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Testimony: 

Before the Subcommittee on International Monetary Policy and Trade, 
Committee on Financial Services, House of Representatives: 

United States Government Accountability Office:
GAO: 

For Release on Delivery: 
Expected at 2:00 p.m. EDT:
Tuesday, November 30, 2010: 

Sudan Divestment: 

U.S. Investors Sold Assets but Could Benefit from Additional 
Information about Companies' Ties to Sudan: 

Statement of Thomas Melito, Director: 
International Affairs and Trade: 

GAO-11-245T: 

GAO Highlights: 

Highlights of GAO-11-245T, a testimony before the Subcommittee on 
International Monetary Policy and Trade, Committee on Financial 
Services, House of Representatives. 

Why GAO Did This Study: 

Recognizing the humanitarian crisis in Darfur, Sudan, Congress enacted
the Sudan Accountability and Divestment Act (SADA) in 2007. This law 
supports U.S. states’ and investment companies’ decisions to divest 
from companies with certain business ties to Sudan. It also seeks to 
prohibit federal contracting with these companies. This testimony (1)
identifies actions that U.S. state fund managers and investment 
companies took regarding Sudan-related assets, (2) describes the 
factors that these entities considered in determining whether and how 
to divest, and (3) determines whether the U.S. government has 
contracted with companies identified as having certain Sudan-related 
business operations and assesses compliance with SADA’s federal contract
prohibition provision. This testimony is based on a GAO report (GAO-10-
742), for which GAO surveyed states, analyzed investment data, 
assessed federal contracts, and interviewed government officials. 

What GAO Found: 

Since 2006, U.S. state treasurers and public pension fund managers have
divested or frozen about $3.5 billion in assets primarily related to 
Sudan in response to their states’ laws and policies; U.S. investment 
companies, which also sold Sudan-related assets, most commonly cited 
normal business reasons for changes in their holdings. State fund 
managers GAO surveyed indicated that their primary reason for 
divesting or freezing Sudan-related assets was to comply with their 
states’ laws or policies. Thirty-five U.S. states have enacted 
legislation or adopted policies affecting their investments related to 
Sudan, primarily in response to the Darfur crisis and Sudan’s 
designation by the U.S. government as a state sponsor of terrorism. 
GAO also found that the value of U.S. shares invested in six key 
foreign companies with Sudan-related business operations declined by 
almost 60 percent from March 2007 to December 2009. The decline cannot 
be accounted for solely by lower stock prices for these companies, 
indicating that U.S. investors, on net, decided to sell shares in 
these companies. Investors indicated that they bought and sold Sudan-
related assets for normal business reasons, such as maximizing 
shareholder value. 

U.S. states and investment companies have often considered three factors
when determining whether and how to divest. First, they have considered
whether divesting from Sudan is consistent with fiduciary 
responsibility—-generally the duty to act solely and prudently in the 
interest of a beneficiary or plan participant. Second, they have 
considered the difficulty in identifying authoritative and consistent 
information about companies with Sudan-related business operations. 
GAO analyzed three available lists of these companies and found that 
they differed significantly from one another. Although information 
directly provided by companies through public documents, such as 
Securities and Exchange Commission (SEC) disclosures, is a particularly
reliable source of information, federal securities laws do not require
companies specifically to disclose business operations in state 
sponsors of terrorism. The SEC has the discretionary authority to 
adopt a specific disclosure requirement for this information but has 
not exercised this authority. Third, investors have considered the 
effect that divestment might have on operating companies with Sudan-
related business activities, such as prompting companies interested in 
promoting social responsibility to leave Sudan, creating room for 
companies that do not share that interest to enter the Sudanese market. 

GAO’s analysis, including a review of a nonrandom selection of 
contracts, indicates that the U.S. government has complied with SADA’s 
contract prohibition provision. Specifically, the U.S. government has 
contracted with only one company identified on a widely used list of 
companies with business ties to Sudan, and the contracts awarded to 
this company did not violate SADA. The U.S. government has contracted 
with subsidiaries and affiliates of companies with business ties to 
Sudan, as SADA permits. 

What GAO Recommends: 

The related GAO report recommends that the SEC consider issuing a rule 
requiring companies that trade on U.S. exchanges to disclose their 
business operations tied to Sudan, as well as possibly other state 
sponsors of terrorism. The SEC’s Division of Corporation Finance 
agreed to present GAO’s recommendation to the commission. 

View [hyperlink, http://www.gao.gov/products/GAO-11-245T] or key 
components. For more information, contact Thomas Melito at (202) 512-
9601 or melitot@gao.gov. 

[End of section] 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here to discuss our work regarding the Sudan 
Accountability and Divestment Act (SADA). Sudan has long been a source 
of concern for the U.S. government both because of its support for 
acts of international terrorism and its campaign of genocide in the 
Darfur region. Congress enacted SADA in 2007 to support U.S. states' 
decisions to divest from foreign companies conducting specific 
business operations in Sudan in four economic sectors--power 
production, mineral extraction, oil-related activities, and production 
of military equipment--and to give investment companies that divest 
from these companies "safe harbor"[Footnote 1] from certain lawsuits. 
The act also contains a contract prohibition clause, which requires 
all U.S. government agencies to ensure that each contract entered into 
for the procurement of goods or services includes a clause requiring 
the contractor to certify that it does not conduct certain business 
operations in Sudan in the four key economic sectors. 

My testimony summarizes our June 2010 report.[Footnote 2] As 
requested, in this report we (1) identify actions that U.S. state 
treasurers and public pension fund managers and U.S.-based investment 
companies have taken regarding their Sudan-related assets and attempt 
to determine the reasons for these actions, (2) describe the factors 
that these entities considered in determining whether and how to 
divest, and (3) determine whether the U.S. government has contracted 
with companies identified as having certain Sudan-related business 
operations and assess compliance with SADA's federal contract 
prohibition provision. 

For our report, we conducted a survey of treasurers and public pension 
fund managers (hereafter referred to as "state fund managers") in all 
50 states and the District of Columbia.[Footnote 3] Ninety-one percent 
(or 138 of 151) of the fund managers we contacted responded to our 
survey, with at least 1 fund manager from each of the 51 states 
providing a response. We also reviewed state laws and policies 
regarding investment of their Sudan-related assets and interviewed 
various advocacy organizations. To identify the actions that 
investment companies took regarding their Sudan-related assets, we 
selected six key foreign companies that have operations in Sudan's oil 
sector and then used shareholder ownership and market data to analyze 
U.S. investment companies' holdings in these companies over time. We 
also interviewed investment companies regarding Sudan-related assets, 
as well as eight primarily European foreign operating companies that 
have or used to have Sudan-related business operations. Because the 
Securities and Exchange Commission (SEC) is responsible for overseeing 
the federal securities laws and, through its Office of Global Security 
Risk, for monitoring operating companies' disclosure of material 
[Footnote 4] business activities in or ties to state sponsors of 
terrorism, we reviewed documents and interviewed officials from this 
agency. We also interviewed officials from the Department of State, 
which oversees U.S. foreign policy toward Sudan, and the Department of 
the Treasury, which administers and enforces U.S. sanctions against 
Sudan. Finally, we searched the Federal Procurement Data System--Next 
Generation to determine whether the U.S. government awarded federal 
contracts to foreign companies identified as having business ties to 
Sudan, as well as to some of their subsidiaries and affiliates. We 
selected the highest dollar amount contract or contract modification 
for each of the companies we identified and reviewed the contract 
solicitation or other relevant documentation for presence of the 
applicable Sudan-related certification clause, if required. We also 
reviewed federal rules related to the contract prohibition provision 
of SADA and interviewed officials at the Office of Management and 
Budget. 

In preparing this testimony, we relied on our work supporting the 
accompanying report. That report contains a detailed overview of our 
scope and methodology. All of our work for this testimony was 
performed in accordance with generally accepted government auditing 
standards. Those standards require that we plan and perform the audit 
to obtain sufficient, appropriate evidence to provide a reasonable 
basis for our findings and conclusions based on our audit objectives. 
We believe that the evidence obtained provides a reasonable basis for 
our findings and conclusions based on our audit objectives. 

U.S. State Fund Managers and Investment Companies Have Sold Sudan- 
Related Assets for Varying Reasons: 

We found that several states have divested or frozen assets primarily 
related to Sudan and that the value of U.S. investment companies' 
Sudan-related asset holdings has declined considerably since March 
2007. Our survey responses show that state fund managers have divested 
or frozen about $3.5 billion in assets primarily related to Sudan (see 
table 1). Specifically, fund managers from 23 of the states responding 
to our survey reported that, from 2006 to January 2010, they divested 
or froze about $3.5 billion in assets held in 67 operating companies 
they identified as related either to Sudan specifically or to a larger 
category of divestment targets, such as state sponsors of terrorism. 

Table 1: Total Sudan-Related Assets Divested or Frozen by U.S. States, 
2006 to January 2010A: 

State: New Jersey; 
Total amount divested or frozen: $2,162,564,000; 
Earliest divestment or freezing action: [B]; 
Most recent divestment or freezing action: May 2006. 

State: Oregon; 
Total amount divested or frozen: $362,000,000; 
Earliest divestment or freezing action: 2006; 
Most recent divestment or freezing action: 2009. 

State: Texas; 
Total amount divested or frozen: $225,990,790; 
Earliest divestment or freezing action: October 2008; 
Most recent divestment or freezing action: January 2009. 

State: Massachusetts; 
Total amount divested or frozen: $164,489,806; 
Earliest divestment or freezing action: March 2008; 
Most recent divestment or freezing action: March 2008. 

State: Florida[C]; 
Total amount divested or frozen: $154,947,926; 
Earliest divestment or freezing action: April 2008; 
Most recent divestment or freezing action: July 2008. 

State: California; 
Total amount divested or frozen: $81,739,949; 
Earliest divestment or freezing action: May 2006; 
Most recent divestment or freezing action: September 2008. 

State: Colorado; 
Total amount divested or frozen: $76,066,122; 
Earliest divestment or freezing action: July 2007; 
Most recent divestment or freezing action: January 2010. 

State: Indiana[C]; 
Total amount divested or frozen: $67,203,695; 
Earliest divestment or freezing action: December 2008; 
Most recent divestment or freezing action: December 2009. 

State: Maryland[C]; 
Total amount divested or frozen: $35,430,790; 
Earliest divestment or freezing action: September 2007; 
Most recent divestment or freezing action: April 2008. 

State: Michigan[C]; 
Total amount divested or frozen: $24,332,285; 
Earliest divestment or freezing action: May 2009; 
Most recent divestment or freezing action: December 2009. 

State: Maine[D]; 
Total amount divested or frozen: $21,500,000; 
Earliest divestment or freezing action: April 2006; 
Most recent divestment or freezing action: June 2009. 

State: Connecticut[C]; 
Total amount divested or frozen: $15,388,947; 
Earliest divestment or freezing action: May 2007; 
Most recent divestment or freezing action: September 2009. 

State: Kansas; 
Total amount divested or frozen: $13,378,022; 
Earliest divestment or freezing action: [B]; 
Most recent divestment or freezing action: June 2008. 

State: Hawaii; 
Total amount divested or frozen: $13,288,052; 
Earliest divestment or freezing action: February 2008; 
Most recent divestment or freezing action: December 2008. 

State: New York[C]; 
Total amount divested or frozen: $12,300,000; 
Earliest divestment or freezing action: June 2009; 
Most recent divestment or freezing action: June 2009. 

State: New Mexico; 
Total amount divested or frozen: $12,000,000; 
Earliest divestment or freezing action: [B]; 
Most recent divestment or freezing action: January 2008. 

State: Iowa; 
Total amount divested or frozen: $10,576,749; 
Earliest divestment or freezing action: October 2007; 
Most recent divestment or freezing action: October 2008. 

State: New Hampshire; 
Total amount divested or frozen: $5,636,966; 
Earliest divestment or freezing action: September 2008; 
Most recent divestment or freezing action: March 2009. 

State: Ohio[C]; 
Total amount divested or frozen: $2,341,595; 
Earliest divestment or freezing action: November 2009; 
Most recent divestment or freezing action: November 2009. 

State: Minnesota; 
Total amount divested or frozen: 1,012,038; 
Earliest divestment or freezing action: January 2008; 
Most recent divestment or freezing action: April 2009. 

State: Pennsylvania; 
Total amount divested or frozen: $945,247; 
Earliest divestment or freezing action: January 2008; 
Most recent divestment or freezing action: January 2008. 

State: Arizona[C]; 
Total amount divested or frozen: $727,480; 
Earliest divestment or freezing action: November 2009; 
Most recent divestment or freezing action: November 2009. 

State: Total[E]; 
Total amount divested or frozen: $3,463,860,458. 

Sources: GAO's survey of states and public state investment reports. 

[A] Illinois was one of the 23 states that reported divesting or 
freezing its Sudan-related assets, but it did not provide the value or 
dates of these actions. 

[B] States with no entry for "earliest date" did not provide us with 
this information. 

[C] The state has a law or policy, which either focuses on both Sudan 
and Iran or targets state sponsors of terrorism. 

[D] Maine's law on Sudan-related investments, enacted in 2005, expired 
July 1, 2009. 

[E] This total reflects the amounts divested or frozen as reported in 
responses to our survey or in public documents. There may be 
additional fund managers whose funds were not included in our survey 
population or who divested but did not respond to our survey. 

[End of table] 

All of the states that reported having divested or frozen Sudan-
related assets had laws or policies regarding their Sudan-related 
assets, and the state fund managers who responded to our survey cited 
compliance with these laws and policies as their primary reason for 
divestment. Thirty-five U.S. states have enacted legislation, adopted 
policies, or both, affecting their Sudan-related investments. These 35 
states did so often out of concern for the genocide in Darfur, as well 
as some concerns about terrorism. Their laws and policies vary in the 
specificity with which they address the sale and purchase of Sudan- 
related assets. For example, most states with laws and policies 
requiring divestment also prohibit or restrict future investments in 
Sudan-related companies. However, some laws and policies only mention 
prohibiting future investments but do not require divestment of Sudan- 
related investments held prior to enactment of the measures. In 
addition to divestment, many state laws and policies also mandate or 
encourage engagement--identifying companies and leveraging power as a 
shareholder or potential shareholder in an effort to change the 
investment or operating behavior of that company. 

Like the states, U.S.-based investment companies have sold Sudan- 
related shares. Specifically, our analysis shows that the value of 
U.S. holdings in six key foreign companies with Sudan-related business 
operations fell from $14.4 billion at the end of March 2007 to $5.9 
billion at the end of December 2009, a decline of nearly 60 percent. 
This decline cannot be accounted for solely by changes in share price, 
indicating that U.S. investors, on net, chose to sell shares of these 
companies. Based on a price index weighted to the U.S. portfolio of 
Sudan-related equities, prices rose by roughly 7 percent from March 
2007 to December 2009, while equity holdings fell by nearly 60 percent 
(see fig. 1). This suggests that net selling of Sudan-related equities 
explains the majority of the decline in U.S. holdings. It is not 
certain if this selling is related to conditions specific to Sudan or 
represents a more general reallocation of assets by U.S. investors. 
Nevertheless, some evidence suggests that Sudan-specific factors may 
have influenced investors' decisions to sell. Specifically, from 
December 2007 to December 2008, U.S. holdings in Sudan-related 
equities declined as a percentage of foreign oil and gas equity 
holdings and as a percentage of all foreign equity holdings. 

Figure 1: U.S. Holdings and Prices of Sudan-Related Companies, March 
2007 to December 2009: 

[Refer to PDF for image: multiple line graph] 

Index value (March 2007 = 100). 

Date: March 2007; 
US holdings: $14.41 billion; 
Price Index: 100. 

Date: June 2007; 
US holdings: $16.32 billion; 
Price Index: 126.45. 

Date: September 2007; 
US holdings: $15.40 billion; 
Price Index: 152.22. 

Date: December 2007; 
US holdings: $15.34 billion; 
Price Index: 159.87. 

March 2008; 
US holdings: $15.94 billion; 
Price Index: 105.46. 

Date: June 2008; 
US holdings: $7.39 billion; 
Price Index: 107.92. 

Date: September 2008; 
US holdings: $7.72 billion; 
Price Index: 88.58. 

Date: December 2008; 
US holdings: $6.24 billion; 
Price Index: 73.45. 

Date: March 2009; 
US holdings: $4.85 billion; 
Price Index: 72.44. 

Date: June 2009; 
US holdings: $5.54 billion; 
Price Index: 94.67. 

Date: September 2009; 
US holdings: $5.19 billion; 
Price Index: 99.24. 

Date: December 2009; 
US holdings: $5.94 billion; 
Price Index: 106.55. 

Source: GAO analysis of Thomson Reuters data. 

[End of figure] 

Investors said they weighed various factors in their decisions 
regarding Sudan-related assets. Most commonly, investors stated that 
they bought and sold Sudan-related assets for normal business reasons, 
such as maximizing shareholder value consistent with the guidelines in 
each fund's prospectus, as well as in response to specific client 
instructions. Each of the investment companies we interviewed issued a 
corporate statement regarding Sudan-related investing, and these 
corporate statements reflect a variety of investor perspectives. For 
example, one firm's statement indicated that it would ensure that its 
funds did not invest in companies materially involved in Sudan, while 
another's explained that it would remain invested in these companies 
in order to actively oppose their practices that it did not condone. 

U.S. Investors Have Often Considered Three Factors When Determining 
Whether and How to Divest from Companies Tied to Sudan: 

We found that U.S. investors have often considered three factors when 
determining whether and how to divest from companies tied to Sudan: 
fiduciary responsibility, the difficulty identifying operating 
companies with ties to Sudan, and the possible effects of divestment 
on operating companies and the Sudanese people. 

Fiduciary Responsibility: 

Both state fund managers and private investment companies we contacted 
told us that they consider whether a decision to divest Sudan-related 
assets is consistent with fiduciary responsibility--generally the duty 
to act solely and prudently in the best interests of the client. 
Representatives from organizations that advocate for the interests of 
state fund managers told us that fiduciary duty could be a 
disincentive to divesting, depending on how each individual state's 
law is written. For instance, they expressed concerns that if the laws 
place emphasis on maximizing returns first and on divesting as a 
second priority, then fiduciary responsibility can be a disincentive 
to divesting. While some states make no explicit mention of fiduciary 
responsibility in their divestment policies and laws, some state 
constitutions emphasize its priority above all other responsibilities. 
Many state laws allow fund managers to stop divesting or to reinvest 
if there is a drop in the fund's value. In addition, while most of the 
35 states' Sudan-related measures generally require divestment of 
Sudan-related assets consistent with the investing authority's 
fiduciary responsibilities, laws and policies in six states include 
clauses explicitly stating that the investing authority should only 
divest if doing so will not constitute a breach of fiduciary trust. 

Our survey results demonstrate that state fund managers, when 
expressing concerns about fiduciary responsibility, focused on the 
impact that divestment might have on a fund's returns and 
administrative costs. Specifically, 17 of the 29 fund managers (or 59 
percent) who had divested or frozen their Sudan-related assets, or 
planned to do so, said they were concerned to a moderate or large 
extent that it would be difficult to divest while ensuring that 
fiduciary trust requirements were not breached, and their offices or 
states were not made vulnerable to lawsuits.[Footnote 5] This same 
concern was also cited as a moderate to large concern for 25 of the 41 
(or 61 percent) fund managers who did not divest. Survey results also 
showed concern among state fund managers, regardless of whether they 
divested, regarding the financial risk of divesting. Specifically, 20 
of the 29 managers (or 69 percent) who divested or planned to divest 
and 18 of the 41 (or 44 percent) who did not divest were concerned to 
a large or moderate extent that divestment could cause their funds to 
incur high transaction costs, earn reduced returns on investment, or 
both. 

Private investment companies expressed differing perspectives on 
whether divesting from Sudan is consistent with their fiduciary 
responsibilities. According to investment companies whose primary goal 
is maximizing returns, ceasing to invest in companies with Sudan- 
related operations based on criteria other than financial merit is 
inconsistent with their fiduciary responsibilities, unless their 
clients established these restrictions. Some of these investors stated 
that limiting the number of investment opportunities based on 
nonfinancial criteria can result in lower investment returns. Other 
investment companies, particularly those identifying themselves as 
socially responsible, maintain that divesting from Sudan based on 
nonfinancial criteria is consistent with fiduciary responsibility, as 
long as alternative equities selected can compete on the basis of 
financial criteria. For these investment companies, creating 
financially viable investment options that respond to social concerns, 
such as genocide or the environment, is the primary goal. These firms 
expressed confidence that taking nonfinancial factors into account 
results in an investment product that is competitive with other 
investments. 

As of May 2010, two companies that sold their Sudan-related assets had 
relied upon the safe harbor provision in SADA. Most companies told us 
that the provision was not necessary to their decision-making 
regarding Sudan-related assets. 

Difficulty Identifying Operating Companies with Ties to Sudan, 
Including Those Monitored by the SEC: 

Investors considering whether and how to divest from companies with 
ties to Sudan have faced difficulties identifying these companies. 
SADA requires that, before divesting from Sudan-related companies, 
responsible entities must use credible, publicly available information 
to identify which companies have prohibited business operations 
related to Sudan. Nongovernmental organizations and private companies 
have sought to create and, in some cases, sell their lists of 
operating companies with business ties to Sudan to the public. Our 
survey results indicate that state fund managers have relied heavily 
on these sources of information. However, our analysis of available 
lists indicates that they differ significantly from one another. We 
compared three lists of companies with business ties to Sudan and 
found that, of the over 250 companies identified on one or more of 
these lists, only 15 appeared on all three. 

Representatives from the organizations that created these lists told 
us that obtaining and evaluating information on operating companies 
with business ties to Sudan is difficult, and that information that 
comes directly from companies is particularly useful. For example, 
they would consider an SEC disclosure filing to be a reliable source 
of information. However, the federal securities laws do not require 
companies specifically to disclose operations in countries designated 
as state sponsors of terrorism. While SEC regulations require 
disclosure of such operations if they constitute "material 
information," the meaning of "material information" is not explicitly 
defined by law and companies are ultimately responsible for the 
accuracy and adequacy of the information they disclose to investors. 

The SEC's Office of Global Security Risk, created in 2004, monitors 
whether the documents public companies file with the SEC include 
disclosure of material information regarding global security risk- 
related issues. According to officials from this office, they focus 
their reviews on companies with business activities in U.S.-designated 
state sponsors of terrorism, including Sudan. This office has 
suggested to companies that any operations they have in state sponsors 
of terrorism might be considered material because divestment campaigns 
and legislation mandating divestment from Sudan indicate that 
investors would consider this information important in making 
investment decisions. However, in their correspondence with the SEC, 
companies have raised concerns about these instructions. For example, 
one energy company wrote that its business dealings in state sponsors 
of terrorism did not need to be further disclosed in annual reports 
because, while these dealings may have been of interest to certain 
investors, they were not material to the general investing public. 

The Office of Global Security Risk provides limited monitoring of 
companies that conduct business in the four sectors covered under 
SADA. For example, SEC officials told us that they have corresponded 
with 59 of the 74 companies that file periodic reports with the SEC, 
and that they have identified as having ties to Sudan. However, many 
of these companies operate in industries not covered under SADA, such 
as food services, telecommunications, and pharmaceuticals. In 
addition, our analysis shows that the office has only corresponded 
with 5 of the 15 companies that are identified in all three of the 
lists we analyzed and that file with the SEC. All 15 of these 
companies operate in the four economic sectors identified in SADA. 
Furthermore, the office has not always followed up with companies 
concerning their correspondence. For example, in December 2005, the 
Office of Global Security Risk asked an oil company that was reported 
to have possible ties to Sudan to describe all current, historical, 
and anticipated operations in, and contacts with, Sudan, including 
through subsidiaries, controlling shareholders, affiliates, joint 
ventures, and other direct and indirect arrangements. The company did 
not provide a response to the request. Four years later, the office 
reiterated its question to the company. 

SEC officials also told us that, in cases where the office determines 
that its comment process has not resulted in full disclosure of 
material operations by a company, it will refer the company to the 
SEC's Division of Enforcement for possible investigation. According to 
these officials, the Office of Global Security Risk has referred one 
company to this division since the office was created in 2004. The SEC 
also has the discretionary authority to adopt a specific disclosure 
requirement for companies that trade on U.S. exchanges (such as 
requiring disclosure of any operations in state sponsors of 
terrorism). Although the SEC has not done so, it could exercise this 
authority by issuing an interim rule for comment and a final rule in 
the Federal Register. However, the agency has indicated that it is 
committed to the practice of relying on companies to ensure that their 
disclosures contain all material information about their operations in 
these countries. 

The Possible Effects of Divestment on Operating Companies and the 
Sudanese People: 

Some companies that have ceased operating in Sudan warned of a 
negative effect on the Sudanese people. For example, one company we 
spoke with told us that when it decided to leave Sudan and sell its 
stake in a project to another company, that company refused to sign 
the sales agreement until language conferring responsibility for 
continuing the seller's humanitarian programs was removed from the 
agreement. Another company that left the Sudanese market stated that 
it had been involved in a nationwide anti-AIDS program in Sudan, which 
it could no longer participate in after leaving Sudan. 

Because of concerns about these possible negative effects, some 
investors have shifted their approach toward engaging with companies 
in order to leverage their resources as shareholders to influence 
companies' behavior and promote efforts aimed at improving the lives 
of the Sudanese people. Some advocacy groups that were originally at 
the forefront of the divestment campaign also have shifted their focus 
toward engagement. One advocacy group we spoke with stated that it 
believed that divestment was too blunt of an approach because it 
targeted a wide array of companies, some of which may not have had 
material operations in Sudan. Instead, this group argued for an 
approach that targets companies involved in the industries that are 
most lucrative for the Sudanese government and that provides 
alternatives to divestment, such as engaging companies to try to 
influence their behavior. Like advocacy groups, some U.S. investment 
companies have also embraced the idea of engagement, and increasingly 
view divestment as a last resort because engagement allows companies 
to continue operating and provides positive incentives for them to use 
their resources to help the Sudanese people. U.S. states have also 
endorsed engagement as a viable alternative to divestment, with a few 
states identifying divestment only as a last resort. Nineteen of the 
25 states whose laws or policies require divestment also encourage or 
require engagement. 

The eight foreign operating companies we spoke with generally agreed 
that, for them, engagement is preferable to divestment because it 
allows them to continue operating in Sudan and to discuss possible 
ways to improve the situation there. These companies consistently told 
us that they believe their business operations positively impact the 
Sudanese people. For example, a mining company told us that it built 
seven schools and a medical clinic, brought water and power supplies 
to the area around the mine, and started agricultural training 
programs for the local population. This company said it also convinced 
its business partners from the Sudanese government to contribute some 
of their profits from the mine to support a humanitarian organization 
operating in Darfur. Almost all of the companies we spoke with said 
they donated to or became directly involved in humanitarian projects 
as a direct result of their engagement with various advocacy groups 
and shareholders. A few of the companies we spoke with decided to 
limit their business activities in Sudan as a result of engagement 
processes. For example, one company we spoke with committed to not 
pursue any new business in Sudan until the situation in Darfur changes 
and United Nations peacekeepers are allowed in the country. The 
company indicated that this commitment sent a strong signal to the 
government of Sudan, which depends on the company to explore and 
identify natural resource deposits. 

Our Analysis Indicates That the U.S. Government Has Complied with the 
Federal Contract Prohibition Provision of SADA: 

Our analysis indicates that the U.S. government has complied with 
SADA's federal contract prohibition. Specifically, we found no 
evidence to suggest that the U.S. government has awarded contracts to 
companies identified as having prohibited business operations in Sudan 
or has violated the Federal Acquisition Regulation (FAR) rules 
implementing section 6 of SADA (Prohibition on United States 
Government Contracts).[Footnote 6] SADA seeks to prohibit the U.S. 
government from contracting with companies that conduct certain 
business operations in Sudan. To that end, section 6 of the act 
requires the heads of federal agencies to ensure that each contract 
for the procurement of goods or services includes a clause requiring 
the contractor to certify that it does not conduct prohibited business 
operations in Sudan in the four key economic sectors. Based on our 
analysis of one of the most widely used lists of companies with 
prohibited business ties to Sudan,[Footnote 7] we found that only 1 of 
88 companies identified in the list has received federal contracts 
since the FAR requirements implementing SADA took effect in June 2008. 
However, the contract certification provision was not required for 
these particular contracts because they were purchase orders under 
simplified acquisition procedures, which generally do not require SADA 
certification under the FAR. 

In addition to the purchase orders with this company, we found that 
from June 12, 2008 to March 1, 2010, the U.S. government awarded 756 
contracts to 29 affiliates and subsidiaries[Footnote 8] of the 
companies identified in the list as having prohibited business ties to 
Sudan. While SADA aims to prevent companies with prohibited business 
operations in Sudan from receiving federal contracts, it does not 
restrict federal contracting with these companies' affiliates and 
subsidiaries, provided that the affiliates and subsidiaries certify 
that they do not have prohibited business operations in Sudan. Some 
advocacy groups have disagreed with the FAR councils' decision to 
apply the requirement only to the entity directly contracting with the 
government because it allows companies that have certified to the 
federal government that they do not conduct prohibited business 
operations to continue operating in Sudan through their subsidiaries 
or affiliates. The FAR councils, however, stated that expanding the 
scope of the rule to include subsidiaries and affiliates would require 
the parties seeking federal contracts to attest to the business 
operations of parent companies, subsidiaries, and other affiliates 
about which they may not have information. In addition, the FAR 
councils noted that the company may not have any influence over the 
affairs of its related companies. Our review of a nonrandom selection 
of contracts awarded to these affiliates and subsidiaries indicates 
that the contractors provided the necessary certification, when 
required. Therefore, for these specific contracts, the U.S. government 
has complied with the contract prohibition section of SADA. We also 
found that the U.S. government has not granted any waivers pursuant to 
SADA, as allowed under the act, or determined that any companies 
submitted false certifications under SADA. 

Conclusions: 

As global awareness of the genocide in Darfur has grown, so too have 
efforts to combat this humanitarian crisis. Divestment from Sudan has 
been at the forefront of these efforts. However, in deciding whether 
and how to divest, stakeholders must consider how divestment affects 
foreign companies operating in Sudan, particularly those that strive 
to make a positive contribution to the Sudanese people. They must also 
ensure that divestment is consistent with their fiduciary 
responsibility. Additionally, they must identify and evaluate 
conflicting sources of information about which companies have Sudan- 
related business operations. Requiring companies to disclose their own 
operations in Sudan (as well as other state sponsors of terrorism) 
would provide more accurate and transparent information to investors 
carefully weighing whether and how to divest from Sudan. Furthermore, 
the strong demand for this information from states that require 
divestment, as well as from other investors, indicates that this 
information could be considered material--a judgment that the SEC has 
suggested in its correspondence with operating companies. 

GAO Recommends That SEC Consider More Complete Disclosure by Companies 
with Business Operations Related to Sudan: 

In our report released today, we recommend that, in order to enhance 
the investing public's access to information needed to make well- 
informed decisions when determining whether and how to divest Sudan- 
related assets, the SEC consider issuing a rule requiring companies 
that trade on U.S. exchanges to disclose their business operations 
related to Sudan, as well as possibly other U.S.-designated state 
sponsors of terrorism. 

Mr. Chairman, this concludes my statement. I would be pleased to 
respond to any questions that you or other Members of the Subcommittee 
may have. 

GAO Contact and Staff Acknowledgments: 

For questions or further information about this testimony, please 
contact Thomas Melito at (202) 512-9601, or melitot@gao.gov. Contact 
points for our Offices of Congressional Relations and Public Affairs 
may be found on the last page of this statement. Individuals who made 
key contributions to this testimony include Cheryl Goodman, Assistant 
Director; Elizabeth Singer; Kay Halpern; Katy Forsyth; Michael 
Hoffman; R.G. Steinman; Julia Becker Vieweg; Sada Aksartova; Debbie 
Chung; JoAnna Berry; Noah Bleicher; Martin de Alteriis; Patrick Dynes; 
Justin Fisher; Cathy Hurley; Ernie Jackson; Debra Johnson; Julia 
Kennon; Jill Lacey; and Linda Rego. 

[End of section] 

Footnotes: 

[1] The safe harbor provision of SADA limits the civil, criminal, and 
administrative actions that may be brought against firms that, in 
accordance with the act, divest from, or avoid investing in, companies 
with prohibited business operations in Sudan. 

[2] GAO, Sudan Divestment: U.S. Investors Sold Assets but Could 
Benefit from Increased Disclosure Regarding Companies' Ties to Sudan, 
[hyperlink, http://www.gao.gov/products/GAO-10-742] (Washington, D.C.: 
June 22, 2010). 

[3] Throughout this report, the term "state" refers to the 50 states 
and the District of Columbia. 

[4] The meaning of "material information" is not explicitly defined by 
law, but the Supreme Court has determined that information is material 
if there is a substantial likelihood that a reasonable investor would 
consider the information important in making an investment decision or 
the information would significantly alter the total mix of available 
information. 

[5] In 2009, the New Hampshire Retirement Plan and the New Hampshire 
Judicial Retirement System sued the state, arguing that complying with 
the state's Sudan divestment legislation would have been inconsistent 
with their fiduciary trust obligations under the state constitution. 
The trial court found on a preliminary basis that the trustees could 
not comply with the legislation without violating their common law 
fiduciary duties, but did not decide what standard to apply in 
determining whether a trustee who complies with the legislation has 
met his fiduciary duties. On October 27, 2010, the New Hampshire 
Supreme Court ruled that the state's Sudan divestment law was 
constitutional, but sent the case back to the trial court to determine 
whether the law interferes with the trustees' statutory or common law 
fiduciary duties. See Board of Trustees of the New Hampshire Judicial 
Retirement Plan v. Secretary of State (Merrimack, No. 2009-621, 
October 27, 2010). 

[6] See FAR § 52.225-20 and FAR § 52.212-3(m) for commercial item 
acquisitions. 

[7] We chose to use this list because it focuses on companies 
identified in the four business sectors targeted in SADA and 
identifies subsidiaries and affiliates of those companies. 

[8] These affiliates and subsidiaries were identified from the list 
that also identified the 88 companies with prohibited business ties to 
Sudan. The list defines affiliates and subsidiaries as companies where 
there is a 50 percent or greater ownership stake. For example, for a 
publicly traded company with Sudan-related operations, the list 
identifies as subsidiaries and affiliates those companies of which the 
parent company owns 50 percent or more. 

[End of section] 

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