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An Inter-Agency Analysis of Terrorism Risk Assessment Disclosure John W. Bagby Information Sciences & Technology The Pennsylvania State University.

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Presentation on theme: "An Inter-Agency Analysis of Terrorism Risk Assessment Disclosure John W. Bagby Information Sciences & Technology The Pennsylvania State University."— Presentation transcript:

1 An Inter-Agency Analysis of Terrorism Risk Assessment Disclosure John W. Bagby Information Sciences & Technology The Pennsylvania State University

2 Policy Risk Analysis Primary Research & Instruction Focus on Risk Analysis of Litigation, Legislation, Regulation, ADR, Goodwill, Market Impact Primary Research & Instruction Focus on Risk Analysis of Litigation, Legislation, Regulation, ADR, Goodwill, Market Impact Once a Securities now a Security Lawyer Once a Securities now a Security Lawyer Last Spring recognized the merger extends beyond, disclosure fraud, insider trading & SOX internal control assessment to: Last Spring recognized the merger extends beyond, disclosure fraud, insider trading & SOX internal control assessment to: Pervasive Interest in Financial System Risk Pervasive Interest in Financial System Risk Financial Economics current primary focus is risk mgt Financial Economics current primary focus is risk mgt Ins Indus relies heavily on Financial Economics Ins Indus relies heavily on Financial Economics

3 Research Objectives Explore Implications of post-9.11 Inter-Agency Relations Explore Implications of post-9.11 Inter-Agency Relations Demonstrate Disclosure Regime Externalities Demonstrate Disclosure Regime Externalities Analyze IT diffusion in eGovernment Analyze 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 Policy Focus Public Dialog on the Conduct of Foreign Policy Game Theoretic Critique of Public Pressure Methods Presidential Election Rhetoric, Exec. Appointments Outside Executive Branch Alternative Channels of Public Preference Communications Outside Executive Branch

4 Problem Statement(s) Public Cos. Sustain Many Unexplored Risks Public Cos. Sustain Many Unexplored Risks Risk Analysis is a Field Expanding Beyond Insurance Underwriting & Derivative Securities Risk Analysis is a Field Expanding Beyond Insurance Underwriting & Derivative Securities Aggressive Risk ID, Analysis & Management Needed Aggressive Risk ID, Analysis & Management Needed Terrorism Risk Assessment is Complex, Imprecise, too long province of only DoD, Foreign Policy Think Tanks Terrorism Risk Assessment is Complex, Imprecise, too long province of only DoD, Foreign Policy Think Tanks Huge Investor Appetite for Terror-Risk Disclosure Huge Investor Appetite for Terror-Risk Disclosure Disclosure Methods Differences Matter Disclosure Methods Differences Matter Significant Institutional & Competitive Obstacles Impede Effective Inter-Agency Coordination Significant Institutional & Competitive Obstacles Impede Effective Inter-Agency Coordination DoS, DHS, DoD, DoJ, Intell Community (IC), SEC DoS, DHS, DoD, DoJ, Intell Community (IC), SEC Should SST Designation Trigger SEC Disclosures? Should SST Designation Trigger SEC Disclosures?

5 Designating 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)

6 Who are the SSTs? SSTs: Cuba, Iran, Sudan & Syria SSTs: 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 Address Axis of Evil: W’s 1.02 State of the Union Address UN Ambassador John R. Bolton (recess appointee only) included “rogue states:” Libya, Syria, Cuba UN Ambassador John R. Bolton (recess appointee only) included “rogue states:” Libya, Syria, Cuba WMD WMD 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, Blackmail Instrument of Terror, Blackmail Opaque Fusion of Intelligence, History & Administration Strategy Opaque Fusion of Intelligence, History & Administration Strategy

7 SST 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

8 Risks of SST Relations U.S. Public Cos Risks from SST Relations Discipline/Punishment aforementioned Discipline/Punishment aforementioned “Operations, Financial Condition, Earnings, Stk Price:” “Operations, Financial Condition, Earnings, Stk Price:” Focuses on investment/return risk of SHs Focuses on investment/return risk of SHs EX: Asset Impairment, Employee Injury, Productivity Compromise, Supply Disruption, Customer Reliability, Payments Delay/Failure EX: Asset Impairment, Employee Injury, Productivity Compromise, Supply Disruption, Customer Reliability, Payments Delay/Failure Goodwill, Reputation, Stock Price, Liquidity Goodwill, Reputation, Stock Price, Liquidity Support/Fund Terrorism, MoneyLaundering Support/Fund Terrorism, MoneyLaundering Human Rights Violator Human Rights Violator Undermine U.S.’s Reputation, Foreign Policy, Economy Undermine U.S.’s Reputation, Foreign Policy, Economy

9 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 Persons (SDN) Specially Designated Nationals and Blocked Persons (SDN) Terrorist Exclusion List (TEL) Terrorist Exclusion List (TEL) Many Others are Maintained by Int’l Orgs Many Others are Maintained by Int’l Orgs (since 1999) UN 1267 List (since 1999)

10 Disclosure Purposes Encompass Terrorism 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

11 SEC Regulation SK Regulation SK (narrative, discretionary, qualitative) vs. Regulation SX (quantitative, financial, acctg stds) Regulation SK (narrative, discretionary, qualitative) vs. Regulation SX (quantitative, financial, acctg stds) No Specific SST or Terror Risk Std. No Specific SST or Terror Risk Std. SK: Item 101 SK: Item 101 SK: Item 103 Legal Proceedings SK, Item 303 Management Discussion & Analysis (MD&A) SK, Item 503(c) – Risk Factors SK, Item 503(c) – Risk Factors Office of Global Security Risk (OGSR) Office of Global Security Risk (OGSR)

12 Regulation SK: Item 101 General Descriptions in Narrative Form General Descriptions in Narrative Form Organized Variously including Geographic Organized Variously including Geographic Domicile, Customers, Foreign Operations Domicile, Customers, Foreign Operations Revenue & Risk, Regions or Nations Revenue & Risk, Regions or Nations To the Extent Vulnerable to Terror Risks To the Extent Vulnerable to Terror Risks Organized by Business Segment Organized by Business Segment Business Component, profit center, subdivision, geographic division Business Component, profit center, subdivision, geographic division Segment Managed (ops, finances, forecasts, plans) Segment Managed (ops, finances, forecasts, plans)

13 SK: Item 103 Legal Proceedings Co vulnerable to SST Enforcement Co vulnerable to SST Enforcement DoJ, DoS, Treasury, SEC DoJ, DoS, Treasury, SEC “Material,” Pending/Contemplated, not routine “Material,” Pending/Contemplated, not routine Filing date, Forum, Parties, Allegations, Relief Filing date, Forum, Parties, Allegations, Relief Also included if key official is named party Also included if key official is named party EX: Environmental separately specified EX: Environmental separately specified Not yet SST or other terror risk indicator Not yet SST or other terror risk indicator

14 SK, Item 303 Management Discussion & Analysis (MD&A) Broad discussion foci Broad discussion foci Narrative catch-all Narrative catch-all Mgt’s own unique intimacy informs interpretation from perspective of insiders & experts Mgt’s own unique intimacy informs interpretation from perspective of insiders & experts Financial Performance Indicators Financial Performance Indicators Liquidity, Capital Resources, Results of Ops Liquidity, Capital Resources, Results of Ops SST EX: Contracts impacted by SST relations SST EX: Contracts impacted by SST relations

15 SK, Item 503(c) – Risk Factors IPO Tradition: Mechanical List of Horribles IPO Tradition: Mechanical List of Horribles 2005 Expansion to Periodic Reports 2005 Expansion to Periodic Reports No SST-Specific Trigger No SST-Specific Trigger “Contextomy” Boot-Strap “Contextomy” Boot-Strap ½ Truths Require Clarification ½ Truths Require Clarification Materiality focus on Total Mix Materiality focus on Total Mix Risk Disclosures incomplete w/o Terror-Risks Risk Disclosures incomplete w/o Terror-Risks User Demand Rising for SST Disclosures User Demand Rising for SST Disclosures Like Environmental & Risk Factors Disclosures Like Environmental & Risk Factors Disclosures

16 SEC’s Corp Fin-OGSR Office of Global Security Risk (OGSR) ’04 Appropriations Legislative Findings ’04 Appropriations Legislative Findings Significant global security risks impact Cos Significant global security risks impact Cos ID Cos w/ SST Relations ID Cos w/ SST Relations Monitors SST Disclosure Monitors SST Disclosure Jawboning w/ OGSR Comment Letters: 200 in ’06-’07 Jawboning w/ OGSR Comment Letters: 200 in ’06-’07 Formerly Inaccessible or FOIA Accessible Formerly Inaccessible or FOIA Accessible Now EDGAR Organized Now EDGAR Organized OGSR Inter-Agency Consultation & Int’l Dialogue Pressuring Foreign Issuers OGSR Inter-Agency Consultation & Int’l Dialogue Pressuring Foreign Issuers

17 The 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 7.16.07 Immediately 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 (R-Ala); SIMFA SEC Com. Atkins (R); Cong.Spencer Bachus (R-Ala); SIMFA SEC letter from Barney Frank (D-Mass) SEC letter from Barney Frank (D-Mass)

18 SST Concept Release Defends SEC’s SST Disclosure History Defends SEC’s SST Disclosure History Solicits Specific Comments Solicits Specific Comments SST Disclosure Propriety SST Disclosure Propriety SST Web tool improvements SST Web tool improvements Issuer Data Tagging in XBRL Issuer Data Tagging in XBRL 28 Comments, see Appendix 28 Comments, see Appendix

19 Data Sources OGSR Comment Letters OGSR Comment Letters SST Concept Release Comments SST Concept Release Comments FOIA Request FOIA Request EDGAR search KWIC EDGAR search KWIC Manual Review Manual Review E.g., Disclosures, Co’s Web, News Sources, Blogs E.g., Disclosures, Co’s Web, News Sources, Blogs

20 XBRL Tagging Challenges Incentives for Robust Tagging Regime Incentives for Robust Tagging Regime False negatives: tag fails to ID material info False 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 Monitoring Incentives for Tag Monitoring Tag Monitor Incompetence, Moral Hazard Tag Monitor Incompetence, Moral Hazard Impact Measures: xbrl Tagging Disclosure Impact Measures: xbrl Tagging Disclosure Tag Usability & Communication Effectiveness Tag Usability & Communication Effectiveness Fin.Econ. Event Studies Fin.Econ. Event Studies Tag Triggers Corp. Governance Tag Triggers Corp. Governance Tag Induces Public Policy Intervention Tag Induces Public Policy Intervention Tag Impacts Markets: Suppliers, Customers, “Partners” Tag Impacts Markets: Suppliers, Customers, “Partners”

21 OGSR Enforce- ment Files Deliberate Disclosure XBRL Tagged SST Web tool EDGAR Accessible Thru FOIA InAccessible Involuntary Semi- Voluntary Semi- Voluntary

22 Future Work Ventilating SST Commentators Incoherence Ventilating SST Commentators Incoherence ECMH mantra “SST info already well known” vs. “SST Discl will adversely surprise markets & damage issuer” ECMH mantra “SST info already well known” vs. “SST Discl will adversely surprise markets & damage issuer” Evaluating Disclosure Methods Evaluating Disclosure Methods ECMH debate redux ECMH debate redux Effectiveness hierarchy Effectiveness hierarchy Secret, FOIA, EDGAR, Web tool, XBRL Secret, FOIA, EDGAR, Web tool, XBRL Could base on Insider Trading dissemination method safe harbors: Could base on Insider Trading dissemination method safe harbors: E.g., press release, web posting, broadtape E.g., press release, web posting, broadtape SST Disclosure Externality #1 SST Disclosure Externality #1 Securities Markets coerce divestment Securities Markets coerce divestment Alt. encourage humanitarianism Alt. encourage humanitarianism SST Disclosure Externality #2 SST Disclosure Externality #2 Executive Branch’s Claim to Exclusive Conduct of Foreign Policy Executive Branch’s Claim to Exclusive Conduct of Foreign Policy Risks vs. Benefits of Fishbowl Negotiations Risks vs. Benefits of Fishbowl Negotiations


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