An Inter-Agency Analysis of Terrorism Risk

Assessment Disclosure

John W. BagbyJohn W. BagbyInformation Sciences & Information Sciences &

TechnologyTechnology

The Pennsylvania State UniversityThe Pennsylvania State University

Policy Risk AnalysisPolicy Risk Analysis

Primary Research & Instruction Focus on Risk Primary Research & Instruction Focus on Risk Analysis of Litigation, Legislation, Regulation, Analysis of Litigation, Legislation, Regulation, ADR, Goodwill, Market ImpactADR, Goodwill, Market Impact Once a SecuritOnce a Securitiesies now a Securit now a Securityy Lawyer Lawyer

Last Spring recognized the merger extends Last Spring recognized the merger extends beyond, disclosure fraud, insider trading & beyond, disclosure fraud, insider trading & SOX internal control assessment to:SOX internal control assessment to: Pervasive Interest in Financial System Risk Pervasive Interest in Financial System Risk Financial Economics current primary focus is risk Financial Economics current primary focus is risk

mgtmgt Ins Indus relies heavily on Financial EconomicsIns Indus relies heavily on Financial Economics

Research ObjectivesResearch Objectives

Explore Implications of post-9.11 Inter-Agency Explore Implications of post-9.11 Inter-Agency RelationsRelations

Demonstrate Disclosure Regime ExternalitiesDemonstrate Disclosure Regime Externalities Analyze IT diffusion in eGovernmentAnalyze IT diffusion in eGovernment

Interactive Disclosure Initiatives Interactive Disclosure Initiatives SST Web tool SST Web tool XBRL Data Tag XBRL Data Tag

Evaluate Effectiveness of Disclosure Methods Evaluate Effectiveness of Disclosure Methods Focus Public Dialog on the Conduct of Foreign PolicyFocus Public Dialog on the Conduct of Foreign Policy

Game Theoretic Critique of Public Pressure Methods

Presidential Election Rhetoric, Exec. Appointments Alternative Channels of Public Preference Communications

Outside Executive Branch Outside Executive Branch

Problem Statement(s) Problem Statement(s) Public Cos. Sustain Many Unexplored Risks Public Cos. Sustain Many Unexplored Risks

Risk Analysis is a Field Expanding Beyond Insurance Risk Analysis is a Field Expanding Beyond Insurance Underwriting & Derivative Securities Underwriting & Derivative Securities

Aggressive Risk ID, Analysis & Management NeededAggressive Risk ID, Analysis & Management Needed Terrorism Risk Assessment is Complex, Imprecise, Terrorism Risk Assessment is Complex, Imprecise,

too long province of only DoD, Foreign Policy Think too long province of only DoD, Foreign Policy Think Tanks Tanks

Huge Investor Appetite for Terror-Risk Huge Investor Appetite for Terror-Risk Disclosure Disclosure Disclosure Methods Differences MatterDisclosure Methods Differences Matter

Significant Institutional & Competitive Obstacles Significant Institutional & Competitive Obstacles Impede Effective Inter-Agency Coordination Impede Effective Inter-Agency Coordination DoS, DHS, DoD, DoJ, Intell Community (IC), SECDoS, DHS, DoD, DoJ, Intell Community (IC), SEC Should SST Designation Trigger SEC Disclosures? Should SST Designation Trigger SEC Disclosures?

Designating Designating State Sponsors of Terror (SST)State Sponsors of Terror (SST)

Designated by Secretary of State Consultation DoS’s Office of the

Coordinator for Counterterrorism Annother Interagency Consultation:

Participants: DoS, National Security Council (NSC), Department of Defense (DoD), Treasury, Department of Homeland Security (DHS)

Includes inputs from U.S. Intelligence Community (IC)

Who are the SSTs? Who are the SSTs? SSTs: Cuba, Iran, Sudan & SyriaSSTs: Cuba, Iran, Sudan & Syria

Most recently dropped: North Korea Most recently dropped: North Korea Formerly dropped: Formerly dropped: Iraq, Libya, Yemen

Axis of Evil: W’s 1.02 State of the Union Axis of Evil: W’s 1.02 State of the Union Address Address UN Ambassador John R. Bolton (recess appointee UN Ambassador John R. Bolton (recess appointee

only) included “rogue states:” Libya, Syria, Cuba only) included “rogue states:” Libya, Syria, Cuba WMDWMD

E.g., nuclear, gas, pathogens, weapon sales E.g., nuclear, gas, pathogens, weapon sales But…No clear reference to planes as weapons But…No clear reference to planes as weapons

Instrument of Terror, BlackmailInstrument of Terror, Blackmail Opaque Fusion of Intelligence, History & Opaque Fusion of Intelligence, History &

Administration StrategyAdministration Strategy

SST SST Sanctions Restrict What?Sanctions Restrict What? Restricted Exports from U.S

Arms Dual-use technologies plausibly useful for non-terrorism

purposes but adaptable to provide military capacity supporting terrorism

Prohibited Economic Assistance: Blocks loans to SSTs from World Bank & other fitonancial

institutions Denial of duty-free treatment of imports U.S. from SST Prohibits DoD contracts over $100K w/ SST controlled Cos. Sovereign immunity waiver, U.S. civil actions by terror

victims & families Various Economic Sanctions

No tax credits Export license requirements & financial transactions

restrictions on U.S. Cos attempting SST relations

Risks of SST RelationsRisks of SST Relations

U.S. Public Cos Risks from SST RelationsU.S. Public Cos Risks from SST Relations Discipline/Punishment aforementionedDiscipline/Punishment aforementioned ““Operations, Financial Condition, Earnings, Operations, Financial Condition, Earnings,

Stk Price:” Stk Price:” Focuses on investment/return risk of SHsFocuses on investment/return risk of SHs EX: Asset Impairment, Employee Injury, EX: Asset Impairment, Employee Injury,

Productivity Compromise, Supply Disruption, Productivity Compromise, Supply Disruption, Customer Reliability, Payments Delay/Failure Customer Reliability, Payments Delay/Failure

Goodwill, Reputation, Stock Price, Liquidity Goodwill, Reputation, Stock Price, Liquidity Support/Fund Terrorism, MoneyLaunderingSupport/Fund Terrorism, MoneyLaundering

Human Rights ViolatorHuman Rights Violator Undermine U.S.’s Reputation, Foreign Undermine U.S.’s Reputation, Foreign

Policy, Economy Policy, Economy

Alternative Designations of Terrorism Risk

Specially Designated Terrorists (SDT) Treasury’s Office of Foreign Assets Control (OFAC)

Foreign Terrorist Organizations (FTO)Foreign Terrorist Organizations (FTO) Specially Designated Global Terrorists (SDGT)Specially Designated Global Terrorists (SDGT) Specially Designated Nationals and Blocked Specially Designated Nationals and Blocked

Persons (SDN)Persons (SDN) Terrorist Exclusion List (TEL)Terrorist Exclusion List (TEL) Many Others are Maintained by Int’l OrgsMany Others are Maintained by Int’l Orgs

UN 1267 List (since 1999) (since 1999)

Disclosure Purposes Encompass Disclosure Purposes Encompass Terrorism Risks under SecRegTerrorism Risks under SecReg

Cardinal Principle: Asymmetries Cause Adverse Selection

“provide full & fair disclosure of the character of securities, to prevent frauds in the sale thereof, & for other purposes.” ’33 Act

“keystone of the entire structure of federal securities legislation” ’63 Special Rpt

“appropriate publicity tends to deter questionable practices and to elevate standards of business cond9 uct” ’69 Wheat Rpt

Many Commentators, incl. Louis, Loss & Brandeis

SEC Regulation SKSEC Regulation SK

Regulation SK (narrative, discretionary, Regulation SK (narrative, discretionary, qualitative) vs. Regulation SX qualitative) vs. Regulation SX (quantitative, financial, acctg stds) (quantitative, financial, acctg stds) No Specific SST or Terror Risk Std.No Specific SST or Terror Risk Std.

SK: Item 101SK: Item 101 SK: Item 103 Legal Proceedings SK, Item 303 Management Discussion &

Analysis (MD&A) SK, Item 503(c) – Risk FactorsSK, Item 503(c) – Risk Factors Office of Global Security Risk (OGSR)Office of Global Security Risk (OGSR)

Regulation SK: Item 101Regulation SK: Item 101

General Descriptions in Narrative FormGeneral Descriptions in Narrative Form Organized Variously including Geographic Organized Variously including Geographic

Domicile, Customers, Foreign OperationsDomicile, Customers, Foreign Operations Revenue & Risk, Regions or Nations Revenue & Risk, Regions or Nations To the Extent Vulnerable to Terror RisksTo the Extent Vulnerable to Terror Risks

Organized by Business Segment Organized by Business Segment Business Component, profit center, Business Component, profit center,

subdivision, geographic divisionsubdivision, geographic division Segment Managed (ops, finances, forecasts, Segment Managed (ops, finances, forecasts,

plans)plans)

SK: Item 103 Legal Proceedings

Co vulnerable to SST EnforcementCo vulnerable to SST Enforcement DoJ, DoS, Treasury, SEC DoJ, DoS, Treasury, SEC ““Material,” Pending/Contemplated, not Material,” Pending/Contemplated, not

routineroutine Filing date, Forum, Parties, Allegations, Filing date, Forum, Parties, Allegations,

ReliefRelief Also included if key official is named party Also included if key official is named party EX: Environmental separately specifiedEX: Environmental separately specified

Not yet SST or other terror risk indicator Not yet SST or other terror risk indicator

SK, Item 303 Management Discussion & Analysis (MD&A)

Broad discussion fociBroad discussion foci Narrative catch-allNarrative catch-all Mgt’s own unique intimacy informs Mgt’s own unique intimacy informs

interpretation from perspective of interpretation from perspective of insiders & expertsinsiders & experts

Financial Performance IndicatorsFinancial Performance Indicators Liquidity, Capital Resources, Results of Ops Liquidity, Capital Resources, Results of Ops SST EX: Contracts impacted by SST SST EX: Contracts impacted by SST

relationsrelations

SK, Item 503(c) – Risk FactorsSK, Item 503(c) – Risk Factors

IPO Tradition: Mechanical List of IPO Tradition: Mechanical List of Horribles Horribles 2005 Expansion to Periodic Reports2005 Expansion to Periodic Reports

No SST-Specific Trigger No SST-Specific Trigger ““Contextomy” Boot-Strap Contextomy” Boot-Strap

½ Truths Require Clarification½ Truths Require Clarification Materiality focus on Total MixMateriality focus on Total Mix Risk Disclosures incomplete w/o Terror-Risks Risk Disclosures incomplete w/o Terror-Risks User Demand Rising for SST DisclosuresUser Demand Rising for SST Disclosures

Like Environmental & Risk Factors Disclosures Like Environmental & Risk Factors Disclosures

SEC’s Corp Fin-OGSRSEC’s Corp Fin-OGSR

Office of Global Security Risk (OGSR) Office of Global Security Risk (OGSR) ’’04 Appropriations Legislative Findings04 Appropriations Legislative Findings

Significant global security risks impact Cos Significant global security risks impact Cos ID Cos w/ SST RelationsID Cos w/ SST Relations

Monitors SST DisclosureMonitors SST Disclosure Jawboning w/ OGSR Comment Letters: 200 in Jawboning w/ OGSR Comment Letters: 200 in

’06-’07 ’06-’07 Formerly Inaccessible or FOIA Accessible Formerly Inaccessible or FOIA Accessible Now EDGAR OrganizedNow EDGAR Organized

OGSR Inter-Agency Consultation & Int’l OGSR Inter-Agency Consultation & Int’l Dialogue Pressuring Foreign Issuers Dialogue Pressuring Foreign Issuers

The 2007 SST Web toolThe 2007 SST Web tool

Debut: 6.25.07, Suspend: 7.20.07-26 days Debut: 6.25.07, Suspend: 7.20.07-26 days Immediately Popular: 15K hits by 7.16.07Immediately Popular: 15K hits by 7.16.07 Navigation Path:Navigation Path:

Sec.gov; Investor Info, SST, 5 nations, All Cos Sec.gov; Investor Info, SST, 5 nations, All Cos Firestorm of Criticism:Firestorm of Criticism:

SEC Com. Atkins (R); Cong.Spencer Bachus SEC Com. Atkins (R); Cong.Spencer Bachus (R-Ala); SIMFA(R-Ala); SIMFA

SEC letter from Barney Frank (D-Mass)SEC letter from Barney Frank (D-Mass)

SST Concept Release SST Concept Release

Defends SEC’s SST Disclosure HistoryDefends SEC’s SST Disclosure History Solicits Specific CommentsSolicits Specific Comments

SST Disclosure ProprietySST Disclosure Propriety SST Web tool improvementsSST Web tool improvements Issuer Data Tagging in XBRLIssuer Data Tagging in XBRL

28 Comments, 28 Comments, seesee Appendix Appendix

Data SourcesData Sources

OGSR Comment LettersOGSR Comment Letters SST Concept Release CommentsSST Concept Release Comments FOIA RequestFOIA Request EDGAR search KWICEDGAR search KWIC Manual ReviewManual Review

E.g., Disclosures, Co’s Web, News E.g., Disclosures, Co’s Web, News Sources, Blogs Sources, Blogs

XBRL Tagging ChallengesXBRL Tagging Challenges Incentives for Robust Tagging RegimeIncentives for Robust Tagging Regime

False negatives: tag fails to ID material infoFalse negatives: tag fails to ID material info False Positives: tags immaterial info False Positives: tags immaterial info Subjective vs. Objective Taggers Subjective vs. Objective Taggers

Incentives for Tag MonitoringIncentives for Tag Monitoring Tag Monitor Incompetence, Moral HazardTag Monitor Incompetence, Moral Hazard

Impact Measures: xbrl Tagging Disclosure Impact Measures: xbrl Tagging Disclosure Tag Usability & Communication EffectivenessTag Usability & Communication Effectiveness Fin.Econ. Event StudiesFin.Econ. Event Studies Tag Triggers Corp. GovernanceTag Triggers Corp. Governance Tag Induces Public Policy InterventionTag Induces Public Policy Intervention Tag Impacts Markets: Suppliers, Customers, “Partners” Tag Impacts Markets: Suppliers, Customers, “Partners”

OGSR Enforce-ment Files

Deliberate Disclosure

XBRL Tagged

SST Web tool

EDGAR Accessible

Accessible Thru FOIA

InAccessible Involuntary

Involuntary

Semi-Voluntary

Semi-Voluntary

Voluntary

Future WorkFuture Work Ventilating SST Commentators Incoherence Ventilating SST Commentators Incoherence

ECMH mantra “SST info already well known” vs. “SST Discl ECMH mantra “SST info already well known” vs. “SST Discl will adversely surprise markets & damage issuer” will adversely surprise markets & damage issuer”

Evaluating Disclosure MethodsEvaluating Disclosure Methods ECMH debate reduxECMH debate redux Effectiveness hierarchy Effectiveness hierarchy

Secret, FOIA, EDGAR, Web tool, XBRLSecret, FOIA, EDGAR, Web tool, XBRL Could base on Insider Trading dissemination method safe Could base on Insider Trading dissemination method safe

harbors: harbors: E.g., press release, web posting, broadtape E.g., press release, web posting, broadtape

SST Disclosure Externality #1SST Disclosure Externality #1 Securities Markets coerce divestment Securities Markets coerce divestment

Alt. encourage humanitarianism Alt. encourage humanitarianism SST Disclosure Externality #2SST Disclosure Externality #2

Executive Branch’s Claim to Exclusive Conduct of Foreign Executive Branch’s Claim to Exclusive Conduct of Foreign Policy Policy

Risks vs. Benefits of Fishbowl Negotiations Risks vs. Benefits of Fishbowl Negotiations