[R-G] U.S. States Continue to Divest from Businesses Tied to Iran

[Yoshie Furuhashi]

<http://www.worldpoliticsreview.com/article.aspx?id=2371>
U.S. States Continue to Divest from Businesses Tied to Iran
Brian Radzinsky | 02 Jul 2008
World Politics Review Exclusive

WASHINGTON -- Eleven U.S. states have adopted legislation to divest
public pension funds from companies with financial ties to Iran's
petroleum, defense, and nuclear sectors in an attempt to persuade Iran
to give up its uranium enrichment program and alleged sponsorship of
terrorism. Almost 20 more states are considering similar legislation
to supplement existing federal and international sanctions.

This is the first time that state investments have been leveraged for
nonproliferation goals. During the 1980s, anti-apartheid activists
urged state and local authorities and some universities to divest
holdings from companies invested in or doing business with South
Africa. During the 1990s, humanitarian activists persuaded
Massachusetts to divest from companies "doing business with" Myanmar.
More recently, almost 30 states passed legislation to divest from
companies with investments in or engaged in trade with Sudan. The Iran
case is unique, however, because divestment legislation explicitly
references Iran's alleged sponsorship of terrorists and its uranium
enrichment program.

Since the 2003 discovery of Iran's clandestine uranium enrichment
program, the U.N. Security Council has imposed three rounds of
sanctions freezing the finances and limiting the travel of prominent
members of the nuclear and ballistic missile programs. Enriched
uranium can fuel nuclear reactors and provide the explosive core for a
nuclear weapon.

The effort by U.S. states to divest from Iran mirrors a larger change
in the Bush administration's approach to Iran. For its part, the
United States government has maintained various sanctions on Iran
since 1979. Recently, however, Washington has moved away from
advocating sanctions against individuals and organizations and toward
a strategy of financial isolation. The Treasury Department in 2007
barred Iran's Bank Saderat, Bank Sepah, and Bank Melli from the U.S.
financial system and cut off their ability to conduct transactions
with U.S. banks through a third-party. In March, the U.N. Security
Council urged member states to "exercise vigilance" about the
activities of these banks. Treasury officials have recently discussed
sanctioning Iran's central bank, which is said to have picked up some
of the business that used to flow to sanctioned institutions.

Legal Challenges

State divestment efforts also face legal challenges. The National
Foreign Trade Council (NFTC), a business advocacy group, in 2000
successfully sued Massachusetts over legislation to divest from
Myanmar. In that case, NFTC vs. Crosby, the U.S. Supreme Court ruled
that Massachusetts' decision hindered the president's ability to
conduct foreign policy effectively. The NFTC won another legal battle
in a U.S. district court over an Illinois law mandating divestment
from Sudan.

Lawmakers have taken steps to circumvent subsequent court challenges.
Several bills pending at the federal level encourage and authorize
state divestments. In both houses of Congress, the Iran Sanctions
Enabling Act, sponsored by Sen. Barack Obama, the presumed Democratic
presidential nominee, and Rep. Barney Frank (D-Mass.), would publish
in the Federal register the names of companies with $20 million or
more invested in Iran's energy sector and authorize individual states
to adopt divestment legislation.

The bill also provides legal safe harbor for fund administrators who
might oppose divestment on grounds that doing so would cause their
funds to depreciate. To this end, the bill protects mutual fund
managers from lawsuits and pension fund managers from charges of
fiduciary responsibility. According to Missouri's treasurer, the
Missouri post-divestment portfolio suffered minimal disruption, and in
some years outperformed the original fund.

Divesting from Terror

Most divestment legislation adopts the criteria laid out in the 1996
Iran Sanctions Act to identify significant investment in Iran.
Formerly the Iran-Libya Sanctions Act, it requires the president to
sanction those foreign companies with investments of $20 million or
more in Iran's energy sector.

In that vein, legislation signed in Arizona, California, Colorado,
Florida, Georgia, Illinois, Louisiana, Maryland, and Michigan directs
state pension administrators to divest from companies that meet this
standard, as well as companies with financial ties to Iranian
"terrorist organizations" identified by the U.S government. Also
anathema are companies that facilitate Iran's acquisition of nuclear,
chemical, or biological weapons technology or military equipment.

Missouri and New Jersey have adopted explicitly "terror-free"
investment policies. Terror-free investing, part of a larger
initiative endorsed by the American Israel Public Affairs Committee
(AIPAC), the Center for Security Policy, and a number of other groups,
encourages U.S. states to divest from companies "reasonably known to
be operating directly with the government or a government-controlled
agency in U.S.-sanctioned nations, or that are engaged in the
sponsorship of terrorism." Known as the "Divest Terror" movement,
proponents argue that investing in such blacklisted countries as Cuba,
Iran, North Korea, Sudan, and Syria poses not just a threat to
national security, but to the health of the investments themselves.

Of these countries, Iran stands the most to lose from widespread
divestment from its economy. Iran's GDP is greater than that of Cuba,
North Korea, Sudan, and Syria combined -- around $600 billion
according to most sources.

The movement has also gained several prominent adherents, including
presumptive Republican presidential nominee Sen. John McCain (Ariz.).
In a June 2 speech at AIPAC's national convention McCain called for a
"worldwide divestment campaign" in order to pressure Iran's "radical
elite."

The aim of state divestments, both in practice and as a part of a
broader strategy to pressure Iran financially, is to cleave at
companies with significant ties to Iran's energy sector. Companies
potentially affected by divestments include such European giants as
Spain's Repsol, France's Alcatel and Total, and Royal Dutch Shell.
Some states' pension funds are too small to conceivably have an
impact. On the other hand, California's Public Employees' and State
Teachers' Retirement Systems invest a combined $400 billion in U.S.
and international companies. An estimated $2 billion of those funds
are tied up in Iran's oil sector.

Matthew Levitt, a former Treasury Department official in the office of
terrorism and financial intelligence and director of the Stein
Counterterrorism Center at the Washington Institute for Near East
Policy, concedes that divestment alone will probably not force Iran to
adhere to international demands. "The real issue is not divestment [by
itself]," he says, "but the totality of the various [coercive]
measures. Together they have a very good chance of forcing Iran to
rethink its policies."

Brian Radzinsky is a research intern at the Arms Control Association,
specializing in nuclear proliferation in the Middle East.