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Penalty Provisions. The EAA provides criminal, civil, and administrative penalties. A person
who fiknowingly” violates the Act can be fined up to $50,000 or five times the value of the
exports and get up to 5 years in prison. A person who fiwillfully” violates the Act can be fined up
to $250,000 and get up to 10 years. A fiwillful” violation by a business can result in fines up to $1
million. Administrative sanctions can result in the suspension or revocation of a person’s or a
business’s authority to export.
Add. Case: Moller-Butcher v. Dept. of Commerce (D.C. Ct. App., 1994)--Moller-Butcher
(MB) exported semiconductor equipment from the U.S. to Great Britain and Sweden. With his
knowledge, it was re-exported to Bulgaria, Poland, and Rumania. The items were controlled
technologies, classified as such for national security. MB did not get a validated export license.
Because MB did not respond to Commerce inquiries, the ALJ entered default judgment denying
him export privileges for 20 years. MB filed a motion, asking that his export privileges be
reinstated. At a hearing, he argued that the sanctions ruined his business and, combined with the
criminal penalties he had received in other proceedings, the government’s interest in deterring
future export violations had been served. Commerce argued that the sanctions were proper
because MB committed multiple violations and had falsified material information. The ALJ
reinstated MB’s export privileges. The Under Secretary of Commerce reviewed the decision. She
stated that only the Secretary had authority to grant a sanction modification and declared the
ALJ’s decision merely fiadvisory.” The Secretary denied MB’s motion, finding 20 years to be
appropriate. MB appealed that the Secretary’s decision was arbitrary, capricious, and an abuse
of discretion.
Decision. The court of appeals held it lacked jurisdiction to hear the case because it may review
only issues necessary to determine liability. The statute: fiThe United States Court of Appeals for
the District of Columbia Circuit, which shall have jurisdiction of the appeal .... The court may
Add. Disc.: Red Flags for Managers—The managerial considerations with this case discuss
some conditions that may tip-off a manager to the fact that a purchaser may be trying to avoid
the rules and regulations on exports. For example, U.S. manufacturers may be asked to mix a
controlled good or technology in with an uncontrolled good—and then be asked to list only the
uncontrolled good on the Customs declaration. Less overt, but actions which in any case should
be fired flags” to management indicating the possibility of illegal export activity include:
A customer’s reluctance to provide end-use information
Customer’s stated end-use is incompatible with its known or customary line of business
Customer’s willingness to pay cash
Information about the customer is sketchy or nonexistent
Customer asks that the product or technology be sent to an intermediate location that is
incompatible with the purported end-user’s business or location
Customer is evasive as to whether the good or technology is for domestic use, export, or reexport
Add. Case: Iran Air v. Kugelman (D.C. Cir., 1993)--Iran Air placed an order for signal
generators with a German company, Fluke. They are high-tech devices for testing airplane
communications equipment. The order stated: fiPlease ship to Iran Air Frankfurt Airport for
reforwarding to Teheran Iran.” Fluke did not have the generators, and sent the order to an
affiliate, Fluke Holland, which got them from Fluke USA. The invoices between Fluke USA and
Fluke Holland and Fluke Germany stated: fiThese commodities were licensed for ultimate
destination Fed.Rep. Germany. Diversion contrary to United States law is prohibited.” Fluke
Germany delivered the goods to Iran Air. The invoice had no destination control statement. Iran
Air shipped the generators to Iran. In 1990, Commerce’s Office of Export Enforcement (OEE)
charged Iran Air with causing the reexport of U.S.-origin Fluke signal generators from Germany
to Iran without obtaining the appropriate license. The ALJ dismissed the charge, ruling that the
Export Act authorized civil sanctions only for knowing violations of the Act. Commerce protested
that fiknowledge” is not a requirement in a civil penalty case. It imposed a $100,000 civil
penalty and a suspension of export privileges for two years. Iran Air appealed that only knowing
violations of export regulations are sanctionable.
Decision: Commerce is correct and may determine the appropriate sanction consistent with the
ALJ’s assessment of the facts and the circumstances of Iran Air’s violation. fiIt is not unusual for
Congress to provide for both criminal and administrative penalties in the same statute and to
permit the imposition of civil sanctions without proof of the violator’s knowledge. Here, the
Note: Amendments to the Export Administration Act reduce or eliminate a number of the
licensing requirements. Those amendments were brought about in response to the dramatic
changes in the world politics over the past five years. Specifically, the amendments have worked
to reduce the number of products subject to export control for national security reasons. Several
export licensing restrictions have also been eliminated on former communist countries. The
Amendments also strengthen the government’s ability to firetaliate” against the unfair trade
practices of foreign governments. If a foreign government imposes import restrictions against
U.S. products, the government may now impose quotas or duties on products from that country.
International Perspective: Controlling International Pirates
The U.S. International Trade Commission estimates that pirates (companies or individuals that
copy or clone) cost U.S. industry more than $100 billion in lost revenues each year. Microsoft
Corporation found an extensive network pirating its Windows software. The group was talented
enough to even copy the hologram used to discourage pirating. Microsoft filed a lawsuit
privately and elicited the assistance of the International Trade Commission to sanction Taiwan
(the location of the pirating organization). For the computer industry, pirating is one of the most
serious problems facing management.
BUSINESS STRUCTURES IN FOREIGN MARKETS—There are two basic ways of selling
products in foreign markets. A business can either export products manufactured in this country
to the foreign country, or manufacture products in the foreign country for distribution there.
Foreign Manufacturing—The decision to engage in foreign manufacturing is generally
motivated by a business’s desire to reduce costs and therefore enhance its ability to compete.
Businesses considering foreign manufacturing have several options available to them
Wholly Owned Subsidiary—When foreign manufacturing in a wholly owned subsidiary; a
business maintains complete ownership in the facilities.
Joint Venture—When foreign manufacturing in cooperation with local owners or other foreign
group; virtually any division of ownership is possible.
Licensing Agreement—A contractual arrangement whereby one business, the licensor, grants
another business, the licensee, access to its patents and other technologies. Licenses can be
granted to cover the transfer any kind of expertise. The licensor usually gets a royalty on net
sales from 1 to 5 percent.
Franchising Agreements—A form of licensing where the franchisor (the supplier) grants the
franchisee (foreign dealer) the right to sell products or services in exchange for a fee. Fast-food
franchises such as McDonald’s have made major inroads overseas.
Contract Manufacturing—Contracting for production of certain products in foreign facilities,
such as Nike manufacturing in Indonesia, where labor costs are lower than in the U.S.
FOREIGN CORRUPT PRACTICES ACT—Government is more involved in business in
many countries than in the U.S. When approval of business action is at the discretion of a
government official, the likelihood of corruption rises. Scandals shook many countries in the
1990s, notably in Italy, Japan, and Korea. The Foreign Corrupt Practices Act (FCPA) prohibits
U.S. companies from bribing foreign officials. A study of U.S. companies by the SEC found the
practice was wide spread—over 400 companies (117 were Fortune 500 companies) admitted
making bribes to foreign officials.
Corruption—As Exhibit 22.2 shows, many countries are rife with corruption; even the U.S.
only gets a score of 7.5 on a 10 point scale used by experts on international corruption of
government officials. Some other countries are cleaner; most low-income countries are more
corrupt.
International Antibribery Movement—The U.S. encourages other countries to enact antibribery
laws, but until recently has been the only nation with such a law. Numerous other nations have
agreed in principle to the Convention on Combating Bribery of Foreign Officials, but while
Congress ratified the treaty in 1998, other countries have been slow to act.
FCPA Antibribery Provisions—The FCPA prohibits U.S. companies from ficorruptly” paying
or offering to pay a fiforeign official” to gain assistance in obtaining or retaining business. The
Act also prohibits payments to a person—such as a foreign agent—when the payment will go to
bribe an official. The ability to know of such payments by an agent is controversial. An
exception is made for a payment that is a fifacilitating or expediting payment ... the purpose of
which is to expedite or secure the performance of a routine government action.” Routine actions
may include processing visas and providing utilities. The basic test of whether the bribe is
allowed focuses not on the person to whom payment is made, but on the purpose for which
payment is made. It is complicated by the fact that payments are often made by local freight
forwarders or other service organizations without the knowledge of the U.S. manager.
Who Knows What?—The most controversial part of the FCPA is the fiknowing” requirement. It
is intended to cover fiany instance where any reasonable person would have realized the
existence of the circumstances or result and the [individual] has consciously chosen not to ask
about what he had reason to believe he would discover.” Foreign agents who work on
commission cause problems if the agent’s commission was used to make a payment to an
official. The Act can have a chilling effect on decisions. While it is clear that paying $10,000 to
the Minister of Transportation to receive a contract is illegal, what about a $100 fitip” to clerk to
encourage the rapid processing of a visa?
Accounting Requirements—The FCPA requires companies to fimake and keep books, records,
and accounts which ... accurately and fairly reflect the transactions and dispositions of its assets.”
Investors must fidevise and maintain a system of internal accounting controls sufficient to
provide reasonable assurances” that transactions are authorized and that access to funds can be
tracked. The Act forces a fipaper trail” to improve accountability and help detect illegal
payments.
Penalties—Justice is responsible for criminal enforcement of the anti-bribery provisions of the
FCPA. A violation is serious, carrying with it fines of up to $100,000 and imprisonment for up to
five years for individuals. Corporations convicted of violating the antibribery provisions could
incur fines of up to $2,000,000 per violation.
CASE: U.S. v. King 8th Cir., 2003)—King was a major investor in OSI. It was trying to do a
large land deal in Costa Rica. Another OSI executive taped conversations with King about
bribing Costa Rican government officials to get the rights for the land deal. King was fined
$60,000 and sentenced to 30 months in prison. He appealed.
Decision: Affirmed. The tape recordings support the jury verdict. It is clear that $1.5 million was
Questions: 1. King contended that since Kingsley was a co-conspirator, his testimony should not
be allowed, as it should not be considered reliable. Is it?
Such evidence is allowed so long as the court is given the background on it. It is up to the jury to
2. Is it fair that King gets prison time and Kingsley did not because he cooperated with the FBI?
It is often the only way the government can get good evidence–get cooperation of an insider. A
Add. Info: UK Bribery Act: As of 2011, the Bribery Law, based on the FCPA, was effective in the
UK, but is written in even more sweeping terms and, as written, could be interpreted to bar
payments for small activities, such as bribes to get telephones installed, as is common in many
countries and generally not a FCPA violation. Enforcement remains to be seen.
INTERNATIONAL CONTRACTS—The basis for any international agreement is the contract
between parties. International contracts often involve parties from differing cultural backgrounds
who do not know each other well at the outset of negotiations.
Cultural Aspects—Sensitivity to cultural differences is important in international contracting.
Although language should not be a barrier, contract terms must be clearly defined and
understood. Attitude toward relationships is a cultural difference in some countries. Contracts
based on trust are often relatively short in length, with few contingencies expressly provided.
The expectation is that issues can be worked out as they arise with the parties working to
maintain the underlying relationship.
Financial Aspects—In managing financial risks that may arise, care should be taken in the
specification of the method of payment and the currency in which payment is to be made.
Exchange Markets—Foreign exchange markets allow trading (buying and selling) currencies. In
general, trade between countries can occur only if it is possible to exchange the currency of one
country for the currency of another country. Exchange of money is not always simple. Losses in
international business sometimes center on exchange risk—the potential loss or profit that occurs
between the time the currency is acquired and the time the currency is exchanged for another
currency.
Financial Instruments Used in International Contracts—Although many financial instruments are
available, two commonly used are bills of exchange and letters of credit. A bill of exchange is a
written instrument that orders the payment of a certain sum of money to the party specified by
the bill. Payment is made at the time specified on the bill or understood from the form of the
standardized bill used. A sight bill specifies immediate payment upon receipt of the goods by the
buyer. A time bill specifies payment at a later date, usually 30, 90, or 180 days after the goods
have been received by the buyer. A letter of credit is an agreement or assurance by the buyer’s
bank to pay a specified amount to the seller upon receipt of documentation proving that the
goods have been shipped and that any other contractual obligations on the seller have been
fulfilled. The usual documentation required includes a certificate of origin, an export license, a
certificate of inspection, a bill of lading, a commercial invoice, and an insurance policy. Letters
of credit can be either revocable or irrevocable.
Exchange Controls—The ability to get money out of another country (repatriation of profits)
may be difficult due to exchange controls that limit the ability to exchange currency. E.g., the
Yuan is not a freely convertible currency, so government permission is needed for a U.S.
company to change to dollars or another currency. Firms must consider this fact before locating
in another country.
Add. Info: Exchange Controls: Repatriation of profits involves payments from a host country
business to the home country parent. Payments usually include royalties and payments for
management services. Repatriating profits reduces the host country’s supply of foreign currency.
For example, a U.S. company operating in Guatemala may repatriate profits by exchanging its
Guatemalan Quetzal (a soft currency) for U.S. dollars (a hard currency). The Guatemalan
government’s holdings of dollars will be reduced by the amount of the exchange. Unless
Guatemala is actively trading with other countries, which brings in foreign currency, those
repatriated dollars may strain the government’s ability to meet foreign currency demands. To
avoid currency shortage problems, countries in this situation may restrict the ability of foreign
companies to repatriate profits. Countries may require that profits be repatriated in that
country’s goods (barter). To turn fiprofits” into dollars, the company must first export those
goods and then sell them. Often, however, the company is not in the business of selling such
products. Such restrictions will reduce the attractiveness of the country for foreign investment.
Transfer Pricing—When a multinational moves goods and intellectual property from one facility
to another facility across countries, records of the transfer must be kept and a price set on the
goods transferred within the firm. About 40% of all fiforeign trade” is in this category—moving
sums from one subsidiary to another. Firms often use artificial prices as no clear market price
may exist. How much is a patent worth? So firms may set prices to try to reduce tax burdens in
countries with higher taxes. The IRS sets guidelines for such transfers.
Key Clauses in International Contracts—Certain clauses are often included in international
contracts and have become standard items to consider.
Payment Clauses—How payment is to be received should be clearly specified. The problems of
repatriation should be addressed. Problems with inflation and currency exchange risks, especially
in unstable economies or in long-term agreements, should also be addressed in this clause of the
contract.
Choice of Language Clause—A word or phrase in one language may not be readily translatable
to another. A contract should have a choice of language clause, which sets out the language by
which the contract is to be interpreted.
Add. Info: Open Price Clause: Not infrequently international contracts provide an open price
clause, which leaves the determination of the contract price to a later time (usually the time of
delivery of the goods or performance of the contract). Normally, the price will determined
according to a pricing formula that will take into consideration any market concerns at the time
the contract is made. If such a formula is in fact used, the formula should be carefully worded.
Add. Case: Bernina Distributors v. Bernina Sewing Machine (10th Cir., 1981)--Bernina
Sewing Machine (BSM) imported sewing machines from Switzerland. It bought machines in
Swiss francs and sold them to Bernina Distributors (BD) for dollars. BD had an exclusive
contract with BSM to sell the machines. The contract had an open price provision that allowed
any ficost increase” to be passed along to it. This worked well until fluctuations in the exchange
market caused the dollar to fall relative to the franc. By the time BSM changed the dollars
received from BD into francs to pay the Swiss manufacturer, the sale generated a much smaller
profit than anticipated. Fearing a further decline in the dollar, and relying on the open price
provision, BSM increased the price of the machines by 10 percent. BD sued, arguing that
fluctuations in the currency did not constitute a ficost increase” under the open price provision.
The court found for BD; BSM appealed.
Decision: Affirmed. Fluctuations in exchange rates do not constitute a valid increase in price
Force Majeure Clause—Force majeure is a French term meaning a fisuperior or irresistible
force.” It protects the contracting parties from problems or contingencies beyond their control.
Add. Case: Coker Intl. v. Burlington Ind. (4th Cir., 1991)--Coker agreed to buy 221 used textile
looms for $1 million from Burlington in December 1987. Coker gave Burlington a 10%
non-refundable payment. The balance was to be paid before removal of the looms before March
1. If the looms were not removed, Burlington had the right to sell the looms to others. The
contract contained a force majeure clause (to protect the parties in event of an occurrence
beyond their control): fiDeliveries may be suspended by either party in case of act of God, war,
riots, fire, explosion, flood, strike, lockout, injunction, inability to obtain fuel, power, raw
materials, labor, containers, or transportation facilities, accident, breakage of machinery or
apparatus, national defense requirements or any cause beyond the control of such party,
preventing the manufacture, shipment, acceptance, or consumption of a shipment of the Goods
or of a material upon which the manufacturer of the Goods is dependent.”
Coker intended to sell the looms to customers in Peru, but no looms were picked up or paid for
by the deadline. On May 27 Coker told Burlington that payment and removal of the looms would
take place by June 30 as it needed an import license to Peru and a letter of credit from the buyer.
Burlington agreed to the June 30 extension, but warned Coker it would be the last. By July 6,
payment had not been received, so Burlington put the looms up for sale. Coker had taken
delivery of 34 of the looms and paid a total of $239,750. Coker demanded the return of the down
payment and referred to the force majeure provision. Its customer in Peru could not accept
delivery for reasons beyond Coker’s control. Coker sued. The court held for Burlington. Coker
appealed.
Decision: Affirmed. fiCoker ... argued that its contractual obligations should be discharged due
to the intervening cancellation on all import licenses by the government of Peru. It further
argued that since the type of used looms it agreed to purchase are only marketable in developing
countries, it could not reasonably make other disposition.” The court disagreed, finding:
1) fiFirst, the language of the contract expressly states that the down payment is non-refundable
2) fiSales to developing countries are inherently risky, especially in Latin America and South
America. Thus, the nonoccurrence of political turbulence resulting in economic uncertainty for
3) fiCoker’s principle purpose for the contract, to resell the looms, has not been substantially
4) fiIf the doctrine of frustration of purpose applied to the facts in this case, the doctrine would
only serve to discharge the remaining obligations of the parties to render performance.
Forum Selection and Choice-of-Law Clauses—To reduce uncertainty in the event of a dispute,
the parties select the court in which disputes are to be resolved and the law that is to be applied.
This eliminates the possibility that the parties will go fiforum shopping”—looking for the most
favorable forum for the resolution of a dispute.
Add. Info: UN Convention on Contracts: Most major trading countries have agreed to the U.N.
Convention on Contracts for the International Sale of Goods. Contracts that incorporate that
law are subject to rules very essentially the same as the Uniform Commercial Code. See 71 F.3d
1024.
Loss of Investment—Governmental action can result in loss of investment through
nationalization, expropriation, and confiscation. Investors concerned about such losses may
purchase insurance.
Nationalization—Occurs when a country takes over, or nationalizes, a foreign investment.
Compensation by the government is often less than the true value of the business. The stated
purpose of nationalization is related to public welfare. Nationalization is not uncommon,
averaging over 100 incidents per decade.
Add. Info: Privatization: In contrast to nationalization, many countries are privatizing
holdings. While privatization in former communist countries is expected, it has also been done
by the governments of France, Great Britain and Italy. Great Britain has sold many of its
utilities and transportation systems. Italy has worked to sell publicly owned Credito Italiano
(bank), IMI (financial services), ENEL (public utility), AGIP (oil and gas), and STET
(telecommunications).
Expropriation—Expropriation is when a country takes foreign assets or other property in
accordance with international law. A valid expropriation is when there is a public purpose behind
the taking and prompt, adequate, and effective compensation is provided. If the takeover is
unlawful, it is a confiscation. The U.S. position has been that takings directed toward a particular
nation are discriminatory and are confiscations rather than expropriations.
Issue Spotter: Making the Deal Stick
You would have to be crazy to take the contract, unless you are getting a pile of cash up front.
You know nothing about Chinese law and, in any event, you do know that the Chinese courts are
not highly rated for efficiency or fairness. You do not want to be subject to litigation there. At a
minimum, you would press for arbitration in a third locations, such as the International Chamber
of Commerce. Chinese law may be fine (you better have a knowledgeable lawyer on your side to
read and interpret the implications of the contract), but you want disputes to be resolved outside
of the court system there, but Glorious is not likely to agree on going to U.S. courts. Big
companies tend to get their way, but if you are putting much at risk, it may be better to walk
away from the big deal than get stuck with a mess at the other end.
Insuring against Risk of Loss—Investors concerned with the risk of loss of investment may
obtain insurance. An all-risk insurance policy can help in case of nationalization or upon
occurrence of a specific problem. Outstanding risks such as currency blockages, embargoes, and
a government’s arbitrary decision to recall letters of credit may be insured through major insurers
such as Lloyds of London. Some countries have agencies to assist in insuring their exporters
from risk of loss. In the U.S., the Overseas Private Investment Corporation (OPIC) insures
investors willing to invest in less- developed countries friendly to the U.S.
INTERNATIONAL DISPUTE RESOLUTION—Contract disputes arise for any number of
reasons. Disputes must be resolved as parties wish to enforce their rights under a contract.
Litigation—Parties in a contract dispute may seek relief in the court system of either country.
Litigation is complicated; evidence, individuals, and documents central to the dispute are often
located in two or more countries. If the action is in a foreign court, the U.S. participant may
encounter a very different judicial system. Courts in some countries are influenced by political
pressures. Another difficulty may be attempting to establish jurisdiction. U.S. courts require
proof of fiminimum contacts” within the country for the courts to have proper jurisdiction over a
foreign defendant.
Add. Case: Harper-Wyman v. In-Bond Contract Manufacturing and Industrial Hase (N.D.
Ill., 1994)--Harper is a Delaware corp. with principal place of business in Illinois. In-Bond is a
Cayman Islands corporation. Industrial Hase is a Mexican company; its principal place of
business is in Ciudad Juarez. Harper, In-Bond, and Hase were parties to a Services Agreement,
negotiated and executed in Ciudad Juarez. Harper makes gas range parts in Illinois which it
ships to the Hase plant in Mexico for assembly (Harper contracted with In-Bond for the
assembly work; In-Bond subcontracted with Hase). Harper owns the equipment and maintains
control of the parts in the Hase plant. Some assembled pieces are shipped around Mexico, but
70% of the assembled pieces are shipped to Illinois for sale. Dispute involved an increase in the
hourly labor charge under the Services Agreement based on a wage increase mandated by
Mexican law. The Agreement required good faith negotiation of disputes. During the dispute,
Hase closed the plant and refused to turn over assembled pieces that belonged to Harper,
allegedly costing it $1 million. Harper sued In-Bond and Hase for damages in state court in
Illinois. In-Bond and Hase removed the case to federal court on the basis of diversity of
citizenship and filed a motion to dismiss for lack of personal jurisdiction.
