Congress Repeals Byrd Amendment, Ending Billion Dollar Subsidy
A provision eventually repealing the Continued Dumping and Subsidy Offset Act ("CDSOA") was included in the Budget Reconciliation Act. While the status of that Act is currently uncertain due to a clerical error in another provision, this revocation is expected to continue. Better known as the Byrd Amendment, CDSOA requires the payment of antidumping and countervailing duties collected from U.S. importers by the U.S. government to those U.S. producers that supported the original petitions requesting that such duties be imposed on the imports.
Because CDSOA distributes to certain U.S. companies the antidumping and countervailing duties collected, rather than the government retaining the duties, CDSOA has been controversial from its inception. Indeed, the controversy began before the law was enacted. Previous attempts to enact such a bill had been defeated in committee several times. In October 2000, Senator Byrd by-passed the normal committee process and CDSOA was passed as an amendment to the Agriculture, Rural Development, Food and Drug Administration and Related Agencies’ Appropriations Act. In January 2003, the WTO Appellate Body determined that CDSOA violated U.S. obligations under the WTO Agreement. This was based on complaints brought by 11 other WTO Members, including some of the United States’ largest trading partners, e.g., the European Union, Canada, Japan, Mexico, and Brazil.
CDSOA provides funds to those U.S. companies that support a petition for the imposition of antidumping ("AD") or countervailing duties ("CVD") on imports of a good from specific countries. Once the investigation is completed and the duty imposed, any AD or CVD duty finally assessed is paid annually to those supporting companies that have incurred qualifying expenses. A new entrant to the industry that begins production after the imposition of duties is not eligible for a share of the duties collected. Similarly, any company that did not state its support for the petition, or that is subsequently acquired by an ineligible company is not eligible for a share of the duties collected. Prior to enactment of the Byrd Amendment, the AD and CVD duties collected went into the general treasury and were available to the U.S. government.
The Government Accounting Office issued a report on CDSOA in September 2005 that discussed many of the domestic problems the Act created. Noting that CDSOA was enacted in order to enhance the remedial nature of the AD/CVD laws, the GAO report questioned the Act’s efficacy. According to the GAO report, between fiscal years 2001 and 2004, $1 billion in Byrd Amendment money was distributed. That money, however, was not distributed broadly among industries harmed by imports. Approximately half of the funds went to just five companies. Nearly 80 percent of the payments went to only 39 of the 770 recipient companies during that period. The GAO report also noted problems in administration largely arising from the statutorily short deadlines for distributing the funds, including problems with verification of so-called eligible expenditures. The funds available for distribution to an industry are distributed on a pro rata basis, based on the amount of eligible expenditures claimed. This has, perhaps, given rise to some creative claims of expenditures. Company claims for eligible expenditures were nearly $2 trillion in fiscal year 2004 alone.
U.S. trading partners have complained about CDSOA since it was enacted and U.S. exporters have experienced the consequences. Eleven countries filed complaints in the WTO. After CDSOA was found to be inconsistent with the WTO Agreement, the U.S. was given a limited time for implementation either through repeal or a restructuring of the program to make it WTO consistent. When the U.S. failed to act within the requisite time, the complaining countries (eight of them to date) requested and received authorization to suspend tariff concessions towards the United States. As a result, numerous U.S. exporters are facing increased duties in the various markets. The amount of retaliation authorized in 2005 was approximately $134 million in increased tariffs. The U.S. exporters affected are not necessarily members of the industries benefiting from the CDSOA subsidies provided.
Nevertheless, it is politically easier to enact a subsidy than to repeal it, and the provision recently passed reflects a compromise. While repeal has been controversial, particularly in the Senate where this past Fall 70 Senators expressed support for the continuation of CDSOA, several factors converged to result in the repeal. Some members of Congress would prefer that the funds collected from antidumping and countervailing duties contribute to the U.S. budget on the revenue side. Many Representatives have received complaints from constituents harmed by the retaliation imposed on U.S. exports. The Administration and some key Senators and Representatives have supported repeal in order to conform to our international obligations. As a result a compromise was reached.
CDSOA will not disappear overnight. It will continue to apply to all goods subject to AD or CVD duties that enter the United States before October 1, 2007. Because final collection of AD and CVD duties can be delayed for years after entry while the entries are reviewed by the U.S. Department of Commerce, and the Commerce decision is litigated either in U.S. courts or through NAFTA proceedings, disbursements under CDSOA will continue long after 2007. This is particularly important with respect to the ongoing dispute over AD and CVD duties on softwood lumber from Canada. Duties deposited in these cases total nearly $4 billion to date, however for the vast majority of those entries the final duties have not been collected and the money has not been distributed. Should these final duties be assessed, the language of the CDSOA repeal will ensure that the petitioners will receive a windfall in future years. In addition, one possible short-term consequence of the repeal may be an increase in the number of AD and CVD duty petitions filed in 2006. Industries may well seek coverage of at least some entries prior to the October 1, 2007 cut-off.
It remains to be seen whether the delayed repeal will be sufficient to end the WTO-authorized retaliation against U.S. exports now. Many of the original complainants in the WTO challenge, including the EU, Canada, Japan, and Brazil have been constrained in their response to the proposed repeal. They remain concerned about the delayed application allowing firms to continue to collect Byrd Amendment money for entries until October 1, 2007. The retaliatory tariffs imposed by the EU, Canada, Japan, and Mexico currently remain in effect. It is unknown when the retaliatory tariffs will be lifted.
FCPA Outlook in 2006 – Heightened Enforcement Continues
Additions in the FCPA enforcement queue: ABB, BearingPoint, Schnitzer Steel and others
The U.S. Securities and Exchange Commission (the "SEC") and the Department of Justice (the "DOJ") spent much of 2005 fighting overseas corruption. 2005 was another record-breaking year in terms of the number of prosecutions, settlements, announced investigations, and the penalties and fines for violations of the United States Foreign Corrupt Practices Act (the "FCPA"). The FCPA prohibits, among other things, U.S. and certain foreign companies from making bribes to foreign government officials in order to obtain or retain business. The FCPA also requires publicly-traded companies to keep accurate books, records and accounts and to devise and maintain strong internal controls. In the last year, the SEC and DOJ imposed unprecedented fines, put individuals behind bars and experimented with new sanctions such as deferred-prosecution agreements, independent compliance monitors, waivers of attorney-client privilege and encouraged companies to make voluntary disclosures of actual and even suspected violations in the early stages of internal investigations. 2006 promises more of the same.
SEC and DOJ officials have indicated that the FCPA is one of their top priorities and they have allocated significant resources to the task. According to the DOJ, it receives tips on potential FCPA violations on a daily basis by telephone, facsimile, mail, e-mail ([email protected]) or from the Department of Commerce Trade Compliance Center’s "bribery hotline" at www.export.gov/tcc. At the beginning of 2006, more than twenty-five publicly-traded companies had announced that they were being investigated by the DOJ and SEC for potential violations of the FCPA.
Moreover, the DOJ has promised more prosecutions of individuals under the FCPA for this year. The examples of individual prosecution from the two prior years are chilling. In 2004, two former officers of HealthSouth Group were indicted for bribing a government official in Saudi Arabia to secure a government contract. These individuals prevailed in court and preserved their freedom. Two former executives of American Rice, Inc. were not so lucky. In July 2005, David Kay and Douglas Murphy were sentenced to three and five years in jail, respectively, for bribing customs officials in Haiti in order to minimize import duties. In October 2005, the DOJ announced indictments of three individuals for their role in an alleged multi-million dollar scheme to bribe officials in Azerbaijan in connection with the privatization of that country’s state oil monopoly. In September 2005, following a criminal action by the DOJ, the SEC brought a civil case against Yaw Osei Amoako, a former regional director for ITXC Corporation. At the direction of Amoako in 2002, ITXC entered into an agency agreement with a senior official of a Nigerian state-owned telephone company. In return, the Nigerian official allegedly steered a lucrative contract to ITXC. For his services, the official received more than $166,000 in bribes disguised as commissions and retainer fees under the agency agreement.
The Independent Inquiry Committee into the Iraq Oil-for-Food Program ("IIC") released its final report in October 2005. The IIC concluded that 2253 companies participated in some form of fraud, totaling around $1.8 billion dollars. Because the IIC has no judicial power, it has listed the names of companies and individuals involved and has left the process of investigating and prosecuting participants up to their respective nations. Officials at the DOJ and the SEC have signaled that the IIC report is fertile ground for FCPA prosecutions, with several cases under way and more expected to follow.
On January 9, 2006, Schnitzer Steel Industries, Inc., a U.S. steel and scrap-metal recycling company, filed its annual report with the SEC disclosing that it had set aside $11 million as a contingent liability reserve to settle SEC and DOJ actions against the company arising from alleged FCPA violations in Asia. Although the investigations by the DOJ and SEC are not yet complete, company management announced that the penalties and disgorgement of profits would be in the $11 million to $15 million range. The projected size of the penalties suggests that enforcement agencies uncovered significant FCPA violations that may have resulted in large profits for the company.
According to the description of the underlying conduct in Schnitzer’s 10-Q report, the company had a practice of making improper payments to the purchasing managers of its government customers in Asia. After being advised that this practice may violate the FCPA, Schnitzer discontinued the payments, conducted an internal investigation and made a voluntary disclosure to the SEC and DOJ and indicated that it is cooperating with the enforcement agencies. Schnitzer also advanced over $400,000 to its former chief executive officer, Robert Philip, to cover legal defense fees in this case. Media reports suggest that Philip, who resigned last May, may be prosecuted separately from Schnitzer.
On January 31, 2006, BearingPoint filed its annual report for the year 2004 with the SEC posting a $546.2 million loss for that year. BearingPoint has also indicated that it will be late with filing its 2005 report. In the report, the company’s management and auditors described in stark terms a long list of "material weaknesses" in company’s internal record-keeping mechanisms and compliance controls. Specifically, BearingPoint disclosed that one of its subcontractors made "inappropriate payments to current or former employees of state-owned enterprises in China." In addition, BearingPoint China management apparently approved expenditures for gifts, entertainment and international travel for employees of Chinese state-owned companies, potentially in violation of the FCPA. It appears that the initial concerns were raised by a whistleblower from within the company. The company has undertaken an internal investigation and concluded among other things that "internal controls relevant to the FCPA present an unacceptable level of risk of exposure for BearingPoint. The results of the internal investigation were turned over to U.S. enforcement officials.
On February 8, 2006, Swiss company ABB Ltd. announced that it had made voluntarily disclosed to the DOJ and SEC "suspect payments" by its subsidiaries in a number of countries, including "a country in the Middle East." The payments were detected during compliance reviews, which triggered internal investigations. ABB reported initiating disciplinary actions against a number of its employees. This is ABB’s second brush with the FCPA in the last two years. In 2004, two ABB affiliates were fined a total of $16.9 million for paying bribes to Nigerian officials to obtain government contracts in the Nigerian oil sector.
In short, FCPA enforcement trends for 2006 show no signs of slowing down from the record-breaking levels of enforcement activity during the past two years. Regardless of size, U.S. companies doing business overseas or foreign companies that are subject to the FCPA should review their internal compliance mechanisms to minimize exposure to FCPA risks.
ABN AMRO Agrees to $80 Million Penalty for Violations of Economic Sanctions Regulations
In late December 2005, the Dutch banking firm ABN AMRO agreed to pay $80 million in fines to settle an enforcement action brought by the Office of Foreign Asset Controls ("OFAC"), the Federal Reserve Board, and the state banking regulators of New York and Illinois. The enforcement action related to ABN AMRO’s North American Regional Clearing Center ("NARCC"), a unit with ABN AMRO’s New York branch, and the New York and Chicago branches of ABN AMRO. NARCC was the entity within ABN AMRO responsible for processing all funds transfers in U.S. dollars.
The penalties were based, at least in part, on violations by ABN AMRO of the Libya and Iran sanctions regulations administered by OFAC. Overseas offices of ABN AMRO were aware of the U.S. sanctions against Libya and Iran and knew that funds transfer requests sent to NARCC for U.S. dollar transfers would be denied if those funds transfers involved individuals or entities in Libya or Iran. Accordingly, the staff of these overseas offices removed from the wire transfer requests any references to such individuals and entities. As a result, they were routinely processed by NARCC.
For example, NARCC processed wire transfers originated by Bank Melli of Iran because the payment instructions were modified to remove all references to Bank Melli. Additionally, the New York branch advised a letter of credit issued by the Arab Bank for Investment and Foreign Trade ("ARBIFT") because the overseas branches of ABN AMRO re-issued the letters of credit in their own names. Finally, the Chicago branch cleared checks for ARBIFT because the overseas branches had arranged for ARBIFT not to endorse or stamp the checks.
The joint "Order of Assessment of Civil Penalties" noted that it was due to an absence of procedures designed to assure compliance by overseas branches of ABN AMRO that these overseas branches were able to develop "special procedures" for transactions involving sanctioned individuals and entities. Accordingly, in addition to the monetary penalties, the Order required that ABN AMRO retain an "independent third-party" to review all transactions in the overseas branches that had been involved in the transactions at issue. The purpose of the review was to determine if any transactions in those branches on behalf of U.S. individuals or entities (including foreign branches) would violate OFAC rules and regulations (as well as the rules and policies of the other agencies issuing the joint Order).
The joint Order represents, in our view, a potentially significant expansion of OFAC enforcement policy. Civil penalties under OFAC are imposed on a strict liability basis: there is no need to prove that the party subject to the penalty knew that the transaction would violate the rules. The steps that the penalized party can take as a matter of course to avoid engaging in a violative transaction would be seen as a mitigating factor in the assessment of the penalty. Typically, the actions taken by that party internally were the focus of the determination of the existence of good faith efforts to comply as a mitigating factor.
In the ABN AMRO case, however, the focus was on the extent to which U.S. branches of ABN AMRO took steps to investigate the business practices of their foreign affiliates. The fact that no external compliance activities had been undertaken by the banks was the basis for OFAC and the other agencies seeking such significant penalties. It is not clear following ABN AMRO what degree of external due diligence should be required and how the U.S. company should accomplish that. The safest approach would be to require that for all transactions involving U.S. individuals or entities, the foreign branch must engage in the same procedures as the domestic branch. Further it would seem that the domestic branch needs to institute procedures to safeguard against rogue employees in the foreign branches who, as happened in this case, withhold relevant information or provide false information regarding the ultimate beneficiary of the transaction.
It is not at all clear what procedures will be adequate to safeguard against overseas misbehavior of the sort encountered by ABN AMRO. The possibilities range from periodic and frequent audit of the overseas branches to engaging in the same sort of due diligence investigation on the foreign affiliates and their employees that are typically undertaken in the context of the Foreign Corrupt Practices Act for overseas agents and distributors.
Finally, it should be recognized that the impact of this decision extends beyond financial institutions. Suppose that a U.S. company receives an order from an overseas agent for a shipment to an unsanctioned company, but the agent arranges, without the company’s knowledge, to transship it to a sanctioned country. Unless that company has in place procedures designed to prevent such activity by its agent, it could anticipate substantial liability for such transshipment to a sanctioned country.
United Nations Convention Against Corruption Comes into Effect
The United Nations Convention Against Corruption entered into effect on December 14, 2005, ninety days after the submission of the thirtieth ratification. The event spurred efforts to promote implementation of its provisions around the world, from Ghana to Brunei. Forty-four countries have ratified the Convention, which opened for signature in December 2003 in Merida, Mexico.
The Convention was transmitted to the U.S. Senate for advice and consent on October 27, 2005 and is currently in committee. The American Bar Association has recommended ratification, with a few clarifications. No changes are anticipated in U.S. law should the Senate consent to ratification of the Convention, but implementation in other countries could be of a very different character, particularly given the Convention’s mandate in Article 21 that every country consider criminalization of bribery occurring wholly within the private sector. Some countries have indicated they will use such "anti-bribery" laws as a method of halting exclusivity agreements and fighting foreign monopolies. The broad definition of bribery – provision of an "undue advantage" – was taken from the Council of Europe convention and could prove particularly problematic for large multinational companies. If countries adopt a mutual evaluation mechanism where nations review implementation of the convention by their peers, the passage of new anti-bribery laws around the world for both the public and private sector will most likely proliferate as countries attempt to come into compliance with the Convention before they are reviewed.
Executive Order Imposes Economic Sanctions relating to Cote d’Ivoire
Just as the national team for Cote d’Ivoire advanced into the finals of the African National Cup for soccer, President Bush, following the lead of similar UN sanctions released on February 7 an order imposing economic sanctions on designated individuals in Cote d’Ivoire. The initial list of individuals added to the list of Specially Designated Nationals ("SDN") maintained by the Office of Foreign Asset Controls ("OFAC") included three individuals.
The first two, Charles Ble Goude and Eugene Djue, are leaders of the Young Patriots movement loyal to Cote d’Ivoire’s President Laurent Gbagbo. Last month, the Young Patriots called supporters onto the streets to demand the departure of UN and French peacekeepers. The third person is Martin Kouakou Fofie, a commander of the rebel New Forces movement, who has been linked to human rights violations in the northern city of Korhogo.
Under the terms of the Executive Order all financial transactions with these individuals are forbidden. More significantly, the Order sets forth the criteria under which future individuals and entities in the Cote d’Ivoire will be added to the SDN. Those criteria include violations of international law in Cote d’Ivoire (e.g., torture or genocide), public incitement of hatred or violence contributing to the conflict in Cote d’Ivoire, and the contribution of material financial or technical support to these activities.
Additionally, the order indicates that a ground for designation under the order will be the shipment of any arms to Cote d’Ivoire or the provision of any military advice or training.
Exempted from this prohibition are arms shipped to the peacekeeping forces, non-lethal military equipment for humanitarian or "protective use," and supplies and services in aid of the restructuring of national security and defense forces under the Linas-Marcoussis Agreement, which seeks to restore peace and order to Cote d’Ivoire.
Exports of defense articles and defense services from the United States to Cote d’Ivoire have been prohibited since December 14, 2004.
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