Pittsburgh Tribune Review
State employee retirement fund invests in companies tied to rogue regimes
By Thomas Olson
The retirement savings of more than 200,000 Pennsylvanians have helped enslave Christians in Sudan, build long-range missiles in Iran and smuggle automatic rifles from China to the United States.
About $100 million of the $30 billion pension fund for state employees is invested in five foreign corporations whose profits benefit regimes with records of human-rights violations, a Pittsburgh Tribune-Review investigation found.
Many commonwealth employees are required to join the State Employees' Retirement System, one of the nation's oldest and largest public pension funds. Membership is optional for others, including elected officials.
The system covers state workers from janitors to the governor, although teachers have a separate retirement system.
James Orloff, 54, of New Castle had no idea his pension money was tainted by bloody business abroad.
"I take my retirement money each month, but I never paid attention to where it was coming from," said Orloff, who was a Pennsylvania State Police trooper until 1997.
"It seems money and profit are more important than morality," he said.
The Trib's findings are based on congressional testimony, government documents and the reports of organizations dedicated to human rights, religious freedom and U.S. national security. According those sources, the corporations in question have helped finance:
- Construction of missiles in Iraq and Iran that could hit targets in Israel and Europe.
- A 16-year campaign of genocide, including slavery, against Christians in Sudan by the country's Muslim fundamentalist military government.
- Shipment of 2,000 Chinese-made AK-47 automatic rifles to U.S. Customs agents posing as organized-crime figures. The guns were destined for Los Angeles street gangs, according to federal officials.
- A plan to lay off 1 million workers in China to cut costs and improve profit prospects for a 2,500-mile natural gas pipeline. The AFL-CIO labor union said the Chinese government violates core standards of the International Labor Organization because the workers have no right to collective bargaining.
Officials who oversee Pennsylvania's pension fund declined to discuss the five companies.
Foreign stocks account for nearly $6.5 billion of the state pension investments, according to the fund's annual report. For instance, the fund holds more than $1 million worth of stock in Sinopec Corp., also known as Sinopec Shanghai Petrochemical.
Sinopec, which is controlled by the Chinese government, is developing oil fields in Iraq. The company also has drilled for oil in Sudan for three years. Both nations have long been on the U.S. State Department's list of terrorist-sponsoring nations.
The U.S. Commission on International Religious Freedom warned last year that a subsidiary of Sinopec is part of a joint venture to develop oil fields in Sudan.
Sinopec issued its first shares on the New York Stock Exchange in October.
"There is highly credible evidence the government of Sudan systemically destroyed villages in areas surrounding the oil fields in order to clear them of human population," according to a United Nations special report released in October 1999.
The state pension fund also owns $706,163 in stock of PetroChina Co., which is building the Chinese gas pipeline. PetroChina, the world's fifth-largest oil company, is owned by the China National Petroleum Co., which in turn is owned by the Chinese government.
China National has a 40 percent stake in a $2 billion project to produce crude oil for Sudan, according to the U.S. House Banking Committee and other sources.
The China National project included construction of a 932-mile pipeline from Sudan to the Red Sea. The pipeline will yield at least $300 million a year in oil revenue for the Sudanese government, according to the U.S. Commission on International Religious Freedom.
The Sudanese government uses money from crude oil to finance the mass murder of Christians, according to the United Nations.
Sudan, in northwestern Africa, is a nation of 27 million divided people. The Arab Muslim majority in the north -
including the government, based in the capital of Khartoum is persecuting the black Christian minority in the poorer south. Most of the nation's oil is in the south.
"This oil revenue is really important for Sudan's expansion of their civil war and for the expansion of their military," said Elliott Abrams, assistant secretary of state for human rights during the Reagan administration.
Abrams now runs the U.S. Commission for International Religious Freedom. Created by Congress in 1998, the commission is a nonpartisan, 10-member panel that reports to the president and Congress on violations of religious liberty abroad.
The state's pension fund also has bought stock in a company that brought assault rifles to the United States and another that indirectly helps Iran build long-range missiles.
Human-rights groups and national security activists have criticized China Ocean Shipping Co., one of the world's largest shippers, and Total Fina Elf, a French oil giant.
In March 1996, a China Ocean Shipping cargo ship docked in Oakland, Calif. One container held 2,000 AK-47 assault rifles made in China, according to the U.S. Customs Service. Posing as mobsters, Customs agents bought the automatic rifles from China Ocean workers and later arrested the suspects.
China Ocean, also known as Cosco, has been identified as an arm of the Chinese military by the U.S. House Task Force on Terrorism and Unconventional Warfare.
Pennsylvania's pension fund held about $1.4 million of stock in Cosco Pacific, a Cosco subsidiary, as of Dec. 15.
But the state's biggest foreign holding is Total Fina Elf: The stake in the company was worth more than $78 million as of January 2000, according to the pension fund's annual report.
Total Fina leads a consortium that is finishing a $2 billion contract to develop offshore natural gas fields for Iran, according to the William J. Casey Institute of the Center for Security Policy, a Washington think tank founded by former Reagan administration officials.
The Iranian government is spending money from the gas sales on long-range missiles capable of reaching Israel and Europe, said Roger Robinson Jr., chairman of the institute.
Total Fina also has extended its oil reach into Sudan, according to the British Broadcasting Corp. Last month, the French company signed an oil-development pact with the military government.
"Some investors will say, `I don't care' or `It's too complicated' or `It's just a small percentage of the fund,'" Abrams said.
"You may find a state pension or a university fund has a small percentage invested in stocks that do business in Sudan, and they may have the information and do nothing about it.
"But there are other Americans who don't want a fraction of a cent supporting slavery and repression and other grave human rights violations."
The fifth investment that has raised concern is in Hutchison Whampoa Ltd. The Hong Kong conglomerate holds long-term leases to operate key ports on the Atlantic and Pacific sides of the Panama Canal.
According to a U.S. military intelligence assessment from 1999, made public through the Freedom of Information Act, Hutchison Whampoa "could provide a conduit for illegal shipments of technology or prohibited items from the West to the PRC (China), or facilitate the movement of arms and other prohibited items into the Americas.''
Hutchison Whampoa's owner, Hong Kong tycoon Li Ka-Shing, "has extensive business ties in Beijing and has compelling financial reasons to maintain a good relationship with China's leadership," according to the intelligence report.
The Pennsylvania pension fund owned more than $17.7 million in Hutchison Whampoa stock as of Dec. 15.
About four years ago, foreign corporations such as Sinopec and Total Fina began tapping an enormous U.S. money pipeline filled largely with vast pension holdings.
U.S. workers own about $430 billion in foreign stocks through their pension funds, the AFL-CIO estimates. In addition, the nation's record-breaking economic expansion has pushed mutual-fund holdings into the trillions.
Since 1980, corporations controlled by the People's Republic of China have raised about $13.5 billion from the sale of bonds in the United States, according to a House select committee chaired by U.S. Rep. Christopher Cox, a California Republican.
Public pension fund officials see their primary role as producing the highest possible investment return.
"It's difficult to invoke social policies and yet fulfill your fiduciary duties on the retirement board," said Allegheny County Manager Robert Webb, a member of the county's retirement board. "It becomes a difficult, expensive and cumbersome practice."
The $702 million county pension fund covers about 11,100 workers and retirees. Its holdings abroad consist of about $2 million in bonds issued by Israel, said Cheryl Bateman, the pension system's executive director.
Failing to watch how pension money is eventually invested can pose a financial risk, other experts said.
"We do not invest in China," said Rebecca Taylor, a spokeswoman for Federated Investors, the Pittsburgh-based manager of some $130 billion in mutual funds. "But the reason has little to do with human-rights issues and everything to do with the fact we don't see it as a good investment."
An AFL-CIO analysis warned that, depending on the political group in power in China, "Business operations in China could be expropriated, which could result in the total loss of any investment there."
Each payday, part of participating state workers' paychecks is channeled into Pennsylvania's pension fund, along with a contribution from the state.
A chief investment officer and outside investment advisers steer the investments, governed by an 11-member board. The advisers are known as fiduciaries, or officials entrusted with other people's money.
The mission: to make as much money as prudently possible.
"The guiding principle is to invest the fund in such a way as to accumulate assets to pay the pension obligations, so that when people retire, they and their beneficiaries will have the benefits promised to them," said Peter Gilbert, the pension fund's chief investment officer since 1992.
On that score, the fund has served its members well. They received about $1.2 billion in benefits last year. The Pennsylvania public pension system makes more money than three out of four of its U.S. counterparts, according to its annual report.
"From a philosophical point of view, if you restrict the universe of potential investments, you can inhibit the ability to get the best possible return," Gilbert said.
State pension officials have been warned about questionable investments, even though most of the investment decisions are entrusted to Wall Street gurus.
State Treasurer Barbara Hafer, who sits on the state pension board, and pension fund Executive Director John Brosius were among dozens of officials nationwide to receive a plea in January 2000 from the Institute on Religion & Democracy and the Center for Religious Freedom.
The two public-interest groups outlined how investments in foreign corporations had fanned mass murder in Sudan. The letter urged pension authorities in Pennsylvania and other states to sell such stocks or avoid buying them.
"To do otherwise would cause your pension fund to help underwrite the world's most egregious practitioner of terrorism, deliberate starvation, religious persecution, slavery and literal genocide," the letter stated.
The letter was signed by Nina Shea of the U.S. Commission on International Religious Freedom and leaders of seven other U.S. religious organizations.
No trustees called for boycotts of such investments, said Gilbert, the Pennsylvania pension fund's chief investment officer. That includes Hafer, who has opposed investment in domestic corporations that produce tobacco products, liquor and some rap music, said state Treasury spokesman Steve Schell.
Some pension money invested through the state gets to foreign corporations through the New York Stock Exchange.
Like most retirement systems, Pennsylvania's hires advisers and money managers to invest the pension money in mutual funds. The pension fund's investments, for example, include stocks with household names - Home Depot Inc., Lucent Technologies Inc., Motorola Inc. and other blue-chip companies.
But lurking inside the pension's global funds are so-called "red chips." These corporations are controlled by the People's Republic of China and are registered on stock exchanges in Hong Kong, New York and London.
Several red chips conducted multibillion-dollar public stock offerings in recent years. As with most U.S. companies that go public, the stock first is bought by an investment bank, such as the Goldman Sachs Group Inc. in New York.
The investment bank then quickly resells the stock, at a reasonable markup, to the public - mostly to mutual funds and pension funds. Given the mountain of money involved, it takes powerful players to assemble such stock offerings and sell them.
Such an offering from one red chip almost was torpedoed by controversy in April.
The $2.89 billion PetroChina stock offering on the New York Stock Exchange was underwritten by Goldman Sachs, the world's most powerful investment banker. In 1998, Goldman also underwrote a $1 billion bond offering by the People's Republic of China.
The PetroChina offering barely got off the ground. Too few Goldman Sachs investors were interested in buying the $10 billion stock.
Some of the world's largest oil companies salvaged the deal. BP Amoco Plc, ExxonMobil Corp. and Shell Overseas Investments all bought major stakes, according to the Casey Institute.
For its $600 million investment, British-based BP Amoco got a major stake in the 2,500-mile PetroChina gas pipeline, plus the rights to open about 150 gasoline stations in China, according to the institute.
To cut costs and improve profit prospects, PetroChina said it would lay off "redundant" laborers, securities documents show. That meant slashing as many as 1 million of the 1.6 million jobs at PetroChina and its affiliates, according to the AFL-CIO. About 38,000 of those layoffs were announced in December, the AFL-CIO said.
"This is a human-rights issue because those million workers have no collective bargaining rights or independent, free trade unions to make their voices heard," said Brandon Rees, an AFL-CIO analyst.
Such a lack of representation, Rees said, is why the AFL-CIO opposes U.S. pension investments in PetroChina. The company and Beijing thus violate key labor standards established by the International Labor Organization, he said.
PetroChina's foreign ties and track record brought together an unlikely collection of forces to oppose its initial public offering.
The so-called PetroChina Coalition consisted of right- and left-leaning groups that fight for human rights, religious freedom, fair labor practices and U.S. national security.
"This PetroChina (stock offering) has many risky financial holes, and they are covered in an intricate patchwork of human rights and environmental violations," said AFL-CIO President John Sweeney.
To drum up interest in PetroChina's stock, Goldman Sachs called on managers of pension funds and mutual funds, a practice Wall Street calls a "road show." The AFL-CIO countered with its own campaign, calling it an "anti-road show."
The PetroChina Coalition sent letters to more than 200 pension systems, including Pennsylvania's. Coalition members also wrote to the heads of the New York Stock Exchange and the federal Securities and Exchange Commission.
More than 180 religious leaders, joined by several former Cabinet members, urged the White House to halt the deal.
But it didn't happen. By mid-October, PetroChina and Sinopec had raised about $6.3 billion on the U.S. stock market.
Many money managers and advisers invest in foreign corporations. To find out what corporate stocks your pension or mutual fund owns, take these steps:
1. Contact your pension fund administrator or your mutual fund manager.
2. Ask for a copy of the latest prospectus or annual report. You might have already received one from your mutual fund.
3. Look through the document for the list of fund holdings, which detail what stocks and other securities the fund owns.
- Thomas Olson can be reached at email@example.com
- or (412) 320-7854.