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
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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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Currents 23.1 2016
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
60
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
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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
62
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
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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.
65
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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Currents 23.1 2016
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
70
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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