The Legal Environment of Business Kubasek Brennan Browne Sixth Edition

Transcription

1 The Legal Environment of Business Kubasek Brennan Browne Sixth Edition

2 Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: Pearson Education Limited 2014 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a licence permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6 10 Kirby Street, London EC1N 8TS. All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. ISBN 10: ISBN 10: ISBN 13: ISBN 13: British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Printed in the United States of America

3 2. Why might the critical thinking questions about ethical norms and missing information be important for international businesses? Clue: Again, consider the variety of cultures involved in international business. Why might identifying the primary ethical norms of a culture be helpful? 3. What ethical norm might influence an entity s willingness to enter into agreements with foreign companies? Clue: How might international agreements differ from agreements between two U.S. companies? Dimensions of the International Environment of Business Doing international business has political, economic, cultural, and legal dimensions. Although this chapter emphasizes the legal dimensions of international business transactions, business managers need to be aware of those other important dimensions as well. POLITICAL DIMENSIONS Managers of firms doing international business must deal with different types of governments, ranging from democracies to totalitarian states. They are concerned with the stability of these governments and with whether economic decisions are centralized or decentralized. In the Marxist form of government, such as that which existed in the former Soviet Union and in Eastern Europe until the 1990s, economic decisions were centralized, and there was political stability. This would seem to be an ideal environment in which to do business from a multinational business manager s perspective. But it was not ideal, because a centralized economy limits the supply of goods coming from outside a country, the price that can be charged for goods inside the country, and the amount of currency that can be taken out of the country by multinational businesses. In 1998, 88 of the world s 191 countries were categorized as free in the sense that they were perceived as having high political and civil liberties (e.g., Australia, Belgium, Luxembourg, Finland, and the United States, to name a few). Fifty-three countries were classified as partly free because they enjoyed limited political rights and civil liberties (e.g., Egypt, China, Ethiopia, and North Korea). 1 A trend toward democratization seems to be under way. The percentages of the total population living in free, partly free, and not free conditions in more recent years are as follows: Free Partly free Not free Despite the collapse of communism and the development of new political systems professing support of free enterprise in Eastern Europe and throughout the former Soviet Union, companies in the industrialized nations have delayed investing in some of these areas because they are uncertain of these areas political stability and willingness to adhere to economic agreements. In the People s Republic of China (PRC or China), an early rush to invest was slowed by foreign companies experiences with a seemingly capricious government. 1 Adrian Karatnycky, Freedom Gains, San Diego Union Tribune 61 (Dec. 27, 1998). 2 Adrian Karatnycky, Freedom in the World 6 (Freedom House, 2002). 261

4 For example, McDonald s leased a prime location in Beijing from the centralized government but found itself ousted a few years later when the government revoked the lease to allow a department store to be built on that site. Moreover, doubts about the Chinese government s intention to honor its agreement with the British government that Hong Kong would retain its separate political and economic status for 50 years after the 99-year British lease expired in 1997 led one long-time Hong Kong trading company, Jardine, to move its headquarters to the Bahamas. In 2010, China s monitoring of Google users Internet communications prompted Google initially to move most of its activities to Hong Kong, a district now belonging to China. Three months later, China rejected the scheme. Google, instead of continuing to reroute queries to its Hong Kong engine, started sending visitors to a new landing page that linked to the Hong Kong Web site where users could perform searches beyond the reach of Chinese censors. Later in 2010, a compromise was reached. China allowed Google to operate in China if it tweaked its mainland search box to ask users if they still wanted to have communications sent to the Hong Kong site. Chinese users of Google thus had a choice, and both the Chinese government and Google saved face. Despite these political problems, China s growth rate in proceeded at an annual gross domestic product (GDP) of percent. Further, China has brought investment capital to Latin American, Asian, and African nations. It is searching for minerals and energy to develop its infrastructure. As this search continues, China s political influence spreads worldwide. ECONOMIC DIMENSIONS Every business manager should do a country analysis before deciding to do business in another nation-state. Such an analysis not only examines political variables, but also dissects a nation s economic performance as demonstrated by its rate of economic growth, inflation, budget, and trade balance. Four economic factors in particular affect business investment: 1. Differences in size and economic growth rate of various nation-states. For example, when McDonald s decided to engage in international business, the company initially located its restaurants only in countries that already had high growth rates. As more and more developing nations moved toward a market economy, McDonald s expanded into Russia, China, Brazil, Mexico, and other countries deemed to have potentially high growth rates. 2. The impact of central planning versus a market economy on the availability of supplies. When McDonald s went into Russia, it had to build its own foodprocessing center to be certain it would get the quality of beef it needed. Furthermore, because of distribution problems, it used its own trucks to move supplies. 3. The availability of disposable income. This is a tricky issue. Despite the fact that the price of a Big Mac, french fries, and a soft drink equals the average Russian worker s pay for four hours of work, McDonald s is serving thousands of customers a day at its Moscow restaurant. 4. The existence of an appropriate transportation infrastructure. Decent roads, railroads, and ports are needed to bring in supplies and then transport them within the host country. McDonald s experience in Russia is commonplace. Multinational businesses face transportation problems in many developing countries. The World Bank classifies economies into one of the following categories according to per capita gross national product (GNP): 3 3 The World Bank Atlas, 2003 (The World Bank, 2002). 262

5 Low income $755 or less Middle income $756 9,265 High income $9,266 or more *The industrial countries are in the high-income category, and developing countries are largely in low- and middle-income categories. CULTURAL DIMENSIONS Culture may be defined as learned norms of a society that are based on values, beliefs, and attitudes. For example, if people of the same area speak the same language (e.g., Spanish in most of Latin America, with the exception of Brazil and a few small nations), the area is often said to be culturally homogeneous. Religion is a strong builder of common values. In 1995, the Iranian government outlawed the selling and use of satellite communications in Iran on the grounds that they presented decadent Western values that were undermining Muslim religious values. Now, in 2010, it monitors Internet communications, which has led to some U.S. congresspersons to seek a ban on all trade with Iran. A failure to understand that some cultures are based on ascribed group membership (gender, family, age, or ethnic affiliation) rather than on acquired group membership (religious, political, professional, or other associations), as in the West, can lead to business mistakes. For example, gender- and family-based affiliations are very important in Saudi Arabia, where a strict interpretation of Islam prevents women from playing a major role in business. Most Saudi women who work hold jobs that demand little or no contact with men, such as teaching or acting as doctors only for women. Another important cultural factor is the attitude toward work. Mediterranean and Latin American cultures base their group affiliation on family and place more emphasis on leisure than on work. We often say that the Protestant ethic, stressing the virtues of hard work and thrift, is prevalent in Western and other industrialized nations. Yet the Germans refuse to work more than 35 hours a week and take 28 days of paid vacation every year. The average hourly wage is higher in Germany than in the United States, and German workers benefits far outpace those of U.S. workers. Business managers must carefully consider language, religion, attitudes toward work and leisure, family versus individual reliance, and numerous other cultural values when planning to do business in another nation-state. They also need to find a method of reconciling cultural differences between people and companies from their own nation-state and those from the country in which they intend to do business. culture Learned norms of society based on values and beliefs. CORRUPTION AND TRADE The nature of trade between nations, between multinationals, and between multinationals and nation-states has led to global competition, and sometimes bribery, and thus corruption (see the Corruption Perception Index from Transparency International in the Comparative Law Corner feature later in this chapter). Attempts to lessen such bribery and corruption through bilateral and multilateral agreements have been led by the United States Foreign Corrupt Practices Act of 1977 (FCPA) and the Convention on Combating Bribery of Foreign Officials in International Business Transactions (CCBFOIBT) drafted by the Organization for Economic Cooperation and Development (OECD) and signed by 34 countries. The Convention adopts the standards of the FCPA. 263

6 In this text, you will find a brief discussion of the FCPA provisions that forbid payments to foreign officials when those amounts are more than grease payments. Facilitating payments made to obtain permits, licenses, or other official documents associated with contract performance, or movement of goods across a country, are considered lawful. The Justice Department, as well as other agencies and individuals, may enforce the FCPA. Activities that constitute a bribe are often the basis for legal action. The case excerpted here deals with this problem. CASE 1 United States v. Kay 359 F.3d 738 (5th Cir. 2004) David Kay (defendant) was an American citizen and a vice president for marketing of American Rice, Inc. (ARI), who was responsible for supervising sales and marketing in the Republic of Haiti. Douglas Murphy (defendant) was an American citizen and president of ARI. Beginning in 1995 and continuing to about August 1999, Kay, Murphy, and other employees and officers of ARI paid bribes and authorized the payment of bribes to induce customs officials in Haiti to accept bills of lading and other documents that intentionally understated the true amount of rice that ARI shipped to Haiti for import, thus reducing the customs duties owed by ARI and RCH to the Haitian government. In addition, beginning in 1998 and continuing to about August 1999, Kay and other employees and officers of ARI paid and authorized additional bribes to officials of other Haitian agencies to accept the false import documents and other documents that understated the true amount of rice being imported into and sold in Haiti, thereby reducing the amount of sales taxes paid to the Haitian government. Kay directed employees of ARI to prepare two sets of shipping documents for each shipment of rice to Haiti, one that was accurate and another that falsely represented the weight and value of the rice being exported to Haiti. Kay and Murphy agreed to pay and authorized the payment of bribes, calculated as a percentage of the value of the rice not reported on the false documents or in the form of a monthly retainer, to customs and tax officials of the Haitian government to induce these officials to accept the false documentation and to assess significantly lower customs duties and sales taxes than ARI would otherwise have been required to pay. ARI, using official Haitian customs documents reflecting the amounts reported on the false shipping documents, reported only approximately 66 percent of the rice it sold in Haiti and thereby significantly reduced the amount of sales taxes it was required to pay to the Haitian government. In 2001, a grand jury charged Kay with violating the FCPA and subsequently returned the indictment, which charged both Kay and Murphy with 12 counts of FCPA violations. Both Kay and Murphy moved to dismiss the indictment for failure to state an offense, arguing that obtaining favorable tax treatment did not fall within the FCPA definition of payments made to government officials in order to obtain business. The district court dismissed the indictment, and the United States of America appealed. Justice Wiener The principal dispute in this case is whether, if proved beyond a reasonable doubt, the conduct that the indictment ascribed to defendants in connection with the alleged bribery of Haitian officials to understate customs duties and sales taxes on rice shipped to Haiti to assist American Rice, Inc. in obtaining or retaining business was sufficient to constitute an offense under the FCPA. Underlying this question of sufficiency of the contents of the indictment is the preliminary task of ascertaining the scope of the FCPA, which in turn requires us to construe the statute. Because an offense under the FCPA requires that the alleged bribery be committed for the purpose of inducing foreign officials to commit unlawful acts, the results of which will assist in obtaining or retaining business in their country, the questions before us in this appeal are (1) whether bribes to obtain illegal but favorable tax and customs treatment can ever come within the scope of the statute, and (2) if so, whether, in combination, there are minimally sufficient facts alleged in the indictment to inform the defendants regarding the nexus between, on the one hand, Haitian taxes avoided through bribery, and, on the other hand, assistance in getting or keeping some business or business opportunity in Haiti. No one contends that the FCPA criminalizes every payment to a foreign official: It criminalizes only those payments that are intended to (1) influence a foreign official to act or make a decision in his official capacity, or (2) induce such an official to perform or refrain from performing some act in violation of his duty, or (3) secure 264

7 some wrongful advantage to the payor. And even then, the FCPA criminalizes these kinds of payments only if the result they are intended to produce their quid pro quo will assist (or is intended to assist) the payor in efforts to get or keep some business for or with any person. Stated differently, how attenuated can the linkage be between the effects of that which is sought from the foreign official in consideration of a bribe (here, tax minimization) and the briber s goal of finding assistance or obtaining or retaining foreign business with or for some person, and still satisfy the business nexus element of the FCPA? Invoking basic economic principles, the SEC reasoned in its amicus brief that securing reduced taxes and duties on imports through bribery enables ARI to reduce its cost of doing business, thereby giving it an improper advantage over actual or potential competitors, and enabling it to do more business, or remain in a market it might otherwise leave. Section 78dd-1(b) excepts from the statutory scope any facilitating or expediting payment to a foreign official... the purpose of which is to expedite or to service the performance of a routine governmental action by a foreign official U.S.C. 78dd-1(b). For purposes of deciding the instant appeal, the question nevertheless remains whether the Senate, and concomitantly Congress, intended this broader statutory scope to encompass the administration of tax, customs, and other laws and regulations affecting the revenue of foreign states. To reach this conclusion, we must ask whether Congress s remaining expressed desire to prohibit bribery aimed at getting assistance in retaining business or maintaining business opportunities was sufficiently broad to include bribes meant to affect the administration of revenue laws. When we do so, we conclude that the legislative intent was so broad. Obviously, a commercial concern that bribes a foreign government official to award a construction, supply, or services contract violates the statute. Yet, there is little difference between this example and that of a corporation s lawfully obtaining a contract from an honest official or agency by submitting the lowest bid, and either before or after doing so bribing a different government official to reduce taxes and thereby ensure that the under-bid venture is nevertheless profitable. Avoiding or lowering taxes reduces operating costs and thus increases profit margins, thereby freeing up funds that the business is otherwise legally obligated to expend. And this, in turn, enables it to take any number of actions to the disadvantage of competitors. Bribing foreign officials to lower taxes and customs duties certainly can provide an unfair advantage over competitors and thereby be of assistance to the payor in obtaining or retaining business. This demonstrates that the question [of] whether the defendants alleged payments constitute a violation of the FCPA truly turns on whether these bribes were intended to lower ARI s cost of doing business in Haiti enough to have a sufficient nexus to garnering business there or to maintaining or increasing business operations that ARI already had there, so as to come within the scope of the business nexus element as Congress used it in the FCPA. Answering this fact question, then, implicates a matter of proof and thus evidence. Given the foregoing analysis of the statute s legislative history, we cannot hold as a matter of law that Congress meant to limit the FCPA s applicability to cover only bribes that lead directly to the award or renewal of contracts. Instead, we hold that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person, and that bribes paid to foreign tax officials to secure illegally reduced customs and tax liability constitute a type of payment that can fall within this broad coverage. In 1977, Congress was motivated to prohibit rampant foreign bribery by domestic business entities, but nevertheless understood the pragmatic need to exclude innocuous grease payments from the scope of its proposals. The FCPA s legislative history instructs that Congress was concerned about both the kind of bribery that leads to discrete contractual arrangements and the kind that more generally helps a domestic payor obtain or retain business for some person in a foreign country; and that Congress was aware that this type includes illicit payments made to officials to obtain favorable but unlawful tax treatment. Reversed and remanded in favor of the United States. CRITICAL THINKING ABOUT THE LAW Congressional intent is a guiding principle of judicial interpretation. Here the court is asked to make a judgment about the scope of legislation. It answers that question by examining the purpose of the law and the applicability of that purpose to the facts of this case. 1. What is the difference between bribery and innocuous grease payments? Clue: For a payment to be innocuous, what effects would it have had to avoid? 2. What ethical norm is advanced by enforcing the statute in this case? Clue: How is fairness affected by permitting a firm to escape some of its tax liability? 265