Are You Bankrolling Terrorism?

In recent weeks, millions of American investors have lost confidence in the stock market — and billions of dollars in equity — in the wake of revelations that a number of U.S. corporations have been cooking their books and engaging in other dubious activities.

One can only imagine the tailspin Wall Street might experience if the crisis in corporate governance were to include not only such abuses of the public trust as shady bookkeeping, self-serving stock options and insider-trading, but the underwriting of terrorist-sponsoring states and entities?

Regrettably, there is reason to be concerned that just such underwriting may be occurring. In fact a new service, known as Global Security Risk Monitor, has recently revealed that some 300 leading U.S. and international companies are doing business with one or more of the nations on the State Department's list of state-sponsors of terrorism, notably Iran, Iraq, Syria, Sudan and Libya.

Public employee pensions and those exercising fiduciary responsibility for them have evinced particular interest in such a screening device. Pennsylvania State Treasurer Barbara Hafer — who not only oversees $90 billion in funds under management but serves as president of her counterparts' national association — recently told the Los Angeles Times that, "No Americans want to see our pension moneys go to companies supporting terrorism."

This is, not surprisingly, especially true of funds responsible for the retirement savings of law enforcement, fire and emergency personnel. In a July 2 broadcast concerning this sort of inadvertent underwriting of terrorism, NBC's New York affiliate interviewed Joseph Maurer, a retired captain with the city's Fire Department who lost a daughter in the Sept. 11 attack on the World Trade Center.

Mr. Maurer declared, "My daughter's gone. Thousands of people are gone and we're helping to fund it? That's outrageous. You can't sit there and watch 343 firemen die and then invest their money in countries that may have been the ones responsible to kill them."

A just-released report by a congressionally mandated commission indicates that the problem of American investors supplying funds to potential adversaries applies as well to Communist China and some of its state-owned and private companies. According to the U.S.-China Security Review Commission, "Chinese firms raised approximately $14.6 billion through Initial Private Offerings in U.S. capital markets from 1999-2001."

The commission expressed concern "about the use of the U.S. capital markets as a source of funding for the Chinese military and intelligence services and for Chinese companies assisting in the proliferation of weapons of mass destruction or ballistic missile delivery systems."

The new report also confirms China's leading role in both of these ominous activities. "China provides technology and components for weapons of mass destruction and their delivery systems to terrorist-sponsoring states such as North Korea, Iran, Iraq, Syria, Libya and Sudan. This arms trafficking to these regimes presents an increasing threat to U.S. security interests, in the Middle East and Asia in particular."

Sen. Fred Thompson, R-Tenn., one of the most knowledgeable congressional monitors of the growing threat posed by China, testified before the Security Review Commission on December 6. He warned: "It is extremely disturbing to think that we are financing China's military development and [its] proliferation of weapons of mass destruction to rogue nations. But plenty of evidence exists that we are directly investing in companies and programs that may one day be the agents of our own destruction."

Clearly, investors need to be at least as informed about the true nature of the entities and states doing business with the companies whose shares they own as they are about other issues bearing on corporate governance. After all, such information bears on both the worthiness and the worth of the investment.

As the WNBC report put it: "Aside from moral and security concerns, both city and state comptrollers acknowledge dealing with terror-sponsoring countries could be risky. If international pressure leads to military action against those countries, the stock prices of companies operating in them could be affected."

Alternatively, share value may be affected adversely by public outcry over the discovery that companies are investing in or otherwise doing business with such countries.

The good news is that the Global Security Risk Monitor appears to offer investors a tool for evaluating purchases of ill-advised and potentially dangerous shares or bond offerings. As it is utilized, another benefit may accrue. As Pennsylvania Treasurer Hafer put it: "It is complex, but if we can set up the [screening] system, we can send a very large message to people that we don't like what they are doing."

The bottom line was beautifully summarized by former NYFD Capt. Maurer: "There's hundreds of thousands of places to invest money. We don't have to invest it in countries that are there to damage us."

Frank J. Gaffney Jr. held senior positions in the Reagan Defense Department. He is currently president of the Center for Security Policy.