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'Terror-free' investing gains ground in US

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Indeed, the bulk of the companies targeted by such divestment initiatives are foreign. US companies are already barred from dealing with Iran, for example. But Missouri's Steelman says she has pulled the plug on investments in US firms whose foreign subsidiaries work in the listed countries. "It seems strange to me that we send young men and women to defend our freedom, [but] we have not yet used our most powerful weapon – America's financial markets," she says.

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Beyond concerns about a potential backlash from cooperating countries, some officials believe the divestment effort is aimed at closing down negotiating channels that have opened up with Iran recently.

Still, such criticisms have not deterred supporters.

Despite the complexities of managing about $20 billion in state revenues, Ms. Steelman says she has been able to certify that Missouri is not investing in companies doing business with the five countries listed as state sponsors of terrorism.

Other states considering adopting terror-free investment criteria include California, Georgia, Ohio, and Texas. A move is also under way to give federal employees the option of choosing terror-free investing for their pension funds and savings.

"Federal employees have a choice, and one of those choices should be a fund that does not invest in terrorist states," says US Rep. Brad Sherman (D) of California, who wants federal employees to have the option of a terror-free savings program similar to the one in Missouri.

Proponents of divestment cite the example of Libya, which they say was persuaded to give up ambitions of building weapons of mass destruction at least in part because of financial sanctions. The country has been removed from the US list of terror sponsors.

Still, some skeptics doubt the effectiveness of such divestment schemes, insisting that the weight of American funds in companies doing business in terror-sponsoring countries is too small to have much of an impact.

But proponents say that today, most countries are sensitive to anything that would sour their foreign-investment environment. "In particular, the Iranian regime is a very important candidate for this kind of strategy," says Mr. Gaffney.

Secretary of State Condoleezza Rice told a congressional committee last week that Iran is suffering financially from measures resulting from sanctions the UN Security Council approved in December. But her broader point was the government's sensitivity to any hurdles to foreign investment.

"You've seen that there has been a decrease in investment presence for Iran, that they're having trouble getting investment in some of their oil and gas activities," she said. "These are all pressures I think on the Iranian government."

Perhaps the strongest criticism of the movement is that it does nothing to target nonstate sponsors of terrorism, like Al Qaeda. Financial experts say it is not impossible to target such nonstate actors, but that doing so would require action against countries where the organizations' charities and other funding sources operate. And that, they add, would mean action against a different set of countries, including ones the US considers to be key strategic friends.