CURRENTS Vol. XXIII, No. 1 | 2016

Page 1


Contents 3 Never For-GATT: What Recent TBT Decisions Reveal About the Appellate Body's Analysis of Evironmental Regulation Under the WTO

Ravi Soopramanien

27 Show me the Money! Harmonizing Dodd-Frank's Resources E xtraction P ayment D isclosure R ules and N on -U.S. Counterparts Marc H. Folladori

34 Enforcement of Foreign Arbitral Awards on the Grounds that the Arbitral Proceedings were Unfair and Composition of the Arbitral Tribunal Saad Badah

44 Assessing the Risk of Going to Trial in a FCPA Prosecution Scott Fraser

56 B itcoin ' s S tanding

within the

Economic Marketplace Ian A. Holcomb

G lobal R egulatory

and

69

We are Still Hungry: The Constant Battle Against World Hunger. Samin Hessami

Currents 23.1 2016


Letter From The Editor

Currents

Dear Reader, On behalf of the Editorial Board and Members of CURRENTS: JOURNAL OF INTERNATIONAL ECONOMIC LAW, we are delighted to present you Volume 23, Number 1. CURRENTS is a studentrun scholarly journal committed to emphasizing timely and practiceoriented articles on international economic issues. This is a very exciting time for CURRENTS as not only does this academic year mark CURRENTS' twenty-fourth year of publication, but we have also re-launched to accurately reflect changes in the international legal landscape. To that end, CURRENTS: International Trade Law Journal has been renamed CURRENTS: Journal of International Economic Law (CURRENTS: JIEL). Under this new name, CURRENTS is broadening its scope to publish articles dealing with both private international law and international economic law. This publication begins with an analysis of environmental regulations under the World Trade Organization Agreements, specifically how Appellate Body decisions interpreting the Agreement on Technical Barriers to Trade reveal a trend of narrowing environmental regulations beyond their original purpose. Next, we examine the scope of required disclosures to the Securities and Exchange Commission under the Dodd-Frank Wall Street Reform and Consumer Protection Act, focusing on payments made to domestic and foreign governments by companies engaged in the commercial development of oil, natural gas, and/or minerals. Following that analysis, we turn to examining the refusal of recognition and enforcement of arbitral awards under the New York Convention in Kuwait based on concerns of the incapacity of parties and the validity of arbitration agreements. We then present a practice guide detailing the scenarios and factors that individuals facing prosecution under the Foreign Corrupt Practices Act should consider when deciding whether to accept a deal or go to trial. Then we switch focus to an comparative study on the regulation of Bitcoin, offering practical regulatory advice that protects the interests of Bitcoin investors while maintaining the integrity of the Bitcoin software. Lastly, we conclude with a discussion of world hunger and food security, proposing that increased expenditures in education posit the best solution to these issues. On behalf of the Editorial Board and members, we thank the authors who have continued to not only support CURRENTS, but also provide additional educational resources to field of international economic law. We would also like to thank the South Texas College of Law Houston administration, faculty, and staff members for their support, particularly our Academic Advisors.

CURRENTS is published by South Texas College of Law Houston. Please cite CURRENTS as CURRENTS: JIEL 23.1, 2016. Please direct inquiries and correspondence to: Editorial Board

CURRENTS South Texas College of Law Houston 1303 San Jacinto Street, Suite 219 Houston, Texas 77002-7006 E-mail: currents@stcl.edu

Copyright 2016. CURRENTS: JIEL All rights reserved. Volume XXIII, Number 1

Editorial Board 2015-2016

2016-2017

Editor-in-Chief Jennifer Taylor

Editor-in-Chief Eric Utermohlen

Managing Editor Erica Reyes

Managing Editor Rhonnie Embres

Articles/Notes Editors Stphanie Tiel Clem Eric Utermohlen Members Analisa Del Pozo Susan Frutiger Kaitlyn Garcia Patrick Harrison Heather Winkles Levinia Lara Rhonnie Embres T.J. Stroud Rachel Miller

Articles/Notes Editors T.J. Stroud Rachel Miller Members Natalie Cusick Serena Hudson Alex Golden Jackie Wilhite Scott Perkins Helen Le Delaram Falsafi Joshua Bonin Stephanie Bryant Jayelle Lozoya Amber Ali Cris Estrada James Snyder Tyler Williams Cynthia Milian Alejandro Mota

Faculty Advisors Assistant Dean Elizabeth A. Dennis Professor C. O’Neal Taylor

We hope you enjoy this edition. Sincerely, Publications Coordinator Jacob Hubble

Credits

Eric Utermohlen Editor-in-Chief Currents 23.1 2016

Publication Services Jacob Hubble


Never For-GATT: What Recent TBT Decisions Reveal About the Appellate Body's Analysis of Environmental Regulation Under the WTO Agreements R AV I —————————————————

A. Abstract

————————————————— Few environmentalists have positive things to say on the impact of the World Trade Organization (WTO) on the environment. WTO legal obligations are frequently cited as the most significant impediment to a range of environmental initiatives, including notably meaningful international coordination to combat climate change, particularly through carbon tax initiatives, and imposition of electronic waste disposal export bans. In this vein, adverse findings of WTO dispute panels on environmental conservation measures tend to attract the ire of international civil society. The tensions between liberal trade and environmental protection can be traced back to the days of the General Agreement on Tariffs and Trade (GATT) of 1947, which pre-dated the WTO. Under the GATT 1947, trade and environment disputes tended to be resolved through diplomatic channels. The WTO Agreements were intended to provide a more predictable and legalistic means by which to resolve such disputes, in exchange for deeper commitments on domestic regulation, a domain historically deemed off limits to international disciplines.

S O O P R A M A N I E N

Ravi Soopramanien is an associate at Hughes, Hubbard & Reed, LLP in Washington, D.C. He previously served as a Legal Officer at the World Trade Organization, where he provided technical, factual and legal advice to WTO panels. Soopramanien holds law degrees from Stanford Law School, the London School of Economics, King's College London, and the World Trade Institute. (TBT Agreement) and the Agreement on Sanitary and Phytosanitary Measures (SPS Agreement), introduced binding disciplines with serious implications for domestic environmental decision-making, a subset of domestic regulation. The expectation was that the depoliticization of WTO disputes would afford more certainty to regulators. This has decidedly turned out not to be the case. This article explores why this is so, focusing notably on the role of the Appellate Body in shaping domestic regulation jurisprudence under the GATT, SPS and TBT Agreements. It argues that the Appellate Body has misapplied important features of the SPS and TBT Agreements, sometimes wrongly condemning environmental regulations, owing to a cognitive bias against trade distortions. It argues for an alternative approach that stays faithful to the text of the WTO Agreements.

—————————————————

I. Introduction

————————————————— I n t e r n a t i o n a l e c o n o m i c l aw a n d international environmental law have developed considerably over the past decades. The WTO Agreements, the focus of this article, entered into force in January 1995, and set binding disciplines on a range of trade-related disciplines ranging from goods and services, to investment, intellectual property, and product standards. In parallel, the United Nations Framework Convention on Climate Change (UNFCCC), among other institutions, has served as a capable forum to coordinate state action to reduce thematic cross-border environmental externalities. Yet, there is surprisingly little formal cross-fertilization between trade and the environment. Instead, environmental regulation is typically framed in trade literature as derogating from core WTO obligations. The possibilities for cross-fertilization between both disciplines are infinite, and certainly well beyond the bounds of this article. Suffice it to state that these disciplines are not natural antagonists: the development of “green” industries can foster growth opportunities in new markets.

Two of these agreements in particular, the

Trade measures, in turn, can steer states

Agreement on Technical Barriers to Trade

towards cleaner and greener development 3

Currents 23.1 2016


trajectories. The preamble to the GATT,

of negotiations establishing the WTO legal

reach of these agreements to environmental

now part of the WTO legal framework,

framework.

laws is broad.

contemplates that economic relations should

—————————————————

Environmental regulation can typically

raise standards of living and lead to the full

distort trade in three ways.6 The first is

ago that economic growth need not come

Together, the GATT, SPS and TBT Agreements impose measures restricting adverse trade impacts of Members' domestic regulation.

at the expense of the global commons.

—————————————————

ban, on imports using a particular process

Despite these provisions, a few years before

Inasmuch as it is common to refer to

and production method (PPM) resulting

becoming part of the WTO framework, the

the WTO legal framework in the singular,

in an environmental externality. Where

GATT Secretariat faced sharp criticism from

it should be borne in mind that the WTO

such PPM is amended or altered to the

environmentalists and civil society actors

Agreements are a series of inter-related

importing Member’s satisfaction, subject

for its handling of two disputes focusing

inter-state treaties. During the Uruguay

products may re-access the relevant market.

on United States (US) dolphin conservation

Round, these agreements were negotiated

It will become clear in the discussion below

measures restricting the sale of imported

in 15 different working groups, with little

of relevant WTO jurisprudence that most

tuna products.1 The GATT panels concerned

to no coordination among them initially.4

trade and environment disputes tend to

made broad statements seemingly indicating

Towards the close of negotiations, the notion

implicate this second distortion, inasmuch

that such conservation measures were per se

of the “single undertaking” gained traction

as complainant Members have a tendency

inconsistent with Contracting Parties’ GATT

– pursuant to which the results of the

to “frame” a particular environmental

obligations. These panel reports were

negotiations were deemed to form a “single

regulation as having the effect of partially

subsequently not adopted into the GATT

package” joined together by the Marrakech

limiting market access to the respondent

acquis by the Contracting Parties.

Agreement Establishing the WTO.5 This led

Member’s domestic market. The third is

The GATT regulated tariff bindings. By

to a scramble to better coordinate among

through sanctions, under which all or some

the 1960s, these bindings reached levels

the different agreements, which Members

of a Member’s imports are subject to punitive

below which tariff increases from applied

resisted to avoid disturbing the negotiated

import restrictions following a serious

to bound levels could no longer afford

texts. The SPS and TBT Agreements

environmental transgression. This latter

meaningful protection to domestic industries.

emerged from these negotiations. Both

category, outside some limited exceptions,7

GATT exporters grew increasingly wary

agreements regulate product standards. The

runs counter to the WTO’s ban on unilateral

of so-called “non-tariff barriers”, such as

SPS Agreement applies to product standards

remedial measures.

product standards similar in operation to

adopted to protect human, animal or plant

This article will address the scope of

those the US had applied to tuna imports.

health from the spread of pests, and from

environmental regulation under the WTO

During the Tokyo Round of negotiations

dangerous additives, contaminants, toxins,

Agreements. It will do so by reviewing WTO

of 1974, GATT Parties pressed for a special

and disease-causing organisms contained

dispute settlement reports on environmental

negotiating group on standards. This yielded

in foodstuffs. The TBT Agreement applies,

regulation under the GATT, SPS and TBT

the plurilateral Agreement on Technical

residually, to all other product standards.

Agreements. The article will demonstrate

Barriers to Trade (the Standards Code),

Together, the GATT, SPS and TBT

that these reports have followed uniform

which 46 Contracting Parties joined.3 The

Agreements impose measures restricting

GATT canons of interpretation. It posits

Standards Code inspired further product

adverse trade impacts of Members’ domestic

that the Appellate Body, the WTO’s judicial

standards negotiations in parallel sessions

regulation. Given the ease with which any

appellate organ, has followed these canons

held by technical barriers and agriculture

domestic environmental regulation can be

of interpretation owing to a cognitive bias,

groups set up during the Uruguay Round

construed as restricting trade, the collective

exhibited in its trade and environment

use of the resources of the world. GATT 1947 drafters thus contemplated decades

2

4

Currents 23.1 2016

through a complete ban on those imported products that produce environmental externalities. The second is through a partial


disputes, in favor of GATT-driven principles

The WTO is composed of two Secretariats:

pillars. Members negotiate new market access

that has enabled it to regulate away internal

the WTO and Appellate Body Secretariats.

commitments. Existing and pre-existing

inconsistencies in the application of

The WTO website summarizes the WTO

commitments are regularly monitored and,

environmental regulations under three

Secretariat’s main duties as follows: “to supply

when required, enforced by WTO DSB.

very different agreements. This article will

technical and professional support for the

This structure has been reversed lately,

conclude that such bias, as manifested in

various councils and committees, to provide

with Members seeking to push new market

recent TBT dispute reports, has resulted

technical assistance for developing countries,

access commitments through the backdoor

in the narrowing of the scope of the TBT

to monitor and analyze developments in

of the third pillar. Below, I summarize these

Agreement beyond whatever was intended

world trade, to provide information to the

developments.11

or foreseen by WTO draftsperson. It will

public and the media and to organize the

—————————————————

posit that this is due principally to a human

ministerial conferences. The Secretariat also

element that is by and large ignored in the

provides some forms of legal assistance in

1. The Demise of the Negotiations Pillar

literature.

the dispute settlement process and advises

—————————————————

Section II will introduce the WTO and

governments wishing to become Members

Uruguay Round negotiators, wary of civil

Appellate Body Secretariats. Section III will

of the WTO.” 8 The WTO Secretariat

society criticism and adverse press from

discuss prevailing theories on the challenges

supports Member actions in relation to the

the abovementioned GATT panel reports

that trade and environment disputes pose

WTO Agreements’ three pillars: negotiations,

condemning US dolphin conservation

to the WTO. These theories, most of which

monitoring and dispute settlement. The

measures, had hoped that the Committee on

were presented over a decade ago at the

Appellate Body Secretariat, in contrast,

Trade and Environment (CTE) could reach

height of WTO dispute settlement activity

“provides legal and administrative support

a political solution to environmental policy

on environment conservation measures, are

to the Appellate Body”10, and thus only

convergence. Sadly, the CTE, composed

still influential in trade circles. This article

supports the last of these pillars.

of trade bureaucrats operating largely

outlines an alternative explanation for the

—————————————————

behind closed doors, failed to deliver

evolution of this activity. Section IV will

on this task. The CTE’s one meaningful

disputes under the GATT, SPS and TBT

[T ]he CTE's failure to produce a solution to environmental re g u l at i o n i n t h e W TO h a s forced environmental regulation into the domain of W TO d i s p u te s e t t l e m e nt p a n e l s.

Agreements. It will demonstrate that the

—————————————————

resort to WTO dispute settlement where

Appellate Body has transposed GATT

Negotiations under the first pillar are held

dispute settlement mechanisms existed

principles into later SPS and TBT disputes

under the auspices of the Trade Negotiations

under other environmental agreements.

in a manner that, particularly in the case of

Committee (TNC) and are mandated to

As this article will elaborate in some detail,

the TBT Agreement, has blurred important

negotiate deeper market access commitments

the CTE’s failure to produce a solution

distinctions between different sets of

and binding rules. Monitoring under the

to environmental regulation in the WTO

obligations. Section VI will conclude with

second pillar is carried out under the Trade

has forced environmental regulation into

recommendations.

Policy Review Mechanism (TPRM). Dispute

the domain of WTO dispute settlement

—————————————————

settlement under the third pillar is formally

panels. As such, the DSB, particularly the

governed by the Membership acting jointly

Appellate Body, exercises final authority on

as the Dispute Settlement Body (DSB).

the conformity of any regulation with WTO

There is something of a fluidity to the three

standards.

summarize WTO provisions relevant to environmental regulation. Section V will give an overview of the Appellate Body’s “guide” to environmental regulation in

II. The WTO and Appellate Body Secretariats

—————————————————

9

contribution, sometimes cited with irony in the literature,12 was to ‘wish away’ the problem of environmental disputes in the WTO by taking the now discredited position that Members were unlikely to

5

Currents 23.1 2016


The result is that Members adopt

provisions of those agreements”.15 WTO

applicability of and conformity with the

environmental laws under conditions of

disputes are formally initiated at the request

relevant covered agreements.”19 For this

uncertainty: such measures are liable to

of a Member (the complainant Member) in

purpose, a panel may “seek information

challenge by another Member, and to be

respect of any trade-related measure adopted

and technical advice from any individual or

deemed to violate the WTO Agreements by

or maintained by another Member (the

body which it deems appropriate”, including

a dispute panel, thus exposing the adopting

respondent Member). These Members must

notably experts.20 In making findings and

Members to trade countermeasures. This

first attempt to reach a negotiated settlement;

recommendations in a given dispute, panels

uncertainty has hindered institutional

if it fails, the complainant Member may

and the Appellate Body cannot “add to

developments in the fields of international

request the establishment of a dispute panel,

or diminish the rights and obligations

economic law and international environmental

normally composed of three trade diplomats.

provided in the covered agreements.”21 Only

law. On the former, the ease by which

The panel’s final report can be appealed to

Members can do so, by way of authoritative

Members can trigger dispute settlement

the seven-judge (formally, they are referred

interpretations under Art. IX:2 of the

procedures stands in contradistinction to

to as “members”) Appellate Body on issues

Marrakech Agreement. The DSU recognizes

the difficulty of successfully negotiating

of law or legal interpretation. Typically, a

that WTO dispute settlement is subject to

new trade disciplines. This has led to a

division composed of three Appellate Body

this qualification.22 The DSU contemplates

collective and progressive loss of faith in the

members will review a given panel report.17

that a panel’s role is limited to assessing the

WTO’s ability to serve as a forum for deeper

Nowadays, most panel reports are appealed.

relative strengths of the arguments presented

multilateral integration, culminating recently

WTO rules on the burden of proof

by the disputing parties. Panels cannot make

in the collapse of the Doha Development

emanate from general principles of law,

law, nor can they stray beyond the claims

On the latter,

and require the complainant Member to

presented to them.

concerns about the WTO-consistency of

assert and prove its claim. A complainant

Over time, the Appellate Body has

proposed environmental agreements have

Member will satisfy its burden when it

implemented its duty to provide ‘security

led to a decline in multilateral environmental

establishes a prima facie case, namely a case

and predictability’ in WTO Members’ treaty

negotiations – exemplified by the slowdown

which, in the absence of effective refutation

obligations, under the DSU, in a manner that

in negotiations in Cartagena over the

by the respondent Member, requires a

some would regard as running counter to

Biosafety Protocol to the Convention on

panel, as a matter of law, to rule in favor

the DSU prohibition against ‘adding to or

Biological Diversity.14

of the complainant Member. 18 Where a

diminishing from’ Members’ WTO treaty

—————————————————

complainant Member fails to establish a

obligations. According to the Appellate

prima facie case, its claim will fail for want of

Body, adopted panel reports, while formally

meeting the burden of proof.

binding only on the disputing parties,

—————————————————

—————————————————

nevertheless “create legitimate expectations

WTO disputes are governed by the

among WTO Members, and, therefore

annexed to the WTO Agreements. The

Appellate Body reports, further, seem to occupy a status in between adopted panel reports and an authoritative interpretation.

reports, further, seem to occupy a status

DSU recognizes that dispute settlement

—————————————————

in between adopted panel reports and an

is a “central element in providing security

A panel’s standard of review under the

authoritative interpretation. In a dispute in

and predictability to the multilateral trading

DSU is neither de novo, nor total deference: “a

which it admonished a panel for departing

system. . . it serves to preserve the rights and

panel should make an objective assessment

from “well-established Appellate Body

obligations of Members under the covered

of the matter before it, including an objective

jurisprudence clarifying the interpretation

agreements, and to clarify the existing

assessment of the facts of the case and the

of the same legal issues”, for instance, the

round of negotiations.

13

2. The Rise of the Dispute Settlement Mechanism

Understanding on rules and procedures governing the settlement of disputes (DSU)

16

6

Currents 23.1 2016

should be taken into account where they are relevant to any dispute.”23 Appellate Body


Appellate Body interpreted the DSU as

trade volumes reaching towards the billions

order”) principles that can be found in the

requiring a panel “absent cogent reasons” to

of dollars. With so much at stake, disputing

analytical approach and sequencing employed

“resolve the same legal question in the same

Members will typically request the WTO

in Appellate Body dispute settlement reports

way in a subsequent case.”

Director-General to compose a neutral panel,

on environmental regulation has led to a line

In constraining panels in such a manner,

acting on the advice of his staff.28 Second,

of jurisprudence that openly struggles with

the Appellate Body introduced stare decisis, and

panelists are often guided by the legal,

the WTO-consistency of environmental

judicial law making, through the backdoor:

factual and technical assistance provided

measures. Before doing so, I summarize

it bears mentioning, in this regard, that the

by Secretariat staff, notably in the form of

alternative theories on trade and environment

Appellate Body has never explicitly reversed

background papers that digest volumes of

disputes. This literature addresses WTO

itself or openly modified its prior reasoning

prior WTO jurisprudence and reams of

disputes in the broader framework of “trade

on a legal question in its more than 20 years

factual exhibits and party arguments into

and” disputes, referring to those disputes that

of existence. This may come as a surprise to

manageable documents.

This process

implicate regulatory concerns extending well

the reader, given that the seven judges serving

applies, mutatis mutandis, to the Appellate

beyond the conventional domain of a WTO

it do so under staggered four-year terms with

Body Secretariat following appeals.

dispute involving tariffs or quotas. I compare

the possibility of only one contract renewal.

—————————————————

these theories to the alternative account for

Further, some of these judges do not have

the Appellate Body’s analytical approach to

facilitating the work of these seven Members.

After spending decades ser vicing dozens of W TO disputes, it is inevitable that a number of these experts will have developed ingrained views on WTO legal doctrine.

The enduring character of Appellate Body

—————————————————

“Trade and” disputes have generated a

jurisprudence would tend to suggest that

In most cases, the authors of the

great deal of literature. This section will

the WTO and Appellate Body Secretariats

background papers prepared for panels

give an overview of how trade scholars

have a larger role to play in facilitating the

and Appellate Body Members are senior

perceive the problématique of “trade and”

role of the DSB than has been chronicled

legal officers working within the WTO or

disputes in the WTO before building on the

in the literature. Indeed, the role of both

Appellate Body Secretariats. The WTO and

above discussion of the Secretariats with an

the WTO and Appellate Body Secretariats is

Appellate Body Secretariats’ rosters of legal

alternative proposal.31 For ease of reference,

surprisingly ignored in the literature.26

officers, some of whom served in the GATT

I have grouped these theories into three

For mally, panelists and Appellate

Secretariat prior to the creation of the WTO,

distinct categories. I have labeled these the

Body Members rule on the outcome of a

include some of the world’s foremost trade

Hermetic Shift, the Constitutional Order and

dispute. They normally do so by consensus,

law experts. After spending decades servicing

the DSU Conflict.

notwithstanding provision in the DSU for the

dozens of WTO disputes, it is inevitable

As I will set out below, the Hermetic

issuance of separate or dissenting opinions.

that a number of these experts will have

Shift is premised on the fragmentation of

Panelists and Appellate Body Members

developed ingrained views on WTO legal

international legal disciplines. It questions

disputes are guided by the two Secretariats.

27

doctrine. Such views, it follows, do not easily

the merit of any convergence of disciplines,

The WTO Secretariat influences panels in

lend themselves to a reversal or modification,

given the lack of coherence in international

two important respects. First, while disputing

from one dispute to the next.30

relations. The Constitutional Order is

24

25

their primary residence in Switzerland. It becomes less of a surprise, however, if the reader considers the understated role the Appellate Body Secretariat plays in

29

environmental regulation. —————————————————

III. Prevailing Theories on "Trade and" Disputes

—————————————————

Members can agree upon panel composition,

Below, I illustrate how a cognitive bias

premised either on the existence of global

they typically do not. WTO litigation is

towards GATT-inspired market access and

administrative law or, more ambitiously,

expensive, and can sometimes implicate

non-discrimination (what I refer to as “first

constitutionalism of international law.

7

Currents 23.1 2016


Both premises consider that international

sovereignty of states… International law

sovereignty in economic relations on the

institutions act beyond the mandate

is built on the fundamental construct of

retention, by states, of control over diverse

conferred upon them by states, by drawing

a community of sovereign states whose

matters of domestic regulation.40 Dunoff

upon a pre-existing or foundational set of

relations with each other is the substance of

illustrated that both models are undermined

international norms. Constitutionalism,

the discipline – international trade law runs

by “trade and” issues. CAM is premised on

moreover, presumes that states are subject

counter to that construct and in significant

the failure, in international relations, that

to a foundational set of international

ways acts to undermine it.”

would result if states each acted individually

36

norms. Both premises further consider

Despite these differences, these two

in economic relations. “Trade and” issues

convergence a natural consequence of the

disciplines have converged towards the end

frame the failure instead as one of uneven

expanding role of international institutions.

of the 20th century. As another commentator,

distribution in substantive international

The DSU Conflict is the most difficult to

Joost Pauwelyn states: “with the end of the

obligations. For Dunoff, the ELM, which

categorize. It is best defined as premised on

Cold War and the accession of many former

juxtaposes shared decision-making in

international legal pluralism: it recognizes

communist countries to the Bretton Woods

international affairs with a state’s exclusive

the phenomenon of convergence, without

institutions, the separation [between different

control over domestic affairs, is undermined

ascribing it any dominant value.

fields of international law] was no longer

as those matters are deemed domestic and

—————————————————

self-evident. The increased inter-dependence

are thus reserved to the sovereign prerogative

between states and between issue-areas

of states are instead scrutinized in an

—————————————————

(e.g., trade and environment, human rights

international forum. “Trade and” disputes

Hermetic Shift theorists consider that

and economic development) ma[kes] the

blur the lines between the domestic and

international economic law was designed

strict separation between different fields of

international, and render the distinction

to operate in a legal vacuum.32 To them,

international law all the more artificial.”37

drawn by ELM a false dichotomy.41

the WTO was not designed to handle trade

—————————————————

Sanford Gaines, another trade scholar,

and environment disputes. At its heart, the

finds that convergence between trade and

in Adam Smith’s laissez-faire33 and David

Hermetic Shift theorists consider that inter national economic law was designed to operate in a legal vaccum.

Ricardo’s comparative advantage ideologies.34

—————————————————

with non-WTO treaty obligations that

Its historical development has consequently

Jeffrey Dunoff, in a widely-cited article,

the DSU is poorly equipped to handle.

fallen out of step with those of the UN

identified subject-matter convergence as the

For Gaines, while “modern international

institutions such as the UNFCCC, borne

driver of trade and environment disputes.

trade law… has the relatively easy task of

out of comity and human rights.35 As one

Writing on the apparent demise of the

establishing agreed ground rules about when

commentator, Donald McRae puts it: “at

international trade regime, he describes the

and how governments are permitted to or

the theoretical level, international trade

impact of so-called “trade and” issues

prohibited from adopting national policies

law and international law are in important

on two trade liberalization models, the

that interfere with these private transactions

respects based on different assumptions.

realist

collective action model (CAM),

or distort the terms of market competition

The organizing principle for the international

which considers that states acting as rational

that drive the transactions. . . environmental

trading regime is the economic theory

actors in international relations will fare

law is vastly more complex and contingent

underlying a liberal trade order that is

worse on aggregate without some form of

than trade law: complex because almost every

the principle of comparative advantage;

supranational coordinating and collaborating

human behavior has multiple environmental

the organizing principle for international

policy, and the liberalist embedded liberalism

effects; contingent because regulation of

law, by comparison, is the concept of the

model (ELM), which justifies a loss of

those effects depends on our incomplete,

1. The Hermetic Shift

WTO stems from the dictates of economic theory: its free trade rationale is rooted

Currents 23.1 2016

38

39

8

environmental laws is problematic due to the use of the more normative WTO dispute settlement mechanisms to induce compliance


ever-changing, and irreducibly uncertain

to the social element. However, in later

freedoms’ (e.g. to produce and exchange

scientific understanding of the natural

and more doctrinal writing on legitimacy

goods and services including one's labour

world.”42 For Hermetic Shift theorists, the

and governance, he suggests that the social

and ideas) illustrates that, for most people,

WTO’s trade rules, if used to adjudicate

element is, indeed, the “output” of the

economic liberties are no less important than

non-WTO environmental treaty terms

normative element.

civil and political freedoms.”52 In Petersmann’s

48

beyond the remit of ‘ordinary’ trade matters,

Writing on the WTO, 49 Weiler found

view, WTO panels can and indeed should

will yield outcomes that twist and turn the

elements of both present, but lacking in

adjudicate more candidly on the full range

environmental treaty terms.

some important respects. On the normative

of “trade and” disputes, particularly those

—————————————————

element, he found that the WTO Secretariat

affecting the environment, and human rights.

did not operate completely free from

[More] Controversially, Petersmann views

—————————————————

‘external influences’, by which he [probably]

Bretton Woods institutions, spearheaded by

Constitutional Order theorists consider

meant large trading Members’ influence.

the GATT, as creating a “right to trade”53

that the prevalence of trade and environment

Weiler attributed the lack of institutional

which must be weighed and balanced against

disputes signals the convergence of different

independence to shortcomings with the

these other fundamental rights.54

legal disciplines in international relations.

WTO’s judicial organs. Weiler considered

In later writing, Petersmann would

These theorists thus propose a counter-

that the Appellate Body’s focus on Oxford

focus on the fragmentation of human

narrative to proponents of fragmentation

English Dictionary definitions to ascertain

rights law, with emphasis on disparate

in international law, such as DSU theorists.43

the “ordinary meaning of words” and

horizontal and regional instruments, and

Beyond this, ‘constitutionalization’ 44

treaty provisions in disputes, in particular,

international economic law, through studying

can mean different things to different

prevented it from meaningfully engaging

the proliferation of bilateral investment

commentators – and the debate has been

with the more difficult and systemic issues

treaty obligations, to argue for a grander

aptly likened to the fabled elephant in the

presented by “trade and” disputes – issues

constitutional order marshalled by an

hand of six blind men by one commentator.45

capable of shaping the social element,

UN-led collective pursuit of human rights

leading to an epistemic trade community.50

protection. In this vein, he would emphasize

Ernst Petersmann are the most frequently

—————————————————

the need for judicial cooperation in applying

cited

so-called “constitutional methodologies”

constitutionalization as possessing a

Beyond this, 'constitutionalization' c a n m e a n d i f fe r e n t t h i n g s to different commentators...–

normative and social element. Writing on

—————————————————

Petersmann would thus consider that trade

the formation of the EU, he identified the

For Petersmann, constitutionalization is a

and environment disputes in the WTO

normative element as the creation of a

rights-based phenomenon. Unlike Weiler’s

should be (but aren’t presently) adjudicated

‘higher’ body of EU law. Weiler credits the

judge-driven model, Petersmann’s model is

upon through adherence to uniform canons

European Court of Justice with shaping

premised on a more substantive notion of

of international judicial adjudication, to

the relationship between Community law

federalism grounded in Kantian philosophy

avoid the types of fragmentation problems

and municipal law as one “indistinguishable

on individual autonomy and freedom. In

that Hermetic Shift theorists observe in

from analogous legal relationships in

Petersmann’s view, international relations

relation to environmental regulation disputes.

constitutional federal states.” The social

are conducted against the backdrop of

—————————————————

element, for Weiler, developed through

unalterable fundamental rights. International

3. The DSU Conflict

the progressive formation of a federalized

trade serves as a conduit for enjoyment of

—————————————————

“European entity.” It is less clear whether

these rights: “the fact that most people

The DSU flipped GATT 1947 dispute

the normative element is a precondition

spend most of their time on their ‘economic

settlement rules. Under the GATT 1947,

2. The Constitutional Order

Against this caveat, Joseph Weiler and 46

proponents of inter national

constitutionalization. Weiler defines

47

51

9

to coordinate between judgments of various international courts and tribunals55

Currents 23.1 2016


Contracting Parties could forum shop

jurisdiction’ away from non-WTO treaties,

hypothesis that there is a negative correlation

and block adoption

by obliging Members to resort to WTO

between effectiveness and independence. A

of an adverse panel report owing to the

dispute settlement when seeking “the

weaker hypothesis reserved by the authors

positive consensus rule. This rule required

redress of a violation of obligations or other

is that “there is no evidence for positive

all Contracting Parties to vote in favor of a

nullification or impairment of benefits under

correlation between independence and

panel report before it could become part of

the covered agreements or an impediment

effectiveness.” The authors conclude, based

the GATT acquis, allowing the losing party to

to the attainment of any objective of the

on findings that Member States are taking

block its adoption. Dispute settlement under

covered agreements”. Gabrielle Marceau,

conspicuously longer to comply with DSB

the GATT was thus weak, and Contracting

a senior WTO legal officer, phrases the

recommendations, that the DSB “will have

Parties preferred negotiated solutions to

problem in the following terms: “a WTO

diminished chances of success, as already

formal dispute settlement.57 Under the WTO,

Member may seek redress for a violation

indicated by steps being taken by states to

in contrast, a negative consensus rule results

of a human rights treaty before a human

avoid or weaken their jurisdiction.”67

in the automatic adoption of panel reports,

rights court. Yet, WTO Members seem to

DSU Conflict theorists, without necessarily

except where all Members block it.

have precluded themselves from engaging

ascribing any value judgments to trade

Under the DSU, further, forum shopping

in any debate on whether human rights

and environment disputes, attribute their

is prohibited due to the now-exclusive

courts would order remedies having any

prevalence in the WTO to a procedural

jurisdiction of WTO panels. 59 Panel

trade-related impact inconsistent with WTO

feature of dispute settlement rules. WTO

proceedings are subject to strict time

law. At the same time, WTO Members have

panels, to them, simply have to deal with

frames, of six months for completion of

human rights commitments, and all states

these disputes in the best way possible.

panel reports and 60 days for completion

must respect all their international rights and

Where they stray too far, they risk having

of Appellate Body reports. 60 Once the

obligations at all times.”66

their recommendations ignored by the losing

findings and conclusions in these reports

—————————————————

party.

are formally adopted by the DSB, the latter

—————————————————

by securing permission – from the DSB – to

WTO dispute settlement is thus broad, compulsory, adversarial, and can often result in economic retaliation. DSU Conflict Debate theorists focus on the first two aspects, to argue that the DSU has 'attracted jurisdiction' away from non-WTO treaties...

suspend “concessions or other obligations

—————————————————

and environment disputes under the WTO

under the covered agreements.” 63 Such

Eric Posner and John Yoo consider that the

Agreements. The GATT 1947 dispute

retaliation, which is prospective in nature,

DSU’s extensive jurisdiction is so broad that

settlement mechanism gave Contracting

may be fixed to a level “equivalent” to

it may actually deter sovereign states from

Parties a way out: the US, it is recalled,

the level of economic harm caused by the

complying. To back this claim with empirical

voted against adopting those adverse GATT

offending measure(s).

data, the authors use proxy indicators for

panel reports that restricted its ability to

WTO dispute settlement is thus broad,

“effectiveness,” which they concede is a

adopt dolphin conservation measures. Such

compulsory, adversarial, and can often

“difficult” measure to apply as a dependent

reports floated around the GATT universe

result in economic retaliation. DSU Conflict

variable. Using the proxies of compliance,

thereafter as specious sources of persuasive

Debate theorists focus on the first two

usage and budget to measure effectiveness,

authority: out of sight, and out of mind.

aspects, to argue that the DSU has ‘attracted

the authors submit by means of a strong

Under the WTO, however, adoption is the

within the GATT,

56

58

61

may recommend, where appropriate, that the respondent Member bring its measures into conformity within a reasonable period of time. Upon expiration of this period of time, the complaining Member can, in principle,

62

seek to retaliate through countermeasures

64

65

10

Currents 23.1 2016

4. Assessment of the Theories and an Alternative Thesis

————————————————— The Hermetic Shift theory considers that panels and the Appellate Body do not have the tools to properly adjudicate trade


default rule. Every trade and environmental

measures can be framed as a trade measure.

turn, filters its way into panel and Appellate

dispute adjudicated by a panel creates

Thus, under the expansive terms of the

Body reports.

new WTO ‘law’ that hurts or benefits

DSU, any environmental measure can be

—————————————————

either economic law or environmental law

challenged before a WTO panel. If this is

foundations, at the cost of the other, and

indeed true, this has more to do with the

thus exacerbates fragmentation. In a similar

fact that most WTO obligations are drafted

This GATT 1947 perspective, in turn, filters its way into panel and Appellate Body reports.

vein, the DSU Conflict theory posits that

as open-ended prohibitions against certain

—————————————————

neither panels nor the Appellate Body

conduct than with the DSU’s compulsory

Whereas, as previously mentioned, the

really have a choice in hearing a dispute:

jurisdiction clause per se. A further flaw with

GATT grew into 15 separate agreements,

whenever Members frame a complaint as

the DSU Conflict theory is that it assumes

the analytical approach to be followed by

a violation of WTO obligations, they must

away the critical role of states in initiating

panels did not likewise develop into 15

adjudicate upon the matters raised therein.

WTO disputes against trading partners. In

separate analytical approaches. Rather, the

The Constitutional Order theory is more

the absence of any prosecutorial authority

analytical approach that WTO and Appellate

prescriptive. It considers that fragmentation

vested in the two Secretariats, these states

Body Secretariat staff adopt when advising

notwithstanding, panels and the Appellate

are surely more to blame for the expansive

panels and the Appellate Body, respectively,

Body should engage with their broader roles in

reach of the DSU than the text of the DSU

stays largely faithful to some of the GATT

an expanding trade or global constitution to

itself. Last, the Constitutional Order theory

first order principles I touched upon

resolve “hard cases.” That the DSU “attracts

has explicitly been rejected by the Appellate

above: namely, those relating to market

jurisdiction” is, if anything, indicative of the

Body, the same body meant to be charged

access, non-discrimination and necessity, all

need for such action.

with creating an epistemological community

buttressed by a skeptical attitude towards

Empirical evidence supporting any of

of free or liberalized traders. 69 Leaving

Members’ purported justifications for the

these theories is weak. The Hermetic

this aside, further, panel and Appellate

promulgation of ‘non-tariff barriers’, of

Shift theory better summarizes the pre-

Body reports are filled with claims that

which environmental regulation formed an

WTO GATT 1947 position on trade

are not addressed for reasons of “judicial

historically contentious subcategory.

and environment disputes. GATT panels

economy”. One would expect tribunals in a

—————————————————

were wary that allowing environmental

constitutional setting not to engage in such

conservation measures to pass muster would

issue-avoidance techniques, but rather make

IV. Domestic Regulation in the WTO

somehow allow these measures to trump

sweeping doctrinal statements on trade and

—————————————————

trade obligations. Yet, as will become clear

environment principles.

68

Below, I will compare and contrast

in the below discussion of the SPS and TBT

I would propose a far more functional

GATT disciplines relevant to environmental

Agreements, these two texts were specifically

theory. Building upon the discussion in

regulation from SPS and TBT disciplines.

designed with environmental regulation in

the previous section on the role of legal

The following Section introduces GATT

mind. Rather than view such regulation as a

officers within the WTO and Appellate Body

key disciplines, alongside analogous SPS

threat to the trading system, WTO drafters

Secretariats, I posit that legal officers advise

and TBT disciplines. It will seek to underline

saw the merit in setting some binding rules to

panels and the Appellate Body through

the distinct analytical approach panels are

limit the discriminatory or disproportionate

the lens of a GATT 1947 lawyer: with a

meant to adopt when resolving an SPS or

elements of environmental regulation, which

keen eye for circumvention of GATT non-

TBT dispute.

panels are in turn meant to enforce. The

discrimination principles, and a sense of

—————————————————

DSU Conflict theory, in turn, is circular – as

skepticism, if not measured disdain, towards

1. The GATT71

applied to trade and environment disputes,

any measure that curtails market access

—————————————————

it assumes that any and all environmental

principles. This GATT 1947 perspective, in

Scope

70

11

Currents 23.1 2016


The GATT applies, broadly, to any

likeness, is determined with respect to the

allow Members to impose trade restrictions

“measure” that nullifies or impairs any of its

following four criteria: (a) product end-

“necessary” to protect stated objectives,

benefit, or frustrates attainment of any of its

uses; (b) consumer tastes and preferences;

notably the protection of public morals,

objectives. At a minimum, these measures

(c) physical characteristics; and (d) tariff

human, animal or plant health, and/or

include: “rules and formalities in connection

classifications.82

to secure compliance with domestic laws

with importation or exportation”;73 “internal

Non-discrimination: Most Favored Nation (MFN)

or regulations not otherwise inconsistent

taxes and other internal charges, and laws,

MFN prohibits WTO Members from

with the WTO Agreements. The GATT

regulations and requirements affecting the

treating imported products from some

also allows Members to impose restrictions

internal sale”;

and measures resulting

Members less favorably than “like”

“related to” the conservation of exhaustible

in the “prohibitions or restrictions”, of

imported products from other Members.

natural resources, where made effective

products.76

Any “advantage”83 granted by a Member

with reductions in domestic consumption.

Market Access

must be accorded, unconditionally, to other

In all instances, Members must satisfy the

Market access under the GATT refers to

Members, whether or not these Members

requirements of the so-called “chapeau”

the elimination of quantitative restrictions

joined the WTO later by accession, and

which requires that the measures at

on goods. In the course of the negotiations

were thus not party to the original tariff

issue are “not applied in a manner which

leading up to the Uruguay Round, WTO

or service commitment negotiations. 84

would constitute a means of arbitrary

Members had embarked upon a process

As with NT, MFN applies to measures

or unjustifiable discrimination between

of tariffication’ of ‘non-tariff ’ quantitative

affording an unfair advantage in law or in

countries where the same conditions prevail,

restrictions, particularly non-automatic

fact, unless such measures were specifically

or a disguised restriction on international

import and export licenses, and quotas.

exempted when commitments were initially

trade”.88 These standards impart meaning

The GATT generally prohibits quantitative

scheduled.85 Whenever such ‘advantage’

to one another, and seek to filter out

restrictions in form and effect.77 GATT

is established, a violation of MFN is

foreseeable discrimination in the application

tariff schedules follow the World Customs

established with no additional inquiry into

of a measure, as distinct from inadvertent or

O r g a n i z a t i o n ( WC O ) H a r m o n i z e d

the “conditions of competition” necessary.

unavoidable discrimination.89

Commodity Description and Coding System

It bears mentioning that in the MFN context,

In disputes where the disputing Members

(HS). Current practice allows Members

likeness is understood to focus more

are party to international law instruments

some flexibility in how they subcategorize

narrowly on physical characteristics and tariff

bearing upon any of the relevant exemptions,

goods and service commitments in domestic

classifications.

dispute panels and the Appellate Body have

law.

—————————————————

shown a greater willingness to consider

Non-discrimination: National Treatment (NT)

these instruments as satisfying the chapeau.90

imported products in law or in fact. In

As with NT, MFN applies to measures affording an unfair advantage in law or in fact, unless such measures were specifically exempted when commitments were initially scheduled.

determining whether a measure adversely

—————————————————

as relevant interpretive context, in other

affects ‘like’ imported products, a WTO

General Exemptions

disputes it has refused to consider the

72

74

75

78

79

NT prohibits WTO Members from treating imported products less favorably than “like” products.80 This prohibition applies to any measure adversely affecting

86

However, the precise status of non-WTO treaties in dispute settlement is unsettled. While the Appellate Body has shown itself willing to consider the terms of such treaties where the disputing parties are signatories

dispute panel will typically assess the extent

WTO Members may derogate from the

relevance of those treaties that fail to reflect

to which the measure at issue has modified

three principles outlined above, whether

the “common intention of all parties”.91

the “conditions of competition” in favor of

for “security interests”,87 or by operation

This sets a high bar, particularly when one

the ‘like’ domestic product. In this context,

of the “general exemptions” clauses that

considers that the WTO membership counts

81

12

Currents 23.1 2016


certain separate customs territories that are

their preambles.100 Both agreements further

achieve the respondent’s stated level of

otherwise unrecognized under international

the objectives of the GATT in the realm of

protection. This proportionality standard

law.

product standards. The SPS Agreement, by

thus embodies a “post-discrimination”

—————————————————

its terms, authorizes Members to adopt only

standard, which extends the reach of the

those measures necessary to protect human,

SPS and TBT Agreements beyond the reach

—————————————————

animal or plant health, provided they are

of GATT non-discrimination principles.104

Scope

backed by “sufficient scientific evidence”.101

Harmonization and the role of international

The SPS Agreement applies to all “laws,

The TBT Agreement is broader than the

standards

decrees, regulations, requirements and

GATT in allowing Members to pursue any

The SPS and TBT Agreements encourage

procedures” bearing on human, animal

“legitimate objectives”, which a panel must

Members to harmonize standards. 105 To

or plant health risk regulation; sanitary

assess against the “risks non-fulfillment

incentivize Members to harmonize on a

matters arising from the risks of entry,

would create.”

An important distinction

broad basis, the agreements afford safe

establishment and spread of pests, diseases

is that while the GATT general exemptions

harbor to standards that are “based on”

or disease-causing organisms or from

clause is, by its terms, an affirmative defense

relevant international standards. 106 The

additives, contaminants or toxins in food

for a respondent Member to invoke to

agreements differ on the parameters of this

and feedstuffs; and pest-related damages.

show that its contested measures were

safe harbor. The SPS Agreement deems all

Given that these operate as a ‘carve out’ from

“necessary” to achieve a stated objective,

domestic regulation “in conformity with”

the TBT Agreement, SPS measures should

the SPS and TBT Agreements frame the

existing international standards to pass the

be narrowly defined.93 Nevertheless, SPS

necessity requirement as an obligation of

necessity test, and presumes them to be

measures have sometimes been interpreted

the complainant.

consistent with the WTO Agreements as

widely to apply to the regulation of GMOs

—————————————————

a whole.107 The TBT Agreement requires

and crossbreeds, as ‘pests.’ 94 The TBT

Members to use existing international

applicable administrative provisions, with

This proportionality standard thus embodies a "post-discrimination" standard, which extends the reach of the SPS and TBT Agreements b e yo n d t h e re a c h o f G AT T non-discrimination principles.

which compliance is mandatory.” Whether

—————————————————

conforming measures to be consistent only

a measure is a technical regulation will turn

Importantly, both Agreements go beyond

with its terms, and not, for instance, with

on the extent to which it lays down “product

the GATT general exemptions clause in

characteristics.” A full or partial import ban

requiring Members to adopt standards

The SPS Agreement defines “international

can constitute a technical regulation.

that are “not more trade-restrictive than

standards” restrictively as those adopted

necessary”.

These common provisions

under the aegis of the Codex Alimentarius

Agreements operate in mutual exclusion:

contemplate that an SPS or TBT measure

Commission, the World Organization for

they cannot apply to the same element of a

can be found to violate WTO law even if

Animal Health (OIE) and the International

measure. In theory, however, they can apply

they do not discriminate, in law or in fact,

Plant Protection Convention (IPPC). 109

to different elements of the same measure.99

against imports. Specifically, they can be

Under the TBT Agreement, on the other

Necessity Test & Post-Discrimination

found to be WTO-inconsistent if a less

hand, whether a standard qualifies as an

Proportionality Standard

trade-restrictive measure is available. Such

“international standard” turns on an enquiry

The SPS and TBT Agreements both refer

measure must be both technically and

of the issuing “international standardization

to the GATT general exemptions clause in

economically feasible to implement, and

body”, which must be a body with recognized

2. SPS & TBT

92

Agreement defines a technical regulation as any “document” which lays down “product characteristics or their related processes and production methods, including the 95

96

97

The default rule is that SPS and TBT

98

103

102

13

standards “as a basis” for their technical regulations, unless such standards are “an inappropriate or ineffective means to achieve” their legitimate objectives.108 However, the TBT Agreement presumes all

the GATT.

Currents 23.1 2016


activities in standardization, whose

the risks redressed by its contested measure,

sequencing of an SPS/TBT analysis differs

membership is open to at least all WTO

bearing in mind that this would signal the

from that of a GATT analysis. Whereas a

Members.

Neither the SPS nor the TBT

absence of any SPS-compliant justification

GATT panel will first assess whether there

Agreement requires qualifying standards

for the resulting market access restriction,

is a market access or non-discrimination

to be adopted by consensus. This seems to

and thus admission of a GATT violation.

violation, followed by consideration of the

110

confer on relevant international bodies some

TBT product standards can also apply

necessity justifications put forward by the

quasi-legislative status under the WTO.

to analogously wide product groups, for

respondent Member, a proper SPS/TBT

Less favorable treatment (NT & MFN)

instance in relation to carcinogen warning

analysis should proceed in the reverse order.

The SPS and TBT Agreements both

labels. It can thus be argued that the “like”

This is because both agreements presume,

contain combined references to MFN and

product in both agreements should also be

to some degree, that domestic regulation

NT. The SPS Agreement requires Members

assessed primarily against the regulatory

will distort trade. Such sequencing, further,

to adopt measures that do not “arbitrarily or

purpose of the relevant measure.

This

stays faithful to the object and purpose of

unjustifiably discriminate between Members

becomes particularly compelling if we

the SPS and TBT Agreements, which, it is

where identical or similar conditions prevail,

recall that the same measure can have

recalled, are elaborations of the GATT’s

including between their own territory and

divisible SPS and TBT components:

‘general exemptions’ clause.

that of other Members.”112 Similarly, the

assess the SPS component of this measure

—————————————————

TBT Agreement requires “treatment no less

as applying to a product group differing in

favorable than that accorded to like products

scope from the TBT component of the same

of national origin and to like products

measure would be anomalous. Yet, panels

originating in any other country”.

appear to approach likeness under the TBT

[T]he texts of the latter agreements suggest that the sequencing of an SPS/TBT analysis differs from that of a GATT analysis.

It is recalled that SPS standards protect

Agreement primarily with reference to the

—————————————————

living organisms from pests or diseases in

four GATT competitive relations factors.118

Under this approach, a complainant

foodstuffs. SPS measures are thus tailored

As I will discuss below in the discussion of

Member should first substantiate its claim

to specific risks, expressed, in terms of a

Appellate Body jurisprudence, an inquiry

that a respondent Member’s SPS or TBT

Member’s stated level of protection. This

into regulatory purpose under the TBT has

measure is not necessary to achieve its

level of protection is typically gauged in terms

been limited to a non-discrimination analysis

stated purpose, through identification of a

of the residual risk that remains following

of “even-handedness” between imported

lesser trade-restrictive alternative measure,

implementation of an SPS measure.

and domestic products (a concept borrowed

with those alternative measures conforming

Depending on how low the residual risk

from the GATT chapeau).

to a relevant international standard being

is set, an SPS measure can affect a range

—————————————————

the most compelling. Importantly, it is

111

113

114

116

117

to

119

SPS Agreement is thus assessed in relation

V. The Appellate Body's Guide to WTO-Consistent Domestic Regulation

to the levels of residual risks set in analogous

—————————————————

so should the respondent Member provide

situations, which in essence focuses on the

of products even in the absence of any competitive situations. Likeness under the

incumbent on the complainant Member to make its case, by satisfying applicable rules on the burden of proof.120 Only when it does

The above Section has attempted to identify

justifications for the contested measure,

115

the commonalities and highlight important

including rebutting the appropriateness

In practice, likeness is rarely a live issue in

distinctions between the definitional elements

of any suggested alternative measures

SPS disputes – rather, likeness tends to be

of GATT obligations on the one hand, and

proffered by the complainant Member. An

assumed, given that no respondent Member

SPS and TBT obligations on the other. It has

SPS or TBT panel should first consider

will seek to argue that the risks posed by the

attempted to show that, broadly speaking, the

the necessity of the contested measure as

underlying imported goods are unrelated to

texts of the latter agreements suggest that the

a threshold issue, before assessing whether

regulatory purposes behind SPS measures.

14

Currents 23.1 2016


or to what extent the measure accords less

Building upon decades of GATT

a “necessity” threshold, where the stated

favorable treatment to imports. Importantly,

jurisprudence, environmental regulation

objective relates to the protection of public

beyond an assessment of necessity, the DSU

resulting in a complete or partial ban on

morals, human, animal or plant health, or

does not authorize panels to evaluate the

imports are almost mechanically found to

to secure compliance with domestic laws or

appropriateness of the contested measure

violate GATT provisions on MFN, NT

regulations not otherwise inconsistent with

in the abstract. They may only do so where

and/or market access, except in those

the WTO Agreements, or as a “related to”

they determine that the complainant Member

circumstances where the “likeness” imported

threshold for the conservation of exhaustible

has made a prima facie showing of WTO-

and domestic products is less clear-cut. In

natural resources. Such natural resources

inconsistency. Where a contested SPS or

those instances, a close analysis of physical

have been interpreted, broadly, to apply to

TBT measure is not necessary, moreover,

characteristics, and tariff classifications (in

“clean air”121 and sea turtles.122 “Necessity” is

no further enquiry into less favorable

addition to product end-uses and consumer

a tougher threshold to meet than “related to”.

treatment, discriminatory or otherwise,

tastes and preferences, in the NT context)

It requires a “material” contribution to the

is warranted. Its trade-restrictive impacts

may compel a panel to find no violation,

achievement of the stated objective.123 In an

become disproportionate, notwithstanding

on the basis that the products at issue

assessment of this nexus, “the contribution

this further enquiry.

are not alike. In a typical GATT dispute,

of the measure has to be weighed against

The above Section has also attempted to

however, framing a violation as a quantitative

its trade restrictiveness, taking into account

illustrate important differences between the

restriction, such as a full or partial import

the importance of the interests of the

scope of the SPS and TBT Agreements, on

ban, or regulatory discrimination through

values underlying the objective pursued”.124

the one hand, and the GATT on the other. The

establishing likeness under NT or MFN,

An assessment of measures “related to”

GATT embodies a series of market access

and subsequent treatment less favorable, is

the conservation of exhaustible natural

and non-discrimination principles. The SPS

straightforward for a complainant Member.

resources, in contrast, hinges on a “close and

and TBT Agreements, while also containing

Necessity

genuine relationship of ends and means.”125

provisions on non-discrimination, codify

—————————————————

Typically, respondent Members have not

a “post-discrimination” proportionality

faced difficulties meeting either relational

the Appellate Body’s SPS analysis has ignored

This clause [the general exemptions' clause] requires, first, that there be a nexus between the measure and the stated objective and, second, that the measure passes the 'chapeau' test of even-handed application.

the proportionality standard. The Appellate

—————————————————

It addresses a form of discrimination

Body’s TBT analysis, further, not only also

In such disputes, the final outcome will

that is unrelated to the violation of, for

ignores the proportionality standard: it even

normally hinge on whether such regulation

instance, MFN or NT.126 The chapeau has

ignores the proper sequencing of a TBT

can satisfy both limbs of the necessity

been met successfully in one dispute to

dispute and is, effectively, tainted by the

analysis contained in the ‘general exemptions’

date, involving US sea turtle conservation

wholesale importation of material elements

clause. This clause requires, first, that

measures restricting the sale of imported

of the Appellate Body’s conventional GATT

there be a nexus between the measure and

shrimp products. 127 In the original

analysis.

the stated objective and, second, that the

proceedings, the Appellate Body found

—————————————————

measure passes the ‘chapeau’ test of even-

elements of “unjustifiable discrimination”

handed application. The nexus under the

in the conservation measures for allowing

first limb is expressed either in terms of

certain Members longer grace periods to

standard meant to go beyond findings of de facto or de jure discrimination. Below, after summarizing the Appellate Body’s GATT analysis, I will show that, in spite of the important distinctions summarized above,

I. GATT

—————————————————

15

threshold. The Chapeau: even-handedness and its limits Respondent Members have fared worse under the chapeau test. The chapeau, it is recalled, filters out discrimination in the way that the contested measure is applied.

Currents 23.1 2016


adapt to the measures than others,128 and

GATT chapeau disciplines. They have turned

“arbitrary discrimination” in the manner

instead to the SPS and TBT Agreements.

Body begins with an assessment of the measure's necessit y.

in which certification decisions under the

In more recent years, GATT claims have

—————————————————

measures were undertaken with respect to

featured as subsidiary claims that are only

Where SPS disciplines apply and the

certain Members with zero to comparatively

assessed in those rare instances where

complainant Member has made a prima facie

low accidental takings of sea turtles.

contested measures fall outside the broad

showing of inconsistency with a provision

More broadly, the Appellate Body was

scope of the SPS and TBT Agreements.

of the SPS Agreement, the Appellate Body

critical of the failure by the US to engage

Assessment

begins with an assessment of the measure’s

129

132

in “serious, across-the-board negotiations

Under the GATT, panels must first

necessity. Necessity can be demonstrated by

with the objective of concluding bilateral or

deter mine whether there has been a

a respondent Member in two ways. First, it

multilateral agreements for the protection

substantive treaty violation. If a panel finds

can be demonstrated where an SPS measure

and conservation of sea turtles” before

a violation, the environmental regulation’s

conforms to a qualifying international

“enforcing the import prohibition against the

compliance with WTO standards will

standard. It is recalled, in this respect, that

130

shrimp exports of those other Members.”

depend on whether the respondent Member

the SPS recognizes a closed list of qualifying

In ensuing compliance proceedings, the

can demonstrate the regulation is applied

international bodies.136 Second, Members can

US streamlined its certification process and

even-handedly between different Members,

diverge from international standards and

engaged in bilateral and regional sea turtle

imports and like domestic products. Such

satisfy necessity by showing that the measure

conservation negotiations, while maintaining

findings, coupled with good faith negotiations

is “based on” a scientific justification or a

an import ban on South Asian shrimp.

that achieve an international consensus on

risk assessment.137

Malaysia, one of the principal complainants,

the underlying policy objective, can clear the

No clear guidelines on the proportionality standard

argued that the US was obliged to successfully

chapeau hurdle.133

conclude negotiations prior to maintaining

—————————————————

Most SPS disputes on environmental regulation to date have focused on

its measures. The Appellate Body disagreed,

2. SPS

finding that such a requirement had no

—————————————————

conducting the required risk assessment

The US

The narrow definition of an SPS measure

include: “relevant inspection, sampling and

effectively pushed the Appellate Body’s

suggests that the SPS Agreement was not

testing methods; prevalence of specific

reasoning to its natural limits, by complying

designed to apply to environmental regulation

diseases or pests; existence of pest- or

with the Appellate Body by removing all

per se, but rather to a subset of food and feed

disease-free areas; relevant ecological and

discriminatory and arbitrary aspects of its

regulation.

That said, the SPS Agreement

environmental conditions; and quarantine

impugned conservation measures. Once it

can apply, and indeed has applied, more

or other treatment.” 138 Appellate Body

did so, the Appellate Body had little choice

broadly to those environmental risks that

decisions on these cases have highlighted

but to accept that the US had complied with

are regulated by WTO Members as a food

two features. First, such Members may factor

its earlier recommendations, at the risk of

and feed regulation. This has been the case

socio-political considerations into their risk

otherwise adding an onerous and ultra vires

with the EU and its legal frameworks for

assessments. This is surprising, as such

requirement that states conclude negotiations

hormones and GMOs.

considerations should logically feature more

before they can meet the chapeau test.

—————————————————

naturally in risk management, an altogether

basis in the GATT or chapeau.

131

Since these proceedings, complainant M e m b e r s h a ve s t o p p e d l i t i g a t i n g environmental measures primarily under the GATT – possibly for fear that the Appellate Body had revealed a blueprint for evading

134

135

Where SPS disciplines apply and the complainant Member has made a prima facie showing of inconsistency with a provision of the SPS Agreement, the Appellate 16

Currents 23.1 2016

this second avenue. Factors relevant to

separate inquiry. Risk management, while not expressly addressed in the SPS Agreement, finds some expression in those provisions on a Member’s stated or desired regulatory level of protection.139 Second, while general


WTO transparency-related considerations

the respondent’s scientific justifications in

of proceedings. Ironically, while this favors

require that a WTO Member’s stated or

a given dispute have been found lacking,

the complainant Member in the short term,

desired regulatory level of protection be

either due to the lack of specificity of studies

it works to its disadvantage in the medium to

sufficiently discernible from surrounding

relied upon

or ambiguities as between the

long term, inasmuch as the lack of any readily

circumstances, the Appellate Body has

scientific conclusions and the SPS measure,

identifiable reasonable alternatives creates

accepted, somewhat counter-intuitively,

or the SPS measure and the respondents’

ambiguities in compliance proceedings by

that ambiguities in defining their level of

stated levels of protection.

the respondent Member.147

protection may actually insulate respondent

Body has done so, while accepting that

—————————————————

Members from a finding that a less trade-

Members’ may base their SPS measures on

restrictive alternative measure exists. These

non-mainstream science.

two factors may suggest that the Appellate

Assessment

143

144

The Appellate

Body has blunted the application of the

Under the SPS Agreement, the WTO-

proportionality standard to its SPS analysis.

consistency of environmental regulation,

Even-handedness: no limits

s u r p r i s i n g l y, d o e s n o t h i n g e o n a

It bears mentioning that the lack of environmental disputes litigated under the SPS Agreement since issuance of a panel report on GMOs bears possible testimony to the over-stringency of SPS disciplines.

I predicate that the Appellate Body’s

proportionality standard. This is odd,

—————————————————

findings on a Member’s level of protection

given the possibility that Members have of

It bears mentioning that the lack of

may have blunted the application of the

basing SPS measures on a range of non-

environmental disputes litigated under the

proportionality standard as the Appellate

mainstream or majority science.

Such a

SPS Agreement since issuance of a panel

Body has never actually moved far enough

standard would have required a complainant

report on GMOs bears possible testimony

along in its SPS analyses to apply it. Instead,

Member to establish that the respondent

to the over-stringency of SPS disciplines.

it has incorporated into its necessity

Member’s environmental regulation is more

While evidence on this point is anecdotal,

assessment a requirement that panels assess

trade restrictive than necessary to achieve

respondent Members seem to prefer framing

the even-handedness of an SPS measure

the respondent Member’s stated level of

environmental regulation as TBT measures

in a manner analogous to that required

protection. Instead, the Appellate Body has

rather than SPS measures.148 Complainant

under the first limb of the GATT necessity

directed that environmental regulation be

Members, for reasons I will elaborate upon

analysis. While meeting the relational

first assessed against a searching necessity

below, are only too happy to base their claims

threshold is easy for respondent Members

analysis, culminating in an examination

under the TBT Agreement.

in a GATT dispute, in the SPS context it

of the relational nexus between contested

—————————————————

calls upon respondent Members to adduce

measure and stated objective based on the

3. TBT

clear scientific evidence. Where the evidence

first limb of a GATT necessity analysis. This

—————————————————

adduced by the respondent Member is

examination assesses a measure’s relational

It bears noting at the outset that, while

ambiguous, panels will actively solicit the

links to underlying scientific justification,

the Appellate Body has drawn a relatively

views of experts on the proper application

and the respondent Member’s stated level

clear line between environmental regulations

of SPS measures.

These experts, in turn,

of protection. All other things being equal,

regulated by the SPS Agreement as distinct

have provided assessments that panels have,

such a heightened necessity analysis will

from the GATT, precisely where the line is

at times, cherry-picked from to question

tend to disfavor the respondent Member,

drawn between an environmental regulation

the merits of the underlying scientific basis

in prompting it to show that its measure

that is a TBT technical regulation as distinct

for a contested measure, and the reasoning

meets a scientific certainty test in a manner

from a GATT measure is currently an

of the risk assessor based on the available

that, effectively, relieves the complainant

open question.149 This is exacerbated by

science.142 The Appellate Body has regularly

Member of any obligation to show a

the lack of any clear guidance on whether

upheld panels’ factual determination that

reasonable alternative measure in the course

a measure deemed consistent with one

140

141

145

146

17

Currents 23.1 2016


preempts a violation of the other.150 It bears

distinctions.”153 This additional enquiry,

While the US lost the appeal, it can comply

emphasizing that such ambiguities would

which finds no textual basis in the TBT

with the Appellate Body’s ruling through

have been avoided altogether if the Appellate

Agreement, draws upon elements of the

cosmetic amendment to its certification

Body had followed its SPS sequencing, and

GATT NT and chapeau provisions, and

requirements, which the Appellate Body

reversed its TBT analysis to first analyze the

requires a respondent Member to show

will be precedent-bound to ratify as TBT

necessity of the TBT measure. This would

that its measure is properly “calibrated” to

consistent in any follow-up compliance

have allowed the Appellate Body, where a

the risks it seeks to mitigate.

In practice,

proceedings. Having zeroed in on the

contested measure is alleged to violate both

all TBT measures to date have failed this

Appellate Body’s GATT-style legal analysis,

the GATT and TBT Agreements, to begin a

amorphous ‘calibration’ test.

the US, as it did in the above-referenced

154

TBT analysis where its GATT analysis closes.

In a development that parallels the

shrimp dispute, again pushed the Appellate

Be that as it may, current ambiguities allow

above-cited GATT dispute concerning US

Body to the limits of its non-discrimination

a complainant Member to frame GATT

sea turtle conservation measures, however,

analysis, by chipping away at all but one

challenges to environmental regulations

the Appellate Body’s most recent TBT

of those aspects of its conser vation

under the (slightly) more stringent disciplines

decision, issued in November 2015, saw the

measures that the Appellate Body had

of the TBT Agreement. In this vein, the

US come within paragraphs of passing the

deemed improperly ‘calibrated.’ Had the

Appellate Body recently disposed of a

‘calibration’ test in recourse proceedings

Appellate Body steered closer to the text

spike of TBT appeals on a US ban on

relating to the latest installment of the

of the TBT Agreement, by focusing less on

clove cigarettes, a US dolphin conservation

dolphin conservation measures that had

discrimination (as there was none present)

measures restricting the sale of imported

so troubled GATT panel over two decades

and more on the feasibility of lesser trade-

tuna products, US country of origin labeling

earlier. In the original proceedings, the US

restrictive alternatives, it could have availed

requirements for imported meat products,

measure had been found to subject tuna

itself of some of the lesser trade-restrictive

and an EU restriction on seal fur and other

harvesters within the Eastern Tropical

alternative measures proposed by the

byproducts151 .

Pacific (ETP) to less onerous certification

complainant, Mexico, to strike down the US

The GATT approach yields its limits

requirements than tuna harvesters outside

measure on other grounds. As I will elaborate

The Appellate Body’s TBT analysis, as

the ETP, despite both groups of harvesters

upon below, however, the Appellate Body

mentioned above, does not begin with a

posing equal risks to dolphin populations.155

has instead elected to distance itself from

necessity analysis. Instead, the Appellate

The US had amended its measure to require

the proportionality standard in TBT case law.

Body reverted in its recent TBT decisions

additional certification outside the ETP in

The better analytical approach

to its GATT analysis. It thus starts its

situations involving the existence of “regular

Pursuant to an SPS-type analysis, which

enquiry with a determination of product

and significant association between dolphins

at one stage seemed to follow in earlier TBT

likeness, and an assessment of whether the

and tuna,” but not upon existence of “regular

disputes,157 the Appellate Body should have

contested measure treats imported products

and significant mortality or serious injury

started its enquiry with a necessity analysis,

less favorably than like imported or domestic

of dolphins.” The Appellate Body found

either by examining relevant international

products. Likeness, in this context, does not

that this regulatory distinction reflected a

standards cited by the complainant, or by

follow an SPS-type analysis of regulatory

lack of even-handedness, inasmuch as the

assessing the extent to which the measure at

purpose, but rather mirrors GATT-type

risks to dolphins from both situations was

issue is based on a legitimate objective.

competitive relations factors.

152

Where

less favorable treatment is established, the Appellate Body directs additional enquiry into whether this treatment “stems exclusively from legitimate regulatory

comparable.156

Most TBT disputes have focused on

—————————————————

Most TBT disputes have focused on the relevance of an existing international standard. ————————————————— 18

Currents 23.1 2016

the relevance of an existing international standard. A complainant Member here must do more than show that a relevant standard exists. It must also show that the standard


is “appropriate” and/or “effective” to

absence of any pervasive requirement to

fashion a suitable compromise measure on

achieve the respondent Member’s legitimate

adduce supporting scientific justification

the record before it.164

objective.158 A respondent Member could

seems to make litigating environmental

Under the proposed analytical approach,

challenge the standard on the basis of

regulation under the TBT Agreement the

the US’ stated level of protection would have

climactic particularities or technology gaps,

more attractive of the three agreements for

been subject to a more searching assessment,

or because it aspires to more stringent

complainant and respondent Members alike.

where a panel would have weighed the

standards than the international standard –

—————————————————

contested certification requirement against

reflecting its stated or desired regulatory level

a range of other possible alternative

as required in an SPS analysis, that the

As with its SPS case law, the Appellate Body's introduction, in its TBT jurisprudence of an even-handedness analysis h a s blunted ap p lic at ion of the proportionality standard.

measure is based on a legitimate objective.

—————————————————

justification for the necessity of the trade-

The starting point in a panel’s analysis here

As with its SPS case law, the Appellate

restrictive impacts, the WTO inconsistency

would not be the TBT provision addressing

Body’s introduction, in its TBT jurisprudence

of the measure would hinge on whether

less favorable treatment, teeing up the

of an even-handedness analysis has blunted

an equally efficient yet less trade restrictive

free-standing calibration test, but rather

application of the proportionality standard.161

alternative existed. If a complainant Member

the proportionality provision requiring

Accordingly, the Appellate Body has been slow

could establish the viability of such an

Members to adopt TBT measures that are

to accept less restrictive alternative measures

alternative, the contested measure would be

No additional

proposed by complainant Members, where

deemed WTO-inconsistent. Otherwise, the

enquiry into less favorable treatment should

these find no basis in existing international

respondent Member should be presumed to

be required where the measure at issue is

standards. 162 It has instead shown total

be acting in a WTO-consistent manner. This

deemed disproportionate.

deference to respondent Members’ stated

analysis would be more accommodating to

Assessment

or desired regulatory levels of protection.

the concerns addressed in the United States’

Under the TBT Agreement, the WTO-

Where proposed alternatives fail to achieve

dolphin conservation measure, while also

consistency of environmental regulation

these stated levels, however artfully or

staying more faithful to the text of the TBT

turns on the respondent Member satisfying

fancifully expressed, the contested measure

Agreement.165

a GATT chapeau-style even-handedness

cannot be considered more trade-restrictive

—————————————————

assessment. This is because the Appellate

than necessary. Thus, in one of the rare

VI. Conclusion

Body has largely framed its TBT analysis in

cases where the Appellate Body addressed an

—————————————————

the same terms as its GATT analysis. The

alternative measure – albeit one based on an

The Appellate Body, through adherence to

result is the transformation of the TBT

international standard – it reversed a panel’s

uniform GATT cannons of interpretation,

into a ‘GATT 2.0’, where the burden of

findings to hold that Mexico’s proposal that

has belied the lack of internal coherence in

proof favors the complainant Member, and

a tuna label certifying that no dolphins were

the various WTO Agreements. In so doing,

contested measures are unlikely to survive

killed by harvesting methods fell short of

it has succeeded in maintaining rigid limits

the freestanding ‘calibration’ test. Though

the broader US concern that dolphins not

on Members’ abilities to lawfully circumvent

this calibration test is no less exacting

be harmed by these methods. Though these

any and all WTO treaty obligations. Laudable

than the even-handedness test applied

objectives were unquestionably different,

as this may be, given the WTO’s recent

in the SPS context, a potentially infinite

there was surely a sufficient commonality in

struggles to push anything meaningful

range of international standards and the

these objectives for the Appellate Body to

through its negotiating pillar as of late, the

of protection in the TBT context.

159

Were a Member to diverge from relevant international standards, it would need to satisfy a necessity standard, by showing,

the least restrictive to trade.

160

163

19

measures adduced by Mexico. Were the US’ certification requirement to yield traderestrictive impacts, this would not necessarily be the end of the matter. Assuming the respondent Member puts forward a plausible

Currents 23.1 2016


problem is that the Appellate Body has not

through with a proportionality assessment,

challenges the relevance of an international

acted pursuant to any clear mandate from

it does not do so in its TBT rulings. This is

standard cited by the respondent Member

the WTO membership. Some might argue

surprising, given that the TBT Agreement is

to benefit from the TBT Agreement’s

that this unbridled judicial activism may

structured much more closely with the SPS

‘safe harbor’ in a GATT complaint, where

have recently caught up with the Appellate

Agreement, and should be identified more

a measure’s purported compliance with

Body, following the US’ recent decision to

closely with the latter.

international obligations may not insulate

block re-appointments of sitting Appellate

The Appellate Body has thus narrowed

it from challenge. Had the Appellate Body

Body members that it deemed had failed

the scope of the SPS and TBT Agreements,

stayed more faithful to the text of the TBT

to properly execute their functions in the

effectively aligning them with GATT-type

Agreement, it would have avoided teeing up

course of their first term, notably due to their

market access, non-discrimination, and

such a potentially significant legal conflicts.

questionable stance on aspects of US trade

necessity principles. Doing so, however, has

—————————————————

remedy legislation.166 The timing is thus ripe

yielded some unintended consequences:

to rethink the Appellate Body’s approach to

chief among them being that it becomes

WTO dispute settlement.

difficult to demarcate precisely where a

When reviewing the above jurisprudence

GATT analysis ends and a TBT analysis

on environmental regulation, we see that

begins. It would seem that a technical

the Appellate Body has imported key

regulation under the GATT is anything short

The Appellate Body has thus narrowed the scope of the SPS and TBT Agreements, effectively aligning the with GAT T-type market access, non-discrimination, and necessity principles.

elements of its GATT necessity analysis

of a product ban that fails to lay down any

—————————————————

into its SPS and TBT jurisprudence. In its

discernible “product characteristics.”167 In

While it is true that the SPS and TBT

SPS case law, the most critical analytical

this sense, the TBT Agreement does not

Agreements seek to extend the application

element, the assessment of the relational

seem to apply as holistically to quantitative

of GATT ‘general exemptions’ principles to

nexus between the contested measure

restrictions. Further, the TBT Agreement

product standards, both are meant to go well

and the stated objective, is lifted from the

allows Members to pursue an open-ended

beyond conventional GATT market access

first limb of the Appellate Body’s GATT

list of “legitimate objectives”. Members

and non-discrimination disciplines. A key

necessity analysis. Case law has yet to reveal

seeking to legislate for objectives beyond

feature of this extension lies in the obligation

whether the second limb will feature in an

those enumerated in the GATT ‘general

common to both the agreements that

SPS analysis. Similarly, in its TBT case law,

exemptions’ clause will thus continue to avail

measures not be more trade-restrictive than

which otherwise replicates the Appellate

themselves of the ability to do so under the

necessary. This common obligation invites

Body’s GATT analysis in full, the most

TBT Agreement.

WTO panels to assess the proportionality

critical analytical element, the assessment

These factors, however, represent the

of a measure, and requires respondent

of a contested measure’s ‘calibration’, draws

‘outer limits’ of the GATT and the TBT

Members to adopt feasible and less restrictive

from the second limb of the Appellate

Agreement. How the Appellate Body will

alternative measures, where such measures

Body’s GATT necessity analysis. No analysis

handle a conflict between GATT and TBT

have been identified clearly by complainants.

of the first limb precedes this calibration

disciplines where they overlap becomes

The Appellate Body has distanced itself

test. It is curious that the Appellate Body

unclear. One can fathom of a situation

from this proportionality standard, perhaps

has ostensibly severed the GATT necessity

where a complainant Member challenges

because it represents a concept relatively alien

analysis between the two agreements in such

a measure that the respondent Member

to a GATT analysis. Unfortunately, the use

a manner. Moreover, while the Appellate

seeks to justify with reference to a TBT-

of and abuse of GATT principles in SPS and

Body seems to follow proper sequencing in

consistent objective that is not listed under

TBT case law has yielded a more intrusive

its SPS rulings, by starting with a necessity

the GATT general exemptions clause;

analysis than that contemplated by the SPS

analysis before, presumably, following

or, where such complainant Member

and TBT Agreement drafters. This comes at

Currents 23.1 2016

20


a significant cost: environmental regulations

principles. They are conditioned to treat

reason that the US is vested with a de facto

with trade-distorting effects tend to be struck

stated justifications for these breaches with

block on Appellate Body member staffing:

down for the very reason that they distort

a healthy dose of skepticism. These staff,

institutional voting requirements favor

trade. This is tautological. Inasmuch as the

in turn, can regularly influence the legal

decisions taken by consensus. Reaching

Appellate Body has elected to avoid applying

analysis contained in panel or Appellate Body

consensus on anything these days is a tall

proportionality standards by affording a

reports. That panels or the Appellate Body

order now that the WTO counts upwards

good measure of deference to a respondent

in these reports seem to struggle with the

of 164 Members.

Member’s stated or desired regulatory level

precise contours of environmental regulation

In-dispute safe harbors. One final reform

of protection, such deference matters not

in its GATT, SPS and TBT analyses is

initiative that may prove easier to implement

where panels consistently find that contested

the product of decades of schooling in

lies in the ‘safe harbor’ provisions of the

measures fail to satisfy a necessity analysis.

the arts of distributional efficiencies that

SPS and TBT Agreements for standards

These Members would surely prefer having

trade lawyers are conditioned to champion

conforming to qualifying international

their environmental objectives preserved,

at the expense of the scientific nuances

standards. Members seeking to reach

even if a more searching enquiry into the

and fine political balancing embodied in

meaningful agreements on environmental

existence of a viable alternative requires

environmental regulation. There is no

regulation need not be held hostage by

them to amend certain aspects of their

easy fix to this problem. Moving forward,

either a rampant Appellate Body or the

regulations.

a more diversified pool of legal officers,

looming collapse of the WTO negotiations

Taking a step back, it cannot be said that the

featuring individuals with stronger science

pillar. A critical mass can come together

Appellate Body’s struggle to properly analyze

and environmental studies training, may offer

to promulgate qualifying international

environmental regulation is supported by any

fresher perspectives yielding more cohesive

standards in international organizations

of the theories outlined in Section II. The

WTO trade and environment dispute reports.

outside the WTO legal framework, which

Appellate Body has not reverted to first order

—————————————————

may subsequently be relied upon in disputes

GATT principles as a means to either blunt

as presumptively valid. The WTO domestic

the use of trade-distorting environmental

Moving forward, a more diversified pool of legal officers, featuring individuals with stronger science and environmental studies training, may offer fresher perspectives yielding more cohesive WTO trade and environment dispute reports.

conservation measures in prior rulings

—————————————————

without destabilizing the global trade regime.

Authoritative Interpretations. Beyond human

Rather, I have sought to show that first-

resource reforms, I have already highlighted

order GATT principles, which are ingrained

that the US has sought to rectify the balance

into the WTO’s institutional memory, filter

of power within the WTO by refusing

through to WTO and Appellate Body dispute

to sign off on Appellate Body member

settlement reports.

reappointments. Curbing the Appellate

Possible reform initiatives

Body’s legislative prerogative by way of

or embrace the DSU’s expansive jurisdiction, or because there is a fundamental conflict between WTO obligations and international environmental law obligations. Indeed, the Appellate Body has previously sanctioned

Human Resources. WTO and Appellate

authoritative interpretations represents

Body legal officers are trained to detect

a more democratic refor m initiative.

circumvention of tariff bindings, in breach

Problematically, such interpretations are

of non-discrimination and market access

nearly impossible to pass for the same 21

regulation disputes of the future may well focus on the contours of qualifying international standard bodies.

Currents 23.1 2016


End Notes 1. World Trade Organization, United States—Restrictions on Imports of Tuna, (not adopted, circulated on September 3, 1991); see United States—Restrictions on Imports of Tuna, General Agreement on Tariffs and Trade (GATT), Basic Instruments and Selected Documents, 39th Supp. 155 (1993), reprinted in 30 I.L.M. 1594 (1991) [hereinafter Tuna-Dolphin I]; see United States—Restrictions on Imports of Tuna, GATT, B.I.S.D., 33 I.L.M. 839 (1994) [hereinafter Tuna-Dolphin II] (neither report was adopted by the World Trade Organization). 2. The Tuna/Dolphin I Panel made two findings that significantly handicapped the range of environmental measures that Contracting Parties could lawfully take under the GATT 1947. First, it found, at paras. 5.105.14, that United States measures disciplining the production and processing methods (PPMs) of tuna harvested by Mexican fishermen were impermissible non-tariff barriers prohibited by GATT Art. XI. It concluded that any measures regulating anything other than a product’s physical or inherent characteristics fell outside the scope of Art. III, the GATT provision on lawful internal regulations. Second, it considered, at para. 5.26, that Contracting Parties could not apply such measures extra-territorially. Accordingly, no Party could enact measures to protect the global commons, where such measures distorted trade. The Tuna/Dolphin II Panel, featuring a complaint by the EU against different aspects of the same US measures, doubled down on these findings (see para. 5.10 for the conclusion on PPMs, and paras. 5.26-5.27 for the conclusion on extraterritoriality). These two GATT decisions, though unadopted, signaled to Parties that, in the eyes of the GATT Secretariat, they could only regulate the physically hazardous properties of a product within its borders. Under the GATT 1947, Parties could take no action against any product that harmed the environment (whether relating to their PPMs or physical properties) where such product was not being imported into their markets. Where the product was being imported into their markets, fur ther, Parties could only regulate it if

3.

4.

5.

6.

7.

8.

9.

its physical or inherent properties posed a proximate danger to human health or the environment. Where the danger to health or the environment related to their PPMs, no GATT-consistent action could be taken. R.W. Staiger & Alan O. Sykes, Inter national Trade, National Treatment, and Domestic Regulation, 40 J. LEGAL STUD. 149, 194 (2001) (discussing the rentshifting interaction between tariffs, consumption taxes, and product standards, as well as a short history of the product standards agreement). Gabrielle Marceau & Joel P. Trachtman, A Map of the World Trade Organization Law of Domestic Regulations of Goods: The Technical Barriers to Trade Agreement, the Sanitary and Phytosanitary Measures Agreement, and the General Agreement on Tariffs and Trade, 48 J. WORLD TRADE 2, 351, 353 (2014). Wor ld Tr a de O r g a n iz a tio n , Ministerial Declaration on the Uruguay Round, Declaration of 20 September 1986, GATT, B.I.S.D., 33 Supp. 19 (1986). Peter Morrison & Laura Nielsen, Trade, environment and animal welfare: conditioning trade in goods and services on conduct in another country? in RESEARCH HANDBOOK ON ENVIRONMENT, HEALTH AND THE WTO 207, 211-212 (Geert Van Calster & Denise Prévost ed., Edward Elg ar Publishing 2013) (this paper does address tariff surcharges motivated by environmental concerns, such as a “carbon tax” as none is featured to date in WTO dispute settlement); see also Reinhard Quick, Border Tax Adjustment to Combat Carbon Leakage: a Myth, 4 GLOBAL TRADE & CUSTOMS J. 11/12, 353–357 (2009) (for a discussion on of relevant issues). Peter Lindsay, The Ambiguity of GATT Article XXI: Subtle Success or Rampant Failure? 52 DUKE L.J. 1277, 1286 (2003) (for a discussion of GATT 1947 practice). Overview of the WTO Secretariat, World Trade Organization, https:// www.wto.org/english/thewto_e/ secre_e/intro_e.htm (last visited Jan. 18, 2016). W. J. Davey, The WTO and RulesBased Dispute Settlement: Historical Evolution, Operational Success, and Future Challenges, 17 J. OF INT’L ECON. L. 679, 693 (2014). For a more detailed breakdown of the

Secretariats’ work within these three pillars, see: https://www.wto. org/english/thewto_e/secre_e/ div_e.htm. 10. Appellate Body Secretariat, World Trade Organization, https://www.wto. org/english/tratop_e/dispu_e/ ab_secretariat_bio_e.htm (last visited Jan. 18, 2016). 11. The second pillar operates constantly in the background—through regular committee meetings convened by the Secretariat. Sometimes concerns expressed in these meetings can manifest themselves in dispute settlement. The second pillar thereby serves a transparency function that supports the first and last pillars. I do not discuss the second pillar any further in this paper. 12. James Cameron & Karen Campbell, A Reluctant Policy Maker, in THE GREENING OF TRADE LAW: INTERNATIONAL TRADE ORGANIZATIONS (Richard H. Steinberg ed., 2002). 13. The Doha Round Finally Dies a Merciful Death, FINANCIAL TIMES, (Dec. 21, 2015), https://www.ft.com/ content/9cb1ab9e-a7e2-11e5955c-1e1d6de94879. 14. J.M. Salazar-Xirinachs, Concern About Trade Impacts Block Adoption of the Biosafety Protocol, BRIDGES 3(2), 11 (1999), http://www.ictsd.org/ downloads/bridges/bridges3-2. pdf. 15. Understanding on Rules and P r o c e d u r e s G ove r n i n g t h e Settlement of Disputes art. 3.2, Apr. 5 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401, https://www.wto. org/english/tratop_e/dispu_e/ dsu_e.htm#3 [hereinafter DSU]. 16. Id. at. 17.1. 17. Id.at 16.7. 18. Appellate Body Report, European Communities- Measures Concerning Meat and Meat Products (Hormones), ¶ 98, 104, WTO Doc. WT DS 26/ AB/R (adopted Feb. 13, 1998), https://docs.wto.org/dol2fe/ Pages/FE_Search/FE_S_S006. aspx?Query=(@Symbol=%20wt/ ds26/ab/r*%20not%20rw*)&La nguage=ENGLISH&Context=F omerScriptedSearch&languageUI Changed=true# [hereinafter EC/ Hormones]. 19. DSU, supra note 15, at 11. 20. Id. at 13. 21. Id. at 19. 22. Id. at 3. 23. Appellate Body Report, Japan – Taxes 22

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on Alcoholic Beverages, ¶ 108, WTO Doc. WT/DS8/AB/R, WT/DS10/ AB/R, WT/DS11/AB/R (adopted Nov. 1, 1996), https://www.wto.org/ english/tratop_e/dispu_e/cases_e/ ds8_e.htm. 24. Appellate Body Report, United States – Final Anti-Dumping Measures on Stainless Steel from Mexico, ¶ 160, WTO Doc. WT/DS344/AB/R (adopted May 20, 2008) https://www.wto.org/english/ tratop_e/dispu_e/ab_reports_e.htm. 25. For an account of subtler changes to the Appellate Body’s methodology, Frieder Roessler, Changes in the Jurisprudence of the WTO Appellate Body During the Past Twenty Years, 14 J. OF INT’L TRADE LAW AND POL’Y 129 (2015). 26. Two papers touch upon this topic, namely J.H.H. Weiler, The Rule of Lawyers and the Ethos of Diplomats: Reflections on the International and External Legitimacy of WTO Dispute Settlement, 35 J. WORLD TRADE 191 (2001) and Merit Janow, The Role of the Secretariat in Dispute Settlement, paper presented at the World Trade Form in Bern (August 2002), 10, http:// www.columbia.edu/~mj60/PDF/ berne%20paper.pdf. 27. Merit Janow, supra note 26. 28. J.H.H. Weiler, supra note 26, at 202; Merit Janow, supra note 26, at 6-7. 29. Janow, supra note 26, at 7. 30. Inasmuch as these senior legal officers train the junior ones, these views effectively carry over into other generations of WTO and Appellate Body legal officers. 31. Richard H. Steinberg, Understanding Trade and the Environment: Conceptual Frameworks, in THE GREENING OF TRADE LAW: INTERNATIONAL TRADE ORGANIZATIONS AND ENVIRONMENTAL ISSUES1-22 (Bowman & Littlefield Publishers, Lanham 2002). 32. Ivan Ber nier, Aspects du dr oit international économique, SOCIÉTÉ FRANÇAISE POUR LE DROIT INTERNATIONAL, 221 (Editions A. Pedone 1972). 33. Adam Smith, An Inquiry into the Nature and Causes of Wealth of Nations bk. IV, at 347-363 (Dent & Sons, London, 1904). 34. David Ricardo, On the Principles of Political Economy and Taxation (3rd ed. 1821), http://www.econlib.org/ library/Ricardo/ricPCover.html. 35. P. Weil, Towards Relative Normativity in International Law? 77 AJIL 413 (1983), http://heinonline.org.proxy.stcl.edu/ HOL/Page?handle=hein.journals/ eurint4&start_page=305&collection =journals&id=327.


36.

37.

38.

39.

40.

41.

D.M. McRae, The WT O in I n t e r n a t i o n a l L a w : Tr a d i t i o n Continued or New Frontier? 3 J. INT’L ECON. L. 27, 29 (2000), http://jiel.oxfordjournals.org/ content/3/1/27.full.pdf+html. J. Pauwelyn, Bridging Fragmentation and Unity: International Law as a Universe of Inter-Connected Islands, 25 MICH. J. INT’L L. 903, 903 (2004), http://heinonline. org/HOL/Page?handle=hein. journals/mjil25&div=33&g_ sent=1&collection=journals. The term “trade and” became popularized in the framework of the WTO’s 1996 Ministerial Conference in Singapore. While the term initially referred to the areas of investment, competition policy, transparency, and trade facilitation, scholars also include matters of environment, labor and human rights in this category. J.L. Dunoff, The Death of the Trade Regime, 10 EUR. J. INT'L L. 733, 733-739 (1999), http://www.ejil. org/pdfs/10/4/608.pdf. J.G. Ruggie, International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order, 36 INTERNATIONAL ORGANIZATION 379, 382 (1982). Ruggie considers that the ELM better exposes the political science “generative grammar” produced by institutions’ functioning. The need for the morel arose partly due to a shift in international monetary theory provoking a change in international economic dynamics – the pre-war tendency of “mak[ing] international monetary policy conform to domestic social and economic policy and not the other way around,” had shifted post-war, necessitating the embedded liberal “compromise” of “multilateralism versus discrimination,” and complemented by a more monetar y-inspired need for “intergovernmental collaboration”, 392-395. In the “trade and” context, the ELM reflects itself through the chapeau conditions, “necessity” and “related to” standards contained throughout the substantive sub-provisions of GATT Art. XX and GATS Art. XIV. J. L. Dunoff, supra note 39, at 747748. Dunoff clarifies that the model identifies the “problem” as “how to facilitate coordination and cooperation so as to avoid collectively sub-optimal outcomes resulting from individually ‘rational decisions,” for which the “solution” is “to combine a binding international agreement

and organization to oversee and enforce the agreement with an ongoing negotiation process,” after which “nations can more easily reach collectively optimal outcomes.” Where the problem is distributional however, “there can be little doubt that an agreement partially harmonizing worldwide IP protections to developed country levels will not maximize global economic welfare.” The “trade and” issues necessitate a closer look at the models’ “Payoff Matrix,” which depicts the costs and benefits States receive from cooperation or defection. The payoffs are always exogenous to the mode, or assumed. The problem under the model thus becomes that it “sheds no light on how the net benefits from cooperation are distributed among various nations. Moreover – and even more unrealistically – game theoretic models frequently assume that the payoffs nations enjoy from collaboration are symmetric.” 42. S.E. Gaines, The Problem of Enforcing Environmental Norms in the WTO and W hat to do About it, 26 HASTINGS INT’L & COMP. L.REV. 321, 362-364 (2003), http://law.au.dk/fileadmin/ Ju r a / d o k u m e n t e r / ko n t a k t / medarbejderhjemmesider/CV_ mappe/sgaines_cv.pdf. 43. L. Lixinski, Nar ratives of the International Legal Order and Why They Matter, 6 ERASMUS L.REV. 2, 2-5 (2013), http://www.law. u n s w. e d u . a u / p r o f i l e / l u c a s lixinski/publications. 44. The term as applied to the GATT first appeared, descriptively, in J.H. Jackson, World Trade and the Law of GATT (Bobbs-Merrill, Indianapolis 1969), 31. 45. J. Trachtman, The Constitutions of the WTO, European Journal of International Law 17(3) (2006), 624; see also D.Z. Cass, The ‘Constitutionalization’ of International Trade Law: Judicial Norm-Generation as the Engine of Constitutional Development in International Trade, EUR. J. INT’L. L. 12(1) (2001), 39. 46. I would be remiss (or indeed, wrong) if I did not return to John Jackson’s writing on the constitutionalization of trade law. Jackson, as alluded to above, in note 46, was the first commentator to allude to the GATT’s constitution. He did so in a descriptive capacity, referring to the history and structure of the GATT. In later writing, he became far more prescriptive, calling for an overhaul of the Westphalian concept of sovereignty, in favor of economic zones of interest;

47. 48.

49. 50. 51.

52.

53.

54.

55.

J.H. Jackson, Sovereignty - Modern: A New Approach to an Outdated Concept, AMER. J. INT’L L. 97 (2003), 782-802. As neither view offers a descriptive or prescriptive account of trade and environment disputes, I do not include Jackson’s work in the body of this essay. J.H.H. Weiler, the Transformation of Europe, YALE L. J. 100 (1991), 2413. J.H.H. Weiler, In the Face of Crisis – Input Legitimacy, Output Legitimacy and the Political Messianism of European Integration, PEKING U. TRANSNAT’L L. REV. 1 (2013), 303. J.H.H.Weiler, supra note 26, at 195. Id. at 207. For which the European integration narrative serves as model. See Ernst-Ulrich Petersmann, The Transformation of the World Trading System through the 1994 Agreement Establishing the World Trade Organization, EUR. J. INT’L L. 6(2) (1995), 1. E.U. Petersmann, Time for a United Nations ‘Global Compact’ for Integrating Human Rights into the Law of Worldwide Organizations: Lessons from European Integration, EUR. J. INT’L L. 13(3) (2002), 621. His strongest criticism in this area have come from Philip Alston, in the Petersmann/Alston debate on cross-fertilization. P. Alston, Resisting the Merger and Acquisition of Human Rights by Trade Law: A Reply to Petersmann, EUR. J. OF INT’L. L. 13(4) (2002), 815. Ernst-Ulrich Petersmann, Human Rights and the Law of the World Trade Or ganization, 37(2) J. WORLD TRADE, 241 (2003), http://heinonline.org.proxy. s t c l . e d u / H O L / Pa g e ? m e n _ tab=srchresults&handle=hein. kluwer/jwt0037&id=247&size =2&collection=kluwer&ter m s=the|Human%20Rights%20 and%20the%20Law%20of%20 the%20World%20Trade%20 Organization|human|rights%20 a n d | T r a d e % 2 0 Law|of|241|of%20the|the%20 Wo r l d % 2 0 Tr a d e % 2 0 rganization|PETERSMANN.%20 The|Journal%20of%20World%20 Trade%2037.2|Law|and%20 the|and%20Trade|and|The|2003&termtype=phrase&set_as_ cursor=0. E.U. Petersmann, How to Reconcile Health Law and Economic Law with Human Rights? Administration of Justice in Tobacco Control Disputes, A S I A N J. W T O & I N T ’ L HEALTH L & POL’Y, Vol. 10.27, 27-81, (2015), http://papers.ssrn. com/sol3/papers.cfm?abstract_

id=2600031. 56. Petersmann, supra note 54, at 208-09. 57. J.H.H. Weiler, supra note 24. 58. Which the prevailing party is not likely to do. 59. Dispute Settlement Rules: Understanding on Rules and P r o c e d u r e s G ove r n i n g t h e Settlement of Disputes, art. 23.1, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization. 60. Id. at arts. 12.8 & 17.5. 61. A plenary meeting of the WTO’s membership, essentially wearing a different hat. 62. DSU, supra note 15, at 22.6 & 21.5. 63. Id. at art. 22.2. 64. Such retaliation may target goods other than those subject to the dispute, and may implicate the suspension of obligations in other WTO Agreements. 65. DSU, supra note 15, at art. 23.1. 66. Gabrielle Marceau, WTO Dispute Settlement and Human Rights, 13 EJIL 753, 761 (2002); Joost Pauwelyn, The Role of Public International Law in the WTO: How Far Can We Go? 95 AJIL 535, 535 (2001) (explaining that WTO panels are arguably prevented by other provisions of the DSU, notably arts. 3(2) and 7, from making any findings on non-WTO law. Such non-WTO law, it is argued can, at best, be raised as a defense to the nonadherence to WTO obligations); Compare David Palmeter & Petros Mavroidis, The WTO Legal System: Sources of Law, 92 AJIL 398, 399 (1998), and Thomas Schoenbaum, WTO Dispute Settlement: Praise and Suggestions for Reform, 47 INT’L & COMP. L. Q. 647, 653 (2000) (arguing a different view, that the DSU contains “implied powers” for panels to adjudicate beyond the Covered Agreements; Joost Pauwelyn, How to Win a World Trade Organization Dispute Based on Non-World Trade Organization Law? 37 J. OF WORLD TRADE 1005-19 (2003) (Pauwelyn takes a middle ground by identifying the possibility for a panel to decline jurisdiction in favor of non-WTO law as an alternative to making findings on non-WTO law). 67. Eric A. Posner & John C. Yoo, A Theory of International Adjudication, University of California, 146 Berkeley Law School (Boalt Hall) Public Law and Legal Theory Research Paper Series, 1, 64 (2004). 68. Paper Presented at the Conference on Regional Trade Agreements by Kyung Kwak & Gabrielle Marceau, Overlaps and Conflicts of Jurisdiction between the WTO and RTAs, 1, 3 (Apr. 26, 2002), https://www.wto.

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69.

70.

71.

72.

73. 74. 75. 76.

77. 78.

79.

org/english/tratop_e/region_e/ sem_april02_e/marceau.pdf. Appellate Body Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, ¶ 105, WTO Doc. WT/ DS90/AB/R (adopted Sept. 22, 1999). Robert E. Hudec, GATT/WTO Constraints on National Regulation: Requiem for an "Aim and Effects" Test, 32 INT’L LAW. 619, 634 (1998), https://www.jstor.org/ stable/40707429?seq=16#page_ scan_tab_contents. I will also refer, in this section, to GATTS rules, inasmuch as they may relate to environmental protection measures. Morrison & Nielsen, supra note 6, at 222-30 (explaining the prohibition on nationals seeking to hunt wild animals abroad). General Agreement on Tariffs and Trade art. XXIII, sec. 1, Oct. 30, 1947, 61 Stat. A-11, 5 U.N.T.S. 194, https://www. wto.org/english/docs_e/legal_e/ gatt47_01_e.htm https://www. wto.org/english/res_e/booksp_e/ analytic_index_e/gatt1994_08_e. htm [hereinafter GATT]. Id. at art. I: 1, https://www.wto. org/english/docs_e/legal_e/ gatt47_01_e.htm. Id. at art. III, https://www.wto. org/english/docs_e/legal_e/ gatt47_01_e.htm. Id. at art. XI, sec.1. General Agreement on Trade in Services, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Org anization, Annex 1B, art.1, sec. 1-3 (1999), 1869 U.N.T.S. 183, 33 I.L.M. 1167 (1994) [hereinafter GATS]. GATT, supra note 72, at art. XI; GATS, supra note 76, at art. XVI, sec. 2 (a-f). International Convention on the Har monized Commodity Description and Coding System, June 14, 1983, Hein’s No. KAV 2260, http://www.wcoomd. org/en/topics/nomenclature/ instrument-and-tools/ hs_nomenclature_2012/hs_ nomenclature_table_2012.aspx; But see GATT Secretariat, Services Sectoral Classification List, MTN. GNS/W/120 (July 29, 1993). Appellate Body Report, European Communities—Customs Classification of Certain Computer Equipment, WT/ DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R (June 5, 1998), https://www.wto.org/english/ tratop_e/dispu_e/62abr.doc; see also S. Biber-Klemm & T. Cottier, Rights to plant genetic resources and traditional knowledge: Basic

See also GATS, supra note 74, at Art. XIV bis. 88. GATT, supra note 72, at Art. XX; GATS, supra note 76, at Art. XIV (emphasis supplied). 89. Appellate Body Report, United States – Standards for Reformulated and Conventional Gasoline, WTO Doc. WT/DS2/AB/R (adopted May 20, 1996) [hereinafter US/Gasoline]. 90. Appellate Body Report, United States – Import Prohibition of Certain Shrimp and Shrimp Products, WTO Doc. WT/DS58/AB/R (adopted Nov. 6, 1998) [hereinafter US/Shrimp] 91. Appellate Body Report, European Communities – Customs Classification of Frozen Boneless Chicken Cuts, ¶ 84, WTO Doc. WT/DS269/AB/R, WT/DS286/AB/R (adopted Sept. 27, 2005) [hereinafter EC/ Boneless Chicken]. 92. WTO Agreement on the Application of Sanitary and Phytosanitary Measures, Annex A.1, Apr. 15, 1994, 33 I.L.M. 1144 [hereinafter SPS] (such measures include: “inter alia, end product criteria; processes and production methods; testing, inspection, certification and approval procedures; quarantine treatments including relevant requirements associated with the transport of animals or plants, or with the materials necessary for their survival during transport; provisions on relevant statistical methods, sampling procedures and methods of risk assessment; and packaging and labeling requirements directly related to food safety.”). 93. Jacqueline Peel, Scope of application of the SPS Agreement: a postBiotech analysis, in RESEARCH H A N D B O O K O N ENVIRONMENT, HEALTH AND THE WTO, 377, 337 (Geert Van Calster & Denise Prévost ed., Edward Elgar Publishing 2013). 94. Panel Reports, European Communities – Measures Affecting the Approval and Marketing of Biotech Products, ¶7.226-7.240, WTO Doc. WT/ DS291/R, WT/DS292/R and WT/DS293/R (adopted Nov. 21, 2006) [hereinafter EC/Biotech]. 95. Agreement on Technical Barriers to Trade, Annex 1.1, Apr. 15, 1994, 33 I.L.M. 1144 [hereinafter TBT] (such measures may “include or deal exclusively with terminology, symbols, packaging, marking or labeling requirements as they apply to a product, process or production method.”). 96. Appellate Body Reports, European Communities – Measures Prohibiting the Importation and Marketing of Seal Products, ¶ 5.58, WTO Doc. WT/ DS400/AB/R (adopted June 18,

issues and perspectives 368-73 (2006). 80. GATT, supra note 72, at art. I I I , h t t p s : / / w w w. w t o. o r g / english/res_e/booksp_e/ analytic_index_e/gatt1994_02_e. htm#article3; See also GATS art. XVII (The GATS draws a distinction between like services and like service suppliers), https:// www.wto.org/ENGLISH/res_e/ booksp_e/analytic_index_e/ gats_02_e.htm 81. GATT, supra note 72, at art. III, note Ad, ¶2, https://www.wto. org/english/res_e/booksp_e/ analytic_index_e/gatt1994_02_e. htm#article3; Appellate Body Re por t, Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, ¶ 137, WTO Doc. WT/DS161/ABR, WT/DS169/AB/R (Dec. 11, 2000), https://www.wto.org/ english/tratop_e/dispu_e/161169abr_e.pdf [hereinafter Korea/ Beef]; See also GATS art. XVII, https://www.wto.org/english/ docs_e/legal_e/26-gats_01_e. htm#articleXVII. 82. Appellate Body Report, Japan—Taxes on Alcoholic Beverages, pg. 20, WTO Doc. WT/DS8/AB/R, WT/ DS10/AB/R, WT/DS11/AB/R (Oct. 4, 1996), https://docs.wto. org/dol2fe/Pages/FE_Search/ FE_S_S009-DP.aspx?language= E&CatalogueIdList=32900&Cur rentCatalogueIdIndex=0&FullTe xtHash=; See Report of the Panel, European Communities—Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/R/ECU (May 27, 1997). Report of the Panel, European Communities— Regime for the Importation, Sale and Distribution of Bananas, WT/ DS27/R/ECU (May 27, 1997), https://www.wto.org/English/ tratop_e/dispu_e/27recu.pdf. 83. GATT, supra note 72, at art. I, §1, https://www.wto.org/English/ res_e/booksp_e/analytic_ index_e/gatt1994_01_e.htm. 84. Id.; See also GATS, supra note 76, at art. II, https://www.wto. org/english/docs_e/legal_e/26gats_01_e.htm. 85. GATT, supra note 72, at Art. II. Temporary waivers can be sought pursuant to GATT Art. I, but are in practice difficult to obtain; See also GATS, supra note 74, at Art. II & Annex on Article II Exemptions. 86. Seemingly, a departure from GATT 1947 principles. See GATT Panel Report, Canada/Japan – Tariff on Imports of Spruce, Pine, Fir (SPF) Dimension Lumber, L/6470 (adopted July 19, 1989). 87. GATT, supra note 72, at Art. XXI; 24

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2014) [hereinafter EC/Seal]. 97. Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos Containing Products, ¶ 76, WT/DS135/AB/R (adopted April 5, 200) at 3243 [hereinafter EC/Asbestos]. 98. SPS, supra note 92, at Art. 1.4; TBT, supra note 95, at Art. 1.5. 99. EC/Biotech, supra note 94, at 7.165 (however, in the event that these elements could not be divided, the panel considered, at paras. 7.3817.393, that the SPS Agreement would control). 100. TBT, supra note 95, at Preamble ¶ 6; SPS, supra note 92, at Preamble ¶1. 101. SPS, supra note 92, at Art. 2.2. Where relevant scientific evidence is insufficient, it should be noted that Members may, under Art. 5.7, provisionally adopt SPS measures on the basis of “available pertinent information”, which may fall short of the default standard set in Art. 2.2. 102. TBT, supra note 95, at Art. 2.2. The provision states that an assessment of the risk non-fulfillment would create will nor mally turn on “inter alia: available scientific and technical information, related processing technology or intended end-uses of products.” 103. TBT, supra note 95, at Art. 2.2; SPS, supra note 92, at Arts. 2.2 & 5.6. 104. Korea/Beef, supra, note 81; see also Alan Sykes, Comment, The Least Restrictive Means, 70 U. CHICAGO L. REV. 403, 403-419 (2003). 105. TBT, supra note 95, at Art. 2.7; SPS, supra note 92, at Art. 4; see also M.E. Echols, Equivalence and Risk Regulation Under the World Trade Organization’s SPS Agreement, in RESEARCH HANDBOOK ON ENVIRONMENT, HEALTH AND THE WTO (Geert Van Calster & Denise Prévost ed., Edward Elgar Publishing 2013), 81-82. 106. TBT, supra note 95, at art. 2.5; SPS, supra note 92, at art. 3.3 107. Note the distinction between measures “based on” international standards in SPS Art. 3.1, which do not benefit from this safe harbor, and measures “in conformity with’ such standards in Art. 3.2, which do. The safe harbor insulating such measures from challenge under, for instance, the GATT. No similar presumption applies with TBT measures, notably because the TBT’s relationship with the GATT is uncertain. I note, in this respect, that measures deemed consistent with the TBT are not ‘carved out’ from the GATT in the manner prescribed by SPS Art. 2.4. As a so-called “Annex 1A” Agreement,


the TBT Agreement is deemed lex specialis to the GATT pursuant to the General Interpretative Note to Annex 1A to the WTO Charter. But this does not altogether exclude the GATT’s application, when raised concurrently in a dispute. Marceau & Trachtman, supra note 4, at 424-425. 108. TBT, supra note 95, at art. 2.4. 109. SPS, supra note 92, at Annex A.3. 110. Appellate Body Report, United States – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products, ¶ 376, WTO Doc. WT/DS381/AB/R (adopted 13 June 2012) [hereinafter US/Tuna]. 111. Panel Report, European Communities – Trade Description of Sardines, ¶ 222, WTO Doc. WT/DS231/ AB/R (adopted 23 October 2002) [hereinafter EC/Sardines]; Codex Alimentarius Commission, Procedural Manual, 21st Edition, Rule XII (2013), on majority voting where no consensus is reached (SPS); and A. Mattoo & P. Sauve, Domestic Regulation and Service Trade Liberalization 70 (World Bank, 2003). 112. SPS, supra note 92, at Art. 2.3. 113. TBT, supra note 95, at Art. 2.1. 114. SPS, supra note 92, at Annex A.5, Note. A better measure would pertain to the reduction in the risk – from risk in a measure’s absence to the residual risk tolerated upon a measure’s implementation. J. Atik, On the efficiency of health measures and the ‘appropriate level of protection, in RESEARCH HANDBOOK ON ENVIRONMENT, HEALTH AND THE WTO (Geert Van Calster & Denise Prévost ed., Edward Elgar Publishing 2013), 117. 115. SPS, supra note 92, at art. 5.5. Panel Report, Australia – Measures Affecting Importation of Salmon – Recourse to Article 21.5 of the DSU by Canada, WTO Doc. WT/DS18/ RW (adopted 20 March 2000). 116. Panel Report, United States— Measures Affecting the Production and Sale of Clove Cigarettes, ¶ 7.244, WTO Doc. WT/DS406/AB/R (April 24, 2012) [hereinafter US/ Clove]. (This was the view of the US/Clove Cigarette panel, which was overturned by the Appellate Body). Donald H. Regan, Regulatory Purpose in GATT Article III, TBT Article 2.1, the Subsidies Agreement, and Elsewhere: Hic et Ubique, in RESEARCH HANDBOOK ON ENVIRONMENT, HEALTH AND THE WTO, 61–74 (Geert Van Calster & Denise Prévost ed., Edward Elgar Publishing 2013); See also TBT, supra note 95, at Art. 2.1.

117. See text accompanying note 96. 118. Appellate Body Report, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WTO Doc. WT/ DS406/AB/R (April 4, 2012). 119. Appellate Body Report, United States—Certain Country of Origin Labeling (COOL) Requirements, WT/DS384/AB/R and WT/ DS386/AB/R (July 23, 2012) [hereinafter US/COOL]. Gabrielle Marceau, The New TBT Jurisprudence in US—Clove, WTO US—Tuna II, and US—Cool, 8 ASIAN J. WTO & INT’L HEALTH L & POL’Y 1, 12 (2013) (Marceau writes that the Appellate Body likely did so in an attempt “to preserve the balance of the TBT Agreement and its place in the WTO Agreement as a whole. This is in keeping with the Appellate Body’s explanation that the ‘balance’ of interests intended by the drafters of the TBT Agreement between the right to regulate and the reduction of unnecessary obstacles to trade must be found within Article 2.1. The approach allows the Appellate Body to make sense of the fact that no GATT Article XX defense exists under the TBT Agreement and, in particular, under the nondiscrimination provisions of Article 2.1.”) (emphasis in original) 120. See text accompanying note 16. 121. US/Gasoline, supra, note 89, at 29. 122. US/Shrimp, supra, note 90, at 51. 123. Appellate Body Report, Brazil— Measur es Af fecting Imports of Retreaded Tyres, ¶ 210, WTO Doc. WT/DS332/AB/R, (Dec. 17, 2007). 124. Marceau & Trachtman, supra note 4, at 368–69. (Although there is some debate as to whether recent GATT cases have dispensed with this proportionality standard.) 125. US/Shrimp, supra, note 90, at 52. 126. US/Gasoline, supra note 89, at 29. 127. The chapeau was also met, obiter, in Appellate Body Report, European Communities – Measures Affecting Asbestos and Asbestos Containing Products, supra note 97. 128. US/Shrimp, supra note 90, at paras.175-176. 129. Id. at paras. 181-184. 130. Id. at para. 170. 131. US/Shrimp, supra note 90, at ¶ 124. 132. EC/Seal, supra note 96; See also Marceau & Trachtman, supra note 4, at 422. 133. US/Shrimp, supra note 90, at para. 133. 134. See Laura Nielsen, The WTO, Animals and PPMs, 20(2) EUR. J. INT’L. L. 476 (2007). 135. EC/Hormones, supra note 18; EC/ Biotech, supra note 94.

136. Thus, in one dispute, a panel ignored the relevance of the Biosafety Protocol, which drew criticism in an ILC study. That particular panel report was not, unfortunately, appealed to the Appellate Body. EC/Boneless Chicken, supra note 91, para. 7.68. See also, Report of the International Law Commission to the General Assembly, U.N. GAOR, 58th Sess., 2d plen. Mtg. at 251, U.N. Doc. A/ 61/10V.2 (2006), reprinted in [2006] 2 Y.B. INT’L L. COMM’N 251, U.N. Doc. A/CN.4/L.682. It bears mentioning that whether or to what extent treaties outside the Codex, OIE or IPCC can legislate relevant international standards is presently an open issue on which the Appellate Body has yet to determinatively weigh in. It is recalled that the Appellate Body’s approach towards non-WTO treaties under the GATT has been erratic. At its most conservative, it deems only those treaty norms reflecting the “common intention of all the parties” relevant. 137. Paradoxically, the Appellate Body considers the requirement that SPS measures be “based on scientific principles”, at Art. 2.2, as identical to the requirement that such measures be based on “an assessment” . . . of the risks to human, animal or plant life or health”; See EC/Hormones, supra note 18. 138. SPS, supra note 92, at Art/ 5.1 & 5.2. 139. EC/Hormones, supra note 18, at ¶ 181, 186-187. 140. Let alone one that is both technically and economically feasible. One such ambiguity pertained to Australia’s stated level of protection in one dispute as aiming “at reducing risk to a very low level, but not to zero”, which the Appellate Body just about tolerated as SPS-consistent. Appellate Body Report, Australia– Measures Affecting the Importation of Apples from New Zealand, ¶ 343, WTO Doc. WT/DS367/AB/R (adopted 29 December 2010) [hereinafter Australia/Apples]. The Appellate Body found insufficient evidence on the record to make a finding that Australia’s measure was less trade-restrictive than necessary. Although, Australia’s measures were found not to be “based on” scientific justification in another claim. 141. SPS, supra note 92, at art. 11.2. 142. Australia/Apples, supra note140, at ¶ 215. 143. Appellate Body Report, Canada – Continued Suspension of Obligations in

the EC – Hormones Dispute, ¶ 685, WTO Doc. WT/DS321/AB/R, (adopted October 16, 2008). 144. Appellate Body Report, Japan – Measures Affecting the Importation of Apples, ¶ 144-147, 4391, WTO DOC. DS245/AB/R, (adopted December 10, 2003) [hereinafter Japan/Apples]; See also Appellate Body Report, United States – Continued Suspension of Obligations in the EC –Hormones Dispute, ¶ 215, WTO Doc. WT/DS320/ AB/R, (September 19, 2008). Surprisingly, a third area in which Members have failed to prevail relates to an SPS provision on the insufficiency of scientific evidence, which authorizes Members to base their SPS measures on “available pertinent infor mation”. This provision allows Members some degree of precaution in adopting SPS measures. No respondent Member to date has successfully demonstrated an absence of sufficient scientific evidence – particularly where a relevant international standard exists. This is so despite the Appellate Body’s statement that such precautionary measures can be based on “a qualified and respected scientific view that puts into question the relationship between the relevant scientific evidence and the conclusions in relation to risk.” 145. EC/Hormones, supra note 18, at ¶ 194. See, for instance, the Appellate Body’s statement in EC/Hormones that “We do not believe that a risk assessment has to come to a monolithic conclusion that coincides with the scientific conclusion or view implicit in the SPS measure. The risk assessment could set out both the prevailing view representing the "mainstream" of scientific opinion, as well as the opinions of scientists taking a divergent view.” 146. SPS, supra note 92, at arts. 5.6 & 2.3 (“measures shall not be applied in a manner which would constitute a disguised restriction on international trade”) 147. A point the EU tried to exploit in US/Continued Suspension, supra note 144, and its companion case, Canada/Continued Suspension, supra note 143. 148. M.C.E.J. Bronckers & R.D. Soopramanien, The Impact of WTO Law on European Food Regulation, EUR. FOOD AND FEED L. REV. 3(6), 363. 149. Indeed, the scope of a “technical regulation” is drafted so widely that some in the WTO Secretariat wryly remark that a countervailing or dumping order could fall within

25

Currents 23.1 2016


its definition. 150. Marceau & Trachtman, supra note 4, at 42-433; see also Regan, supra note 116, at 68-69. 151. This latter dispute was framed principally as a TBT appeal. It was disposed of as a GATT appeal once the Appellate Body determined that the EU legal framework for seal products was not a “technical regulation”. 152. See text at notes 116-120; see also US/Clove, supra note 116, at para. 239. 153. US/Clove, supra note 116, at para. 174. 154. US/Tuna, supra note 112, at para. 283, citing Japan/Apples, supra note 144, at para. 157. 155. US/Tuna, supra note 112, at para. 297. 156. Appellate Body Report, United States – Measures Concerning the Importation, Marketing and Sale of Tuna and Tuna Products – Recourse to Article 21.5 of the DSU by Mexico, W T / D S 3 8 1 / A B / RW [ D S R reference pending], para. 7.266. 157. See EC/Sardines, supra note 111. 158. EC/Sardines, supra note 111, at paras. 259-268 (showing that the standard is “appropriate” or “effective” shifts the burden to the respondent to show that the

standard is “inappropriate” or “ineffective”). 159. Rudiger Wolfrum et al., WTOTECHNICAL BARRIERS AND SPS MEASURES (MAX PLANCK COMMENTARIES ON WORLD TRADE LAW) 221-22 (Rudiger Wolfrum et al. eds., 1st ed. 2007) (using such analysis should refer to the issuing international standardization body; for instance, in the above-mentioned dispute on US Dolphin Conservation measures, the panel found that the US had erred in departing from dolphin-safe label schemes issued under the Agreement on the International Dolphin Conservation Program (AIDCP) and the Appellate body reversed this finding because the AIDCP was not a qualifying “international standardizing body” since it was not “open” to WTO Members, as prospective membership hinged on a consensus vote).; see also US/ Tuna, supra note 112, at para. 398 (having international standard bodies can serve as fertile ground for promulgation of international environmental standards; having such standards are presumed “not to create an unnecessary obstacle to international trade” under

160.

161. 162. 163.

164.

26

Currents 23.1 2016

the TBT Agreement; somewhat tautologically, the Appellate Body requires these to be an “open” international standardizing body” carrying out “recognized activities in standardization.” Existing international environmental bodies could serve this role). TBT, supra note 95, at art. 2.2; see also Petros C. Mavroidis, Driftin too far from shore – Why the test for compliance with the TBT Agreement developed by the WTO Appellate Body is wrong, and what should the AB have done instead, 12 WORLD TRADE REV. 509 (2013). See TBT, supra note 95. US/COOL, supra note 119, at para. 370. US/Tuna, supra note 112, at para. 330 (suggesting that preventing harm to dolphins is not a fanciful objective and the consideration is compelling; panels should be more critical and searching when faced with opaquely stated desired levels of protection similar to that expressed by Australia in relation to its imports of apples); see also Australia/Apples, supra note 140. Instead, the Appellate Body reversed the panel’s findings on the underlying claim, creating compliance ambiguities and

prompting the parties to litigate this issue afresh in compliance proceedings. 165. TBT, supra note 95, at art. 2.2 (“[T]echnical regulations shall not be more trade-restrictive than necessary to fulfill a legitimate objective, taking account of the risks non-fulfillment would create. 166. See Terrance P. Stewart, US Is Correct In Blocking WTO Appellate Body Appointment, LAW360 (May 27, 2016), http://www.law360. com/ar ticles/801553/us-iscorrect-in-blocking-wto-appellatebody-appointment. 167. Id.


Show Me the Money! Harmonizing Dodd-Frank's Resources Extraction Payment Disclosure Rules and Non-U.S. Counterparts M A R C

—————————————————

Introduction

————————————————— As the voluminous Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”)1 was moving toward passage by Congress in 2010, a provision was added to the bill as an amendment during the conference process. This provision, Section 1504, added a new subsection (q) to Section 13 of the Securities Exchange Act of 1934 (the “Exchange Act”), directing the Securities and Exchange Commission to adopt rules requiring SEC-registered companies engaged in “commercial development of oil, natural gas, or minerals” to disclose in an annual report any payments they make to the U.S. government or any foreign government with respect to their extractive activities.

2

The rules to be adopted would mandate U.S. and non-U.S. oil and natural gas exploration and production companies required to file reports with the SEC to disclose annually payments they make to governments for their extraction-related activities in those governments’ countries.3 The types of payments that must be disclosed include taxes, royalties, license and other fees, production entitlements, bonuses and other “material benefits.” The 4

disclosure must include the type and total amount of such payments made to each government with respect to each “project”

H .

F O L L A D O R I

Marc H. Folladori is senior counsel at Haynes and Boone, LLP in Houston, Texas. He focuses his practice on sophisticated transactional matters, namely securities law, mergers and acquisitions and corporate governance. Folladori has coauthored articles the Oil & Gas Financial Journal each year since 2010 and has also been a guest lecturer at the Rice University Jones Graduate School of Business and the SMU Cox School of Business. of the company relating to such commercial development.5 Section 1504 of Dodd-Frank was enacted to address “resource curse” – the paradox that countries having abundant oil, gas and mineral resources are some of the world’s poorest, often experiencing less economic development than resource-poor countries.6 Transparency activists argue that the large gap between the rich and the poor in these countries results in part from a lack of transparency concerning the arrangements made between these countries’ governments and resource extraction companies.7 This lack of transparency enables corruption, lessens public oversight of extraction operations in those countries and deprives their citizens and investors of information concerning the true value and risks of resource development there.8 Backing these objectives, Section 13(q) (2)(E) provides that the rules the SEC adopts must, “to the extent practicable, . .

. support the commitment of the Federal Government to international transparency promotion efforts relating to the commercial development of oil, natural gas, or minerals.”9 Section 13(q)(1)(C)(ii) also states that the types of payments and benefits to be disclosed by the rules must include those that the SEC determines, “consistent with the guidelines of the Extractive Industries Transparency Initiative” to be “part of the commonly recognized revenue stream for the commercial development of oil, natural gas or minerals.”10 —————————————————

Extractive Industries Transparency Initiative

————————————————— The Extractive Industries Transparency Initiative, or EITI, is a Norwegian nonprofit organization supported by a voluntary coalition of companies, governments, industry groups, civil society organizations and institutional investors, formed to address global “resource curse” concerns through increased transparency.11 The EITI publishes information about payments that extractive industry companies make to governments and the revenues the g over nments receive from those companies.12 Countries participating in the EITI cooperate with company-participants and civil society-participants to establish an agreed-upon protocol for reporting

27

Currents 23.1 2016


payments and revenues.13 Companies and

participants argued that Section 13(q)

2011.26 In August 2012, the SEC adopted

host governments separately submit payment

had only directed the SEC to issue rules

final rules, which contained very few changes

and revenue information confidentially to an

requiring companies to submit confidentially

from the proposed rules, including new Rule

independent reconciler, who then compiles

their more sensitive, detailed information

13q-1 and a special disclosure form (Form

the information according to that protocol

relating to payments to governments in

SD) to be used by companies in submitting

and publishes a publicly-available report.14

an annual report21 and that the only data

their annual data.27 The final rules required

Before 2013, EITI’s “Principles” had

that Section 13(q) had required to be

resource extraction issuers to disclose the

required disclosure of only total payments

publicly disclosed, and then only “to the

very same payment information that the

and total revenues by company and by

extent practicable,” was a compilation of the

proposed rules had required.28 None of the

government.15 In 2013, these Principles

companies’ submitted information.”22 These

commentators’ requests described above

were expanded and incorporated into a new

commentators contended that the proposed

were granted.

Standard, which added a requirement that

rules were mandating companies to disclose

—————————————————

the data contained in each report must also

more information than the statute appeared

Rules Challenged

be presented on a per-project level, so long as

to require – and at a level of detail that

—————————————————

“project level reporting is consistent with the

could prove competitively harmful to these

In October 2012, shortly following

[SEC] rules and the forthcoming European

companies and place them at a comparative

the final rules’ adoption, the American

Union requirements.”17

disadvantage to companies not subject to

Petroleum Institute, the U.S. Chamber of

—————————————————

SEC reporting obligations.

Commerce and other trade and industry

—————————————————

groups filed a complaint in the U.S. District Court for the District of Columbia seeking

expanded upon, Section 13(q)’s statutory

The final rules required resource extraction issuers to disclose the very same payment information that proposed rules had required.

language. The proposed rules provided

—————————————————

in adopting the rules, the SEC had acted in

that resource extraction issuers would be

These and other commentators also

an “arbitrary and capricious” manner under

required to include in their annual reports

contended that the rules should contain

the U.S. Administrative Procedure Act.29 The

filed with the SEC each year the payments-

exemptions from disclosure requirements

plaintiffs’ principal complaints were that

to-governments information that would be

whenever public disclosure of payment

the SEC had overreached in its rulemaking

publicly available, like all other information

information is prohibited under the host

authority by not allowing companies to submit

included in their publicly-available SEC

country’s laws, pointing out that the laws of

their payment information confidentially,

filings. This information would include the

China, Cameroon, Qatar and Angola would

not defining the term “project,” denying

type and total amount of payments made for

prohibit the disclosures required under

an exemption in cases where foreign law

each project (identifying the project), the type

Section 13(q).24 They also recommended that

prohibited disclosure, and insufficiently

and total amount of payments made to each

the term “project” under the rules be clearly

evaluating the costs and benefits as SEC

government (identifying the country and

defined in order for companies to avoid

rulemaking requires.30

governmental instrumentality), the currency

unnecessary costs in determining what their

On July 2, 2013, the D.C. District Court

used and the financial period in which the

“projects” actually were, and avoid having

granted the plaintiffs’ motion, and ordered

payments were made.20

to track the payment information at a more

that the rule be vacated and remanded to the

granular level than what companies’ systems

SEC for further proceedings.31 U.S. District

currently tracked.25

Judge John D. Bates determined that the

16

Adoption of SEC Rules

————————————————— In December 2010, the SEC proposed rules, which largely tracked, but also 18

19

Several interested parties submitted comment letters to the SEC relating to the proposed rules. Many oil and gas industry

23

The comment period closed in March 28

Currents 23.1 2016

a summary judgment to vacate the rules on grounds that Section 1504 violated their members’ First Amendment rights and that,

SEC had misread the statute by mandating


public disclosure of each company’s detailed

material payments they make to governments

payment data while the statute required that

in relation to their extraction operations in

The United Kingdom became the first EU

only a compilation of such information, “to

those countries. However, these proposals

member country to implement Chapter 10 of

the extent practicable,” be made publicly

would have exempted disclosing payments

the EU Directive through its government’s

available.32 In addition, he found that the

to governments where public disclosure of

adoption in late 2014 of the “Reports on

SEC’s decision to deny any exemption in

those payments was prohibited by criminal

Payments to Governments Regulations

cases where foreign law prohibited disclosure

law in that country.

2014.” 44 The UK Regulations became

had been arbitrary and capricious in light

—————————————————

effective on December 1, 2014,45 and require

of the limited explanation the SEC had

subject companies to submit a report of

the SEC indicated that the decision in API

Chapter 10 of the EU Directive obligated EU member states to adopt reulations that would re q u i re s u b j e c t c o m p a n i e s engaged in extractive activities to prepare and publish each year a repor t on payments they made to governments.

would not be appealed and the rule would

—————————————————

following criteria: total assets exceeding £18

be redrafted; in November 2014, the SEC

In 2013, these proposals (with some

million; total annual revenues exceeding £36

indicated that it would propose revised rules

modifications) were adopted through a new

million; and average number of employees

in 2015. Because the District Court did

directive (the “EU Directive”). Chapter

during a fiscal year exceeding 250), or (ii) a

not find Section 13(q) itself to be invalid,

10 of the EU Directive obligated EU

company whose securities are publicly listed

the SEC remains obligated to adopt rules to

member states to adopt regulations that

on a regulated securities exchange, such as

implement its requirements.

would require subject companies engaged

the London Stock Exchange.47 Like Chapter

—————————————————

in extractive activities to prepare and publish

10 of the EU Directive, the UK Regulations

each year a report on payments they made to

do not require reporting of payments (or a

—————————————————

governments. The EU Directive obligates

series of related payments) below a certain

In the meantime, other jurisdictions were

each EU member state to implement Chapter

threshold (€100,000 under the EU Directive

10’s provisions by July 20, 2015.

vs. UK £86,000), and permit the delivery of

provided for not granting the exemption, and the SEC’s own assessment that indicated that the lack of any exemption “drastically increased the [rules’] burden on competition and cost to investors.”

33

In September 2013, a spokesperson for

34

Non-US Jurisdictions

observing the U.S. legislative and regulatory

36

37

38

39

40

project-by-project bases.43

their payments to governments within 11 months following their fiscal year ends, beginning with fiscal 2015.46 They apply to any company incorporated in the UK engaged in the oil, gas, mining or logging industries that is either: (i) a “large” entity (i.e., a company that meets at least two of the

processes unfold. Influenced by the EITI

Norway, while not a EU member state,

reports that comply with another country’s

Principles and the SEC’s rulemaking under

adopted in late 2013 a country-by-country

mandatory reporting requirements, provided

Section 13(q), the European Commission in

reporting regime applicable to Norwegian

that those requirements are considered

2011 published proposals to amend a 2004

companies, which was modeled after the

equivalent to the UK Regulations.48

European Union (EU) transparency directive

EU Directive.41 These regulations require

There are numerous similarities and

applicable to companies having securities

the reporting of payments of 800,000 or

differences between the rules under Section

listed on a regulated securities market in the

more Norwegian kroner to each government

13(q) and the requirements under the UK

EU. Part of these proposals would mandate

relating to each project, but does include

Regulations. These include the following:

EU member states to adopt regulations

some disclosure exemptions.42 In March

requiring subject companies engaged in the

2015, Statoil became the first company to

extractive industries (“extraction of minerals,

report under the Norwegian regulations,

• The UK Regulations define the term

oil, natural gas deposits or other materials”)

disclosing 2014 revenues and payments to

“project” as “operational activities [which]

to publicly disclose, on an annual basis,

governments on country-by-country and

are governed by a single contract, … lease,

35

• Both contain exemptions for the disclosure of “de minimis” payments.49

29

Currents 23.1 2016


concession or similar legal agreement and

—————————————————

payments-to-governments disclosure

form the basis for payment liabilities with

Final Analysis

measures have generally referenced and

a government.” While the term “project”

—————————————————

given some deference to Section 13(q) and

was not defined in Section 13(q) or the

Clearly, the impetus is on the side of

the SEC rules, it remains unclear how these

rules, the Adopting Release stated that

the movement for enhanced international

issues will ultimately be resolved in those

a contractual arrangement between the

resource extraction payments disclosure.

jurisdictions, regardless of what the SEC

company and a government can provide

Even in the brief period since the SEC’s rules

re-proposed rules may provide. Optimally,

a basis for determining what a “project”

were vacated in 2013, this transparency drive

an international assemblage of regulators

would be.

has grown globally and gained momentum.

could be convened to harmonize these

• Both permit companies to disclose

The SEC remains charged to adopt rules

regulations. It is not likely, however, that any

payments only at the company level, and

to implement Section 13(q) unless Section

such coordination would occur due to the

not at a project level, if the payment is

1504 of the Dodd-Frank Act is repealed

lack of any overarching governing authority

made for obligations levied on it that are

or substantially modified by Congressional

having behind it the force of international

not attributable to a specific project (such

action, which appears doubtful at this time.

law or professional standards (such as the

as income tax payments to a government);

The combination of outside pressure

International Accounting Standards Board).

however, neither the projects nor payments

from institutional investors and transparency

The SEC should fashion re-proposed rules

may be categorized artificially in any way in

movement activists, along with regulatory

to fit Section 13(q)’s primary purpose – to

order to evade disclosure requirements.

52

efforts completed or under way in other

publicly highlight sums that the extractive

• Importantly, the UK Regulations exempt

countries, have created a dilemma for the

industries pay governments for the privilege

companies from its disclosure requirements

SEC: Should it re-propose rules that conform

of removing depleting assets from those

if the payments to governments are

to the regulatory regimes adopted elsewhere

governments’ countries. One remaining

reported under equivalent reporting rules

or simply re-propose rules amended strictly

important question that payments-to-

of another country having jurisdiction.

in accordance with the holding in API?

governments disclosure laws do not answer

There is no similar exemption under

—————————————————

– and cannot answer by their very nature – is

Section 13(q) or its rules.

what those governments do with those

to the UK Regulations.56 For most companies

The SEC should fashion re-proposed rules to fit Section 13(q)'s primary purpose – to publicly highlight sums that the extractive industries pay governments for the privilege of removing depleting assets from those governments' countries.

subject to these new regulations, reporting will

—————————————————

Public disclosure of only compilations of

commence with respect to their fiscal years

The D.C. District Court judge cited

the more-detailed information would seem to

ending in 2015. The Canadian legislation

two principal faults in the SEC rules – the

fulfill the principal purpose of Section 13(q),

does not require project-level payments

ambiguity in Section 13(q) as to the scope of

and satisfy the judge’s objections. Adding

in its reporting requirements, but leaves

public disclosure required (publicly disclosed

a requirement to disclose companies’ per-

open the possibility for those requirements

detailed payment information vs. merely a

project payment information may constitute

to be adopted later by executive action.58

compilation of such information) and the

a helpful additional level of disclosure for

SEC’s “arbitrary” rejection of any disclosure

those seeking more transparency by better

exemption where disclosure is prohibited by

indicating for what the payments are spent,

law. While the EU’s and other countries’

but more regulatory guidance is needed to

50

51

53

• The UK Regulations apply to large nonlisted companies,54 which Section 13(q) does not.

55

In December 2014, Canada’s Government adopted regulations similar in many respects

57

60

30

Currents 23.1 2016

59

payments. In District Judge Bates’ view, the SEC in adopting its rules did not give sufficient weight to the potential burdens imposed on companies required to disclose information that would violate the laws of countries in which those companies operated.


define what a “project” consists of. Regulators (including the SEC in API)

governments, one set of standards would result in the most desirable outcome.

and activist organizations have argued that the laws of certain countries that allegedly prohibit disclosure of payment information do not, in fact, do so. This argument was not persuasive to Judge Bates, and it will likely fail again unless the SEC can successfully relitigate and win the argument.61 The EITI’s Standard adopted in 2013 do not affect this analysis because it is not yet clear how reports submitted to EITI since 2013 will comply with its requirement to disclose perproject data, particularly where disclosure is prohibited by some countries. The SEC’s re-proposed rules should permit companies to satisfy Section 13(q)’s requirements by providing disclosures required under other countries’ extractive payments reporting requirements, provided there is some degree of equivalency between them. Consider a company like BP, PLC, which, as an English-chartered entity having securities are listed on the New York Stock Exchange, would be subject to both the UK Regulations and Section 13(q). Should BP be required to comply with both sets of regulations that may ultimately contain conflicting provisions? Of course, the most salutary solution to this predicament would be to conform the extractive payments’ transparency regulations of the various countries to each other so that the same standards would apply, world-wide. This would avoid repeated examinations of whether different regulations are sufficiently “equivalent.” One size fitting all, as a general rule, often does not work where international laws and regulations are concerned. However, in the context of regulating disclosures of extractive companies’ payments to 31

Currents 23.1 2016


End Notes 1. Dodd-Frank Wall Street Reform and Consumer Protection Act, 15 U.S.C. § 78o (2012). 2. Securities Exchange Act of 1934, 15 U.S.C. § 78m(q)(1) (1934), amended by 15 U.S.C. §78o (2012). 3. Id. § 78m(q)(2)(A). 4. Id. § 78m(q)(1)(C); Id. § 78m(q)(2)(A). 5. Id. § 78m(q)(2)(A)(i). 6. See Richard M. Auty, Sustaining Development in Mineral Economies: The Resource Curse Thesis (1993); see also What is the EITI?, Fr e q u e n t l y A s ke d Q u e s t i o n s , EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (last visited Aug. 8, 2015), https:// eiti.org/faqs#resourcecurse [ h e r e i n a f t e r FA Q ] ; Q & A : Company Disclosures Under DoddFrank Section 1504, NATURAL RESOURCE GOVERNANCE INST. (Aug. 27, 2012), http:// www.resourcegovernance.org/ news/qa-company-disclosuresunder-dodd-frank-section-1504. 7. The EITI Standard, Extractive Industries Transparency Initiative 6 (2015), https://eiti.org/files/ English_EITI_STANDARD.pdf [hereinafter The EITI Standard]. 8. Am. Petroleum Inst. v. Sec. and Exch. Comm’n, 714 F.3d 1329, 1331 (D.C. Cir. 2013) (quoting statements of a sponsoring Senator appearing in the Congressional Record). 9. 15 U.S.C. § 78m(q)(2)(E) (1934), amended by 15 U.S.C. §78o (2012). 10. 15 U.S.C. § 78m(q)(1)(C)(ii) (1934), amended by 15 U.S.C. §78o (2012). 11. FAQ, EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (last visited Aug. 8, 2015), https:// eiti.org/faqs. 12. Id. 13. Id. 14. Id. See also The 9th Annual National Report: On the Implementation of Extractive Industry Transparency Initiative in K azakhstan, EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (2014), https://eiti.org/files/ EITI-2013-Report-Kazakhstan_ Annex.pdf. 15.The EITI Requirements, EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (last visited Aug. 12, 2015), https:// eiti.org/eiti/requirements. 16. The EITI Standard, supra note 7. 17. Id. §5.2(e); See also Jonas Moberg, Charting the Next Steps for Transparency, EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE, (May 10, 2013), https://eiti. org/blog/charting-next-steps-

transparency-extractives. 18. Disclosure of Payments by Resource Extraction Issuers, 75 Fed. Reg. 80978 (Dec. 23, 2010) (to be codified at 17 C.F.R. pt. 229 and 249), http://www.sec.gov/rules/ proposed/2010/34-63549fr.pdf. 19. Id. 20. Id. at 80979. 21. 15 U.S.C. § 78m(a) (2012). 22. See 15 U.S.C. § 78m(q)(2)(A); See 15 U.S.C. § 78m(q)(3); See also letter from Kyle Isakower, Vice Pres. Reg. and Econ. Policy, Am. Petroleum Inst., and Patrick T. Mulva, Chairman, Am. Petroleum Inst. Corp. Fin. Comm., Am. Petroleum Inst., to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n (Jan. 28, 2011); Letter from Matthew J. Foehr, Vice Pres. And Comptroller, Cheveron, to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n (Jan. 28, 2011); Letter from Patrick T. Mulva, Vice. Pres. And Controller, Exxon Mobil, to Elizabeth M. Murphy, Sec’y, U.S. Sec. and Exch. Comm’n (Jan. 31, 2011); Letter from Brendon Muller, Controller and Vice Pres. Insurance, Nexen, to Elizabeth M. Murphy , Sec’y, U.S. Sec. and Exch. Comm’n. (Mar. 2, 2011); Letter from Martin J. ten Brink, Exec. Vice Pres. Controller, Royal Dutch Shell PLC, to Elizabeth M. Murphy, Sec’y, U.S. Sec. and Exch. Comm’n (Jan. 28, 2011). 23. See generally, Comments on Proposed Rules: Disclosure of Payments by Resource Extraction Issuers, Securities and Exchange Commission (last visited Aug. 12, 2015), http:// www.sec.gov/comments/s7-4210/s74210.shtml. 24. Comment Letter from Isabella Munilla, Dir., Publish What You Pay U.S., to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule for Disclosure o f Pa y m e n t s b y Re s o u r c e Extraction Issuers (Feb. 25, 2010). 25. See Kyle Isakower, Vice President & Patrick T. Mulva, Chairman, A m e r i c a n Pe t r o l e u m I n s t . , Comment Letter to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule for Disclosure of Payments by Resource Extraction Issuers (Jan. 28, 2011); Also Martin J. ten Brink, Executive Vice President Controller, Royal Dutch Shell Plc., Comment Letter to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule

for Disclosure of Payments by Resource Extraction Issuers (Aug. 1, 2011); Byron Grote, CFO, BP p.l.c., Comment Letter to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule for Disclosure of Payments by Resource Extraction Issuers (Feb. 11, 2011); and Byron Grote, CFO, BP p.l.c., Comment Letter to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule for Disclosure of Payments by Resource Extraction Issuers (July 8, 2011); Regarding defining the term “project,” see Isakower & Mulva, supra at 3; Matthew J. Foehr, Vice President, Chevron C o r p., C o mmen t Letter to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule for Disclosure of Payments by Resource Extraction Issuers (Jan. 31, 2011); Patrick T. Mulva, Vice President and Controller, Exxon Mobil Corp., Comment Letter to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule for Disclosure o f Pa y m e n t s b y Re s o u r c e Extraction Issuers (Jan. 31, 2011); PricewaterhouseCoopers, Comment Letter to Elizabeth Murphy, Sec’y, U.S. Sec. and Exch. Comm’n, on Proposed Rule for Disclosure of Payments by Resource Extraction Issuers (Mar. 2, 2011). 26. SEC Extends Comment Period on Pr oposed Resour ce Extraction Issuer R ules to Mar ch 2011, M C D E R M O T T, W I L L & EMERY (Feb. 8, 2011), http:// www.mwe.com/publications/ uniEntity.aspx?xpST=Publication Detail&pub=5001. 27. Disclosure of Payments by Resource Extraction Issuers, 77 Fed. Reg. 56365 (Sept. 12, 2012) (to be codified at 17 C.F.R. pts. 240 and 249) [hereinafter Adopting Release]; See 17 C. F.R. § 249b.400; See Adopting Release, 77 Fed. Reg. 56383, n. 27; See Adopting Release, 77 Fed. Reg. 56401, n. 563. 28. Adopting Release, 77 Fed. Reg. at 56368. 29. U.S. CONST. amend. I; The Administrative Procedure Act, 5 U.S.C. §§ 701-708 (2012). 30. 5 U.S.C. § 706; See also Plaintiffs’ Complaint, Am. Petroleum Inst., et al. v. SEC, 953 F. Supp. 2d 5 (Dist. D.C. 2013) (no. 12-1398) (API). 31. API, 953 F. Supp. 2d at 8. 32. Id. at 12. 33. Id. at 25. 32

Currents 23.1 2016

34. Sarah N. Lynch, SEC Won't Appeal Ruling vs Disclosing Payments Abroad, REUTERS (Sept. 3, 2013, 6:40 PM), http://www. reuters.com/article/2013/09/03/ us-sec-resource-extractionidUSBRE9820Z820130903. 35. Proposal for a Directive of the European Parliament and of the Council on the Annual Financial Statements, Consolidated Financial Statements and Related Reports of Certain Types of Undertakings, at 1, COM (2011) 684 final (Oct. 25, 2011). 36. Id. at 5 and 63. 37. Id. at 62. 38. See Directive 2013/34, of the European Parliament and of the Council of 26 June 2013 on the Annual Financial Statements, Consolidated Financial Statements and Related Reports of Certain Types of Undertakings, Amending Directive 2006/43/EC of the European Parliament and of the Council and Repealing Council Directives 78/660/EEC and 83/349/EEC, 2013 O.J. (182) 19, 52 [hereinafter EU Directive]. 39. Id. 40. Id. at 55. 41. See Regjeringen, Forskrift om Land-for-Land Repportering, REGJERINGEN.NO (20-122013), https://www.regjeringen. no/no/dokumenter/forskriftom-land-for-land-rapportering/ id748525/ (Nor.) translated in Publish What You Pay Norway, Norwegian Regulations Concerning Countr y-By-Countr y Reporting, PUBLISH WHAT YOU PAY NOR. (Feb. 24, 2014), http:// www.publishwhatyoupay.no/en/ node/16414. 42. Id. 43. See Statoil, 2014 Payments to Governments, STATOIL ASA (2015), http://www.statoil.com/no/ InvestorCentre/AnnualReport/ AnnualReport2014/Documents/ DownloadCentreFiles/01_ KeyDownloads/2014%20 Payments%20to%20governments. pdf. 44. See The Reports on Payments to Governments Regulations 2014, SI 2014/3209 (U.K.) [hereinafter UK Regulations.]. 45. Id. at 1. 46. Id. at 8. 47. Id. at 4-5. There has been industry guidance provided by certain industry groups that is critical of the UK Regulations. See Miles Litvinoff, Faulty Industry Disclosure


48. 49.

50. 51. 52.

53. 54.

55. 56.

Guidance Puts Responsible Companies at Risk, PUBLISH WHAT YOU PAY (Mar. 20, 2015), http://www. publishwhatyoupay.org/uk-faultyindustry-disclosure-guidance-putsresponsible-companies-at-risk/. In December 2014, the UK Financial C o n d u c t Au t h o r i t y ( F C A ) authorized regulations to enact rules similar to the UK Regulations for companies listed on UKregulated securities markets. See Disclosure and Transparency Rules (Reports on Payments to Governments) Instrument 2014, FCA 2014/63 (U.K.). See UK Regulations, supra note 44, at 5; See EU Directive, supra note 38, at 25. See 17 C.F.R. § 249.400(b) (2012) (under the SEC’s Form SD, any payment, individually or as a series of related payments, that is less than US $100,000 need not be disclosed); See Adopting Release, supra note 27, at 56,382 (Sept. 12, 2012); UK Regulations, supra note 44, at 5 (as noted above, the UK Regulations payment reporting threshold is £86,000). UK Regulation, supra note 44, at 3. Adopting Release, supra note 27, at 56,406. Adopting Release, supra note 27, at 56,376; UK Regulation, supra note 44 at 5; See also Adopting Release, supra note 27, at 56,406. UK Regulation, supra note 44 at 8. See Division 28, Extractive Sector Transparency Measures Act, SOR/2014-Section 376 [hereinafter Canadian Regulation]. Adopting Release, supra note 27, at 56,371. Adopting Release, supra note 27, at 56,368; UK Regulation, supra note 44, at 5.

INSTITUTE, (Dec. 1, 2014), http://www.resourcegovernance. org/news/press_releases/stronguk-rules-disclosure-oil-gas-andmining-companies-come-force. 60. Am. Petroleum Inst. v. S.E.C., 953 F. Supp. 2d 5, 16 and 20 (D.D.C. 2013.) 61. Notably, SEC rules governing companies’ disclosures of their estimated oil and natural gas reserves provide that reserves in certain countries need not be disclosed where those countries’ g over nments prohibit such disclosure. 17 C.F.R. § 229.1202 (2010).

57. Canadian Regulation, supra note

55 at §9(5). See also Andrew Godfrey, W hat You Need to Know about the Extractive Sector Transpar enc y Measur es Act, Mining.com, (Oct. 29. 2014), h t t p : / / w w w. m i n i n g. c o m / web/the-extractive-sectortransparency-measures-actwhat-you-need-to-know/.

58. Canadian Regulation, supra note 54, at §9(5); See also Andrew Godfrey, W hat You Need to Know about the Extractive Sector Transparency Measures Act, MINING.COM, (Oct. 29. 2014), http://www. mining.com/web/the-extractivesector-transparency-measures-actwhat-you-need-to-know/. 59. Natural Resource Governance Institute, Strong UK Rules on Disclosure by Oil, Gas and Mining Companies Come Into Force, NAT. RESOURCE GOVERNANCE

33

Currents 23.1 2016


REFUSING THE RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS ON THE GROUNDS THAT THE ARBITRAL PROCEEDINGS WERE UNFAIR AND COMPOSITION OF THE ARBITRAL TRIBUNAL S A A D

Saad Badah is a career arbitrator in Kuwait for the Cooperation Council for the Arab States of the Gulf. —————————————————

Introduction

————————————————— This article aims to highlight the flexibility of the Kuwaiti courts on nonenforcement of international arbitration awards where the arbitration proceedings were unjust. A party may claim that they did not have an opportunity to present their case to the arbitral tribunal. Or it could be argued that the arbitration panel did not have the power to make the award because its decision was outside its terms of reference. The opposing party may also argue that the court did not grant them an opportunity to challenge the provisions of the arbitral procedure. A decision on the law applicable to objections is always made when the court applies the standards of enforcement in Kuwait.1 However, the courts commonly evaluate the objection by adopting a noninterfering approach so as to intervene only when necessary. This allows the arbitrators to respect the balance of efficiency and all the applicable circumstances of the case.2

B A D A H

—————————————————

Lack of Due Process

be enforced if the court is able to confirm

—————————————————

that the parties involved were appropriately

In Gulf Cooperation Council (GCC)

summoned to the arbitral proceedings and

countries, a losing party may have an

were afforded appropriate representation.7

application for the enforcement of a foreign

A lack of due process has been identified

arbitral award rejected by proving that that

as the most significant grounds on which

the arbitral proceedings suffered from a lack

parties seek the rejection of an enforcement

of due process.

application.8 The requirement to follow

The New York Convention on the

due process is intended to guarantee that

Recognition and Enforcement of Foreign

the parties involved receive a fair hearing.9

Arbitral Awards (NYC) provides that the

As a result, if a party seeks to have the

enforcement of a foreign arbitral award may

enforcement of an arbitral award denied

be rejected if a losing party can show that

on these grounds, they must prove precisely

they were not given: (i) proper notice of the

how a lack of due process infringed upon

arbitral proceedings, (ii) the name of the

the fairness of the hearing.

arbitrator, or (iii) they were not able to present

Not all legal regimes adopt the same

their case for some further reason. Similar

concept of due process. The NYC expresses

to the NYC, the Riyadh Convention4 and the

the most advanced form of due process.

Arab League Convention also provide that

Due process under the NYC contains

an enforcement application can be rejected if

two features, one concerning a party’s

the parties were not properly summoned to

right to receive fair notice and the other

appear. The Convention on the Enforcement

concerning how able a party is to present

of Judgments, Delegations and Judicial

their argument.10 National legislation and

Notices in the GCC states that an application

other international conventions, however,

for enforcement will fail if passed in absentia

adopt a concept of due process that relates

and if the losing party was not provided with

solely to a party’s right to be appropriately

appropriate notice of the suit or the award.

6

summoned and represented. 11 It must

National legislation in GCC nations, including

be noted that “proper representation” is

3

5

34

Currents 23.1 2016

in Kuwait, provides that an arbitral award can


referred to in provisions that relate to both

that article V(1)(b) of the NYC establishes

The case law of GCC countries again

foreign arbitral awards and foreign judgments

an international substantive rule on lack

does not deal with this issue. Also, excluding

in general. “Proper representation” suggests

of due process that in itself creates a due

the UAE, the law of GCC nations does

that a defendant in cases held before a

process standard. The wording of article

not contain any provisions concerning

criminal court should be represented

V(1)(b) has led to this concept that the

the applicable law for lack of due process

by a lawyer, but this is not required in

article, as it written, is expressed ‘in terms

standards. It is the researcher’s belief that the

arbitral proceedings. Consequently, it can be

of substantive rules’ rather than chosen legal

national law of an enforcing court should not

concluded that this particular issue will not

terms. Consequently, the infringement of the

apply regardless of whether enforcement is

lead to any problems in regard to foreign

rules laid out in article V(1)(b) is sufficient

being pursued under national provisions or

arbitral award enforcement.

to allow the rejection of an application for

under an international convention. There are

General consensus holds that the

the enforcement of a foreign arbitral award.

a number of reasons for this. First, national

concept of due process as it exists in

Others, however, deny this interpretation,

legislation does not include any provisions

as this would give rise to an ambiguous due

supporting that law’s application. Second,

Consequently, a lack of due process under

process international standard.

Those

the law gives arbitrators the liberty, unless

article V(1)(b) is now determined to overlap

who share this perspective argue that the

the parties decide otherwise, to select the lex

with article V(2)(b), which concerns the

applicable law concerning due process

arbitri.24 Thus, provided that the parties or

public policy defense. 14 It is, therefore,

standards can be found in the applicable law

arbitrators have selected a different applicable

common for parties to use either article to

for the arbitration proceedings as selected by

law for arbitration and national legislation

raise a defense of a lack of due process. The

the parties or, if no such selection has been

does not apply to national arbitration, due

same result occurs in other legal regimes in

made, the law of the seat of arbitration.

process considerations (in relation to the

GCC countries.

—————————————————

enforcement of foreign arbitral awards)

—————————————————

should not be viewed by an enforcing court

may change depending on the applicable

In GCC nations, due process standards may change depending on the applicable law for arbitration agreements or the law of the location in which the arbitration takes place.

law for arbitration agreements or the law of

—————————————————

foreign arbitral awards. Last, it is highlighted

the location in which the arbitration takes

A further viewpoint, supported by

in article V(1)(d) of the NYC that party

place. As a result, the issue of which law or

numerous authors and applied by a large

autonomy to decide upon the applicable law

court should apply may arise when a party

number of national courts, suggests that the

for arbitration proceedings supersedes both

raises lack of due process as a ground for the

law of the location where the enforcement

the law of the location of arbitration and

rejection of the enforcement of a foreign

of an award is being pursued is the applicable

that of the forum in which enforcement is

arbitral award.

law. Thus, a national enforcing court can

pursued. Therefore, enforcing courts in GCC

Article V(1)(b) of the NYC is ambiguous

dismiss an enforcement application if its

nations would be advised to apply the law of

as to what law should be applied to a lack

national legislation determines that there has

the seat of arbitration or the applicable law as

of due process defense. Currently, no

been a lack of due process. Furthermore,

chosen by the parties when dealing with due

GCC case law covering this subject exists.

certain courts bear in mind the law selected

process considerations in the context of the

Commentators and national courts have

by the parties to arbitration as well as national

enforcement of an arbitral award.26

taken diverse perspectives on the matter.16

law; for example, the Court of Final Appeal

the NYC forms part of public policy. 12

13

15

Lack of Due Process and Applicable Law

————————————————— In GCC nations, due process standards

One particular perspective affirms

17

18

19

20

21

22

in Hong Kong has adopted this practice.

23

in light of its own national legislation. Third, courts do not apply their own national law when applying statutory provisions concerning the enforcement of foreign judgments,25 including the enforcement of

The national law of the UAE does include a conflict-of-law rule.27 This rule

35

Currents 23.1 2016


provides that all procedural issues are subject

—————————————————

ICC Rules38 and the UNCITRAL Rules39

to the law of the nation in which the action

contain a comparable standard, whereas the

Thus, the appropriate law for an enforcing

No mandator y regulations concerning proper notice currently exist in the UAE or Kuwait.

court to apply concerning issues of due

—————————————————

Centre states that proper notice will only be

As regards proper notice, it is the

made if sent by registered post.40 In GCC

It should be noted that there should

facts of each individual case that primarily

legislation, proper notice standards for

exist a basic standard of due process which

determine whether proper notice has been

arbitral proceedings differ from those that

includes, for example, the right to offer a

given. The elements to be considered here

apply in the Code of Procedure and are

defense, proper notice of all measures, and

include: general proper notice requirements,

used prior to court proceedings.41 The legal

equal treatment of the parties involved,

deadlines, disclosing the names of arbitrators,

position is that where parties cannot come

regardless of what law is determined to apply

the delivery address, and the language the

to an agreement on appropriate procedure

to due process. It is the duty of an enforcing

notice is in.

or where procedure is decided by the

court to refuse an enforcement application

—————————————————

arbitrators, the arbitrators are constrained

is brought or where the proceedings occur.

28

process is that of the seat of arbitration.

31

Charter and Arbitral Rules of Procedure adopted by the GCC Commercial Arbitration

if arbitrators do not comply with basic due

Proper Notice Standards

process doctrines. 29 However, again the

—————————————————

CCPL only.42 No mandatory regulations

national law of GCC countries – including

Regardless of whether the party was

concerning proper notice currently exist

Kuwait – concerns only the due process in

in attendance, proper notice must be

in the UAE or Kuwait.43 It is simply stated

the context of the summons or notice to

provided.32 If this is not done, a foreign

that the arbitrators will notify the parties

appear and not the right of the parties to

arbitral award will not be enforced by the

of the date and location of the first sitting

present their case. It is submitted that such

courts.33 However, the issue arises as to

for a dispute hearing.44 The Explanatory

aspect of due process can be dealt with under

what standard of notice is acceptable. The

Memorandum explains this issue further,

the broad concept of public policy.

general view is that the notice does not need

stating that proper notice will be deemed

—————————————————

Proper Notice

to take any specific form. Nonetheless, the

to have been given if it is sent by registered

standards as specified under applicable law

post or through any more simplified forms

—————————————————

will be the primary determinants of whether

that can ensure that parties have received

The above discussion has clarified

proper notice has been given.35 As a result,

the notification of the place and time of

that, except in cases where the national law

it is necessary to examine the standards

a hearing.45 It is the fact that notification

of the location of enforcement has been

that exist under GCC nations’ national

has been given rather than the form of the

chosen by the parties as the applicable law

laws and under international arbitration

notification that is of concern here. Provided

for arbitration proceedings, enforcing courts

legislation. International arbitration law

that a party is notified of the hearing, the

of GCC countries will not apply their own

does not contain many details in terms of

form this notification takes is irrelevant.

national rules when determining due process

the standards of proper notice. Under the

Consequently, enforcing courts may take a

issues. For the cases in which GCC national

UNCITRAL Model Law,

for instance,

broader approach to interpreting “proper

law is selected by the parties, it is worthwhile

for parties that disagree on a particular

notice.” It is likely that the UNCITRAL

to explore GCC legal provisions. In terms

procedure, proper notice will be considered

Rules and other international arbitration

of a lack of due process, the most significant

to have occurred when delivered via written

law standards relating to this matter will be

aspect is the requirement that the losing party

communication sent by registered or ordinary

highlighted. Furthermore, as it is possible

be able to, firstly, provide a translated version

post or any other method where a record

for arbitration to take place when one party

of applicable law if not written in Arabic

of attempted delivery exists, including

is not present, the fact that a losing party

and, secondly, prove a failure in due process.

electronic communication methods. The

was aware of the arbitration denies them

30

34

37

36

Currents 23.1 2016

36

by the rules of the relevant section of the


any grounds for seeking the dismissal of the

arbitration can continue without the presence

remark to be made about this provision

enforcement of an award. An award can be

of all parties, it is uniformly advised that

is that the agreement between the parties

granted even when the other party does not

notice be made by registered post to prevent

concerning arbitration proceedings and the

show up to the hearing as notified. The

any assertion that notice was never received.

composition of the arbitral tribunal takes

sections on arbitration in the Code of Civil

—————————————————

precedence over other rules.56 It is only when

46

such an agreement does not exist that the

requirements. It is within the authority of

Arbitration Proceedings and the Composition of the Arbitral Tribunal

arbitrators to decide on arbitration procedure

—————————————————

Consequently, article V(1)(d) of the NYC58

as long as the parties’ rights are guaranteed.48

A losing party may choose to seek the

is most commonly understood to indicate

In Bahrain and Oman, notice does not need

refusal of an application for the enforcement

that the rules as set out in an arbitration

to take a particular form. This is in line with

of a foreign arbitral award in a GCC nation on

agreement govern decisions on whether

the UNCITRAL Model Law. Arbitration

the basis that there has been an abnormality

the proceedings or tribunal composition

law in Saudi Arabia does provide formal

in the way the arbitral tribunal was composed

have suffered any irregularities, regardless

requirements for notification, which are very

or in the arbitration proceedings themselves.

of whether these rules are contrary to the

close to the procedural rules adopted by the

—————————————————

law of the country where arbitration took

Board of Grievances.

place.59 Additionally, it must be considered

process. Yet, article 36 of Saudi Arabia’s

The NYC plays a crucial part in establishing the legal setting for international arbitration proceedings by making the law of the location of arbitration less important than the agreement between the parties, and by removing the role of the procedural regulations of other jurisdictions altogether.

Arbitration Regulations does make reference

—————————————————

regulations of other jurisdictions altogether.61

to the general due process principle of

Only Bahraini law and the NYC permit

Although the agreement between the

informing the parties of claim proceedings

this ground for invalidity, with other GCC

parties takes precedence, the demands of

and states that an arbitration panel must

52

legal systems remaining silent on the issue.

due process must still be satisfied. If not,

observe the “principles of litigation.” As a

The NYC stipulates that the enforcement

articles V(1)(b) or V(2)(b) of the Convention

result, it can be concluded that an enforcing

of an arbitral award may be denied if it

can be invoked to seek the refusal of the

court is able to rely on the aforementioned

can be shown that the arbitral tribunal was

enforcement of an award.62 It is clear from

text to apply a broad interpretation of proper

not composed properly, the arbitration

this that articles V(1)(b) and V(1)(d) overlap

notice so that the notification is sufficient to

proceedings were not carried out in line with

as they both concern alleged infringements

satisfy the requirement, rather than adhere to

the agreement as determined by the parties,

of correct arbitration procedures. So, even if

any particular formal requirements.

or such an agreement does not exist, in line

it is the clear decision of the parties that the

In summary, notice requirements would

with the law of the nation in which arbitration

arbitrators’ names should not be disclosed,

not result in any difficulties provided that the

took place. These same stipulations appear

this goes against a fundamental principle of

parties were aware of the time and place of

in the Bahraini International Commercial

due process. Therefore, articles V(1)(b) or

the arbitration proceedings. Nonetheless, as

Arbitration Law.

V(1)(d) can be used to prevent an award from

and Commercial Procedure of Qatar and of Bahrain make no reference to proper notice 47

49

For example, notification of parties must be made by a clerk of authority and must include specific details. However, 50

these rules do not apply outside of arbitration that occurs within Saudi Arabia regardless of whether the parties have agreed on this procedure and Saudi Arabian law has been selected as the law governing the arbitration 51

53

54

55

The most important

law of the state in which the arbitration took place will be deemed to govern the process.57

that the parties’ intent may arise from an explicit agreement on rules or from a more vague reference to specific arbitration rules or laws.60 The NYC plays a crucial part in establishing the legal setting for international arbitration proceedings by making the law of the location of arbitration less important than the agreement between the parties, and by removing the role of the procedural

37

Currents 23.1 2016


being enforced.63 The courts seldom uphold

that raising a claim that the composition of

a number of court rulings have applied

an objection on the basis of article V(1)(d)

an arbitral tribunal was irregular is seldom

estoppel in relation to article V(1)(d). This

despite the copious amount of academic

successful. There are four key situations that

has especially been the case where the

writing this ground has generated. One

give rise to this defense being refused: 1) the

parties have not raised any protest during

academic has commented that this is because

irregularity is only minor; 2) the application

arbitration itself. In Hong Kong,73 a resisting

a key advantage of arbitration is the capacity

of the doctrine of estoppel; 3) the court

party claimed that there were irregularities

for the parties to decide upon panel members

chooses to apply the law of the nation in

in the composition of the arbitral tribunal

that specialize in the relevant area of

which the arbitration took place to allow

as the arbitrators were selected from the

dispute. As there are only a limited number

an award to be enforced and pays no heed

Shenzhen list, when the parties had agreed

of such experts, they may find themselves

to the arbitration agreement; and 4) the

that they would be chosen from the Beijing

serving on a number of arbitration panels

court believes that the parties subsequently,

list. The High Court recognized that this

simultaneously, some of which may have

and implicitly, agreed to the change in the

defense against enforcement had been

parties in common. Also, courts will not take

composition of the arbitral tribunal.

proved, but nonetheless refused it on the

64

69

to broad claims of prejudice very well if these

Regarding the first point, as a general

basis of the doctrine of estoppel. They

objections have not been brought before the

rule, courts do not consider minor anomalies

reasoned that the party had made no

tribunal itself, but are used to try and prevent

in an arbitral tribunal’s composition. To

protest during arbitration.74 This doctrine

enforcement. This is because the promotion

illustrate, in a case heard in Hong Kong,70 it

has also prevented the ground of improper

of arbitration and thus enforcement of

was argued that the institute that granted the

composition of a tribunal from succeeding

awards is a key objective of the NYC.

65

award, the China International Economic and

in a case where the arbitration agreement

Such assertions may even be considered

Trade Arbitration Commission (CIETAC),

stated that the third arbitrator should not

by the court to be made in bad faith. 66

was not the arbitral organization specified in

have any connection with either party,75 and

Moreover, the majority of arbitration laws

the contract. However, China’s international

in a case where an arbitrator was not able to

and rules as well as parties to arbitration give

arbitration institute, the Foreign Economic

speak German, contrary to the agreement.76

arbitrators significant discretion regarding

Trade Arbitration Commission (FETAC),

Moreover, courts have accepted an

the arbitration proceedings, which makes

had changed its name to CIETAC and

application for the enforcement of an award

it challenging to successfully invoke this

the Supreme Court determined that both

when the composition of the arbitral tribunal

ground for invalidity.67 The enforcement of

institutes were the same legal entity, and thus

was in accordance with the law of the seat

foreign arbitral awards has only been denied

the defense that the arbitral authority was not

of arbitration rather than the agreement

under article V(1)(d) in a handful of cases.

that named in the agreement failed.

between the parties. In the U.S., a resisting

—————————————————

—————————————————

party protested that one lone arbitrator had granted the award when the agreement had

An

An irregularity occurs when the composistion of the tribunal does not adhere to the arbitration agreement or, if there is such agreement, the law of the country in which arbitration took place.

irregularity occurs when the composition of

—————————————————

law.78 This approach has also been taken by

the tribunal does not adhere to the arbitration

In addition, the enforcing court can

other national courts,79 which view this issue

agreement or, if there is such agreement, the

rely upon the application of the doctrine of

in a way that promotes the enforcement of

law of the country in which arbitration took

estoppel to refuse this defense. The NYC

awards.80 Nonetheless, this interpretation

place. A review of court applications reveals

makes no reference to estoppel; however,

appears to go against the unequivocal

The Composition of the Arbitral Tribunal

————————————————— Irregularities in the composition of the arbitral tribunal is the first defense against enforcement under article V(1)(d).

68

71

72

38

Currents 23.1 2016

required three arbitrators. The U.S. Court of Appeals77 allowed the enforcement of the award as the composition of the arbitral tribunal was in line with the law of the seat of arbitration, specifically, English arbitration


wording of the NYC by giving an agreement

party and the final one by both parties

of the arbitral award. 90 As a result, the

between parties precedence over the law of

together. Despite these requirements, a single

courts must handle a huge range of different

the seat of arbitration, especially in cases

arbitrator granted the award in London. The

procedural infringements, such as tribunals

where this agreement is in line with the

resisting party objected to enforcement on

not making an award within the deadlines set

mandatory regulations of the seat.81

the ground that the tribunal composition

by the applicable agreement or law, tribunals

Lastly, courts can reject the defense

did not comply with the agreement. It was

not making a logical award, tribunals not

of irregularity in the composition of an

highlighted by the Court of Cassation that

applying the correct rules for procedure,

arbitral tribunal if it is believed that the

English arbitration law provides that a

tribunals not carrying out arbitration in the

parties later, and implicitly, accepted the

single arbitrator appointed by one party can

agreed location, and tribunals that do not

changes. The German Court of Appeals

determine a dispute when the other party has

either address or set aside requests regarding

allowed enforcement where the tribunal was

not appointed an arbitrator, despite being

evidentiary issues.

not composed as per the initial agreement,

asked to do so. Thus, the Court allowed

—————————————————

because it determined that the conclusion

enforcement and rejected the resisting

of a contract with the arbitrator indicated

party’s objection. This illustrates that the

consent to future changes in the tribunal’s

Court of Cassation used the law of the

The question arises whether every infringement of procedural rules results in non-enforcement.

composition.82

seat of arbitration to limit the efficacy of

—————————————————

It appears that this defense has

this defense. In this way, it was determined

The question arises whether every

succeeded in just two instances where

that the objecting party could not protest

infringement of procedural rules results in

the courts did give the parties’ agreement

against enforcement based on their own

non-enforcement. It has been highlighted by

precedence. The Italian Court of Appeals did

lack of participation in the arbitration

Fouchard, Gaillard, and Goldman91 that there

not allow enforcement when the agreement

process. It is of course too early to judge the

is a flaw in article V(1)(d) of the Convention,

had required three arbitrators to make the

stance of Kuwaiti courts based on just one

in that it offers no guidance regarding what

award determination and only two did so,

decision, but in the researcher’s view it can

procedural infringements are severe enough

regardless of the fact that the use of two

be concluded that this decision accords with

to warrant the non-enforcement of an

arbitrators complied with the law of the seat

the primary goal of the NYC to encourage

award. The courts and legal commentators

of arbitration. The U.S. Court of Appeals

and promote enforcement, and this approach

have dealt with this issue by taking the view

decided similarly when a third arbitrator was

should be followed in future cases.

that non-enforcement should only occur if

not appointed by the Commercial Court

—————————————————

a procedural infringement was substantial

83

in Luxembourg, in contravention of the 84

parties’ agreement.

85

87

88

The Aribitration Proceedings

or resulted in a party suffering significant prejudice.92 It is thus required by the courts

The courts of GCC nations have thus

—————————————————

that a resisting party prove this state of

far not dealt with this matter, save for one

Under article V(1)(d) of the NYC,89 a

affairs if the enforcement of an award is to

notable exception. In 1981, the Kuwaiti

further ground for resisting the enforcement

be denied. It is understood by jurisprudence

Court of Cassation enforced a foreign

of an award is that the rules governing the

that a procedural infringement is serious if it

arbitral award in a case where the agreement

arbitration proceedings, as per an arbitration

has an impact on the arbitration proceedings

of the parties regarding the composition of

agreement or, in its absence, the law of the

to such an extent that the tribunal would

the arbitral tribunal had not been respected.86

nation in which arbitration occurred, were

have made a different decision had the

It was stipulated in the agreement that three

breached by an arbitral tribunal.

infringement not occurred.93

arbitrators from the London Maritime

Arbitration proceedings are inclusive of

Given the above approach, a procedural

Arbitrators Association would make up

all parts of the arbitration process from the

violation committed by an arbitral tribunal

the arbitral tribunal, one chosen by each

filing of the complaint to the determination

will not be enough per se to result in the

39

Currents 23.1 2016


non-enforcement of an award. The majority

how to make a counterclaim.100

—————————————————

of courts, for example, have decided that an

In Kuwait and Saudi Arabia, there is

award will still be enforced where an arbitral

case law addressing the defense, but this is

tribunal has exceeded the relevant deadlines

not the situation in other GCC nations. An

established by the agreement.94 Furthermore,

intriguing decision regarding article V(1)

in situations where these elements are not

(d)101 was handed down in Kuwait in 1986. In

demanded by the applicable arbitration law,

this case, the parties agreed that contractual

From these cases, it can be inferred that the courts in Saudi Arabia and Kuwait will only reject an application for the enforcement of an award if substantial procedural infringements have occurred.

granting an unreasoned award or granting an

disputes would be arbitrated by a three-

—————————————————

award without holding an oral hearing does

arbitrator panel in London, with one party

From these cases, it can be inferred

not constitute a procedural infringement as

deciding on one arbitrator, the other party

that the courts in Saudi Arabia and Kuwait

per article V(1)(d).95

on the second arbitrator, and the two parties

will only reject an application for the

A court may still apply the doctrine of

together deciding on the third arbitrator.

enforcement of an award if substantial

estoppel to enforce an award even when a

Upon reading the award, it was determined

procedural infringements have occurred.

substantial and unequivocal infringement

by Kuwait’s Court of Appeals that the third

It is suggested here, however, that GCC

of procedure has occurred. Numerous

arbitrator had acted as an umpire in the

courts should take a variety of factors

courts have refused this defense where

arbitration proceedings and had instructed

into account when deciding this issue.

the resisting party made no protest to the

the other two arbitrators to decide the issue.

A first consideration is that procedural

procedural violation when it arose, especially

As a result, the arbitral award was granted by

infringements should seemingly have an

in cases where the applicable procedural

only two arbitrators, which was seen by the

impact on the award issued in order for

requirements demand that objections be

court to contravene the applicable procedural

enforcement to be denied. This view is in line

raised sufficiently early.96

rules, and thus led to a successful defense

with the general principle that a procedure

against enforcement under article V(1)(d)

will not be deemed null and void unless the

of the Convention.

procedural irregularity caused damage to the

Procedural violations as grounds for the non-enforcement of an award have mostly been unsuccessful. There are, however, a

102

a losing party

other party.107 Thus, the enforcement of a

few examples of success. A Swiss Court

sought to have the enforcement of a foreign

foreign arbitral award should only be refused

of Appeals rejected an application for the

arbitral award refused on the grounds that the

if, but for the procedural irregularity, the

enforcement of an award because arbitration

arbitral tribunal had violated Saudi Arabian

arbitral tribunal would have made a different

was carried out in two stages, which was

procedural rules, and that the arbitration had

determination.108 A second consideration

not provided for in the law governing this

been not been carried out in the agreed-upon

the courts should bear in mind is whether

arbitration procedure. A Turkish Court of

location. It was decided by the Board of

the party objected to the infringement in

Appeals did not allow the enforcement of

Grievances that the agreement between the

the seat of arbitration. If such objection

an award in a case involving an award made

parties was for the dispute to be resolved in

was made and was unsuccessful, then the

in Switzerland and subjected to Switzerland’s

Paris by ICC arbitration.104 Consequently, the

same objection should not be allowed to

procedural law. It was decided that Turkey’s

arbitration proceedings were not governed by

be heard again. Additionally, it should be

procedural law should have been applied

Saudi Arabian procedural rules. In addition,

confirmed that the objecting party had

by the arbitral tribunal as demanded by the

the Board of Grievances highlighted that the

not surrendered their right to object to

arbitration agreement.99 Also, a Dutch court

ICC decided the arbitration,105 even though

a procedural infringement when it arose,

denied enforcement in a case where the

it was carried out in Jordan, making the issue

particularly in cases where applicable rules

arbitration panel chairperson in Moscow had

of the seat of arbitration less important. The

on procedure govern the relevant issue.

made inappropriate contact with a party in

objection was thus refused and the award

which the chairperson advised the party on

enforced.106

97

98

In a Saudi Arabian case,

40

Currents 23.1 2016

103


—————————————————

also submitted here that the other strand of

during the arbitration itself. Again, this is a

due process, namely, the right of the parties

stance that can be considered as progressive,

—————————————————

to present their case, can still be invoked

and the researcher agrees that this position

The purpose of the above discussion

through the operation of the ground of

is consistent with Kuwait’s treaty obligations

has been to provide an explanation of

public policy. It is generally acknowledged

and international standard.

two grounds for resisting enforcement of

that a lack of due process under article V(1)

Finally, problems with the composition

foreign arbitral awards in Kuwait: a party

(b) overlaps with article V(2)(b)’s public

of a tribunal are not viewed favorably by

not being provided with appropriate notice

policy defense. General consensus holds

courts, and even in cases where irregularity

or not being able to present their case, and

that a lack of due process in arbitration be

under article V(1)(d) is shown to exist, a court

the improper composition109 of the arbitral

determined by the law of the country in

may still rule in favor of enforcement.121 This

tribunal or anomalies in the proceedings.110

which enforcement is being pursued.119

research finds that there are four reasons

Summary

Under the NYC,

the burden of proof

Alternatively, it is argued that the

why courts choose enforcement in these

of these two grounds rests on the party

applicable law for this issue is that selected

situations: 1) the irregularity is minor; 2) the

seeking to have enforcement refused.

In

by the parties or the law of the seat of

doctrine of estoppel applies; 3) the court

contrast, the relevant legal provisions found

arbitration. GCC courts have indicated that

disregards the arbitration agreement and

in the laws of Bahrain, the UAE, Qatar,

they follow this second view. While a lack

applies the law of the location of arbitration;

place the burden of

of proper notice is often used as grounds

and 4) the court finds that the parties

This, in the

to resist the enforcement of an award, this

have implicitly agreed to changes in the

researcher’s view, is a major deviation that

argument is rarely successful. The prevailing

composition of the tribunal. This is another

goes against the very purpose of the NYC

view is that a party must be notified of

instance of Kuwaiti law narrowly applying

in supporting enforcement. Moreover, it is

the arbitrators, but that the form of this

the ground for refusing enforcement of

necessary to interpret the defenses against

notification is not important. Short deadlines

foreign arbitral awards.

115

enforcement found in the NYC narrowly.

are not normally considered to indicate a

National courts and legal writers have

lack of due process. In this respect, Kuwaiti

construed these grounds in a number of

law arguably follows the majority of court

different ways.116 In terms of a lack of due

practices in many countries which requires

process, this principle is not understood

the violation of due process to be so severe

in the same way across regimes. Article

as to be determinative of the outcome award.

V(1)(b) of the Convention provides the

The same standard applies in the context

most advanced form of this concept and

of the parties’ right to present their case. The

includes a party’s right to receive appropriate

requirement that a party be able to present

notice and requires that all parties be given

their case includes any severe anomaly in the

the opportunity to present their case.

117

arbitration process that may result in a party

Other conventions and national legislation,

not being able to present their argument.120

including Kuwaiti law, only refer to a party’s

This defense may be denied by a court if the

right to be notified of proceedings and/

anomaly was not severe. Rejection of this

or represented appropriately.118 Therefore,

defense is especially likely if this anomaly

it can be concluded that the notion of due

did not result in the award being decided

process as a ground to refuse enforcement

differently, if it is a result of the resisting

of foreign awards in Kuwait is narrower than

party’s own behavior, or if this party did

the one provided in the NYC. However, it is

not make any protest regarding procedure

111

112

Oman, and Kuwait

113

proof on the enforcing party.

114

41

Currents 23.1 2016


End Notes 1. Mary Lu, The New York Convention of the Recognition and Enforcement of Foreign Arbitral Awards: Analysis of the Seven Defenses to Oppose Enforcement in the United States and England, 23 ARIZ. J. INT’L & COMP. L. 748, 764 (2006). 2. Id. 3. United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards art. V(1) (b), June 10, 1958, 21 U.S.T. 251, 330 U.N.T.S. 3 [hereinafter New York Convention]. 4. Riyadh Arab Agreement for Judicial Cooperation art. 37(d), Apr. 6, 1983 [hereinafter Riyadh Convention]. 5. Arab Convention for Enforcement o f Judgments (and Ar bi tr a l Awards) of 1952 art. 3(d), Sept. 14, 1952 [hereinafter Arab League C o n v e n t i o n ] , h t t p : / / w w w. aiarbitrators.com/#!blank/c10t5. 6. Gulf Cooperation Council Convention on Execution of Judgments, Deleg ations and Judicial Notifications art. 2(b), 1996 [hereinafter GCC Convention]. 7. Bahrain Civil and Commercial Procedure Act, art. 252(2) (No. 12/1971); Kuwait Civil and Commercial Procedures Law, art. 199(b) (No.38/1999); Qatari Code of Civil and Commercial P r o c e d u r e L aw, a r t . 3 8 0 ( 2 ) (No.13/1990); Oman Code of Civil and Commercial Procedure, art. 352(b) (No. 29/2002); UAE Civil Procedure, art. 235(c) (No. 11/1992). 8 . A L B E R T J A N VA N D E N B E RG, T H E N E W YO R K ARBITRATION CONVENTION O F 1 9 5 8 : T O WA R D S A UNIFORM JUDICIAL INTERPRETATION 297 (Kluwer Law and Taxation Publishers 1981); ALAN REDFERN AND MARTIN HUNTER, LAW AND PRACTICE OF INTERNATIONAL COMMERCIAL ARBITRATION 448 (Nigel Blackaby & Constantine Partisides eds., Sweet & Maxwell 4th ed. 2004). 9. JULIAN D M LEW, LOUKAS A MISTELIS AND STEFAN M KROLL, COMPARATIVE I N T E R N A T I O N A L ARBITRATION 711 (Kluwer Law International 2003); REDFERN & HUNTER, supra note 8. 10. LEW ET AL., supra note 9. 11. Id. 12. New York Convention, supra note 3. 13. United Nations Conference on Trade & Development, Dispute Settlement: International Commercial Arbitration 32 (2003),

http://unctad.org/en/Docs/ edmmisc232add37_en.pdf. 14. Cour d’appel [CA] [regional court of appeal] Paris, May 10, 1971, YCBA 1971, 1, 184, (Fr).; VAN DEN BERG, supra note 8; LEW ET AL., supra note 9; FOUCHARD E T A L . , F O U C H A R D, G A I L L A R D, & G O L D M A N ON INTERNATIONAL COMMERCIAL ARBITRATION 986 (Emmanuel Gaillard & John Savage eds., Kluwer Law International 1999); DOMENICO DI PIETRO & MARTIN P L AT T E , E N F O RC E M E N T OF INTERNATIONAL ARBITRATION AWARDS: THE NEW YORK CONVENTION 149 (Cameron May 2001). 15 See Hebei Imp. & Exp. Corp v Polytek Eng’g Co Ltd., [1999] 1 HKLDR 552, (H.K.C.F.A.R.) (H.K). 16.ABDULLAH MUBARAK ALDELMANY ALENEZI, A N A N A LY T I C A L S T U DY OF RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWARDS IN THE GCC STATES 221 (Sept. 2010) (unpublished thesis, University of Stirling School of Law) (on file with University of Stirling) [hereinafter Alenezi], http://dspace. stir.ac.uk/bitstream/1893/2943/1/ Abdullah%20Thesis.pdf. 1 7 . Fe r n a n d o M a n t i l l a - S e r r a n o, Towards a Transnational Procedure Public Polic y, in TOWARDS A UNIFORM INTERNATIONAL A R B I T R AT I O N L AW ? 1 6 3 (Emmanuel Gaillard et al. eds., 2005); LEW ET AL., supra note 9; FOUCHARD ET AL., supra note 14; VAN DEN BERG, supra note 8 at 298; Gabrielle Kaufman-Kohler, Globalization of Arbitral Procedure, 36 VAND. J. OF TRANSNAT’L L. 1313, 1321 (2003). 18. LEW ET AL., supra note 9; Robert B. von Mehren, Enforcement of Foreign Arbitral Awards in the United States, 1 INT’L ARB. L. REV. 198, 200 (1998). 19. LEW ET AL., supra note 9; Richard Gar nett, Inter national Arbitration Law: Progress Towards Harmonisation, 3 MELB. J. INT’L L. 400, 406 (2002); ANDREW T W E E D DA L E & K E R E N TWEEDALE, ARBITRATION OF COMMERCIAL DISPUTES: INTERNATIONAL AND ENGLISH LAW AND PRACTICE 233 (Oxford University Press 2007); Ramona Martinez, Recognition and Enforcement of International Arbitral Awards Under the United Nations 42

Currents 23.1 2016

Convention of 1958: The “Refusal” Provisions, 24 INT’L L. 487, 499 (1990). 20. DI PIETRO & PLATTE, supra note 14; REDFERN & HUNTER, supra note 8. 21. Dutch Seller v. Swiss Buyer, IV YBCA 309, 310 (Switzerland Court of Appeal, 1979); Irvani v. Irvani, 1 Lloyd’s Rep 412 (English Court of Appeal, 2000); Kanoria v. Guinness, [2006] EWCA Civ 222 (English Court of Appeal, 2006); Parsons and Whittemore Overseas Co., Inc., v. Societe Generale de L’industrie Du Papier (RAKTA), 508 F.2d 969, 975 (2d Cir. 1974). 22. Id. 23. See Hebei Imp. & Exp. Corp v Polytek Eng’g Co Ltd., [1999] 1 HKLDR 552, (H.K.C.F.A.R.) (H.K.); Ukrvneshprom State Foreign Economic Enterprise v. Tradeway Inc., 1996 WL 107285, at *5 (S.D.N.Y. 1996). 24. Bahrain Civil and Commercial Procedure Act, art. 238 (No. 12/1971); Kuwait Civil and Commercial Procedures Law, art. 179 and 182 (No.11/1995); Qatari Code of Civil and Commercial Procedure Law, art. 198 and 200(1) (No.13/1990); Oman Code of Civil and Commercial Procedure, art. 25, 30 and 33 (No. 29/2002); UAE Civil Procedure, art. 208 and 212 (No. 11/1992); Kingdom of Saudia Arabia Law of Arbitration, art. 39 (Royal Decree No. M/34). 25. ALENEZI, supra, note 16, at 222. 26. See Case no. 2660/1996/Egyptian Concrete Company & Hashem Ali Maher v. STC Finance & Ismail Ibrahim Mahmoud Thabet & Sabishi Trading and Contracting Company, (Court of Cassation, Egypt). 27. UAE Civil Procedure, art. 208 and 212 (No. 11/1992). 28. UAE Civil Code, art. 21. 29. ALENEZI, supra, note 16, at 223. 30. Bahrain Civil and Commercial Procedure Act, art. 238 (No. 12/1971); Kuwait Civil and Commercial Procedures Law, art. 179 and 182 (No.11/1995); Qatari Code of Civil and Commercial Procedure Law, art. 198 and 200(1) (No.13/1990); Oman Code of Civil and Commercial Procedure, art. 25, 30 and 33 (No. 29/2002); UAE Civil Procedure, art. 208 and 212 (No. 11/1992); Kingdom of Saudia Arabia Law of Arbitration, art. 39 (Royal Decree No. M/34). 31. Albert Jan van den Berg, Consolidated Commentary Cases Reported in Volumes XXII (1997) - XXVII (2002), 28, Y.B. COMM. ARB. 655 (2003). 32.FRASER D AV I D S O N , INTERNATIONAL COMMERCIAL ARBITRATION: SCOTLAND AND THE UNCITRAL MODEL LAW

201 (1991). 33. Id. at 204. 34. Presse Office SA v. Centro Editorial Hoy SA, 1979 Y.B. COMM. ARB. (ICCA) 301; Malden Mills Inc. v. Hilaturas Lourdes SA, 1979 Y.B. COMM. ARB. (ICCA) 303; Albert Jan van den Berg, THE NEW YORK ARBITRATION CONVENTION OF 1958, at 303 (1981); LEW ET AL., supra note 9, at 675; Generica Ltd. v Pharmaceuticals Basics Inc. 1998 Y.B. COMM. ARB. (ICCA) 1076; Shipowner v. Charterer 2007 Y.B. COMM. ARB. (ICCA) 373; Karaha Bodas Co., L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara No. 07-619, 2007 U.S.App. LEXIS 21458, at *119 2007 U.S. S. Ct. Briefs LEXIS 2836.. 35. LEW ET AL., supra note 9, at 107. 3 6 . U N C I T R A L M o d e l L aw o n International Commercial Arbitration art. 3, 24 I.L.M. 1302 (1985) [hereinafter UNCITRAL]. 3 7 . F R A S E R D AV I D S O N , I N T E R N A T I O N A L COMMERCIAL ARBITRATION: SCOTLAND AND THE UNCITRAL MODEL LAW 34 (1991); LEW ET AL., supra note 9, at 513. 38. ICC Rules of Arbitration art. 3(2), ICC Publication 865-1 ENG (2012) [hereinafter ICC]. 39. UNCITRAL, supra note 36 at art. 3. 40. The Charter and Arbitral Rules of Procedure art. 10, Dec. 1993. 41. THE BAHRAIN CIVIL AND COMMERCIAL PROCEDURES ACT [CIVIL CODE] art. 238 (Bahrain); CIVIL AND COMMERCIAL PROCEDURE CODE [CIVIL CODE] art. 1 7 9 ( Ku wa i t ) ; C I V I L A N D COMMERCIAL PROCEDURE LAW [CIVIL CODE] art. 200 ( Q a t a r ) ; O M A N I L AW O F ARBITRATION IN CIVIL AND COMMERCIAL DISPUTES, arts. 7, 30 (Oman); ARBITRATION LAW OF 2012 [CIVIL CODE] art. 6 (Saudi Arabia); THE UAE CODE OF CIVIL PROCEDURE [CIVIL CODE] art. 208 (U.A.E.). 42. CIVIL AND COMMERCIAL PROCEDURE LAW [QATAR C. CIVIL] [CIVIL CODE] art. 198 (Qatar); OMANI LAW OF ARBITRATION IN CIVIL AND COMMERCIAL DISPUTES, art. 25 (Oman); CIVIL AND COMMERCIAL PROCEDURE CODE [CIVIL CODE] art. 182 (Kuwait); ARBITRATION LAW OF 2012 [CIVIL CODE] art. 15


(Saudi Arabia); THE UAE CODE OF CIVIL PROCEDURE [U.A.E. C. CIV.] [CIVIL CODE] art. 212 (U.A.E.). 43. THE UAE CODE OF CIVIL PROCEDURE [CIVIL CODE] art. 208 (U.A.E.); CIVIL AND COMMERCIAL PROCEDURE CODE [CIVIL CODE] art. 182 (Kuwait). 44. THE UAE CODE OF CIVIL PROCEDURE [CIVIL CODE] art. 208 (U.A.E.); CIVIL AND COMMERCIAL PROCEDURE CODE [CIVIL CODE] art. 179 (Kuwait). 45. CIVIL AND COMMERCIAL PROCEDURE CODE [CIVIL CODE] art. 179 (Kuwait). 46. THE UAE CODE OF CIVIL PROCEDURE [CIVIL CODE] art. 208 (U.A.E.); CIVIL AND COMMERCIAL PROCEDURE CODE [CIVIL CODE] art. 179 (Kuwait). 47. THE BAHRAIN CIVIL AND COMMERCIAL PROCEDURES AC T [ C I V I L C O D E ] a r t . 238 (Bahrain); CIVIL AND COMMERCIAL PROCEDURE LAW [CIVIL CODE] art. 198 (Qatar). 48. HASSAN ALI RADHI, JUDICIARY A N D A R B I T R AT I O N I N BAHRAIN, 186 (2002). 49. UNCITRAL, supra note 36 at art. 3. 50. ARBITRATION LAW OF 1983 [CIVIL CODE] art. 8 (Saudi Arabia). 51. ARBITRATION LAW OF 2012 [CIVIL CODE] art. 2 (Saudi Arabia). 52. CIVIL AND COMMERCIAL PROCEDURE LAW [CIVIL CODE] art. 198 (Qatar); CIVIL AND COMMERCIAL PROCEDURE CODE [CIVIL CODE] art. 182 (Kuwait); OMANI LAW OF ARBITRATION IN CIVIL AND COMMERCIAL DISPUTES, art. 25 (Oman); ARBITRATION LAW OF 2012 [CIVIL CODE] art. 2 (Saudi Arabia); THE UAE CODE OF CIVIL PROCEDURE [CIVIL CODE] art. 212 (U.A.E.). 53. New York Convention, supra note 3 at art. V(1). 54. New York Convention, supra note 3 at art. V(1)(d). 55. HASSAN ALI RADHI, JUDICIARY A N D A R B I T R AT I O N I N BAHRAIN, 202 (2002). 56.GIORGIO GAJA, I N T E R N AT I O N A L C O M M E R C I A L ARBITRATION: NEW YORK CONVENTION, at I.C.3 (1978). 57. UN Doc E/CONF 26/SR3, 4. U.N. Conference on Int’l Commercial Arbitration, Summary Record of

the Third Meeting, U.N. Doc. E/ CONF.26/SR.3 (Sept. 12, 1958); Summary Record of the Fourth Meeting, U.N. Doc. E/CONF.26/SR.4 (Sept. 12, 1958). 58. New York Convention, supra note 3 at art. V(1)(d). 59. GAJA, supra note 56, at I.A.3; VAN DEN BERG, supra note 8, at 324-31; KARL-HEINZ BÖCKSTIEGEL ET AL., ARBITRATION IN GERMANY: THE MODEL LAW IN PRACTICE 544 (2008); JEAN F. POUDRET & SEBASTIEN BESSON, COMPARATIVE LAW OF INTERNATIONAL ARBITRATION 838 (2007); F R A S E R D AV I D S O N , I N T E R N AT I O N A L C O M M E R C I A L ARBITRATION: SCOTLAND AND THE UNCITRAL MODEL LAW 203 (1991); DI PIETRO & PLATTE, supra note 14, at 163; FOUCHARD ET AL., supra note 14. 6 0 . X v X 2 0 0 6 Y. B. C O M M . A R B. ( I C C A ) 6 4 0 ; R E N É DAVID, ARBITRATION IN INTERNATIONAL TRADE 399 (1985); FOUCHARD ET AL., supra note 14; EMMANUEL GAILLARD & DOMENICO DI PIETRO, ENFORCEMENT OF ARBITRATION AGREEMENTS A ND INTE RNATIO NA L ARBITRAL AWARDS: THE NEW YORK CONVENTION 1958 IN PRACTICE 730 (2009); GAJA, supra note 56. 61.GARY B. BORN, I N T E R N AT I O N A L C O M M E R C I A L A R B I T R A T I O N : COMMENTARY AND MATERIALS, 764-65, (Kluwer Law International, 2nd ed. 2001). 62. BOCKSTIEGEL ET AL., supra note 59, at 534-35; VAN DEN BERG, supra note 8, at 312-31. 63. Joseph T. McLaughlin & Laurie Genevro, Enforcement of Arbitral A wa r d s u n d e r t h e N e w Yo r k Convention - Practice in U.S. Courts, 3 INT’L TAX & BUS. LAW, 249, 266-67 (1986). 64. LEW ET AL., supra note 9, at 26-95; DI PIETRO & PLATTE, supra note 14, at 163. 65. New York Convention, supra note 3.. 66. Diana G. Richard, Enforcement of Foreign Arbitral Awards Under the United Nations Convention of 1958: a Survey of Recent Federal Case Law, 11 MD. J. INT’L L 13, 32 (1987). 67. BOCKSTIEGEL ET AL., supra note 59, at 547-48; VAN DEN BERG, supra note 8, at 323. 68. New York Convention, supra note 3. 69. INTERNATIONAL COUNCIL fOR COMMERCIAL

A R B I T R A T I O N : NEW HORIZONS IN I N T E R N AT I O N A L COMMERCIAL ARBITRATION AND BEYOND 302-05 (Albert Jan van den Berg ed., 12 ed. 2005). 70. ALAN REDFERN ET AL., L AW O F P R AC T I C E O F COMMERCIAL ARBITRATION 451-52 (London Sweet & Maxwell, 4th ed. 2004). 71. Shenzhen Nan Da Industrial & Trade United Company Limited v. FM International Limited, [1992] 1 H.K.C. 328, 379 (H.C.). 72. Combe v. Combe [1951] 2 K.B. 215 (AC) (appeal taken from Eng). 73. REDFERN & HUNTER, supra note 8, at 451-53. 74. Id. 75. X v. Y [2004] EWCA (Civ) 662 [673], [675]-[676] (Eng.). 76. Imperial Ethiopian Government v. Baruch-Foster Corp., 535 F.2d 334 (5th Cir. 1976). 77. Id. 78. Al Haddad Bros. Enterprises Inc. v. M/S AGAP, 635 F. Supp. 205, (D. Del. 1986), aff ’d, 813 F.2d 396 (3rd Cir. 1987); Associated Bulk Carriers of Bermuda v. Mineral Import Export of Bucharest 1980 U.S. Dist. LEXIS 9005 at *463-64 (S.D.N.Y. Jan. 31, 1980). 79. R. DOAK BISHOP & ELAINE MARTIN, ENFORCEMENT OF FOREIGN ARBITRAL AWARDS 22 (2009). 80. Id. 81. Id. 82. RONKE ET AL., RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRAL AWA R D S : A G L O B A L COMMENTARY ON THE NEW YORK CONVENTION, 290 n.45 (Kluwer Law International, 2010) (citing OlG Naumburg, Intl Arb L Rev 2006, N-61 (Naumburg Court of Appeal, Germany)). 83. Rederi Aktiebolaget Sally v. Srl Termarea, IV YBCA 249, 295-296 (Italy Court of Appeal 1978). 84. Encyclopaedia Universalis S.A. v. Encyclopaedia Britannica, Inc., 403 F.3d 85, 91-92 (2d Cir. 2005). 85. Id. 86. ALANEZI, supra note 16, at 256. 87. Arbitration Act 1996, §§ 42 and 44 (Eng.). 88. ALANEZI, supra note 16, at 256. 89. VAN DEN BURG, supra note 8. 90. DI PIETRO & PLATTE, supra note 14, at 730; POUDRET & BESSON, supra note 59, at 840. 91. FOUCHARD ET AL., supra note 14, at 989. 92. DI PIETRO & PLATTE, supra note 14, at 741; BORN, supra note 61, at 277; R. Garnett et al., A Practical Guide to International Commercial

Arbitration, at 106-107 (Ocean Publications 2000); LEW ET AL., supra note 9, at 171. 93. Compagnie Des Bauxites de Guinee v. Hammermills, Inc., 1992 WL 122712 (D.D.C. May 29, 1992); P.T. Reasuransi Umum Indonesia v. Evanston Ins. Co., 1992 WL 400733, at 1-2 (S.D.N.Y. Dec. 21, 1992); DI PIETRO & PLATTE, supra note 14, at 742; POUDRET & BESSON, supra note 59, at 840-841. 94. Laminoirs Trefileries-Cableries de Lens, SA v Southwire Co, 484 F Supp 1063, at 1066-67 (ND Ga 1980); La Societé Nationale Pour La Recherche, etc v Shaheen Natural Resources Co, 585 F Supp 57 (SDNY 1983), aff ’d 733 F 2d 260 (2d Cir 1984). 95. German Buyer v English Seller (Germany Court of Appeal 27 July 1978) 267; Shipowner v Time Charterer (2002) XXV YBCA 714 (Germany Court of Appeal 30 July 1998) 716. 96. Id. at 257-258. 97. Id. at 258. 98. Id. 99. Id. 100. Id. 101. VAN DEN BURG, supra note 8. 102. ALENEZI, supra note 16, at 258-259. 103. Id. at 259. 104. Id. 105. Id. 106 Id. 107 Qatar Code of Civ. and Comm. Proc., art. 16; Kuwait Code of Civ. and Comm. Proc., art. 19(2); Oman Code of Civ. and Comm. Proc., art. 21; U.A.E. Code of Civ. Proc., art 13. 108. Id. 109. New York Convention, supra note 3 at art. V(1)(b). 110. GAJA, supra note 56. 111. New York Convention, supra note. 112. GAJA, supra note 56. 113. ALENEZI, supra note 16 at 279. 114. Id. 115. New York Convention, supra note 3. 116. GAJA, supra note 56. 117. Id. 118. Id. 119. Id. 120. Main legislation includes: the CCPL, promulgated by Law Decree No 38/1980 in June 1980; the JAL, Law No 11/1995, Civil and Commercial Articles; and the Civil Code 1980, issued by Law No 67/1980. Subsidiary legislation on arbitration includes Ministerial Resolutions (Nos 43, 44, 174 and 179). 121. New York Convention, supra note 3, at (V).

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Assessing the Risk of Going to Trial in a FCPA Prosecution S C O T T

—————————————————

Introduction

————————————————— Consider the following hypothetical. You are the top sales representative for a major energy company. In the fall of 2013, you landed a major $50 million service contract from an established Mexican energy company. The deal took two years to finalize

F R A S E R

Scott Fraser is an attorney at The Potts Law Firm in Houston, Texas. He works on multi-district litigation products liability suits and represents clients from all over the country. Fraser is an active member in the legal community, regularly participating as a negotiation and mediation coach at his former law school and publishing legal works on civil and commercial law topics.

and required you to hire a third-party agent

with a plea deal. They are willing to drop

to help procure business in Mexico.

some of the charges against you and will

work, efforts to save their home and life savings, the embarrassment of a public trial, harassment by criminal investigators, and of course the impact felt by your whole family.2 This type of pressure is enough to make an innocent man take a plea deal. The following are a set of factors, a starting place, for any individual who seeks guidance on whether they should accept a deal or go to trial. —————————————————

Assessment Factors

Fast forward to 4:00 A.M. on January 12,

recommend a lenient twelve month sentence

2015. You, your wife, and your two children

if you are willing to testify against your

—————————————————

are inside the home sleeping peacefully.

partner. You believe that you are being falsely

1. Does the entity or person reasonably

However, things outside the home are

accused, but the plea deal is a good one,

qualify as a foreign official?

far from peaceful. The Federal Bureau of

considering the fact that you could face up

An element of the FCPA requires that

Investigation (“FBI”) has surrounded your

to ten years in jail. After all, one year in jail

you give something of value to a foreign

home and plans to arrest you for your role

is a small price to pay in comparison to the

official.3 The foreign official definition can

in an alleged bribery scheme. With one

risk of losing the ability to see your kids grow

include: government employees, political

forceful swing of a battering ram, FBI agents

up. Your question now becomes one of risk.

party officials, candidates for office, military

break into your home, and your world is

Do you take the deal or put the DOJ to its

personal, and state owned enterprises

turned upside down. Your wife and kids are

burden of proof ?

(“SOE”).4 The foreign official element often

crying and wonder why their husband and

This hypothetical is all too real for

times is contested at trial in FCPA cases,

father is being escorted into an FBI vehicle.

individuals who face FCPA prosecutions.

especially when the DOJ contends that a

You are informed that you and your sales

Corporate entities who violate the FCPA

SOE qualifies as an instrumentality under

partner are being charged with Foreign

are subject to criminal and civil monetary

the FCPA.5 In United States v. Esquenazi,

Corrupt Practices Act (“FCPA”) anti-bribery

penalties, which can be viewed as the cost of

the Eleventh Circuit provided the first

violations, conspiracy, and money laundering.

doing business.1 An individual faces different

appellate court decision to analyze the word

After a couple months, the Department of

pressures, such as: jail time, the potential of

“instrumentality” under the foreign official

Justice (“DOJ”) approaches your attorney

losing their job, the inability to acquire future

definition.6 In this case, the DOJ charged Joel

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Currents 23.1 2016


Esquenazi and Carlos Rodriguez with FCPA

and 100% controlled by the government

degree of knowledge concerning the status

anti-bribery violations for making several

in Haiti. The company was funded with

of a foreign official.16 With regards to the lack

bribes to officials at Telecommunications

government money, given a monopoly in

of proof, the DOJ did not prepare an expert

D’Haiti, S.A.M. (“Teleco”) in exchange for

providing communication service in Haiti,

to testify that the electric company, Comision

reduced rates of telecom services.7 The court

received multiple tax advantages, and the

Federal de Electricidad (“CFE”), met the

provided a two part test to determine if a

government appointed two members to the

instrumentality definition under the FCPA.

SOE qualifies as an instrumentality: (1) is

board of directors. Therefore, the court

It was only during an evidentiary hearing

the entity controlled by the government of

held that Teleco, a commercial business,

at trial that the government attempted to

a foreign country and (2) does it perform a

could qualify as an “instrumentality” of a

prove up this element.17 Before that, the

function that the controlling government

foreign government, and their employees

government simply assumed that CFE was

treats as their own.8

could be considered foreign officials.

an instrumentality, as defined by the FCPA.

In determining whether a government

—————————————————

This led the judge to make the following

“controls” an entity, the court provided

remarks, she stated,:

government's formal designation of that

In determining whether a government "controls" an entity, the court provided a non-exhaustive list of factors to aid the trier of fact...

entity; (2) whether the government has

—————————————————

relied…I don’t know what was presented

a majority interest in the entity; (3) the

T he DOJ has provided a set of

to the grand jury, but as I observed

government's ability to hire and fire the

circumstances where a private company

several days ago, the government

entity's principals; (4) the extent to which

could qualify as an instrumentality with

should have been prepared before they

the entity's profits, if any, go directly into the

less than 50% of ownership by the

brought charges to the Grand Jury. It’s

governmental fisc and, by the same token,

government.13 In United States v. Alcatel-Lucent,

something you have to prove. And you

the extent to which the government funds

the DOJ considered Telekom Malaysia, a

shouldn’t indict people on the stuff you

the entity if it fails to break even; and (5) the

commercial company, to be a government

can’t prove.18

length of time these indicia have existed.9

instrumentality despite the Malaysian

In terms of the second proof issue on this

For the second prong of the test, the court

Ministry of Finance only owning 43% of

element, the government failed to show that

considered whether the function of the entity

the company.14 Notwithstanding the minority

Mr. O’Shea knew that he was making a bribe

is one that the government treats as its own,

stake in the company, the DOJ had other

to a foreign official. The FCPA requires the

and it provided another set of factors: (1)

proof that the Ministry held the status of

government to prove that the defendant

whether the entity has a monopoly over the

"special shareholder," veto power over all

made a bribe with the specific intent that it

function it exists to carry out; (2) whether the

major expenditures, controlled important

would, directly or indirectly, end up in the

government subsidizes the costs associated

decisions, and the top officials were political

hands of a foreign official.19 In this case,

with the entity providing services; (3)

appointees.15 It is important to note that this

the DOJ could not connect Mr. O’Shea

whether the entity provides services to the

case settled and that these facts were not

to CFE, and therefore, could not show he

public at large in the foreign country; and

tested at trial.

knew that the payments he authorized would

a non-exhaustive list of factors to aid the trier of fact, which includes: (1) the foreign

11

12

[T]he government failed to present evidence on governmental status on which a reasonable jury could have

(4) whether the public and the government

In United States v. O’Shea, the DOJ failed

end up in the hands of CFE.20 Even if Mr.

of that foreign country generally perceive

to meet its burden on the foreign official

O’Shea knew the money would be received

the entity to be performing a governmental

element. There were two main problems

by CFE, the defense counsel argued, “[H]

function.

with the DOJ’s case on this element: 1) the

ow can Mr. O’Shea be held to the standard

In applying these factors, the court

lack of proof of company’s status as an

of knowledge…one of the highest levels of

determined that Teleco was 97% owned

instrumentality, and 2) the failure to show any

proof…for a matter that experts can’t even

10

45

Currents 23.1 2016


agree with. If you’re dealing with the country

2. Where does the money trail end?

bank statements and other foreign company

of Mexico, that may be one thing. Here, we

To violate the FCPA a person must,

documents. 30 The documents that the

are dealing with an electricity company, and

directly or indirectly, pay or authorize a

DOJ did have suggested that the money

it would not be obvious to Mr. O’Shea that

bribe that ends up in the hands of a foreign

may have went to another company called

he was bribing a foreign official.”21 This point

official.23 Bribes that end up in the hands

BCA Electric.31 To make matters worse, the

involves a question of fact, but in this case,

of non-foreign officials do not violate the

DOJ relied on the testimony of Fernando

it did seem to resonate with the trial judge.

FCPA, although it may violate other federal

Basurto Junior (“Basurto Junior”) to help

Advice: Despite the Esquenazi decision,

or state laws. There is an exception to

prove a connection between ABB and CFE.

the concept of an instrumentality is far from

this rule: a FCPA violation can exist if a

However, his testimony lacked credibility

straightforward, and a case-by-case approach

defendant authorizes, promises, or offers a

and was unsupported by any financial or

is required. The above mentioned cases

bribe to a non-foreign official that ends up in

company documentation. 32 In terms of

provide a benchmark for FPCA defendants

the hands of a foreign official.25 This scenario

proof, the DOJ failed to show that payments

in determining whether the DOJ can meet

often occurs when a person knowingly or

left the hands of intermediary companies

its burden on this element. In light of the

recklessly gives money to a third party agent,

and that money ended up in the hands of

two-part test in Esquenazi, a defendant should

and the funds end up in the hands of a

foreign officials. For these reasons, Judge

have an expert testify or use other forms

foreign official.26 It is also important to note

Hughes had no issue in concluding that a

of evidence to show that the government

that the fact that a bribe does not actually

reasonable jury could not convict Mr. O’Shea

lacked control over the entity, and that the

reach the foreign official will not prevent a

on counts 8 and 11.33

government has not adopted the primary

prosecution.27 This is because an attempt to

Advice: If you can show that the payments

business function as its own. As stated by

bribe a foreign official is sufficient to violate

the DOJ alleged were used to bribe foreign

the judge in O’Shea, the DOJ cannot assume

the FCPA.28

officials never left the hands of intermediary

that it will succeed on this element simply

—————————————————

companies, then you may have a successful

because a commercial business has ties

argument in your case. In O’Shea, the DOJ’s

court held that merely presenting evidence

To violate the FCPA a person must, directly or indirectly, pay or authorize a bribe that ends up in the hands of a foreign official.

of government investment and control in a

—————————————————

official. The DOJ needed more detailed bank

private business alone is not enough to satisfy

In O'Shea, the defense counsel successfully

account and company information of the

the foreign official element. The DOJ has

argued that many of the DOJ’s FCPA counts

intermediary companies. Without it, the DOJ

to go beyond that. It must prove that the

failed to place money in the hands of a

was forced to use less than perfect evidence

commercial function of the company also

foreign official. In counts 8 and 11, the DOJ

to connect ABB, the intermediaries, and the

acts as a function normally carried out by

traced two separate payments of $327,000.00

foreign official, CFE.

the government.22

and $76,000.00 from ABB Inc. (“ABB”) to

3. How

Lastly, the government is required to

Obras Maritimas HB (“Obras”), which they

evidence?

prove beyond a reasonable doubt that the

claimed were funds used to pay off CFE

In a FCPA individual prosecution, the

defendant has the specific intent to bribe a

officials. However, the DOJ had limited

government must prove that the defendant

foreign official. Therefore, the government

information on Obras’s bank accounts and

committed the criminal act with both

must prove that the money ended up in

had almost no information on where the

corrupt intent and willfulness.34 A person

the hands of a foreign official and that the

payments went after entering these accounts.

acts “corruptly” if he commits the criminal

defendant acted with the requisite degree

A reason for this could be attributed the

act voluntarily and intentionally, with an

of mens rea.

DOJ’s difficult time in retrieving Mexican

improper motive of accomplishing either

to a foreign government. This point was covered in United States v. Carson, where the

24

29

46

Currents 23.1 2016

lack of documentation and weak star witness led to its inability to prove a connection between Mr. O’Shea and the alleged foreign

strong is the

DOJ's

mens rea


an unlawful result or a lawful result by some

partners in Azerbaijan bribed local foreign

that may have helped prove or disprove the

unlawful means. A person acts “willfully”

officials. For these reasons, the court of

connection to the alleged foreign official.44

when he deliberately intends to do something

appeals upheld the trial court’s findings

Judge Hughes stated that the only thing the

that the law forbids, that is, with a bad

that Bourke either knew about the bribery

documents establish is that “ John O’Shea

purpose to disobey or disregard the law.36

or consciously avoided it. And either is

took kickbacks from the Basurtos…the

A person does not need to know that his

sufficient for an FCPA conviction.41

problem with that is it is unrelated to a public

actions violate the FCPA. The defendant only

—————————————————

official…while that is reprehensible, it’s not

has to act with the intent to do something

bribing a foreign official.”45 Therefore, even if the money was considered a bribe, the

an indirect payment to a middleman, the

The key FCPA case on the mens rea element, as it relates to third parties, is United States v. Kozeny.

DOJ may have a harder time in showing that

—————————————————

money paid to the Basurtos would end up

the defendant knew, knew with substantial

In contrast to Kozeny, the O’Shea case

certainty, or had a “firm belief ” that all or

provides an example where the DOJ failed to

Advice: The Bourke and O’Shea case

part of the money would be used to bribe

prove that the defendant acted “knowingly”

provide a good example of the type of

a foreign official. Further, the knowledge

in a scheme to bribe a foreign official. In

facts and evidence needed to prove up the

element is not satisfied by showing that the

this case, the government alleged that John

knowingly element. The take away from

defendant merely acted negligently in failing

O’Shea through various third parties bribed

these cases is that strong documentation

to learn that the money would end up going

a CFE employee, who the DOJ alleged was

and corroborating witness testimony are

to a foreign official.

a foreign official. The DOJ had evidence

essential to the DOJ’s case in proving up the

The key FCPA case on the mens rea

of a restaurant meeting where John allegedly

knowingly element. Suggestive facts alone

element, as it relates to third parties, is

agreed to bribe a foreign official through

are not enough.

United States v. Kozeny. In this case, the

the Basurto family, who then would act

4. Can you prove that actual work was

DOJ met its burden in proving that the

as middlemen. The DOJ also had coded

done?

defendant “knowingly” transferred funds

emails that discussed money transfers,

Another requisite element for a FCPA

to a foreign official through the use of

potentially fraudulent invoices for work

violation is that the defendant give “anything

a middleman company. On appeal, the

projects, an alleged cover up email where

of value” to a foreign official to induce the

defendant argued that the DOJ only proved

John said to “use Yahoo email because it’s

procurement or retention of business.46

that he negligently authorized the payment

harder to follow,” and a spreadsheet on

Legitimate business transactions do not

of funds that ended up in the hands of a

John’s computer that had terms like “Third

violate the FCPA, as the statute only covers

foreign official; therefore, he did not have the

World Tax” and “Good Guys.” Despite

payments which are made with corrupt

requisite degree of knowledge for an FCPA

this circumstantial evidence, the trial judge

intent, meaning a payment of an improper

conviction.40 The court of appeals disagreed.

determined that the DOJ failed to prove

benefit to influence a foreign official.47 This

They determined that Mr. Bourke knew how

that John knowingly bribed a foreign

can include: cash, improper commissions,

pervasive bribery was in Azerbaijan and

official. This result was due in part to the

travel expenses, gifts, and even charitable

that the party he was working with had a

testimony of Basurto Junior. He alleged

donations.48 Legitimate promotional activities

shady history. In fact, he was dubbed as the

that certain accounts were used as conduits

and business transactions do not possess

“Pirate of Prague.” Bourke also created two

for bribes to foreign officials, but he never

the necessary corrupt intent to violate the

U.S. companies in order to shield himself

personally witnessed or participated in those

FCPA.49

and other investors from potential FCPA

transactions.43 In addition to witness issues,

The O’Shea case serves as an example on

violations. Lastly, during a conference call,

the DOJ failed to produce a considerable

how a defendant can counter the DOJ’s

Bourke expressed concern that his business

amount of records and potential witnesses

bribery allegations with proof that legitimate

35

that the law forbids.37 When the case involves

38

39

42

DOJ could not prove that John knew that in the hands of a foreign official.

47

Currents 23.1 2016


business transactions occurred. For example,

relationship. It is important to note that the

defense counsel was quick to point out that

in counts 8 and 11, the DOJ alleged that

DOJ has succeeded in FCPA cases where

two years prior, Basurto Junior stated to

John O’Shea made payments of $327,000

it could show transactions involving false

FBI agents that he could not recall whether

and $76,000 to Obras that ended up in

invoices or invoices with commissions that

the term referred to CFE people or his own

the hands of CFE officials.50 This led to

exceeded the industry norm.

employees.57 Basurto Junior also admitted

an internal investigation by the Inspector

5. How credible are the DOJ's witnesses?

that most of the transactions he described

General’s Office in Mexico to determine if a

Most FCPA cases settle before trial;

to FBI agents were handled by his father;

bribe was used in this case to obtain business.

therefore, there is a lack of judicial guidance

therefore, most of his information derived

After conducting an investigation of CFE

on how to interpret the law. From the

from what others said and not from his own

and Obras, the inspector found that actual

guidance that is available, a clear principle

personal knowledge. When Basurto Junior

work was done and that CFE did not receive

has emerged, and it holds that strong

was asked where the money went after it

any bribe money in return for awarding its

documentation is vital to the DOJ’s success

left the Basurto family bank accounts, he

business to ABB.

at trial. A secondary factor has also emerged

could not provide the government agents

A similar allegation was made in counts 9

as a reason for the DOJ’s lack of trial success,

with any details. He did not know where

and 12, where, again, the DOJ alleged that

which is a case built around a witness who

the money went.58 For these reasons, the

John authorized payments of $218,000 and

lacks credibility.54

trial judge stated that the principle witness

$50,800 to Soverill International (“Soverill”),

—————————————————

knew “almost nothing” and that his answers

which was used to pay $30,000 in military

were “abstract and vague, generally relating

considered as a foreign official. However,

The African Sting case provides another example where the lack of credibility of a DOJ witness may have caused it to lose the case.

the DOJ was limited in supporting these

—————————————————

if the money was a bribe, the DOJ had no

allegations with the testimony of Basurto

The O’Shea case exemplifies what can

proof that Mr. O’Shea gave that money to

Junior. The defendant countered this

happen to the DOJ’s FCPA prosecution

the Basurtos with the knowledge it could

evidence with the Mexican Inspector

when it revolves around a witness who

end up in the hands of a foreign official,

General’s findings that the contracts and

lacks credibility. In this case, the DOJ gave

especially when Junior himself could not say

invoices involving business with Soverill were

immunity to several key witnesses and

where the money went.

legitimate. The inspector interviewed Soverill

failed to produce others that may have been

The African Sting case provides another

employees and legal counsel and concluded

involved in the bribery scheme. This led

example where the lack of credibility of a

that actual work was done. Therefore, in

the DOJ to build its case around Basurto

DOJ witness may have caused it to lose the

counts 8, 9, 11 and 12, the defendant’s proof

Junior who accepted a plea deal in return

case. In that case, the FBI created a sting

of legitimate contracts, proper invoices, and

for his testimony against Mr. O’Shea. 56

operation where a FBI agent would pose

other proof of actual work persuaded the

During his cross-examination, it became

as the Minister of Defense of an African

judge to dismiss these counts.

apparent that Basurto Junior did not have

country and have employees of Smith &

Advice: If you can prove that actual work

personal knowledge of certain events, and

Wesson offer a bribe to that undercover

was conducted, then the DOJ will be hard

had several memory issues. When Basurto

agent. 60 The person leading the sting

pressed in proving the requisite guilty act

Junior was asked about the term “Good

operation and the undercover agent was

needed for a FCPA prosecution. Like the

Guys” found in a spreadsheet used by John

Richard Bistrong. He was previously charged

O’Shea case, a defendant should try to present

and Basurto Junior and Senior (collectively,

and convicted of violating the FCPA. The

proof of actual contracts, proper invoices,

the “Basurtos”), he stated that the term

sting operation resulted in the DOJ charging

and other evidence of a legitimate business

referred to CFE officials. However, the

22 individuals for FCPA violations, who

51

school tuition for Nester Moreno’s son.

52

Nester was a CFE official who the DOJ

53

55

48

Currents 23.1 2016

to gossip.” Further, the judge indicated that “even hearsay testimony must be something other than a conclusion.”59 Therefore, even


were supposed to be tried in four separate

business, then a FCPA violation has not

of financial documentation, the lack of

cases. In the first case, the DOJ did not

occurred. This is because the payment made

a business relationship tying the parties

call Mr. Bistrong as a witness because of

to the foreign official would not be made

together, and the narrow focus in which the

his questionable tactics used in the sting

with corrupt intent. Therefore, if a payment

DOJ traced the funds between accounts.70

operation and due to his own FCPA criminal

to the foreign official does not look like a

In two instances, both counts 4 and 7, the

past. The first trial ended in a mistrial in

bribe or the connection between the parties

DOJ had no documentation tracing these

favor of all defendants. In the second trial,

is too attenuated, then the DOJ will have a

funds to Chelala, the first alleged middleman.

the DOJ called both Mr. Bistrong and FBI

difficult time succeeding in the FCPA case.

The money trail ended in the Basurtos family

agent Forvour as witnesses. Both witnesses

—————————————————

account. Because the Basurtos are not CFE

played key roles in the sting operation.

[I]f a payment to the foreign official does not look like a bribe or the connection between the parties is too attenuated, then the DOJ will have a difficult time succeeding in the FCPA case.

officials, the defense successfully argued

Further, the jury generally felt that the DOJ’s

—————————————————

defense pointed out that the DOJ never

witnesses lacked credibility based on the

In the O’Shea case, the DOJ had a difficult

interviewed Chelala, nor did they have a

manner in which the sting operation was

time in proving a connection between the

complete picture of his financial interests.

carried out. Two weeks after the second trial,

defendant and the foreign official in counts

The DOJ’s only evidence to support this

the DOJ moved to dismiss all remaining

2 through 7. The DOJ alleged that the money

connection was the Basurtos $80,000.00

charges against all of the defendants in the

flowed in the following manner. First, on

disbursement to Chelala, and Chelala’s

case.64

February 2, 2004, John O’Shea made six

subsequent $68,000.00 disbursement to Mr.

payments of approximately $30,000.00 to

Lizarraga. And without more, a disbursement

then the DOJ will be forced to use strong

67

various bank accounts held by the Basurtos.

alone does not point to a bribe or shady

witnesses at trial to build the case. A

On February 20-23, 2004, the DOJ then

business relationship. The judge agreed and

defendant and their attorney should consider

traced four payments of $22,500.00 from

was unconvinced that these disbursements

using discovery tools, like a deposition, to

the Basurtos account to the “Chelala”

were bribes.72

test the strength and credibility of the DOJ’s

account. From the Chelala account, the

In terms of the connection between

witnesses. As exemplified by O’Shea and the

DOJ then traced $68.159.00 to Mr. Lizarraga

Nestor Moreno and Lizarraga, the DOJ

African Sting case, that the DOJ can lose a

(Moreno’s son-in-law) on February 26, 2004.

alleged that Lizarraga funneled $27,352.00

case based on credibility issues surrounding

And the trail ended with Nestor Moreno

in favor of John O’Shea to Moreno in

their primary witnesses.

receiving $27,352.00 for hair plugs. The DOJ

order to procure contracts for ABB.73 On

6. Do the traced funds reasonably point

considered Nestor as a foreign official in this

cross-examination, the defense attacked the

to bribery of a foreign official or is the

case. To prove that the money chain was

DOJ’s lack of documentation. The DOJ

relationship too attenuated?

part of a scheme to bribe Nestor Moreno,

had information on only one of Lizarraga’s

The DOJ does not have to trace a bribe into

the DOJ had various pieces of evidence: the

accounts in the USA, and it failed to obtain

a specific pocket, but it does have to show

bank account information of the parties,

account information located in other

that the money, directly or indirectly, paid or

the traced funds allegedly connecting these

countries. The DOJ did not have a complete

authorized reasonably ended up in the hands

parties, and the testimony of Basurto Junior,

financial picture for Lizarraga. This led the

of a foreign official. However, if a foreign

who was used to explain the scheme. The

defense counsel to ask, “So, every time Mr.

official received funds as a result of legitimate

defense counsel attacked the DOJ’s lack

Lizarraga writes a check to Nestor Moreno,

61

62

However, the second trial, again, ended up in a mistrial in favor of the defendants. After the case, the jury foreman stated that “the jury found that nearly all the prosecution’s witnesses to be evasive and combative.”

63

Advice: If the DOJ is lacking documents,

65

66

68

69

that these counts cannot support a FCPA prosecution.71 With regards to counts 2, 3, 5, and 6, the defense counsel attacked the connection between the Basurtos and Chelala. The

49

Currents 23.1 2016


it’s because he got the money from ABB

was connected to business involving ABB.

This element seems straight forward, until

or Basurtos?... You attribute $27,000.00 to

The Judge stated that “it is common for

you consider the DOJ’s tactic in prosecuting

ABB, but you don’t know whether or not Mr.

families, especially in Mexico, to have a

FCPA individuals. Most FCPA individual

Lizarraga had money in investment accounts,

financial relationship with each other… and

prosecutions occur in groups, where the

or other accounts.”74 The defense also argued

one that has nothing to do with business.”81

same bribe money or scheme implicates

that the $27,000.00 to Moreno is less than

In essence, the Judge believed that the DOJ

multiple parties or corporations.83 Since 2008,

one of the DOJ’s six counts, all of which

did not sufficiently rule out the alternative

the DOJ has prosecuted 77 individuals for

were a minimum of $30,000.00. Therefore,

reasoning why one party might provide

FCPA anti-bribery violations. Just to name

the money was seriously diminished at this

money to another , a reason that has nothing

a few of these prosecutions: 22 individuals

point, and the relationship between Moreno’s

to do with business or a bribe.

were a part of the African Sting case, 9

hair plugs and ABB’s initial $180,000.00

—————————————————

individuals were a part of the Haiti Teleco

payment was too attenuated.

action, 8 were a part of the Siemens case, and

raise similar arguments challenging their

Most FCPA individual prosecutions occur in groups, where the same bribe money or scheme implicates multible parties or corporations.

connection to a foreign official. The judge

—————————————————

prosecuted 47 individuals representing 61%

stated that although the DOJ does not have

Advice: In combating the DOJ’s tracing

of all FCPA individual prosecutions.84 These

to trace a particular dollar into a particular

of funds, the O’Shea case provides some

statistics are compelling and suggest that the

pocket, it does have to trace the money

important tips. First, the DOJ cannot

DOJ casts a wide net over companies and

in some reasonable way to an identifiable

simply connect disbursements as a means

individuals who it believes have violated the

foreign official.76 The judge pointed out

of conclusively proving that a bribe was

FCPA. At times, this type of prosecution

that modest and inconclusive production

made between the defendant, the foreign

strategy resulted in the DOJ using the same

of documents will not be sufficient for a

official, and any alleged middleman. At a

bribe money or transaction to prosecute

FCPA prosecution. In this case, the Judge

minimum, the DOJ must have financial

multiple people in separate cases.

felt that the DOJ “only established that

records to connect the parties and then

The O’Shea case represents an example

John O’Shea took kickbacks from Basurtos,

supporting evidence to show that this

where the DOJ used the same bribe money

while reprehensible, not a bribe to a foreign

financial connection involved a bribe to an

to try to convict multiple parties. There, the

official.” In terms of the Basurto family

identifiable foreign official. If the traced

DOJ alleged that John O’Shea provided

business, although ill defined, the Judge felt

funds do not land on the foreign official, a

Moreno a bribe in order to win a business

that their business was legitimate. For these

FCPA charge or count cannot be supported.

contract. The problem is that in United State

reasons, the DOJ did not prove beyond a

Therefore, a defendant should present

v. Aguilera, a case pending at the same time

reasonable doubt that the Basurtos were in

evidence that the traced funds do not

as O'Shea, the DOJ alleged that the same

the business of paying bribes in favor of

prove that a bribe was made, that it was not

bribe money was connected to Enrique

ABB. In terms of Chelala, the Judge still

reasonably connected to a foreign official,

Aguilera, a Lindsey Manufacturing officer.85

had no idea who Chelala was and felt that the

or that alternative explanations exist for the

In fact, the DOJ used the same bribe money

DOJ presented no foundation or specifics in

transfer of funds.

to prosecute ABB, ABB AG, Lindsey

proving that he was a conduit for bribes.80

7. Is the DOJ using the same dollars to

Manufacturing, and several individuals from

Lastly, in terms of the relationship between

convict another person?

all of these companies.86 This left O'Shea's

75

The Judge’s remarks in this case are instructive to FCPA defendants who might

77

78

79

4 were a part of the Lindsey Manufacturing enforcement action. To put this into context, in just the 4 largest cases alone, the DOJ

Lizarraga and Moreno, the judge stated that

In order to violate the FCPA, a person

attorney to ask if "the government is double

the DOJ did not sufficiently prove that the

must pay, offer, or authorize the payment

dipping... How many times can you take

hair plugs paid by Lizarraga for Moreno

of anything of value to a foreign official.

the same $24,000?"87 However, from this

82

50

Currents 23.1 2016


strategy, the DOJ succeeded in obtaining

to John O'Shea and ABB’s procurement

from foreign countries, corporations, or

several convictions and settlements. Lindsey

of obtaining or retaining a deal called

individuals ("foreign parties") that may help

Manufacturing lost at trial, which was

the "Evergreen Contract." The defense

their case.99 Of course, the prosecutor can

overturned on appeal, and ABB and ABB

argued that even if a payment was made,

always informally request documents, but this

AG both settled. Only Aguilera and O'Shea

it was not used to procure new business.

option often times lacks the needed force to

put the DOJ to its burden of proof. O'Shea

They argued that the contract had already

compel production and hinges on the foreign

was acquitted at trial. Aguilera lost his trial,

been won before any bidding occurred, and

parties cooperation.100 If the prosecutor were

but later won his case because of the severe

that the new work contract involved only

to seek assistance from a foreign country,

misconduct by the prosecution. Therefore,

the maintenance and upgrading on work

this may involve a treaty like a Mutual Legal

in reality, the government went 50% in, trying

that ABB had already won. The defense’s

Assistance Treaties (“MLATs”). MLAT's are

to turn one wrongful act into two.

witnesses stated that "it was a guarantee that

legally binding commitments between two

Advice: If this scenario fits your case,

ABB would get the contract… It would have

countries to assist each other through their

ensure that the DOJ is not trying to tie the

costed millions more to award it to someone

own domestic legal mechanisms to obtain

same bribe to someone else. Your client

else.” These facts were enough to persuade

evidence to support criminal investigations

should not be put to trial for acts which he

the Judge to dismiss these counts.

or prosecutions in the requesting country.101

88

93

94

95

himself did not commit. If this is the case,

Advice: This is an issue of causation, as

However, this process can be complex and

then the DOJ should not win as a matter of

the bribe must be made to procure or retain

often times can create delays in the DOJ’s

law since there is no actus reus.

business. Payments made out for good will

prosecution.102

8. Is

or past acts are not illegal. As the defense

The O’Shea case provided a great example

attorney correctly stated, "if this was a

of showing the difficulty faced by the

For the FCPA’s “to obtain or retain

payment to say thank you guys and just a

DOJ in obtaining foreign documentation.

business” element, the money used to

reward for past acts, it doesn't rise to the level

In counts 8 and 11, the DOJ alleged that

procure business must amount to something

of an FCPA violation." Therefore, if you

John O'Shea made payments to Obras that

more than a good will payment. A good will

have evidence that the contract was already

ended up in the hands of CFE Officials.

payment is one which is made to say thanks

going to be rewarded to your company, it

To obtain this information, the DOJ used

after the contract is won for your business in

may negate this element. This issue has been

their power under its MLAT with Mexico

the past. The payment is not used to procure

litigated more than once, and the DOJ has

to gather Obras's account information.103

a current contract or any future business.90

lost three times out of four.97

Through this treaty, the DOJ obtained some

A FCPA violation requires a quid pro quo

—————————————————

of Obras's bank statements that showed

relationship, as the bribe must induce the

money coming in, but it failed to fully

In O'Shea, the DOJ failed to prove up

Strong documentation might be the most important factor and measuring stick for the strength of the DOJ's case.

the “obtain or retain business” element. In

—————————————————

needed more information to confirm this,

counts 9 and 12, the DOJ alleged that John

9. Is there strong documented proof?

but after four years of waiting on requests,

the payment one of good will or

an actual bribe?

89

procurement of business from the foreign official.91

96

describe where the money went. There was a description indicating that it may have gone to a company called BCA Electric. The DOJ

O'Shea made a payment to Soverill that

An FCPA prosecution is a criminal matter,

no additional documents were produced.104

ended up in the hands of a CFE official,

and therefore, the government has the burden

This forced the DOJ to use less powerful

Nestor Moreno. The bribe took the form

to prove all elements by a standard of beyond

evidence at trial to advance their theory that

of a $30,000.00 tuition payment in favor

a reasonable doubt. This standard can be

John O’Shea bribed CFE Officials. The

of Moreno’s son. The DOJ argued that

challenging in international bribery cases

effect on the DOJ’s case was evident, as it

Soverill’s tuition payment was connected

due to the difficulty in obtaining documents

led to a speculative connection between ABB

92

98

51

Currents 23.1 2016


and CFE officials.105 The DOJ’s counts 8 and

violation. First, Guideline § 2C1.1 starts

a price to testing your innocence at trial. For

11 were ultimately dismissed largely because

with a “base offense” of level 12 for an

example, in Esquenazi, the defendants were

of the lack of documentation.

individual convicted of an anti-bribery

sentenced to 180 and 84 months respectively.

Advice: Strong documentation might be

offense, which ranges from 10-16 months

However, between the years of 2010 and

the most important factor and measuring

of incarceration.109 The base offense can

2013, these prison sentences were above

stick for the strength of the DOJ’s case.

then be increased under Guideline § 2C1.1

the norm for that period, which had an

Many countries have MLAT's with other

because the offense involved more than

approximate average incarceration period of

foreign countries, but as a practical matter

one bribe, the value or benefit conferred

23 months for FCPA individual defendants.

the effectiveness of these agreements has

from the bribe, and the level of the public

This statistic is reconciled when you learn

often times been called into question. Take

official.110 As a third step, a defendant should

that most people accept the DOJ’s plea deal,

the O'Shea case as an example. The discovery

then look to the enhancements listed under

and very few test their innocence at trial. And

roadblocks caused major problems in the

§ 3B1.1, which based on the defendant’s

take the Esquenazi case as an example of the

DOJ's case. Without proper documentation,

role in the bribe can increase jail time.

In

consequences of losing at trial to the DOJ.

the DOJ had a hard time in O’Shea proving

addition to enhancements, a defendant may

—————————————————

up its case. Because the FCPA requires a

also mitigate or decrease their total offense

high degree of proof, the DOJ cannot rest

score by accepting responsibility for the

of mere conclusory testimony without the

offense and cooperating with the DOJ’s

supporting documentation. Therefore, this

investigation.112 After completing the steps

factor is crucial in deciding whether or not

above, a defendant can then calculate their

An important consideration for any FCPA defendant is to consider the criminal fines and potential jail time for a FCPA violation before accepting a plea deal.

to take the DOJ on at trial.

“total offense level,” which again can be

—————————————————

10. U nder

F ederal S entencing

increased based on the defendant’s criminal

11. The DOJ's

what is the offense level, and

history.113 Both criminal history score and

at trial.

Guide,

the

111

recent lack of success

offense level score provide the court with a

From the years of 1978 to 1999, the DOJ

An important consideration for any FCPA

recommended range of incarceration time.

only charged 38 individuals with FCPA

defendant is to consider the criminal fines

As a result of United States v. Booker, federal

violations. However, from 2000 to 2014, the

and potential jail time for a FCPA violation

courts consult the Guidelines, but are not

DOJ dramatically increased these numbers in

before accepting a plea deal. For example,

bound to follow them.114 However, when a

charging 133 individuals with FCPA criminal

if an individual is found guilty of violating

court adheres to the Guidelines it acts in a

offenses. The majority of these individual

the FCPA anti-bribery provision, then that

115

manner which is presumptively reasonable.

prosecutions, 74% of the charges, occurred

person is subject to a fine up to $100,000.00

Lastly, Guideline § 5K1.1 is an important

in 2008 to 2014.117 This upward trend in

per violation and imprisonment for up to five

provision for FCPA defendants, as it allows

individual prosecutions has led many FCPA

years.106 Further, under the Alternative Fines

the DOJ to recommend to the trial judge a

practitioners to believe that the DOJ will

Act, the DOJ can try to recover a criminal

significantly lower sentence if a defendant is

continue to prosecute individuals in greater

fine equal to twice the benefit sought by the

said to have provided “substantial assistance

numbers in the future.118 This increase in

defendant in making an unlawful payment.107

in the investigation or prosecution of another

individual prosecutions has also coincided

person who has committed an offense.”

with a time period where the DOJ has

are there any mitigating factors?

In trying to predict one’s potential jail

116

time in a FCPA case, an individual defendant

Advice: T he Federal Sentencing

aggressively expanded its legal theories and

should consult the U.S. Federal Sentencing

Guidelines provide a FCPA defendant the

applications of the FCPA statute.119 One

Guidelines (“Guidelines”).108 A multi-step

ability to predict his/her prison length, and

might argue that both the DOJ’s increase

process is required in order to determine

to evaluate the benefits of a DOJ plea deal.

in individual prosecutions coupled with

the appropriate “offense level” for a FCPA

A defendant should note that there may be

aggressive legal theories have caused a

52

Currents 23.1 2016


corresponding increase in the willingness

of his statements connecting John to CFE

of FCPA defendants to take their cases to

were based on hearsay.127 Further, the DOJ

trial. In fact, FCPA individuals have recently

could not provide sufficient documentation

experienced some success in winning their

to connect John to the crime and even was

case when putting the DOJ to its burden of

unprepared to prove that the company CFE

proof at trial.120

should qualify as an instrumentality under

A FCPA defendant can point to three

“foreign official” element.128

examples where the DOJ’s increase in

Lastly, in the Lindsey Manufacturing case,

prosecutions, legal theories, and trial tactics

the DOJ won their case at trial, but the

have caused them to lose its case at trial.

judge ended up vacating the judgement

In the African Sting cases, the DOJ arrested

and dismissed the indictment because of

22 individuals during a sting operation.121

prosecutorial misconduct.129 For example,

The defendants allegedly agreed to pay

the DOJ allowed a key FBI agent to testify

undercover agent, acting as foreign official

untruthfully before the grand jury, inserted

from Gabon, a bribe in order to procure

falsehoods into affidavits used for search of

various business contracts. Of the 22

seizure warrants, improperly reviewed emails

defendants, three of them pled guilty.122

between the defense attorney and his client,

However, the other defendants went to trial

failed to comply with discovery obligations,

in four separate trials. All of which resulted

and made misrepresentations to the court.130

in either a mistrial, hung jury leading to a

The judge stated that the DOJ’s investigation

mistrial, an acquittal, and even a dismissal of

was sloppy, incomplete, and over-zealous.

the case involving the three defendants who

Further, that the conduct which the DOJ

initially pled guilty.123 The reasons behind

attributed to the two company executives

this result were said to occur because of the

was unfounded, and the evidence was often

DOJ’s questionable enforcement theories,

times obtained unlawfully.131

the lack of witness credibility, and the lack of good faith in the sting operation.

124

————————————————— This article should not leave you with the opinion that you should always go to trial on your FCPA prosecution. These factors are merely a guideline or benchmark to help a person make an objective decision on whether to put the DOJ to its burden of proof. I believe that the statute is written in such a way that a FCPA case is difficult to win and that it doesn’t punish all types of bad behavior. The FCPA is a specific intent crime for a reason, and I believe that the international setting of the crime only accentuates the challenges of meeting the required burden of proof. That being said, the power and reach of the United States government and its laws are the strongest of any nation. Therefore, you need to carefully weigh your decision. Those who have opposed the DOJ in FCPA cases have been handed the harshest penalties, even if their behavior is better by comparison to others who chose to cooperate.

experienced some success at trial, but these wins do not follow a general pattern or

John O’Shea with a FCPA violation and

present a common flaw. When a defendant

other related offenses for his involvement

was successful it was because the DOJ

in authorizing payments that ended up in

was overly aggressive in its legal theories,

the hands of a Mexican company, which

misconduct, or insufficient evidence. What

was owned and controlled by the Mexican

is important to note for a defendant is that

government.

Following the DOJ’s case,

all the DOJ’s losses coincide with a period

the trial judge granted the defenses motion

of time when enforcement actions and

for acquittal because of the DOJ’s failure to

individual prosecutions are on the rise.

present evidence on which a reasonable jury

Although, the DOJ scored many victories

could have relied on. For example, Basurto

in prosecuting individuals, it appears that the

Junior, the principle witness against John

DOJ’s new legal theories and trial tactics have

O’Shea “knew almost nothing,” and most

decreased its success at trial.

126

Conclusion

Advice: Recently, FCPA individuals have

In the O’Shea case, the DOJ charged

125

—————————————————

53

Currents 23.1 2016


End Notes 1.. MIKE KOEHLER, THE FOREIGN CORRUPT PRACTICES ACT IN A NEW ERA 995 (2014) [hereinafter KOEHLER]. 2. Id. 3. 15 U.S.C.A. § 78dd-2(a)(1). 4. See 15 U.S.C.A. § 78dd-2(h)(2) (A); See also, Department of Justice & Security and Exchange, A RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT at 20 (Nov. 2012), http://www.sec.g ov/ spotlight/fcpa/fcpa-resourceguide.pdf [Hereinafter, DOJ Resource Guide]. 5. United States v. Esquenazi, 752 F. 3d 912 (11th Cir. 2014); See United States v. Carson, No. SACR 09–00077–JVS, 2011 WL 5101701 at *5 (C.D. Cal. May 18, 2011). 6. Esquenazi, 752 F. 3d at 912. 7. Id. at 928. 8. Id. at 925. 9. Id. 10. Id. at 926. 11. Id. at 928. 12. Id. at 929. 13. DOJ Resource Guide, supra note 4, at 21. 14. Id. 15. Id. 16. Trial Transcript Day 4 at 248, United States v. O’Shea, No. 09CR-629 (S.D. Tex. Jan. 16, 2012) [hereinafter Trial Transcript Day 4]. 17. Trial Tr. at 223: 1-21. 18. Did “Foreign Official “Impact the O ’ S h e a A c q u i t t a l ? , F C PA PROFESSOR (July 11, 2012), http://fcpaprofessor.com/didforeign-official-impact-the-osheaacquittal/. 19. KOEHLER, supra note 1, at 98-99. 20. United States v. John Joseph O’Shea, SHEARMAN & STERLING, http://fcpa.shearmancom/?s=m atter&mode=form&id=250 (last visited Apr. 3, 2016) [hereinafter SHEARMAN & STERLING]. 21. Trial Tr. at 222: 7-17; Trial Tr. at 224: 11-16. 22. Carson, 2011 WL 5101701, at *5. 23. 15 U.S.C.A. § 78dd-2(a)(1). 24. DOJ Resource Guide, supra note 4, at 48-49. 25. 15 U.S.C.A. § 78dd-2(a)(1). 26. KOEHLER, supra note 1, at 104. 27. Id. at 14. 28. Id. 29.Friday Roundup, FCPA PROFESSOR ( A p r. 2 6 , 2 0 1 3 ) , h t t p : / / fcpaprofessor.com/category/ john-joseph-oshea/. 30. Trial Tr. at 146: 13-25; Trial Tr. at 147: 1-18.

31. Id. at 148: 7-25. 32. Richard L. Cassin, O’Shea Acquitted o n A l l C o u n t s, T H E F P C A BLOG (Jan. 17, 2012, 7:28 am), h t t p : / / w w w. f c p a b l o g. c o m / blog/2012/1/17/oshea-acquittedon-all-counts.html. 33. Id. 34. KOEHLER, supra note 1 at 1030. 35. United States v. Kozeny, 667 F. 3d 122, 135 (2d Cir. 2011). 36. Id. 37. Id. 38. Id. at 132. 39. Id. 40. Id. at 128-29, 134. 41. Id. at 127-29, 133. 42. Richard Connelly, John O’Shea: Energy Exec Acquitted on Mexican Bribery Charges, HOUSTONPRESS (Jan. 17, 2012), http://www. houstonpress.com/news/johnoshea-energy-exec-acquitted-onmexican-bribery-charges-6748104. 43. Trial Tr. at 229: 11-25; Trial Tr. at 238: 1-18. 44. Key Points from the O’Shea Acquittal, LAW 360 (Feb. 6, 2012), http:// www.nortonrosefulbright.com/ files/us/images/publications/20 120206KeyPointsFromTheOShe aAcquittal.pdf.y 45. Trial Transcript Day 4, supra note 16, at 248-249. 46. 15 U.S.C.A. § 78dd-2(a) 47. KOEHLER, supra note 1, at 98-99. 48. DOJ Resource Guide, supra note 4, at 13. 49. 15 U.S.C.A. § 78dd-2(c)(2). 50. Trial Tr. at 146: 7-12. 51. Id. at 154: 3-9. 52. Id. at 158: 1-6. 53. Id. at 161: 7-18. 54. KOEHLER, supra note 16, at 213-220. 55. Trial Transcript Day 4, supra note 16, at 249. 56. FCPA Winter Review 2010, MILLER & CHEVALIER (Jan. 12, 2010), http://www.millerchevalier.com/ Publications/MillerChevalierPubl ications?find=23807. 57. FCPA Spring Review 2012, MILLER & CHEVALIER (Apr. 16, 2012), http://www.millerchevalier.com/ Publications/MillerChevalierPubl ications?find=78301. 58. Id. 59. Trial Transcript Day 4, supra note 16, at 248. 60. KOEHLER, supra note 1, at 214. 61. Id. 62. Inside The “Africa Sting” Trial: Anatomy of a Failed Prosecution, FCPA PROFESSOR (July 23, 2012), http://www.fcpaprofessor. com/inside-the-africa-sting-trial-

anatomy-of-a-failed-prosecution. 63. KOEHLER, supra note 1, at 215. 64. Id. at 216. 65. Trial Transcript Day 4, supra note 16, at 248. 66. 15 U.S.C.A. § 78dd-2(a); Kozeny, 667 F. 3d at 135. 67. Trial Tr. at 166: 18-24. 68. Id. at 167-178. 69. Id. at 229: 1-4. 70. Richard L. Cassin, Judge To DOJ: Your Principal Witness Knows Almost Nothing, THE FCPA BLOG (Jan. 19, 2012), http://www.fcpablog. com/blog/2012/1/19/judge-todoj-your-principal-witness-knowsalmost-nothing.html. 71. SHEARMAN & STERLING, supra note 20. 72. Trial Tr. at 168-169. 73. Id. at 169: 23-25. 74. Id. at 175: 22-25. 75. Id. at 177:14-18; Id. at 212: 8-25. 76. Trial Transcript Day 4, supra note 16, at 248. 77. Id. at 250. 78. Id. at 248; see also Id. at 249. 79. Id. at 250. 80. Id. at 251. 81. Id. at 214. 82. 15 U.S.C. § 78dd-2(a). 83. Michael Himmel and Steven Llanes, Individual FCPA Defendants: Should an Individual Defendant Go to Trial on FCPA Charges? Five Important Considerations, THE FCPA REPORT (Volume 3, Number 11) (May 28, 2014) [hereinafter Himmel & Llanes], https://www.lowenstein.com/ files/Publication/1c94249f2 8 8 4 - 4 a a d - b 0 9 3 2d604f510e21/Presentation/ PublicationAttachment/b61ea5cbed52-49ba-ad13-2db424cf173e/ FCPAR%20Reprints.pdf. 84. KOEHLER, supra note 1, at 204-05. 85. Trial Transcript Day 4, supra note 16, at 163. 86. See California Company, Its Two Executives and Intermediary Convicted by Federal Jury in Los Angeles on All Counts for Their Involvement in Scheme to Bribe Officials at State-Owned Electrical Utility in Mexico, THE UNITED STATES DEPARTMENT OF JUSTICE (May 10, 2011), https://www. justice.gov/opa/pr/californiacompany-its-two-executives-andintermediary-convicted-federaljury-los-angeles-all. 87. Trial Tr. 165: 23-25. 88. Himmel & Llanes, supra note 83, at 2. 89. 15 U.S.C. § 78dd-2(a)(1); see also DOJ Resource Guide, supra note 4, at 12; see also United States v. Kay, 54

Currents 23.1 2016

513 F. 3d 432, 453 (5th Cir. 2007) (finding that circumstances may exist where payments outside the context of procurement could violate the FCPA). 90. The SEC Has Never Prevailed In An FCPA Enforcement Action When Put To Its Ultimate Burden of Proof, FCPA PROFESSOR (Mar. 5, 2014), http://fcpaprofessor.com/ the-sec-has-never-prevailed-in-anfcpa-enforcement-action-whenput-to-its-ultimate-burden-ofproof/. 91. United States v. O’Shea, No. 09-CR629, 7 (S.D. Tex. 2009). 92. Id. at 20. 93. Id. at 10-11. 94. Id. at 5. 95. Trial Tr. at 220: 14-20. 96. Id. at 221: 3-5. 97. KOEHLER, supra note 1, at 94 98. In re Winship, 397 U.S. 358, 364 (1970). 99. Marcus Christian, Navigating the minefield: Special risks in FCPA cross-border internal investigations, INSIDE COUNSEL (Apr. 16, 2014), http://www.insidecounsel. com/2014/04/16/navigating-theminefield-special-risks-in-fcpacro? page=2&slreturn=1453262440. 100. Navigating The Arcane World of Mutual Legal Assistance Treaties, Letters Rogator y and EvidenceGathering From Abroad, FCPA PROFESSOR (May 21, 2014), http://www.fcpaprofessor.com/ navigating-the-arcane-world-ofmutual-legal-assistance-treatiesletters-rogatory-and-evidencegathering-from-abroad. 101. Markus Funk, Mutual Legal Assistance Treaties and Letters Rogatory: A Guide for Judges, FEDERAL JUDICIAL CENTER INTERNATIONAL LITIGATION GUIDE (2014), http://www.fjc.gov/public/pdf. nsf/lookup/mlat-lr-guide-funkfjc-2014.pdf/$file/mlat-lr-guidefunk-fjc-2014.pdf. 102. Id. at 14-15. 103. O’Shea, No. 09-CR-629, at 9. 104. Richard Smith & Marsha Gerber, Gossip and Conclusory Statements Insufficient to Prove FCPA Charges: K e y Po i n t s Fr o m t h e O ’ S h e a Acquittal (Jan. 23, 2012), http:// www.nortonrosefulbright.com/ knowledge/publications/94070/ gossip-and-conclusorystatements-insufficient-to-provefcpa-charges-key-points-from-theoshea-acquittal. 105. Id. 106. 15 U.S.C. § 78dd-2(g). 107. 18 U.S.C. § 3571(d).


1 0 8 . U. S . S E N T E N C I N G GUIDELINES MANUAL § 1.A1 (U.S. SENTENCING COMM’N 2011). 109. DOJ Resource Guide, supra note 4, at 68-69.; U.S. SENTENCING GUIDELINES MANUAL § 2C.1 (U.S. SENCTENCING COMM’N 2011).; A Resource Guide to U.S . Foreign Cor rupt Practices Act, THE UNITED S T A T E S D E PA R T M E N T OF JUSTICE (Nov. 14, 2012), https://www.justice.gov/sites/ default/files/criminal-fraud/ legacy/2015/01/16/guide.pdf. 1 1 0 . U. S . S E N T E N C I N G GUIDELINES MANUAL § 2C.1 (U.S. SENTENCING COMM’N 2011). 111. Id. at § 3B1.1. 112. Id. at § 3E1.1. 113. Id. at § 5A. 114. United States v. Booker, 543 U.S. 220, 264 (2005). 115. See, e.g., United States v. Dorcely, 454 F. 3d 366, 376 (D.C. Cir. 2006). 1 1 6 . U. S . S E N T E N C I N G GUIDELINES MANUAL § 5K1.1. (U.S. SENTENCING COMM’N 2011). 117. A Focus on DOJ FCPA Individual Prosecutions, FCPA PROFESSOR ( Ja n . 2 0 , 2 0 1 5 ) , h t t p : / / fcpaprofessor.com/category/ year-in-review-2014/page/2/. 118. Marsha Gerber, Aggressive FCPA Prosecutions Against Individuals Continue, LAW 360 (March 6, 2014), http://www.law360.com/ articles/515918/aggressive-fcpaprosecutions-against-individualscontinue. 119. KOEHLER, supra note 1, at 204-205. 120. Id. at 214. 121. Id. 122. Id. 123. Himmel & Llanes, supra note 83, at 2. 124. KOEHLER, supra note 1, at 215-216. 125. Id. at 218. 126. Trial Transcript Day 4, supra note 16, at 234. 127. Id. at 248. 128. Id. at 235. 129. KOEHLER, supra note 1, at 195-196. 130. Himmel & Llanes, supra note 83, at 2. 131. KOEHLER, supra note 1, at 196.

55

Currents 23.1 2016


BITCOIN’S STANDING WITHIN THE GLOBAL REGULATORY AND ECONOMIC MARKETPLACE IAN A. HOLCOMB

—————————————————

providing concrete examples of how differing

source software, any individual is capable

treatments of Bitcoin can have dramatically

of reviewing the raw programming to make

————————————————

different results for the bitcoin holder. Part

sure that the software is acting in accordance

Transparency, anonymity, efficiency, and

V will then expand the discussion, analyzing

with its protocol. 7 This transparency

decentralized governance—this is the mantra

how different countries have (or have not)

discourages individuals from tampering with

that fuels users of the ever-increasingly

attempted to regulate Bitcoin, as well as the

the programming for their personal gain, for

popular virtual cryptocurrency, Bitcoin.

implications of those regulations. Lastly,

others can detect these abnormalities and

The idea for Bitcoin spawned in 2009 from

Part VI offers a solution that bridges the

undo them. Unlike traditional government-

a software developer using the pen name

gap between two divergent categorizations:

backed currencies, Bitcoin implements

Satoshi Nakamoto , and in the six years

Bitcoin is best treated as a payment system

cryptography principles (i.e. advanced

since then, its use has become widespread

for commercial purposes and as property for

mathematical proofs) to maintain the

to the point that it is now showing up on

investment applications.

integrity of the system.9 Additionally, Bitcoin

the regulatory radar of many countries.3

—————————————————

contains protocols that regulate the number

However, these countries have struggled

and rate at which bitcoins are introduced

because Bitcoin’s special properties make it

II. How Does Bitcoin Work?

difficult to place within a single regulatory

————————————————

transactions are recorded on a public,

In order to fully understand the impact

general ledger that is known as the “block

This note seeks to unpack all of the

that varying regulations might have, it is

chain.”11 The only identifying feature on

information concerning Bitcoin and offer a

important to flesh out an understanding

the block chain is a bitcoin wallet number

practical regulatory solution that will strike

of how Bitcoin functions. For clarification,

unique to that particular individual. 12

a balance between protecting investors and

“Bitcoin” with a capitalized “B” denotes

Bitcoin wallets can be set up online and,

maintaining the integrity of the Bitcoin

the underlying software program and

unless someone knows who owns that

software. Part II begins with an overview of

technology, whereas “bitcoin(s)” refers to

particular bitcoin wallet number, the system

Bitcoin’s history and mechanisms, as well as

the individual units of currency generated

is anonymous.13 This system enables Bitcoin

how one goes about obtaining bitcoins. Part

by the software.5 Bitcoin is an open-source

to exist as a currency that is independent

III follows with a discussion on the risks of

software program that provides a framework

from any sovereign nation’s influence.14

Bitcoin, highlighting recent controversies

for generating bitcoins and auditing bitcoin

and academic discourse surrounding the

transactions.6 This process is referred to

viability of Bitcoin as an investment tool

as “bitcoin mining,” and is discussed in

or currency. Part IV expands on Part III by

further detail below. Since Bitcoin is open-

I. Introduction

2

regime.

4

56

Currents 23.1 2016

into the market.10 Furthermore, all bitcoin

A. Bitcoin Mining/ Acquiring Bitcoins


Bitcoin mining is the method by which

bitcoins to exist at any given time.27 Until

these actions will be discussed in greater

bitcoins are introduced into the market

this limit is reached, the award for mining

detail in Part III.

and is one of the primary ways that users

bitcoins is divided in half every four years.

acquire bitcoins.15 This process began when

It is projected that Bitcoin will generate the

Bitcoin generated the genesis block;16 this

21 millionth bitcoin in the year 2140.29

28

B. Storing Bitcoins

is the first block in the block chain and it

In addition to the ceiling on number of

Once bitcoins have been acquired, the

generated fifty bitcoins. As these original

bitcoins, the mining process is designed to

next issue is storage. Individual bitcoins

bitcoins were transferred between users, the

make the task exponentially more difficult as

are intangible pieces of coding. The only

transactions were recorded on the public

blocks are added to the block chain. When

way to store them is in a bitcoin wallet.37

ledger. After a certain amount of time passed,

bitcoin miners are creating a hash, the hash

These wallets contain a public ID number

Bitcoin consolidated these transactions into

is not merely applying cryptography proofs

for depositing bitcoins, as well as a private

a subsequent block. Presently, the rate at

to that individual block alone.

Instead,

number for withdrawing bitcoins. Bitcoin

which Bitcoin creates blocks is approximately

the hash must generate codes that represent

wallets come in five different forms—

one block every ten minutes.19

every prior block in the block chain in

desktop, mobile, web, hardware, and

Each block in the block chain must be

addition to the new block.31 Bitcoin creates a

paper—each with their own advantages and

audited as it is created.20 For this to work,

new block every ten minutes - or 52,596 new

disadvantages.38 Anytime someone is mining

bitcoin “miners” supply computer hardware

blocks every year. This burdensome process

or transacting in bitcoins, the public bitcoin

that runs the software and creates a digital file

has drastically slowed the rate at which

wallet ID number will be the sole identifiable

called a hash.21 The hash is a mix of numbers

bitcoins are produced and also explains why

feature that appears on the block chain.

and letters representing a condensed version

it is projected to take until 2140 to generate

Because Bitcoin is open-source, any user

of the block chain, and it is proof that the

the final bitcoin.32

can readily determine how many bitcoins are

17

18

30

Bitcoin

The final factor that discourages many

held in any one wallet. However, unless the

then reviews these hashes for accuracy. If

potential bitcoin miners is the cost. To have

person knows who holds that bitcoin wallet

the hash is 100% correct, Bitcoin attaches

the best chance of creating the correct hash

ID, there is no way of knowing to whom

the block and accompanying hash to the

first, a miner will need to have a powerful

the wallet belongs.39 This has lead to Bitcoin

block chain, and it generates twenty-five

computer that is dedicated exclusively

being termed pseudonymous.40

bitcoins.24 These bitcoins are awarded in full

to running the Bitcoin software. These

The desktop wallet is the original bitcoin

to the first miner that submits an accurate

specialized computers are colloquially

wallet.41 It is setup simultaneously with

hash.25 This creates incentives for miners

referred to as “Bitcoin Miners,” and can be

the Bitcoin software and is stored on the

to supply a lot of computing power, for

quite pricey. In addition to the cost of the

user’s local hard drive.42 The advantages

more computing power means faster hash

equipment itself, there are the associated

of the desktop wallet is that it has access

generation. Additionally, once Bitcoin has

costs of insurance, utilities, and maintenance.

to the full functionality of Bitcoin, so any

completed the auditing process for the block

Furthermore, if the price of bitcoin were to

transactions conducted with a desktop

chain, an updated version of the block chain

drop, a miner could quickly find themselves

wallet will be seamless.43 However, several

is sent out to all users to repeat the process

in Candide’s shoes, for the cost of producing

disadvantages also exist. First, a desktop

for the next block.26

bitcoins will exceed their initial wealth.34

wallet is not mobile, so transactions may

To combat this problem, some miners pool

only be conducted where the computer is

bitcoin mining is a quick and easy operation,

their resources into one mining operation.

35

located.44 Second, desktop wallets are stored

there are multiple factors that place a cap on

Others opt to not mine for bitcoins at all

on a computer, and thus, are susceptible to

bitcoin generation. The first cap stems from a

and, instead, purchase bitcoins from miners

hardware failure (e.g. wear and tear, short-

Bitcoin protocol that allows only 21 million

or through exchanges. Consequences of

circuiting, etc.) and security breaches.45 That

particular block is legitimate.

22

23

While this description makes it appear as if

33

36

57

Currents 23.1 2016


being said, other software has been developed

wallet is not subject to online hacking.55

exchanged for money, goods, or services with

46

to increase the security of desktop wallets.

Despite the flexibility and security provided

any person that will accept them.65 When

Further, backing up desktop wallets to an

by hardware wallets, they tend to be more

conducting a bitcoin transaction, the sender

external source can minimize the collateral

expensive than all other forms of bitcoin

will enter their private ID number (this acts

damage from hardware failure.47

wallets and are still subject to the same

as a signature), the amount of bitcoins they

Next, the mobile wallet is designed to

potential hardware failures as desktop

want to transfer, and the public ID number

facilitate bitcoin transactions in a way that

wallets. Additionally, there are very few

of the person receiving the bitcoins.66 Once

desktop wallets are incapable of doing.

hardware wallets presently available, but

the sender confirms the transaction, it is

Mobile wallets function as an app on a

several new types of hardware wallets are due

recorded onto the block chain, and must

cell phone, which allow you to store your

to appear in the near future, which could

go through the auditing process before the

bitcoin wallet information on the app and

lower costs.57

recipient has access to the bitcoins.67 This

56

complete transactions anywhere bitcoins are

The last type of bitcoin wallet is the paper

usually creates a short delay (roughly ten

accepted. The problem with mobile wallets

wallet. This wallet is a document that usually

minutes) between the execution and delivery

is that if the phone is stolen or hacked into

contains two QR codes - one for the public

of bitcoins.68 However, the tradeoff is that,

the wallet is compromised.49 Furthermore,

ID number and the other for the private ID

unlike other payment systems that place fees

mobile apps are incapable of running the

number.58 A paper flap conceals the private

on delivering funds, there are usually no

full version of Bitcoin. Instead, they rely on

ID number, so it allows users to let others

transaction costs associated with a bitcoin

a small subset of the block chain and other

scan the public number while simultaneously

transaction.69

reliable nodes in the network to support the

protecting the private one.59 The major

There are special risks involved with

integrity of the transactions.50

advantage to having a paper wallet is that it

bitcoin transactions. Due to the unique

Third, online wallets are a hybrid of the

is an analog wallet.60 The ID numbers are not

nature of the mining process, whenever

two previous types of wallets. With this type,

digitally stored, so it is impossible to hack

bitcoin transactions are recorded on the

the bitcoin wallet and private information

into them. Paper wallets also provide the

block chain, they are irreversible.70 The only

are stored on a data server (similar to online

convenience provided by mobile, online, and

way to get bitcoins back would be to have

hard drives, such as Dropbox and Google

hardware wallets because you can carry the

that person send you an equivalent amount

Drive).51 This means the bitcoin wallet

paper wallet anywhere with you.62 The only

of bitcoins in return. With this in mind,

has full access to Bitcoin software at all

disadvantages of paper wallets are that they

users must ensure that their bitcoin wallets

times and can be accessed on any device

can be stolen and, because paper wears out

are properly constructed so that their public

with an Internet connection. The major

and ink fades over time, the paper wallet will

and private ID numbers are always correct.

disadvantage to using an online wallet is

need to be replaced occasionally to protect

If someone has a faulty public key, then

that they require registration with the online

the user.63 Additionally, if the paper wallet

the funds might get sent to a different user,

provider, which nullifies the pseudonymous

is ever stolen or destroyed, there is no way

which will leave the sender without recourse.

nature of Bitcoin, and it places all relevant

to ever access that wallet.

48

52

61

64

information with a third party. If that third

—————————————————

53

C. Making Exchanges with Bitcoins

III. Bitcoin Valuation & Inherent Risks

Fourth, hardware wallets offer a unique

The next step in understanding how

————————————————

experience for storing bitcoins. They work

Bitcoin functions is to understand how

With an understanding of the core

by storing the bitcoin wallet on an encrypted

transactions are conducted. Unless the laws

functions of Bitcoin, the next issue is

USB device.

The encryption allows the

of a country proscribe this conduct (to

Bitcoin’s benefits and risks as they pertain

device to be used on any computer, and the

be discussed in Part IV), bitcoins may be

to their use as an alternative currency or

party is hacked, then the bitcoin wallet is susceptible to being emptied.

54

58

Currents 23.1 2016


investment tool. A look at how bitcoins are

any security being analyzed is highly traded.

that could be illegally traded on. However, it

valued provides a good starting point.

Analysts will not pay much attention to stock

is important to note that bitcoin holders and

that is only thinly traded. With regard to

exchanges have nonpublic information and

bitcoins, this assumption is valid because

data. If such an exchange or holder conducts

bitcoins have consistently had a high trading

illegal activities and possesses a large enough

volume since 2013. Furthermore, a cursory

quantity of bitcoins, this can lead to volatile

When a company’s stock is valued, there

Google search for “bitcoin news” generates

price changes.

is usually an intrinsic value supporting such

millions of articles that cover all aspects of

the price, namely, the net value of that

the technology. It is safe to say that bitcoin

company’s assets over its liabilities, (also

trades in an efficient market.

A. Does Bitcoin Trade in an Efficient Market?

76

B. Arguments For and Against Bitcoin's Viability

referred to as “book value”).71 There are other

The ECMH has three possible alternatives

factors that further adjust the price of stock

with regard to the type of information

Since bitcoins have no intrinsic value and

by comparing it with comparable companies

that is incorporated into a security’s price:

all information about Bitcoin is publicly

or by conducting a discounted cash-flow

weak-form, semistrong-form, and strong-

known, it must be, therefore, that Bitcoin

valuation method. Bitcoins are unique

form.77 The weak-form model suggests that

valuation is largely based on consumer

because they do not represent anything that

only a security’s past price performance

confidence in the currency and as speculation

would amount to intrinsic value; they are

is incorporated into the present value.

78

regarding how it will perform in the future.

neither backed by any sovereign nation, nor

However, this model has been largely

The factors that lead to bitcoins’ price surges

are they tied to any commodity. In short,

considered an ineffective means of predicting

in 2013 were as follows: the software was

bitcoins have no intrinsic value.73 Instead,

future price values, and therefore merits no

established that year; reasonable quantities

the value adheres more to a Keynesian

further discussion. The semistrong-form

of bitcoins were present in the market;81

“castles-in-the-air” theory, i.e. investors want

model posits that all publicly available

there was large trading volume; and large

to know what other investors think the value

79

information is incorporated into the price.

companies were accepting bitcoins as forms

of bitcoins should be.

74

This can include particulars of the security

of payment.82 However, just as quickly as

This leads to the question of whether or not

(e.g. SEC filings, etc.), general market

Bitcoin rose, it fell in early 2014 when Mt.

bitcoin prices are accurate. The best method

conditions, and public speculation of future

Gox, a large Japanese bitcoin exchange (and

of determining this is by determining

performance. This model is the one believed

online bitcoin wallet provider) declared

whether bitcoin trading occurs in an efficient

to be the most reliable and consistent

bankruptcy.83 The bankruptcy arose after a

marketplace. Under the Efficient Capital

approach to the ECMH. 80 Under the

Ponzi scheme resulted in the loss of $480

Market Hypothesis (ECMH), if a market

strong-form model, all information, even

million worth of bitcoins.84

can quickly impound new information into

nonpublic information, is incorporated

These recent bouts of price volatility have

the price of a security in a nonbiased manner,

into price. While this model has also been

made several countries wary of bitcoins

that resulting price will be more stable and

largely discredited, even if it were correct,

as a currency due to its inability to hold a

less prone to sudden shifts. The primary

it would still never apply to bitcoins. This

steady value. Similarly, many countries are

mechanism for establishing efficiency is

inapplicability stems from the open-source

discouraging consumers from investing too

by competitive analysis. If there are many

nature of Bitcoin. Since anybody can look

heavily in bitcoin out of fear they could lose

analysts researching a particular security,

into the software and know exactly how it is

their investment.85 Additionally, some feel

the idea is that they will all find information

working, there is nothing about Bitcoin that

that bitcoin has been artificially propped up

that will be immediately disseminated and

is nonpublic. This might lead one to believe

by its “wide acceptance” for many companies

incorporated into the price of that security.

that Bitcoin is immune from sudden price

that accept bitcoins as payment do not

This theory also relies on the assumption that

shifts because there is no insider information

actually hold onto those bitcoins, but instead

72

75

59

Currents 23.1 2016


immediately exchange all received bitcoins

are considered property or currency. For

then they are taxed on both the disposition

into fiat currencies.

simplicity, only U.S. taxation laws will be

of bitcoins and on the property received in

Despite these criticisms, Bitcoin has its

referenced. The first issue related to taxation

exchange and vice versa.98

defenders.87 These defenders have pointed

is bitcoin mining. The tax implications are

The currency regime has the same impact

out that bitcoins have been no more volatile

the same regardless of bitcoin’s status. Under

on bitcoins in the investment context, but

than the Swiss Franc or North Sea Brent

the Internal Revenue Code, gross income

a significant change occurs in the merchant

Crude Oil. Furthermore, the risks of market

is defined as “all income from whatever

context. If bitcoin is treated as a currency,

manipulation by bitcoin exchanges are no

source derived, including (but not limited

there is not a realizable event as to any

89

worse than an ordinary stock exchange.

to) the following items . . . [c]ompensation

property received. This is the same treatment

Additionally, in cases such as Mt. Gox,

for services, including fees, commissions,

that cash and incurred debt receive. If a

which provided online wallets and exchange

fringe benefits . . . [and g]ains derived from

person purchases a good with bitcoins, that

services to people, using different forms of

dealings in property.” If someone is engaged

person would only have tax consequences

bitcoin wallets (as discussed in Part I) can

in bitcoin mining, they realize income when

(i.e. a realized gain or a realized loss) when

reduce the possibility of being defrauded

they successfully audit the block chain and

he or she disposes of the property. While this

by hackers or a Ponzi scheme. Based on the

receive twenty-five bitcoins. This income

is not the current trend for bitcoin, there

trends, Bitcoin appears to be going through

will need to be reported on a miner’s federal

have been some efforts to treat bitcoin as a

a stage of fluctuations before it establishes

income tax return for the appropriate year.

currency.99

equilibrium.90 As Bitcoin usage becomes

The more interesting issue arises when an

The main difference exhibited under the

more widespread and technology and laws

individual decides to buy and sell bitcoins.

currency regime is how bitcoins would be

materialize to enable its continued use, it is

Since the IRS has decided to treat bitcoins

taxed if used for investment purposes. This

likely that bitcoins will reach a stable value

as property, the implications of bitcoin as

activity would constitute a currency swap,

and resolve many countries’ resignations, but

property will be discussed first.

Under

whereupon an investor swaps US Dollars

only time will tell.

the property regime, purchased bitcoins

(or other foreign currency), which have

are subject to the rules regarding property

a steady interest rate, for an equivalent

purchases.

Additionally, since bitcoins

number of bitcoins, whose interest rate is

IV. Practical Implications of Dealing in Bitcoin

can be used for investment activities, the

constantly in flux. The controlling provision

disposition of bitcoins would result in an

in this instance is section 988 of the Internal

————————————————

application of the capital gains rules. This

Revenue Code.

This next section focuses on the implications

is advantageous to bitcoin investors, for they

As a preliminary matter, in light of

of using Bitcoin in various commercial and

may receive preferable tax rates on bitcoin

Representative Stockman’s proposed

investment settings. Specifically, this section

transactions.95 The property regime is good

legislation, the following discussion is

will address issues regarding tax obligations,

for people using bitcoins for investment

assuming provisions discussed herein have

securities regulations, and commercial

purposes, but it discourages the use of

been modified as necessary to reflect the

lending.

bitcoin as a currency. This is due to the fact

realities of Bitcoin.100 The general rule under

that gross income is realized when there

section 988 is that any foreign currency

are “accessions to wealth, clearly realized,

gain or loss that results from section 988

over which the taxpayers have complete

transactions will be calculated separately

Anyone wanting to get involved with

dominion.” Anytime property is disposed

and treated as ordinary income or loss on

Bitcoin needs to be aware of the possible

of, there is a realizable event. Therefore,

interest. 101 A “section 988 transaction”

tax implications. The great divide for tax

when anyone accepts or uses bitcoins as

is defined as, “any transaction . . . if the

liability stems from whether or not bitcoins

a form of payment for goods or services,

amount which the taxpayer is entitled to

86

88

—————————————————

A. How are Bitcoins Taxed?

91

93

94

96

97

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Currents 23.1 2016

92


receive (or is required to pay) by reason of

of 1933.105 Specifically, this arrangement is

as collateral for obtaining loans. Articles 8

such transaction—(i) is denominated in

an “investment contract.”

The Supreme

and 9 of the Uniform Commercial Code

terms of a nonfunctional currency, or (ii) is

Court established the test for an investment

will be the best resource in resolving this

determined by reference to the value of 1 or

contract in in S.E.C. v. W.J. Howey Co.107

issue. This is a tricky situation, for bitcoins

more nonfunctional currencies.”102 Bitcoin

Under Howey, an investment contract is

share similar aspects with several different

transactions fall into this definition quite

defined as:

types of collateral. Bitcoins can be used to

106

neatly, as getting paid in bitcoins would

[A] contract, transaction or scheme

purchase property and services, like money;

satisfy the condition in romanette one.

whereby a person invests his money

they are intangible pieces of coding, similar

The downside to this type of transaction is

in a common enterprise and is led to

to software; they are stored in a wallet, like

that ordinary income has a higher tax rate

expect profits solely from the efforts of

how money is stored in a deposit account,

when compared alongside capital gains.103

the promoter or a third party, it being

and bitcoins can also be held for investment,

However, unlike capital losses, ordinary

immaterial whether the shares in the

exactly like investment property.

104

losses can be deducted much more freely.

enterprise are evidenced by formal

The economic realities behind bitcoins

The conclusions that can be drawn from

certificates or by nominal interests in

must be appreciated in order to promulgate

this analysis are that if bitcoins are treated

the physical assets employed in the

effective guidance in commercial lending

as property, from a taxation standpoint,

enterprise.108

scenarios. That being said, money and

they are better for investment purposes

Furthermore, U.S. courts have held

software, both being types of collateral

and if they are treated as a currency, they

that Bitcoin mining pools are investment

defined in 9-102 of the UCC, are red

are better suited as a medium of exchange.

contracts.

This means that if someone

herrings in the bitcoin context, albeit for

How bitcoin ends up being treated should

wishes to start a bitcoin mining pool

different reasons. “Money,” is not a helpful

be based on how Bitcoin users use their

and cannot find an exemption under the

definition to associate with Bitcoin, for, “a

bitcoins.

securities laws, they will be required to

security interest in money may be perfected

register their securities with the Securities

only by the secured party’s taking possession

and Exchange Commission before soliciting

under Section 9-313.”113 While some of the

any prospective investors. 110 Failure to

bitcoin wallets (e.g. hardware and paper) are

comply with the Securities and Exchange

tangible products that could be possessed,

laws could result in civil and criminal

these represent a minority of bitcoin

penalties.

wallets used by people trading in bitcoin.

B. Bitcoin Mining Pools & Securities Regulations As mentioned in Part I, bitcoin mining can be a costly operation. In order to have

109

111

better success, some individuals prefer to

However, it should be noted that

Furthermore, bitcoins are always intangible

enter into a bitcoin mining pool whereupon

investment contracts require the, “efforts of

pieces of coding and therefore, can never be

several investors invest in one company. In

the promoter or a third party.” This means

“possessed” within the meaning of the UCC.

turn, this company uses the funds to operate

that if someone desires to engage in a bitcoin

Similarly, “software,” is defined as a specific

a bitcoin mining business, and as income

mining operation by herself, she may do so

type of “general intangible,” and 9-310

is realized, the investors receive returns in

without regard to the securities laws.

requires that all security interests in general

112

proportion to what they originally invested. While this practice has helped people who would otherwise have never had the

intangibles must be perfected by filing a C. Bitcoins & the Uniform Commercial Code

opportunity to profit from bitcoin mining,

UCC-1 Financing Statement.114 While this definition appears to be suitable on its face, it ignores the economic realities of Bitcoin.

it can spell trouble for the company, as this

A third consideration that bitcoin users

Bitcoin is more than just software. In fact,

would likely constitute a, “security,” within

will want to consider is how bitcoins

it tends to act more like a deposit account

the meaning prescribed in the Securities Act

could be used commercially, specifically

and investment property, both of which may

61

Currents 23.1 2016


be perfected by establishing control.115 This

Bitcoin generates bitcoins, these are placed

respective currencies, which has only become

is important because if there is a priority

in the bitcoin wallet, which creates a security

a wider concern in light of the Greek and

dispute between creditors over a deposit

entitlement in favor of the bitcoin wallet

Cypriot debt crises. 123 Nakamoto labels

account or investment property, the creditor

owner (i.e. the entitlement holder).120 If the

these outcomes as byproducts of the “trust

that has control has priority over a creditor

entitlement holder wishes to put bitcoins up

based model” of finance, which he sought to

that does not have control.

as collateral, he/she can execute an agreement

eliminate when he proposed Bitcoin. With

That being said, “deposit account,” cannot

whereupon they deliver the public and

Bitcoin, there is no need to “trust” anyone.

be the definition for one small reason - the

private ID numbers to the secured party and

The system, as previously discussed in Part II,

definition of “deposit account” has limiting

indicate that such party controls all security

monitors itself and is open-source, allowing

language to the effect that deposit accounts

entitlements. This will establish control in

all users the ability to access and ensure the

are “maintained with a bank.”117 From what

favor of the secured party.121

software is operating as it should, which

116

helps eliminate fraud and prevent inflation

we have learned about Bitcoin thus far, that

from occurring.124

is simply not the case. Many bitcoin wallets

—————————————————

are either held by the individuals themselves or they are maintained by a third party

V. How Countries have (Not) Regulated Bitcoin

exchange, neither of which constitute a bank.

————————————————

Investment property is not subject to

The previous sections have all analyzed

the same restrictions as deposit accounts.

Bitcoin within contextual microcosms.

On the other side of this policy debate

Therefore, for purposes of obtaining and

This section will shift gears and look at

are governments who are responsible for

perfecting a security interest, as well as

macro-concerns that Bitcoin poses to

the welfare of their own people. From the

having first priority to the funds, bitcoins

various countries. First, major policy

outset, when presented with something new,

(and bitcoin wallets) need to be classified as

concerns for bitcoin advocates and sovereign

governments have three options: proscription,

investment property.

nations will be addressed in turn. Then, a

indifference, or prescription. While the first

Article 8 of the UCC helps fill in the

snapshot of different countries’ approaches

two options end the discussion, prescription

gaps. Individual bitcoins fall within the

will be analyzed in an order of increasing

can be implemented in a way that can either

definition of a “financial asset” because

friendliness towards the technology.

limit new concepts or allow them to flourish.

B. Policy Considerations from a

The stance of this note is that within the

they are an, “interest . . . in property . . . which is, or is of a type, dealt in or traded on financial markets, or which is recognized

Government's Perspective

A. Proper Policy from the Bitcoin

context of Bitcoin, proscription cannot and should not be the answer. Furthermore,

User's Perspective

while indifference leaves things unchanged,

in any area in which it is issued or dealt in as a medium for investment.”118 Additionally,

Bitcoin did not arbitrarily appear

it creates uncertainty in many aspects, several

since bitcoin wallets are the sole method by

overnight. Its inception was the result of

of which have been and will be addressed. The

which bitcoins are stored, they parallel the

what many see as an unnecessary reliance on

focus on creating Bitcoin policy should be

definition of “securities account,” defined

government-backed financial institutions.

122

prescription, which facilitates governmental

as, “an account to which a financial asset

In particular, bitcoin’s loudest advocates

proscription of certain unsavory aspects

is or may be credited in accordance with

criticize high transaction costs associated

while simultaneously fostering the growth

an agreement under which the person

with the movement of money, a lack of

and prosperity of Bitcoin.

maintaining the account undertakes to

privacy, the inability to completely eliminate

The two most important issues that

treat the person for whom the account is

fraudulent activity (e.g. counterfeiting),

concern governments about Bitcoin are

maintained as entitled to exercise the rights

the contentment as to that inability,

(1) the lack of consumer protection, and

that comprise the financial asset.”119 As

and governmental manipulation of their

(2) the possibility that bitcoins could

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Currents 23.1 2016


be used to launder money and finance

repercussions of such actions will be reserved

be regarded as having a monetary value

terrorism.

for the latter policy consideration.

constitutes “funds” within the meaning of

125

There are legitimate public

policy concerns that have been fueled by

This next issue has been the focus of a

the events surrounding Mt. Gox, and the

great deal of recent controversy in the United

FBI shut-down of Silk Road.126 Each of

States. This is the potential for bitcoins

While there have not been any cases on the

these concerns will be fully outlined in the

to be used as a vehicle to commit money

subject, it is likely that a U.S. court would

paragraphs below, as they help illuminate

laundering and finance terrorism. Money

reach a similar conclusion if someone was

the analysis of the steps countries have taken

laundering has been on the forefront of

charged with financing terrorism. This is

or will take regarding the [non-]regulation

concerns since millions of dollars in bitcoins

especially true since the statute uses the word

of bitcoins.

were found when the FBI raided and shut

“funds,” the same word the New York Federal

The first issue that needs to be addressed

down Silk Road 2.0. Ross William Ulbricht

District Court focused on.133

is consumer protection. Governments

(a/k/a “ the Dread Pirate Roberts”) was the

The primary reason why governments fear

recognize that consumer protection laws

person responsible for Silk Road, an online

bitcoins being used for illegitimate purposes

are necessary because consumers are the

black market. When the FBI shut it down,

originates from the pseudonymous nature of

ones who buy things on the marketplace.

Ulbricht was convicted of several crimes,

the technology. As discussed previously, the

If consumers feel that too much is at risk,

most notably money laundering.129 The

only efficient way to know who is associated

they will avoid buying, and markets will

money laundering statute reads,

with a bitcoin wallet ID number is to have the

the statute. Therefore, the statute was written broadly enough to encompass bitcoins.132

The main aspects of Bitcoin

[w]hoever transports, transmits, or

entity disclose its identity. Unilateral action

that fuel the consumer protection concerns

transfers . . . a monetary instrument

by one country will certainly help diminish

are the irreversibility of transactions and the

or funds from a place in the United

the problem, but no single country has the

integrity of bitcoin wallets’ security system.

States to or through a place outside

power to apply its laws extraterritorially

As previously discussed, by Bitcoin’s

the United States or to a place in the

to all individuals on Earth. This issue of

very nature, once a transaction is recorded

United States from or through a place

pseudonymity appears to be the only aspect

on the block chain, there is no way that

outside the United States—(A) with

of Bitcoin usage whereupon advocates in

the transaction can be undone, since the

the intent to promote the carrying on

both camps are diametrically opposed to

block chain is constantly being audited.

of specified unlawful activity . . . shall

one another. In light of all the public policy

The pseudonymous aspect of the software

be sentenced to a fine of not more than

considerations, bitcoin users will need to

further exaggerates this problem. If there is

$500,000 or twice the value of the

capitulate to the legitimate concerns of

a breach of contract, where one party trades

monetary instrument or funds involved

governments in hopes of preferential bitcoin

bitcoins for performance and the other

in the transportation, transmission,

regulation. Such capitulation would include

party fails to do so, a court could order the

or transfer, whichever is greater, or

publicly disclosing only the public bitcoin

breaching party to pay bitcoins back through

imprisonment for not more than twenty

wallet ID number and the identity of the

the network. However, if the party paying

years, or both.

person behind it. This is the smartest choice,

crumble.

127

130

for the performance mistakenly enters an

for it would resolve many public concerns

incorrect bitcoin wallet ID number, that

Ulbricht attempted to argue that he could

over bitcoin usage, and bitcoin users’ wallets

money is gone because there is no way to

not be charged with money laundering

would remain safe from being frozen because

positively identify the individual behind

because bitcoins are not monetar y

governments would not know the private

that bitcoin wallet ID.

instruments and bitcoins were the exclusive

ID number. More importantly, Bitcoin

could minimize this problem is requiring

medium of exchange on Silk Road.

would retain its most important feature,

people to register their public bitcoin wallet

However, the court focused on the word

ID number. For now, commentary regarding

“funds,” noting that anything that can

128

One method that

131

decentralization. With all of this information in mind, the

63

Currents 23.1 2016


next issue is how countries have conducted

cite several concerns that were previously

Capital controls would allow Russia to place

themselves with regards to regulating Bitcoin,

discussed in Part V, Section B. (money

limits on its citizens’ ability to convert rubles

along with analysis of their motivating

laundering, financing terrorism, etc.).

into other hard currencies and take those

factors for acting in such ways. C. Countries that have Exhibited Hostility toward Bitcoin

137

On its face, it appears that China missed an

out of the country.144 The criminalization

opportunity to protect its native consumers

of Bitcoin is evidence that Russia is slowly

and instead made it so that those interested

moving towards implementation of capital

in Bitcoin will have to make contacts

controls against other currencies.

with outside—possibly illegal—sources in

Of the three countries mentioned above,

The position of this paper is one advocating

order to use Bitcoin. That being said, any

Thailand’s proscriptive mindset towards

pragmatic prescription. We will, therefore,

individual that engages in such activity will

Bitcoin is the least severe and the easiest

begin our analysis by focusing on the

be largely without any avenue to trade or use

to resolve. Thailand’s negativity towards

countries that have taken the opposite

their bitcoins.

Bitcoin originated when Bitcoin Co Ltd,

approach. The countries that are the least

Russia’s approach has been even more

a Thai startup company, sought to register

friendly towards Bitcoin are China, Russia,

proscriptive than China. Presently, Russia has

its business with the Bank of Thailand, and

and Thailand.134 First, China has issued an

laws that forbid the trade or dissemination

was told, “buying and selling bitcoins, using

official notice, which states that all financial

of any currency other than the ruble.138 This

bitcoins to buy or sell goods and services, and

institutions,

provides a blanket ban on all currencies,

transferring bitcoins in and out of Thailand

may not use Bitcoin pricing for products

bitcoin included. However, Russia has

were all currently illegal.” 145 However,

or services, may not buy or sell Bitcoins,

recently announced that it views bitcoin

the Bank of Thailand holds this position

may not act as a central counterparty in

transactions as dubious activities that

because there are no existing laws to regulate

Bitcoin trading, may not offer insurance

are likely utilized solely by criminals and

Bitcoin usage.146 Fortunately, this was only a

products associated with Bitcoin, may

terrorists. It has moved from a blanket ban

preliminary ruling by the Bank of Thailand.

not provide direct or indirect Bitcoin-

of all foreign currencies to a direct attack

It has withheld final judgment while they

related services to customers, including:

on Bitcoin by not only banning its financial

look further into the matter.147 Despite this

registering, trading, settling, clearing or

institutions from dealing in Bitcoin, but

ruling, bitcoin exchanges continue to exist

other services; accepting Bitcoin or use

proposing legislation that would make all

in Thailand, so it appears that the passage

of Bitcoin as a clearing tool; trading

dealings with Bitcoin a misdemeanor. 139

of bitcoin laws would shift the paradigm

Bitcoin with CNY or foreign currencies;

This misdemeanor would carry a fine that

towards a friendlier bitcoin environment.148

storing, escrowing, and mortgaging in

varies based on the extent of the activity and

Bitcoin; issuing Bitcoin-related financial

the individual conducting the activity (i.e.

products; and using Bitcoin as a means

individual persons will likely be fined less

of investment for trusts and funds.

than corporations that engage in the same

135

activity).

D. Bitcoin—Sovereign Neutrality A large majority of countries have chosen the route of indifference, including the

140

The interesting aspect of this notice is

D e s p i t e R u s s i a’s t o u t e d p o l i c y

United States.149 The primary reason these

that it only proscribes Bitcoin with respect

considerations, this argument is severely

countries have not made any direct rulings

to Chinese financial institutions, but leaves

undercut by the recent ruble crisis.141 Russia

on Bitcoin’s legality is that they feel that

individuals free to invest in Bitcoin as they

is attempting to stabilize its currency so that

either the technology has not become

please. The notice is filled with language

its credit rating will not be downgraded,

widespread enough to merit concern or they

warning people of the risks associated with

which could lead to a reduction in foreign

are taking a “wait and see” approach.150

the technology, but otherwise does nothing

investment.142 One of the methods available

In the mean time, however, many of

to limit its citizens.136 Chinese officials

to achieve this result is capital controls.143

these countries have wasted no time in

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Currents 23.1 2016


taking certain positions regarding particular

“electronic currency is further defined as,

activities.159 Canada accomplished this goal

functions of bitcoin.151 Most of these include

“resources stored on [a] device or electronic

by amending section 5 of their Proceeds of

treating bitcoins as commodities (i.e.

system that allows the end user to [conduct

Crime (Money Laundering) and Terrorist

property) for tax purposes and warning of

a] payment transaction.”156 This language

Financing Act, so that anyone dealing in

the dangers that bitcoin could pose by being

enables Brazil to encapsulate all commercial

virtual currencies, including, “persons and

used to finance terrorism, launder money,

bitcoin activities, namely bitcoin exchanges

entities that have a place of business in

152

or leave consumers without protections.

and miners, whose primary business is

Canada,” and, “persons and entities that do

At this time, it does not appear that any of

mining bitcoins. It does, however, exclude

not have a place of business in Canada, [but]

these countries appear to be swayed by the

private individuals. Article 7 of the new

that are engaged in the business of providing

approaches taken by China, Russia, and

law then outlines parameters that all

services . . . that [are] directed at persons or

Thailand, so there does not seem to be any

payment institutions are required to follow,

entities in Canada, and that provide those

cause for alarm.

Only time will tell what

particularly, “meeting the needs of end

services to their customers in Canada,” must

these countries plan to do going forward, but

users, especially freedom of choice, safety,

register with the Financial Transactions and

hopefully there is enough information about

[and] protection of their economic interests,

Reports Analysis Centre of Canada (the

Bitcoin that will have been disseminated

non-discrimination, privacy and protection

“Centre”).160 As a result, entities engaged

so that today’s neutral countries can be the

of personal data, transparency and access

in the bitcoin business are required to keep

proactive prescribers of tomorrow. With that

to clear and complete information on the

and retain mandatory records relating to

in mind, the next section will analyze Brazil

conditions of service.”

Lastly, Article 9

their clients’ identities and transactions.

and Canada, the only two countries that

grants powers to the Central Bank of Brazil

They must also report any transactions that

have been proactive with their regulation of

to control the establishment, operation, and

they reasonably suspect are being executed

Bitcoin in order to meet their public policy

termination of all payment institutions and

to commit money laundering or to finance

goals and foster the software’s growth.

grants the Bank power to impose disciplinary

terrorism.161 While this approach satisfies

actions and sanctions against institutions

some of Canada’s policy considerations,

that do not observe the parameters.

While

there are concerns that the legislation, in

this law does not recognize bitcoin as a

its current form, will undermine Bitcoin’s

legitimate currency, it brings bitcoin into the

purpose of pseudonymous usage, but it

At this juncture, Brazil and Canada are

regulatory fold as a payment system, which

is likely a compromise that bitcoin users

the only two countries that have adopted

allows Brazil to subject all bitcoin exchanges

will have to make in order to alleviate

legislation that adapts their economies

to the same rules and regulations as banks.

sovereign concerns. Furthermore, even if

to facilitate bitcoin transactions. In fact,

By doing this, Brazil can help ensure that

the anonymity feature is stripped, Bitcoin

both countries have taken quite similar

no Mt. Gox scenario will ever arise within

is still completely decentralized. It would

approaches in doing so.154 Since Brazil was

its borders. Additionally, these regulatory

be impossible for any single country to

the first to enact bitcoin legislation, their

hurdles will help instill consumer protection,

centralize the software, for it is worldwide.

approach will be scrutinized first.

and by extension consumer confidence, into

Furthermore, no sovereign country can

the system. With this in mind, the focus will

manipulate Bitcoin into producing more

now shift to Canada’s approach.

bitcoins, for other users can identify this

153

E. Brazil & Canada—Bitcoin Havens, in a

Sense

Brazil’s law states that, “[any] legal entity that, sticking to one or more payment

157

158

arrangements whose principal activity or

While Canada has enacted legislation

accessory, alternatively or cumulatively . . .

to regulate bitcoin, it is much narrower in

convert[s] physical currency [into] electronic

scope than Brazil’s law. It focuses on limiting

currency, or vice versa,” falls within the

the ability of bitcoins to be used for money

definition of a “payment institution;”

laundering and financial vehicles for terrorist

155

type of abnormality and undo it.

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Currents 23.1 2016


—————————————————

merchants accept bitcoins as payment for

VI. Conclusion

goods then immediately convert them

————————————————

into a government-backed fiat currency.162 Affording bitcoin the payment system

The analysis in the previous sections

treatment will aid merchants and consumers

reveals that Bitcoin has potential to be used

in avoiding double taxation from bartering

for nefarious purposes, it also has great

property—bitcoins would be treated the

potential for use in investment and other

same as cash or debt. Furthermore, allowing

commercial contexts. In order to truly

this facet of bitcoin to flourish will help those

foster and help Bitcoin evolve, countries will

investing in it to succeed as well.

need progressive laws that capture Bitcoin’s

Finally, despite Bitcoin being labeled a

economic realities and help shape this

cryptocurrency, it should not be treated

dynamic. Bitcoin and other cryptocurrencies

as such. At present, there are still many

are likely here to stay, and creating laws

risks and variables that limit its ability to

that attempt to proscribe their use will only

serve as an effective currency, namely the

push the technology further into the dark.

large swings in price volatility and lack

Therefore, what is needed is pragmatic

of sovereign backing. This is not to say,

prescription of Bitcoin. This can best be

however, that this will always be the case.

established through bilateral investment

The price might eventually stabilize as its

treaties and multilateral agreements.

use becomes widespread to the point where

However, it will require a large dissemination

the collapse of a single bitcoin exchange will

of information about how Bitcoin truly

not cause a plummet in value, as was the

functions before many countries will be

case with Mt. Gox. Alternatively, Bitcoin

willing to abandon their draconian measures

might suffer Pied-Piper syndrome, meaning

and adopt more proactive approaches.

that Bitcoin’s underlying technology

At this juncture, the best way to regulate

could serve as the foundation for other

Bitcoin is by utilizing a two-pronged test

applications, particularly a sovereign-backed

that distinguishes between bitcoins held

cryptocurrency, while its overall primary

for investment purposes and bitcoins used

purpose is discarded.163

to facilitate commercial transactions. For the former, bitcoins should be treated as property, which will allow the economic realities of bitcoins’ investment quality to be realized and help bitcoin investors receive capital gains treatment for their bitcoins. In the latter scenario, Brazil’s model should be followed, i.e. Bitcoin should be treated as a type of payment system, akin to negotiable instruments, wire transfers, and credit cards. The strongest evidence in favor of this policy is the fact that many 66

Currents 23.1 2016


End Notes 1. See What is Bitcoin?, COIN DESK, http:// www.coindesk.com/information/ what-is-bitcoin/ (last updated Feb. 20, 2014) [hereinafter WIB] (“[T]hese [bit]coins can be divided into smaller parts (the smallest divisible amount is one hundred millionth of a bitcoin and is called a ‘Satoshi’ . . . .”). 2. Id. 3. See Regulation of Bitcoin in Selected Jurisdictions, LIBRARY OF CONG., http://www.loc.gov/law/help/ bitcoin-survey/index.php (last visited Mar. 22, 2015) [hereinafter Bitcoin Regulation] 4. See Reuben Grinberg, Bitcoin: An Innovative Alternative Digital Currency, 4 HASTINGS SCI. & TECH. L.J. 159, 181-206 (2012), www.bitcointrading. com/pdf/bitcoinbyreubengrinberg. pdf. 5. Sharon D. Nelson & John W. Simek, New Money: What Lawyers Need to Know About Bitcoins, 77 TEX. B.J. 954, 954 (2014), https://www.texasbar.com/ AM/Template.cfm?Section=Past_ Issues&Template=/ C M / C o n t e n t D i s p l ay. cfm&ContentID=27595. 6. WIB, supra note 1. 7. Id. 8. Id. 9. Id. 10. Id. 11. Id. 12. Id. 13. Id. 14. Id. (the primary influence that Bitcoin discourages is the creation of additional currency to meet current needs, which leads to inflation and in some cases, hyperinflation). 15. How Bitcoin Mining Works, COIN DESK, http://www.coindesk.com/ information/how-bitcoin-miningworks/ (last updated Dec. 22, 2014) [hereinafter Bitcoin Mining]. 16. Michael Carney, From the “Genesis Block” to Tim Draper’s Big Buy: A History of Bitcoin, PANDO DAILY (July 4, 2014), http://pando. com/2014/07/04/from-the-genesisblock-to-tim-drapers-big-buy-ahistory-of-bitcoin/. 17. Sarah Rotman Parker, CONSULTATIVE GRP. TO ASSIST THE POOR, Bitcoin Versus Electronic Money, CGAP 1 (Jan. 2014), http:// www.cgap.org/sites/default/files/ Brief-Bitcoin-versus-ElectronicMoney-Jan-2014.pdf. 18. Id. 19. Id. 20. Bitcoin Mining, supra note 15. 21. Id. 22. Id. 23. Id.

Id. Id. Id. WIB, supra note 1. Parker, supra note 17. Id. Bitcoin Mining, supra note 15. Id. See Total Bitcoins in Circulation, BLOCKCHAIN INFO, https:// blockchain.info/char ts/totalbitcoins?showDataPoints =false&show_header=true&daysA verageString=1&timespan=all&scal e=1&address= (last visited Mar. 21 2015) [hereinafter Bitcoin Circulation]. 33. See, e.g., Meissner v. BF Labs, Inc., No. 13- 2617- R D R , 2 0 1 4 W L 2558203, at *1 (D. Kan. June 6, 2014) (Demonstrating Plaintiff paid Defendant $62,598 for two Bitcoin Miners). 34. See VOLTAIRE, CANDIDE 76-80 (George Stade ed., Henry Morley trans., Barnes & Noble Classics 2003) (1759). 35. What Are Bitcoin Mining Pools?, COIN DESK, http://www.coindesk.com/ information/get-started-miningpools/ (last updated Mar. 10, 2014). 36. WIB, supra note 1. 37. How to Store Your Bitcoins, COIN DESK, http://www.coindesk.com/ information/how-to-store-yourbitcoins/ (last updated Dec. 22, 2014) [hereinafter How to Store Your Bitcoins]. 38. Id. 39. Id. 40. Id. 41. Id. 42 Id. 43. How to Store Your Bitcoins, supra note 37. 44. Id. 45. Id. 46. Id. 47. Id. 48. Id. 49. Id. 50. Id. 51. Id. 52. Id. 53. Id. 54. Id. 55. Id. 56. Id. 57. Id. 58. Id. 59. How to Make a Paper Bitcoin Wallet, COIN DESK, http://www.coindesk. com/infor mation/paper-wallettutorial/ (last updated Dec. 22, 2014) [hereinafter Paper Bitcoin]. 60. How to Store Your Bitcoins, supra note 37. 61. Id. 62. Paper Bitcoin, supra note 59. 63. Id. 24. 25. 26. 27. 28. 29. 30. 31. 32.

64. Id. 65. How Do Bitcoin Transactions Work?, COIN DESK, http://www.coindesk. com/information/how-do-bitcointransactions-work/ (last updated Mar. 20, 2015). 66. Id. 67. Id. 68 Id. 69. Id. (Some online Bitcoin operators do charge fees for conducting bitcoin transactions, but these are still far less expensive than traditional bankimposed fees). 70. Id. 71. Douglas V. Austin & Steven A Bires, Dissenter’s Appraisals, 111 Banking L.J. 393, 395 (1994). 72. WIB, supra note 1. 73. Id. 74. See generally JOHN MAYNARD K E Y N E S, T H E G E N E R A L THEORY OF EMPLOYMENT, INTEREST, AND MONEY (1936), http://cas.umkc.edu/economics/ people/facultypages/kregel/ courses/econ645/winter2011/ generaltheory.pdf (establishing the idea that people do not value stock based on its intrinsic value, but instead look to see what other people value a particular stock at). 75. See Christopher Paul Saari, The Efficient Capital Market Hypothesis, Economic Theory and the Regulation of the Securities Industry, 29 STAN. L. REV. 1031, 1035 (1977) [hereinafter Saari]. 76. USD Exchange Trade Volume, BLOCKCHAIN INFO, https:// blockchain.info/charts/trade-volum e?showDataPoints=false&timespan =1year&show_header=true&daysA verageString=7&scale=0&address= (last visited Apr. 19, 2015). 77. Saari, supra note 75, at 1041. 78. Id. 79. Id. at 1044. 80. Id. 81. Bitcoin Circulation, supra note 32. 82. Jonas Chokun, Who Accepts Bitcoins As Payment? List of Companies, Stores, Shops, BITCOINVALUES.NET, http:// www.bitcoinvalues.net/who-acceptsbitcoins-payment-companies-storestake-bitcoins.html (last visited Mar. 22, 2015). 83. Grace Huang, Mt. Gox Seeks Bankruptcy After $480 Million Bitcoin Loss, BLOOMBERG BUS. (Feb. 28, 2014, 1:25 PM), http://www.bloomberg. com/news/articles/2014-02-28/mtgox-exchange-files-for-bankruptcy [hereinafter Huang]. 84 Id. 85. See Eur. Banking Auth., EBA Opinion on ‘Virtual Cur r encies’,

EUR. BANKING AUTH. (July 4, 2014), http://www.eba.europa.eu/ documents/10180/657547/EBAOp-2014-08+Opinion+on+Virtua l+Currencies.pdf [hereinafter EBA Opinion]. 86. Jacob Davidson, No, Big Companies Aren’t Really Accepting Bitcoin, MONEY (Jan. 9, 2015), http://time.com/ money/3658361/dell-microsoftexpedia-bitcoin/ [hereinafter Davidson]. 87. See John Matonis, Why the OECD Needs to do its Homework on Bitcoin, COIN DESK (July 1, 2014), http:// www.coindesk.com/oecd-needshomework-bitcoin/. 88. John Matonis, Volatility, Deflation, and Manipulation: A Response to Bitcoin’s Critics, COIN DESK (Jan. 26, 2015), http://www.coindesk.com/volatilitydeflation-manipulation-responsebitcoins-critics/. 89. Id. 90. See Adrian Blundell-Wignall, The Bitcoin Question: Currency Versus TrustLess Transfer Technology, fig. 1 (Org. for Econ. Co-operation & Dev., Working Paper No. 37, 2014), http:// www.oecd-ilibrary.org/docserver/ download/5jz2pwjd9t20.pdf ?expire s=1423451407&id=id&accname=g uest&checksum=C104DB2FB5056 E6478BB51A3DCF752BD. 91. I.R.C. §§ 61(a)(1), (3) (West 2015). 92. I.R.S. Notice 2014-21, 2014-16 I.R.B. 938 (Mar. 26, 2014). 93. See I.R.C. § 1001 (West 2015). 94. See id. at §§ 1221-22. 95. See id. at § 1(h). 96. C.I.R. v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955). 97. Id. 98. Id. 99. See H.R. 5892, 113th Cong. (2015) (proposing to place a moratorium on all regulation of virtual currencies and regard virtual currencies as money for tax realization purposes). 100. See, e.g., I.R.C. § 988(c)(1)(C)(ii) (West 2015) (as it currently stands, bitcoins would not constitute a nonfunctional currency). 101. Id. at § 988(a). 102. Id. at § 988(c)(1)(A). 103 Id. at § 1(h). 104. See id. at § 1211. 105. 15 U.S.C. § 77b(a)(1) (2012). 106. Id. 107 S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298-99 (1946). 108. Id. (emphasis added). 109. See, e.g., S.E.C. v. Shavers, Case No. 4:13-CV-416, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013). 110. 15 U.S.C. § 77e (2012). 111. Id. at § 77l; see also 18 U.S.C.

67

Currents 23.1 2016


§ 1348 (detailing the penalties for committing securities and commodities fraud). 112. Howey, 328 U.S. at 299. 113. U.C.C. § 9-312(b)(3) (2014). 114. Id. at §§ 9-102(a)(42), 9-310(a). 115. See id. at §§ 8-106, 9-104, 9-106. 116. Id. at §§ 9-327(1), 9-328(1). 117. Id. at § 9-102(a)(29). 118. Id. at § 8-102(a)(9)(ii). 119. Id. at § 8-501(a) (2014). 120. Id. at § 8-501(b)(2). 121. See id. at §§ 8-106, 9-106. 122. Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, BITCOIN.ORG, https://bitcoin. org/bitcoin.pdf (last visited Apr. 19, 2015). 123. Id.; see also Acr opolis Now, ECONOMIST (Apr. 29, 2010), http://www.economist.com/ node/16009099; see also Bank Nonperforming Loans to Total Gross Loans (%), WORLD BANK, http://data.worldbank.org/ indicator/FB.AST.NPER.ZS (last visited Apr. 15, 2015). 124. WIB, supra note 1. 125. Saari, supra note 75. 126. Huang, supra note 83; see also Matt Burns, FBI Seizes Deep Web Black Market Silk Road, Arrests Owner, TECH CRUNCH (Oct. 2, 2013), http://techcr unch. com/2013/10/02/fbi-seize-deepweb-marketplace-silk-road-arrestowner/ (noting that approximate $1.2 billion worth of bitcoins were connected to Silk Road). 127. See About the Bureau of Consumer P r o t e c t i o n , F E D. T R A D E COMM’N, https://www.ftc.gov/ about-ftc/bureaus-offices/bureauconsumer-protection/aboutbureau-consumer-protection (last visited Apr. 19, 2015). 128. But see Dorit Ron & Adi Shamir, Quantitative Analysis of the Full Bitcoin Transaction Graph 1, WEIZMANN INST. SCIENCE (2013), https://e print.iacr. org/2012/584.pdf (suggesting that it is possible to follow the money on the blockchain and link an entity to that bitcoin wallet). 129. United States v. Ulbricht, 31 F. Supp.3d 540, 546-47 (S.D.N.Y. 2014). 130. 18 U.S.C. § 1956(a)(2) (2012) (emphasis added). 131. Ulbricht, 31 F. Supp.3d at 569. 132. Id. at 570. 133. 18 U.S.C. § 2339C(a)(1) (2012). 134. See Bitcoin Regulation, supra note 3. 135. The People’s Bank of China and Five Associated Ministries Notice: “Prevention of Risks Associated with Bitcoin”, BTC CHINA EXCH. (Dec. 3, 2013), https:// v i p. b t c ch i n a . c o m / p a g e / bocnotice2013. 136. Id.

137. Id. 138. See Bitcoin Regulation, supra note 3. 139. Id. 140. Id. 141. See Russia’s Rouble Crisis: Going Over the Edge, ECONOMIST, (Dec. 20, 2014), http://www.economist. com/node/21636720. 142. Id. 143. Id. 144. Id. 145. Jake Maxwell Watts, Thailand’s Bitcoin Ban is not Quite what it Seems, QUARTZ (July 31, 2013), http://qz.com/110164/thailandsinfamous-bitcoin-crackdown-isnot-quite-what-it-seems/. 146. Id. 147. Id. 148. Id. 149. See Bitcoin Regulation, supra note 3. 150. Id. 151. See id. 152. See id. 153. See id. 154. See id. 155. Lei No. 12.865 de 9 de Outubro de 2013, artigo 6(III)(h) [Law No. 12,865 of Oct. 9, 2013, art. 6(III) (h)] (Braz.). 156. Id. at art. 6(VI). 157. Id. at art. 7(IV). 158. Id. at art. 9. 159. Proceeds of Crime (Money L a u n d e r i n g ) a n d Te r r o r i s t Financing Act, S.C. 2000, c. 17, § 3, amended by S.C. 2014, c 20 (Can.). 160. Id. at §§ 5(h)-(h.1), 11.1 (emphasis added). 161. Id. at §§ 6-7. 162. Davidson, supra note 86. 163. See Silicon Valley: Minimum Viable Product (HBO television broadcast Apr. 6, 2014); see also Fergal Gallagher, Fedcoin: A Possible Government-Backed Cryptocurrency, TECH TIMES (Feb. 23, 2015), http://www.techtimes.com/ articles/34350/20150223/ fedcoin-bitcoin-cryptocurrency. htm

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We are Still Hungry: The Constant Battle Against World Hunger. S A M I N

One in nine people on earth suffer from

H E S S A M I

to food, which they define as “a human

access to education.

hunger. Although the concentration of

This note will illustrate why Countries

right that protects the right of all human

victims of world hunger varies from one

should focus on developing more policies

begins to live in dignity, free from hunger.

country to another, the estimated 805

that enhance access to education. First, there

It is protected under international human

million people who are unable to maintain

will be a section dedicated to understanding

rights and humanitarian law.”4 However,

a healthy life are spread across the world.2

world hunger. Second, there will be a brief

food security is more than a humanitarian

Therefore, hunger, or food security as some

discussion on the common causes of hunger

issue; it is a global economic issue. Almost all

scholars refer to it, is a global issue that is yet

across the world. Third, this note will offer

individuals that suffer from food insecurity

to be solved. We are still hungry; why can’t we

general short and long-term solutions and

are victimized because of their lack of ability

win the battle against world hunger?

their potential consequences that have

to purchase and have access to food, rather

There have been many different solutions

been examined by scholars. Fourth, there

than others violating their right to have access

offered to battle world hunger over the years.

will be a section focused on a case study of

to food.5 “The right to food is realized when

On the one hand, the United Nations sought

Uganda, a developing country with a large

every man, woman and child, alone or in a

to set nations ambitious goals, such as one of

number of hungry individuals. Lastly, this

community with others, has physical and

the 2015 Global Millennium Development

note will conclude with a section dedicated

economic access at all times to adequate food

Goals that aim to completely eradicate world

to education. This section will demonstrate

or means for its procurement.”6 The World

hunger.3 On the other hand, scholars have

the advantageous economic implications

Health Organization (WHO) has set three

published a myriad of works concerning

of education and how education can be a

pillars of food security: food availability, food

world hunger and its potential solutions.

vehicle to help achieve the goal of eradicating

access, and food use.7 The first pillar measures

Food security is still referred to as an issue.

hunger. The thesis of this note will be further

the amount and consistency of food available;

Perhaps, scholars and policy-makers have

reinforced by two examples of developing

food is available if it is adequate. 8 The

been overlooking a solution that provides

countries that have followed educational

second pillar is satisfied if there are sufficient

the most effective short as well as long term

policies and succeeded at reducing hunger

resources that allow individuals to maintain

remedies to world hunger: education. Some

issues.

the appropriate foods for a “nutritious diet”.9

experts believe that policies securing access

—————————————————

The last pillar requires appropriate food use,

1

which is determined based on “knowledge of

be the main focus of Countries. This note

I. Understanding Food Security

will suggest that eradicating world hunger

—————————————————

water and sanitation.”10 Once these pillars are

will also require a shift in focus to a different

When scholars discuss world hunger

satisfied, then all people will have sufficient

sector, education; everyone should have

and food security, they refer to the right

access to nutritious food that will allow

to food and social security benefits should

basic nutrition and care, as well as adequate

69

Currents 23.1 2016


them to lead a healthy life.11 Notably, these

further poverty.20 Undernourishment causes

conflicts in the Middle East.28 The refugees

pillars require not only sufficient, but also

these individuals health issues, which further

tend to flee to environments that “lack

adequate nutrition; the first pillar refers

worsens their ability to provide for themselves

sanitation, water, and health services.”29

to an adequate amount of food whereas the

and their children, and have access to food.21

Women and children, who are the most

second and third require the knowledge of

Indigents have limited funds to survive

vulnerable in these situations, become

what is nutritious for the human body as well

on so they need to choose wisely on how

nutrition deficient due to low emergency food

as access to it.

to spend on food and shelter. Often, the

rations and lack of nutritious food.30 These

Sufficient food is indicative of the

only source of food for the poor consists of

displaced and “stateless” people contribute

minimum amount upon which humans

staple foods and cereals because they are the

to the hungry and poor population as they

can survive.13 This is misleading because

cheapest available options. Therefore, the

leave their lives behind in search of a safe

poor people have a tendency to survive on

poor become the victims of food insecurity.

environment and then become poor and

food that is extremely low in nutritional

Unstable political conditions in the

value, since it is the cheapest food available,

developing countries are very harmful to

Climate change is another global

hence, 165 million children have nutrition

the hunger issues faced by the poor. There

phenomenon that contributes to world

deficiencies.14 Adequate nutrition is what

has been a recent trend of uprisings, internal

hunger. 31 The seasons have lost their

provides humans with the proper vitamins

conflicts and regime changes in developing

consistency and created an environment

and nutrients that are “essential for good

countries. The use of food as a weapon is

that is not consistent with the one we

health.” Sufficient food is only a short-term

one way in which an armed conflict causes

were familiar with in the past. The climate

solution to hunger issues because ultimately,

hunger.

Enemies destroy food stocks,

change has caused drought, flooding and

individuals need adequate nutrition to live

livestock food markets and all the sources of

different climate patterns that farmers are not

healthy lives rather than barely surviving on

their opponents’ livelihood in order to gain

accustomed to.32 Farmers have to adapt to

minimum food. Eradicating world hunger

control over them. For example, in 1990,

the fluctuating weather patterns to maintain

and stabilizing food security requires us to

Sudan used famine as a tool to fight the

high crop yields that will satisfy the high

focus on adequate nutrition; that is the root

opposition, which was starving due to lack

demand, which is becoming increasingly

of world hunger.

of resources. Food shortages due to conflict

challenging to meet as the world population

—————————————————

are accompanied by the destruction of health

increases exponentially. 33 Furthermore,

and relief facilities that further reduces the

weather concerns and persistent warnings

population’s ability to produce food.

A

from scientists of the consequences of these

—————————————————

starving population that is in a conflict zone

continuous climate changes are instrumental

Poverty is the underlying cause of world

needs health clinics and medical care to

to the increase in food prices.34 Notably,

hunger;16 it is one of the most dire issues

survive and recuperate. However, since many

food prices in the least developed countries–

that concerns many regions of the world.17

of these facilities are destroyed during conflict

many of which depend on their agricultural

There are over a million people in developing

and can take a few years to be replaced, the

sector–have increased the most.35 Some of

countries that live on $1.25 or less each day18

population cannot immediately recover and

these countries, such as Somalia, Togo and

and over a billion who are undernourished.

be productive. Therefore, food shortages can

Ethiopia are classified as the poorest countries

People who lack the purchasing power

continue even after conflicts are over.

in the world.36 The same indigents who were

12

15

22

23

24

25

II. Why is There World Hunger?

19

26

hungry refugees.

necessary to subsist will have difficulty buying

The ones who flee such disastrous conflict-

already incapable of providing sufficient

food, especially if these individuals have

driven situations also suffer. The United

nutrition for themselves and their families

children to provide for. Many indigents find

Nations reported an estimate of over 26

are now faced with an increase in food prices.

themselves trapped in a vicious cycle, where

million refugees by 2011, and this number

Therefore, the changes in climate further trap

poverty causes hunger and hunger leads to

was calculated prior to the recent political

the poor in poverty and worsen hunger issues.

27

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Currents 23.1 2016


—————————————————

III. General Solutions Offered and Potential Consequences

Therefore, increasing cattle production

not have the funds or means to purchase

is short-sighted and not a durable global

food.

solution to food security issues.

Sen also supports liberalization of trade

Another solution to world hunger is what

because he believes that in order to enhance

—————————————————

is called the Green Revolution. This consists

food security, governments should allow

Scholars and policy-makers have offered

of an increase in the production of major

food imports when prices increase to further

short-term, short to medium-term and

cereals to grow agricultural production.

43

stimulate the free market economy and

long-term solutions to global hunger issues.

The Green Revolution can be established by

maintain low prices.52 The liberalization of

Some of these solutions have been attempted

increased irrigation and the use of nitrogen

trade policies, accompanied by developmental

and some other ones are in the process of

based fertilizers and pesticides.44 However,

programs, would increase the flow of food

being attempted. However, as it will be

the increase in cereal production through this

and result in lower food prices globally.53

demonstrated, these solutions are either not

method has led to harmful environmental

Therefore, the IMF encourages governments

sustainable for the world’s future needs or

consequences. The overuse of fertilizers that

to take less protective measures and promote

require more conditions to be met to have

are used to increase agricultural production

lower tariffs on imports.54 However, further

success.

have greatly polluted fresh water with

trade liberalization could harm food security

An increase in the amount of cattle is one

phosphate, which stimulates algae growth

in developing countries. Less developed

solution offered to meet the exponentially

that absorbs the oxygen in the water that the

countries faced a sudden shift of rural to

increasing population and demand for

46

fish need to survive. This solution would

urban population migration between the mid

food. “Livestock production employs 1.3

not only harm the oceans, but also reduce the

to late 1900s.55 This resulted in a decrease of

billion people and sustains livelihoods for

supply of fish. Furthermore, irrigation and

farmers and thus farming capabilities that

about 900 million of the world’s poor.”38

fertilizers are environmentally hazardous, as

could help these countries be self-sufficient.56

High meat production could help the poor

they require a considerable amount of energy,

As a result, they started to depend on

because of the advantageous nutrition that is

adding up to an additional 17 percent of the

food imports, which were constituted of

derived from meat and dairy. However, the

total amount of greenhouse emissions that

processed foods “richer in salt, sugar and

negative impacts of high meat consumption

are produced by our food system. Therefore,

saturated fats–foods that have a long shelf

are currently observable in high-income

increasing the amount of environmentally

life and are attractive to urban populations

countries; it causes obesity, diabetes, cancer

harmful gases that our food system produces

and younger generations”57; the people in

and cardiovascular problems.40 Increased

would increase the changing climate patterns

developing countries had a shift of diet from

meat consumption to meet such demands is

and add to the harmful consequences that the

nutritious agricultural products to much

not advantageous in the long term as it has

poor and the hungry are facing.

less nutritious and healthy imports.58 If the

37

39

45

47

48

harmful effects for individuals in high income

The International Monetary Fund (IMF)

developing world further liberalizes trade to

and low-income countries.41 Increased meat

suggests an economically focused solution:

allow more inflow of food, it has to adjust

production could lead to sufficient food

49

further liberalization. The IMF has pointed

its farming sector to the global food market

across the world, but it certainly would not

to the increase in food prices and how that

to be able to compete and subsist within the

provide individuals with adequate nutrition.

has created further hunger and poverty in

market.59 The global market favors either a

Furthermore, the livestock sector contributes

the world, adding over 100 million people

rise in commodities for livestock or the food

18 percent of greenhouse emissions, “a

to the poor population.50 Amartya Sen points

processing industry, both of which result in

larger share than transport.”

As it was

out: food availability does not result in food

more food processing and low nutrition in

previously discussed in this note, the climate

accessibility. Therefore, producing ample

developing countries.60 Therefore, while food

change is already causing more hunger

food does not mean that all the people in a

may become cheaper and more accessible in

issues; encouraging it cannot be a solution.

country have access to food when some do

these countries, it will still not be nutritious

42

51

71

Currents 23.1 2016


enough to satisfy the pillars of food security.

or disability.69 Many European states have

which don’t have a social security system in

Some scholars suggest that focusing on

long adopted the welfare state model, where

place, do not have the experience, budget or

local farmers in developing countries could

their government subsidizes medical care and

economic stability of developed countries like

enhance access to nutritious food, since these

provides general benefits for those in need to

England, France and Germany to effectively

farmers are considerably marginalized by

ensure that no one falls below the poverty

implement them.

the effects of global mass production. As

line. This solution seems very promising, as

—————————————————

previously discussed point, the global market

it would eliminate hunger related problems

has shifted to a food processing industry,

such as health issues and extreme poverty.

61

70

IV. Case Study: Uganda

—————————————————

creating a high demand in particular types

There are different types of social protection

Over a third of Ugandans have low dietary

of commodities.62 This shift in the farming

that a government could provide for its

diversity and poor food consumption that

industry discouraged farmers who were no

citizens, many of which have been tried

results in an unbalanced diet.76 Scholars use

longer able to make an appealing living from

around the world. Malawi, for example,

the most vulnerable of a population, the

producing traditional goods.

Therefore,

consists of numerous smallholder farmers

children, to assess their nutritional status.77

countries started subsidizing their farming

who are victims of food insecurity.71 The

When a child does not receive nutritious

industries to provide an incentive for their

government of Malawi implemented a

food during the first thousand days if it’s

farmers to continue farming.64 Developed

program called the Starter Pack in the 1990s,

life, his or her physical development becomes

countries have a much higher financial

which promoted maize production by “100-

impaired as the child grows into an adult,78

capability than developed ones, so they

150 kg per household” by distributing “free

and the adult doesn’t develop an optimal

subsidize their farmers much more than

seed and fertilizer packages to all 2.8 million

immune system and becomes vulnerable.79

developed countries can. 65 As a result,

smallholder families” in the country.72 By

Consequently, the physically vulnerable

farmers in developed countries have a higher

2005, this program reduced the food gap

adult is not very productive and more likely

advantage than those in developing ones;

and stabilized food prices in Malawi.

73

to become poor, turning malnutrition into a

for example, the US subsidizes its farmers

This program slowly disappeared but the

vicious circle.80 That is why many Ugandans

with an estimated $20 billion a year, 66

government tried to replace it with other

are victims of food insecurity. This case study

allowing US exports to outcompete those of

subsidy aids to help smallholder farmers

will demonstrate that although Uganda could

poorer countries such as Africa and India.67

maintain agricultural productivity and food

potentially eradicate food insecurity, its

However, every country strives to support

security.74 These programs have cost the

population majorly suffers from this problem

its local farmers to the best of its financial

government of Malawi hundreds of millions

because the three pillars of food security (food

capability. The global market requires its

of dollars, which is the principal reason why

availability, food access and food use) are not

players to be competitive to survive, so the

they can only last for so long.75 Developing

properly met.

poorer countries suffer as a consequence.

countries don’t have the budget to maintain

Uganda is blessed with various natural

Consequently, developing countries need

such expensive programs for long durations,

resources such as “fertile soils, regular

more economic growth before they can help

so any social remedy involving large subsidies

rainfalls, abundant lakes and rivers, deposits

their farmers compete in the global food

can only be a short-term solution for victims

of copper, gold and other minerals and

market.

of food insecurity in that country. However,

an estimated 3 billion barrels of soon-to-

One long-term solution that is often

social aids are certainly a positive method

be-tapped oil reserves.”81 The country has

proposed is universal access to social

to help improve food security across the

managed to stimulate economic growth that

security. There is a general consensus that

world. As the next section to this note will

resulted in an impressive increase in its Gross

there are too many individuals without the

demonstrate, it is unlikely that social security

Domestic Product (GDP) in late 2010.82

social security shield that will save them from

alone could eradicate hunger across the

Uganda has also made substantial efforts in

the harmful effects of unemployment, illness

world. Especially when developing countries,

reducing poverty and reached an impressive

63

68

72

Currents 23.1 2016


reduction of 31 percent by 2010.83 However,

rise in food prices affects many households

However, population growth in the poor

despite of all the progress that Uganda has

by limiting their access to food. As a result,

rural areas, which are home to most of

made, 48 percent of Ugandans suffered from

the foundations of the chain of food supply

Ugandans, has increased the number of poor

food insecurity from September 2009 to

in Uganda are neither consistent nor solid.

people.105 Studies show that the lower the

August 2010.84

97

Besides domestic food price fluctuations,

income of a household in Uganda, the higher

Uganda has a promising agricultural

Uganda’s population is also affected by

the likelihood that it obtains “more than

potential; over 80 percent of Uganda is

international prices; an increase in the cost

three quarters of its energy from staples.”106

fertile soil and an abundance of fresh water

of food and fuel internationally influences

Staple foods that are rich in starch and

allow Ugandan farmers to grow a wide

Uganda’s domestic market because of trade

lack any protein, like plantain and maize,

variety of food.85 Therefore, the economy is

and exchange rates.98 On the one hand,

constitute the diet of many Ugandans.107

highly dependent on agriculture and over 80

surging international food prices harm

Some Ugandans barely consume any dairy

percent of Ugandans engage in agricultural

Uganda’s domestic markets because rising

products or proteins.108 Over a fifth of the

activities.86 Maize, beans, bananas, cassava

food prices are either caused by increasing

Ugandan population suffers from a poor

and sweet potatoes are the top five highly

99

demand or scarce international food supply,

diet or nutrition deficiency. 109 Indeed,

grown crops of Uganda. 87 The United

neither of which could advantage an already

the wealthy urban population of Uganda

Nations Food and Agriculture Organization

inconsistent domestic food market. On the

consumes a more varied diet consisting of

(FAO) reported that Uganda produces

other hand, vehicles that transport food

fish, meat, eggs, milk and fruits than does the

enough staple foods to feed its people.

88

require fuel to function. Uganda imports

rural one.110 However, Uganda’s indigenous

Livestock production has also increased in

over $5 billion of petrol and related products

population that tends to undertake labor-

the country with over 7 million farmers

per year.100 Since fuel is traded in dollars and

intensive jobs lacks the nutrients necessary

engaged in it.89 So food availability, which is

the Ugandan shilling is weak, an increase in

to remain active and healthy. Since the diet

one of the pillars of food security discussed

fuel prices would increase the price of food in

of most individuals lack the “minimum

earlier in this note, does not seem like an issue

101

Uganda to cover the expensive costs of fuel.

dietary energy requirement” that allows an

for Uganda. However, food availability is

Another factor that limits food availability

adult to reach his or her optimum health,

inconsistent because it varies based on the

in Uganda, as in many other regions around

almost half of the population is “food energy

seasons.91

the world, is climate change. The change

deficient.”111 Food insecurity also has a deep

Some regions in Uganda suffer from

in climate has increased the “occurrence of

impact on the health of children in Uganda.

unfavorable weather conditions, such as 6

droughts, floods, and soil erosion through

Poor households are more likely to have

consecutive months of rain that reduce the

landslides.”

This has reduced Uganda’s

stunted and undernourished children.112

supply of food commodities.92 These extreme

agricultural productivity, introduced the

Stunting refers to a child’s appropriate height

conditions only allow for one harvest per

farmers to crop and animal diseases that they

for his age and is influenced by inadequate

year,93 and scarce supplies increase the price

are unfamiliar with, and changed the patterns

nutrition during the child’s first thousand

of food. Furthermore, a large amount of

of crop growth.

So not only are the farmers

days of life.113 As a result, most Ugandans

Ugandans are smallholder farmers with

struggling with seasonal inconsistencies,

lack access to food because they do not have

limited access to credit or storage facilities.

95

fluctuating prices of the domestic and

sufficient resources to obtain appropriate

So when the price of staple crops rise due to

international market, the rural population

foods for a nutritious diet.

disadvantageous weather conditions, these

also has to face the negative consequences of

So far, this case study has established that

farmers become more dependent on markets

climate change. Therefore, food availability

Ugandans suffer from food insecurity because

since their own stocks are exhausted.

is limited in Uganda.

they become trapped the vicious circle. A

90

94

96

Unfortunately, since more than half of Ugandans depend on the food market, a

102

103

Uganda has greatly reduced its poverty rates in urban areas over the years.

104

child is born into an indigenous rural family where the parents consume heavy amounts of

73

Currents 23.1 2016


starchy foods or cereals for subsistence. That

is the also the provider, they use “coping

red meat. A larger production could reduce

child never receives proper nutrition that is

strategies” such as “removing children from

the price of cattle and meat, hence enhancing

varied and balanced to help him become a

school” or “reducing food intake” in order

availability and accessibility of it for the

healthy and active adult. As an adult, the

to subsist.121 Unfortunately, these methods

indigents. However, the rural population

person is prone to disease since he never

not only drown them further into poverty

consists almost entirely of smallholder

received proper nutrition and continues to

and increase their food insecurity, but they

farmers, which indicates that this population

have the same unbalanced nutrition. The

also increase the likelihood that their children

mainly produces for self-sustenance. As

same vulnerable individual is reborn into

will be victims of food insecurity. Education

previously discussed, these farmers rarely

every family because of the lack of food

could be these children’s only way out of the

keep any surplus because of lack of space.124

availability and food access. Unfortunately,

cycle of food insecurity.

Thus, space would be the first issue with this

the last pillar, food use, customarily goes

Food access does not have to overlap food

solution. Next, this note noted that Ugandan

hand in hand with food access. “More than

use. It is true that having sufficient funds

farmers face extreme weather conditions such

a quarter of Ugandans are illiterate, which

to purchase different types of foods is an

as droughts, heavy 6-month-long rainfalls

locks them into a cycle of low paid work and

indicator of a household’s ability to provide

and hardships that lead to the loss of cattle.125

perpetuates poverty and food insecurity.114”

for its children, send them to school and

So it would be wasteful for these farmers to

Food use consists of the appropriate use

educate everybody about nutrition. However,

purchase cattle that will likely not survive the

of food, based on an individual’s knowledge

this note aims to illustrate that poverty

rough weather conditions of the land. Lastly,

on food types and nutritional values.

30

should not create a vicious cycle of food

livestock production already contributes a

percent of rural Ugandans live below the rural

insecurity for indigenous people because

large amount to the hazardous gases that

poverty line.116 This percentage of indigenous

governments or international organizations

are changing the weather patterns across the

people consists of those who are too poor to

can put policies in place to enhance food

world.126 Unfortunately, Ugandan farmers

have more than one meal a day.117 So they

use. Policies that spread education and

are already suffering from the negative

survive on very few portions of staple foods

encourage families to send their kids to

consequences of Global Warming.

per day. However, the other 70 percent who

school cannot only eradicate poverty but also

can afford more than one or two meals per

food insecurity.

115

The second solution that was offered is referred to as the Green Revolution. This

day, even if they are still poor, is unaware of

Prior to explaining how education is the

solution involves new methods of farming

the potential benefits of proper nutrition.118

overlooked solution, this note will strive to

that lead to an increase in agricultural

Indigenous people cannot afford to educate

apply the most common solutions offered by

production of major cereals. The most

themselves or their children. So they rarely

scholars, discussed in the fourth section of the

obvious problem with this solution is

learn about the nutritional benefits of

note, and demonstrate why they would not

that, as it has already been discussed, it is

different foods. Beside the fact that staple

be effective in fighting the food insecurity of

environmentally hazardous and weather

foods are cheaper to purchase, the poor

the Ugandans.

changes have already placed most farmers

people of Uganda are not educated about

The first solution discussed was the increase

around the world in unfamiliar situations

their food consumption and how a change

in livestock production. Rural Ugandans

where they have to adapt new techniques

in diet could benefit their health.

consume a large amount of cereals and

to fight pests and have consistent harvest.127

Only 14 percent of rural Ugandans attend

staple foods. 122 Most of rural Ugandans

Another issue with this solution is that

secondary school.119 Poverty is the main reason

are food insecure because of lack of access

it could potentially lead to more food

behind this shockingly low percentage.

to and availability of food variety.

So an

waste. The World Food Programme (WFP)

poor have sufficient funds to survive on,

increase in livestock would initially sound

reports that one third of all food produced

but during times of drought, crop failure or

like a solid solution, as it would add variety

is wasted.128 Sources report that individuals

illness of a member of the household who

to these people’s diets by adding dairy and

tend to waste the foods they consume most

120

The

74

Currents 23.1 2016

123


of; it becomes a redundant part of their diet

their agricultural production of major

as well as accessibility, of food in Uganda.

so they hardly notice how much of it they

cereals could only improve food availability.

However, one of the differences between

waste.129 The figure (Figure 3) below, provided

However, the second pillar of food security,

developing and developed countries is the

by Forbes,130 illustrates that individuals living

food access, would remain absent because the

economic stages that each group has been

in the most developed regions such as North

poor’s diet would still lack fruits, vegetables,

through.133 A developed country has made

America waste a high percentage of cereals at

meat and dairy. As such, this method would

a full transition from an agricultural to

the consumption stage, whereas populations

not effectively solve food insecurity.

an industrial based economy, whereas a

The next suggested method was the

developing country customarily depends

liberalization of trade policies. Some

on agriculture for subsistence. 134 This

his means food is wasted in the Sub-

economists believe that further liberalization

matters because when a country’s economy

Saharan region before it even reaches the

of trade will increase the flow of food

depends on its industry, it can maintain

consumers’ hands; the conditions don’t

and thus reduce its price in the global

stability during market fluctuations, since

allow for an increase in food availability.

markets.132 When applied to developing

the growth and profitability of its economy

Lastly, most developing countries are

countries, such as Uganda, this solution

is not solely based on one sector. However,

similar to Uganda, which means that they

would require that Uganda lower tariffs on

when a country, like Uganda, depends on its

depend on farming and their poor consume

imports and take less protective measures.

agricultural sector for subsistence, it is highly

heavy amounts of cereals and staple foods.

This solution sounds promising because

vulnerable on the fluctuating global food

Therefore, providing such peoples with

a greater inflow of food would result in a

prices. Further liberalization would allow

alternative means of farming that increase

reduction in prices and increase availability,

for more ties between its domestic and the

of the Sub-Saharan Africa waste the cereals at the agricultural and postharvest stages.

131

75

Currents 23.1 2016


international market, which could seriously

promotion of social security around the world.

struggled for years to find underlying causes

hurt the Ugandan economy during times of

Similar to Malawi, discussed above, Uganda

of food security and to experiment with

global economic crises. Therefore, further

mainly consists of smallholder farmers.

140

different policies in order to find one that

liberalization of trade policies would not be

These farmers would greatly benefit from

works for all. Yet we are still struggling in

an effective long-term policy for Uganda.

social protection programs implemented by

2016. Thus, it seems that this problem must

The next solution, discussed above, is to

their policy-makers, especially since most of

be resolved on a case-by-case basis. As a result,

focus on local farmers. This solution would

them suffer from hunger, poverty and food

this note suggests that the Panel’s observation

benefit countries, such as Uganda, where

insecurity. However, similar to Malawi,

is correct, yet not concise enough. As it will

the economy is highly dependent on the

Uganda is a developing country with a

be further explained in the next section,

agriculture and a large proportion of the

restricted budget and unstable economy

education is the single most effective long-

population is engaged in farming.135 As

that depends on an inconsistent and seasonal

term solution to the achievement of global

previously discussed, the markets in these

agricultural sector.

food security.

developing economies are too raw to be

help its population achieve food security,

overexposed to the global markets. Therefore,

Uganda needs to stimulate its economy.

perhaps the Ugandan government should

And in order to stimulate economic growth,

focus on its local farmers and their needs to

Uganda needs to narrowly tailor effective

V. Education: A Solution that has been Overlooked

facilitate the flow of food within that country.

methods to invest in its children and help

—————————————————

Some regions of Uganda face unfortunate

them become healthy, fully-grown adults

Education benefits a society in many

hardships, such as bad weather conditions,

who have acquired the many different skills

different ways. Put simply, education

that are not within the government’s control.

necessary to help the economy flourish. The

enhances the people’s understanding of

However, the government could develop

High Level Panel of Experts of the committee

each other, of themselves and of their

policies that would help farmers in the

on World Food Security correctly noted in a

surroundings. Education helps people live

post-harvest stages so that they would not

report, in 2012, that social protection alone

better lives by teaching them how to achieve

have to face problems, such as lack of space

is not adequate to address problems of food

optimum health and allowing them to gain

for surplus or credit for purchasing proper

security. Access to clean water, healthcare

skills that they can use to their economic

facilities, during better harvest seasons.136 For

and education are also vital.142 This explains

advantage. Even when a child is born into

example, the Ugandan government can rent

what the three pillars of food security (food

a poor family, that child can go to school

storages at a low cost to farmers to stimulate

availability, food access and food use) indicate

and gain a skill that will later help him with

the food market.

Every economy functions

and how they relate to one another. The Panel

better employment. That child does not

differently, so this approach is most effective

described how food security is achieved and

have to be a smallholder farmer to support

when done on a case-by-case basis. Scholars

suggested what sectors countries should focus

himself because education has provided him

view this as a long-term solution.138 However,

on to achieve it. This note concurs with the

with more skills and therefore more options

this is not so for developing countries

Panel of experts on their view of food security

for his future. That child’s survival does not

because they still face other problems, such

and how the pillars interrelate.

have to depend on weather, soil or food

137

141

Therefore, in order to

—————————————————

as economic vulnerability to global market

So far, we have looked at the various

market conditions because he has other skills

fluctuations. These can only be improved by

solutions, their advantages and disadvantages

he can rely on. Furthermore, that child will

a transition to an industry-based-economy.139

and observed the example of Uganda more

become an educated parent who knows about

As it will be demonstrated, such a transition

closely to demonstrate how complex the food

nutrition and will be aware of the importance

could be achieved more quickly if the

security problem can be. Every population

of including a variety of nutritious foods in

population of Uganda becomes educated.

is the victim of food security for a variety

his children’s diet. In return, his children will

of different reasons. Therefore, experts have

benefit from proper nutrition and have better

The last solution, discussed above, was the

76

Currents 23.1 2016


chances at achieving their optimum health

economic growth is called “Establishing the

secondary goods and services.160 At this

and an active lifestyle. Education can take

Preconditions for Takeoff”.148 At this stage,

stage, the economy is highly prosperous and

a child out of the food insecurity cycle and

a country has achieved a surplus of wealth,

profitable. Therefore, a country can invest

create a secure one.

which allows it to diversify its economy

in improving its healthcare and educational

In order to properly demonstrate how

and be more profitable. 149 Historically,

systems, which will provide its population

education can help solve food insecurity,

this stage involved the emergence of new

with an opportunity to refine their skills

this section will provide an analysis of global

means of transportation, communication

while maintaining optimum health to aid in

economies, the different stages of economies,

and exploration of natural resources by the

further promoting the economy.161

how they are influenced by education and

governments.150 The next stage of economic

This theory, as most existing theories

how that can resolve global food insecurity.

growth is “Economic Takeoff”.151 At this

in the world, has been criticized by some

This section will also provide two brief case

point, a country has invested the surplus

economists. Some economists hold that this

studies of developing countries that have

it has gathered from the previous stage

theory is too narrow, as it is too westernized,

adapted educationally focused measures

and made technological innovations that

and therefore only applies to western

and policies that have had impressive results

allow for simpler methods of producing

countries.162 These stages describe what

so far.

goods, which are more profitable. At this

western countries, such as England, France

stage, the main focus of the economy is

and the United States, have undergone to

developed countries are at a different stage

manufacturing.

Notably, a country is no

achieve economic development and the final

of economic development than developing

longer dependent on its agricultural sector.

stage of the process.163 Economists suggest

ones. This indicates that the economy of a

It merely maintains it for commercial

that developing countries, such as the Sub-

developed country, such as the United States,

purposes.153 Therefore, the population will

Saharan ones, are formed on different cultures

functions differently from the economy

undergo a transition from rural to urban

and economies and should not be expected

of a developing country. Walt Rostow, a

neighborhoods, as more individuals will be

to progress through the same stages.164 The

globally acclaimed economist, was most

engaged in the tertiary sector of the economy,

critics of this theory have reasonable grounds

famous for his theory on the stages of

also known as the service sector.

As the

for doubt, but this economic theory model

economic development.

Rostow’s theory

rural population progressively outnumbers

is not being used here to demonstrate

illustrates that every country faces five stages

the urban one, the country advances to

how developing countries should proceed,

of economic development.144 As a country

the fourth stage called “The Drive to

especially since food insecurity exists around

advances through the stages, it becomes

Maturity”.

This stage involves an “extended

the world, regardless of a country’s economic

more economically developed. A developing

period of growth” in which the population’s

stage. Rostow’s theory is particularly relevant

country is in the initial stages of economic

wealth starts to grow (referred to as per capita

to education because it helps illustrate why

development, whereas, a developed country

growth, or GDP).156 New innovations lead

developing countries have a more dire

is in one of the last phases of this process.145

to modern production methods that increase

problem with food insecurity and how this

The first stage, also referred to as

economic efficiency, and the country uses

issue can be solved on a global scale.

“Traditional Society”, is indicative of an

its accumulated wealth to further economic

economy dominated by agriculture.

development.

As it was briefly touched upon above,

143

152

154

155

Economic development has many

Finally, a country reaches the

advantages for a country and its population.

At this stage, a country depends on its

fifth stage of “High Mass Consumption”.158

As Rostow’s theory demonstrated, economic

agriculture for subsistence and is therefore

At this stage of economic development, the

development allows a country to gather

vulnerable to natural disasters, such as

population of a country has a high enough

surplus and stop depending on one single

droughts and extreme weather conditions,

income to purchase goods other than basic

sector for subsistence. This will allow for a

limiting its ability to stimulate economic

necessities.

Therefore, individuals become

diversification of the economy, which will

and social growth.

mass consumers who create a demand for

make the markets more stable. If once sector,

147

146

The second stage of

157

159

77

Currents 23.1 2016


such as agriculture, is unsuccessful during one

developed countries are food secure, but it

food for its population. Once the economy

season the economy will not suffer because it

indicates that they have the means to achieve

of Uganda is no longer dependent on one

has other sources of income to fall back on.

food security if they implement effective

sole sector, its people will not have to suffer

Furthermore, diversification leads to further

policies.

extreme price changes during economic crises.

economic profits, or surplus, that can be

Global food security requires economic

used to invest in new technologies and other

development. Education stimulates

Educating the population would also lead

means of helping the population engage

economic development. Therefore, global

to a break in the existing poverty cycles that

in stable employment, such as the services

food security requires universal access to

result in recurring food insecurity. Ugandan

sector, which will reduce the likelihood of

education. It does not matter how many

children that receive education can make a

hunger or sudden strikes of poverty.

stages of economic growth a country will

transition to the urban parts of the country,

Uganda, as a developing country, accurately

go through before it reaches the final two

where they can join the tertiary service sector

fits the description of a country at the first

stages and becomes developed because every

of the economy. This will allow for an increase

stage of economic development. Uganda is

country may require a different number of

in urban population and a need for more

a “Traditional Society” because it depends

steps. The importance of the process lies

facilities in the cities. The urban transition

on its agricultural sector for subsistence, it

between the first and last two stages because

of the educated population will create more

is prone to droughts and extreme seasonal

a developed country can afford to invest in

jobs in cites that are met by the supply and

rainfalls and it has limited economic and

its people. Uganda is trapped in the first stage

demand of diversified skills. For example, the

social progress. Most developing countries

of economic growth because the Ugandans

increase in the number of people moving to

around the world are at the same exact stage of

are primarily engaged in farming. The people

the cities will create a demand for a larger real

economic development.165 This is important

of Uganda don’t have the skills necessary to

estate sector, which will provide for the needs

because this specific stage of development

diversify the Ugandan economy. More than

of the urban dwellers. This is one of many

is very restrictive for a country. This stage

a quarter of Ugandans are illiterate,

possible markets that can be established to

indicates that there is a low urban population

more than a quarter of the country has only

and a large rural one, as was observed within

one skill: farming. It is difficult to imagine

A focus on tailoring policies that improve

Uganda. The rural population endeavors to

Uganda making innovations or technological

educational standards is also helpful in

stimulate the economy and feed its children

advances with a monotonous population.

promoting food security in developed

by farming under unfavorable conditions.

It is also unrealistic to expect a developing

countries. A rich country is not necessarily

This leaves little room for progress and

country that suffers from seasonal price

representative of a rich population. The US

restricts the government’s ability to help

changes and domestic fluctuations to have

has a considerably high GDP gap between

its people. If Uganda’s economy were more

sufficient funds to import costly machinery

its rich and poor populations.168 It has one

developed, it would be able to sustain itself

to help its economy advance. Therefore,

of the most thriving economies in the world,

based on manufacturing goods and trading

Uganda needs to enhance and facilitate

but there are still hungry people and those

with neighbors and perhaps be able to

education for children. If Uganda provides

who are victims of food insecurity living in

adjust food prices during times of global

universal access to education for its children

it. The US can benefit from increasing its

economic crisis. But since that is not the

and ensures that they attend school, it will

investments in education, improving the

case, Uganda and many other developing

start raising individuals with diversified skills

standards around the country and allowing

countries similarly situated, suffered the

and interests. Diversification of skills will

children to have better options. Once a

most during the global financial crises in

allow for a diversification of markets in the

country is economically advanced to the

Therefore, a country needs economic

economy. Perhaps a developing country,

point where its population can benefit from

development in order to ensure food security

like Uganda, only needs to reach Rostow’s

education, it can start shifting its focus to

for its population. This does not imply that

third stage of development to start securing

ameliorating that education. For example,

2008.

166

78

Currents 23.1 2016

167

so

provide jobs and boost the economy.


increasing standards equally in every state.

population. The following two case studies

health and nutrition of their children.”181

A better quality education will allow more

provide examples of policies implemented

The government sought to promote the

children, not just those who have fortunate

in developing countries to reduce food

long-term economic effects of education

backgrounds, to pursue more ambitious

insecurity. These programs were tailored

on Mexican children, so it provided their

career goals. When more people have access

to break the poverty cycle by reinforcing

families with cash transfers in exchange for

to such opportunities, less of them will suffer

education for children, thereby reducing

keeping their children in school and seeking

from food insecurity.

the amount of individuals that suffer from

regular health checkups.182 Policy-makers

food insecurity.

noted that most families are aware of the

Lastly, education would satisfy the third pillar of food security: food use. This pillar

In 2003, the World Bank became involved

benefits of education but cannot afford to

concerns the appropriate use of food based

in a program in Brazil called the Bolsa

send their children to school because they

on an individual’s knowledge of nutrition

Familia.

This social welfare program was

either need money for subsistence or need the

and the benefits of different types of food.169

introduced by the Brazilian government

children to work to help the family survive.183

The idea is that if an educated individual has

and aimed at assisting poor families, which

The International Food Policy Research

knowledge of the nutritional values of food,

174

constitute over 46 million people in Brazil.

Institute (IFPRI) conducted an evaluation

170

he will be able to adjust his diet accordingly.

Pursuant to the program, Brazilian families

of this program and presented impressive

Educated individuals could also use the

with children receive a direct transfer of an

results that demonstrated how successful this

information gained in school to budget their

average of $35 (USD) per month in exchange

program has been for Mexico.184 The Mexican

finances in a manner that would allow for

for keeping their children in school and

government reported that “the results of the

a healthy diet and optimization of health

maintaining regular health checks.

The

evaluation of IFPRI show that after only

benefits for themselves and their children.

program aims to break the cycle of poverty

three years, poor Mexican children living in

Regardless of whether an individual resides

by encouraging families to invest in their

the rural areas where Oportunidades operates

in a developing or developed country, if they

children.

So far, it has had impressive

have increased their school enrollment, have

learn that including fruits and vegetables

results for the Brazilian society. The World

more balanced diets, are receiving more

will benefit their health and prevent them

Bank reported that Dinalva Pereira de

medical attention, and area learning that the

from contracting illnesses, they will likely

Moura, a mother and beneficiary of the

future can be very different from the past”185

include those foods in their diet to obtain

program, has praised its results, noting it has

Proper nutrition allows these children to

the health benefits. Consequently, they will

177

made her family happier and more secure.

grow into healthy and active adults that can

be more productive at their jobs, which is

Furthermore, Brazilian statistics have shown

use the education they have received to stay

then likely to generate more profit for their

that most of the program’s money which

out of poverty and become successful.

employers. Businesses and corporations tend

reaches the poorest population in Brazil

Education is the key to solving global

to reinvest surplus cash into their own stock

is used to buy food and supplies for the

food insecurity. In 2013, one in every

and expand their profitability.

children.

The Brazilian families are slowly

eight people on Earth went to bed hungry

businesses stimulate economic growth for a

progressing by educating their children and

each night.186 In other words, 842 million

country because they increase the supply and

ensuring that they have bright futures. This

people in the world suffered from nutrition

demand of jobs, the need for new technology

program has been so successful that other

deficiency.187 Food security will be satisfied

and other advantages from modernization

countries have adopted similar models for

when there are adequate amounts of food

that accompany a country at the fifth stage

their people.

available consistently for all, everybody has

of Rostow’s theory.

171

Prosperous

173

176

178

175

179

Mexico adopted Oportunidades in early

the resources to obtain food necessary for a

So far, this section has demonstrated how

1997. 180 Similar to Bolsa Familia, this

nutritious diet and all people have the right

education can promote economic growth and

program focuses on investing in the country’s

knowledge of basic healthy nutrition and care

stability, which enhances food security for a

human capital by “improving the education,

for the appropriate use of food.

172

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Currents 23.1 2016


This note demonstrated how experts and

can help eradicate world hunger in the long-

policy-makers have been striving to find

term, but authorities need to shift their focus

solutions for global food security for many

to the world’s educational needs.

years. International organizations have also done their part by setting different goals for every country, hoping that achieving those goals will serve to eradicate hunger and poverty around the world. But we remain hungry. Therefore, scholars have studied other methods that could provide short and long term solutions to the world’s hunger issues. This note critically observed those propositions and illustrated what their strengths and weaknesses were, concluding that none seemed to be effective for eradicating food insecurity in the longterm. The example of Uganda was used to show how a developing country struggles with food insecurity. Uganda was also used to show how this note’s thesis could apply to a developing country in need of different policies that would benefit its poor population. In the last section, this note focused on economic and social advantages of education. Uganda was also a brief illustration of how economic growth can occur in a country striving for growth. Economic prosperity is a requirement for effective and durable policies because legal mechanisms need funds for enforcement. It was then concluded that the advantages of education could stimulate economic growth. Perhaps, the economy and education have a symbiotic relationship, since they are both so beneficial for the advancement of each other. More quality education will lead to more qualified individuals that can invent, innovate and modernize the economy, which can then provide funds for research programs, facilities and other educational purposes. The appropriate policies and legal mechanisms 80

Currents 23.1 2016


End Notes 1.. Hunger Statistics, WORLD FOOD PROGRAMME, http://www.wfp. org/hunger/stats, (last visited Oct. 31, 2016). 2. Id. 3. Millennium Development Goals and Beyond 2015, UNITED NATIONS, http://www.un.org/ millenniumgoals/bkgd.shtml (last visited Oct. 31, 2016). 4. Jean Ziegler, Promotion and Protection of all Human Rights, Civil, Political, Economic, Social and Cultural Rights, Including the Right to Development, UN HUMAN RIGHTS COUNCIL 8 (2008) http://www. righttofood.org/wp-content/ uploads/2012/09/AHRC75.pdf 5. Id. 6. Id. 7. Trade, Foreign Policy, Diplomacy and Health: Food Security, WORLD HEALTH ORGANIZATION, http://www.who.int/trade/ glossar y/stor y028/en/ (last accessed on April 20, 2014). 8. Id. 9. Id. 10. Id. 11. Id. 12. Id. 13. Olivier De Schutter (Special Rapporteur on the Right to Food), Underwriting the Poor : A Global Fund for Social Protection, UN HUMAN RIGHTS COUNCIL 4 (January 2014), http://www. srfood.org/images/stories/pdf/ otherdocuments/20121009_gfsp_ en.pdf. 14. Id. 15 Id. 16 See World Hunger and Poverty Facts and Statistics, WORLD HUNGER (July 27, 2013), http://www. worldhunger.org/articles/Learn/ world%20hunger%20facts%20 2002.htm [hereinafter WORLD HUNGER]. 17. Id. 18. Id. 19. Id. 20. Id. 21. Id. 22. WORLD HUNGER, supra note 16. 23. Id. 24. Conflict as a Cause for Hunger, UNITED N AT I O N S U N I V E R S I T Y http://archive.unu.edu/unupress/ unupbooks/uu22we/uu22we0j. htm, (last visited Oct. 31, 2016), [hereinafter Conflict]. 25. Id. 26. Id. 27. Id. 28. WORLD HUNGER, supra note 16. 29. Id.

Id. Id. Id. Id. Food Price Watch, THE WORLD BANK GROUP 1, May 2014, (Year 5, Issue 17). 35. Id. at 4. 36. Valentina Pasquali, The Poorest Countries in the World, GLOBAL FINANCE, https://www.gfmag. com/global-data/economic-data/ the-poorest-countries-in-the-world (last visited Oct. 31, 2016). 37. Olivier De Schutter, supra note 13, at 5. 38. Id. 39. Id. at 6. 40. Id. 41. Id. 42. Id. 43. Id. 44. Id. 45. Id. at 5. 46. Id. 47 Id. 48 Id. 49. Maros Ivanic and Will Martin, Ensuring Food Security 45.4, I N T E R N AT I O N A L MONETARY FUND (December 2008) http://www. i m f. o r g / e x t e r n a l / p u b s / f t / fandd/2008/12/ivanic.htm. 50. Id. 51. Id. 52. Id. 53. Id. 54. Id. 55. Olivier De Schutter, supra note 13, at 7. 56. Id. 57. Id. 58. Id. 59. Id. at 14. 60. Id. 61. Id. 62. Id. 63. Id. 64. Id. 65. Abhirup Bhunia and Geethanjali Nataraj, Indian Food Security and the WTO Deal, EAST ASIA FORUM (Januar y 2014) http://www. eastasiaforum.org/2014/01/25/ indian-food-security-and-the-wtodeal/. 66. Id. 67. Id. 68. Id. 69. Id. 70. Id. 71. High Legal Panel of Experts on Food Security and Nutrition, Extract from the Report “Sustainable Fisheries and Aquaculture for Food Security and Nutrition”, FOOD

A N D AG R I C U LT U R E ORGANIZATION OF THE UNITED NATIONS 32 (May 14, 2014), http://www.fao.org/3/ai3844e.pdf [hereinafter High Legal Panel of Experts]. 72. Id. 73. Id. 74. Id. 75. Id. 76. Comprehensive Food and Security and Vulnerability Analysis: Uganda, WORLD FOOD PROGRAMME, 1 (2013), http://documents.wfp. org/stellent/groups/public/ documents/ena/wfp256989.pdf [hereinafter Uganda]. 77. Id. at 3. 78. Id. 79. Id. 80. Id. 81. Id. at 4. 82. Id. 83. Id. at 5. 84. Id. at 1. 85. Id. at 4-6. 86. Id. 87. Id. at 6. 88. Id. 89. Id. at 7. 90. Id. at 8. 91. Id. 92. Id. 93. Id. 94. Id. 95. Id. at 8. 96. Id. at 11. 97. Id. at 8. 98. Id. at 12. 99. Steve Odland, W hy are Food Prices so High?, FORBES (Mar. 15, 2012, 4:304 PM), http:// w w w. f o r b e s . c o m / s i t e s / steveodland/2012/03/15/whyare-food-prices-so-high/. 100. Uganda, supra note 76, at 5. 101. Id. at 12. 102. Id. at 31. 103. Id. 104. Id. at 17. 105. Id. 106. Id. at 15. 107. Id. at 12. 108. Id. at 13. 109. Id. at 12. 110. Id. at 13. 111. Id. at 14. 112. Id. at 18. 113. Id. at 16. 114. Id. at 5. 115. Id. at 3. 116. Id. at 5. 117. Id. at 5, 15. 118. Id. at 15-16. 119. Id. at 5. 120. Id. at 18-19. 121. Id.

30. 31. 32. 33. 34.

122. Id. at 13. 123. Id. at 17-18. 124. Id. at 8, 18. 125. Id. at 31. 126.Climate Change Science Overview, U.S. ENVTL. PROT. AGENCY, h t t p : / / w w w. e p a . g o v / climatechange/science/overview. html (last visited Mar. 11, 2015). 127. Uganda, supra note 76, at 31. 128. What Causes Hunger, WORLD FOOD PROGRAMME, http:// www.wfp.org/hunger/causes, (last visited Oct. 31, 2016). 129. Anna-Louise Taylor, Why is Bread Britain’s Most Wasted Food?, BBC, http://www.bbc.com/news/ magazine-17353707 (last visited Mar. 11, 2015). 130. Beth Hoffman, W hat Foods Do We Throw Out? How to Stop Food Waste at Home, FORBES, http://www.forbes.com/sites/ bethhoffman/2013/02/07/whatfood-do-we-throw-out-how-tostop-food-waste-at-home/ (last visited Mar. 11, 2015). 131. Id. 132. Olivier De Schutter, supra note 13, at 43. 133. Walt Whitman Rostow, Stages of Economic Development, WORLD ISSUES, http://worldissues2011. wikispaces.comStages+of+Econ omic+Development (last visited Mar. 8, 2015) [hereinafter WORLD ISSUES]. 134. Id. 135. Uganda, supra note 76, at 3. 136. Id. at 8. 137. See Id. (arguing that by providing low-income farmers with low cost storage options, the farmers will be able to keep surplus yields from the harvest for longer periods of time). 138. High Legal Panel of Experts, supra note 71, at 51. 139. See Uganda, supra note 76, at 11 (arguing that to secure food security in developing countries, it will be necessary to shift to an industry-based-economy). 140. Id. at 3. 141. Id. at 9-10. 142. High Legal Panel of Experts, supra note 71, at 51. 143. WORLD ISSUES, supra note 133. 144. Id. 145. Id. 146. Id. 147. Id. 148. Id. 149. Id. 150. Id. 151. Id. 152. Id. 153 Id.

81

Currents 23.1 2016


154. Id. 155. Id. 156. Id. 157. Id. 158. Id. 159. Id. 160. Id. 161. Id. 162. Id. 163. Id. 164. Id. 165.See World Development Indicators, THE WORLD BANK, (2012), file:///C:/Users/Eric%20 Utermohlen/Downloads/68172 0PUB0EPI004019020120Box36 7902B.pdf. 166. The Global Social Crisis: Report on World Social Situation, UNITED NATIONS, (2011), http:// www.un.org/esa/socdev/rwss/ docs/2011/rwss2011.pdf. 167. Uganda, supra note 76, at 2. 168. Drew DeSilver, U.S. Income Inequality, On Rise For Decades, Is Now Highest Since 1928, PEW RESEARCH CENTER (Dec. 5, 2013), http:// w w w. p e w r e s e a r ch . o r g / f a c t tank/2013/12/05/u-s-incomeinequality-on-rise-for-decades-isnow-highest-since-1928/. 169. Trade, Foreign Policy, Diplomacy and Health: Food Security, supra note 7. 170. Jessica L. Johnston, et al., Understanding Sustainable Diets: A Descriptive Analysis of the Determinants and Processes That Influence Diets and Their Impact on Health, Food Security, and Environmental Sustainability, 5 ADVANCES IN NUTRITION: AN INT’L REV. J. 418, 422 (2014), http://advances.nutrition.org/ content/5/4/418.full.pdf. 171. Aswath Damodaran, Returning Cash to the Owners: Dividend Policy, N.Y. UNIV., http://pages.stern.nyu. edu/~adamodar/pdfiles/ovhds/ divid.pdf (last visited Mar. 5, 2015). 172. WORLD ISSUES, supra note 133. 173. Bolsa Família: Changing the Lives of Millions in Brazil, WORLD BANK, http://web.worldbank. org/WBSITE/EXTERNAL/NE WS/0,,contentMDK:21447054~p agePK:64257043~piPK:437376~t heSitePK:4607,00.html (last visited April 3, 2015). 174. Id. 175. Id. 176. Id. 177. Id. 178. Id. 179. Mexico’s Oportunidades Program, WORLD BANK, http:// web.worldbank.org/archive/ website00819C/WEB/PDF/ CASE_-62.PDF (last visited April 3, 2015). 180. Id. 181. Id. 182. Id.

Id. Id. Id. 10 Hunger Facts for 2014, WORLD FOOD PROGRAMME, (Dec. 30, 2013), https://www.wfp.org/ stories/10-hunger-facts-2014. 187. Id. 183. 184. 185. 186.

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Currents 23.1 2016


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