Emerging Markets? Where?

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Transcript Emerging Markets? Where?

Global Business Basics

Emerging Markets? Where?

Presented by :

Klint Alexander

211 Commerce Street Suite 800 Nashville, TN 37201 615.726.5698

[email protected]

21st Century World

• • Every Business today should embrace globalization by having a basic understanding of the transnational aspects of law doing business abroad Why? − Globalization and change are inevitable − The world is opening up to expanded trade, investment and economic opportunity − − Other Businesses are going global Competition is fierce

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Transnational Sales

• Vienna Convention on Contracts for the International Sale of Goods (CISG) −

Note:

parties who fail to include a choice of law clause in their contract may discover that their rights and obligations are governed by the CISG − sets forth substantive law rules governing the formation of contracts for the sale of goods between parties whose places of business are in different states  The parties’ respective States must be contracting parties to the CISG − It does not deal with fraud, duress, incapacity, mistake or unconscionability, which are governed by national law (

see

UCC) − Parties may exclude the application of the CISG in their contract  If the parties wish to opt out of the CISG they should do so explicitly −    CISG v. UCC CISG applies the “mirror image rule” for the battle of forms No statute of frauds or parole evidence rule in the CISG No “perfect tender rule” in CISG

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The Contract of Affreightment

• The Carriage of Goods by Sea Act (COGSA) − Governs the liability of ocean carriers for damage or loss to cargo from “tackle-to-tackle” to or from U.S. ports  Limit liability to $500 per package or “customary freight unit”  COGSA does not apply to inland carriage or to any party not considered to be an ocean carrier unless: 1.

o Bill of lading contains a Himalaya Clause Extends COGSA protection to third parties o Bill of lading contains a Responsibility Clause Explicit statement extending COGSA inland  Carrier is not liable for: 1.

Losses caused by perils of the seas, and 2.

Losses caused by negligent navigation of the ship

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Transnational Sales

•

Letters of Credit Function

−  Serves a verification function rather than as a guarantee Bank’s involvement verifies to the seller that the buyer is creditworthy •

Why use a letter of credit?

− − Greater risks involved in doing transnational business Provides Seller with an assured means of payment  Seller might have to seek remedies in a foreign country −  Protection for Buyer against Non-delivery by the Seller Buyer: provides the buyer assurance that payment will not be made until the seller has delivered the goods to the carrier − Provides the Buyer with financing flexibility

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Goods: Customs and Tariff Law

• • •

Three Issues to Consider

Classification (WCO Harmonized Tariff System) Valuation (WTO Valuation Agreement) Origin of the Goods (WTO Agreement on Rules of Origin) − At present, rules of origin are determined mainly by domestic law

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Transnational Sales

•

Forms and Drafting Incoterms 2010

− − − − −  Defined trade terms that parties can incorporate by reference in their contracts Governs issues such as cost of shipment and risk of loss The parties should specify that their contract is governed by the Incoterms Be sure to use the correct Incoterm Different for water transport, land transport and air transport In the bulk of modern commercial transactions (FOB, CFA, C&F & CIF), the seller satisfies its delivery obligations when the goods have been properly loaded on board the carrier (“when the goods pass the ship’s rail”)

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Export Controls

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Economic Sanctions

OFAC administers a number of different sanctions programs. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

• • • •

Multilateral Sanctions

Arab Boycott of Israel U.N.-imposed boycott of South Africa − To protest apartheid U.N.-imposed limited sanctions against Iran WTO-authorized sanctions

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Economic Sanctions

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Unilateral Sanctions

United States − − − −      Ban arms-related exports Controls over dual-use exports Restrictions on economic assistance Financial restrictions Oppose loans by the World Bank to listed countries Tax credits denied for income earned in listed countries Duty-free goods exemption suspended for imports from listed countries Prohibit U.S. citizens from engaging in financial transactions with the listed government without a license Prohibit Defense Department contracts above $100,000 with companies controlled by listed countries

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Economic Sanctions

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Other Unilateral Sanctions

United States − Countries:   Iran, since 1979 Burma (Myanmar), since 1997      North Korea, since 1950 Sudan Syria China, no arms-related exports, since 1989 Côte d'Ivoire/Ivory Coast   Yemen Zimbabwe

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U.S. Export Controls

• • •

Export Control Licensing

DOC Bureau of Industry and Security (BIS) − − Primary licensing agency for dual-use exports A small percentage of exports require license − DOS Office of Defense Trade Controls Licenses exports of defense articles/services Nuclear Regulatory Commission − Licenses certain nuclear materials/equipment

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U.S. Export Controls

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Export Control Licensing

“Sensitive Products” to “Sensitive Places” − − − P resumption: “No license required” See Commerce Control List (CCL) See Country Chart (15 CFR 738.3)

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When is a license required?

• • Five Ws − What? (export item’s technical characteristics) − Where? (country) − − Who? (end-user) What? (end-use) − What other activities are they involved in?

Commerce Control List (CCL)

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Summary of Steps to Take to Process Your Export

• Ensure that your export is under U.S. Department of Commerce jurisdiction. • Classify your item by reviewing the Commerce Control List.

• If your item is classified by an Export Control Classification Number (ECCN), identify the Reasons for Control on the Commerce Control List. • Cross-reference the ECCN Controls against the Commerce Country Chart to see if a license is required. If yes, determine if a License Exception is available before applying for a license.

• Ensure that no proscribed end-users or end-uses are involved with your export transaction. If proscribed end-users or end-uses are involved, determine if you can proceed with the transaction or must apply for a license.

• Export your item using the correct ECCN and the appropriate symbol (e.g., NLR, license exception, or license number and expiration date) on your export documentation (e.g., Shipper’s Export Declaration).

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U.S. Export Controls

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Exporter’s Duties

Be Proactive    Concealment of information is prohibited No duty to look beyond the customer’s representations ▫ Duty to Inquire (triggered by Red Flags) What red flags?

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U.S. Export Controls

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Exporter’s Duties

Red Flags         Product capabilities do not fit buyer’s business Item ordered is incompatible w/ State’s technical expertise level Delivery dates vague or planned for out-of-the-way destinations Packaging is inconsistent with the stated method of shipment Customer’s address is same as party found on DOC’s List of “Denied Persons” Customer has little or no business background Customer prefers to pay in cash Customer is reluctant to offer information about end-use

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ENFORCEMENT & PENALTIES

• • • BIS Office of Export Enforcement Export Enforcement Program − Prevent illegal export of dual-use items − − Investigate/assist prosecuting violators of EAR Inform/educate exporters, freight-forwarders Penalties − Civil   Corporation (up to $1,000,000) Individual (up to $250,000) − − Criminal Loss of export privileges

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U.S. Export Controls

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Other Export Considerations

“Deemed Export” Rule − Release of technology to a foreign national in the U.S. is considered a “deemed export” to the home country of the foreign national

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Regulating FDI & MNC Activity

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Home State Concerns

Impediments to FDI & MNCs − − Nationalization (exprop. w/out compensation) Performance Requirements  Local content requirements  Export performance requirements − − Capital controls Discrimination (No MFN/National Treatment)

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NAFTA Chapter 11

• • • • • • • National Treatment (Article 1102) MFN treatment (Art. 1103) Minimum standard of treatment that must be “fair and equitable” with “full protection and security” (Art. 1105) Protection against performance requirements (Art. 1106) − Exceptions for legitimate regulatory and police purposes of the host state (Art. 1106(2)) Freedom to appoint senior management without respect to nationality (Art. 1107) Freedom to transfer profits and proceeds (Art. 1109) Protection against expropriation (Art. 1110)

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Joint Ventures

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Types

Equity Joint Ventures − − Involves creation of corporation owned by JV partners Contractual joint ventures Parties do not establish another corporation but simply specify their rights and obligations by contract

Why a joint venture?

− Local law may require it − Local partners can provide valuable knowledge of the local markets and bureaucracy

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China - Joint Ventures

• • •

Chinese Regulation of Foreign Investment

China regulates FDI at the point of entry Equity Joint Venture Law − − −     Art. 2: provides limited protection against expropriation Art. 4: provides for minimum amount of foreign equity in JV Art. 43: regulates technology transfer agreements: Requires a fair and reasonable royalty – 25% Allows continued use of the technology after the expiration of contract Provides for reciprocal exchange of information on improvements Permits the licensee to purchase materials from sources they deem suitable (i.e., avoids tying arrangements) Art. 43 also requires JVs to be submitted to the govt. for approval

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Brazilian Regulation of FDI

• • • • • • No law regulating joint ventures Brazil regulates FDI at the point of exit Repatriation of profits is the big issue for Brazil Profits Remittance Law − Capital and profits should be registered with the Central Bank − − All Brazilian taxes must be paid first All patents & trademarks must be registered with the National Department of Industrial Property in order to repatriate royalty payments Limited Liability Company (preferred form) − − Managers do not have to be Brazilian residents Does not allow for public participation through stock ownership Stock Corporation − − Board of Directors must be Brazilian residents Public participation in the form of stock permitted to raise capital

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Agency & Distributorship Agreements

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Basic Distinctions

Agents − − − − − − −   Manufacturers exercise greater control A i.e., may determine the price to the customer rrange sales for manufacturer, but don’t take title to goods Buyer usually pays seller directly Paid by commission on sales they arrange Manufacturer bears the risk of nonpayment by customer Actions of the agent may be attributable to seller (tort) Agents can be given authority to enter into contracts with customers on behalf of the manufacturer Anti-bribery and FCPA concerns

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Agency & Distributorship Agreements

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Basic Distinctions

Distributors − − − − − − −   Usually a larger company with more resources M ore independent/less vulnerable to manufacturers’ whims Manufacturers have less control Buy goods from manufacturer, take title, & resell goods Make a profit when they resell the goods to customers at a price higher than what the manufacturer charged The risk of customer nonpayment rests with the distributor More likely to raise antitrust concerns E.g., agreement between manufacturer and distributor concerning the price to the customer may violate U.S. or foreign antitrust law Anti-bribery and FCPA concerns

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Agency & Distributorship Agreements

• • •

Protecting Agents and Distributors

U.S. law − − Does not provide special legal protection Automobile Dealers Act of 1956 is an exception Other Countries (EU, Latin America, Middle East) − − Legislation to protect agents (i.e., compensation, termination, restraints on competition) Agent/distributor may have extensive rights against seller Can parties opt out of legislation protecting agents through a choice of-law clause/choice of forum clause?

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Agency & Distributorship Agreements

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EC Council Directive 86/653

Governs contracts btw commercial agents/principals (not distributors) − Requires compensation of agent for termination without cause  Up to one year’s average remuneration (Art. 17) − Sets minimum periods of notice for termination of an agreement with an indefinite term (Art. 15) − Limits non-compete obligations after termination to 2 years (Art. 20) • EC Directive 86/653 was implemented in the U.K. by the Commercial Agents (Council Directive) Regulations 1993

Ingmar GB Ltd. v. Eaton Leonard Technologies Inc.

European Court of Justice (2000)

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Agency & Distributorship Agreements

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Taxation

Two Tax Issues with These Types of Agreements 1)  Whether the use of a foreign representative subjects the manufacturer to foreign taxes?

▫ ▫

Answer

: Depends on whether the representative constitutes a “permanent establishment” Agents who have authority to bind the principal (see US-German tax treaty) ◦ Must deny agent authority in the agreement “All orders are subject to manufacturer’s approval” Using a German distributor will not create a permanent establishment and subject the American manufacturer to German tax

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Agency & Distributorship Agreements

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Taxation

Two Tax Issues with These Types of Agreements 2)  Application of the Value Added Tax (VAT) Payable upon each sale in the chain of distribution but with a deduction for VAT ▫ paid on previous sales Any VAT paid with respect to the sale from the manufacturer to the distributor should be deductible from the VAT owed on the sale from the distributor to the customer

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Licensing

• • •

General Points

Involves the production of goods abroad where labor and materials may be cheaper

Advantages:

− Production in the consumer’s country may save tariffs and transportation costs − The licensor need not acquire the same knowledge of local conditions and markets that would be necessary for it to run the manufacturing and sales operation itself − The risks of foreign expropriation are lower than FDI

Risks:

− − Loss of control over licensee (i.e., marketing of goods) Loss of control over technology

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Licensing

• • •

Developing Country Technology Transfer Laws

Some developing countries have enacted technology transfer laws that attempt to level the playing field between foreign IP owners and local licensees in licensing agreements Andean Commission Decision 291 − − Bolivia, Colombia, Ecuador and Peru Requires licensing agreements to be approved and registered with a national authority in order to be valid

Disfavored

Tying Contract Provisions b.

Price-fixing Restraints on production Non-compete obligations Grant backs Minimum royalties Territorial restrictions

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International Commercial Arbitration

• • • • • •

Advantages of Arbitration

Neutrality of the forum Streamlined proceedings (faster) Cheaper than litigating in court (really?) Less formal More confidential Non-appealable • • •

Disadvantages of Arbitration

Arbitrators have no power to compel discovery Arbitrators can only award damages (not injunctions) Arbitrators are paid by the parties themselves − − Can be expensive Can incentive settlement

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What is the FCPA?

The FCPA prohibits U.S. companies and their agents from:

• • • Using a payment or the promise of a payment of anything of value to a foreign official, foreign political party or candidate, directly or indirectly To influence his or her official actions in violation of his or her duty Or to secure improper advantage or to induce the person to use his influence to affect official action

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Enforcement Trends

• • • • • • • • • 200% increase in cases from 2005 to 2008 More specialized government investigative units More targeted and proactive investigations More trials Much higher penalties Sector investigations by the SEC and the DOJ Increased individual fines Increased jail time Individual prosecutions years after corporate settlement

FCPA IS A HOT TOPIC with the highest level of government attention.

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Foreign Corrupt Practices Act (FCPA)

• • • • • •

Elements:

Any U.S. person/corporation or foreign person or corporation acting in U.S. Corrupt intent (evil motive) Corrupt intent: purpose of wrongfully directing business to the payor or to wrongfully obtain favorable legislation or regulations Proscribed payments: any act in furtherance of a payment − Exceptions:  Grease payments (to secure the performance of a routine government function)  Bona fide expenditures (travel, lodging, meals incurred by a foreign government official for the purpose of promoting the payor’s products or services)   Payments lawful under the existing written laws of the foreign state Expenses related to the execution of a contract Persons to whom payments are made (foreign officials, foreign political parties or candidates for foreign office) Business purpose test: to obtain/retain business

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Examples of Improper “Travel and Entertainment” Expenses

• Examples of improper “travel and entertainment” expenses, which could trigger an FCPA investigation, include: − A $12,000 birthday trip for a government decision-maker from Mexico that included visits to wineries and dinners; − $10,000 spent on dinners, drinks, and entertainment for a government official; − A trip to Italy for eight Iraqi government officials that consisted primarily of sightseeing and included $1,000 in “pocket money” for each official; and − A trip to Paris for a government official and his wife that consisted primarily of touring activities via a chauffeur-driven vehicle.

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Affirmative Defenses

•

It is not a corrupt action to provide:

“Business hospitality,” such as bona fide expenses for travel and lodging, if: − The hospitality is directly related to the promotion, demonstration or − explanation of a product/service Or the performance of a contract with a government entity • Payment, if it is permitted under the country’s law: − − − Must be very specific Must be in writing in the law/regulations itself Very limited applicability

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FCPA Recordkeeping Requirements

• • • • •

Best Practices

Keep books, records and accounts with details that accurately and fairly reflect transactions and dispositions of assets and financial statements in accordance with GAAP Have a system of internal accounting controls Be able to show that transactions are executed in accordance with management's authorization Be able to show authorizations required for access to assets Do timely audits to compare books/records to accounts

Note: Financial results of foreign subsidiaries/agents that are incorporated into the parent’s records must not conceal illicit payments.

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Types of Records/Actions that May Fail to Include Appropriate Detail

• • • • • • Political contributions Commercial bribes or kickbacks Income tax violations Customs violations Payments to foreign government officials Gifts/Travel/Entertainment

Note: A person or entity may be criminally liable if he or she knowingly circumvents or knowingly fails to implement an internal control system. Note: Both DOJ and the SEC will enforce recordkeeping requirements.

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Successor Liability

• Liability of an acquiring or merged company for the acts of a predecessor • An acquiring company should: − Immediately integrate an acquired company into its compliance and training scheme − Conduct an FCPA-specific audit of the new company as soon as possible − Disclose all of the acquired company’s violations and cause them to cease immediately

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FCPA Penalties and Enforcement

• • • •

Corporate Penalties

Up to $25 million criminal fine per violation or 2 times the gain $10,000 civil penalty per violation company or the gross gain Disgorgement of profits Appointment of compliance monitor • • • •

Individual Penalties

Up to 20 years in prison Up to $5 million criminal fine per violation or 2 times the gain $10,000 civil penalty per violation The fine shall not be paid directly or indirectly by the company the

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Compliance Program Pointers:

• • • • • • Adopt written code of conduct and anticorruption policy with a clear message from the top Appoint a compliance officer Train employees and agents/contractors/consultants Undertake and document due diligence Use questionnaires to evaluate third parties Establish a mechanism for reporting behavior

“IT TAKES THE WHOLE COMPANY”

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Best Practices

• • • • • • • • Interact with lower level bureaucrats Do not ask or allow a government official to make business arrangements Use local language and incorporate ethical local customs Use technology to educate, train, and monitor Be careful with email/voicemail!

Engage all levels of the corporation Pay attention to concerned employees because most whistleblowers tried internal reporting first “

New York Times

Rule”: would the conduct imply corruption if reported in a newspaper?

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Emerging Markets? Where?

Transcript Emerging Markets? Where?

Global Business Basics

Emerging Markets? Where?

21st Century World

Transnational Sales

The Contract of Affreightment

Transnational Sales

Goods: Customs and Tariff Law

Transnational Sales

Export Controls

Economic Sanctions

Economic Sanctions

U.S. Export Controls

U.S. Export Controls

When is a license required?

Summary of Steps to Take to Process Your Export

U.S. Export Controls

U.S. Export Controls

ENFORCEMENT & PENALTIES

U.S. Export Controls

Regulating FDI & MNC Activity

NAFTA Chapter 11

Joint Ventures

China - Joint Ventures

Brazilian Regulation of FDI

Agency & Distributorship Agreements

Agency & Distributorship Agreements

Agency & Distributorship Agreements

Agency & Distributorship Agreements

Agency & Distributorship Agreements

Agency & Distributorship Agreements

Licensing

Licensing

International Commercial Arbitration

What is the FCPA?

Enforcement Trends

Foreign Corrupt Practices Act (FCPA)

Examples of Improper “Travel and Entertainment” Expenses

Affirmative Defenses

FCPA Recordkeeping Requirements

Types of Records/Actions that May Fail to Include Appropriate Detail

Successor Liability

FCPA Penalties and Enforcement

Compliance Program Pointers:

“IT TAKES THE WHOLE COMPANY”

Best Practices

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