The Wall Street Journal: Trading Outcry Intensifies: Firms Face More Calls to Cut Ties With Censured Nations

EXTRACT: The growing scrutiny comes amid political and grass-roots pressure on U.S. investors, such as state pension funds, to dump shares of non-U.S. companies with major investments in energy businesses in Iran. Earlier this month, Republican Rep. Ileana Ros-Lehtinen of Florida introduced a bill calling for federal pension funds to sell shares of any company with more than $20 million in Iran’s energy sector. Such companies include Royal Dutch Shell PLC, based in the Netherlands; Total SA of France and Russia’s OAO Gazprom.

THE ARTICLE

By PAULO PRADA and BETSY MCKAY
March 27, 2007; Page A6

American companies that do business with countries subjected to U.S. trade sanctions face increasing financial and political pressure to stop as tensions between Iran and the United Nations Security Council worsen.

As a result, many companies are severing connections — or plan to when current contracts end — with customers in the 13 countries or regions penalized after the U.S. accused them of supporting terrorism, human-rights abuses or other unacceptable behavior.

The clamor spotlights how scores of U.S.-based companies manage to do business in sanctioned countries either through offshore subsidiaries or using export licenses granted by the Treasury Department. After seeing this traffic grow briskly for several years, companies now find lawmakers stepping up efforts to tighten restrictions and shareholders and fund managers steering investments away from countries in Washington’s doghouse.

Companies whose foreign subsidiaries operate in a sector dominated by a sanctioned nation’s government — General Electric Co., Halliburton Co. and Dresser-Rand Group Inc. among them — have faced particularly harsh criticism. Securities filings show many other U.S. corporations acknowledge their overseas units conduct such business, and the federal government last year fined at least a dozen U.S. companies for violating sanctions in Iran, Sudan, Cuba and elsewhere.

“It’s questionable and shameful, if not treacherous, behavior,” Sen. Frank Lautenberg said. As part of an Iran sanctions bill introduced in the Senate last week, the New Jersey Democrat included provisions that would ban subsidiaries of U.S.-controlled companies that lack a special export license from doing business in Iran. The new Democratic majority in Congress tilts the odds in favor of his effort, which failed as an amendment to three bills in previous sessions largely because of Republican opposition.

The growing scrutiny comes amid political and grass-roots pressure on U.S. investors, such as state pension funds, to dump shares of non-U.S. companies with major investments in energy businesses in Iran. Earlier this month, Republican Rep. Ileana Ros-Lehtinen of Florida introduced a bill calling for federal pension funds to sell shares of any company with more than $20 million in Iran’s energy sector. Such companies include Royal Dutch Shell PLC, based in the Netherlands; Total SA of France and Russia’s OAO Gazprom.

“We’re concerned most about…companies that have financial relationships with a government, helping to develop oil fields and profits that are then turned around to support terrorism,” said Sarah Steelman, state treasurer in Missouri, who oversees one of the country’s first “terror-free” public investment funds, the $29 million Missouri Investment Trust.

Florida lawmakers are considering requiring the state’s pension fund to sell any holdings in companies found to have ties to Iran’s energy industry. A separate bill could force the pension fund to divest itself of 12 companies operating in Sudan, in protest of militia attacks terrorizing the Darfur region. And pension funds in at least seven other states already have sold stakes in U.S. companies linked to Sudan.

The exact number of companies doing business despite trade embargoes isn’t clear, partly because federal officials won’t disclose which companies are legally allowed to export to proscribed countries, citing a trade-secrets law. Among those known to have interests in Iran are GE, which services power plants through contracts set up by non-U.S. subsidiaries; Xerox Corp., which sells spare parts and supplies, though no longer sells copiers there; and Overseas Shipholding Group Inc., which operates tankers that at times dock in Iran and transport Iranian oil to other foreign buyers.

Many in business and industry oppose any tightening of sanctions laws, which already put them at a disadvantage with overseas rivals. “Foreign competitors are not dummies,” said William Reinsch, president of the National Foreign Trade Council, a business group that promotes free trade. Sanctions can “destroy your reputation as a reliable supplier, and it’s something that your foreign competitors will play up shamelessly with their customers.”

U.S. exports to sanctioned countries surpassed $1.15 billion last year, according to the U.S. Census Bureau. Exports to Iran were $85 million, up from $8 million in 2001. Those figures don’t count services such as consulting or revenue generated through subsidiaries in embargoed countries. Despite the increase, trade with Iran is at less than 20% of its volume in the early 1990s, before the Clinton administration tightened restrictions on sales or investments by U.S. companies.

“U.S. companies are generally happy to do business in these places because they want to build a relationship in case things thaw,” said Adam Pener, chief operating officer of Conflict Securities Advisory Group Inc., a consulting firm that advises institutional investors on the risks of buying stakes in companies with exposure to countries linked to terrorism. “As soon as people start shining the light on these things, it’s a no-brainer…to leave because you don’t want to be seen as supporting or associated with terror.”
Under U.S. law, makers of agricultural products, medicine, equipment and services can get licenses to legally export items as long as they are used for food, health or humanitarian purposes. But that definition is broad enough to include photography equipment, musical instruments, plastics and tobacco, according to the Census Bureau.

Companies without a license still can do business through foreign subsidiaries if those units are run separately from the U.S. parent and don’t have any U.S. citizens as managers, directors or employees. But non-U.S. units can be difficult to monitor, and some critics claim they offer a huge trade loophole for American companies.

In filings with the Securities and Exchange Commission this year, various U.S. companies acknowledge their foreign subsidiaries conduct business in embargoed countries. A recent filing by heavy-machinery maker Dresser-Rand, for instance, notes that “some of these countries…are or previously have been identified by the State Department as terrorist-sponsoring states” and that “our reputation may suffer due to our association with these countries.”

Natco Group Inc., a Houston maker of oil-and-gas-production equipment, said in a filing that subsidiaries in the United Kingdom, Japan and Canada “have made sales” and “expect to continue making sales…to customers in certain countries that are subject to U.S. government sanctions.”

Dresser-Rand, of Houston, declined through a spokesman to comment. Calls to Natco seeking comment weren’t returned.

Last year the Treasury Department’s Office of Foreign Assets Control fined more than a dozen U.S. companies for violations. Supermicro Computer Inc., a San Jose, Calif., maker of computer servers, paid more than $450,000 in fines because the company, through a Dubai-based distributor, knowingly sold 300 computer motherboards in Iran. Howard Kalt, an investor-relations manager for Supermicro, says the company severed its relationship with the distributor and launched an “export compliance program,” and that violations by the company “are all past tense now.”

The heightened scrutiny has led some companies to say they will wrap up operations their subsidiaries conduct in sanctioned countries when they complete existing contracts.

Flowserve Corp., a supplier of pumps, valves and other equipment, gets 1% to 2% of its revenue from Iran, Syria and Sudan. The Dallas company is making “a voluntary withdrawal” from pursuing additional business there but “may continue to honor certain existing contracts, commitments and warranty obligations,” according to a securities filing last month. A company spokesman, in an email response to questions about the decision, said “once these legally compliant warranties and contractual commitments expire, these subsidiaries will no longer do any business in these countries.”

Such withdrawals can be slow, though. GE and Halliburton, for example, reacted to pressure by announcing in 2005 they would stop seeking new business in Iran. Yet neither has actually pulled out.

GE still has “long-term service agreements and maintenance agreements” for power plants and sells spare parts for oil and natural-gas projects there, spokesman Gary Sheffer said. Its Iran operations are handled through units in Austria, Canada, China, France, Italy and the U.K.

Halliburton is “winding up our work in Iran, and will exit upon the completion of existing commitments,” spokeswoman Melissa Norcross wrote in an email.

–Neil King Jr. contributed to this article.

Write to Paulo Prada at [email protected] and Betsy McKay at [email protected]

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