one of the worst genocides in
the last 30 years. While it is less vigorous today, it
continues with low-intensity conflict. And the degree to which
there is less violence is not because of a change of heart but
because there are fewer targets of opportunity, with over
300,000 people dead and more than 2 million displaced--
displaced and nowhere to go, no hope, their lives ruined, their
families killed.
Meanwhile, aerial bombings by the Government of Sudan
continue. The Qatar negotiations have not been productive. The
International Criminal Court has issued arrest warrants for
President al-Bashir regarding his actions on Darfur for war
crimes, crimes against humanity, and genocide.
Finally, if the north-south does proceed, you should be
aware that it may make more difficult progress in Darfur, the
Nuba Mountains, and the Blue Nile, as Khartoum is worried that
it may lead to further dismemberment.
Bottom line, I think that SADA provides a useful purpose,
that coercive steps are required to get action. And having
negotiated with all the prominent personalities in Khartoum, in
Juba, in Darfur, I believe the only way to make progress is to
go beyond what the current envoy has referred to as ``gold
stars and cookies,'' i.e., incentives for the north, and to use
pressure and tie it to concrete, verifiable steps for progress.
That is the only way this genocide in slow motion will end.
Thank you.
[The prepared statement of Mr. Williamson can be found on
page 86 of the appendix.]
Chairman Meeks. Thank you very much for your testimony.
And I do see, for the first time in a long time, and as
indicated by just about anybody here, we all are united in that
we want the genocide to stop. We have to make sure that we are
doing everything that we can to have that done. And one method
is the divestment.
What I want to make sure, and I think the reason for you
being here is, what else do we need to do?
For example, Mr. Melito, in your testimony you talked about
how exchanges between the SEC and companies and even investors
at times as to whether or not their activities in the Sudan can
be considered material--yet, a lot of those issues just remain
unresolved. And the SEC has not given, I think, the real
guidance or made the guidance clear here.
I was wondering, are there other comparable examples to
using a starting point where the SEC did decide to give a clear
guidance as to what might constitute material information or
something else that we can then try to push to the SEC so that
we don't have these unresolved issues?
Mr. Melito. Mr. Chairman, I don't believe there is an
example. Part of our discussions with SEC is that they have
generally left the materiality decision to the operating
company to decide, within the broad parameters which were
partly established by the Supreme Court, which is, if the
information is important to investors, it should be disclosed.
That said, in our dialogues with them and in response to
our report, they seem quite open to our recommendation. The way
it would work, though, is the SEC staff would present it to the
Commissioners. Then it is up to the Commissioners to either
approve it or not. If it does get approved by the Commission,
then it would become a rule, which would have to go through the
regulatory process.
Sudan has been designated by the U.S. State Department to
be a state sponsor of terrorism. The SEC can then say, in that
case and potentially for the other three state sponsors, you,
as an operating company, should disclose your activities.
It doesn't mean that everyone would divest, because, as
other witnesses have mentioned, it is possible that you are
involved purely in humanitarian activities or you are
conducting activities that SADA approves of. But putting the
information out to the public would then greatly increase the
credibility of available information.
Chairman Meeks. Let me ask another question then, because I
am trying to--I would like to make sure that we accomplish our
goals. And in your opening statement, you indicated that your
data showed that the United States did, in fact, withdraw
capital from the Sudan.
I am concerned about other folks coming in or, you know--so
we withdraw, but other folks are still coming in, and we are
not stopping this genocide because there is no real effect that
we are having here, and there may be--we have to do something.
I am wondering whether or not you have any additional data
that will show who is stepping in when we are leaving. And
maybe there should be--because I am going to look at it from
the point that some pressure point may be put on some other
individuals also. Because I like more pressure on multilateral
sanctions also, as opposed to just the sanctions that we may
have from the United States.
Mr. Melito. Our analysis of both the private sector and the
States were on holdings in publicly traded companies. So they
sold their shares, and it is unclear who bought them, but it is
obvious that the holdings of State governments and private
sector investment companies have gone down.
The issue of operating companies is very tricky, though.
There are a number of operating companies; some are Western,
some are Asian. There are no U.S. companies operating in the 4
sectors because that would be against our sanctions law.
Some of the companies we spoke with try to engage the
Government of Sudan to change its behavior; they try to provide
humanitarian or social programs. At least one of the companies
we spoke with said, as they left Sudan that the company that
bought them said they would not continue those activities. So
there are some real concerns.
Though divestment is a blunt instrument, but it is having
an effect in terms of changing investor behavior. So there are
a number of tradeoffs that need to be considered.
Chairman Meeks. Mr. Cohen, I would like for you to respond
to this. It is similar. We need to stop it. And I don't know if
we have sufficient data about who is moving in. You indicated
in your testimony how some American companies are investing and
others who are still doing business. Do you have any or have
you done any research or anything in that regard? Any
suggestions?
Mr. Cohen. I agree with Mr. Melito that it would be helpful
to have a really good, deep list of who is operating in Sudan.
But one thing we know is who the worst players are, because
universally everyone recognizes that the worst players are the
oil companies helping the regime. So in our work at Investors
Against Genocide, we focused on those oil companies, because
they most substantially contribute to the problem. So if you
just think about leverage, who is the worst problem, and then
it doesn't take you long to focus on the CNPC group, of which
PetroChina is a part, because it is the largest partner with
the Government of Sudan.
So if you just look at PetroChina and its holdings, what we
see is, as recently as October 11th of this year, Franklin
Templeton owned over a billion shares of PetroChina. This is
worth about $1.3 billion, in that one company alone. So there
could be really big voices that could be used if the Franklin
Templetons of the world didn't think that it was okay to invest
their shareholders' money in the very worst companies.
I use them as an example, but I don't want to use them
alone because it is not like they are the only one. It is many
financial institutions who are the biggest holders. It was
never the colleges and universities, and it was never the
States. The biggest holders of the worst companies were
financial institutions.
Chairman Meeks. What about divestment also from other OECD
countries?
Mr. Cohen. If you look at U.S. sanctions and included just
the biggest, most prominent ones--let's take Burma, Sudan, and
Iran, all of which are sanctioned against U.S. companies doing
business in the oil industry--there is a heavy correlation of
the companies in Sudan being in the other countries, as well.
So pressure on the CNPC group, on Sinopec, on PETRONAS, on
ONGC would be helpful not just in Sudan but helpful across the
board in the places where the worst human rights abuses are
happening and where the United States has already identified
sanctions are worth having because of those terrible human
rights abuses.
Chairman Meeks. Thank you.
I am going to turn it over to Mr. Miller. Just saying this
from my point of view, because that is tremendously important.
I believe Mr. Williamson talked about South Africa. South
Africa because successful when everybody--we happened to be one
of the last joining in, but when we joined in and everybody
else joined in, then we were able to make a difference. And to
the degree that we can put the pressure on everybody so that we
can stop this creep, if you will, that I think goes on--as we
leave out, somebody else comes in, and it keeps this regime in
Khartoum up and continues the genocide. We have to focus how we
can put the same kind of multilateral pressure on the financial
institutions and the other countries so that we can join in,
because this is an atrocity to all of us.
Mr. Miller?
Mr. Miller of California. Yes. If you look at the way GSEs
bundle their mortgage-backed securities, if they have a
nonperforming loan within the bundle, they can remove that and
replace it with a performing loan. So the investors are held
harmless.
But if you look at the way the private sector did it, which
got us in many of the problems we face today, they weren't
bundled that way. And the problem you have is the servicer, if
they try to replace one of the nonperforming loans, they can be
sued by the investors for all the losses associated with the
mortgage-backed security.
Do you believe that the investment advisor who would divest
in Sudan-related holdings is open to a charge of violating
fiduciary responsibility if the reinvestment doesn't yield a
rate that competes? Or do you believe that SADA's safe-harbor
provision really adds needed protections to that?
Anybody who wants to address that.
Mr. Kanzer. One answer, I think, is: It depends. As a
mutual fund manager, our fiduciary duty is to comply with our
prospectus. Our prospectus says that we apply human rights
standards and environmental standards to our holdings. Our
investors come to us for that; they expect us to do that. If we
fail to do that, we could be subject to a lawsuit for violation
of fiduciary duty because we would have a duty to uphold our
prospectus.
Mr. Miller of California. But the question was--
Mr. Kanzer. Yes?
Mr. Miller of California. I understand, but if you have an
investor who invests, and their perspective might be something
they are looking for other than human rights but they are
looking for an investment they thought was reasonable, and you
divested of that when they put their money with you, and the
investment you put it into did not compete as it applies to
yield, does SADA's safe harbor--I am wondering if we need to
address it or if it is not adequate. That is my concern.
Mr. Kanzer. Possibly, yes. Possibly. And I think it is a
real problem.
Mr. Miller of California. Because that was discussed during
the presentations, and that raised a big flag to me of who is
going to be liable if we placed a situation in the private
sector where investment advisors are open to litigation because
of what we have asked them to do and the consequence of good
faith on their part has put them in court.
Mr. Kanzer. Generally, a trustee is accorded pretty wide
discretion in making those kinds of decisions, the business
judgment rule. So it would be, I think, difficult to bring a
successful lawsuit because you made a couple of decisions that
were wrong and impaired the performance of the fund. Look how
many funds underperform their benchmarks and don't get sued. I
don't think it is a high risk.
But there is a theoretical risk, and I think--
Mr. Miller of California. Mr. Melito's comments are why I
brought it up. I think in your statement you said that. And
when you said that, that was a concern for me.
Mr. Melito. It is a theoretical risk, as Mr. Kanzer is
saying.
We interviewed a number of investment companies, and all of
them said that their decisions were based on market reasons.
And they held to that very, very closely.
That said, at the time we issued our report, two companies
had applied for safe harbor. Now three companies have in fact
applied for safe harbor. So I think there is ambiguity here.
But I do think it would be difficult to discern why an
investment company sold its shares if it didn't say it was to
divest.
Mr. Miller of California. But Mr. Kanzer would have stated
that publicly was the reason for the sell. And that is the
concern I am having. I am just wondering if we have a loophole
out there that needs to be dealt with or addressed or not. And
I am not trying to debate you. I am trying to see if we can
open this can up and there is something there that we don't
want to have in it.
Yes, sir?
Mr. Cohen. Yes, on this point, when we have dealt with
financial institutions about this problem, some, like TIAA-
CREF, publicly spoke out against the genocide, said they would
do more, and divested, and they took advantage of the safe-
harbor provision of SADA.
Mr. Miller of California. So it was adequate for them.
Mr. Cohen. Yes. So they used it because it helped them.
When American funds decided to sell 100 percent of their
PetroChina, $200 million worth, they did what you heard Mr.
Melito describe, which is, ``We don't discuss why we do
things.''
Mr. Miller of California. Okay.
Mr. Cohen. The less said, the better, because they don't
want to increase the risks Mr. Kanzer is talking about, about
getting sued for whatever reasons.
When we talked to Fidelity, Fidelity at shareholder
meetings would say, ``We are just following our prospectus,''
and they want to say as little as possible.
The thing they can do, though, is, if Congress acts and
provides an ongoing safe-harbor provision, then that can
provide protection for fiduciaries who choose to use it such as
TIAA-CREF did.
Mr. Miller of California. Okay.
Mr. Cohen. The second thing that any financial institution
could do with a prospectus is to disclose that they cared
enough that they would try to avoid investments in companies.
And the Fidelity general counsel agreed with us that that was
all they would have to do to eliminate any of these theoretical
risks.
The problem the lawyers in these financial institutions
have is they want to minimize risk so they will do the most
conservative thing so they will talk the least about it, they
will do the least they can in this direction, even if they--
Mr. Miller of California. So they are being proactive in
their approach. They are not being extremely candid on what
they are really doing--
Mr. Cohen. Yes. So if we give them reasons and give them
tools, then we will have a chance that they will use them.
Mr. Miller of California. Okay. Looking at the continuing
unrest in the Sudan, does it contribute to destabilizing nearby
African countries, or is there the opposite occurring in some
cases?
Mr. Williamson. I am sorry. Could you repeat that?
Mr. Miller of California. The destabilization that has
occurred in Sudan, has that had a negative or positive impact
on surrounding countries?
Mr. Williamson. Oh, no question, it has had a significant
bleeding effect, especially in Chad, which has to deal with a
rebel group which is given safe harbor in Darfur by the
Government of Sudan to make attacks on N'Djamena, the capital
of Chad, because they fear that Chad gives safe harbor to the
Justice and Equality Movement. So there is a destabilization
there.
There is also a bleed of refugees into Egypt. There is some
bleed into Ethiopia. There is unquestionably a link between the
LRA in southern Sudan, again enhanced by the Government of
Khartoum, to cause destabilization down there.
So, of the nine neighbors, all of whom have an interest in
Sudan, all of whom play a role, not always constructive, and
the potential from Somalia all the way to the Congo of a bleed
of destability is real. And the consequences would be
catastrophic, both on the war on terror and for the people who
live there.
Mr. Miller of California. Has anybody seen any changing of
behavior in the Khartoum regime based on what we have done so
far?
Mr. Williamson. Congressman, if I could just comment. And
it certainly came out in my discussions and negotiations with
the senior level of the Government of Khartoum, or the
Government of Sudan, but also in discussions with other
regimes.
I think it is safe to say that those who have done the
least to earn legitimacy, either because of their action or
lack of expression of the will of the people, hold a claim of
legitimacy most dearly. And among other consequences, beyond
what Chairman Meeks had raised earlier, the financial one, it
goes to the issue of legitimacy. That is a heavy burden.
And the divestment act contributes to that questioning and
reinforces that the behavior in which they are engaged is
unacceptable to the international community and to the United
States of America.
Mr. Miller of California. Thank you very much for your
candid response and for your testimony. I appreciate it.
Chairman Meeks. Mr. Maffei?
Mr. Maffei. Thank you, Mr. Chairman.
Mr. Williamson, I want to follow up by bringing the
upcoming referendum into the discussion. The Sudanese people,
or the southern Sudanese people, are going to be able to vote,
at least allegedly are going to be able to vote, on whether
they want to stay part of the Khartoum Government or break
away. And that vote is supposed to be, I believe, in late
January?
Mr. Williamson. January 9th.
Mr. Maffei. January 9th, earlier in January.
First, can you give me some sort of sense of your estimate
about whether that will actually occur on time, whether it will
be a fair process? I have constituents who are Sudanese
refugees who are going to be able to vote in that election.
They have to come down to Washington to vote, but are going to
be able to vote in that referendum.
Can you give us some context about that?
Mr. Williamson. Sure.
Congressman, as you know, the referendum was part of the
Comprehensive Peace Agreement. It gave 6 years for the
Government of Sudan to make unity attractive. Those 6 years
were not utilized to make unity attractive. The marginalization
continued--economically, politically, and otherwise. There is
no observer who does not believe that the will of the people
will be for independence on the plebiscite.
The mechanics of the plebiscite are difficult; it goes on
for 7 days. Many of the mechanics have not been put in place
because of dragging by the north. And in a country the size of
Texas, with over 50 inches of rain a year, they only have about
40 miles of asphalt road--mostly dirt. So the logistical is
consequential, the logistical handicaps. USAID and others are
intervening to try to help as best they can.
Second, there is a cluster of important issues, such as
citizenship, freedom of movement, treaties, etc., that need to
be dealt with. And a very able diplomat, Ambassador Princeton
Lyman, is there now, heading those negotiations. Some progress
is being made.
There are more difficult, divisive, and consequential
issues dealing with contested border areas, the area of Abyei,
oil revenue sharing. There, the progress has been nonexistent.
There have been two different mechanisms for the contested
border area. Both sides agreed to having it arbitrated
initially by a border commission, second by the International
Board of Arbitration. Both times, the north reneged on its
word.
There is going to be a 6-month period after the vote to try
to resolve those issues. The south says it should be a firm
date; the north has said it should be a soft date. And the
senior presidential advisor for security, former head of
intelligence for the Government of Sudan, Salah Gosh, just last
week said that this issue could be resolved by war.
Mr. Maffei. So you do think, though, that the referendum or
the plebiscite will occur?
Mr. Williamson. It will occur. There will be some violence.
Whether or not it is credible will be a tough call. If it is in
the least bit credible, it will be a vote for independence. And
then it is trying to make that a reality.
Mr. Maffei. And trying to avoid a civil war, hopefully, the
Khartoum Government.
Then my question is, for Mr. Cohen and Mr. Kanzer or anyone
else who wants to chime in: After that process, won't it be a
lot easier to bring attention to the injustices in Sudan and,
therefore, make this situation far more comparable to South
Africa, when there was a massive movement to divest in South
Africa?
Mr. Williamson. If I could just make one comment?
Mr. Maffei. Yes, of course. Of course. Sorry.
Mr. Williamson. I do think the risk is going to be even
more intense on Darfur, Nuba Mountains, Blue Nile, other areas.
And I think if the reaction is an increase in violence, which
it could well be, there will be repercussions in the
neighborhood and in the international community, which
hopefully will further galvanize people on this issue.
Mr. Maffei. Yes, even for their own self-interest, people
may want to divest.
Anyway, sorry, I am almost out of time, but I think I have
a little time for Mr. Cohen and Mr. Kanzer to respond.
Mr. Cohen. Just to add to that, one of the things we know
about the Government of Sudan is that it is constantly testing
the limit of what it can get away with. And if sanctions are
weak, if financial pressures are weak, they will sense it. They
are looking to find what the limits are.
So the point that Mr. Williamson made about now is the time
to make the pressures be as great as possible so that they
believe the pressures will build, build, build, build, build,
will have perhaps a chance of success; where, even if the south
secedes peacefully, the challenges in the south don't end and
the challenges for Darfur may be just beginning.
So the stronger our measures, the better. The sooner we can
make them credible and clear, the more powerful.
Mr. Maffei. So your answer is, yes, it would help, but we
can't wait for that because our best chance of avoiding civil
war is to act effectively.
Mr. Kanzer, I believe other Members took a little bit
longer, so, please, go ahead.
Mr. Kanzer. Sure. If I could just add a couple of quick
comments on that.
I think, first, you would have thought that calling this a
genocide would have been sufficient to raise awareness. A civil
war, a new civil war may be a new opportunity for us to raise--
Mr. Maffei. In one where a clear plebiscite, a clear
referendum is ignored.
Mr. Kanzer. Right. True, but we have that in Burma, as
well. And although we are part of a movement to divest from
Burma, it hasn't changed the government yet.
So, one, I think that we have a problem here where there
are a lot of traditional, mainstream investors that still
simply view these issues, regardless of how egregious they are,
as off the table for them as investors, which I do consider to
be a breach of fiduciary duty, because these things do raise
financial issues, they do raise long-term issues, and they do
raise systemic risks. And we all know how well our financial
system deals with financial risks.
So we need to revisit those issues, and we need to put more
pressure on fiduciaries to think more broadly about their
obligations to their beneficiaries and what it really, truly
means to provide benefits to their beneficiaries.
The other quick thing I just want to note is that we
haven't been sitting on the sidelines here. And the Conflict
Risk Network, which is a network of investors and other
stakeholders--a subscriber base of trillions of dollars--has
been--and we have been part of this--has been engaging with
telecommunication companies and oil and gas companies on the
referenda, to say there has been evidence in the past--the
Sudatel apparently shut down cell phone communication in timing
with attacks in the south to ensure that people couldn't warn
each other that the attacks were coming.
So we have reached out to the telecommunication companies
that are operating in Sudan to ensure that they put appropriate
measures in place to make sure that communication is maintained
throughout the referendum and that they ensure it is a fair
process.
Mr. Maffei. Excellent. Thank you very much.
I also just want to quickly note, Mr. Chairman, that Mr.
Williamson mentioned Princeton Lyman. I am familiar with his
work and we couldn't have a better person there to help observe
this very challenging situation. But I want to thank all of the
panelists.
Chairman Meeks. Thank you. Now, we couldn't have a better
person here than Mr. Michael Capuano.
Mr. Capuano. Thank you, Mr. Chairman. First of all, I want
to thank the witnesses for coming today and helping us out.
Mr. Williamson, I presume you know the most about Sudan. Is
there anything, any natural resources in Sudan that are unique
to Sudan that can't be found anyplace else? I know that oil is
the major item, but is there gold that can't be found, some
kind of special diamonds or bauxite or anything that can't be
found anyplace else?
Mr. Williamson. Unlike the Eastern Congo that, as you know,
with cobalt and other things, has unique mineral assets, the
discovered assets in Sudan don't reflect that. However, let me
emphasize, when the NCP came to power through a coup in 1989
there were less than $500 million of exports. Today, there is
$9.5 billion, principally from oil. Second, that there are
great agriculture resources in the south and that is the
opportunity for development.
Mr. Capuano. I understand. But there is nothing unique that
can't be replicated someplace else?
Mr. Williamson. Not that I am aware of.
Mr. Capuano. Are there any manufacturing techniques that
can't be replicated anyplace else?
Mr. Williamson. Not that I am aware of.
Mr. Capuano. So that basically any investor who is looking
at an investment opportunity--not necessarily helping out Sudan
and building Sudan--as an investment opportunity, there is no
particular reason to invest in Sudan and not someplace else.
Mr. Williamson. I am not aware of unique attributes that
would compel an investment, no.
Mr. Capuano. Fair enough. I was wondering if anybody on the
panel--are there any other countries, at the moment, that we
know of that have been designated officially by the United
States Congress as engaged in committing genocide?
Mr. Williamson. No.
Mr. Capuano. So that we have a country that has no
specifically unique attribute to attract investors, that maybe
we could say, geez, you can't get it anyplace else. We have the
only country in the whole world that the United States Congress
has said, ``You are committing genocide.'' Are there any
studies anywhere? And maybe, Mr. Kanzer, you might be the best,
or maybe Mr. Cohen. Are there any studies anywhere that
indicate that investment in Sudan provides a particularly
unique or large return on that investment?
Mr. Kanzer. Not that I am aware of. I think the problem is
that most of the companies that we are speaking about are not
Sudanese companies. They are global companies that have
operations in Sudan. So the problem for a fiduciary that
manages a large mutual fund, for example, that wants to track,
let's say, a PAC Asia benchmark that has PetroChina as one of
its largest holdings and is going to be held to performance
against that benchmark, it might be difficult for them to say,
I can't hold PetroChina. It is not because of PetroChina's
investment involvement in Sudan, it is because it is PetroChina
and it is because it is one of the largest components of their
benchmark.
Mr. Capuano. I understand. But I am trying to make sure
that--it has been argued to me that anytime you add social
agenda to investment opportunities, it is a slippery slope.
Today, it is genocide. Tomorrow, it might be because I don't
like left-handed people. And I understand that argument.
And my argument in return has always been, unless you can--
I understand the slippery slope argument. I get that, that you
can't just have an unlimited list of things we don't like. But
I think in this particular case we have a unique situation: a
country that is committing genocide, that doesn't offer
anything in particular, to my knowledge, doesn't offer a
specifically astronomically high return on investment. So there
is no real reason for anybody to look me in the eye and say, I
really have to invest in Sudan and only in Sudan in order to
fulfill my fiduciary responsibility of providing the highest
return to my investors. Is that a fair statement to make?
Mr. Kanzer. I agree that is a fair statement, yes.
Mr. Capuano. And I understand the difficulties in tracking
all this. Which brings me to the last point, and this is a
point to Mr. Melito in particular. I want to be clear. The SEC,
as you understand the law now, currently has the authority, if
they choose to exercise it, to require disclosure from various
companies about the investments they make in Sudan.
Mr. Melito. As the law is written, they have the authority
to enforce materiality, which is a rather imprecise designation
or definition. We were privy to correspondence between the SEC
and a few companies where the SEC said, given the divestment
campaign and given your large holdings, you may want to include
this information on Sudan. But in those cases the company said,
we don't think so, because even though the holdings may have
been large as a portion of Sudan, they said it was a small
portion of their global holdings. That is why our
recommendation is to clarify the materiality standard to say:
In the cases where it is state-sponsored terrorism, where Sudan
is one of them, it is material.
Mr. Capuano. And in your judgment, the SEC has the
authority currently to make that clarification pursuant to
regulation?
Mr. Melito. The SEC has that authority, but they would have
to go through the regulatory process, which includes going
through the Commission.
Mr. Capuano. So everything is in place. This law, we know,
has some loopholes. I understand there are some problems in
definition. I understand there are problems defining exactly
which company. But according to you, Mr. Melito, there are at
least 15 companies that everybody agrees is on this list, and
another several dozen companies that most people will agree.
And then you will get the debates. That I understand.
But at least, if nothing else--I don't even know what the
15 companies are, but these 15 companies that everybody agrees
fits this materiality, the SEC could require them to disclose
their investments.
Mr. Melito. Yes.
Mr. Kanzer. Can I add to that?
Mr. Capuano. Sure.
Mr. Kanzer. Actually, I believe the SEC actually does have
the authority to add a specific item of disclosure that could
relate to Sudan or many other items, and they do this all the
time. There are many items of disclosure, for example, in a
corporate proxy statement related to executive compensation,
board composition, etc., etc., that are not material. The SEC
simply decided this is material that must be disclosed. If a
company has environmental liabilities that exceed $100,000, you
are required to disclose it. They decided that was material.
Now companies ignore the rule, but it is a rule.
The SEC just decided that you must disclose whether you
have a policy on board diversity. If you do, how is it
implemented; not because it is material, because they thought
it was important. So the SEC can do this, but they need to step
outside of the materiality framework. Once you are within the
materiality framework we will never, in my view, resolve this
problem.
Mr. Capuano. I would certainly think that--I would love to
see that disclosure statement from any company saying, ``We
invest in a genocidal country that is also officially
sanctioned as a state sponsor of terrorism.'' And then I would
love to see anyone invest in that company.
Mr. Melito. In our dialogues with the SEC, they see this as
possibly consistent with the materiality clause, given SADA,
given State laws, given interests of certain investment
companies. So part of the materiality clause is what is
interesting to an investor. So it can work within or without
the materiality clause.
Mr. Capuano. Fair enough. And for me, basically what I take
out of this hearing, and some of the information that has been
given by the GAO is, number one, the law that we have is okay,
could use some improvements, but is okay.
Number two is we have some further work to do both on
Sudan, and maybe particularly on some other regimes that might
attract our attention.
But number three, in particular, the quickest thing that
can be done, in my estimation based on this hearing today, is
to get the SEC to actually take the next step and to demand
disclosure from companies. And again, I am not ready to argue
every single company. But there are 15 companies that everybody
agrees should be on this list. Then at least start with them to
simply allow disclosure, so that if the American public or the
people that they invest through want to invest in companies
that admittedly invest in a genocidal state sponsor of
terrorism, let them explain that to their neighbors.
Mr. Cohen. That certainly would be very powerful and very
helpful. I would just add one thing. It is now 7 years and more
since the genocide started. We are lucky this is a slow-motion
genocide or we would have lost count of the number of people
killed. Something is wrong with our system if we are here, 7
years after the beginning, arguing, trying to discuss, trying
to find ways to incent the people who are ignoring the problem.
So one of the things I hope we can accomplish, beginning
today, is the kind of rules that you were just describing could
be put in place not only for Sudan, but looking forward, so
that we never have to sit 7 years after the event and say, now
what can we do so that we can have less investment in the very
worst places?
Mr. Capuano. I agree. Thank you, gentlemen. I thank the
Chair for your indulgence.
Chairman Meeks. Thank you. And the Jets will beat New
England. All right.
Now I will call on my friend and colleague, Barbara Lee.
With unanimous consent, there is no objection.
Ms. Lee of California. Thank you very much, Mr. Chairman. I
apologize for being late, so if I ask a couple of questions
that are redundant, please forgive me. But as the author of the
original legislation that passed the House, and working with
Senator Dodd--this was back in 2007--I just want to say thank
you for getting us this far. And I want to thank Mr. Melito and
the GAO for your report that came out.
I guess we didn't really know exactly how the law would
work, but we knew it would be significant not just for the real
impact on the regime in Khartoum and its supporters, but also
for engaging the American public in a sustained commitment and
campaign to invest with a conscience and to encourage others to
do the same.
Of course, I come from California and have been very
involved in many divestment movements, and it was really a
challenge here to get this bill passed for many reasons. And
one of the issues I remember when we tried to get the--when we
were writing the bill was that the SEC had no information.
There was no database, no knowledge of what companies were
actually doing business in the Sudan.
And so I wanted to just ask about, and following up with
Mr. Capuano, how, and with the GAO's recommendation in terms of
a rule, why can't we, why can't the SEC develop a rule that is
meaningful so that we have that information, we have the
knowledge of who is doing this? I think it could really provide
meaningful information to investors. And I don't see why this
can't be done.
I know I read just a minute ago the letter that Mr. Cross
from the SEC wrote, talking about the overall mix of
information about a company and how this could possibly
overwhelm investors and possibly obscure other material
information. And so I don't see how that is possible. These
companies know what they are doing, and they should be able to
easily disclose this if the SEC had a rule that would require
them to do that.
Mr. Melito. Congresswoman, the SEC, even though it is so
strangely written, is agreeing with the recommendation. But
they are agreeing with the great caveat that they don't want
the rule to be broad. They want the rule to be narrow. So state
sponsors of terrorism, potentially just Sudan, they agree with.
And in the dialogue with SEC staff yesterday, my staff said
that they are preparing the package to present to the
Commission. So it will go to the Commission. The next step then
will be whether or not the Commission agrees with the
recommendation.
Ms. Lee of California. Okay. Can you define what ``broad''
versus ``narrow'' would mean?
Mr. Melito. In our opinion, the designation of a state
sponsor of terrorism is an objective finding by our State
Department. State has determined that four countries are state
sponsors of terrorism, one of which is Sudan. So we believe
that designation then should fall within the materiality
clause. We limit our recommendation to Sudan since our report
is about Sudan.
But we say you could possibly go beyond and to the other
three--Syria, Cuba and Iran--as well and be consistent. So that
is how we--there is a process that the State Department goes
through. They make a designation, then, that should then be
consistent with materiality.
Mr. Kanzer. Can I just add a couple of comments to that?
First, in terms of the investors being inundated with
information, if you look through current securities filings,
there is plenty of information in there that investors are not
finding particularly useful, and it does take a lot of time to
get through it. I would agree with that. We spend most of our
time looking elsewhere. Most investors want as much quality
information as they can get, and I don't think that there is a
risk here, as long as the requirement is carefully drafted.
The other thing that I want to just stress here is that
companies face human rights risks all over the world. They are
profiting from slavery. They are profiting from child labor.
They are profiting from forced labor. They are profiting from
horrendous abuses all around the world. We really need to get
information about how companies are managing these risks
everywhere.
And we can engage with our holdings on sweat-shop issues,
on slavery in Brazil, on child labor around the world.
Obviously, genocide rises to a different level. But if we are
going to avoid the next genocide, if we are going to avoid the
next conflict zone, the next set of problems, we need to make
sure that the companies we are investing in have the
appropriate policies in place, that they understand and respect
human rights, that they know what to do when they are
confronted with these situations, because sometimes when you
engage with a company that is doing business in Sudan, they
don't know what you are talking about. And I think the people
you talk to are being honest when they say that. They honestly
don't know what you are talking about.
And that happens with virtually every human rights issue we
raise, the first time we raise it. But after we continue to
raise it, they get smarter about it. And I think it can be
done. I think the SEC could require companies to disclose, do
you have a human rights policy? Where can we find it? How do
you implement it? Who is in charge?
And then with respect to specific countries where we know
there are egregious human rights risks or where the U.S.
Government has designated a state sponsor of terrorism, are you
operating there, and what are you doing to mitigate those
risks? I think that is useful information. I don't think it is
going to bury investors in useless information.
Ms. Lee of California. Mr. Cohen?
Mr. Cohen. Just one caveat to add about SEC disclosure. A
lot of the time, when I read discussions about what the SEC is
going to do, there is a discussion about what happens on U.S.
stock exchanges. However, what we have seen in investigating
financial institutions who are investing in the worst
companies, helping the regime in Khartoum, is most of their
holdings are in Hong Kong.
So, for instance, I know that Franklin Templeton is a 5
percent shareholder in PetroChina not because of any SEC
filing, but because of one in Hong Kong. They own zero shares,
zero shares of PetroChina in New York. So if a rule is written
that sounds really good, but only dealt with New York holdings,
it might accomplish nothing; not the intended consequence,
because they just wouldn't report on PetroChina. After all,
they don't own it in New York.
So for anything that goes forward, it would be really
valuable to be keeping in mind the need to be addressing that
the financial institutions that we use in America are investing
globally, global markets, not just in domestic markets.
Ms. Lee of California. Let me mention one thing. I couldn't
let this go. In terms of a standard being used, state sponsors
of terrorism, how do we--if we use that standard, how do we
address countries that are on that list for political reasons,
such as Cuba?
Mr. Melito. Our recommendation is about Sudan, so we say
perhaps consider the other state sponsors. We know that there
is a process to designate a country as a state sponsor of
terrorism. So whether for political reasons, economic reasons
or such, there is a process, and we considered that to be an
important objective element in this particular materiality
clause. If a country is on this list, if a company is working
in one of these countries, it could potentially be consistent
with U.S. interests. They could be conducting activities in a
humanitarian way. So their disclosure wouldn't necessarily be
brief. It could disclose the activities, and then it would be
for the investors to decide whether or not these are activities
that they want to support.
Ms. Lee of California. Mr. Cohen?
Mr. Cohen. I would register a concern about using the state
sponsor of terror list. Just recently, we heard the news that
the United States Government might trade listing Sudan as a
state sponsor of terror for having free and fair and relatively
safe recognized elections in south Sudan, not a determination
that they weren't anymore, but a political judgment as a chip
to trade away. So that list is very, very political, and I
would worry about that.
In contrast, the sanctions list has a hand, not just from
the Administration with Executive Orders, but also from
Congress, so that there is some balance there. So that politics
may still come into play, but there are more hands getting to
have a say in what are the really terrible things that are
happening in the world. So I would encourage a close look in
that tie-in to sanctions.
Ms. Lee of California. Mr. Chairman, just one more
question. When we were writing the legislation, we had some
concerns about the impact on the south. Of course we were
naturally targeting the Khartoum regime as it relates to
Darfur. How has this impacted the south, if it has, or not
impacted the south? We were very careful to try to carve out
that type of exemption.
Mr. Williamson. Unfortunately, the south still remains
enormously underdeveloped. As I mentioned earlier, in an area
the size of Texas, it has about 40 kilometers of asphalt roads,
has a rainy season that gives it over 50 inches of rain a year.
But to the best of my knowledge, the Divestment Act hasn't had
a negative impact. And with respect to sanctions, there have
been waivers given.
I would suggest the issue with respect to the lack of
development in the south has to go with both the donor
community and trying to hold together an area which was divided
into various competing militias that have fragmented since the
CPA was signed.
But bottom line, Madam Congresswoman, I do not think, at
least in my experience, that the Divestment Act has been a
significant burden for the development that is necessary, and
hopefully the United States will redistribute its substantial
development assistance in the south from just humanitarian to
actual economic development, good governance, etc.
Ms. Lee of California. Thank you very much. Thank you, Mr.
Chairman. And thank you all very much, because not only is this
important, and I think all of us have been to Darfur and
witnessed the tremendous tragedy that has and continues to take
place there. But it is an effort to try to stop the genocide,
but also trying to figure out ways to prevent future genocides.
And so your role in that and this oversight hearing has been
very important. And so I just want to thank you for following
up and responding.
Chairman Meeks. Thank you. And I also want to thank you.
This has been a good hearing, and one of which I think that all
of you who have testified, I could just look back and see the
facial expressions and the acknowledgements of one another and
listening to the points that each other was making, which leads
to the focus of trying to make sure we stop the genocide. And
going further than that, we make sure that we don't have an
opportunity where so much time goes by, where so many people
die, and we are still trying to figure out what needs to be
done; that we need to stop this and put something in place so
that should this ever arise again, we know how to stop it
before thousands and thousands of lives are lost.
I heard that sentiment from all four of you and I thank you
for that, because that is really what this is really about. It
is about preserving human life and making sure that this never
happens again. But if it does, it shouldn't take, 7, 8, 9, 10
years to figure out how do we stop it and put the pressures on
the government to stop this from happening. Because those are
lives that are gone. Those are people, those are generations of
young kids who will never have a chance to enjoy this place
that we call Earth.
So your testimony and your work and your commitment is
something that is much, much appreciated. And again, I thank
you very much for being here today.
Let me note that some members may have additional questions
for the witnesses which they may wish to submit in writing.
Without objection, the hearing record will remain open for 30
days for members to submit written questions to these witnesses
and to place their responses in the record.
With that, this hearing is now adjourned.
[Whereupon, at 3:26 p.m., the hearing was adjourned.]
A P P E N D I X
November 30, 2010
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