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It's The Oil Stupid: Why foreign divestment statutes and Congressional efforts to override constitutional defects don’t work

Jerry Gordon - 4/23/2007

I have no problem with trying to strike back at Islamist terror in whatever form, be it in the Sudan, Tehran or Israel. In fact I applaud efforts here in the U.S. to do that. But, if you’re going to arouse grass- roots action in support of doing something about Islamist terrorism make sure that it’s constitutional.

Last year, I wrote an article - “Only Oil will stop the genocide in the Sudan,” - about the roiling debate on grassroots efforts to enact Sudan divestment statutes in several states, including California, Illinois, Oregon, Missouri, Pennsylvania and Connecticut. Former Israeli PM Bibi Netanyahu has argued in the U.S. about enlisting American municipal and state public pension systems to divest securities from companies doing business directly or indirectly with Iran.

The thrust of these pieces of legislation developed by Save Darfur, Divest Terror and other groups was to authorize the heads of state pension and retirement systems to shed securities holdings in their portfolios of companies that engaged in doing business with the Islamist regimes in Khartoum and Tehran. I suggested that most of the legislative proposals were ephemeral-they would have little or no impact. I noted that these state divestment proposals might run into legal matters concerning fiduciary responsibilities for plan beneficiaries. I also made the key point that only federal level solutions made any practical sense.

In late February, 2007 a decision was handed down in the Northern Illinois Federal District Court: National Foreign Trade Council (NFTC) v. Giannoulias. The Northern Illinois Federal District Court in the NFTC v Giannoulias decision declared the 2005 Illinois Act to End Atrocities and Terrorism in the Sudan ("Illinois Sudan Act") was unconstitutional and in violation of the Supremacy Clause, the foreign affairs power of the Federal government and the Foreign Commerce Clause of the U.S. Constitution.

Further, the Court referred to two earlier U.S. Supreme Court cases. One was the decision in 2000 in re: Crosby & National Foreign Trade Council v Massachusetts which challenged a Massachusetts law that boycotted companies that did business with Myanmar (Burma) from engaging in procurements let by the Commonwealth. The Supreme Court held that the Massachusetts law violated the Supremacy Clause of the U.S. Constitution. The other and more recent Supreme Court case was American Insurance. Association v Garamendi in 2003. There, the Supreme Court struck down a California statute on the grounds that it interfered with Federal government conduct of foreign affairs.

The Northern Illinois Federal District Court in its February 2007 decision noted that the Illinois Sudan Act was a 'more heavy handed' approach and could lead to economic effects limiting Federal government 'bargaining power' vis a vis the Sudan.

Even where the Northern Illinois Federal District court saw no conflict with these Constitutional provisions the Northern Federal District Court opined such state laws would have 'little to no effect.’


I gave the example in the instance of Connecticut that the State Treasurer had identified less than $4 million of ‘tainted’ securities that might be possible candidates for Sudan divestment from a pension portfolio of over $22 billion.
On March 8th, Illinois U.S. Senator Richard Durbin introduced S. 831 – The Sudan Divestment Authorization Act - in an attempt to resolve the constitutional defects of the groundbreaking Illinois Sudan Divestment statute and similar ones in California and elsewhere. The bill pending before Senate Banking, Housing and Urban Affairs Committee would authorize states and municipalities” to prohibit the investment of State assets in any company that has a qualifying business relationship with Sudan.” It would seek to avoid the Supremacy, foreign affairs and foreign commerce clauses ‘conflicts’ at the heart of the Northern Illinois Federal District Court decision. Whether it succeeds or not is moot. The effects, as both the Federal Court and I have commented on, will be minimal.


Florida Congresswoman, Ileana Ros-Lehtinen has introduced a measure H.R. 1357 – Additional Iran Third Party Sanctions - requiring disclosure and divestment of Iran related investment in U.S. private sector pension funds which may complicate the matter by imposing substantial reporting burdens on fund managers.


Having made some of these criticisms of state divestment proposals in my original article, do I take any comfort in the Federal Court decision and the remedial Congressional legislative initiatives? The answer is a resounding no. Because what I wanted to provide were alternatives for groups like Divest Terror and concerned Members of Congress.


Clearly in the wake of the Illinois Federal District Court case the answer is, we must pressure our federal government to do some dramatic arm twisting. One example in Iran’s case would be a moratorium on delivery of refined gasoline and diesel fuel products from foreign sources that comprise over 40 percent of Iran’s needs. Another example is the proposed World Bank /IMF oil revenue trust to force the Islamist Republic of the Sudan to pay back over $25 billion of sovereign debt. The oil revenue trust would also steer ‘excess’ funds to much needed humanitarian, job development and peacekeeping purposes in the Sudan.


Divestment unfortunately also has the taint of the Arab Boycott of Israel and the anti-Israel divestment proposals by left radical elites and Islamist allies in universities and a few liberal Protestant church groups. There has been federal legislation on the books since 1977 that created an Office of Antiboycott Compliance at the U.S. Department of Commerce to monitor U.S. companies participating in the Arab Boycott. That has made pro-Israel advocacy groups like AIPAC gun shy about signing on to divestment proposals in the cases of Sudan, and especially Iran.


We should now coalesce around solutions that are constitutional and use the enormous power of our Federal government to implement the provisions of both the Darfur Accountability Act of 2005 and the Iran and Libya Sanctions Act of 1996 and go after their oil money and financial assets. Undersecretary of the Treasury for Terrorism and Financial Intelligence, Stuart Levey, has done an able job of convincing the international banking community to bottle up access to capital markets by the Islamic Republic of Iran. But when it comes to the proposals I have discussed here and elsewhere regarding sequestering Sudan’s oil revenues and a gas and diesel fuel deliveries moratorium with regard to Iran, clearly more has to be done. They are far more powerful ‘tools’ to bring both Islamist terror nations to heel than divesting foreign securities from state and municipality pension funds.