[Senate Report 110-213]
[From the U.S. Government Publishing Office]
Calendar No. 458
110th Congress Report
SENATE
1st Session 110-213
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SUDAN ACCOUNTABILITY AND DIVESTMENT ACT OF 2007
_______
October 31, 2007.--Ordered to be printed
_______
Mr. Dodd, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following
R E P O R T
[To accompany S. 2271]
The Committee on Banking, Housing, and Urban Affairs,
having had under consideration an original bill (S. 2271) to
authorize State and local governments to divest assets in
companies that conduct business operations in Sudan, to
prohibit United States Government contracts with such
companies, and for other purposes, having considered the same,
reports favorably thereon and recommends that the bill do pass.
I. INTRODUCTION
On October 17, 2007, the Senate Committee on Banking,
Housing and Urban Affairs considered a Committee Print,
entitled the ``Sudan Accountability and Divestment Act of
2007,'' a bill to authorize State and local governments to
divest assets in companies with certain business operations in
Sudan, to prohibit United States Government contracts with such
countries, and for other purposes. The Committee voted
unanimously to report the bill to the Senate.
II. PURPOSE
The Sudan Accountability and Divestment Act (hereafter `the
Act') provides a legal framework by which States, local
governments and certain other investors can divest Sudan-
related assets from their portfolios. Specifically, it allows
States and local governments and private asset fund managers,
if they so choose, to adopt measures to facilitate divestment
from companies involved in four key business sectors in Sudan.
Such measures may be adopted to reduce the financial or
reputational risk associated with investments in a country
subject to international sanctions. The Act also directs the
federal government to require that all U.S. government
contractors certify that they are not involved in business in
four key sectors of Sudan's economy.
III. BACKGROUND AND NEED FOR LEGISLATION
The ongoing crisis of genocide in Darfur
The conflict in Darfur has led to a humanitarian disaster,
with an estimated 2 million people displaced; more than 234,000
people forced into neighboring Chad; and an estimated 450,000
people killed.\1\ In July 2004, the U.S. House of
Representatives and the Senate unanimously passed resolutions
(H. Con. Res 467 and S. Con. Res. 133, respectively) declaring
the crisis in Darfur to be genocide, based on the five criteria
for genocide enumerated in Article 2 of the Convention on the
Prevention and Punishment of the Crime of Genocide. On
September 9, 2004, then-Secretary of State Colin Powell
acknowledged that the violence occurring in Darfur constituted
genocide.
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\1\CRS Report.
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On May 29, 2007, the U.S. imposed new economic sanctions on
two Sudanese government officials, and 31 Sudanese companies.
According to Administration officials, these Sudanese officials
acted as liaisons between the Sudanese government and the
government-supported Janjaweed militia, which have attacked and
brutalized innocent civilians in the region. Of the 31
companies sanctioned, 30 are either owned or controlled by the
Government of Sudan, and the other violated the arms embargo in
Darfur. These companies are banned from doing business within
the U.S. financial system and with U.S. companies, and U.S.
citizens are restricted from doing business with them.
On July 31, 2007, acting under Chapter VII of the Charter
of the United Nations, the United Nations Security Council
adopted Resolution 1769. The resolution calls for the
deployment of a hybrid United Nations-African Union force in
Darfur. The resolution also calls for immediate support for the
existing African Union Mission in Sudan (AMIS) and a commitment
to end the suffering in Darfur, while expressing concern about
ongoing attacks on civilians in Darfur and the security of
humanitarian aid workers in the region.
While efforts have been made to identify and deploy up to
26,000 peacekeeping troops to Darfur by early 2008, it remains
unclear when or whether such a force will reach full strength,
whether such a force-level will be adequate to stabilize the
region and halt mass killings, or even whether the government
and other factions in Sudan will cooperate to allow for the
force's successful operation.
State and local divestment efforts
Notwithstanding the wide range of diplomatic and economic
sanctions that have been pursued by the Federal Government,
many states and localities have enacted measures restricting
their agencies' economic transactions with firms that do
business with, or in, Sudan. Twenty States have already
initiated some form of divestment; and campaigns are under way
in an additional twenty States to adopt similar measures. Also
joining this movement are many colleges and universities, large
cities, non-profit organizations, and numerous pension and
mutual funds.
Legal and constitutional challenges
The state of Illinois passed a divestment law in June of
2005. Highlights of the law are as follows:
Provides that the State Treasurer may not deposit any funds
or otherwise transact any business with any financial
institution unless an expressly authorized officer of that
financial institution certifies that the financial institution
has not, during any time following the effective date, loaned
to or invested in certain entities involved with the Republic
of Sudan.
Provides that a fiduciary with respect to a retirement
system or pension fund established under that Code shall not,
directly or through a fund manager, transact any business with
any company unless an expressly authorized officer of that
company certifies that the company has not engaged in certain
activities concerning the Republic of Sudan.\2\
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\2\Bill Status of SB0023 94th Illinois General Assembly.
In February 2007, a federal district court held Illinois's
Sudan sanctions law to be unconstitutional and permanently
enjoined its enforcement (National Foreign Trade Council v.
Giannoulias); the defendants have since appealed. In its
decision, the court highlighted federal law regarding Sudan,
beginning with a 1997 Executive Order signed by President
Clinton freezing Sudanese property in the United States and
prohibiting various transactions between the United States and
Sudan, and continuing with three subsequent public laws: the
Sudan Peace Act (2002), the Comprehensive Peace in Sudan Act
(2004), and the Darfur Peace and Accountability Act (2006).
None of these statutes contains a provision addressing state
law preemption. The court held that the Illinois statute's
``lack of flexibility, extended geographic reach, and impact on
foreign entities interferes with the national government's
conduct of foreign affairs,'' and was in large part preempted
by federal law. In unanimously approving the legislation, the
Committee sought to address the issues raised in the Illinois
case and the issue more broadly, by clearly authorizing
divestment decisions made consistent with the standards it
articulates.
The Committee recognizes that this legislation involves
balancing two important interests. The first is the singular
authority of the Federal Government to conduct Foreign Policy.
The second is the ability of State and local governments to
invest or divest their funds as they see fit. The Committee
believes it has struck an appropriate balance by targeting
state action in such a way that permits state divestment
measures based on risks to profitability, economic well-being,
and reputations, arising from association with investments in a
country subject to international sanctions. The Act explicitly
states the sense of Congress that the United States should
support the decisions of State and local governments to divest
from firms conducting business operations in certain sectors of
Sudan's economy and the legislation is not pre-empted by any
Federal law or regulation.
IV. DESCRIPTION OF THE BILL
The Act is meant to codify the appropriate rights of
investors as well as State and local governments to hold or
relinquish assets in accordance with their responsibilities to
guard against both economic and reputational risks, as long as
in so doing, fund managers continue to otherwise adhere to
their fiduciary responsibilities and State and local
governments adhere to the limited federal authorization
provided in this bill. With such a limited federal
authorization, the Act addresses policy concerns raised by the
Executive Branch over previous legislative proposals regarding
Sudan divestment, and it addresses the Constitutional concerns
outlined above.
Four targeted sectors
Divestment authorized under this bill is targeted against
four specific economic sectors, widely recognized as key
sources of revenue for the Government of Sudan. These sectors
are: oil, power production, mineral extraction, and military
equipment. The first three sectors, by the Government of
Sudan's own admission, serve as that country's main
destinations of foreign direct investment (FDI), reaching $2.4
billion in 2005, according to the International Monetary Fund.
As a result of such investment, revenues to the Government of
Sudan have increased steadily over the past several years. The
benefits of such increased investment do not appear to have
benefited the general populace, which the World Bank reports
maintains an income of $650 per capita. Meanwhile, a former
finance minister of Sudan was recently reported to have said
that more than 70 percent of the Khartoum government's share of
oil profits is spent on military equipment, particularly for
the local production of ammunition and weapons, in case defense
imports to Sudan ever diminish or are effectively cut off by
international sanction.
The Committee's reported bill has five main provisions:
(1) State divestment. Permitting states and localities that
choose to do so to adopt measures to divest from companies
involved in four key business sectors in Sudan;
(2) Private divestment. Allowing mutual fund and private
pension fund managers to sell securities of companies involved
in four business sectors in Sudan, while maintaining that
managers must otherwise abide by their normal fiduciary
responsibilities and comply with relevant laws and regulations
in performing this task;
(3) Federal procurement. Requiring federal government
contractors to certify that they are not conducting business
operations in any of the four key sectors in Sudan identified
in the measure. The President may waive the federal procurement
certification if he determines and certifies to Congress that
it is in the national interest to do so;
(4) Sanctions report. Requiring a report on the efficacy of
current Sudan-related sanctions; and
(5) Termination. Setting forth conditions for this bill to
sunset, including that Sudan is abiding by UN Security Council
Resolution 1769, and has ceased attacks on civilians,
demilitarized the Janjaweed militia, allowed unfettered
humanitarian relief delivery, and granted refugees right of
return.
V. SECTION-BY-SECTION ANALYSIS OF BILL
Section 1.--This section establishes the short title of the
bill as the ``Sudan Accountability and Divestment Act of
2007''.
Section 2.--This section defines terms used in the bill
including: business operations, executive agency, Government of
Sudan, marginalized populations of Sudan, military equipment,
mineral extraction, oil-related activities, person, power-
production activities, and State.
Clarifications regarding terms
For purposes of implementing measures adopted in accordance
with Sections 3, 4, and 6 of this bill, the Committee makes the
following observations regarding specific industry activities.
In targeting persons involved in oil-related or mineral
extraction-related activities in Sudan, States may target
companies that sell supplies and provide services specifically
for oil operations in Sudan. An example of such a case might be
a company that sells pumps exclusively for installation along a
pipeline in Sudan. However, coverage would not include a
subcontractor that sells supplies to an array of companies for
use in various operations, which are neither specifically
integral, nor specifically designated for oil operations in
Sudan. The Committee further notes that some consortia of oil
and mineral extraction investors retain rights in Sudan but
remain ``inactive'' in exploration or drilling there. Because
investors in such consortia are generally not generating
revenue for the Khartoum government, and may be effectively
displacing others who might otherwise seek to actively engage
in oil-related operations, the Committee does not intend for
such investors to be targeted for divestment, as long as they
remain ``inactive.''
Regarding the definition of ``military equipment,'' the
Committee notes that some `dual-use' items may be exported to
Sudan to serve civilian functions, such as military-grade
trucks to ship regular goods and services, and radar equipment
to support weather forecasting and other communications. It is
not the intent of the Committee to authorize divestment from
companies involved in such business if it can be credibly
proven that these items will not be used for any military
purpose.
The Committee's definition of a person is highly
inclusive--not only including corporations and State-owned
entities, but their successors, subunits or subsidiaries.
Implicit in this definition is the requirement that parent
companies to subsidiaries, or subsidiaries that share the same
parent company, may be targeted for divestment as long as there
is credible evidence linking their affiliates to business
operations in key sectors of Sudan.
Section 3.--Authorizes States and localities to divest from
companies involved in key Sudan business sectors and sets
standards for them to do so.
While not mandating divestment, this section authorizes
State and local governments, if they so choose, to divest
public assets from certain companies doing business in Sudan.
In its formulation of this section, the Committee recognized
that divestment actions are being taken by investors for
prudential and economic reasons, including to address concerns
over reputational and financial risks associated with
investment in Sudan and to sever indirect business ties to a
government that is subject to international sanctions.
Risk
Given the Constitutional concerns about States' enacting
legislation which touches on international relations,
subsection (a) expresses the sense of Congress concerning State
or local divestment conducted for purposes of mitigating a
`financial or reputational risk.'
Standards
In order to ensure reasonable consistency and uniformity,
the Committee sets forth specific standards by which States and
localities may divest, and requires that a State or local
government provide notice to the Department of Justice when it
enacts a Sudan-related divestment law under the authority
provided in this section. The standards for divestment to be
observed include targeting companies that conduct business
operations in Sudan's power production, mineral extraction,
oil, and military equipment sectors. Furthermore, to avoid
hampering positive development in Sudan, this section
explicitly excludes companies whose business in Sudan only
involves: investments in the regional government of Southern
Sudan; legal transactions under a license from the Office of
Foreign Assets Control (OFAC) or other U.S. authorization;
delivery of goods and services for marginalized populations or
internationally recognized humanitarian organizations, and
other similar investments. In addition, companies that have
voluntarily suspended operations are to be excluded from
targeted divestment. The Committee recognizes that it may take
up to a year, or possibly longer, for a company to fully
suspend its operations once it has initiated such a process.
Therefore, those agencies implementing measures adopted
pursuant to this section should review all credible information
provided to demonstrate voluntary suspension. In order to
facilitate this process, the Committee has required that
companies be informed in writing by the State or local
government before divestment. Companies then have at least 90
days to comment on that decision.
In its testimony before the Committee, the Department of
the Treasury seemed to sanction lists developed by non-
governmental organizations (NGOs) produced for purposes of
divestment from Sudan, suggesting that the federal government
would not be able to add much value given current efforts
already under way by NGOs. The Committee therefore discerns
that in accordance with sections 3 and 4 of this Act, States,
local governments, and fund managers may rely on resources
provided by internationally recognized NGOs, and other
appropriate sources, to target companies for divestment.
Finally, the Committee notes that because Section 4(b) of
the Employee Retirement Income Security Act (ERISA)
specifically excludes governmental plans, including State and
local government pension plans, this provision should not be
construed as conflicting with the directives of ERISA.
Section 4.--This section allows private asset managers, if
they so choose, to divest from the securities of companies
conducting business operations in the power production, mineral
extraction, oil, and military equipment sectors of Sudan, and
provides a ``safe harbor'' for those divestment decisions made
in accordance with the legislation. A major concern inhibiting
divestment has been the possibility of a breach of fiduciary
responsibility by asset managers who decide to divest. The
Committee thus finds that fund managers may have financial or
reputational concerns as reasons to divest from companies that
accept the business risk of operating in countries subject to
international economic sanctions. Fund managers will still be
required to observe all other normal fiduciary
responsibilities. The Securities and Exchange Commission is
required to promulgate rules that require fund managers to
disclose their divestment decisions made pursuant to Section 4
of this legislation in regular periodic reports filed with the
Commission.
Section 5.--This section expresses the sense of Congress
affirming pension managers' rights to divest from companies
conducting business operations in key sectors of the Sudan
economy in accordance with an interpretative bulletin issued by
the Department of Labor in 1994, and printed in the Code of
Federal Regulations in section 2509.94-1 of title 29. Under the
regulations, making such ``economically targeted investment''
(ETI) decisions are allowed under sections 403 and 404 of the
Employee Retirement Income Security Act of 1974 (ERISA), as
long as the fiduciary making such a decision has diversified
his portfolio adequately and made these decisions in the
interest of the plan's participants and beneficiaries.
Section 6.--This section requires that companies seeking
contracts with the United States Government first certify that
they are not conducting business operations in key sectors of
Sudan. Government agencies are provided a range of remedies if
prospective contractors submit a false certification, including
terminating the contract, suspending a contractor's eligibility
for future contractors, and debarring a company from government
contracts for up to three years. The President may waive these
requirements on a case by case basis, if he determines and
certifies in writing to Congress that it is in the national
interest to do so.
Perjury
In addition, the Committee notes that in the course of
legal proceedings, if a prospective contractor submits false
statements pursuant to this section, the company may be subject
to penalties of perjury in accordance with 18 U.S.C. 3571,
which amount to the greater of $250,000 for an individual,
$500,000 for an organization, or twice the amount of the
proposed contract.
Section 7.--This section expresses a sense of Congress that
the governments of other countries should adopt measures
similar to those contained in the bill.
Section 8.--This section expresses the sense of Congress
that the President should continue to work with the
international community both to facilitate the urgent
deployment of a peacekeeping force to Sudan and to call for a
vote on a United Nations Security Council resolution imposing
multilateral sanctions on Sudan in response to the ongoing
genocide in Darfur.
Section 9.--This section explicitly addresses
Constitutional and legal concerns by expressing the sense of
Congress that the bill does not conflict with current U.S.
international obligations, or the Supremacy Clause of the
Constitution.
Section 10.--This section requires that the Secretaries of
State and the Treasury report on the efficacy of current
sanctions on Sudan.
Section 11.--This section repeals a previously enacted
reporting requirement upon the Secretary of the Treasury.
Section 12.--This section describes the circumstances under
which the provisions of this bill will terminate, including
Sudan's compliance with UN Security Council Resolution 1769,
ceasing of attacks on civilians, demilitarizing of the
Janjaweed militia, allowing unfettered humanitarian relief
delivery, and its granting of the right of return to refugees.
This provision is an important incentive for the Sudan
government to meet its international obligations, stop the
genocide in Darfur, and provide for conditions for the people
of Sudan to recover from decades of violence. It is also
important in that by sunsetting divestment authorizations for
State and local governments and other investors, it helps
ensure that their decisions will not conflict with future
policies and objectives set by the federal government.
VI. HEARINGS
On October 3, 2007, the Committee on Banking, Housing, and
Urban Affairs held a public hearing entitled ``Combating
Genocide in Darfur: The Role of Divestment and Other Policy
Tools.'' Witnesses, Panel One: Honorable Richard Durbin, United
States Senator; Honorable Sam Brownback, United States Senator;
Witnesses Panel Two: Honorable Jendayi Frazer, Assistant
Secretary for African Affairs; Ms. Elizabeth Dibble, Principal
Deputy Assistant Secretary for International Finance and
Development, Department of State; Mr. Adam Szubin, Director,
Office of Foreign Assets Control, Department of the Treasury;
Witnesses, Panel Three: Honorable Frank Caprio, General
Treasurer, State of Rhode Island; Mr. Bennett Freeman, Senior
Vice President for Social Research and Policy, Calvert
Investment; Mr. John Prendergast, Co-Chair, ENOUGH Project; Mr.
William Reinsch, President, National Foreign Trade Council; Mr.
Adam Sterling, Director, Sudan Divestment Task Force.
VII. COMMITTEE CONSIDERATION
The Committee on Banking, Housing, and Urban Affairs met in
open session on October 17, 2007, and unanimously ordered the
bill reported, as amended.
VIII. CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
Section 11(b) of the Standing Rules of the Senate, and
Section 403 of the Congressional Budget Impoundment and Control
Act, require that each committee report on a bill contain a
statement estimating the cost of the proposed legislation. The
Congressional Budget Office has provided the following cost
estimate and estimate of costs of private-sector mandates.
Sudan Accountability and Divestment Act of 2007
This legislation would allow state and local governments to
divest their holdings in certain companies doing business in
Sudan. If any state or local government chose to divest, it
would be required to notify both the Attorney General and the
companies affected by the divestiture. It also would allow
state and local governments to divest financial holdings or any
government assets used to make loans and extensions of credit
to companies doing business in Sudan. The bill also would
prohibit federal agencies from entering into contracts for
goods or services without a certification from the contractor
that it does not conduct business operations in Sudan.
Based on information from the Securities and Exchange
Commission, CBO estimates that implementing the new regulations
necessary to carry out the bill's provisions would cost less
than $500,000 per year. Based on information from the General
Services Administration, we estimate that changes to the
federal contracting process would cost about $1 million per
year, including computer and administrative costs. Thus,
enacting this legislation would cost about $5 million over the
2008-2012 period, subject to the availability of appropriated
funds. Enacting the bill would not affect direct spending or
revenues.
The bill contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
State or local governments that chose to divest their assets
would have to notify the Attorney General and the companies
affected by the divesture, but the costs of such notifications
would result from their voluntary decision to divest and would
not result from an intergovernmental mandate as defined in
UMRA.
The CBO staff contacts for this estimate are Susan Willie
(for federal costs) and Elizabeth Cove (for the state and local
impact). This estimate was approved by Theresa Gullo, Deputy
Assistant Director for Budget Analysis.
IX. REGULATORY IMPACT STATEMENT
In accordance with paragraph 11(b), rule XXVI, of the
Standing Rules of the Senate, the Committee makes the following
statement concerning the regulatory impact of the bill.
The Act permits states, localities, and private asset
managers to divest from companies involved in four key business
sectors in Sudan. While these provisions remain discretionary,
they may nevertheless entail the production of more
documentation by involved corporate entities than would
otherwise have been required. Fund managers who make such
divestment decisions will be required to report such actions to
the Securities and Exchange Commission. States and local
governments will be required to file similar reports to the
Department of Justice on their divestment decisions.
Furthermore, companies are to be informed of divestment
decisions pursuant to provisions in the Act, and will be given
the opportunity to comment on those decisions, as well.
In addition, the Act requires federal government
contractors to certify to appropriate agency heads that they
are not conducting business operations in four key business
sectors in Sudan. While the President may waive the federal
procurement certification, he would nevertheless be required to
certify to Congress that doing so is in the national interest.
The Congressional Budget Office Cost Estimate prepared for
this bill notes, ``The bill contains no intergovernmental or
private-sector mandates as defined in the Unfunded Mandates
Reform Act (UMRA). State or local governments that chose to
divest their assets would have to notify the Attorney General
and the companies affected by the divesture, but the costs of
such notifications would result from their voluntary decision
to divest and would not result from an intergovernmental
mandate as defined in UMRA.''