CURRENTS Vol XXIV, No. 2 | 2021 by Currents: Journal of International Economic Law

2021

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urrent C S J o u r n a l o f I n t e r n at i o n a l E c o n o m i c L aw

2021

South Texas College of Law Houston

Hegemony, Self-Regulation or Responsive Regulation: International Regulatory Competition in Crypto-finance Iris H-Y Chiu The Key Aspects of State Failure in the International Legal System Dr. Karaman Mamand

Currents

Journal of International Economic Law

A Re-Conceptualization of WTO Law’s Security Exceptions: Squaring the Circle and Judicializing National Security Csongor István Nagy Legal Scrutiny of an Indirect Advertising Ban on Tobacco Products under WTO Laws Pei-kan Yang CURRENT Events Feature: COVID-19 and International Economic Law CURRENTS: JIEL Editorial Staff

Vol. XXIV No. 2

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Vol. XXIV, No.2

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Contents

Hegemony, Self-Regulation or Responsive Regulation: International Regulatory Competition in Crypto-finance 3

Iris H-Y Chiu

The Key Aspects of State Failure in the International Legal System 29

Dr. Karaman Mamand

A Re-Conceptualization of WTO Law's Security Exceptions: Squaring the Circle and Judicializing National Security 49

Csongor István Nagy

Legal Scrutiny of an Indirect Advertising Ban on Tobacco Products under WTO Laws 60

Pei-kan Yang

CURRENT Events Feature: COVID-19 and International Economic Law 81

CURRENTS: JIEL Editorial Staff

International Law in the Arctic: Looming Conlicts Over Resources, Shipping, and Regional Influence 92

Journal of International Economic Law

Greta Carlson

Tales from the Crypt: Global Trends in the Taxation of Cryptocurrency 116

Elizabeth Nevle

The FCPA Enforcement Landscape: What Corporate Counsel and Compliance Departments Need to Know 131

Kyle Vento

Currents 24.2 2021

Letter From The Editor

Currents

Dear Readers: The Editorial Board of CURRENTS: Journal of International Economic Law (CURRENTS:JIEL) is proud to present an issue containing collective insights on issues impacting the world before COVID-19 changed the global landscape. Thus, the issue embodies topics that will hopefully return to the forefront of international economic law. However, the COVID-19 crisis remains at the forefront of our attention. Consequently, we have included in this issue a CURRENT Events feature – a listing of issues and an annotated bibliography of some publications on the pandemic and international economic law. Volume 24.2 contains variety of articles analyzing issues that affect varying aspects of international economic law. Hegemony, Self-Regulation or Responsive Regulation: International Regulatory Competition in Crypto-finance by Iris H-Y Chiu, Professor of Corporate Law and Financial Regulation at University College London, focuses on the regulatory issues in the world of cryptocurrency. Key Aspects of State Failure in International Legal System by Dr. Karaman Mamand analyzes the effects of a state’s inability to maintain control over their territory leading to their collapse as a nation. A Re-Conceptualization of WTO Law’s Security Exceptions: Squaring the Circle and Judicializing National Security by Csongor István Nagy, Professor of Law and Head of the Department of International Law at University of Szeged, looks at the WTO’ security exceptions and analyzes the potential changes to the existing model. Legal Scrutiny of Indirect Advertising Ban on Tobacco Products under WTO Laws by Pei-kan Yang, Associate Professor of Law at Chengchi University, Taiwan, analyzes the effects of banning brand stretching and sharing under existing WTO laws regarding tobacco. Volume 24.2 contains three student notes: “International Law in the Arctic: Looming Conflicts Over Resources, Shipping, and Regional Influence,” “Tales from the Crypt: Global Trends in the Taxation of Cryptocurrency,” and “The FCPA Enforcement Landscape: What Corporate Counsel and Compliance Departments Need to Know for Effective Compliance in the New Decade.” Finally, our CURRENT Events feature is an annotated bibliography of resources relating to COVID-19 and its impact on varying areas of international economic law that has been written by our staff members. We are delighted to provide a platform for students to engage collectively on the journal beyond editing. I would like to thank Associate Dean Cherie O. Taylor and Associate Dean Elizabeth Dennis, our faculty advisors, for their continued commitment and dedication to the journal and our members who seeks to develop knowledge and expertise in international economic law. I would like to thank the entire staff and Editorial Board. While 2020 has presented numerous challenges, everyone adapted and worked tirelessly to prepare this issue and faced unprecedented challenges along the way. On behalf of the Editorial Board, I would also like to thank Dean Barry for his unwavering support of CURRENTS: Journal of International Economic Law. The Editorial Board always welcomes article submissions on any topic in the field of International Economic Law. Please visit our website at https://www.stcl.edu/ academics/law-reviews-journals/currents/ for additional information about how to submit and our publication schedule. We hope you enjoy this issue.

CURRENTS is published by South Texas College of Law Houston. Please cite CURRENTS as CURRENTS: JIEL 24.2, 2021. 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

Editorial Board 2020-2021 Editor-in-Chief Elizabeth Nevle Managing Editor Alexis Summers Executive Editor Greta Carlson Articles & Notes Editors Hannah Addison Lucian Hill Sarah Reese Andrea Russell Editorial Board Assistants Matias Gallegos Members Gisela Aguilar Timothy Bond Serena Cansler Yee Cheung Alan Galloway Cienna Hancock Joitza Henriquez Caleb Johnston Alexandria Monroe Amir Nazarian Vikesh Patel Ashley Segura Chance Siller Sameeha Vaid Faculty Advisors Assistant Dean Elizabeth A. Dennis Associate Dean C. O’Neal Taylor Publications Coordinator Jacob Hubble

Elizabeth Nevle Editor-in-Chief CURRENTS: Journal of International Economic Law Currents 24.2 2021

Credits Publication Services Jacob Hubble

Hegemony, Self-Regulation or Responsive Regulation: International Regulatory Competition in Crypto-finance I R I S

H - Y

C H I U *

—————————————————

Professor of Corporate Law and Financial

persuade their regulatory constituents to state

Introduction

Regulation, University College London, PhD,

a position and remain instead of threatening

LLM (Cambridge).

to exit.20

————————————————— Initial coin offerings (ICOs),1 which

regulatory policy that may be susceptible to

We do not adopt a singularly Tieboutian21

became popular in 2017, introduced a

regulators’ engagement with competition vis

model of proactive regulatory competition in

new financial asset known as the “token”

a vis each other.

this article in order to examine international

or “cryptoasset.”2 The cryptoasset has its

It may be argued that regulatory diversity

regulatory developments for cryptoassets.

origins in cryptocurrency, such as Bitcoin,

is not necessarily due to “competition” in

This article takes the view that the observed

which has galvanised imagination in relation

the form of races to the top or bottom.10

regulatory diversity in relation to cryptoassets

to an alternative economic order powered

This presumes that regulators are designing

reflects signs of incentive-based approaches

by privately supplied money.4 Although

regulatory regimes on a calculative basis to

to regulatory policy. After all, regulators are

cryptocurrency has been introduced as an

augment their market share, especially in

mindful of the need to attract mobile assets,

innovation since 2009, its penetration

the era of globalisation.11 Regulators face

such as finance which is perceived to be useful

into mainstream commerce and economic

demand-side pressures12 and have incentives

for financial and economic development in

life has been limited. Cryptoassets have

for generating regulatory policies.13 Such

any jurisdiction.22 Regulatory diversity in

now captured the attention of mainstream

policies can be proactive14 or reactive15 but

this space seems to be consistent with the

financiers,7 and an explosion in their market

is not necessarily poised to lead a “race.”

explanations for regulatory diversity in other

capitalisation has led regulators to consider

Moreover, regulators face institutional

bodies of financial regulation, such as bank

how they may address cryptoassets in their

constraints in political contexts16 and do

regulation discussed by commentators. 23

regulatory repertoire.

not always respond to global regulatory

However, regulatory diversity also reflects

Regulators in different jurisdictions

developments in a manner that treats their

a mixture of regulatory goals, such as the

have taken rather different approaches

regulatory regimes as competitive products.17

protection of existing institutions and social

towards cryptoassets.9 In critical exploration

Further, even in an incentive-based context

compacts.24

of such regulatory diversity, this article

where regulatory constituents can vote

This article takes the view that

inquires into whether the differences reflect

with their feet due to their mobility, 18

regulators should not assume that the same

signs of regulatory competition amongst

constituents’ preferences for regulators range

considerations in other areas of financial

jurisdictions. As Section A explains, the

from the law in books—the legal standards

regulatory competition necessarily apply to

characteristics of cryptoassets do not easily

and frameworks—to the law in action —

the cryptoasset markets. In this experimental

cohere with established financial product

referring to regulators’ enforcement policies,

space, regulators need to address aspects

categories that are subject to regulation. This

as well as more informal attributes such as

of novelty that cryptoassets bring. The

compels regulators to consider if regulatory

their accessibility and willingness to engage

paradigm of regulatory competition should

extension or reform may be appropriate,

for discussion and guidance. 19 Hence,

not be treated as “same old,” and it should

giving rise to an opportunity for generating

regulators can engage in different ways to

not be assumed that familiar strategies

Currents 24.2 2021

would yield expected results, leading to the

and the International Organization for

regulatory policy in due course.

augmentation of any regulators’ “market

Securities Commissioners (IOSCO),

It is possible that the policy trajectory

share” of regulatees. Instead, the narrative of

that national regulators have not sought

for cryptoassets will coalesce in regulatory

regulatory competition that contributes to

international dialogue or convergence as

coordination or convergence, such as the

policy-making can incentivize regulators to

the first step towards their consideration of

coordinated statement the Basel Committee30

come to a better understanding of the supply

regulatory policy in the realm of cryptoassets.

issued in relation to Facebook’s proposed

and demand sides of the cryptoasset market

Indeed, international policy coordination or

digital currency, Libra.31 Section C argues

and to discover new and different needs.

regulatory convergence is often an incentive-

that the proposed regulatory approach to

Against this broader conception, this

based maneuver undertaken when problems

Libra is different from the considerations

article analyses three broad movements in key

of commons and mutual externalities compel

regarding cryptoassets. Traditional means of

jurisdictions in relation to their development

such coordination.28 The state of regulatory

financial regulatory capitalism32 can apply to

of regulatory policy for cryptoassets. This

diversity also reflects regulators’ perception

Libra, unlike in the case of cryptoassets. This

article argues: (a) hegemonic approaches

that cryptoasset markets do not yet pose

article takes the position that coordinated

taken by several United States agencies and

challenges for these needs to arise.

action in cryptoassets remains unlikely,

in China; (b) self-regulatory approaches

—————————————————

and regulatory diversity is likely to persist.

regulatory regimes such as Malta, Israel,

This article takes the position that coordinated action in cryptoassets remains unlikely, and regulatory diversity is likely to persist.

and Thailand. These approaches reflect some

—————————————————

the minimisation of the hazards of regulatory

characteristics of regulatory competition, as

In Section A, this article provides a condensed

competition.34

the experimental development of regulatory

and high-level overview of financial regulatory

A. The Regulatory Lacuna or Virgin

policies is intended to engage in a form of

frameworks in key jurisdictions that have

Territory for Cryptoassets

non-coordinative discovery of the terms for

persisted despite sectoral differences between

Why do crypto assets give rise to a

regulatory competition. However, it should

major product types, and in the U.S., along

regulatory lacuna? Existing bodies of financial

not be assumed that the terms of competition

the lines of different sectoral regulators.

regulation have grown exponentially over the

are clear. This article argues that the nascent

This provides the context for explaining

years, from the U.S. New Deal establishing a

signs of regulatory competition can bring

why there is a regulatory lacuna in respect

system of securities regulation and investment

about the discovery of new knowledge

of cryptoassets. Section B then discusses the

advisers regulation since the 1930s35 and

relating to the supply and demand sides of

three different regulatory approaches that are

1940s, 36 to the growth in harmonised

the cryptoasset market, and regulators should

in development. This Section discusses how

financial regulation in the EU in banking

engage in a broad-based discovery exercise in

the regulatory approaches reflect competitive

and securities since the 1970s.37 More recent

order to generate suitable regulatory policies.

incentives, but the state of “competition”

exponential growth in financial regulation has

Although financial regulators engage

shows incomplete learning and discovery

also taken place since the Financial Services

in collective forums such as the Financial

regarding the novelties of the cryptoasset

Action Plan of 199938 and the post-crisis de

Stability Board (FSB)—an international

markets. This Section calls for constructive

Larosière report in 2009.39 Although financial

body that now has a clear mandate to look

engagement with the possibilities offered by

products and services have increasingly been

over global systemic risks after the global

regulatory competition, towards learning and

captured within the scope of regulation,40

financial crisis of 2007–0925—it can be

discovery of new supply and demand-side

the organisation of regulatory regimes may

seen from documents issued by the FSB26

needs, as part of the process in fashioning

nevertheless give rise to gaps. These gaps

which are in effect taken by the popular ICO jurisdictions of UK, Switzerland, and Singapore; and (c) new enabling regimes designed by emerging financial

Currents 24.2 2021

Although diversity gives rise to competitive incentives in regulatory policy,33 this article will argue that a constructive approach to learning in regulatory competition, as suggested above, would contribute towards

arise in two ways. First, regulatory regimes

credit46 and micro-prudential regulation that

The different business models in

have been developed along “sectoral” lines

introduces law and economics techniques

full intermediation in banks and partial

for a long time; these sectoral lines reflecting

to moderate risk-taking behaviour in full

intermediation in securities and investments

major financial product business models.

intermediation.47 Insurance products, which

underpin the establishment of different

Cryptoassets offer a particular challenge as

also have full intermediation features in terms

regulatory agencies overseeing these activities.

to their “fit” within major financial product

of underwriting risks, are subject to legal

For example, Office of Comptroller of

models or “packages.” Second, regulatory

duties in underwriting and microprudential

Currency—which absorbed the Office

regimes identify certain mainstream financial

regulation to incentivise appropriate risk-

of Thrift Supervision in 2011—oversees

institutions as regulated subjects— creating

taking.

In Europe, for example, the

deposit-taking banks in the U.S. and the

regulatory relationships between regulators

synergies between banking and insurance

U.S. Securities Exchange Commission

and corporatized entities, whether they

business have also led to “bancassurance”

overseeing securities issuers, intermediaries,

are issuers, intermediaries, or markets. The

business models.

and markets. In the United Kingdom (UK),

cryptoasset paradigm creates challenges for

—————————————————

the Bank of England was the bank regulator

equivalent to familiar regulatees.

Securities products are not subject to product regulation as such.

i. A Primer on the Ontologies of Financial

—————————————————

system until 2000.59 Securities and investment

Securities products are not subject to

intermediaries were separately regulated

Financial regulation has developed

product regulation as such. This means that

under a self-regulatory system before 1986

largely along sectoral business lines. Banking

legal and regulatory governance over securities

and gradually became subject to regulation

sector products of deposit-taking and private

do not presume to govern their performance

from 2000.60

money creation by loan underwriting are

in certain ways. Rather, securities are subject

The rise of the financial “supermarket”

regulated differently from investment sector

to mandatory disclosure regulation at point

or conglomerate61 since the 1990s, facilitated

products. Banks take on full intermediation

of sale51 and on a continuing basis52 so as to

by the abolition of the Glass-Stegall Act in

of financial risks, allowing them to maximise

fully inform investors of material contexts

the U.S. which forcibly kept banking and

the private profits of risk-taking while

in order to assist investors’ decision-making.

securities businesses separate, gave rise to

providing socially useful services to customers

In a similar manner, collective investing

financial institutions with multi business

in relation to money safekeeping and

in funds that trade in securities and other

lines. This in turn gradually allowed banking,

payment. Securities products on the other

financial assets are also regarded as credence

insurance, securities, and investment services

hand, are credence goods. Investors hope for

goods but with a twist, as fund management

to be cross-fertilised. The collateralised debt

a future return that cannot be guaranteed at

involves discretionary judgment in selecting

obligation—the precursor to the 2007 to

the time of participation.43 Where financial

and managing portfolios. Hence, collective

2009 global financial crisis and a financial

institutions take on full intermediation, their

investment products such as mutual funds are

asset which featured loan assets packaged in

products are subject to legal and regulatory

subject to a similar regulatory technique of

“slices” and “tranches” into securities—is a

duties, unlike in the case of credence or

mandatory disclosure regulation, but there

type of financial innovation borne out of the

investment goods where investors bear the

is a greater extent of regulatory governance

new liberation and blurring of sectoral lines.62

capital risk. Hence, “banking products”

of aspects of fund management. 55 Such

Industry and product structure changes

have attracted legal duties with regards to

regulatory governance has grown over the

paved the way for reapproaches to sectorally-

deposit return: the facilitation of payment

years as occupational pension saving in

developed product regulation as well as the

services arising out of the safekeeping

funds has become staple and mandatory

appropriateness of regulatory structures. In

function of deposits, duties in relation to

in the UK.

this respect, a number of regulators in the

regulators in terms of new actors that may not comfortably be regarded as functionally

Regulation

between 1979 and 200058 while securities issuers were subject to the London Stock Exchange’s rulebook, as a self-regulatory

Currents 24.2 2021

world including the UK63 moved to the single

meet redemptions at the dollar due to losses

crisis of 2007 to 2009. Such path dependence

regulator architecture in order to house all

suffered on the underlying assets held.

is also reflected in the architecture of

regulatory and supervisory functions over

Although money market funds regulations

regulators, as the U.S. maintains sectoral

the entire financial sector.64 However, the UK

have been reformed in the U.S.72 and EU,73

lines between securities, banking, and futures

continued to departmentalise the different

financial regulators have created bespoke

trading—supervised by the Commodities

sectoral lines due to a legacy inheritance

regimes for financial innovations that adopt

and Futures Trading Commission.76 The

of disparate sectoral bodies that existed

mixed elements of the full and partial

EU has established along sectoral lines its

previously. Some regulators opted for an

intermediation roles. This example reflects

architecture of pan-European regulators over

“objective-based” system or “twin peaks”

the fact that regulators do not fundamentally

national regulators, the European System

where a prudential regulator could supervise

rethink product ontologies. Instead, reforms

of Financial Supervision (System). The

the full intermediation aspects of financial

are built upon the full-partial intermediation

System comprises the European Banking

business carrying prudential risk, compared

binary in a rather patchwork manner. In this

Authority,77 the European Securities and

to a conduct regulator who supervises the

manner, regulatory ontologies have become

Markets Authority,78 the European Insurance

financial products, services, and markets

industry-led and are not technologically

and Occupational Pensions Authority,79

aspects of financial business. 66 The UK

neutral.

and a joint committee of the three to look

ultimately took this approach in 201367 after

Another example is the exchange-traded

at cross-sectoral issues.80 The UK adopts a

a decade of the single regulator, which did not

fund, an investment structure premised

twin-peaks approach, but the Prudential

prove effective against the banking crisis.

on being tied to an index, therefore giving

Regulation Authority, under the Bank of

However, the U.S. continued to maintain

investors exposure to a range of indexed

England, is effectively the “bank” regulator,

sectoral lines of regulation despite the merger

securities while trading closely to the

although there is good evidence81 of working

of the Office of Thrift Supervision into the

transparent market price of the index.74

jointly with the Financial Conduct Authority,

Office of the Comptroller of Currency,

However, as Hu and Morley point out,

which is the regulator of business conduct for

which was mandated in the Dodd-Frank

hidden arbitrage strategies are employed by

all financial firms.

Act of 2010, after the crisis. Regulatory

the exchange-traded fund operator, and the

—————————————————

ontologies for financial products have very

fund may not be trading close to the index

slowly responded to financial innovation that

at different times of the trading day.75 These

challenge sectorally-based boundaries. For

apparent “securities” or investment fund-like

example, money market funds “behave” like

products are placed in the fund category,

a deposit product but have never been subject

but they are functionally more equivalent

to bank-like duties to customers or micro-

to full intermediation type products as

prudential regulation.70 They are regarded

fund operators undertake endeavours

as “fund” products subject to investment

to maintain value reliability. However,

The path dependence of regulators on established financial products or sectoral ontologies has led to regulatory gaps, which may not create particular problems when markets seem to work.

regulatory regimes applicable to credence

regulatory governance has not engaged with

—————————————————

goods. Money market funds engender an

these features.

Cryptoassets pose a unique challenge

impression of being as stable and reliable

The path dependence of regulators on

to the regulatory ontologies for financial

as deposit products as they are invested in

established financial products or sectoral

products, as they are not, unlike many

highly liquid assets and can be subject to

ontologies has led to regulatory gaps,

financial innovations, developed based on

short redemption notice. This impression

which may not create particular problems

techniques that mix features of existing

was challenged during the global financial

when markets seem to work. The gaps are

financial products. Rather, cryptoassets are

crisis when a large money market fund,

scrutinised only in the wake of significant

developed within a functional environment,

the Reserve Primary in the U.S., could not

problems or crises, such as the global financial

with certain technological protocols and

Currents 24.2 2021

present new features as well as features

which is known as the public key to the

key of the bitcoins sent, the successful miner

that resemble full or partial intermediation

coins—by using a private key to which she

is able to propose to add the transaction to

techniques. In this manner, cryptoassets give

is authorised and which is mathematically

a block on the distributed ledger, which

rise to questions as to whether they fall within

related to the public key. As the transaction is

would be timestamped. Blocks of validated

established ontologies and which regulatory

private in nature, the integrity of the system

transactions are added in sequence, forming

agencies ought to regulate them.

can only be maintained if the double spend

a chain in the ledger. These validated

ii. What are Cryptoassets

problem is prevented—the system prevents

transactions are immutable in the ledger and

Cryptoassets have become treated as

Alice from being able to send the same coins

also irreversible.

financial assets, although they are more

to someone else again. The transaction is

The bitcoin blockchain is the first

accurately and functionally known as

validated only by the community within the

private cryptocurrency and has inspired the

“application tokens.” To understand the

system, known individually as nodes, whose

development of over thousands of private

nature of application tokens, one needs to first

computers are connected to and have joined

cryptocurrencies to date.85 Cryptocurrencies,

understand the nature of cryptocurrency. The

the bitcoin network.

supported by a blockchain and mining

bitcoin blockchain was introduced in 2008

From the early days of bitcoin, anyone

protocol for maintenance of the system, have

by a pseudonymous Satoshi Nakamoto82

can be a node and hence membership of the

become a basic infrastructure for private value

in order to allow private payments to be

bitcoin blockchain is purportedly highly

transfer in a peer-to-peer network. However,

made securely and efficiently between

democratised. Nodes are responsible for

cryptocurrencies have not per se given rise

individuals without needing to involve

and compete to validate transactions on

to a new economic system of markets as

existing intermediaries in the banking and

the bitcoin blockchain, as validation is

their rudimentary monetary systems are

financial system. The global banking crisis of

incentivised by the reward of new bitcoins.

meant to support the existing real economy

2007 to 200983 loomed large in this context,

Validation is carried out on the blockchain,

and provide an alternative to intermediated

and this development can be seen not only as

which is a network cum database that

systems of payment in the real economy.

a technological innovation but as a statement

records all of the transactions in bitcoin, of

Cryptocurrencies are not massively utilised

of distrust of the prevailing institutions and

which each node would have an identical

in mainstream commerce because their

financial intermediaries at that time.

copy. The single distributed ledger is thus

distributed architecture for maintenance

—————————————————

tamper-proof and fail-safe at the same time

is costly in terms of its energy footprint,86

as it is highly challenging for nodes to alter

and they are not necessarily as speedy as

the ledger unilaterally. There is no single

existing payment systems dominated by large

point of failure for the ledger. When Alice

providers such as Visa and Mastercard.87

The bitcoin blockchain is the first private cryptocurrency and has inspired the development of over thousands of private cryptocurrencies to date.

and Bob complete their transfer and this

However, innovations have been made on

transaction is broadcast or “proposed” to

the basis of the cryptocurrency infrastructure.

nodes, the transaction is broadcast with

The Ethereum blockchain, which went

—————————————————

the public key of the bitcoin sent and a

live in 2015, now supplies an underlying

Purporting to be a private currency,

digital signature. Nodes do not know Alice’s

infrastructure which is a blockchain and a

bitcoin is most famously depicted in an

private key but have to compete to verify

protocol token—the ether—that codes in

exchange context. Alice can send Bob

if the digital signature is mathematically

basic laws of functionalities that can then

bitcoins in order to discharge a payment

coherent with the public key of the bitcoins

be further programmed to execute specific

obligation or to transfer value to Bob. Alice

sent. Those competing to verify transactions

“smart contracts”. The ether is the native

may achieve this by initiating a transfer of

in order to earn new bitcoins are “miners”.

token of the ethereum blockchain, just as

bitcoin which she owns, manifested by a

Upon solving the cryptographic puzzle and

the bitcoin is the native token of the bitcoin

string of digital data unique to the coins—

verifying the history regarding the public

blockchain. Other than representing value,

Currents 24.2 2021

transferring value, and recording balances,

Tokenisation introduces an easy, user-

of investment and risk, which are classified

which are the limited functionalities of

friendly means of accessing and using

as falling foul of existing financial markets

bitcoin, the script of the ether token—the

distributed ledger marketplaces. This

or securities regulation.101 Currency tokens

most popular of which is ERC-20—is coded

technological breakthrough is able to facilitate

may confer on subscribers a right to use for

with more universal functional qualities

two new broad types of business innovation.95

payment in a more interoperable manner

such as transferring information and value.

One is that tokenised distributed ledger

than utility tokens. Further, currency tokens

These universal qualities then allow coders

marketplaces can become new platform

refer largely to their general exchangeability

to build upon the code with more specific

economies for new virtual goods and

for other tokens, such as bitcoin, ether, or

functions which can be automated upon

services, such as cryptokitties. The second

other coins of more significant circulation

the satisfaction of certain conditions, such

is that tokenisation facilitates the creation

and volume of trading.102 Tokens may also be

as smart contracts.88 Hence, ERC-20 tokens

of new commodification in real economy

coded with a mixture of the abovementioned

can be used for the building of application

assets and allows them to be easily liquefied

characteristics, depending on how it ought

tokens that are ERC-20 compatible upon the

and transacted. As tokens are capable of

ultimately to function on the distributed

ethereum blockchain.89 These applications

representing economic rights and functions

ledger platform.103

can then offer new opportunities for

in one “digitised representation,” business

Purchasers of tokens at pre-sales can

economic and commercial activity, such

developers have rushed into this space to

usually immediately trade them away on

as the purchase and sale of digital art, like

innovate in the new tokenised economy.

one of many digital asset exchanges that

The most significant economic activity

have arisen all over the world104 in exchange

in the crypto-economy to date is fund-

for more popular cryptocurrencies, such as

raising for distributed ledger development

bitcoin or ether, which are then exchangeable

projects, known as “initial coin offerings”

for fiat currencies. The “liquefication” of

or ICOs. In order to fund these projects,

tokens fundamentally allows them to become

developers typically offer tokens in return

financialised, turning tokens into “crypto

for cryptocurrency from supporters of

assets”, which the Bank of England now

the project. These are the application

defines as “generally held as investments by

tokens under development, envisaged to

people who expect their value to rise.”105

—————————————————

be used on the distributed ledger platform

The first ICO was made by the founder

Since 2015, business innovations have

when the project goes live. A number of

of Mastercoin, JR Willett, who wished to

exploded, built on this framework, and other

commentators have started profiling the

create a protocol layer upon the bitcoin

application platforms with their own native

nature of tokens offered,

which confer

blockchain so that the bitcoin blockchain

coins have also been developed to compete

a variety of consideration in return for

can facilitate the creation of digital assets and

with Ethereum, such as Tezos,91 EON,92 and

supporters’ funds. For example, utility

other application tokens, much like how the

Tron. In other words, application tokens

tokens confer on subscribers a right—in the

ethereum blockchain supports application

are multifunctional in nature and are in

future—to use or enjoy certain services.

tokens.106 Willett raised USD $500,000 by

essence a representation of the: (a) holder’s

However, these come in a different variety

selling 5,000 mastercoin tokens. This project

entitlement; (b) value; (c) information or

in terms of whether they may be user-based

has now become live and is known as Omni,

data; (d) contractual performance; and

or include other participation rights. 99

which is a distributed layer upon the bitcoin

(e) the currency of the system all in one.

“Fun” tokens may confer a benefit to the

blockchain.107 In the same footsteps many

Application tokens are the new portal for

community at large or to another without

ICOs sell future rights to goods and services

participation in new technologically-framed

consideration.

Investment tokens confer

embodied in tokens under development

business activities.

on subscribers a right to participate in a form

to supporters. These tokens are primarily

cryptokitties, over the internet.

—————————————————

The most significant economic activity in the crypto-economy to date is fund-raising for distributed ledger development projects, known as “initial coin offerings” or ICOs.

100

Currents 24.2 2021

functional in nature but have become

services in order to construct a regime

theft,118 in each case, the founder developers

financialised because of developmental

for allocating responsibilities to users and

and core miners of the blockchain would

needs in business and the rise of private

payment services providers. For example,

intervene and create a fork so that rogue

infrastructure for trading. It has thus become

consumers need to provide a clear payment

behaviour is not legitimised in the forked

important to ascertain if such tokens are

mandate by utilising personalised security

chain.119 Code developers and core miners

financial assets and if so, how may they be

features. Providers are responsible to ensure

are not merely atomistic entities unrelated

regulated under existing regimes.

strong customer authentication and secure

to each other, but are socially networked

iii. What Type of Financial Product are

communications.

This is supported by the

and connected,120 in order to coordinate

Cryptoassets?

duty to provide comprehensive information

crisis management action when needed.121It

The success of many unregulated ICOs

on the part of the provider.114 Consumers are

may be queried if new actors in crypto

has turned financial regulators’ attention

protected in the event of unauthorised use of

“payment services” have arisen122 and whether

to the possibility that ICOs’ successes

payment instruments.115 Further, credit card

regulatory reforms should address their

are attributed to their engagement with

providers are jointly and severally liable with

functionally equivalent duties to safeguard

regulatory arbitrage, exploiting the gaps and

the supplier of goods or services paid for with

the payment system and the expectations

uncertainties in extant financial regulation.108

the credit card.116

of users of such payment services. But one

113

First, all cryptoassets are built upon

The regime for risk and responsibility

needs to bear in mind that the extant basis

the basic value transfer function of

allocation under the EU regime is a

for subjecting commercial/business actors to

cryptocurrency and potentially function as

governance order that is unlikely to be

certain duties would not necessarily apply.

“payment” instruments. However, European

provided by market forces and may be

Indeed, legal reform if any would be on a

policymakers have stated that cryptocurrency

regarded as a public good. This position is

new basis of power and governance needs for

does not fall with the European Payment

reflected in payment legislation at the U.S.

the commons of the blockchain,123 and it can

Services Directive, nor the Electronic Money

federal level as well as part Article 4A of the

even be queried if this goes beyond “financial

Regulations.

Uniform Commercial Code.

regulation”.124

109

This is because the legislations

117

In contrast,

—————————————————

make certain assumptions that do not apply

the value transfer systems in cryptocurrencies

to cryptocurrencies. Electronic money is

are usually open infrastructures that can

assumed to be provided by commercial

be maintained by any volunteer, and

providers who are able to issue, redeem, and

participants rely on volunteers’ incentives

safeguard the electronic units of money vis-

and the protocols operating in the system for

a-vis customers and would cover banking

reliability. There are no commercial providers

and non-banking credit card issuers or

of payment services here to whom regulatory

online money remitters. The regulation

duties of verification or remedy can attach.

of payment services providers is broader,

In a peer-to-peer context, the assumptions

covering a wide scope

of account servicing

of “business” and “consumer” roles that

The proposed Model Law in the U.S. on virtual currencies by the Uniform Law Commission would however start to provide a legitimation and governing regime for virtual currency providers under the regulation of payments.

providers such as banks, payment initiation

form the backbone of regulatory design

—————————————————

services (these may be separate but plugged

cannot be made. Further, it is uncertain

Nevertheless, regulation has been

into bank or credit card accounts to initiate

if remedies can arise as transactions are

extended to new commercial intermediaries

payments such as Paypal or Apple Pay),111 and

theoretically irreversible and immutable on

in the crypto space, in the form of exchanges

money organising services (such as Money

the blockchain. Where a rogue majority of

between fiat and cryptocurrency, so that

Dashboard).

The current regulatory

nodes on an open blockchain has attained

they are subject to anti-money laundering

regime captures a scope of commercial

51% control of the nodes and is able to effect

regulations. 125 These are however not

outfits providing various aspects of payment

miscreant behaviour such as hacking and

regulated comprehensively as payment

110

112

Currents 24.2 2021

services.126 The proposed Model Law in the

non-redeemability, unlike equity securities,136

which they manage,141 hence the need to

U.S. on virtual currencies by the Uniform

will likely push us into the opposite direction

subject points of sale and the intermediaries

Law Commission would however start to

of distinguishing tokens from securities.

themselves to duties governing their roles.

provide a legitimation and governing regime

In the UK, there is an additional

There exists no such discretionary power is

for virtual currency providers under the

question as to whether tokens can may be

similarly exercised over the DAO participants

regulation of payments. This is not yet taken

regarded as units in a collective investment

by the protocol or the developers.

up in most states.

scheme.

—————————————————

127

137

Tokens do not quite fit the

or give rise to futures trading

(”DAO”), characterised as a security offering

on the secondary trading markets for tokens,

by the United States,139 could be a collective

This lack of clarity regarding the characterisation of crypto assets will allow regulators to potentially extend or reform their regulatory perimeter and policies depending on what objective are perceived to be relevant.

as tokens involve future rights.130 The roles

investment scheme in the UK. It was a

—————————————————

of agencies in applying their regulatory

pioneer template

for smart contract

Further, the crypto community is

standards and extending their regulatory

applications to be built upon the Eethereum

experimenting with the development of

perimeter is explored in Section B. In the EU,

platform which had include the following

stablecoins to improve the moneyness

commentators debate whether tokens can

functions:

of cryptocurrency and to mitigate their

be treated as securities, and there are mixed

(a) To enable participants to send funds in

its volatility. The two key techniques for

argue that

ether to an address on the blockchain,

stablecoins involve either a monetary

utility tokens are unlikely securities for the

and the address mentioned to receive the

provision and management function, like a

lack of conferment of equity participation and

funds in a pooled form;

central bank, or the pegging of a token’s value

Next, the fund-raising objectives of

definition of collective investment scheme as

ICOs naturally give rise to the comparison

they are not necessarily parts of a “pooled”

between tokens and securities. In the United

investment, and investment and may not

States, tokens can be regarded as securities if

be held for expectation of profit alone.138

they meet the requirements of the Howey

For example, it can be argued that the

test,

Decentralised Autonomous Organisation

128

and they can also be treated as

commodities,

129

opinions. Hacker and Thomale

131

140

governance rights, which is typical of equity

(b) To enable participants to vote on

to a basket of financial assets whose market

securities, and the lack of debt repayment

where the funds should be deployed

values can be more readily ascertained.142

and coupon rights, which is typical of debt

i.e. to indicate by vote the participant’s

The future potential of such tokens could be

securities. Maume et al

preference for investment;

their integration into protocol infrastructure,

132

however opine

that the European definition of securities

such as becoming the native currency of

turns upon liquidity in secondary markets

investment votes to meet the majority

the blockchain system. At the moment,

and tokens, as mentioned below, which

number trigger;

they tokens are treated more as pegged

have become liquid tradeable assets. Alexis

(d) To enable funds to be sent to the

assets and are used to hedge143 investors’

Collomb, Primavera de Filippi, and Klara

investment opportunity destination that

exposures to more volatile144 cryptocurrency,

Sokalso take the view that utility tokens serve

the majority of votes support.

such as bitcoin. The FSB and IOSCO have

the purpose of fund-raising for start-ups,

Although the DAO had features of

identified similarities between stablecoins

and are therefore the functional equivalent

pooling funds, there was no centralised

with payment mechanisms,145 electronic

of securities issued by companies.133 The

management other than the majority voting

money,146 commodities,147 bank deposits,148

characteristics of tradability and fungibility134

protocol operating on the blockchain. The

money market funds,149 securities150 and

may push us into the direction of similarly

collective investment scheme regulation in

other collective investment schemes.151

characterising these as securities. However,

the UK is intended to target intermediaries

the characteristics of functionality

who that attract investors into pooled schemes

135

and

Currents 24.2 2021

B. Three Approaches in Regulatory

Such a fundamental bedrock should be

Competition

timeless. In this manner, new developments

—————————————————

The characterisation of cryptoassets and

should prima facie be interpreted within

their appropriate regulation is not obvious

the existing ontologies rather than assumed

under a number of jurisdictions’ existing

to be challenging them. However, as much

financial regulatory regimes, thus providing

as there is the ideal that law should be

an opportunity for regulators to consider

legislated or judicially articulated to reflect

clarifying interpretation. This lack of clarity

timeless human and social expectations,

regarding the characterisation of crypto assets

it is inherent in the nature of human

The more dominantly functional tokens are, in comparison to their tradability or potential to provide gain as “financialized” items, the more likely they are not securities.

will allow regulators to potentially extend or

and social expectations to be shaped by

—————————————————

reform their regulatory perimeter and policies

existing infrastructure, both physical and

This approach is observed in the

depending on what objective are perceived

social conditions This ensures that existing

treatment of cryptoassets by the United States

to be relevant. We turn now to discuss three

institutions are not always as timeless as

Securities and Exchange Commission (SEC)

regulatory approaches to the characterisation

originally hoped. There are limits to which

and the Commodities and Futures Trading

of cryptoassets, and argue that broadly

a coherentist approach can be stretched, and

Commission (CFTC). In a different way,

speaking, all approaches are motivated by

at the logical extreme, a coherentist approach

this approach is also observed in China, a

the intention to capture the new financial

could be counterproductive in the sense

country which has banned all cryptocurrency

products and actors.Thus, an underlying

that it would not be able to tolerate legal

and cryptoassets. Although coherence with

competition narrative is appropriate for

reform. A hegemonic approach would not

institutions and protection of existing

their comparison. However, the hazards

only be coherentist, but it seeks to advance

institutions may be maintained to an extent,

of such competition are sounded, and we

a coherentist agenda as far as possible in

the contraventions are also clear.

propose that regulators should grapple with

order to entrench a dominant position and

—————————————————

regulatory competition in a more meaningful

to marginalise challengers. This is compatible

in the

way.

with the incentives of regulatory agencies and

T he SEC and CFTC United States

—————————————————

jurisdictions with “clout”, demonstrated by

—————————————————

Hegemonic Approach

Gadinis153. Regulatory agencies tend to insist

The SEC and CFTC signal maintain

—————————————————

on extending and applying extant laws to

tough stances against regulatory arbitrage

A “hegemonic” approach is one that

innovations when it is perceived that they

and the need to secure investor protection

seeks to capture and fit cryptoassets within

oversee dominant markets. The conditions

and market integrity. Their patchwork

a regulatory agency’s regulatory jurisdiction.

of dominance are that: (a) a jurisdiction’s

approaches are further set and reflected

It may be argued that such an approach is

national financial industry maintains the

in the context of separate regulation on

merely “coherentist” as suggested by Roger

largest market share globally; and (b) the

the payments aspects by Financial Crimes

Brownsword. 152 A coherentist approach

wealth available for investment within that

Enforcement Network (FinCen). 154 The

seeks to interpret new developments within

state’s borders is significantly larger than

SEC has issued guidelines on how “digital

the corpus and ontologies of existing

that of other states. As such, a jurisdiction

assets” may be treated as securities,155 but

legal frameworks as an approach of least

with such comparative advantage, whether

however, this does not provide has not

disruption, while also seeking to reconcile

wrought by earlier global regulatory

achieved definitive clarity as to regarding

and develop the law in a “coherent” and

competition, would tend to maintain and

which types of tokens fall within the given

continuing narrative. This approach is

extend its regulatory application rather than

interpretation. In particular, the SEC has

understandable as law can be perceived

reform it.

refused to say acknowledge that tokens structured as “utility” tokens are categorized

to inhere fundamental and social values. 11

Currents 24.2 2021

as not securities.156 In this manner, the SEC

advantage of the ICO hype,157 it can pose a

dominant market allows the SEC to exert is

has maintained its hegemony in securities

genuine problem for tokens that are poised

jurisdictional hegemony. Further, the deep

regulation over cryptoassets, although the

to be successful both functionally and

private markets in the United States for

results of this application presently achieve no

financially. The approach presumes that

accredited investors is a viable alternative.163

real clarity and are likely counterproductive

genuinely functional tokens would be niche

—————————————————

for genuinely innovative blockchain-based

in nature and thus artificially delimits the

business developments.

prospects of token-based businesses. The

The “investment contract” category

SEC took enforcement against Munchee

of securities, as defined in the Howey

Incorporated (Munchee), an ICO for tokens

test and explicated in the SEC guidance,

to be used in a food review application under

Even if ICOs are globally mobile, the need to appeal to a dominant market allows the SEC to exert is jurisdictional hegemony.

seeks to capture tokens with trading and

development. The reason for the enforcement

—————————————————

appreciative characteristics, even if these

is that Munchee’s disclosure made reference

The CFTC’s remit extends to trading

exist alongside functional or potentially

to appreciation of token value by developers’

in various derivative contracts specified in

functional characteristics (for projects

efforts and was on the financialised end of

legislation. The Commodities Exchange Act

under development). The more dominantly

the spectrum for investment contracts.158

administered by the CFTC also requires

functional tokens are, in comparison to

This practice can be interpreted as unduly

registration of trading operators and

their tradability or potential to provide gain

restrictive and can be tantamount to objecting

empowers the CFTC to exercise enforcement

as “financialized” items, the more likely

to any significant entrepreneurial effort

authority over fraudulent or manipulative

they are not securities. Several indicators

in developing a blockchain-based project.

activity on markets.164 Although the CFTC’s

are used to determine if tokens are closer to

Additionally, it may however be argued that

“advisory” does not clarify what tokens are

the end of the “financialized” spectrum or

Munchee’s reference to token appreciation

likely to be treated as “commodities,”165 a

the “functional” end. These factors include

in secondary trading also further damaged

number of enforcement decisions potentially

whether centralised efforts exist to develop

Munchee’s case.

have wide import. The decision can be

the project and arrange for tokens to be

In light of significant uncertainty for

interpreted narrowly or more broadly in the

traded, as opposed to ministerial functions

ICOs, developers have turned to new legal

CFTC’s enforcement against My Big Coin

for the blockchain system. It would also be

mechanisms, such as the Simple Agreement

Pay Inc,166 which is a token designed to be

relevant whether the token is offered broadly

for Future Tokens (SAFT) agreement.159 The

a cryptocurrency interchangeable for other

(presumably to attract investment interest) or

SAFT provides a template for token offers

cryptocurrencies, but purportedly backed by

more narrowly to a targeted market interested

to be made only to accredited investors

gold. A more narrow interpretation would be

in functionality.

in the United States (therefore, therefore

confined to the CFTC’s enforcement against

However, the SEC’s presumption

exempt from having to register with the

fraudulent schemes, as My Big Coin was

of functionality versus financialisation is

SEC as a public securities offer).160 This

issued in order to fund the founder’s lavish

misplaced because tokens likely have both sets

was undertaken in Filecoin, an ICO for

lifestyle and not for project development.

of characteristics, and financialisation need

developing a peer-to-peer cloud storage

This is similar to the enforcement against

not undercut the functional characteristics

161

system, which did not attract enforcement.

McDonnell,167 and such enforcement may

that exist. For example, consider residential

It may be argued that the SEC’s tough

signal that non-fraudulent token offers

property as being both fully functional and

stance is possible because of the dominant

may not attract enforcement. However, the

financialised in many developed economies.

U.S. market for capital investments,

and

basis for enforcement against fraudulent

Although such a binary may be useful for

it provides a self-regulatory alternative if no

schemes is that a “commodity” is involved

capturing scams and frauds, where bare

retail investors are targeted. Even if ICOs

and the characterisation of My Big Coin as

functionalities are a façade for those taking

are globally mobile, the need to appeal to a

a commodity168 would potentially implicate

162

Currents 24.2 2021

most currency tokens of a similar nature.

the ban laws should be tainted by ex turpi

domestic market forms the basis for such

Further, as utility tokens are presales and

causa. Such a position may be interpreted

hegemonic approaches. In other words, the

would likely involve future delivery beyond

as recognising the “grandfathered” rights of

regulators bank on the existing markets’

the spot market exemption of 28 days,

crypto-asset holders acquired before the ban.

relative immobility on the demand side,

they could also fall within the definition

It may hint of a contrary movement in private

due to home bias, familiarity with home

of commodity futures.

dispute resolution that could still support

institutions or indeed the compulsion to rely

that the CFTC can assert over tokens, if an

private ownership of cryptoassets.

on home institutions. In this manner, even if

expansive interpretation of “commodity”

—————————————————

the supply side is globally mobile, its threat

169

The jurisdiction

respect the SEC’s jurisdiction over tokens “if

[C]hina is developing a central bank digital currency (CBDC).

initial buyers are told that the developers or

—————————————————

promoters will bring them a return on their

It has nevertheless been noted that the

The self-regulatory approach refers

investments, or if the buyers are promised

ban does not affect China’s enthusiasm for

to regulators’ refrain from extending the

a share of future returns of the project.”171

developing the use of blockchain technology

regulatory perimeter, hence desisting from

Further clarity is needed over the delineation

in mainstream commercial activity.176 While

capturing cryptoassets within their realm.

between the two agencies’ jurisdictions.

the disintermediated economic ethos that

In this sense cryptoassets would be regarded

—————————————————

emanates from the bitcoin-blockchain may

as unregulated but outside the scope for

China

be resisted by the institutional ethos of

mandatory authorisation or oversight. This

—————————————————

ordered economic planning in China, the

would not necessarily achieve clarity for

China has banned cr ypto-asset

efficiencies of blockchain technology seem

cryptoassets but it can be queried as to

commercial activity ie purchasing, trading,

appealing. In particular, China is developing

what extent of “legal certainty” is needed.

intermediating crypto-asset investments,

a central bank digital currency (CBDC).

177

In the United States, Filecoin’s approach of

and payment and exchange services relating

One way to interpret these developments is

only targeting accredited investors under

to cryptoassets. The Chinese ban

has

that the Chinese authorities are outlawing the

Regulation D and therefore being exempt

been attributed to policy-makers’ concerns

privately supplied blockchain infrastructure,

from a public securities offer requirements

that crypto-asset investment and payment

i.e., private cryptocurrency, and putting

seems to have achieved success, therefore

systems would facilitate the transfer of

in place an official alternative.

The

carving out a scope of private offering that is

Chinese capital to overseas markets and

CBDC can become the native currency

self-regulatory within the certainty of known

evade capital controls put in place by the

of blockchain-based businesses so that the

regulatory exemptions.

government.173 This ban is also in line with

Chinese market is fenced in and leaks out to

It may be argued that self-regulation or

China’s crackdown on shadow banking in

private cryptocurrency-supported blockchain

the lack of provision of regulation for the

general, where financial activity has been

systems would be prevented.

cryptoassets regime can be attractive for the

is taken, is potentially comprehensive.

170

However, the CFTC’s advisory seems to

172

178

to exit is mitigated. —————————————————

The Self-regulatory Approach

shifting away from mainstream regulated

As the SEC’s and CFTC’s approaches

purposes of regulatory competition. Regimes

institutions that are perceived to be too

represent a hegemonic one where old

that are popular for the establishment of

restrictive or expensive.174 However, a recent

institutions are maintained and entrenched

digital asset exchanges and token offerings

Shenzhen arbitral tribunal was willing to

for their perceived institutional timelessness

all refrain from extending the regulatory

recognise property rights in cryptoassets so

and superiority, the Chinese approach is to

perimeter. For example, in 2018, Switzerland

that they can be enforced.

This creates

install new institutions that are officially

clarifies that payment and utility tokens are

confusion as to the legal position, as property

supervised and controlled to capture

not subject to securities law, and indirectly

rights “illegally” obtained in violation of

domestic markets. In both cases a sizeable

permits them to be offered as being outside

175

Currents 24.2 2021

of the regulatory perimeter, via the process of

regulatory sandbox provides a safe space for

more competitive: to introduce governance

seeking a “no-action” letter from FINMA.

testing innovations that may need financial

and standards in the name of transaction

regulatory authorisation.

cost efficiency, which can provide legal

179

Only offers of securities tokens are to be in compliance with securities regulation.

The 3-fold token classification

clarity, or to allow (and wait for) bottom-up

Singapore also clarifies that only securities

approach allows the UK, like Switzerland

solutions to evolve. The former can create

tokens are caught within its regulatory

and Singapore, to delineate the regulatory

dissonance with other regulatory and legal

perimeter,

although other tokens must

perimeter, achieving a form of refrain from

institutions186 and costly for regulators and

comply with existing commercial and

over-regulating cryptoassets. The chief benefit

regulatees. Further, it is uncertain if the

regulatory laws applicable to the business

is that such implicit permission may be a

standardised solutions are indeed optimal

model, such as anti-money laundering laws.

way attracting cryptofinance developments

for the blockchain-based community.187 It

Although no formal “exemption” regimes

while preventing them from being stifled

can also be argued that the existing private

are articulated in Switzerland or Singapore,

by regulation. The UK, Switzerland, and

law institutions in the UK and Singapore,

“implicit permission” can be derived from

Singapore are highly popular jurisdictions

based on common law concepts of contract

the authorities’ clear delineation of the

for conducting token issuances.

It can

and property, provide a favourable backbone

regulatory perimeter and its inapplicability.

be argued that this is tantamount to a “race

for dispute resolution if any in the blockchain

This seems to achieve a balance between the

to the bottom” although the jurisdictions

space. Commentators have argued that

desire to embrace innovation and prevent

appear to defend their existing securities,

property rights in cryptoassets188 and that

existing regulation from unduly stifling such

investments and payment services laws.

contractual doctrines should work within

innovation, and providing an appearance of

However, it may also be argued that the self-

the reasonable expectations of transactors189

the strength of existing regulation and law.

regulatory approach reflects the purported

Commentators on Swiss law have also

These approaches are based on not expanding

lack of governance needs by blockchain-

provided similarly assuring opinions.190

the existing regulatory perimeter, and have

based businesses, as these businesses crucially

—————————————————

also influenced the UK’s approach.

rely on peer-to-peer exchange and do not

180

183

The Financial Conduct Authority (FCA)

create business-consumer relationships.

in the UK consulted on the regulatory

The automated protocols on the blockchain

perimeter for cryptoassets,181 and has adopted

provide for the functional and self-governing

The UK, Switz erland, and Singapore are highly popular jurisdictions for conducting token issuances.

the token classification first adopted by the

needs of the system’s participants, and such

—————————————————

Swiss authority, ie utility, securities and

businesses may be argued to be not in need

The self-regulatory approach may not

182

payment tokens. The FCA now clarifies

of external institutions of governance anyway.

be a “race to the bottom” as it may indeed

that only tokens that confer investment and/

However, as experiences with self-

be a continuing experimental but engaged

or governance rights would fall within the

regulating cryptocurrency blockchains

endeavour to understand the needs of the

scope of securities tokens, and that payment

have shown, all permissionless blockchains

blockchain-based community in relation

and utility token offerings do not have to

encounter situations where incomplete

to legal and regulatory institutions, and

comply with securities regulation. They

contracting gaps that were not envisaged by

what structures if any may provide the

would have to comply with payment services

184

the smart contract code need to be filled,

certainty needed for those businesses. This

regulation and other commercial or business

or that collective goods or commons need to

approach may also arguably be superior

regulations such as anti-money laundering,

be protected.185 Would it be more optimal for

to the exempt private market approach in

advertising and data management laws that

regulators to provide such collective standards

the United States which confine ICOs to

across the board. The FCA is also keen to

and protect commons, or should this be left

accredited investors and the institutional

emphasise that it provides consultation

further for self-regulation? For regulators,

investment market, shutting out retail

opportunities for innovation and the

it is uncertain which approach would be

participation. As blockchain-based businesses

Currents 24.2 2021

are fundamentally peer-to-peer networks

—————————————————

code and terms and conditions of the

that provide opportunities for anyone to

Enabling Regimes

smart contracts used for executing token

join in the enterprising efforts, as well as

—————————————————

subscription. The disclosure statements

financialised prospects,191 the prevention

A number of jurisdictions have

are vetted by the authorised ICO portal

of retail participation in the name of retail

embarked on providing tailor-made regimes

over which the token offering must be

investor protection ironically leads to the

to legitimise and facilitate ICOs, and such a

conducted as well as by the Office of the

result of their marginalisation from an

policy move can be aimed at attracting ICOs

SEC. Issuers are to be registered corporate

innovative economic frontier. This may

to their jurisdictions in order to boost their

personalities in Thailand, and the SEC

be contrary to the ethos and intentions of

jurisdictions’ innovative financial regulatory

seems to reserve discretion in vetting if the

blockchain-based business developers, who

reputations and to attract inflows of capital

company’s management is of good repute,

may see the forced funnelling down of ICOs

and investment. We discuss a select few

has a “fundamentally sound business plan,”

into private markets as oppressive in nature.

below.

and is financially sound from audited

Further, the self-regulatory approach

An early proactive facilitative regime

financial statements. Offers of tokens may be

may be transitory in nature as regulators

that has already passed legislation is Thailand.

made to sophisticated, high net worth and

have to grapple with the demand side

Thailand offers an authorisation regime198 for

institutional investors, and retail investors

of the ICOs market consistent with the

token offerings whether they are designed

subject to an investment cap for minimising

“law and finance” literature

in relation

to function as crypto-currency (medium

their exposure.

to their preference for protective legal

of exchange), utility tokens (conferring

—————————————————

institutions. This balance of supply and

rights in respect of goods or services) or

demand side pressures can be reflected in the

securities tokens (conferring rights in

evolution of regulatory regimes for online

respect of participation in investment), as

crowdfunding, such as in the UK

and

well as a regime for authorising ICO portals

that ultimately permitted

(the platforms used for conducting token

new forms of platform intermediation for

offers), digital asset exchanges, brokers and

private loans or fund-raising balanced against

dealers. However, recognising that regulation

the mandatory registration of platforms

operates in a landscape where the unregulated

and investor protection regulations.

crypto-economy has already established its

Switzerland, Singapore and the UK already

own marketplaces and practices, a list of

have established reputations as jurisdictions

seven established cryptocurrencies are exempt

of significant financial sector activity and the

from the regime and authorised as permitted

self-regulatory approaches do not preclude

media of exchange for tokens.199 Further, a

A number of jurisdictions have embarked on providing tailor-made regimes to legitimise and facilitate ICOs, and such a policy move can be aimed at attracting ICOs to their jurisdictions in order to boost their jurisdictions’ innovative financial regulator y reputations and to attract inflows of capital and investment.

further refinement. These jurisdictions do not

token offering for already functional utility

—————————————————

benefit from the dominant market advantage

tokens for goods and services is exempt,

The Thai regime also regulates ICO

that the United States enjoys,

but they can

suggesting that this would be treated as

portals, digital asset exchanges, digital asset

provide sufficient contestation to maintain

general sales and not “investment” products.

brokers, and dealers that are incorporated in

competitive divergences196 that are responsive

The Thai authorisation regime seems

Thailand. They are subject to initial capital

to the market developments that are already

to be a pared down version of the securities

regulation, perhaps to prove that they are

responding to their self-regulatory regimes.

regulation model, requiring issuers to file

sufficiently capitalised and unlikely to engage

a registration statement and prospectus

in scams. These are imposed with regulatory

containing the key aspects of business plan,

obligations not unlike their functional

token type and rights conferred, the source

equivalents in the financial economy, such as

United States,

194

192

195

193

197

Currents 24.2 2021

the underwriter for a securities offer, markets

limiting investment to 5,000 euros per

upon wilfulness and gross negligence, rather

for financial instruments, and brokers and

retail investor. The Maltese act provides

high levels of proof for investors who may

dealers. These are relatively skeletal and

for some general principles for the conduct

allege inaccuracies, inconsistencies or untruth

general, such as being required to maintain

of issuers, such as the management of

in white paper statements. It may be argued

robust operational, secure systems and sound

conflicts of interest, conducting business

that as all blockchain-based businesses are

governance, being compliant with anti-

with integrity, due care, skill and diligence

in experimental phases, they cannot warrant

money laundering regulations and customer

and under proper control.

These mimic

perfectly the functionalities, performance or

protection. As the regulatory requirements

the standards of the EU Markets in Financial

desired outcomes of the business. However,

not extensive, Thailand offers a gateway for

Instruments Directive 2014 to an extent but

it can be queried why these cannot be clearly

legitimising the activities of the cryptoasset

are relatively open-ended and it is uncertain

caveated so that investors are clear on their

market. However, the fees levied upon

if any regulatory enforcement supports such

risks and a simple standard of negligence can

would-be applicants are not insignificant, as

duties. This is because the Maltese regime for

apply instead. We may not need to apply

token issuers face an application fee of over

investor protection lies chiefly in civil liability

strict liability as under the gold standard

USD $10,000 from January 2020 onwards

for a white paper which contains untrue,

of the EU Prospectus Regulation, but it is

and a filing fee which is a percentage of the

misleading, inconsistent and inaccurate

arguable that the Maltese standard in fact

intended token offer (about 0.05%). Digital

statements.203

erodes much of investor protection in favour

asset exchanges, brokers and dealers also

—————————————————

of issuers. Further, the Act’s rules on insider

202

regime for virtual assets under the Virtual

In sum, the two enabling regimes studied tend to suggest some semblance of a race to the bottom by either leaving standards openended or lowering them in comparison with those applicable to the conventional financial economy.

Financial Assets Act.201 Virtual assets cover

—————————————————

requirements for exchanges and their risk

the scope of digital tokens that are not

The Maltese Act also requires an issuer

governance and compliance capacity. 204

merely for consumption, payment or

to appoint a Virtual Financial agent that

Service providers would be licensed as

a financial instrument as falling within

would be responsible for the anti-money

VFA service providers and overseen by the

European legislation definitions. The Act

laundering compliance side of fund-raising,

new Maltese Digital Innovation Authority.

requires issuers of virtual assets to be a

in relation to the standards of due diligence

Services providers are defined in an open-

legal person in Malta, and a white paper

consistent with the European legislation on

ended manner in order to accommodate

with items of mandatory disclosure to be

anti-money laundering. On the whole the

the provision of various and new forms of

filed and published. A summary that is in

Maltese regime seems to offer a credible light

services, and there are not many specific

plain language and more narrative in nature

version of the EU’s ‘gold standards’ but on

regulations on their conduct, except in

should also be published for ease of use

closer look there are features that suggest a

relation to custodial functions. As custodial

by retail investors. This curiously mimics

limited level of investor protection in order to

functions face risks of theft and loss of

the European Prospectus Regulation, as of

attract issuers, and there are hazards in terms

customers’ assets, a regime similar to the EU

2017, regime but is relatively pared down.

of race to the bottom. For example, the civil

Markets in Financial Instruments Directive

Investor protection is further secured by

liability regime white papers are premised

duty205 to safeguard client moneys and assets

face license fees of USD $30-50,000 and annual fees based on a percentage of trading volumes. To date a cryptocurrency exchange and three digital asset brokers have been licensed in Thailand, seeming to indicate that the price for legitimation is not that deterring.

200

Malta offers a similar tailor-made

Currents 24.2 2021

dealing and market manipulation also seem to be in favour of issuers and markets rather than investors. The Act also provides a regime for regulating key intermediaries: it defines a blockchain-based digital asset exchange, and seeks to authorise secondary trading markets and related intermediaries involved in virtual financial assets, in relation to prudential

applies. Service providers having custodial

and aspects in such regimes that may not

Union prospectus rules,213 if in excess of one

functions need to respect clients’ ownership

cohere with blockchain-based businesses’

million euros over twelve months.

rights, perform duties of record keeping and

needs, as will be discussed.

The enabling regimes discussed above

reconciliation to clarify these rights and put

Israel212 is also en route to formalising a

attempt to attract issuers and service

in place adequate systems to protect these

regulatory regime for the crypto-asset market,

providers by incentivising incorporation in

rights.

This is not altogether clear in terms

poised to introduce a facilitative regime to

their respective states. It is uncertain if this

of the demands placed on service providers

harness the benefits of distributed ledger

coheres with the needs of the blockchain-

in relation to their cybersecurity systems as

technology. Israel intends to introduce a

based community. First, if the “issuer” to be

the regime does not articulate or prefer any

formal regime to legalise all types of crypto-

incorporated is the developer, the developer

particular industry standards.

asset offerings by mandatory disclosure,

may not wish to be formalised as a company

Service providers however do not need

but to by introducing introduce regulatory

and be subject to a state’s company law rules.

to comply with other EU “gold standards” in

requirements proportionately matching

This is because in some blockchain projects

relation to market surveillance, monitoring

the regulation for online crowdfunding.

such as Filecoin214 and Decentraland,215

and control.207 Indeed, the regime for anti-

Moreover, digital asset exchanges are to be

the developers envisage withdrawal from

market abuse in the Maltese Act suggests that

regulated as well, as a response to increasing

the project in due course as it becomes

the area is regulated. However, it is uncertain

concerns regarding the governance of such

mature, so that the blockchain can be left

whether investors can be assured of safe and

marketplaces in order to ensure customer

entirely into the hands of the community of

credible markets on crypto-exchanges. The

protection and security.

participants to operate and maintain. The

Act criminalises insider dealing and market

—————————————————

need to incorporate and maintain ongoing

206

applied

[B]lockchain systems are often regarded as peer-to-peer marketplaces and not legal persons such as corporations.

in the EU for insider dealing and market

—————————————————

is a potential lacuna in terms of regulatory

manipulation. Although the lower standard

The above regimes compete in offering

treatment of the blockchain-based system

is more attractive to service providers and

“legitimizing” opportunities for ICOs,

itself. Is the blockchain system itself to be

issuers, investor protection may be relatively

by attracting them to buy into the legal

incorporated so that token purchasers have

limited. Moreover, there is no provision

certainties provided in the tailor-made

continuing clarity of rights beyond the sale

allowing for civil recovery for investors in

regulatory regimes. Additionally, such

of tokens? However, blockchain systems are

such situations.

regimes provide regulatory legitimation

often regarded as peer-to-peer marketplaces

In sum, the two enabling regimes

for the host of supporting services for

and not legal persons such as corporations.

studied tend to suggest some semblance of a

ICOs, including digital asset exchanges

The corporation is a hierarchical legal person

race to the bottom by either leaving standards

and intermediaries. However, without a

and does not reflect relational realities in the

open-ended or lowering them in comparison

dominant captured market of investors,

peer-to-peer blockchain system. If there is

with those applicable to the conventional

these regimes may not be as attractive to

indeed a regulatory lacuna in relation to the

financial economy. As the trade-offs are

U.S. investors. Further, in the rest of the

treatment of the community of participants

made in investor protection, there may be

European Union, there is no harmonised

that comprises the blockchain system,

an implicit favouring of the supply side by

recognition for virtual assets legitimately

token-holders would not have clarity in

lowering their potential cost. It remains to be

offered in Malta in the rest of the European

relation to the governance of the system

seen if enabling regimes would lead a race to

Union, and other jurisdictions remain free to

and their respective rights. If incorporation

the bottom,

regard a Maltese offering as being in breach of

requirements attach to the blockchain

manipulation similar to the EU Market Abuse Regulation 2014208 but only if such acts are committed intentionally.

209

This significantly

lowers the strict liability standard

211

210

as there are many assumptions

compliance with company or securities rules may be disincentivising. Further, even though offerings are to be registered and trading is to be regulated, there

Currents 24.2 2021

system itself, then the fitting of blockchain

needed for growing the novel crypto-financial

policy.221

systems into a state’s company law rules is

space, and regulation can only be incremental

Hence, the Uniform Law Commission

likely to cause severe friction. In a peer-to-

and experimental at this stage. However,

has drafted a Uniform Act for Virtual

peer blockchain system, there is no readily

any motivation to race to the bottom on

Currencies Businesses, 222 providing a

ascertained management organ. Would

the part of these enabling regimes may be

registration regime for businesses that engage

miners and/or core developers be regarded

counterbalanced by the discovery of the

in virtual currency business. Virtual currency

as taking on that role and the enormous

terms that the crypto-economy needs.

business includes the control, exchange, and

responsibilities that normally attach to

—————————————————

storage of virtual currencies, defined as a

render it rather pointless that a bespoke

ICOs raise a unique challenge for financial regulators who are still grappling with their mixture of novel and familiar characteristics as regards concerning fund-raising.

fund-raising has been created but without

—————————————————

is defined as a “security” or “commodity”

the support of a fully considered regime for

In fact, the United States actually also

under the relevant federal legislation.

the business formation and governance of

offers a limited enabling regime for virtual

Virtual currency businesses handling a total

blockchain businesses.

currencies, and it can be said, in sum, that

volume of over $35,000 must be registered,

Further, the skeletal regimes regulating

there are a mixture of approaches coming

and those handling under $5,000 are

service providers, such as digital exchanges,

from the United States, where hegemonic

exempt. Businesses handling volumes under

in Thailand and Malta may not be sufficient

and pro-innovation approaches are being

$35,000 are subject to certain compliance

to protect investors and customers. This is

developed concurrently. This reflects inter-

obligations, and may opt to be registered,

because such legislation does not crucially

agency competition in the United States

and or at least a minimum, must file a notice

discuss wallet providers’ responsibilities, and

itself,

which can, on the one hand,

with the state authority and is subject to

many investors keep their crypto-currencies

be perceived to be useful for generating

certain compliance obligations. Registered

and assets in exchange providers’ wallets,

responsive regulatory solutions, but can also

businesses are subject to obligations in

which can be susceptible to cyber-hacking

lead to laxity amongst agencies that do not

relation to keeping prescribed records of

if they are “hot”, i.e., linked to the internet.

wish to suffer from first-mover disadvantage

transactions and the possibility of annual

Additionally, there is no provision for

in introducing regulation.

examinations by the authority. They are also

the business continuity and protection of

introduced its Bit-license scheme

in 2015

subject to custodial duties to protect the

investors in the event of exchange closure,

to allow businesses engaged in cryptocurrency

proprietary rights of those on whose behalf

suspension, or disruption of service. This

exchange, custody, and transmission, among

they hold virtual currencies on behalf of.

is a major problem as many digital asset

others, to apply for a specific license to

The Uniform Act potentially covers all forms

exchanges are start-ups that may fail for lack

carry out their activities. However, this

of tokens as the width of interpretation of

of competitiveness or appeal to investors

regime has been criticised and viewed to be

both “virtual currency” and “virtual currency

or become victims of cyber-hacking and

onerous for compliance, and, to date, only

business” could cover ICOs themselves.

operational risks. The skeletal regulatory

three large businesses have been licensed.220

However, the Act clarifies that it applies to

regimes provoke skepticism, as they seem to

States are, however, increasingly considering

tokens that are definitively not securities or

offer legitimation but with little real promise

having explicit regulation for cryptocurrency

commodities, in order to avoid overlapping

of substantive credibility or robustness. The

businesses, as the pressures of growing scale

with federal jurisdiction. The Act supports

argument exists that an enabling regime is

force choices to be made in regulatory

the legitimation of cryptocurrency, but this

management?

216

It remains unclear if token

holders are the equivalent of shareholders and whether the rights, duties, and liabilities established in company law jurisprudence should apply. This treatment would also

217

Currents 24.2 2021

218

New York 219

“digital representation of value” that mimics characteristics of money, i.e., capable of being a unit of account, medium of exchange, or store of value, but not actually actual legal tender. This definition excludes electronic money that is legal tender and that which

does not extend to the fund-raising and

of blockchain-based businesses that have

well, as the demand side’s understanding of

business development needs that blockchain

conducted successful ICOs are not structured

the nature of the blockchain-based business

businesses now raise. To date, a number of

in the conventional corporatized manner.

may be incorrectly framed by the need to fit

states have introduced bills to pass versions

A developer entity that kickstarts the

ICOs into a form of securities regulation.

of the Uniform Act, but nothing has been

project can be established as a corporation,

Although self-regulatory approaches do not

definitively legislated.

a Foundation (such as for ethereum), or

hold out any assumptions, regulators may be

The position of the Uniform Act is a

be unincorporated. As blockchain-based

doing too little to contribute to sense-making

curious one as it is an enabling regime within

projects are peer-to-peer networks by

in the market.228

federal regimes that are more hegemonic

nature, the network can become mature

—————————————————

and coercive in nature. Currently, it seems

with sufficient participants who carry out

that the federal approaches are becoming

operations and the protocols for maintenance

the dominant policy in relation to initial

(such as for verification and recording of

coin offerings, reflecting the preference for a

transactions). The developer entity may not

form of coherentism that is seen to cement

continue to exert a pronounced presence

hegemonic implementation and extension.

on the blockchain and may move onto

—————————————————

another project.225 For many developers,

Reflections

Re g u l a t o r s , e s p e c i a l l y in developed financial jurisdictions, perceive t h e d i l e m m a b e t we e n institutional protection and regulatory competition and indeed innovation.

the main reward for development would

—————————————————

be in the form of the initial coins raised

Regulators, especially in developed

T h e a b ov e d i s c u s s i o n r e f l e c t s

for development that also go towards

financial jurisdictions, perceive the

the underlying narrative of regulatory

paying for their time and efforts. They are,

dilemma between institutional protection

competition in many jurisdictions’ regulatory

dissimilar to platform companies such as

and regulatory competition and indeed

policy for ICOs. In theory, regulatory

eBay or Uber, not owners of the blockchain

innovation. This dilemma may be due to

competition in the Tieboutian- sense can

network as their proprietary asset and usually

the perception that institutional protection

bring about regulatory innovation and

not intent on maintaining an ongoing

and regulatory innovation pursuant to

responsiveness to provide regulatory goods

relationship of rent or value extraction on

competitive instincts would serve divergent

regarded by the relevant constituents as

the network.226 This is because developers

goals.229 However, that is to presume that

optimal. 224 However, such a theoretical

are working towards the self-maintenance

regulatory reform for cryptoassets would

paradigm assumes that it is clear what the

of blockchains in a distributed manner by

necessarily be captured by that market’s

terms of competition are clear, and that

consensus protocols, and not intent on

interest in maintaining low barriers to entry.

constituents have perfect information and

continuing with centralised management

Regulators need to discern the difference

mobility.

and governance. 227 As such, the fund-

between giving in to supply side demands

ICOs raise a unique challenge for

raising event may be regarded as a separate

and discerning what genuine differences they

financial regulators who are still grappling

phenomenon from the ongoing development

bring that challenge regulators’ assumptions.

with their mixture of novel and familiar

and maturation of the blockchain network

In this manner, the lens of regulatory

characteristics as regards concerning fund-

itself., and Further, such unique supply side

competition can be particularly useful for

raising. Hence, the “terms for competition”

characteristics are not taken into account

generating regulatory policy in due course

are up for challenge and yet to be determined.

in the hegemonic approach or the enabling

if regulators engage in that process for the

It may be presumptuous for both hegemonic

regimes that overwhelmingly assume that

purpose of discovering new needs on the

and enabling regimes to assume that

regulation attaches to the corporatized

supply and demand sides of the market.

they are addressing the equivalents of

developer entity on an ongoing basis. This

There is a lack of obviousness in relation to

corporate issuers. As discussed, a number

is also hazardous for the demand side as

supply side structures and needs, as well as

223

Currents 24.2 2021

who comprises the demand side constituents.

approaches for now are well-placed to

the blockchain. Despite this set-up being

This learning process should be open-

engage in such learning and discovery for

a blockchain, it is in fact to be centrally

minded and inclusive, and in this manner,

development of regulatory thinking, instead

managed by the Association, which extracts

engagement in an extent of competition may

of being content to justify their laissez-faire

rent from users on an ongoing basis. This is

allow us to discover what terms matter for

positions.

not fully distributed unlike in cryptocurrency

regulatory constituents, such as their appetite

C. Regulatory Coordination in Sight?

and other application blockchains such as

for regulatory or private legal frameworks,

230

It may be argued that the divergent

Filecoin as discussed. —————————————————

231

to what extent legal institutions matter,

and apparently competitive approaches

and how on the whole the crypto-economy

taken by financial regulators discussed above

can interface with the mainstream one.

can be resolved via a form of international

This does not mean that regulators would

coordination. There are signals of such

not ‘trade-off ’ certain regulatory goals

232

internationally concerted action in relation to

or establish regimes that promote choice

Libra,235 the proposed digital currency to be

The FSB’s interest may signal the advent of a c o o rd i n a t e d a p p ro a c h internationally vis a vis cryptofinance development.

or indeed arbitrage. What we argue is that

launched by the Libra Association of which

—————————————————

the processes of learning and discovery are

Facebook is a key founding member.236

As Facebook is potentially able to

per se important and can be teased out in

The Libra Association is based in

galvanise 2 billion users to participate in

competitive dynamics. This argument is

Geneva, Switzerland, and its founding

Libra, the potential scalability of Libra has

especially relevant as the assumptions made

members, led by Facebook, includes:

drawn regulators’ attention to it. Financial

in hegemonic jurisdictions for the crypto-

payment services company PayU, retailers

Stability Board Chair Randall Quarles and

asset market may eclipse such learning and

Farfetch and Uber, streaming service Spotify,

Bank of England Governor Mark Carney

discovery. We do not preclude the possibility

telecommunications companies Vodafone

have warned that the use of Libra could

that processes for discovery and learning

and Iliad, digital asset and cryptocurrency

generate systemic risk,238 a warning that

through competition could lead to ‘races’ in

exchanges such as Coinbase and Anchorage,

has not been aimed at the cryptofinance

certain directions

cryptocurrency payment service Xapo,

market so far.239 Indeed, the FSB240 has

blockchain developer Bison Trails and a

issued a consultation paper on monitoring

Regulatory competition, usually catered

number of venture capital funds and not-

the systemic risks of “BigTech” companies

for the supply side, based clearly on low cost

for-profit multilateral organisations such

in financial services, and this would not be

or low standards, has been criticised by Stark

as Women in Banking that aim to service

limited to Facebook. Zetzsche et al241 also

as being pursuant to the commoditisation

the unbanked. The Association’s plan is to

shed light on the regulatory implications

of law that is neither supported by political

develop a global payments blockchain that

for Libra, ranging from payment service

representation nor social values in the

facilitates payment in a private stablecoin.

registration and compliance to anti-money

community in which the law is produced.234

The stablecoin will be issued in return

laundering compliance, including due

However where familiar assumptions are

for fiat currency that is held in a reserve

diligence for all its users. The management

disrupted by novel business structures

backed by low-risk assets such as deposits

of the Libra reserve could also attract

and stakeholders, this should present an

and government securities in order to

characterisation as a collective investment

opportunity for regulators to take a broad

ensure each Libra coin is fully backed and

scheme or a money market fund, which are

view of who the supply side comprises and

stable in value.237 The reserve is managed

extensively regulated in the EU and many

what needs there are, as well as who the

by asset managers and custodians, subject

other developed financial jurisdictions. These

demand side comprises and whether old

to the Association’s oversight. Transactions

regimes attract microprudential as well as

assumptions such as ‘law and finance’ matter.

in Libra are validated by the founding

governance and internal control regulation,

Indeed, jurisdictions taking self-regulatory

members who are the validator nodes on

which the Association does not seem to be

233

, but we do not think this

is an only or foregone conclusion.

Currents 24.2 2021

grappling with yet.

similar projects by BigTech firms is not

necessarily reflective of a wider trend for

The FSB’s interest may signal the advent

likely to be the same as for the cryptoasset

the cryptoasset industry. This is because

of a coordinated approach internationally vis

industry, as the former raise fewer novel

regulators can apply existing and familiar

a vis cryptofinance development. However,

issues for regulatory extension than the

financial regulation paradigms more easily

we argue that this is likely limited to Libra and

latter. The opportunity that Libra provides

to the Libra Association, mainly its leading

similar projects led by “BigTech” firms. Such

in kickstarting regulatory discussions at the

founding member Facebook. The cryptoasset

firms, unlike cryptoasset developers, are likely

international level can pave the way for more

market is still likely to give rise to diversity

to adopt a platform model for their business,

consideration of coordination. This could

and should facilitate the discovery of new

allowing them to gather network effects and

happen if cryptoassets are written in Libra

bases for regulatory thinking and policy,

to centrally manage and extract rent on a

and extend the scale of both mainstream

uncoordinated or otherwise.

continuing basis. These corporatized entities

and blockchain-based business adoption of

that are commercial in nature are familiar

the private currency. Until then, cryptoasset

subjects to which regulators can easily attach

developers can choose from ethereum, Tezos,

regulatory obligations, whether in terms of

EON, Tron infrastructures and others,

registration as payment services provider,

operating in a diverse market which may yet

collective investment fund, derivatives

to give rise to signs of systemic importance.

trader, or continuing compliance. In other

D. Conclusion

words, the familiar institutions of financial regulatory capitalism

The ICOs market has challenged

can apply to BigTech

financial regulators in terms of determining

firms in relation to their equivalent financial

a fit with existing regimes and consideration

functions in the relevant sector. Indeed,

for regulatory reform. Regulatory divergences

BigTech firms are likely to attract systemic

have emerged in a number of jurisdictions

risk monitoring by regulators

as many of

and we discuss three dominant approaches

them have vast social footprint. Zetzsche et al

in relation to hegemonic, self-regulatory

argue that it may not be altogether clear that

and enabling regimes. These reflect different

international standards would be introduced,

assumptions and regulators’ understandings

but regulators dealing with BigTech firms

of the cryptoasset industry. To which we

with vast social capital and resources may

argue that the “terms for competition” in

be incentivised to cooperate in multilateral

relation to supply and demand side needs

forms of action, such as leveraging upon

are still being discovered and are incomplete.

established supervisory college structures244

This provides a unique opportunity for

for supervising “too-big-to fail” financial

regulators to jettison familiar assumptions

institutions. Further, regulators may also

in relation to corporatized securities issuers

be able to harness supervisory economies of

or institutional investors in order to discover

scale between themselves by giving equivalent

what governance needs are truly at stake.246

or mutual recognition to other regulatory

This may pose challenges for coherence

regimes. Within the EU, such coordination

with existing regulation, but coherence itself

may also be led by policy levels at the

should not be an obstacle for learning and

European Commission or the European

potentially reforming. We also argue that

System for Financial Supervision.

signs of international regulatory coordination

242

243

245

The regulatory trajectory for Libra and

in relation to the Libra project are not 21

Currents 24.2 2021

End Notes 1. 2. 3.

See infra Section A, subsection ii. See infra Section A, subsection ii. See generally Satoshi Nakamoto, Bitcoin: A Peer to Peer Electronic Cash System (2008), available at https://bitcoin.org/ bitcoin.pdf. 4. John Flood & Lachlan Robb, Tr u s t , An a rc h o - Ca p i t a l i s m , Blockchain and Initial Coin Offerings 1, 5 (2017), http://ssrn. com/abstract=3074263. 5. Nakamoto, supra note 3. 6. Revealing Reality, How and Why Consumers Buy Cryptoassets: A Report for the FCA 1, 7 (2019), h t t p s : / / w w w. f c a . o r g . u k / publication/research/how-andwhy-consumers-buy-cryptoassets. pdf. 7. E.g., Robin Wigglesworth, Fidelity Rolls Out Cryptocurrency Custody Business, Fin. Times (Oct 18, 2019); see PwC & Elwood, 2019 Crypto Hedge Fund Report, PwC 1, 10 (2019), https://www.pwc.com/ gx/en/financial-services/fintech/ assets/pwc-elwood-2019-annualcrypto-hedge-fund-report.pdf (discussing the rise of specialist hedge funds that invest only in cryptoassets); see also Lin Lin & Dominika Nestacorva, Venture Capital in the Rise of Crypto Economy: Problems and Prospects 1,6 (Nat’l Univ. of Sing. Law, Working Paper No. 2019/003, 2019), http://law. nus.edu.sg/wps/pdfs/003_2019_ LinLinDominika.pdf (discussing the rise of venture capital and private equity funds investing in cryptoassets besides looking to finance developments directly). 8. Coinmarketcap statistics shows the market capitalisation of many cryptoassets to be at least in the tens of millions in United States dollars, with the Tether token being the most highly capitalised at over $46 billion in United States dollars. See Top 100 Tokens by Market Capitalization, CoinMarketCap (last visited Feb. 22, 2020), https://coinmarketcap. com/tokens/. 9. Apolline Blandin et al., Global Cryptoasset Regulatory Landscape St u d y 1 , 3 1 - 3 2 ( Un i v. o f Cambridge, Paper No. 23/2019, 2019), https://www.jbs.cam.ac.uk/ fileadmin/user_upload/research/ centres/alternative-finance/ downloads/2019-04-ccaf-globalcryptoasset-regulatory-landscapestudy.pdf [https://perma.cc/ QET8-LCTY]; see infra Section B.

10. Claudio Radaelli, The Puzzle of Regulatory Competition, 24 J. Pub. Pol’y 1, 10 (2004). 11. Institutional, political and social needs may underlie regulatory and legal choices. See J Samuel Barkin, Racing All Over the Place: A Dispersion Model of International Regulatory Competition, 21 Eur. J. Int’l Rel. 171, 181 (2015). Regulatory differences, however, create arbitrage opportunities, and regulatory policy may further respond to such opportunities. See Pierre Schammo, EU Prospectus Law: New Perspectives on Regulatory Competition in Securities Markets (Cambridge Univ. Press 2011); see also Amit M. Sachdeva, Regulatory Competition in European Company Law, 30 Eur. J. L. & Econ. 137, 138 (2010). 12. See generally Alissa Amico, A Regulatory Race to the Bottom?, Project Syndicate (Aug. 14, 2017), https://www.projectsyndicate.org/commentary/saudiaramco-london-stock-exchangeby-alissa-amico-2017-08; Douglas Cumming and Sofia Johan, Demand-driven Securities R e g u l a t i o n : Ev i d e n c e f r o m Crowdfunding, 15 Venture Capital 361 (2013); But there are two sides to any market that may pressure regulators in different ways. See Andreas Haufler and Ulf Maier, Regulatory Competition in Capital Standards: A ‘Race to the Top’ Result, 106 J. Banking & Fin. 180 (2019). 13. Dale D. Murphy, The Structure of Regulatory Competition: Corporations and Public Policies in a Global Economy 4 (Oxford Univ. Press 2004). 14. Amico, supra note 12; Colin Pr o v o s t , C o m p e t i t i o n a n d Coordination in Bank Regulation: The Financial Crisis of 2007–09, 39 Int’l J. Pub. Pol’y Admin. 540, 543-545 (2016) (discussing regulatory policy responsiveness to incentives such as regulatees’ preferences and public choice). 15. Johanna Stark, Law for Sale: A Philosophical Critique of Regulatory Competition (Oxford Univ. Press 1st ed. 2019). 16. Barkin, supra note 11, at 175. 17. There are two sides to the debate on law as a product. Compare Horst Eidenmuller, The Transnational Law Market, Regulatory Competition, and Transnational Corporations, 18 Ind. J. Global

18.

19.

20.

21.

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23. 24. 25. 26.

27.

28.

29.

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Legal Stud. 707, 707–08 (2011); with Stark, supra note 15, at 5. See Murphy, supra note 13; Florian Buck and Eva Schliephake, The Regulator’s Trade-Off: Bank Supervision Vs. Minimum Capital, 37 J. Banking & Fin. 4584 (2013). R o b e rt Ba l d w i n e t a l . , Understanding Regulation: Theory, Strategy, and Practice 356–69 (2011). Barbara Sennholz-Weinhardt, Regulatory Competition as a Social Fact: Constructing and Contesting the Threat of Hedge Fund Managers’ Relocation from Britain, 21 Rev. Int’l Pol. Econ. 1240 (2014). Charles M. Tiebout, A Pure Theory of Local Expenditures, 64 J. Pol. Econ. 416 (1956) (offering the starting point for regulatory competition discussions though its fit with global conditions is usually questionable). See, e.g., Buck & Schliephake, supra note 18, at 4585; Joel F Houston et al., Regulatory Arbitrage and International Bank Flows, 67 J. Fin. 1845, 1892 (2012). See Murphy, supra note 13, at 211–54. See infra Section B. See Financial Stability Board, http://www.fsb.org (last visited Mar. 1, 2020). Financial Stability Board [FTB], Crypto-assets: Work Underway, Regulatory Approaches and Potential Gaps, (May 31, 2019), https:// www.fsb.org/wp-content/uploads/ P310519.pdf. IOSCO has not attempted to issue a clarification on cryptoassets’ characterization but instead lists the divergent approaches of jurisdictions on its website. See Regulators’ Statements on Initial Coin Offerings, Int’l Org. Sec. Commissions, https://www.iosco. org/publications/?subsection=icostatements (last visited Mar. 1, 2020). See Baldwin et al., supra note 19, at 364–65; Stavros Gadinis, The Politics of Competition in International Financial Regulation, 49 Harv. Int’l L. J. 447, 503 (2008). That cryptoassets do not pose international financial stability risks was opined by Mark Carney, in a letter as Chair of the Financial Stability Board to the G20 Finance ministers and central bankers. Letter from Mark Carney, former Chair, Fin. Stability Bd., to G20 Fin. Ministers & Cent. Bank

Governors (Mar. 13, 2018), http:// www.fsb.org/wp-content/uploads/ P180318.pdf. 30. See Nicholas Megaw, BIS Warns on Facebook Risk to Finance After Libra Plan Unveiled, Fin. Times (June 23, 2019), https://www. ft.com/content/db37a29e-95a811e9-8cfb-30c211dcd229. 31. Libra, https://www.libra.org (last visited Feb. 27, 2020). 32. See infra Section C. 33. See, e.g., Pierre Schammo, EU Prospectus Law: New Perspectives on Regulatory Competition in Securities Markets 288–309 (2011); Amit M. Sachdeva, Regulatory Competition in European Company Law, 30 Eur. J. L. & Econ. 137, 161 (2010). 34. See generally Daniel Schwarcz, Regulating Insurance Sales or Selling Insurance Regulation: Against Regulatory Competition in Insurance, 94 Minn. L. Rev. 1707, 1731–33 (2010) (discussing the extent to which the hazards of regulatory competition should be mitigated). 35. Securities Act of 1933, ch. 38, 48 Stat. 74 (codified as amended at 15 U.S.C. §§ 77a–77aa (2012); Securities Exchange Act of 1934, Pub. L. No. 73-291, 48 Stat. 881 (codified as amended at 15 U.S.C. §§ 78a–78kk (2012). 36. Investment Advisers Act of 1940, ch. 686, 54 Stat. 847 (codified as amended at 15 U.S.C. §§ 80b1–20). 37. The First Banking Directive 1977 moves towards liberalization of the EU banking market and harmonizing rules for regulation like the 1980s Solvency and Own Funds Directives 1999 and the Second Banking Directive 1989; and in securities regulation, the Admission Directive 1979 and Listing Particulars Directive 1980 were early efforts to introduce mutual recognition of listed issuers and to harmonize certain rules for listing particulars and mandatory disclosure to investors. 38. Commission Communication, Financial Services: Implementing the Framework for Financial Markets: Action Plan, COM (1999) 232 final (May 11, 1999). 39. Ja c q u e s d e L a r o s i è re , T h e High-Level Group on Financial Supervision in the EU (Feb. 25, 2009), http://ec.europa.eu/ internal_market/finances/docs/ de_larosiere_report_en.pdf.

40. See Iris H-Y Chiu & Joanna Wilson, Banking Law and Regulation, Chapter 6 (Oxford: Oxford University Press 2019) (finding the UK in particular had a long history of self-regulation in banking and investment services until the first formal Banking Act of 1979 and a semi-formal Securities Investments Board, Financial Services Act 1986, that oversaw self-regulatory trade associations and did not have direct relationships with who they regulate); see also Julia Black, Rules and Regulators (Oxford: Clarendon Press, 1997), at chs 2 and 3. 41. See Commission Regulation 1286/2014, 2014 O.J. (L 352) 1, 6 (detailing that the recognized ‘packages’ or mixtures of elements of established financial products include banking, insurance and fund investment products). 42. Foley v. Hill [1848] 2 H.L.C. 28. 43. Clay Helton, Credence Good, Investopedia (Feb. 24, 2020), https://www.investopedia.com/ terms/c/credence-good.asp (“A credence good is a type of good with qualities that cannot be observed by the consumer after purchase, making it difficult to assess its utility.”). 44. Foley, supra note 42. 45. Sierra Leone Telecommunications Co. Ltd v. Barclays Bank Plc [1998], 2 All ER 821 (Q.B. 1998). 46. S e e L e n d i n g S t a n d a r d s Board, Standards of Lending Practice: Personal Customers ( Ju l y 2 0 1 6 ) , h t t p s : / / w w w. lendingstandardsboard.org.uk/ wp-content/uploads/2016/07/ Standards-of-Lending-PracticeJuly-16.pdf (requiring regulatory duties and banking standards with regards to overdrafts); Financial Conduct Authority (FCA), Consumer Credit Sourcebook (CONC), https://www.handbook. fca.org.uk/handbook/CONC. pdf; see also Chiu & Wilson, supra note 40, at 134-135 (detailing the treatment of consumers in terms of protection and loan management under the Consumer Credit Act 1974). 47. The Basel I (1988), II (2003) and III (2009-2017) Accords transposed into law in the EU under the Capital Requirements Directive and Regulation 2013 for example. See Iris H-Y Chiu, Rethinking the Law and Economics of Post-Crisis Micro-prudential Regulation- The Need to Invert the Relationship of Law to Economics? 38 Rev. Banking & Fin. L. (forthcoming 2020). 48. R.A. Hasson, The Doctrine of

49.

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Uberrima Fides in Insurance Law—A Critical Evaluation, 32 Mod. L. Rev. 615, 616–17 (1969) (discussing the duty of uberrima fides dealing with insurance products). Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) 2009 O.J. (L 335) 1, 3. See Global Bancassurance Market Trends, Share, Size, Growth, Opportunity and Forecasts, 20112018 & 2019-2024, Intrado (Apr. 19, 2019), https://www. globenewswire.com/newsrelease/2019/04/19/1806973/0/ en/Global-BancassuranceMa r k e t - Tre n d s - Sh a re - Si z e Gr o w t h - O p p o r t u n i t y - a n d Forecasts-2011-2018-2019-2024. html. See, e.g., Commission Regulation 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/ EC, 2017 O.J. (L 168) 12 (EU) (explaining why the mandatory disclosure regulation at the point of sale is known as a prospectus prior to the making of a public offer of securities); Alan C. Page & R.B. Ferguson, Investor Protection, 59–77 (Cambridge: Cambridge University Press 1992); see generally John C. Coffee Jr., Market Failure and the Economic Case for a Mandatory Disclosure System, 70 Virginia L. Rev. 717 (1984). Mandatory continuous disclosure regimes assist ongoing investment decisions on the secondary market by allowing investors to constantly evaluate buying and selling decisions, based on the efficient capital markets hypothesis. This hypothesis states that information will feed into price and price will be informationally efficient for investors on the markets. See Jeffrey N. Gordon & Lewis A. Kornhauser, Efficient Markets, Costly Information and Securities Research, 60 N.Y.U. L. Rev. 761, 771-72 (1985); see also Merritt B. Fox, Rethinking Disclosure Liability in the Modern Era, 75 Wash. U. L. Q. 903, 905 (1997). In the US, the Securities Exchange Act 1934 governs secondary market disclosure and regulations made thereunder such as Regulation Fair Disclosure. See Commission

Delegated Regulation 2015/761 of the European Parliament and of the Council of 17 Dec. 2014 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to certain regulatory technical standards on major holdings, 2015 O.J. (L 120) 2 (EU). 53. Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on Market Abuse (Market Abuse Regulation) in Repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/ EC, 2003/125/EC and 2004/72/ EC, 2014 O.J. (L 173/1) 34, 36 (explaining the EU Market Abuse Regulation 2014 makes it mandatory for issuers to disclose to securities markets whenever a material information is known). See Case C-19/11 Markus Geltl v. Daimler AG, CELEX LEXIS 62011CJ0019. 54. A prospectus is required for retail collective investment schemes such as UCITs (Art. 68-74) and NURs (Non-UCITs Regulated Schemes) (FCA Handbook COLL 4 applying all pre and postsale disclosure requirements to UCITS and NURS equally, absorbing the UCITS regulatory standards for NURS). See Directive 2009/65/ EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulation and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), O.J. (L 302/32) 69-70; A key investor information requirement that provides an accessible summary is also part of mandatory disclosure. See Commission Regulation (EU) No 583/2010 of 1 July 2010 implementing Directive 2009/65/EC of the European Parliament and of the Council as regards key investor information and conditions to be met when providing key investor information or the prospectus in a durable medium other than paper or by means of a website, O.J. (L 176/1) 5-6; Continuing disclosure is also mandated, see Art. 69(3) and Art. 68, UCITs Directive 2009 and FCA Handbook COLL 4.5 for NURs. 55. These duties deal with valuation and redemption (Art 85, UCITs Di re c t i ve , F C A Han d b o o k COLL 6.3, 6.6A), governance (FCA Handbook COLL 6.1012), portfolio management (for

56.

57.

58. 59. 60.

61.

62.

63.

UCITs, duties under Commission Directive 2010 Arts 21-26), and increasingly investment management best practices such as value for money (FCA Handbook COLL 4.5.7, 6.6.20-22; 8.3.5A, 8.5.16-19), securities lending policies (FCA Handbook COLL 8.8A, 8B) and “stewardship”. See Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement, O.J. (L 132/1) 12; FCA Handbook COBS 2.2B provides an implementation framework and FRC Stewardship Code 2020 provides a framework for asset owners and managers. See William F. Bassett, Michael J. Fleming & Anthony P. Rodrigues, How Workers Use 401(k) Plans: The Participation, Contribution, and Withdrawal Decisions, 51 Nat’l Tax J. 263 (1998). S3, Pensions Act 2008, c. 30, s. 3 (Eng.) (This explains on automatic enrolment of employees into occupational pension schemes. Employers can enrol employees into NEST, the government established defined contribution scheme that outsources investment management to the private sector). See Banking Act 1979 c. 37 (Eng.); see also Banking Act 1987 c. 22 (Eng.). Ranald C. Michie, The London Stock Exchange: A History (Oxford: OUP 1999). There was self-regulation until 1986. See Financial Services Act 1986, c. 60 (Eng.) (providing a semi-self regulatory system until the passage of the Financial Services and Markets Act in 2000 along with significant regulatory reforms). Arthur E. Wilmarth Jr., The Transformation of the Financial Services Industry: 1975-2000, Competition, Consolidation and Increased Risks, 2002 U. Ill. L. Rev.215 (2002); Jerry W. Markham, Banking Regulation: Its History and Future, 4 N.C. Banking Inst. 221(2000). Richard E. Mendales, Collateralized Explosive Devices: Why Securities Regulation Failed to Prevent the CDO Meltdown, and How to Fix it, 2009 U. Ill. L. Rev.1359 (2009). Eilis Ferran, Examining the United Kingdom’s Experience in Adopting a Single Financial Regulator Model, 28 Brook. J. Int’l L.257 (2003); Clive Briault, Revisiting the Rationale for a Single Financial Services Regulator, FSA Occasional Paper (2002), http://www.fsa.gov.

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uk/pubs/occpapers/op16.pdf. 64. Financial Services and Markets Act 2000, c.8. s19 (Eng.). 65. Joanna Gray and Jenny Hamilton, Implementing Financial Regulation: Theory and Practice (Chicester: John Wiley & Sons 2006) at 45. 66. Giorgio Di Giorgio & Carmine Di Noia, Financial Market Regulation And Supervision: How Many Peaks For The Euro Area?, 28 Brook. J. Int’l L. 463, 481 (2003). 67. Financial Services Act 2012, c. 21 (Eng.) (amending the Financial Services and Markets Act 2000, c. 8, to set up the Prudential Regulation and Financial Conduct Authorities). 68. See Financial Services Authority, Th e Tu r n e r R e v i e w : A R e g u l ato ry R e s p o n s e to the Global Banking Crisis (2009) http://www.actuaries. org/CTTEES_TFRISKCRISIS/ Documents/turner_review.pdf (criticising the single regulator). 69. Dodd-Frank Wall Street Reform and Consumer Protection Act, 12 U.S.C 5412 § 312 (2018). 70. Iris H-Y Chiu, Transcending Regulatory Fragmentation and the Construction of an EconomySociety Discourse: Implications for Regulatory Policy Derived from a Functional Approach to Understanding Shadow Banking, 42 J. Corp. L. 327, 335 (2016). 71. Reserve Primary Money Fund Falls Below $1 a Share Amid Lehman Fall, Reuters, (Sept. 16, 2008), https://uk.reuters. com/article/us-reservefund-buck/ reserve-primary-fund-dropsbelow-1-a-share-amid-lehmanfall-idUKN1669401520080916. 72. The key reform is the adoption of a floating net asset value which makes MMFs more like investment funds. SEC, Money Market Fund Reform Rules; Amendments to Form PF, SEC Release Nos. 339616, 2014 WL 12563340 (July 23, 2014) 73. The EU Money Market Funds Regulation 2017 provide for categories of money market funds, in order to mandate publishing of changing net asset value prices as well as prescriptive actions and duties for funds that intend to maintain a constant net asset value. Hence this approach is different from the US as it continues to support funds that are closer to investment funds and those closer to deposits separately. Regulation (EU) 2017/1131 of the European Parliament and of the Council of 14 June 2017 on Money Market Funds, 2017 O.J. (L 169) 8. 74. See David J. Abner, The ETF

75.

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Handbook: How to Value and Trade Exchange-Traded Funds (John Wiley & Sons, 2d ed. 2010); see also Gary L Gastineau, Mutual Funds Versus ExchangeTra d e d Fu n d s , i n M u t ua l Funds: Portfolio Structures, Analysis, Management, and Stewardship (John D. Haslem ed., 2010). See Henry T. C. Hu & John D. Morley, The SEC and Regulation of Exchange-Traded Funds: A Commendable Start and a Welcome Invitation, 92S. Cal. L. Rev. 1155, 1184-85 (2019). Howell E. Jackson, Regulation in a Multisectored Financial Services Industry: An Exploratory Essay, 77 Wash. U. L. Rev. 319(1999). See Regulation (EU) 1093/2010 of the European Parliament and of the Council of 24 November 2010 Establishing a European Supervisory Authority (European Banking Authority), Amending Decision No 716/2009/EC and Repealing Commission Decision 2009/78/EC, 2010 O.J. (L 331) 12. See Regulation (EU) 1095/2010, of the European Parliament and of the Council of 24 November 2010 Establishing a European Supervisory Authority (European Securities and Markets Authority), Amending Decision No 716/2009/ EC and Repealing Commission Decision 2009/77/EC, 2010 O.J. (L 331) 84. See Regulation (EU) 1094/2010, of the European Parliament and of the Council of 24 November 2010 Establishing a European Supervisory Authority (European Insurance and Occupational Pensions Authority), Amending Decision No 716/2009/EC and Repealing Commission Decision 2009/79/EC, 2010 O.J. (L 331) 48. The Joint committee focuses on cross-sectoral issues such as consumer protection, financial crime, etc. See Report from the Commission to the European Parliament and the Council on the Operation of the European Supervisory Authorities (ESAs) and the European System of Financial supervisions (ESFS), COM (2014) 509 final (Aug. 8, 2014)). For example, the joint publication between the FCA, the Bank of England, and HM Treasury. Crypotassets Taskforce: Final Report (2018), available at https://www. gov.uk/government/publications/ cryptoassets-taskforce. See Nakamoto, supra note 3. See Financial Services Authority,

supra note 68. See also Howard Davies, The financial crisis: who is to blame? (Polity, 2010). 84. Dan Bousfield, Cr ypto-coin Hierarchies: Social Contestation in Blockchain Networks, 19 Global Networks, 291, 292 (2019); M oritz H ütten and Matthias Thiemann, Moneys at the M argins : F rom P olitical E x p e r i m e n t t o C ash l e ss S ocieties , M alcolm C ampbell Verduyn—Bitcoin and Beyond: Cryptocurrencies, Blockchains, and Global Governance, at ch. 2 (2018) 85. Liquid, How Many Cryptocurrencies Are There? Liquid Blog, (Nov. 8, 2019), https://blog.liquid.com/ how-many-cryptocurrencies-arethere. 86. Jean Bacon, Johan David Michels, Christopher Millard & Jatinder Singh, Blockchain Demystified: A Technical and Legal Introduction to Distributed and Centralised Ledgers, 25 Rich. J.L. & Tech. 1 (2018) (explaining that about 200kw of energy is consumed to validate each transaction on the bitcoin blockchain). 87. Billy Bambrough, PayPal and Visa Warned Bitcoin Presents a Ludicrous Existential Challenge, F o r b e s , ( M a r. 4 , 2 0 1 9 ) , https://www.forbes.com/sites/ billybambrough/2019/03/04/ paypal-and-visa-warned-bitcoinpresents-a-ludicrous-existentialchallenge/. 88. See Maxwell William, ERC-20 Tokens Explained, Cointelegraph (May 12, 2018), https:// cointelegraph.com/explained/erc20-tokens-explained. 89. See Jonathan Rohr & Aaron Wright, Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets, 70 Hastings L.J.463, 472-73 (2019) (explaining the difference between protocol and application tokens). 90. See CryptoKitties, https://www. cryptokitties.co/ (last visited Apr. 13, 2020). 91. See Tezos, https://tezos.com (last visited Apr. 13, 2020). 92. See Eon, https://eontechnology. org (last visited Apr. 13, 2020). 93. See Tron, https://tron.network (last visited Apr. 13, 2020). 94. Lawrence J. Trautman, Bitcoin, Virtual Currencies, and the Struggle of Law and Regulation to Keep Peace, 102 Marq. L. Rev. 447 (2018); Dragan Zelic & Nenad Baros, Cryptocurrency: General Challenges of Legal Regulation and the Swiss Model of Regulation, 33rd International Scientific 24

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Conference on Economic and Social Development “Managerial Issues in Modern Business”, Warsaw, Poland, Sept. 26-27, 2018, pp. 168-176. Sandra Díaz-Santiago, Lil María Rodríguez-Henríquez &Debrup Chakraborty, A Cryptographic Study of Tokenization Systems, 15 International Int’l J. of Info. Sec., 413 (2016) (arguing that multifunctional tokens are efficient). 95. Iris H-Y Chiu, Regulating the Crypto-economy (2022) (forthcoming at chapter 2). 96. Chris Berg, Sinclair Davidson and Jason Potts, 5 Understanding the Blockchain Economy, Money, Dequit y and the Barter Economy of the Future, 1536 (2019); Antony Welfare, Commercializing blockchain: strategic applications in the real world (2019) (explored in chapter 2 in greater detail). 97. Philipp Hacker & Chris Thomale, Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law, 15 Eur. Co. & Fin. L. Rev., 645 (2018); Dirk A. Zetzsche et al., The ICO Gold Rush: It’s a Scam, It’s a Bubble, It’s a Super Challenge for Regulators, 60 Harv. Int’l L. J. 267 (2019). http://ssrn.com/abstract=3072298 [hereinafter Zetzsche et al]. 98. Id. 99. See Carol Goforth, Securities Treatment of Tokenized Offerings under U.S. Law, 46(3) Pepperdine L. Rev. 405, 417-418 (2019). 100. See Zetzsche et al, supra note 97. 101. See SEC, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (25 July 2017), https://www.sec.gov/litigation/ investreport/34-81207.pdf. 102. G e o r g i o s P a p a d o p o u l o s , H a n d b o o k o f D i g i ta l Currency: Bitcoin, Innovation, Financial Instruments, and Big Data 553 (2015). 103. Goforth, supra note 99, at 413415. 104. Tokens can be listed on exchanges such as Poloniex and Bittrex. See coinist.io, https://www.coinist. io/how-to-get-your-digital-tokenlisted-on-an-exchange/ (last visited Mar. 13, 2020) 105. S e e W h a t a r e c r y p t o a s s e t s (cryptocurrencies)?, BankofEngland.co.uk, https:// w w w. b a n k o f e n g l a n d . c o. u k / knowledgebank/what-arecryptocurrencies (last visited Mar. 4, 2020). 106. Laura Shin, Here’s the Man who Created ICOs and This is the New

Token He’s Backing, (Sep. 21, 2017, 12:06 PM) available at https://www.forbes.com/sites/ laurashin/2017/09/21/herest h e - m a n - w h o - c re a t e d - i c o s and-this-is-the-new-token-hesbacking/#91aebbf11839. 107. See Omnilayer.org, https://www. omnilayer.org (last visited Mar. 4, 2020). 108. See generally Usha Rodrigues, Semi-Public Offerings? Pushing the Boundaries of Securities Law, (2018) available at https://ssrn. com/abstract=3242205. 109. European Central Bank, Cryptoassets Task Force, Crypto-Assets: Implications for Financial Stability, Monetary Policy, and Payments and Market Infrastructures (May 2019). 110. See Council Directive 2015/2366, Payment Services in the Internal Market, Amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) No 1093/2010, and Repealing Directive 2007/64/EC, 2015 O.J. (L 337) 35 [hereinafter Directive 2015/2366]. 111. Iris H-Y Chiu, A New Era in Fintech Payment Innovations? A Perspective from the Institutions and Regulation of Payment Systems 9 L., Innovation & Tech 190 (2017). 112. See Moneydashboard.com, https://www.moneydashboard. com (last visited Mar. 4, 2020). 113. Directive 2015/2366, supra note 110, at 46. 114. The Payment Services Regulations 2017 (SI 2017/752) 42-48 (implementing the relevant provisions of the Payment Services Directive of 2015). 115. Id. at 55-58 (Consumers are obliged to notify the provider in the event of unauthorised use of payment instruments, but in the absence of fraud or gross negligence, would only be responsible for up to £35, meaning that such a risk allocation would hold in the event of the consumer’s simple negligence, Regs 74-80). 116. Consumer Credit Act 1974, c. 39, § 75 (Eng.) (establishing liability for creditors in the event of the supplier’s breach for transactions exceeding £100 but below £30,000). 117. U.C.C. § 4A (Am. Law Inst. & Unif. Law Comm’n 1977); See also Board of Governors of the Fed. Res. Sys., 12 CFR 205 Electronic Funds Transfers, https://www. federalreserve.gov/supervisionreg/ reglisting.htm#E (last updated Jan. 13, 2020) (providing legislation dealing with checks, cards, and interchange fees). 118. Alyssa Her tig, Blockchain’s

Once-Feared 51% Attack Is Now Becoming Regular, coindesk, Jun. 8, 2018, https://www.coindesk. com/blockchains-feared-51attack-now-becoming-regular. 119. See Forkdrop, How Many Bitcoin Forks Are There?, PrimeVR, https:// forkdrop.io/how-many-bitcoinforks-are-there (last visited Feb. 28, 2020) and Michael del Castillo, Ethereum Executes Blockchain Hard Fork to Return DAO Funds, coindesk, (July 20, 2016), https:// www.coindesk.com/ethereumexecutes-blockchain-hard-forkreturn-dao-investor-funds. See also Anthony Cuthbertson, Cryptocurrency Hackers Steal $1.5M Of Ethereum Classic In Rare Attack, Independent, (Jan. 8, 2019), https://www.independent. co.uk/life-style/gadgets-and-tech/ news/ethereum-classic-attackcryptocurrency-bitcoin-coinbaseetc-a8716986.html (attack on the already forked ethereum classic in January 2019). 120. See Dan Bousfield, Crypto-coin Hierarchies: Social Contestation in Blockchain Networks, 19 Global Networks 291, 291-93 (2019) (drawing a parallel between CCs and networked social movements). 121. Francesca Musiani, Alexandre Mallard, & Cécile Méadel, Governing What Wasn’t Meant To Be Governed: A ControversyBased Approach to the Study of Bitcoin Governance, Bitcoin and Beyond: Cryptocurrencies, Blockchains, and Global Governance 133, 138 (Malcolm Campbell-Verduyn ed., 2017). 122. See Angela Walch, In Code(rs) We Trust: Software Developers as Fiduciaries in Public Blockchains, R e g u l at i n g B l o c kc h a i n . Techno-Social and Legal Challenges, (Philipp Hacker et al. eds., Oxford University Press, 2019) (suggesting that core code developers should be subject to fiduciary duties); but see Raina S. Haque, Rodrigo Seira SilvaHerzog, Brent A. Plummer, & Nelson M. Rosario, Blockchain Development and Fiduciary Duty, 2.2 Stan. J. of Blockchain L. & Pol’y 139, 141 (2019) (refuting the suggestion). 123. See generally Elinor Oström, Governing the Commons: The evolution of institutions for collective action (Cambridge University Press, 1990) (discussing sources of success and failure in self-government and fundamental characteristics of successful common-pool management schemes). 124. Cf. Karen Yeung, Regulation by

Blockchain: The Emerging Battle for Supremacy between the Code of Law and Code as Law, 82 Mod. L. Rev. 1, 1 (forthcoming 2019) (arguing about whether governance norms or structures should be established). 125. See Directive 2018/843, of the European Parliament and of the Council of 30 May 2018 A m e n d i n g Di r e c t i v e ( E U ) 2015/849 on the Prevention of the use of the Financial System for the Purposes of Money Laundering or Terrorist Financing, and Amending Directives 2009/138/ EC and 2013/36/EU, 2018 O.J. (L156) 43, 72 (requiring the registration of virtual currency exchange providers and storage services- wallets- and to subject them to the requirements of the Directive in relation to customer due diligence and monitoring, as well as reporting, in order to detect suspicious of money laundering). 126. See id. at 45. 127. See Uniform Regulation of Virtual-Currency Businesses Act § 102 (National Conference of Commissioners on Uniform State Laws), https://www.uniformlaws. org/committees/communityhome/librarydocuments?comm unitykey=e104aaa8-c10f-45a7a34a-0423c2106778&tab=librar ydocuments (excluding securities and commodities in its definition). 128. S e e U . S . S e c u r i t i e s a n d Exchange Commission, Fra m e w o rk f o r “ In ve s t m e n t Contract” Analysis of Digital Assets, https://www.sec.gov/corpfin/ framework-investment-contractanalysis-digital-assets (last updated Apr. 3, 2019) (discussing whether an investment contract can be found in the transaction at hand to qualify as a security); (“The U.S. Supreme Court’s Howey case and subsequent case law have found that an ‘investment contract’ exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.”). 129. U.S. Commodit y Futures Tr a d i n g C o m m i s s i o n , An Introduction to Virtual Currency, h t t p s : / / w w w. c f t c . g ov / s i t e s / default/files/idc/groups/ public/%40customerprotection/ documents/file/oceo_aivc0218. pdf. 130. See generally U.S. Commodity Futures Trading Commission, Bitcoin, https://www.cftc.gov/ Bitcoin/index.htm. 131. Hacker & Thomale, supra note 97. 132. Philipp Maume and Mathias

Fromberger, Regulation of Initial Coin Offerings: Reconciling U.S. and E.U. Securities Laws, 19 Chi. J. Int’l L. 548, 566 (2019). 133. See Alex Collomb et al., Blockchain Te c h n o l o g y a n d F i n a n c i a l Regulation: A Risk-Based Approach to the Regulation of ICOs, 10 Eur. J. Risk Reg. 263, 275 (2019). 134. P h i l i p p Pa e c h , S e c u r i t i e s , Intermediation and the Blockchain: An Inevitable Choice between Liquidity and Legal Certainty 21 Unif. L. Rev. 612, 619 (2016) (demonstrating how security intermediaries serve as fungible goods for financialisation). 135. Jay Preston, Initial Coin Offerings: Innovation, Democratization and the SEC, 16 Duke L. & Tech. Rev. 318, 323 (2018). 136. Rohr & Wright, supra note 89, at 479. 137. Financial Services and Markets Act 2000, c. 8, § 235 (UK). 138. Iris H-Y Chiu, Decoupling Tokens from Trading: Reaching Beyond Investment Regulation for Regulatory Policy in Initial Coin Offerings, Int’l Bus. L.J. 265 (2018). 139. SEC Release No. 81207, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO (July 25, 2017), https://www.sec.gov/ litigation/investreport/34-81207. pdf. 140. See generally Christopher Jentzsch, The History of the DAO and Lessons Learned, slock.it (Aug. 24, 2016), https://blog.slock.it/the-historyof-the-dao-and-lessons-learnedd06740f8cfa5 (describing the DAO as an open source project that is intended to inspire others to develop DAOs). 141. See generally Asset Land Inv. Plc v Fin. Conduct Auth. [2016] UKSC 17, [2014] EWCA Civ 435 (appeal taken from Eng.) (including exotic assets such as land banks). 142. Dirk Bullman et al., In Search for Stability in Crypto-assets: Are Stablecoins the Solution?, 230 Eur. Cent. Bank Research Paper Series 1, 8 (Aug. 2019), https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3444847 [hereinafter Bullman]; see also Ingolf G.A. Pernice et al., Monetary Stabilisation in Cryptocurrencies - Design Approaches and Open Questions, Weizenbaum-Inst. For the Networked Soc’y & Humboldt-Univ. Berlin, (May 28, 2019) (Ger.), https:// papers.ssrn.com/sol3/papers. cfm?abstract_id=3398372 (suggesting that pegging a token’s value to national currency reflects a more readily ascertainable

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value per the 2019 Cr ypto Valley Conference on Blockchain Technology). 143. See, e.g., Chris Daniels, Using Maker DAI to Hedge Your Crypto Portfolio, CryptoDigest (Dec. 10, 2018), https://cryptodigestnews. com/using-maker-dai-tohedge-your-crypto-portfoliod6d9e4baef3d. 144. Christopher Fink & Thomas Johann, Bitcoin Markets, Univ. of Mannheim Sch. Of Econ. & Soc. Sci. 1, 5 (Sep. 17, 2014) (Ger.), http://ssrn.com/ abstract=2408396; see also Olivier Scaillet et al., High-Frequency Jump Analysis of the Bitcoin Market (Swiss Fin. Inst. Research Paper No. 1719, 2, June, 27, 2017), https:// ssrn.com/abstract=2982298 (expanding on the volatility of Bitcoin stability). 145. Financial Stability Board, R e g u l ato ry I s s u e s o f Stablecoins 2 (Oct. 18, 2019), https://www.fsb.org/wp-content/ uploads/P181019.pdf [hereinafter FSB]. 146. See generally id.; see also Bullman supra note 142, at 12 (stating that from a functional viewpoint, tokenized funds can fall under different asset types, including electronic money). 147. FSB, supra note 145, at 2 (comparing the similarities between stablecoins with payment systems and commodities). 148. Id. 149. See generally Press Release, Int’l Org. of Sec. Comm’n, Statement on IOSCO Study of Emerging Global Stablecoin Proposals (Nov. 4, 2019), https://www.iosco.org/ news/pdf/IOSCONEWSS550. pdf (considering the benefits that stablecoins can potentially have on market participants). 150. Id. (stating that stablecoins include features that are typical of regulated securities). 151. FSB, supra note 145, at 2 (comparing the similarities between stablecoins with payment systems and other collective investment schemes). 152. See Roger Brownsword, Law, Technology and Society: Reimagining the Regulatory Environment 191-96 (John Paterson & Julian Webb eds., Routledge 2019). 153. Gadinis, supra note 28, at 462. 154. Scott D. Hughes, Cryptocurrency Regulations and Enforcement in the U.S., 45 W. St. U. L. Rev 1, 2-3 (2017). 155. See U.S. Sec. & Exchange C o m m’ n , Fr a m ewo r k f o r “Investment Contract”

Analysis of Digital Assets (Apr. 3, 2019), https://www.sec.gov/ corpfin/framework-investmentcontract-analysis-digital-assets. 156. See Press Release, Statement on Digital Asset Securities Issuance and Trading (Nov. 16, 2018), https://www.sec.gov/news/publicstatement/digital-asset-securitesissuuance-and-trading. 157. See, e.g., Ana Alexandre, New Study Says 80 Percent of ICOs Conducted in 2017 Were Scams, Coin Telegraph (July 13, 2018), https://cointelegraph.com/news/ new-study-says-80-percent-oficos-conducted-in-2017-werescams. (reporting that in 2017, over 70% of ICO funding went to higher quality projects, but over 80% of the projects were identified as scams). 158. Munchee Inc., Securities Act of 1933 Release No. 10445 (Dec. 11, 2017), https://www.sec.gov/ litigation/admin/2017/33-10445. pdf. 159. Juan Batiz-Benet et al., The SAFT Project: Toward A Compliant Token Sale Framework, SAFT Project (Oct. 2, 2017), https:// saftproject.com/static/SAFTProject-Whitepaper.pdf. 160. 17 C.F.R. § 230.506 (2013). 161. Freshfields Bruckhaus Deringer, ‘Is FileCoin’s $200m ICO the first SEC-compliant token sale?’ (29 Aug 2017) at https://digital. freshfields.com/post/102edvn/ is-filecoins-200m-ico-the-first-seccompliant-token-sale. 162. Gadinis, supra note 28. 163. Investors, “Starved for Returns,” Flood Private Markets in Search of High-Growth Opportunities, CNBC, Aug. 12, 2019, https:// www.cnbc.com/2019/08/12/ investors-starved-for-returnsflood-private-markets.html. 164. 7 U.S.C. § 2a(1)(A)- (C) (2011). 165. CFTC, Customer Advisory: Use Caution When Buying Digital Coins or Tokens, (July 2018), https://www.cftc.gov/sites/default/ files/2018-07/customeradvisory_ tokens0718.pdf. 166. CFTC, CFTC v My Big Coin Pay Inc, (Sept. 2018), https://www.cftc. gov/sites/default/files/2018-10/ enfmybigcoinpayincmemorandu m092618.pdf. 167. Press Release, CFTC, Court Orders Defendants to Pay over $1.1 Million in Penalties and Restitution in Connection with the “Vicious Defrauding of Customers” (Aug. 24, 2018), https://www.cftc.gov/PressRoom/ PressReleases/7774-18. 168. See id. (detailing the nature in which Justice Zabel refers to the

definition of “commodity” in the Commodity Exchange Act in order to determine the nature of My Big Coin and found in favour of the CFTC’s argument that My Big Coin is a commodity). 169. Commentators have noted that over the years, although the CFTC’s jurisdiction has broadened over all sorts of commodities, there is also a rise in the liberation of trading in their derivatives. Hence inclusion within the scope of “commodity” is not the same as achieving a prohibitive effect. See Alexandra G Balmer, Regulating Financial Derivatives (Cheltenham: Edward Elgar 2018); Chris Muellerleile, Speculative Boundaries: Chicago and the Regulatory History of US Financial Derivative Markets, 47 Env’t & Plan. 1805 (2015). 170. S e e N e i l T i w a r i , T h e Commodification of Cryptocurrency, 117 Mich. L. Rev. 612 (2019). 171. See CFTC, supra note 165. 172. B h u s h a n A k o l k a r, C h i n a Officially Bans All Crypto-Related Commercial Activities, Bitcoinist (Aug. 22, 2018), https://bitcoinist. com/china-officially-bans-cryptoactivities/. 173. Joseph Young, China Bans All Crypto Events After Spending $3 Billion to Fund Blockchain Startups. NEWSBTC (Aug. 22, 2018), https://www.newsbtc. com/2018/08/22/china-bansall-crypto-events-after-spending3-billion-to-fund-blockchainstartups/. 174. See Wei Shen, Shadow Banking in China: Risk, Regulation and Policy, (Cheltenham: Edward Elgar 2016). 175. Chinese Court Rules Bitcoin Should Be Protected as Property, coindesk (Oct. 26, 2018), https://www. coindesk.com/chinese-arbitrationcourt-says-bitcoin-should-belegally-protected-as-property. 176. See Young, supra note 173. 177. China’s Central Bank Likely to Pilot Digital Currency in Cities of Shenzhen and Suzhou: Report, coindesk (Dec. 9, 2019), https://www.coindesk.com/ chinas-central-bank-likely-topilot-digital-currency-in-cities-ofshenzhen-and-suzhou-report. 178. This is the case especially in the face of the offering of Libra backed by Facebook. See infra Section C. 179. How FINMA’s ICO Guidelines impact future ICOs in Switzerland, KPMG (Feb. 26, 2018), https:// home.kpmg/ch/en/home/ insights/2018/03/how-finmasico-guidelines-impact-future-icosin-switzerland.html. 180. M o n e ta ry Au t h o r i t y o f 26

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Singapore, A Guide to Digital Token Offerings (Dec. 13, 2018), http://www.mas.gov.sg/~/ media/MAS/Regulations%20 and%20Financial%20Stability/ Regulations%20Guidance%20 and%20Licensing/Securities%20 Futures%20and%20Fund%20 Management/Regulations%20 Guidance%20and%20 Licensing/Guidelines/A%20 Guide%20to%20Digital%20 Token%20Offerings%20last%20 updated%20on%2030%20 Nov%202018.pdf. 181. FCA, Guidance on Cryptoassets, (Jan. 2019), https://www.fca. org.uk/publication/consultation/ cp19-03.pdf. 182. FCA, Guidance on Cryptoassets Po l i c y S tat e m e n t, ( Ju l y 2019), https://www.fca.org.uk/ publication/policy/ps19-22.pdf. 183. ICObench, Stats and facts, https:// icobench.com/stats (last visited July 18, 2020) (searching for the “Top countries and ICOs” by raised funds). 184. Eliza Mik, Smart Contracts: Terminology, Technical Limitations and Real World Complexity, 9 L. Innovation & Tech. 269 (2017); Roger Brownsword, Smart Contracts: Coding the Transaction, Decoding the Legal Debates, in Ioannis Lianos, Philipp Hacker, Stefan Eich and Georgios Dimitropoulos (eds), Regulating Blockchain (Oxford: OUP 2019) at ch17. 185. See generally Oström, supra note 123; Organization for Economic Co-operation and Development, Trust in Peer Platform Markets, Pub. No. 263, OECD Digital Economy Papers 1, 11 (2017); see also Marta Cantero Gamito, Regulation. com Self-Regulation and Contract Governance in the Platform Economy: A Research Agenda, 9 Eur. J. Legal Stud. 53, 61 (2017); Marc Rocas-Royo, Decentralization as a New Framework for the Sharing Economy, in Handbook of the Sharing Economy 220-221 (Russell W. Belk, Giana M. Eckhardt & Fleura Bardhi eds., 2019). 186. Any reforms would have to be considered within the context of financial regulation, as well as the regulatory objectives sought to be served. 187. Francesca Musiani, Alexandre Mallard & Cécile Méadel, Governing What Wasn’t Meant to be Governed: A Controversy-Based Approach to the Study of Bitcoin Governance, in Bitcoin and Beyond: Cryptocurrencies,

Blockchains, and Global Governance 133, 138-142 (Malcolm Campbell-Verduyn ed., 2018). 188. David Fox, Cryptocurrencies in the Common Law of Property in The Law of Cryptocurrencies, 148155 (David Fox & Sarah Green eds., 2019); UK Jurisdiction Taskforce, LawTech Delivery Panel, Legal Statement on C ry p toa s s e ts a n d S m a rt Contracts, 16 (2019), https: //35z8e83m1ih83drye280o9d1wpengine.netdna-ssl. c o m / w p - c o n t e n t / uploads/2019/11/6.6056_JO_ Cryptocurrencies_Statement_ FINAL_WEB_111119-1.pdf [https://perma.cc/B2ZM-KYKB]. 189. Blaise Carron & Valentin Botteron, How Smart Can a Contract Be?, in Blockchains, Smart Contracts, Decentralised Autonomous Organisations and the Law, 101, 143 (Daniel Kraus, Thierry Obrist & Oliver Hari eds., 2019); but see Jared Arcari, Decoding Smart Contracts: Technology, Legitimacy, & Legislative Uniformity, 24 Fordham J. Corp. & Fin. L. 363 (2019). 190. Carron & Botteron, supra note 190. 191. Alyse Killeen, The Confluence of Bitcoin and the Global Sharing Economy, in The Handbook of Digital Currencies 485, 494 (David Lee ed., 2015). 192. E.g., Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer, What Works in Securities Laws, 61 J. of Fin. 1 (2006). 193. FCA, Loan-based (‘peer-to-peer’) and investment-based crowdfunding platforms: Feedback to CP18/20 and final rules (last updated Apr. 6, 2019), https://www.fca.org.uk/ publications/policy-statements/ ps19-14-loan-based-peer-to-peerinvestment-based-crowdfundingplatforms-feedback-final-rules (detailing investor protection m e a s u re s s u c h a s i n v e s t o r restrictions, the need for advice for retail customers, and platform governance and responsibilities). 194. S e c u r i t i e s a n d E x c h a n g e Commission, Crowdfunding Fi n a l R u l e ( O c t o b e r. 3 0 , 2015), http://www.sec.gov/ rules/final/2015/33-9974.pdf; Cumming & Johan, supra note 12, at 26 (discussing the market forces that shaped regulation). 195. Gadinis, supra note 153, at 451; see ICO Statistics by Country, ICO Watchlist (Jan. 13, 2019), https://icowatchlist.com/statistics/ geo [https://perma.cc/YQM4-

B45A] (indicating statistics that the U.S. is the leading ICO jurisdiction by far). 196. See ICO Watchlist, supra note 196. 197. ICO Watchlist, supra note 196 (demonstrating that Switzerland, Singapore, and the United Kingdom are highly popular ICO jurisdictions); see also Winifred Huang et al., The Geography of Initial Coin Offerings, Small Bus. Econ., (2019) (finding that developed financial jurisdictions with good technology infrastructure remains crucial to ICOs, therefore favoring ‘peer’ level challengers to the U.S.). 198. Baker McKenzie, A Complete Guide to Cryptocurrencies and ICOs in Thailand, 4-13 (2018), https://www.bakermckenzie. com/-/media/files/insight/ publications/2018/09/ b k _ t h a i l a n d _ completeguidecryptoicos_sep18. pdf?la=en [https://perma.cc/ GQP6-N8W4]. 199. Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, Ripple, and Stellar. 200. Yashu Gola, Thailand’s Finance Ministr y Grants Licenses to Three Crypto Exchanges, CCN, https://www.ccn.com/newsflashthailands-finance-ministr ygrants-licenses-to-three-cryptoexchanges/ [https://perma.cc/ PH74-JE7M] (last updated Jan. 24, 2020). 201. The Virtual Financial Assets Act, Grant Thornton, https://www. grantthornton.com.mt/industry/ fintech-and-innovation/TheMalta-Virtual-Financial-AssetAct/ (last visited Mar. 3, 2020) [https://perma.cc/7MJV-PDZJ] (summarizing the Maltese Virtual Financial Assets Act). 202. Virtual Financial Assets Act, art. 9 (Malta). 203. Virtual Financial Assets Act, art. 10 (Malta). 204. See also Christopher Buttgieg & Christos Efthymiopoulos, The Regulation of Crypto Assets in Malta: The Virtual Financial Assets Act and Beyond, 13 L. Fin. Mkts. Rev. 30, 35 (2019). 205. Art 16(8). 206. Virtual Financial Assets Act, art. 14 (Malta). 207. Directive 2014/65/EU of May 15, 2014, Markets in Financial Instruments, art. 18, 19, 31 O.J. (L. 173); Financial Conduct Authority, FCA Handbook: Market Conduct §§5, 5A, 5AA (2019). 208. Regulation 596/2014, of the European Parliament and of the

Council of 16 April 2014 on Market Abuse and Repealing Council Directive 2003/6/EC and Commission Directives 2003/124/ EC, 2003/125/EC and 2004/72/ EC, 2014 O.J. (L 173) 1, 2. 209. Virtual Financial Assets Act, art. 34-36 (Malta), http://www. justiceservices.gov.mt/Download Do c u m e n t . a s p x ? a p p = l o m & itemid=12872&l=1 [https:// perma.cc/8QZA-NW8W]. 210. See, e.g., Case C-45/08, Spector Photo Group NV, Chris Van R a e m d o n c k v. C o m m i s s i e voor het Bank-, Financie- en Assurantiewezen (CBFA), 2009 E.C.R. I-12073. 211. Article tbc?Murphy, supra note 13 (discussing factors resulting in a race to the bottom, including demand side mobility and their relatively superior bargaining power). 212. Roy Katsiri, ISA Publishes Cryptocurrency IPO Regulations, Globes (Mar. 7, 2019), https:// en.globes.co.il/en/article-isapublishes-cryptocurrency-iporegulations-1001277152 [https:// perma.cc/6YXE-EPJ2]. 213. Regulation 2017/1129, of the European Parliament and of the Council of 14 June 2017 on the Prospectus to be Published When Securities are Offered to the Public or Admitted to Trading on a Regulated Market and Repealing Directive 2003/71/EC, 2017 O.J. (L 168) 12, 26-27. 214. See https://filecoin.io (last visited Mar. 4, 2020). 215. See https://decentraland.org (last visited Mar. 4, 2020). 216. Walch, supra note 122 (arguing that developers function similarly to fiduciaries). 217. Michael K. McShane et al., Regulator y Competition and Forbearance: Evidence from the Life Insurance Industry, 34 J. Banking & Fin. 522 (2010). 218. See id.; Schwarcz, supra note 34. 219. N.Y. Comp. Codes R. & Regs. tit. 23, § 200.3 (2019), https://www. dfs.ny.gov/docs/legal/regulations/ adoptions/dfsp200t.pdf [https:// perma.cc/DPY7-GZJN]. 220. The three businesses that have obtained licenses are Coinbase, Circle, and Ripple. 221. Carl T, New Bitcoin Regulations Coming to Nevada, California, OK, RI and Hawaii Following BitLicense’s Lead, BitcoinExchangeGuide. com (Mar. 18, 2019), https:// bitcoinexchangeguide.com/ new-bitcoin-regulations-comingto-nevada-california-ok-ri-andhawaii-following-bitlicenses-lead/ [https://perma.cc/G8P5-M4WG].

222. Unif. Regulation of VirtualCurrency Bus. Act (Unif. Law Comm’n, Proposed Official Draft 2017). 223. Christopher Casper, Bitcoin and Cr yptocurrency Laws in All 50 States, CoIQ (June 30, 2018), https://coiniq.com/ bitcoin-and-cryptocurrencylaws-usa/ [https://web.archive. org/web/20191107002931/ https://coiniq.com/bitcoin-andcryptocurrency-laws-usa/]. 224. See Baldwin et al., supra note 19, at 360; Eidenmuller, supra note 17, at 707; Stark, supra note 15 (analysing the physical externalities of regulatory competition). 225. See, e.g., Daily Briefing: Virtual Reality Land “Selling for Millions,” Business Cloud (Aug. 29, 2018, 7:39 AM), https://www. businesscloud.co.uk/opinion/ daily-briefing-virtual-reality-landselling-for-millions [https://perma. cc/MHK7-2DKP] (providing that Decentraland plans to withdraw from the blockchain-based virtual world in due course). 226. Jonathan M. Barnett, The Costs of Free: Commodification, Bundling and Concentration 17-7 (U.S.C. L. Sch. Working Paper Series, Paper No. 242, 2017), https:// papers.ssrn.com/sol3/papers. cfm?abstract_id=2916859. 227. For example, see Giulia Leoni and Lee D Parker, Governance and Control Of Sharing Economy Platforms: Hosting on Airbnb, (2018) 51 Brit. Acct. Rev. at 2, 6, 10, 20, (2018). 228. See Consumer Warning About the Risks of Investing in Cryptocurrency CFDs, Fin. Conduct Auth. (Nov. 14, 2017), https://www. fca.org.uk/news/news-stories/ consumer-warning-about-risksinvesting-cryptocurrency-cfds [https://perma.cc/DW6S-KV7X] ( ad d re s s i n g tha t cons umer warnings alone do not really educate consumers about the nature of financialisation or the nature of the cryptoasset); Cryptoassets, Fin. Conduct Auth. (Mar. 7, 2019), https://www.fca. org.uk/consumers/cryptoassets; ESAs Warn Consumers of Risks in Buying Virtual Currencies, Eur. Banking Auth. (Feb. 12, 2018), https://eba.europa.eu/-/esas-warnconsumers-of-risks-in-buyingvirtual-currencies [https://perma. cc/C9KD-XZ4Z]. 229. See generally Saule Omarova, New Tech v. New Deal: Fintech As A Systemic Phenomenon, 36 Yale J. Reg. 735, (2019) (warning that established institutions such as post-New Deal regulations in

Currents 24.2 2021

the US have been undermined by financial innovation and regulatory sympathy towards the latter can lead to a stealthy process of institutional erosion). 230. See infra note 231, n. 179–198, 199–225. 231. Houston et al., supra note 22 at 23–24, 28. 232. See generally Iris H-Y Chiu, A Rational Regulatory Strategy for Governing Financial Innovation, 8 Eur. J. of Risk Reg. 743 (2017) (discussing regulatory objective trade-offs). 233. Barkin, supra note 11 at 174, 189. 234. Stark, supra note 15, at 59–61, 63–65, 68–69. 235. LIBRA, https://libra.org/en-US/ (last visited Feb. 29, 2020). 236. Association, LIBRA, https://libra. org/en-US/association/ (last visited Feb. 29, 2020). 237. White Paper, LIBRA, https:// libra.org/en-US/white-paper/ (last visited Feb. 29, 2020). 238. Kiran Stacey & Caroline Binham, Global Regulators Deal Blow to Facebook’s Libra Currency Plan, Fin. Times (June 25, 2019), https:// www.ft.com/content/0c1f383296b1-11e9-9573-ee5cbb98ed36 [https://perma.cc/J3XD-5BR5]. 239. Letter from Mark Carney, Chair of the Financial Stability Board, to the G20 Finance Ministers and Central Bankers, (Mar. 13, 2018), http://www.fsb.org/wp-content/ uploads/P180318.pdf [https:// perma.cc/77JN-LQNC]. 240. BigTech in Finance: Market Developments and Potential Financial Stability Implications, Fin. Stability Bd., (Dec. 9, 2019) at 22–24, https://www.fsb.org/wpcontent/uploads/P091219-1.pdf [https://perma.cc/5SLP-NSGP]. 241. See generally Dirk Zetzsche, R o s s B u c k l e y, & D o u g l a s Arner, Regulating LIBRA: The Transfor mative Potential of Facebook’s Cryptocurrency and Possible Regulatory Responses, 47 U. N.S.W Res. Series, at 16–18, 20–24, 28, (2019) (hereinafter Zetzsche et al.). 242. See David Levi-Faur, The Global Diffusion of Regulatory Capitalism, (2005) 598 The Annals of the Am. Aca. of Pol. and Soc. Sci. 12 (using the term); John Braithwaite, Regul atory Capitalism (Edward Elgar 2008) (discussing and referring in chapter 1 to the persistent co-existence of the regulatory state alongside capitalist developments in relation to private sector provision of goods, services, and markets). 243. Zetzsche et al, supra note 243. 244. Se e Pr i n c i p l e s f o r Ef f e c t i ve

Super visor y Colleges, Basel Comm. Banking Supervision (June 2014), https://www.bis. org/publ/bcbs287.pdf (stating that structures for supervising significant cross-border banks and financial conglomerates have been established since the end of the global financial crisis); See Principles for Supervising Financial Conglomerates, Basel Comm. Banking Supervision (Sept. 2012), http://www.bis.org/publ/ joint29.pdf. 245. See discussion supra Section A. 246. Iris H-Y Chiu, Regulating the Cryptoeconomy (Oxford: Hart Publishing 2021) (forthcoming 2021).

Currents 24.2 2021

The Key Aspects of State Failure in the International Legal System D R . —————————————————

I n t r o d u c t i o n ————————————————— This research article studies aspects of

K A R A M A N

M A M A N D

An educator, researcher, and activist,

that threatens both their dignity and their

he holds (S.J.D) (Doctor of Laws) in

lives. Indeed, malnutrition rather than war

International Legal System Studies

causes over ninety percent of hunger-related

and LL.M in US Legal System Studies

deaths.

the State as a failure. Around the world,

at Golden Gate University (GGU),

countries face disastrous consequences as a

This article studies key aspects of state

School of Law in California, USA.

result of their failures. There are countries

failure in international legal system, it

Also holds Master of Laws (M.A) from

with histories of inefficiencies such as

contains three Chapters: the first describes

Koya University, College of Law as

the absence of applicable State control,

the legal aspects of the State as a failure, the

well as Bachelor of Laws (B.sc) degree

State violations of human rights, internal

second discusses the political aspects of the

in Law, University of Salahaddin,

armed conflicts, and massive migration and

State as failure, and the third explains the

College of Law in the Kurdistan,

refugee outflows. In other words, States—

economic and social aspects of the State as

Iraq. Also, a faculty member at Koya

whether democratic or authoritarian—have

a failure.

University College of Law-Currently

horrendous records of violating human

—————————————————

Department of Law, Faculty of

rights. In addition, they frequently suffer

Humanity and Social Science.

I. Legal Aspects of the State as a Failure

Today, countries with wars and turmoil that

—————————————————

from insufficiencies, injustice, and economic inequality, but citizens understand their civil liberties and try to get around the States’ restrictions. Therefore, throughout history, individuals and groups have introduced all powerful ideas such as free market and civil society because they were tempted to do so. This article discusses States’ inability to maintain control over their territory, which caused their collapse. Meanwhile, it raises concern and explores ambiguity about the origins of the crises that consistently challenge States. Ethnic or armed conflicts, for instance, are not enough to completely understand State crises. Still, internal conflicts have a greater chance than international conflicts to resurface. Besides, States share the primary responsibility for subsequent refugees and displaced migrants. Refugee crises have existed throughout history.

have the characteristics of a failed State are

1.1. State Insufficiency and the Absence of

the primary source of refugees. These types of

Applicable State Control

countries have a post-colonial structure that

There are many characteristics that

favors a particular elite group, while the rest

indicate a State is likely to fail, such

of the population experiences economic and

as State insufficiency and absence of

social suffering.

applicable State control, State human-

This article argues that despite all

rights violations, internal armed conflicts,

the governmental approaches to fighting

massive migration and refugee outflows,

corruption, corruption is still a controversial

economic disaster, corruption, poverty,

topic. Around the world, an epidemic

and the disintegration of social structure.

of corruption has dramatically affected

Failed States vary with respect to their

State economies and capabilities; as a

geographic locations and the sizes of their

result, numerous States have failed to

land and populations, but they all share at

provide essential public and social services or

least one of these characteristics.

maintain security and the rule of law. At the

A State has a very influential role in a

same time, citizens of democratic countries

nation’s path toward either development

have the choice to punish corrupt politicians

and happiness or turmoil and catastrophe.

by not reelecting them. Additionally, billions

The State must act appropriately to

of people still experience extreme poverty

maintain its internal order, and it must

Currents 24.2 2021

remain in control within its boundaries.

regime.” The argument is that “a strong

into new-born States—an innovative

However, the absence of State power is

territorial State is able to maintain its

example of State fragmentation.7

related to the dramatic loss of central

organizational coerciveness and territorial

For this purpose, Theda Skocpol

power in a State’s internal affairs. As a

integrity, whereas a weak territorial State

appears unaware of the difference between

result, such a loss means a State will be

is vulnerable to fragmentation.”3

government administration and territorial

dysfunctional, so another domestic actor

Different levels of the government

sovereignty. She believes in the similarity

could gain control. Those local actors will

carry out political action according to

between State and government based on

not have enough experience and control to

their distinctive political systems, such as

the mutual interest between the State and

manage the essential requirements needed

states or provinces in the federal system

State officials in the central government.

to govern effectively. In this case, a State’s

or cities and counties in the centralized

Thus, State fragmentation pulls the central

legal and political nature will transfer

system.4 For instance, France and Sweden

government’s administration to pieces.8

to an unusual outcome characterized by

have centralized political systems, and the

When a State has a significant position,

weakness and locality. Obviously, this

United States has an extra-disintegrated

it should not be seen as an alternative to

curtails a State’s ability to meet its basic

political system.

government. The State has a wider influence

needs for survival such as stable security

Both Sweden and France have

than government does. The State can

and economic growth.

centralized political systems

change with respect to natural resources,

Ever since the 18th century, liberalism

with very limited power at the

territory, and population. Its sovereignty

has stood for limiting State power.

local level. Both countries are

is central in its relationships with other

Liberalism challenges the State that has its

parliamentary democracies

States and gives it exclusive power and

own regulations and activities. Meanwhile,

with a single legislative body.

jurisdiction over its territory. The State’s

it prohibits the State from going beyond

Both Sweden and France have

power goes beyond the administrative

its national boundaries. Civil power that

centralized court systems. In

power of its government and depends on

is equivalent to State power is essential for

France, administrative courts

its territorial unity.9

protecting rights.1

hear cases involving government

Randall Collins’s geopolitical

The State, whether it is a Western

contracts and torts of government

theory as a method to address

welfare State or an Eastern State,

departments and appeals against

State breakdown can be summed

has been showing horrific images.

administrative decisions; in

up in four principles: (I ) states

However, citizens see their freedom and

Sweden, administrative courts

with greater size, economic

dignity as existing beyond the State.

hear primarily tax matters.

resources , and population expand

Inadequacies and social inequality have

Judicial courts in both countries

at the expense of poorer and

characterized the State, so social factions,

hear civil and criminal cases.6

smaller states; (2) ‘marchland’

organizations, and individuals have

—————————————————

states, with rivals in only a few

been limitations on liberalism in favor

The growth and collapse of State control affects the size and scope of its territory.

of State power as a necessary element

—————————————————

leads to increasing logistic costs

of sovereignty within a State’s borders.2

The growth and collapse of State

of controlling distant territories,

Revolutionary theories have defined

control affects the size and scope of

thereby bringing potential for the

the State “as an administrative entity,

its territory. After the collapse of the

rapid loss of territorial control; and

and ‘State breakdown’ simply refers to

Soviet Union, Russia lost control over

(4) ‘interior’ states with rivals on

the disintegration of a given political

surrounding territories, which transformed

multiple fronts tend to fragment

produced the ideas of the free market and civil society. However, there has

Currents 24.2 2021

directions, expand at the expense of ‘interior’ states surrounded by more enemies; (3) overextension

into smaller units.10

could deal with the assumption that when

Asian, and Eastern European economies

Theories of ethnic conflict cannot

one person gains power, it means an equal

reveals that:

answer the question as to what causes

loss for another.

. . . “[T]he Middle Eastern states have

central State power to decline because they

Scholars also question why ethnic

uneven regional socioeconomic

focus on the origins of ethnic conflicts

secession is successful in some countries

development, lower level of

rather than the State. Ethno-regional

but not others. More specifically, why have

economic growth, substantial

groups in a federation always seek to

Estonia, Latvia, and Lithuania become

demographic increase, capital

reach their ultimate goal of becoming

independent, but not Tibet?” Regardless,

shortages, rising unemployment,

independent States. Historically, central

all factors such as language, religion,

greater external debts per GNP,

governments have not quickly accepted

and ethnic self-determination mean the

insufficiency of foreign investment,

secessions. As long as a central government

deterioration of power in the central

and higher public consumption

maintains power, it will try to stop any

State has a significant role in the State’s

and military budgets. These states

secessionist movement.

fragmentation. In the past three decades,

also have been trailing behind

In the case of power in the state of

most new States were formed as a result of

the other regions in developing

nature, Hobbes “tells us directly that

State fragmentation rather than secession.

efficient institutions, rules, and

one’s gain of power is another’s loss,”

Whenever a State faces ineffective power in

norms that would have enabled

but this argument does not make sense,

the central government, power relocates to

them to provide collective goods

logically. There is a question as to why

the outside ethnic regions instead.

and services to the citizens and cope

Hobbes said that “the excess of the power

There are four cases—the Soviet

with the demands of a growing

of one above that of another.” Because

Union, the Federation of Yugoslavia, the

global economy more effectively.”20

of the state of nature, everyone is a loser;

Iranian Revolution in 1979, and China’s

In addition, another problem

whoever advanced in power meant there

political crisis in 1989—that include the

for Middle Eastern countries is the

was a loser at that stage.

In this point

role of territorial disintegration in State

displacement and marginalization of

of view, the dynamic of power in modern

fragmentation. The Soviet Union is an

the ethnic and religious groups that are

society is based on exemplifying all powers

obvious example of a dramatic change from

substantial parts of their populations.

in the State.13

a strong territorial State to a weak territorial

As an example of these complex ethnic

—————————————————

State that finally comes to an end.17

and religious dimensions, an enormous

In the past three decades, most new States were formed as a result of State fragmentation rather than secession.

Further, Middle Eastern countries still

percentage of Middle Eastern populations

face many challenges that have influenced

belong to different ethnic or religious

the basis for State legitimacy and its

groups. However, in Iraq before 2003,

effectiveness in the public service and

Syria, and Bahrain, minority religious

good governance.18 Democracy has been

groups control the governments. 21

—————————————————

a challenge in Middle Eastern countries

Further, a large amount of the Middle

At the first stage, a common popular

because of a democratic institution and

Eastern countries’ gross domestic

interest is necessary to establish a sovereign

political legitimacy. Nevertheless, there

product (“GDP”) goes to government

power. However, this power operates

has been progress in countries such as,

overspending, and their policies of food

without common interest because that

“Israel and Cyprus, and to a lesser degree

subsidies and public services result in

is the main element needed to create

Turkey, Lebanon, Jordan, Morocco,

budget deficits and foreign borrowing.

sovereignty. Thus, it is the part of the

Kuwait, Tunisia, and recently, Iran.”

“[O]n average, the Middle Eastern

instrument, rather than its operation.

Comparing the Middle Eastern countries

region has dispensed 19% of its GDP

A civil society that gives everyone power

with the Latin American, East Asian, South

on governmental consumption between

Currents 24.2 2021

1980 and 1996.” 22 The low level of

sovereignty, territory, resources, and

the International Committee of the Red

foreign investment—with the exception

population with ultimate power and

Cross (“ICRC”) proposes the following

of the rich Arab Gulf countries—means

authority over both land and people.

definitions, which reflect the strong prevailing legal opinion27:

the region still faces annually increasing

A State’s central power sometimes

unemployment rates, despite the fact that

declines as a consequence of ongoing

1. International armed conflicts

the rate of labor force in the Middle East

ethnic conflicts inside it, while a central

occur whenever there is resort to

is greater than in any other region of the

government is most likely to oppose any

armed force between two or more

developing world.

movement toward secession to preserve

States.

As has been noted, globalization is

unity and avoid further independence

2. Non-international armed

causing State power to vanish. However,

movements by internal groups. There is

conflicts are protracted armed

it is not so simple. States’ involvement

the assumption that someone must gain

confrontations occurring between

in trade means they will not disappear

power at the expense of another. Moreover,

governmental armed forces and

from the world stage. The current global

a State’s sovereignty is based on mutual

the forces of one or more armed

trade environment implies that further

public interest. However, power oftentimes

groups, or between such groups

commitment to trade leads to an increase

is less of a benefit to common people. Also,

arising on the territory of a State

in the role of the State.24 In brief, the

there is a high probability of rearranging

[party to the Geneva Conventions].

main product of State central authority

authority in favor of ethnic groups and

The armed confrontation must

is security, which promises internal safety

minorities as a result of weakness in the

reach a minimum level of intensity

and stability; meanwhile, a State should

central government.

and the parties involved in the

be capable preventing foreign aggression

—————————————————

conflict must show a minimum of

and invasion.25

organization.28

Despite the differences among failed

II. Political Aspects of the State as a Failure

States, they share many characteristics

—————————————————

sorted into three categories: (1)

such as corruption, poverty, refugee

2.1. Armed Conflicts

major powers and/or their allies

The external actors can be

outflows, and a lack of security. States have

The Uppsala Conflict Data Project

acting to gain or deny strategic

leading roles in either creating catastrophic

defines an armed conflict as a contested

advantages vis-a-vis an opposing

outcomes or bringing more prosperity into

incompatibility that concerns government,

major power (notably, the Cold

people’s lives.

territory, or both where the use of armed

War pattern); (2) neighboring

—————————————————

force between two parties results in at

countries with concerns of their

least 25 battle-related deaths. At least

own (possibly in addition to

one party is the government of a State.

alliance considerations); and

For instance, “armed conflicts” are divided

(3) interventions of a more

into three categories: minor armed conflict,

asymmetric nature, involving

where the number of battle-related deaths

troop engagement of major

is at least 25 but below 1,000; intermediate

powers in a non-major power’s

—————————————————

armed conflict, with more than 1,000 battle-

internal conflict (e.g. the

At the same time, the State is a

related deaths recorded during the course

neocolonial pattern as well as

unique creature entirely different from

of the conflict but fewer than 1,000 in any

the global war on terror). These

the government. Its scope goes beyond the

given year; and war, with more than 1,000

categories overlap.29

administrative concept of the governed,

battle-related deaths in any given year.26

Most armed conflicts have ended.

consisting of interconnected layers of

On the basis of the analysis set out above,

However, whether they end depends on

Despite the differences among failed States, they share many characteristics such as corruption, poverty, refugee outflows, and a lack of security.

Currents 24.2 2021

the nature of the conflict. Internal conflicts

the period between 1989 and 2001. In all

Moreover, armed conflict is likely to

are likely to peter out, while international

or part of 200l, thirty-four conflicts were

be the last resort after all political efforts

conflicts usually end by either victory or

occurring in twenty-eight States.

to eliminate State suppression have failed.

negotiation. In addition, the chance for

In 2004, there were thirty active

In South Africa, the ANC

restarting international conflicts is 13%,

armed conflicts, up by one from 2003.

initially used solely nonviolent

while internal conflicts have a 45% higher

Despite this slight increase, the number

means of struggle, only establishing

chance of reoccurring.

of armed conflicts remains lower than at

its armed wing Umkonto we Siswe

Following this, a study shows that

any time since the early 1970’s. While

(MK) in 1961 following the

the external costs of internal armed

seven of the conflicts from 2003 were

1960 Sharpeville massacre and

conflicts in the post-Cold War period

no longer active, one new conflict broke

the enforcement of a ban that

ranged from $4.5 billion to $54 billion.

out and seven restarted—three by new

prevented it from operating

Another study shows the economic

rebel groups and four by previous actors.

peacefully. Maharaj (2008, 12)

cost of armed conflict during and after

Scholars have recorded 228 armed conflicts

recalls Mandela’s justification of

it “as measured by GDP growth.”

since World War II and 118 since the end

armed struggle as a “legitimate

Assumptions are factored into the

of the Cold War. The vast majority have

form of self-defense against a

calculation where typical internal armed

been fought within States. However, a little

morally repugnant system of

conflict in a low-income country “lasts 7

over one-fifth of the internal conflicts were

government which will not allow

years, and that it takes 14 post-conflict

internationalized in the sense that foreign

even peaceful forms of protest.

years for GDP to return to its pre-

States contributed troops.

. . . Likewise, the CPN-M in

conflict level. This time span of 21 years

—————————————————

Nepal first entered parliamentary

including the cost of maintaining

Draught and shortage of water are causing shortage of food, and later, conflict.

security, peace, and reconstruction,

—————————————————

is the period for which the cost estimates are made.” The cost after a conflict, 32

politics, only preparing for a “protracted people’s war” in 1995 after encountering police repression, fake trials,” and mass

is much higher than the cost during

In fact, most internal armed conflicts

arrests. . . In Northern Ireland,

a conflict is. Meanwhile, the cost for

have occurred in developing countries,37

the violent repression of the

international armed conflicts is much

with rare internal armed conflicts

civil rights movement in the

higher especially within developed

occurring in developed countries.

1960s and the introduction of

countries; for example, the estimated

However, developed countries have

internment without trial in 1971

cost of the Iraq War was over $1.9

been taking part in inter-State wars

convinced Sinn Féin members

trillion after more than ten years of

within developing countries.38 “There

that only armed struggle could

fighting.33

have been many studies about the

accomplish the end of British rule

Equally important, between 1946 and

relation between scarcity of renewable

in Ireland. In El Salvador, “a great

2001, there were 225 armed conflicts, and

resources and armed conflicts. More

part of . . . society viewed armed

thirty-four were dynamic in all of or part

extreme weather is to be expected

struggle as the only possible

of 2001. In addition, sixteen years after the

due to climate change. Draught and

way to face structural violence,”

end of the Cold War in 2007, there were

shortage of water are causing shortage

amidst the “lack of institutional

118 conflicts in eighty locations. Armed

of food, and later, conflict.

The

channels that would resolve the

conflicts remain a major issue in the post-

Middle East has proven to be the region

political, economic and social

Cold War period. An aggregate of 115

most susceptible to armed conflict, both

crisis” prevailing in the 1970s.

armed conflicts have been recorded for

regional and domestic.

All engagement broke down.

Currents 24.2 2021

Moreover, once militants started

War II, more people have been killed

resorting to armed activities, it

and displaced in internal conflicts than

Regrettably, the international

did not mean that they ceased

in all international conflicts combined.

community does not have a well-founded

their engagement on the other

Moreover, there are similarities between

standard for dealing with crises effectively

fronts.41

armed conflicts and renewable conflicts.

around the world—specifically in the Middle

International participation in internal

The Middle East, for example, is one of

East, Africa, and Eastern Europe. As a result,

conflicts has increased sharply since

the most volatile regions in the world in

refugee outflows have increased dramatically

the September 11, 2001 attack in the

this regard.

as a direct consequence of ongoing global

United States. Many countries have

—————————————————

conflicts. As a matter of fact, governments

further understand the connection between

Scholars have defined and divided armed conflicts into internal and international conflicts based on their natures and the parties within them.

terrorism and armed conflicts:

—————————————————

been involved in the Afghani, Iraqi, and Syrian conflicts.42 To date, there has been a decline in the number of armed conflicts. However, terrorism for political purposes has become an ever-growing phenomenon. To

Outflows

still hold a leading role in refugee and migration issues. However, States are the most essential actors in ensuring that refugees are allowed to return to their homelands or that internally displaced migrants return to their homes to continue with their daily routines.44

The current concern about

Volatile situations in failed States

There is a strong connection between

terrorism warrants a discussion

trigger more conflicts because armed

war and refugees, and all countries have

on the links to armed conflict

conflict is the last resort after the

experienced war. Currently, the major sources

as reported here. First, terror is

failure of political efforts to end State

of refugees are Afghanistan, Bangladesh, Iraq,

part of armed conflict, as any

crackdowns against civilians, racial

Syria, Somalia, and the Balkan countries. In

armed conflict includes a form

groups, or minorities. The circle of

addition, there is a firm link between refugee

of terrorization of the population

ongoing turmoil and chaos these

outflows and human-rights violations. A

and of the opponent that is built

countries have to handle as a result of

tremendous number of refugees around the

into the use of weapons and forms

unsuccessful approaches to deal with

world belong to countries in the Middle East

part of the strategy. However, this

current issues and reach satisfactory

and Northern Africa region (“MENA”) as a

is not the same as terrorism. For

political settlements compounds these

result of the repressive nature of these States.

instance, in a large number of

crises.

Meanwhile, countries in the same region with

the armed conflicts the warring

For all these reasons, controlling

clean human-rights records contribute less to

parties are not explicitly targeting

a conflict is directly connected to the

the number of refugees. However, despite the

civilians. Rather, armed conflict

process of the restoration of the State,

brutality of South American countries, they

is directed at ‘legitimate’ military

enabling it to update and implement

have contributed less to refugee outflows.45

targets and not primarily aimed at

more favorable political arrangements

Governmental instability has been one of its

the civilian population.

to resolve clashes. However, this process

major causes.46

might take longer without the guarantee

“Today, more people are living this

Scholars have defined and divided

of success. Inevitably, conflict will arise,

sorrow than at any other time since

armed conflicts into internal and

through State action, inaction, or other

most of us in this room were born.

international conflicts based on their

reasons, until the State embraces viable

At the end of 2013, over 51 million

natures and the parties within them.

and practical political solutions.

people were in displacement due

Internal conflicts are most likely to

2.2. The State as a Birthplace and Main

to conflict and persecution. By the

reoccur, and since the end of World

Cause Behind Massive Migration and Refugee

end of this year, I am sure they will

Currents 24.2 2021

be even more.”47

around the world. Countries that border

a consequence of a “well-founded fear of

Of course, the refugee issue has no

trouble countries have the highest chances

persecution.” This definition implies that

place in the international customary law.

of receiving large numbers of refugees.

such fear is caused by an agent located within

However, this does not mean that refugees

In addition, there is a difference between

the country of origin. The term “refugee”,

are a new phenomenon. Frequent human-

land-locked countries that have only a land

within the mandate of the U.N. High

rights violations have accompanied the rise

border and countries that border water—

Commissioner for Refugees (“UNHCR”),

of the modern State. The dominant principle

most refugees enter neighboring countries

also includes persons outside their country

of international relationships after the Peace

through land borders because they can walk,

who can be determined to be without—or are

of Westphalia was noninterference with

run, or drive.

unable to avail themselves of—the protection

State sovereignty. Conversely, in the 20th

Of great concern, however, is when

of the government of their State of origin,

century, refugees have become a threat to

international community States and

for which it is essential that “the reasons for

international peace and security. Thus, the

organizations work toward resolving the types

flight should be traced to conflicts, or radical

international community came up with new

of conflicts that lead to enormous outflows

political, social, or economic changes in their

concepts and actions to help refugees that live

of refugees. This assumes that States have

country.”53

inside their borders.48

implemented the international humanitarian

Since the end of World War II, there has

There have always been refugees

principles put in place to protect refugees. In

been a new definition of “refugee.” The 1951

throughout human history. Ever since the

addition, the measure of the success of this

U.N. Convention Relating to the Status of

1980s, refugees have been increasing rapidly.

implementation depends on the number of

Refugees (“1951 Convention”) has narrowed

Today, millions have been displaced.

States in a conflict. However, less conflict

the concept, defining a refugee as a person

Researchers agree that poverty and political

ensures a higher chance of this humanitarian

who, “[a]s a result of events occurring before

turmoil produce refugees around the world.

protection.

January 1951 and owing to well-founded

Developing countries contribute most to

Unfortunately, the international

fear of being persecuted for reasons of

the number of refugees, while developed

community does not have any firm norms

race, religion, nationality, membership of a

countries contribute less due to their strong

that prevent conflicts or bind States that are

particular social group or political opinion,

economies and stable political systems.

reluctant to protect their citizens. Thus, there

is outside the country of his nationality and

Economic issues, in conjunction with

has been significant confusion about the way

is unable or . . . unwilling to avail himself of

political turmoil, accelerate the displacement

the international community has dealt with

the protection of that country.”54

of people and lead to unrestrained mass

crises in Rwanda, Burundi, Haiti, Somalia,

Three decades after the birth of

migration. The U.N. framework, on the

Bosnia, Chechnya, Afghanistan, Iraq, Syria

the United Nations, the international

other hand, contends that only economic

and all the major ongoing conflicts in the

community implemented a compound

components lead to the fundamental political

Middle East.52

system of international, regional, and

causes of increased refugees, while some

—————————————————

national responsibilities toward aiding

with the 1951 Refugee Convention, cruel

Increasing numbers of refugees are the direct result of increasing levels of human-rights violations around the world.

governments with poor human-rights

—————————————————

about refugees has changed the world’s

records cause refugee migration. Increasing

In general, the international-law

perspective on their numbers. The UNHCR

numbers of refugees are the direct result of

definition of “refugee” refers to a person

has issued a mandate to collect information

increasing levels of human-rights violations

who crossed an international frontier as

about people who are covered by the 1951

researchers focus on an interplay between political and economic issues.

Many authors such as M. Gibney, C. Apodaca, and J. McCann believe that

refugees. In addition, it has introduced the 1951 Convention, 1967 Protocol, and approximately 50 other international and regional agreements on refugees to deal with the issue.55 The UNHCR database

Currents 24.2 2021

Convention. 56 After the Cold War, the

ethnic groups are persecuted

example, 9.76 million refugees in

world has faced more conflicts than at any

by the State or are in conflict

1969, dropping to 7.72 million

other time in history. The end of the Cold

with other ethnic groups in the

refugees in 1982, and rising to

War refugee crisis changed the concept of

society. Conflicts between different

16.55 million refugees in 1992.

sovereignty, considered “certain issues” to be

religious communities are classified

Thirty-four countries produced

State matters, and allowed the international

as ethnic; conflicts within religious

refugees in 1969, 19 countries in

community the right to intervene. The New

com munities are also classified as

1982, and 36 countries in 1992.

Flows group report of 1986 shows refugee

ethnic (e.g., Alewite versus Sunni

There has been a significant increase

flow as a threat to peace and security. The

Muslims in Turkey), but are not so

in the average number of refugees

General Assembly, which led to actions by the

classified if the conflict is primarily

produced in each conflict. In a

Security Council pursuant to Chapter VII.

ideological (e.g., the conflict

world population of 5.7 billion in

Later, the protection Article 2(7) provided to

between Islamic fundamentalists

1995, roughly one in every 130

member States was exempted from actions

and secularists in Egypt).

people on earth has been forced

taken under Chapter VII. Domestic conflicts,

Despite the nature of the ethnic conflict,

into flight. (These numbers include

which threaten international peace and

State response is crucial for mitigating it.

internally dis-placed persons. In

security, give other States jurisdiction to act

Coercive measures by developing countries

the 1980s the number of internally

to mitigate that threat. As a result, “soft”

are the only way to secure the State’s existence

displaced increased at a very rapid

intervention, or a number of non-military

and survival. However, this seemingly sort

rate: 600,000 in 1984, three million

interventions, are legitimate even without the

of coercive approach is a direct affront

in 1985, five to six million in 1988,

Security Council’s authorization. Currently,

to opposing groups, and the result will

24 million in 1992, and 26 million

the UNHCR deals with refugee outflows

beresulting in escalating an escalation in

at the beginning of 1994).64

around the world on a daily basis, and the

violence and stepping a step away from a

international community accepts this. The

peaceful solution.

—————————————————

fact that the UNHCR and other agencies

At the close of World War II there

now deal routinely both with countries that

were an estimated 30 million

produce refugees and situations involving

refugees and displaced persons

internal displacement demonstrates that

on the European continent, some

some forms of intervention are always

dislodged by the war and others

permissible.

by the redrawing of Europe’s

If the brutality of a State’s human-rights violations displaces the entire population, it becomes not only an internal issue but also a regional and international one.

After all, a study of the causes of massive

boundaries. 63 The numbers of

—————————————————

refugee outflows over more than three

refugees began to creep upwards

In the post-Cold War era, the world

decades shows four categories of inter-State

in the 1960s, declined somewhat

media extensively documented human-

wars (conflicts between States, including anti-

in the 1970s, crept upwards

rights abuses and violations committed by

colonial wars), ethnic conflicts. Meanwhile,

again but leveled off in the early

failed States and police States. This new

two types of ethnic conflicts generate refugee

1980s, and rose steadily thereafter

phenomenon led to a movement in favor of

flows:

throughout the 1980s and 1990s.

favoring broader international intervention in

(1) where territorially based ethnic

The acceleration of refugee flows

regarding internal conflicts. State sovereignty

groups are engaged in secessionist

began several years prior to the

and national security came under more

or autonomy struggles against the

end of the Cold War and the

scrutiny and the refugee crises received wider

central government; or

breakup of the Soviet Union

international attention and responses.65

(2) where territorially dispersed

and Yugoslavia. There were, for

If the brutality of a State’s human-rights

Currents 24.2 2021

violations displaces the entire population, it

changes of political and social structures,

outflows may increase the risk of transferring

becomes not only an internal issue but also

which have led to internal conflicts and

conflicts to neighboring countries. Further,

a regional and international one. Most cases

human-rights violations, most refugees are

most refugees do not engage in violence or

lead to instability and outflows of refugees to

from third-world countries.72

conflict in their host countries. However,

neighboring countries.

The majority of third-world countries

the presence of vast numbers of refugees

The statement claiming, “most of the

have post-colonial structures featuring

present in the host country may enable

world’s refugees are sheltered in the world’s

dominant interests of elite groups and

the transmission of weapons, fighters, and

poorest states,” was written over 25 years

political, resulting in and political and

conflict.75

ago, but it still holds true today. Iraq, Egypt,

social suffering for the rest of theremaining

On September 30, 2014, during the

Syria, Turkey, Jordan, Pakistan, Lebanon,

population.73 These structures have led to

opening remarks at the 65th session of

Iran, and Afghanistan have low annual per

gave rise to different varied categories of

the Executive Committee of the High

capita incomes but host the highest numbers

ethnic conflicts:

Commissioner’s Program in Geneva,

of refugees in the world.(Footnote?) In

1) ethnic groups seeking secession

Southeast Asia, over two million people have

from the State

by building a

Massive forced displacement

left Vietnam, Cambodia, and Laos since the

new political entity toward

due to armed conflict and

end of the Vietnam War. In Southwest Asia,

independence and autonomy. An

persecution has marked 2013/14.

approximately 4.5 million Afghan refugees

estimated 100,000 to 200,000 East

While many of these movements

reside in Pakistan and Iran, forced to leave

Timorese have been killed since civil

have remained within national

in the wake of the Soviet invasion.

war broke out in 1975 following

boundaries, increasingly more

—————————————————

the Indonesian government’s crack-

refugee men, women, and children

down on their aspirations for

have fled across international

a separate nation. In Turkey,

borders in search of protection

a thirty-year war between the

and solutions. Protracted refugee

Turkish government and P.K.K.

situations have also contributed

has claimed more than 30,000 lives.

to onward movements. Today,

2) minorities within a State

refugees and asylum-seekers are a

—————————————————

seeking a better place and greater

prominent part of mixed migratory

In particular, the study shows that since

rights within the existing political

movements worldwide. Prominent

the end of World War II, most refugees have

and social context; these are

developments in the update period

come from Asia, Africa, and Latin America.

generally indigenous peoples.

are shared below:

Because some countries experience more conflict than others do, refugee outflows may increase the risk of transferring conflicts to neighboring countries.

António Guterres, UNHCR, observed:

Sustained economic development is aided

3) rivalries between ethnic and

The crisis in the Central African

by State structure and characterized as in

religionous groups to getobtain or

Republic (CAR), which had

the form of “rapid demographic expansion,

keep the control of the economic

triggered by mid-2014 the

fast growing population, low resource

and political power in the State.

displacement of over 400,000

endowment, undeveloped human capital,

For example, the ongoing fights

asylum-seekers, . . .prompted

[and] extreme ethnic heterogeneity.”71 Most

between Sunnis and Shias in Iraq,

massive mixed flows beyond the

refugees are from third-world countries

Syria, and Yemen, Lebanon, has

Central African region. Recurrent

mainly due to internal conflicts and human-

displaced millions, and hundreds

incidents in Northern Mali

rights violations caused by the nature of

of thousands have been killed.

continued to hamper the return

dynamic changes in political and social

Because some countries experience

of Malian refugees and migrants,

structures. Due to the nature of the dynamic

more conflict than others do, refugee

while insecurity in northeastern

Currents 24.2 2021

Nigeria had led to the flight of

during and after October 2011

primary sources of refugee outflows. More

over 140,000 estimated refugees

indicated potential or actual need

importantly, there is a strong correlation

and returnees, as well as long-time

for asylum and international

between wars and refugee outflows.

residents, into the neighboring

protection.76

Today, statistics show that most refugees

countries by November 2014.

In the middle of the mid-twentieth

come from countries with long histories

Approximately 85 percent of the

century, there was a belief that refugees were

of ongoing war and internal conflict.

more than 154,000 persons, who

a temporary issue, and that after the end of

Although they have existed for centuries,

chose to cross the Mediterranean

the conflict and the establishment of a new

customary international law does not pay

to Italy by October 2014, departed

government, they would return to their home

enough attention to refugees. Accordingly,

from Libya.

countries. However, this presumption was in

refugees have become one of the biggest

The number of Southeast Asians

error. With ongoing turmoil, crises, and civil

existential threats to international peace

seeking protection or a better

wars throughout the Middle East and Africa,

and security.

life, increased by over 60 percent,

most refugees are willing to stay in their host

Economics are another motivation

between June 2013 and July

countries or find better and safer places in

behind the refugee phenomenon.

2014, with over 6,500 refugees

third countries.77

Economic hardship has displaced millions

and asylum-seekers believed to

Some scholars characterize the

of people. Further, the combination

be in immigration detention by

refugee crises as a problem of individuals.

of political and economic factors has

end-November 2014. Informal

However, it is one of the most complicated

increased the outflow of refugees around

cross border movements between

problems because it involves governmental,

the globe. More conflicts produce more

Afghanistan and Pakistan, as well

international security, environmental, and

refugees, and the situation is now out

as movements of Afghans from the

natural resource dimensions.78 Refugees

of control. Just last summer, over a half

Islamic Republic of Iran, continued

need water, food, fuel, and land, so the

million refugees fled to Europe. The

into Turkey, which hosted over

environmental impact in already marginal

international community does not have

one million Syrian refugees by

areas may be devastating. By competing for

a well-founded plan that deals with this

November 2014.

jobs and scarce goods, refugees drive wages

problem.

At the end of November 2014,

down, and when they compete for scarce

Despite the narrow definition

the conditions in Ukraine had led

goods, they create inflation respectively.

of “refugee” according to the 1951

almost 230,000 persons to apply

Refugees require social services beyond those

Convention, the number of refugees

for international protection in the

provided by international agencies provide,

has noticeably increased. This strongly

Russian Federation, while 490,000

putting further strain on domestic structures

indicates the effects of war and conflict

had been internally displaced. Over

that may already have been inadequate.

on refugee outflows. Also, State human-

200,000 refugees and migrants had

—————————————————

rights violations produces large numbers

Over 68,000 unaccompanied

Although they have existed for centuries, customary international law does not pay enough attention to refugees.

children crossed the southern

—————————————————

arrived in Europe by sea across the Mediterranean by end-November 2014, compared to 60,000 in 2013.

of refugees that threaten international stability. The assumption that refugees are a temporary issue which ends after the resolution of conflict is incorrect. Instead,

United States border between

The international community has

refugees create ongoing problems for

October 2013 and September

shown only modest performance in

their host countries, as they aim to stay in

2014. Almost 60 per cent of the

changing failed States to successful ones.

search of for new lives and opportunities.

children interviewed by UNHCR

As a result, failed States have become the

On the other hand, going back to their

Currents 24.2 2021

countries of origin can be risky, and

itself at the tip of the tongue, so

private sector development, and particularly

rehabilitation will take a long time and

it is impossible for a government

hurts the poor.”83

may be uncertain under the circumstances

servant not to eat up, at least, a

In the following manner, “public sector

of their host countries.

bit of the king’s revenue. Just as

corruption means misuse of public office

—————————————————

fish moving under water cannot

for private benefits.” Various international

III. Economic and Social Aspects of the State as a Failure

possibly be found out either as

organizations, including TI, have used

drinking or not drinking water, so

this definition to measure the level of

government servants employed in

corruption.84 According to the Transparency

—————————————————

the government work cannot be

International Corruption Perceived Index

3.1. The Worldwide State Corruption Epidemic

found out (while) taking money

2014, Denmark, New Zealand, and Finland

(for themselves).80

are the least corrupt countries with a

most controversial topics in the world.

Moreover, corruption has multiple

Corruption Perceptions Index (“CPI”) score

Most governments have an agenda to fight

social, political, and economic dimensions.

of 1/174. On the other side, the list of the

corruption. There is a general consensus

As a multifaceted phenomenon, corruption

most perceived corrupt countries with high

for eliminating and reducing the level of

has numerous definitions. 81 Corruption

CPI scores includes Somalia (174/174),

corruption through internal, regional,

has been defined as “as the abuse of public

North Korea (173/174), Sudan (172/174),

and international plans. However, the

office for private gain,” whether pecuniary

and Afghanistan (171/174).85

role of the State remains critical within

or in terms of status. The gain may accrue

Significantly, Professor Peter Schroth

the corruption context because those who

to an individual, a group, or those closely

suggests that “any discussion of international

run the government are the most skillful

associated with such an individual or group.

measures against corruption and bribery

at “hijacking” it. “Corruption is a limp

Corrupt activity includes bribery, nepotism,

must begin with the United States.”86 The

in the walk of human progress. It is not a

theft, and other misappropriation of public

Watergate scandal occurred in the United

new phenomenon; it is as old as the history

resources.

States in the 1970s and raised the level of the

of mankind itself. [C]orruption made

—————————————————

international concern about corruption, after

Corruption has become one of the

No region, and hardly any country,

Above all, the World Bank views corruption as “the single greatest obstacle to economic and social development.

has been immune from corruption.

—————————————————

organized crimes under United

Like a cancer, it strikes almost all

Above all, the World Bank views

Nations agenda.] In late 1989,

parts of the society and destroys the

corruption as “the single greatest obstacle

the Department of Technical Co-

functioning of vital organs, means

to economic and social development. It

Operation and Development and

cultural, political and economic

undermines development by distorting the

the Government of Netherlands

structure of society.

role of law and weakening the institutional

held an Interregional Seminar

Corruption is an ancient

foundation on which economic growth

on Corruption in Government

problem. In a treatise on public

depends.” Transparency International (“TI”)

at The Hague. . . . In 1990, the

administration dating back to

takes it as “one of the greatest challenges

Secretary General completed a

the fourth century B.C. in India,

of the contemporary world. It undermines

manual on practical measures

Kautiliya writes in his Arthasastra:

good government, fundamentally distorts

against corruption that had

Just as it is impossible not to taste

public policy, leads to the misallocation

been previously circulated in the

the honey (or the poison) that finds

of resources, harms the private sector and

Hague Seminar. . . . In late 1990,

itself visible when the institution of the government was established.” According to Glynn et al.:

which it became part of the international agenda.87 [In the 1980s, international initiatives were grown against

Currents 24.2 2021

the General Assembly adopted

Initiative (PACI) and the World

In most cases, corruption obstructs State

recommendations on international

Bank Institute (WBI) implement

economic, domestic, and foreign investment.

cooperation for crime prevention

this principle. By partnering with

It not only wastes abilities and activities, but

and criminal justice in the context

the UN Office on Drugs and

also weakens the State’s capacity to deliver

of development, which included

Crime (UNODC), Transparency

necessary services and law enforcement.94

a paragraph of recommendations

International (TI), the International

In the developing world, multidimensional

on corruption. . . . In 1992, the

Chamber of Commerce (ICC),

corruption has undermined State legitimacy.

Eighth United Nations Congress

the World Economic Forum

First, the enthusiasm to make more money

on the Prevention of Crime and

Partnership Against Corruption

is high due to low income, a deficiency of

Treatment of Offenders called

Initiative (PACI) and the World

public services, and a lack of insurance.

upon the Crime Prevention and

Bank Institute (WBI), the UN

Second, insufficient regulatory systems and

Criminal Branch to develop a draft

Global Compact contributes

economic dysfunctionality mean there are

international code of conduct for

to the fight against corruption

too many opportunities for corruption.

public officials. In November 1994,

by providing a platform for

Third, the lack of the rule of law leads to

the United Nations International

learning and dialogue and by

weak accountability and human-rights

Drug Control Program organized

offering guidance to companies

enforcement. Finally, countries with sizable

a Ministerial Forum against

on how to implement principle.

populations and limited natural resources

Corruption in Pretoria, South

Fighting against corruption became

have a greater tendency than other countries

Africa.

momentum in the world by

to be corrupt as opposed to other countries.95

Since then, the United Nations

having international, regional and

In a democratic country, citizens have

has actively developed and

national efforts.90, Fighting against

the chance to punish corrupt politicians

promoted numerous approaches

corruption gained momentum

during elections, and they are likely not to

to combatting corruption such

worldwide by having international,

reelect them. If losing an election would be

as scholarships, conferences, and

regional and national efforts.

catastrophic for a politician’s career, then he

events. Several agencies such

In fact, the least corrupt countries92

or she might try to avoid corruption.96 At

as the U.N. Crime Prevention

are those which have higher degrees of

and Criminal Justice Program

democracy, higher level of economic

[a]n inefficient judiciary may

(“UNCPCJP”) and the UNDP

freedom, press freedom and economic

weaken the effectiveness of direct

are tackling corruption. The

integration (globalization). The most corrupt

countervailing actions against

UN Global Compact contributes

states tend to lack strong political norms, are

corruption because losers may be

to the fight against corruption

less involved in the world economy and their

reluctant to take corrupt officials to

by providing a platform for

residents have less economic freedom .

a court. Wei (1998) also emphasizes

learning and dialogue by offering

—————————————————

the critical role of an impartial

the World Economic Forum

In fact, the least corrupt countries92 are those which have higher degrees of democracy, higher level of economic freedom, press freedom and economic integration (globalization).

Partnership Against Corruption

—————————————————

guidance to companies on how to implement principle; partnerships with the UN Office on Drugs and Crime (UNODC), Transparency International (TI), the International Chamber of Commerce (ICC),

Currents 24.2 2021

the same time:

and independent judiciary in controlling corruption because an effective judiciary increases the probability of being caught and punished and, hence, deters corruption.97 “Little did we suspect,” remarked Nelson Mandela, “that our own people, when they

get that chance, would be as corrupt as the

a strong indication of this that corruption

and of these, 2.7 billion—or 43% of the

apartheid regime. That is one of the things

is linked to less democratic progress, the

world’s population—live on less than U.S.

that have really hurt us.” Nicholas Sanchez

absence of free economic society, and the lack

$2 per day. 103 One in four people—or

and Alan R. Waters recognize that:

of an economic integration system.

1.4 billion—in the developing world live

[e]very revolution in the less

Corruption may determine a State’s

in extreme poverty attempting to survive

developed world has been at

capacity and legitimacy. Meanwhile, many

below the international poverty line of U.S.

least partially inspired by the

factors contribute to escalating corruption to

$1.25 a day.105 Excluding China to get a

desire to drive out corrupt rulers

the highest level in developing countries. For

sense of the generalized trend, the number

and officials, replacing them

instance, people are more interested in saving

of people globally living in extreme poverty

with honest men and raising the

cash due to the lack of the excellent public

has increased over the past three decades.106

moral tenor of society. But the

services, insurances, economic opportunities,

Moreover, recent findings challenge the

process is never completed. One

and functionality. In the majority of

oft-advanced conclusion that world poverty

regime replaces another, and the

developing countries, accountability does

has fallen substantially since the early 1990s

corruption appears again.

not exist as effectively as it does in most

due to a decrease in poverty in China and

Nobel Laureate Oscar Arias Sanchez

developed countries. Above all, elections

India. 107 World poverty may be down,

are one of the most efficient ways to fight

but if so, it is largely due to very small

When the public at large

corruption. In the advanced democratic

poverty reduction figures.108 Further, the

demonstrates for more

societies, the electorate must punish corrupt

gap between the world’s richest and poorest

accountability and decent

politicians by removing them from office.

countries increased from 3:1 in 1820 to

government in so many countries

3.2. The State’s Role in Reducing or

70:1 in 2000.109 In one of his last speeches

of the world they are motivated,

Increasing Poverty in the World

as administrator of the UNDP, Gustave

remarked that:

to no small extent, by anger

Nanak Kakwani at the International

Speth claimed that poverty must be viewed

over corruption: corruption that

Poverty Center approaches poverty from the

as a denial of basic human rights.110 Human

humiliates the poor who must

income perspective which views it simply

rights may impact poverty reduction.111

bribe officials for minimal services;

as a lack of income (or consumption).101

—————————————————

corruption that bankrupts the

Poverty exists when some people have so

honest trader; corruption that

little income, they cannot satisfy socially

empowers unscrupulous captains

defined basic needs. But the lack of income

of commerce and their partners,

is not the only kind of deprivation people

dishonest politicians; corruption

may suffer.102 They may experience acute

which spreads like a cancer to kill

deprivation in many aspects of life beyond

Excluding China to get a sense of the generalized trend, the number of people globally living in extreme poverty has increased over the past three decades.

all that is decent in society.100

those defined as basic needs even if they have

—————————————————

Despite the fact that all governments

enough food to eat (for example, ill health or

Increasingly, numerous international

have at least some semblance of a national

lack of education and so on). The conceptual

human-rights documents affirm the principle

campaign to fight corruption, the role of

distinction between the deprivation of this

of human dignity. The Universal Declaration

government officials is still scandalous.

kind and that primarily resulting from the

of Human Rights, which is the founding

Unfortunately, these officials are often the

inadequacy of income is of fundamental

declaration of principles for the modern

most experienced at running the government.

importance.

international human-rights law (“IHRL”)

103

Moreover, corruption as a multilayer

Consider that poverty blights the lives

framework, recognizes in its first sentence

phenomenon has a powerful negative impact

of almost half the world’s population; 4.8

that the “inherent dignity . . . of all members

on economic and social progress. There is such

billion people live in developing countries,

of the human family is the foundation of

Currents 24.2 2021

freedom, justice and peace in the world.”

—————————————————

“right of self-determination,” which includes

Poverty not only threatens the basic dignity of people, but also their lives.

the right to “freely pursue their economic,

—————————————————

Article 1 of the International Covenant on Civil and Political Rights grants all people the

its debt burden through existing debt-relief mechanisms and it has maintained a track record of implementing the economic and social reforms the World Bank and IMF

Addressing

suggest.121 Meanwhile, the Group of Eight

that “[in] no case may a people be deprived

poverty is based on the IHRL principle of

(“G8”)122 (United States, Canada, Germany,

of its own means of subsistence.”

ensuring minimum standards of dignity for

United Kingdom, France, Japan, Italy,

The UNDP document that argues

everyone.

and Russia) has also proposed a debt-relief

most forcefully for a human rights

on Economic, Social and Cultural Rights

approach to development and

(“ICESCR”) recognizes that the rights of

In this situation, the World Bank

poverty is the Human Development

everyone with respect to living standards,

and IMF have identified forty

Report 2000 (HDR 2000). HDR

food, clothing, and housing are framed in

‘heavily indebted poor countries’

2000 offers two main arguments to

terms of meeting “adequate” standards, and it

(‘HIPCs’) - countries at the bottom

justify the shift in approach:

refers to a universal right to the “continuous”

end of the world’s wealth spectrum,

1) Human rights are double-edged

improvement of living conditions.

The

with per capita incomes of just a few

tools that look at the law as well

right of everyone to physical and mental

hundred dollars a year. Developing

as atmorality, and they represent

health is framed in terms of meeting the

countries have the debt burden over

already accepted international

“highest” attainable standard.

$2 trillion.124 The world hunger

social and cultural development,”’ and states

Human rights are crucial.

can qualify if it has been unable to relieve

113

114

The International Covenant

115

116

initiative.123

According to the U.N. Committee

and poverty are directly connected

2) Human rights approaches

on Economic, Social and Cultural Rights

to the debt burden. Debt takes the

add analytical force to the

(“CESCR”), a “minimum core obligation

big portion of developing countries

implementation\ of human

to ensure the satisfaction of, at the very

budget, While the majority of

development, since rights place

least, minimum essential levels of each of

the population in those countries

claims on others (individuals

the rights is incumbent upon every State

in dire need of resources and

or institutions) to fulfil their

party.”117 Beyond its general application in

money.125

requirements. Rights entail duties,

the ICESCR, the obligation of international

As a result, international debt forgiveness

and duties bring with them

cooperation is reaffirmed in the treaty in the

has become a means for religious groups to

responsibility, accountability and

particular context of “the fundamental right

solve world poverty and hunger. “The Roman

culpability. . . .

of everyone to be free from hunger.”

Catholic Church has declared the year 2000

standards inboth areas.

....

118

Poverty not only threatens the basic

a Jubilee Year, invoking an ancient Hebrew

In short, this objection claims that

dignity of people,

but also their lives.

tradition discussed in the Old Testament.

social and economic rights cannot

Ninety percent of hunger-related deaths are

According to this tradition, the Jubilee was

be implemented unless they are

caused by malnutrition, while only 10% are

a time to start over, to right old wrongs, to

institutionalized, but since one

related to war.

reestablish justice and equity.”126

cannot identify the duty-bearers of

efforts by the international community to

By contrast, countries desperately need

the designated rights, it is difficult,

help the poorest countries reduce their debt

social incentives together with economic

if not impossible, to justify the

burdens. For instance, the World Bank and

growth to halt the progression of poverty.

obligations necessary to respect and

IMF established the Heavily Indebted Poor

In addition, strong leadership is necessary

promote such second-generation

Countries (“HIPC”) Initiative in 1996 as a

to invent, keep, and define reform success.

rights.112

joint program. A heavily indebted country

Innovation and adaptation are also essential,

120

119

After all, there have been

Currents 24.2 2021

like China, which is implementing innovation

States can endure fiscal deficits for a while.

resulting in poverty. Moreover, the wealthiest

programs inside institutions to reduce

However, they cannot do so for extended

nations can help the poorest around the

poverty and monitoring and evaluating the

periods because fiscal deficits bring out

world through debt-relief mechanisms.

process to guarantee its effectiveness.127

recession, low fiscal revenue, enormous

The trillions of dollars of debt burdening

The evaluation of the Oportunidades

public debt, unemployment, growing social

developing countries is an obstacle for major

(former PROGRESA) program

demands, high rates of population growth,

economic and social development because of

in Mexico provides a powerful

and inflation.

Most importantly, the

their high demand for money and resources.

example. This program started

current situation undermines the political

Ultimately, failed States have less chance

with a pilot project to improve the

legitimacy of the international order because

of overcoming budget deficits in the future.

educational, health, and nutritional

rich countries make people in poor countries

The outcome of this ongoing financial burden

status of poor families, and to

suffer and die. Thus, the entire world faces

would be unpleasant and create more chaos

encourage active participation of

political risk which threatens international

and turmoil, which can jeopardize entire

the families in education. At the

peace and security.

regions and global peace and security. To

130

131

request of the Mexican authorities,

The rate of poverty around the globe

aid the poorest and failed States, developing

an evaluation component was built

is alarming. More than half the world’s

countries and major economic powers should

into the design of the program

population lives in developing countries,

make more influential effort and take more

from the outset. The results quickly

with one in four people living in extreme

generous approaches.

shed light on the positive impact of

poverty. Many international conventions

—————————————————

the program: all health indicators

amplify economic and social development

IV.

among children improved, school

with the goal of ensuring a “minimum

—————————————————

enrollment increased, the gap

standard of dignity for everyone” around

Despite the fact that failed States vary

between girls’ and boys’ enrollment

the world; on the other hand, the number

in territory, location, and population,

narrowed, and total years of

of people who have fallen into poverty has

they still share common characteristics

schooling increased significantly.

dramatically increased.

such as State insufficiency, the absence of

This convinced Mexican authorities

—————————————————

applicable State control, State violations

Conclusion

contributed to a horizontal scaling

To aid the poorest and failed States, developing countries and major economic powers should make more influential effort and take more generous approaches.

up across countries like Colombia

—————————————————

For this reason, sometimes even the most

and Brazil, which are implementing

The aftermath of poverty is breathtaking.

efficient approaches to resolving State crises

similar programs of conditional

Malnutrition is the primary cause of nine in

such as federalism and decentralization have

cash transfers.

ten deaths related to hunger, which indicates

failed.

The upshot is that successful countries

how dangerous poverty is because it can bring

Democracy has failed in most countries,

characterized by good government and the

about more deaths than war does. Developed

especially in the Middle East, as a result of the

rule of law are able to achieve economic growth

countries have a major role in reducing the

lack of a democratic organization, genuine

and reduce poverty. However, failed States

debt burdens on the largest population in

civil society, or legitimate political process

face worse outcomes in the form of economic

the world, and they are taking significant

that empowers individuals and gives them

dysfunction and increasing poverty.

responsibility in any unsatisfactory outcome

voices and power. These countries have also

not only to maintain the program, despite political pressures, but also to scale it up. The impact evaluation not only supported the program expansion, but also

128

129

Failed

of human rights, internal armed conflicts, and massive migration and refugee outflows. Also, a failed State has broader consequences than a government does because the latter has so many unstable prospects—including natural resources, territory, and population.

Currents 24.2 2021

ignored the right of self-determination. This

tackling poverty by having good government

State? Reflections on Stateness in an

ignorance leads to ongoing ethnic conflicts

and achieving the rule of law. Nevertheless,

Era of Globalization, 50 World Pol.

and civil war. The chance of restarting

failed States head in the opposite direction

62 (1997).

internal conflicts is almost 50% higher than

by utilizing practices that lead them into

Fiscal Crises, Failed States, Institutions

that of restarting international conflicts.

political and economic woes—and, therefore,

and Poverty (May 13, 2015), http://www.

they fall deeper into poverty.

law.yale.edu/documents/pdf/fiscal_crises_

War II, the international community is

—————————————————

failed_states_institutions_and_poverty.pdf

confronting severe refugee crises again.

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End Notes 1.

2. 3.

5. 6. 7. 8. 9. 10. 11. 12.

13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.

25.

26.

27.

28.

Nikolas Rose & Peter Miller, Political Power beyond the State: Problematics of Government, 43 B. J. Soc. 173, 180 (1992). Id. at 174. Jieli Li, State Fragmentation: Toward a Theoretical Understanding of the Territorial Power of the State, 20 Soc. Theory 139 (2002). Elizabeth Heger Boyle, Political Frames and Legal Activity: The Case of Nuclear Power in Four Countries, 32 L. Soc’y Rev. 141, 146 (1998). Id. at 167. Id. at 170. Li, supra note 3, at 139. Id. at 140. Id. at 141. Id. Id. at 145. James H. Read, Thomas Hobbes: Power in the State of Nature, Power in Civil Society 23, Pol’y 505, 506 (1991). Id. at 514. Id. at 521. Id. at 523 Li, supra note 3, at 145. Id. at 148. Emile Sahliyeh, The Limits of State Power in the Middle East, 22 Arab Stud. Q. 1, 1 (2000). Id. at 4. Id. at 24. Id. at 8. Id. at 15. Id. at 18–22. Peter Evans, The Eclipse of the State? Reflections on Stateness in an Era of Globalization, 50 World Pol. 62, 67(1997). Derwent Whittlesey, The Impress of Effective Central Authority upon the Landscape, 25 Annals Ass’n Am. Geographers 85, 85 (1935). Mikael Eriksson, Peter Wallensteen and Margareta Sollenberg, Armed Conflict 1989–2002, 40 J. Peace Res. 593, 597(2003). P eace R esearch I nternational C ommittee of the R ed C ross (ICRC) Opinion Paper, How Is the Term “Armed Conflict” Defined in International Humanitarian Law 1–5 (2008). These are the definitions of “international armed conflict” and “non-international armed conflict” under international humanitarian law (“IHL”), the branch of international law which governs armed conflict. IHL distinguishes two types of armed conflicts: international armed conflicts,

opposing two or more States, and non-international armed conflicts, between governmental forces and non- governmental armed groups, or between such groups only. IHL treaty law also establishes a distinction between non-international armed conflicts in the meaning of common Article 3 of the Geneva Conventions of 1949 and noninternational armed conflicts falling within the definition provided in Art. 1 of Additional Protocol II. Legally speaking, no other type of armed conflict exists. It is nevertheless important to underline that a situation can evolve from one type of armed conflict to another, depending on the facts prevailing at a certain moment. Id. 29. Lotta Harbom & Peter Wallensteen, Armed Conflict and Its International Dimensions, 1946–2004, 42 J. Peace Res. 623, 628(2005). 30. Id. at 629. 31. Elisabeth Sköns, The Costs of Armed Conflict, in Peace and Security: Expert Papers Series Five, International Task Force on Global Public Goods 169, 187 (2005). 32. Id. 33. Id. 34. Nils Petter Gleditsch et al., Armed Conflict 1946–2001: A New Dataset, 39 j. Peace Res. 6415, 615 (2002). 35. Id. at 616. 36. See Harbom & Wallensteen, supra note 29, at 623. 37. Sköns, supra note 31, at 173 (“Internal conflicts are the most common type of armed conflict in terms of geographical scope. Since the end of the cold war most major armed conflicts have been internal. During 1990– 2003 there were 59 major armed conflicts in 48 locations (internal citation omitted). All but four were internal conflicts. The four interstate conflicts were Iraq versus Kuwait, Ethiopia versus Eritrea, India versus Pakistan and the conflict between Iraq and the United States, United Kingdom, Australia and others. In 2003 there were 19 major armed conflicts—two were interstate conflicts.”). 38. Id. at 174. 39. Ole Magnus Theisen, Blood and Soil? Resource Scarcity and Internal Armed Conflict Revisited, 45 J. Peace Res. 801, 801–03 (2008).

40. See Gleditsch et al., supra note 34, at 616; One zone of conflict is found from Central America and the Caribbean and into South America, another from East Central Europe through the Balkans and the Middle East and India to Indonesia. The third conflict zone is Africa, and spans almost the entire continent. Almost all cross-national empirical studies find that populous countries have more internal conflicts than small countries. A country the size of Nigeria has an estimated risk that is about 3 times higher than a country the size of Liberia. The increase in the risk of conflict does not increase proportionally with population, however – the per-capita risk of civil war onset decreases with country size. The typical study finds that a 1% increase in population leads to a 0.3% increase in risk of conflict onset. Symposia, Predicting Armed Conflicts, ISA A nn . C onv . 10 (2009). See also Havard Hegre et al., Education and Armed Conflict Prediction, Int’l Stud. Ass’n 1, 5 (Feb. 15-18, 2009). 41. Véronique Dudouet, Intra-Party Dynamics and the Political Transformation of Non-State Armed Groups, 6 Int’l J. Conflict & Violence 96, 99–100 (2012) (alteration in original) (citations omitted). 42. See Harbom & Wallensteen, supra note 29, at 627. 43. See Eriksson, Wallensteen and Sollenberg, supra note 26, at 597. 44. Rosemarie Rogers, The Future of Refugee Flows and Policies, 26 Int’l Migration Rev. 1112, 1114 (1992). 45. Harto Hakovirta, The Global Refugee Problem: A Model and Its Application, 14 Int’l Pol. Sci. Rev. 35, 42 (1993). 46. Id. at 43. 47. U. N. High Commissioner for Refugees, Opening Remarks at the 65th Session of the Executive Committee of the High Commissioner’s Programme (Sept. 30, 2014), https://www.unhcr.org/enus/admin/hcspeeches/542a6e6e9/ opening-remarks-65th-sessionexecutive-committee-high-commissioners-programme.html. 48. Alan Dowty & Gil Loescher, Refugee Flows as Grounds for International Action, 21 Int’l Sec. 43, 53-54 (1996). 49. Susanne Schmeidl, Exploring 46

Currents 24.2 2021

the Causes of Forced Migration: A Pooled Time-Series Analysis, 1971–1990, 78 Soc. Sci. Q. 284, 284–85 (1997). 50. Id. at 287. 51. Myron Weiner, Bad Neighbors, Bad Neighborhoods: An Inquiry into the Causes of Refugee, 21 Int’l Sec. 5, 5 (1996). 52. Id. at 6. 53. Aristide R. Zolberg et al., International Factors in the Formation of Refugee Movements, 20 Int’l Migr. Rev. 151, 151 (1986). 54. The UN Refugee Agency, Convention and Protocol Relating to the Status of Refugees 14 (2010), https://www.unhcr. org/3b66c2aa10. 55. See Dennis Gallagher, The Evolution of the International Refugee System, 23 Int’l Migr. Rev. 579, 584 (1989). 56. Hakovirta, supra note 45, at 53. 57. See Shin-wha Lee, Preventing Refugee Crisis: A Challenge to Human Security, 23 Asian Perspec. 133, 134 (1999). 58. Rogers, supra note 44, at 1126. 59. See Dowty & Loescher, supra note 48, at 58–59. 60. See id. at 66. 61. Weiner, supra note 49, at 9–11 (“non-ethnic civil conflicts, include those based upon class, regional, or ideological differences, or an armed struggle for political power by the military or by political factions. and flights from repressive authoritarian and revolutionary regimes”). Omitted from this list is the category of fight as a result of famine or other natural or man-made disasters. Also omitted from this list are migrants who are forced to leave the country to which they have migrated. They are not refugees in accordance with the 1951 United Nations Convention on Refugees, since they can return to the country in which they are citizens. However, they are in ‘refugee-like’ situations. For example, the Gulf War of 1991 forced an estimated five million migrant workers and their families to leave Kuwait, Iraq, and Saudi Arabia, some because of the war itself, while others were expelled. The largest number were Yemenites forced out of Saudi Arabia because their government supported Iraq. After the United States and its allies had freed Kuwait, the government of Kuwait expelled its Palestinian population

because the Palestinian Liberation Organization and its supporters had endorsed the Iraqi invasion. Other examples of the forced return of people to their ‘home’ country (though many are the descendants of migrants who have never lived in their ‘home’ country) include the return of French citizens (pied noirs) from Algeria at the end of the French-Algerian war, the return to India of Indian tea estate laborers from Sri Lanka and Indian settlers from Burma, the forcible return of migrant workers to Ghana from Nigeria when the latter’s economy went into recession following the decline in the price of oil, and the current movement of Russian nationals from Central Asia to Russia. Jews who fled to Israel from Iraq, Syria, and North Africa and from the former Soviet Union are also not classified as refugees, since Israel has a law of return under which Jews enter as immigrants. Between 1990 and 1994, an estimated 500,000 Jews migrated from the former Soviet Union to Israel. 62. Lee, supra note 57, at 140. 63. Weiner, supra note 51, at 6. 64. Weiner, supra note 51, at 7–8. 65. Dowty & Loescher, supra note 48, at 43. 66. Dowty & Loescher, supra note 48, at 44. 67. Idean Salehyan & Kristian Skrede Gleditsch, Refugees and the Spread of Civil War, 76 Int’l Org. 335, 335 tbl. (2006) (“Countries with significant refugee populations, 2001. Iran 2,558,000, Pakistan 2,018,000, Jordan 1,643,900, Tanzania 498,000, United States 492,500, Yugoslavia, 400,000, Syria, 397,600, Lebanon, 389,500, India, 345,800, China, 345,000, Sudan, 307,000, DR Congo, 305,000, Thailand, 277,000, Zambia, 270,000, Guinea, 190,000.”). Id. at 47. 68. Gallagher, supra note 55, at 585. 69. Gallagher, supra note 53, at 587. 70. Zolberg et al., supra note 53, at 151. 71. Zolberg et al., supra note 53, at 151. 72. Zolberg et al., supra note 53, at 151. 73. Lee, supra note 57, at 137. 74. Lee, supra note 57, at 137-39. 75. Salehyan & Gleditsch, supra note 67, at 335. 76. U.N. High Comm’r for Refugees [UNHCR], Refuge Protection and International Migration Trends August 2013-July 2014, at 3-4 (2014). 77. Gallagher, supra note 55, at 584. 78. Hakovirta, supra note 45, at 35.

96. Drury et al., supra note 81, at 126. 97. Ahmed, supra note 91, at 64. 98. Snider, supra note 85, at 695. 99. nider, supra note 85, at 695 (quoting Nicholas Sanchez & Alan R. Waters, Controlling Corruption in Africa and Latin America, in The Economics of Property Rights 279 (Eirik G. Furubotn & Svetozar Pejovich eds., 1974)). 100. Snider, supra note 85, at 696 (quoting Jeremy Pope, Corruption in Africa: The Role for Transparency International, in Corruption, Democracy and Human Rights in Eastern and Central Africa 143 (Ayodele Aderinwale ed., 1995)). 101. Nanak Kakwani, What Is Poverty? 22 Int’l Poverty Ctr., Sept. 2006, at 1. 102. Id. at 1. 103. Id. at 1. 104. Margot E. Salomon, Why Should It Matter that Others Have More? Poverty, Inequality, and the Potential of International Human Rights Law, 37 Rev. Int’l. Stud. 2137, 2138 (2011). 105. Id. at 2137, 2138. 106. Id. at 2137, 2138. 107. Id. at 2137, 2138. 108. Id. at 2137, 2138. 109. Id. at 2139 (quoting Richard Jolly, Global Inequalities, in The Elgar Companion to Development Studies 196, 197 (David Alexander Clark ed., 2006). 110. Asuncion Lera St Clair, How Can Human Rights Contribute to Poverty Reduction? A Philosophical assessment of the Human Development Report 2000, in International Poverty Law: An Emerging Discourse 14, 14 (Lucy Williams ed. 2006). 111. See Ahmed Aoued, The Right to Food: The Significance of the United Nations Special Rapporteur, in International Poverty Law: An Emerging Discourse 87, 88 (Lucy Williams ed. 2006). Recent medical findings and scientific research by the WHO Commission on the Nutrition Challenges for the 21st Century of the Administration Committee on Coordination Subcommittee on Nutrition (ACC/SCN) suggest that inadequate access to food and sub-optimal nutritional status may have multiple interacting causes – some of which affect one’s whole life and lead to malfunctioning in society. The report summarizes the seriousness and complex interrelationships at work as follows: The acceptance by the international community that poorly fed adults are economically less effective now needs to be linked to new

79. Ghulam Shabbir & Mumtaz Anwar, Determinants of Corruption in Developing Countries, 46 Pak. Dev. Rev. 751, 751 (Winter 2007). 80. Pranab Bardhan, Corruption and Development: A Review of Issues, 35 J. Econ. Literature 1320, 1320 (1997). 81. Anja Rohwer, Measuring Corruption: A Comparison Between the Transparency International’s Corruption Perceptions Index and the World Bank’s Worldwide Governance Indicators, 7 CESifo DICE Rep. 42, 42 (Autumn 2009). 82. A. Cooper Drury et al., Corruption, Democracy, and Economic Growth, 27 Int’l Pol. Sci. Rev. 121, 122 (2006). 83. Shabbir & Anwar, supra note 78, at 751. 84. Shabbir & Anwar, supra note 78, at 751. 85. Shabbir & Anwar, supra note 78, at 751. 86. Thomas R. Snider & Won Kidane, Combating Corruption Through International Law in Africa: A Comparative Analysis, 40 Cornell Int’l L.J, 691, 696 (2007). 87. Alejandro Posadas, Combating Corruption Under International Law, 10 Duke J. Comp. & Int’l L. 345, 348 (2000). 88. Id. at 370–71. 89. Id. at 372–73. 90. Id. at 407–8. 91. U.N. Off. on Drug & Crimes, http://www.anticorruptionday. org/actagainstcorruption/en/ about-the-campaign/index.html (last visited May 26, 2015). 92. Naved Ahmed, Corruption and Competition in Bureaucracy: A Cross-Country Analysis, 42 Pak. Econ. Soc. Rev. 61, 70–82 (2004). (“The World Bank data provides measures of corruption from several perspectives. For example, one question asks respondents to rate on a scale of 1 to 6 how corruption is problematic in doing business. The other question asks respondents to rate on a scale of 1 to 6 whether these businesses accept bribes. Still another question asks about the pervasiveness of bribery. The government should adopt prudent policies that strengthen the community’s ability to resist corruption whether by enabling losers to avoid their losses or limiting the discretionary power of the winners.”). 93. Shabbir & Anwar, supra note 78, at 758. 94. Cheryl W. Gray & Daniel Kaufman,The World Bank, Corruption and Development, 4 Premnotes, May 1998, at 1. 95. Id. at 2.

findings that up to 1 billion adults are malnourished, with a reduced work capacity and an enhanced susceptibility to infections. The remarkably high rates of anemia in children, men and women in many parts of the globe not only impair work capacity but permanently damage the normal brain development of infants . . . . It is also clear that the commonest form of ‘childhood’ malnutrition, involving stunted growth, is also closely linked to impaired mental as well as physical development . . . Malnourished mothers particularly in Asia are producing low-birthweight babies . . . with a double handicap of physical and mental limitations with new evidence that poor girls grow into malnourished adults who then in pregnancy pass on the long term impact of their own poor development during their fetal life to the next generation. Id. 112. Asuncion Lera St Clair, supra note 103, at 15-17. 113. Asuncion Lera St Clair, supra note 103, at 30. 114. Salomon, supra note 101, at 2137. 115. Salomon, supra note 101, at 2140. 116. Salomon, supra note 101, at 2140. (citing International Covenant on Economic, Social and Cultural Rights (ICESCR) art. 12(1), adopted Dec. 16, 1966, 993 U.N.T.S. 3). 117. Salomon, supra note 101, at 2140 (citing U.N. Comm. on Econ., Soc. and Cultural Rights Comment No. 3, The Nature of States Parties’ Obligations, annex.III, ¶ 10, U.N. Doc E/1991/23 (1990). 118. Salomon, supra note 101, at 2142 (citing International Covenant on Economic, Social and Cultural Rights (ICESCR) art. 11(2), adopted Dec. 16, 1966, 993 U.N.T.S. 3). 119. One reason why reducing economic inequality matters, and not just reducing poverty, is because poverty is not only unfair, it is needlessly unfair. Roughly 43 per cent of the world population (2,735 million) lives below a World Bank poverty line of US $2 a day, yet consumes only 1.3 per cent of the global product, while high-income countries, with far less people (955 million citizens), together consume 81 per cent of the global product. World Bank figures indicate that high-income countries that already receive 81 per cent of the global product could give up a modest degree of their wealth – 0.7 per cent gross national income, which is enough to eradicate poverty – without

Currents 24.2 2021

sacrificing anything of comparable value. Salomon, supra note 101, at 8. 120. Chantal Thomas, International Debt Forgiveness and Global Poverty Reduction, 27 Fordham Urb. L. J. 1711(1999). 121. Id. at 1719. 122. Reformatted as G7 from 2014 due to Russia’s suspension. Russia has been expelled for invading and annexing Crimea and supporting separatist rebels in Donetsk and Luhansk in Ukraine. 123. Thomas, supra note 112, at 1719. 124. (“For the poorest countries, the debt burden is about $5 billion each. This amounts to about 0.3% of U.S. federal budget, and .05%, or one-half of one-thousandth of U.S. annual economic output. The same $5 billion in debt, however, constitutes an average 125% of annual GDP of each of these countries.”). 125. Thomas, supra note 112, at 1712. 126. Thomas, supra note 112, at 1714. 127. Prem Anchor, Reducing Poverty on a Global Scale, World Bank, Aug. 2006, at 1, 1–2. 128. Kakwani, supra note 100. 129. Fiscal Crises, Failed States, Institutions and Poverty (May 13, 2015), http://www.law.yale. edu/documents/pdf/fiscal_crises_failed_states_institutions_ and_poverty.pdf 130. Id. 131. Thomas, supra note 112, at 1716.

Currents 24.2 2021

A Re-Conceptualization of WTO Law's Security Exceptions: Squaring the Circle and Judicializing National Security C S O N G O R

I S TAV Á N

N A G Y

—————————————————

LL.M., Ph.D., S.J.D., dr. juris, Professor of

2020, by the panel report in Saudi Arabia

Introduction

Law and head of the Department of Private

— Measures Concerning the Protection of

—————————————————

International Law at the University of

Intellectual Property Rights.3

Judicialization of international economic

Szeged, research chair and the head of the

Nonetheless, the Trump administration’s

relations was one of the revolutionary

Federal Markets “Momentum” Research

f re q u e n t re l i a n c e o n t h e n a t i o n a l

innovations of the post-WWII trade regime,

Group of the Hungarian Academy of

security exception broke down this tacit

which largely replaced trade wars, political

Sciences, recurrent visiting professor at the

understanding, kicking-off a foundational

pressure and economic extortion. The rule-

Central European University (Budapest/

stone of the world trade system. With this,

based system was created step by step. The

New York) and the Sapientia University of

the security exceptions turned from an

GATT era between 1948–1994 featured

Transylvania (Romania). The research for

obsolete and largely overlooked provision

a strange mix of law and diplomacy but

this article was supported by the project

into a central issue of the scholarly discourse.

laid the groundwork for the completion of

nr. EFOP-3.6.2-16-2017-00007, titled

In US – Steel and Aluminum Products, the

judicialization by the WTO system launched

“Aspects on the Development of Intelligent,

U.S.’s reliance on Article XXI GATT4 and

in 1995. Nonetheless, judicialization was not

Sustainable and Inclusive Society: Social,

the reaction of the affected countries sparked

exhaustive and failed to effectively address

Technological, Innovation Networks in

an intensely fierce debate of interpretation

a highly sensitive issue: national security.

Employment and Digital Economy.” The

which, contrary to earlier controversies,

A reading of Article XXI GATT, Article

project has been supported by the European

normally remained bilateral.5 It grew into

XIV GATS and Article 73 TRIPS (“security

Union, co-financed by the European Social

an everybody against one situation. In the

exceptions”) is that, once the unilateral action

Fund and the budget of Hungary. The

session of the WTO Council for Trade

comes under the scope of these provisions,

author is indebted to Professor David

in Goods in March 2018, more than 40

member states are allowed to step out of the

Gantz, Professor Lukasz Gruszczynski,

members objected to the U.S. measures

rule-based system as long as their national

and Professor Kathleen Claussen for their

and voiced concerns about “the impact they

security is concerned.

comments. Of course, all views and any

may have on the global trading system.”6

errors remain the author’s own.

This was followed by a good number of

a general understanding that the security

and have endeavored to separate military

formal complaints7 and the introduction of

exceptions should be used only in the last

and serious security-related conflicts from

retaliatory tariffs against the U.S. in quite of

resort and remain highly exceptional. In

economic and trade disputes.”1 Member

few member states.8

addition to member states’ legally binding

states’ forbearance from abusing this provision

US–Steel and Aluminum Products may

commitments, the system has also rested

was so consistent that no security dispute has

give an opportunity to clarify various

on the gentlemen’s agreement that states

ever reached the Appellate Body and the

questions of interpretation in WTO law

would use the security exceptions sparingly.

first panel report on Article XXI GATT was

and be a milestone in the history of world

“Members have generally exercised restraint

adopted as late as 2019, in Russia – Measures

trade. The controversy raises two important

in their invocations of [this exception] …

Concerning Traffic in Transit,2 followed, in

legal questions. On the one hand, can the

For several decades, there has been

Currents 24.2 2021

U.S. properly rely on Article XXI GATT to

claims. Furthermore, it is also argued that

successful, resulting in almost full binding

justify the increased tariffs and the violations

member states whose interests are impaired

coverage in developed countries. The binding

of its Article II GATT tariff-bindings? On

by security measures may have the right

coverage also skyrocketed in developing

the other hand, although this is not within

to rebalance under Article XIX GATT

countries:9 today it covers three quarters

the terms of reference, the dispute raises

(safeguard measures).

of the product lines. 10 Although bound

the question of whether the rebalancing

—————————————————

tariffs are multilateral, in the sense that they

tariffs imposed by the affected countries in

apply to all member states, at the time these

retaliation for the alleged U.S. violation could

II. The Judicialization of the World Trade System

be regarded as lawful?

—————————————————

plurilateral economic background: member

The WTO’s regulatory architecture

states agreed to cap the tariffs of products

is made up of a number of judicialized

they tended to import because they saw that

obligations and judicialized exceptions.

other members did the same as to products

—————————————————

While security exceptions are reviewable in regard to scope, the y put an otherwise rather weak check on member state actions.

promises were made, they had a bilateral or

States are subject to a comprehensive

they tended to export. Notwithstanding

scheme of obligations that limit them

this economic reality, the architecture of

in interfering with international trade.

tariffs-bindings is a judicialized element of

—————————————————

Quantitative restrictions are prohibited,

the rule-based system: the promises backed

Against this background, this article

with a couple of narrow exceptions (Article

by synallagmatic economic considerations

provides an analysis of WTO law security

XI GATT), reducing protectionism’s toolkit

were turned into normative rules. A similar

exceptions. First, it examines if acts adopted

to tariffs, internal regulation, and subsidies.

process took place as to trade in services,

with reference to national security are

However, all of these are subject to legal

which resulted in a comprehensive although

reviewable and, if they are, which elements

disciplines. This includes the most-favored

presently less complete set of commitments

are reviewable and what defenses, if any, are

nation principle (Article I GATT, Article II

concerning market-access and national

enjoyed by member states? Second, it inquires

GATS), which bans discrimination between

treatment.11

whether WTO law’s ban on self-help prevents

WTO members, and the national treatment

The judicialization accomplished by

member states from reacting to the excessive

principle (Article III GATT, Article XVII

WTO law has achieved remarkable results

use of the security exception or permits them

GATS), which rules out discrimination

also in regard to the exceptions to members’

to “rebalance” against security measures

between foreign and national products.

obligations. Special duties may be imposed to

without first undertaking the WTO’s dispute

Although the regime on subsidies is imperfect,

neutralize subsidies (counter-vailing duties)

settlement process?

WTO law restricts the use of certain forms

and to stand up to unfair trade (anti-dumping

This article argues that security

of subsidies (Article XVI GATT, Article XV

duties) (Article VI GATT),12 restrictions may

exceptions should be conceived as quasi-

GATS). Furthermore, member states’ trade

be introduced on the basis of the general

reservations limiting the scope of treaty

liberalization commitments were turned into

exceptions (Article XX GATT, Article XIV

obligations and, as such, they are only slightly

legally binding multilateral obligations. As

GATS) and general and balance-of-payment

judicialized and reviewable only under the

to goods, member states promised to cap

safeguards may be adopted (Article XIX

highly deferential good faith standard. While

their tariffs and Article II GATT makes

GATT,13 Articles XII and XVIII GATS).

security exceptions are reviewable in regard

these promises legally binding. Although

These exceptions are legally conditioned,

to scope, they put an otherwise rather weak

WTO law has not required member states

that is, they may be relied on solely if the

check on member state actions. Nonetheless,

to cut tariffs, the coordinated reduction

state measure meets the pertinent substantive

acts adopted under this exception may

served their interests and, hence, they

conditions. This implies that member states’

nullify lawfully acquired benefits and, as

entered plentiful promises during the various

references to them are subject to legal review

a corollary, may give rise to non-violation

trade rounds. This process was extremely

in the WTO’s dispute settlement system.

Currents 24.2 2021

Article VI GATT authorizes member

at a price: member states injured by the

the rule-based system as long as their national

states to adopt measures against unfair trade.

measure are entitled to suspend substantially

security is concerned.19

Anti-dumping duties may be imposed, if

equivalent concessions or other obligations.

Although member states have at times

goods are exported at a price lower than their

Articles XII and XVIII(8)–(12)

invoked it, producing a good deal of

value (normal market price in the exporting

GATT authorize member states to “restrict

diplomatic communication of little legal

country).

Member states may impose

[temporarily and proportionately] the

relevance, the national security exception had

counter-vailing duties in case they are flooded

quantity or value of merchandise permitted

not been “legally” interpreted until the 2019

with subsidized import products. This duty

to be imported” in order to safeguard their

panel report in Russia—Measures concerning

aims to offset the subsidy the import product

balance of payments. The application of this

traffic in transit.20 Unfortunately, the case was

benefited from and it is capped at the amount

exception is reliant on the macroeconomic

not reviewed by the Appellate Body, because

of the subsidy.15

determinations of the International Monetary

the parties did not appeal.

Article XX GATT and Article XIV

Fund (IMF). Nonetheless, it lost much of its

Although the panel report is often

GATS authorize Member States to restrict

significance as a result of the abolition of

welcomed as confirming that security

trade, if that is justified by the local public

exchange controls and restrictions on capital

measures are reviewable, the panel chose

interest, such as the protection of public

transfers.18

the most deferential possible standard,

morals or public health. However, measures

—————————————————

short of declaring the provision completely

are subject to a “weighing and balancing”

self-judging.21 The only element of Article

Body examine whether the state went beyond

III. Is National Security an Exception to the Rule-Based System's Judicialization?

what was warranted by the protection of the

—————————————————

objective determination”) was its scope

Although judicialization of international

made up of the categories enumerated in the

economic relations was comprehensive, it was

three subparagraphs: fissionable materials;

not exhaustive and left out a highly sensitive

products relevant for military purposes

issue: national security. Article XXI(b) GATT

(broadly conceived); and measures adopted

authorizes a member state to take:

during times of war or other emergency

analysis, where the panel and the Appellate

local public interest.16 —————————————————

Under Article XIX GATT, member states may adopt safeguards; however, the exercise of this possibility is legally conditioned and restricted in terms of time and pur view.

XXI(b) of the GATT that was found prone to judicial application (“capable of

Any action which it considers

in international relations. 22 This should

necessary for the protection of

not come as a surprise, given that Article

its essential security interests (i)

XXI(b) does not authorize states to adopt

relating to fissionable materials or

measures they consider necessary to protect

—————————————————

the materials from which they are

their national interest but authorizes them to

Under Article XIX GATT, member

derived; (ii) relating to the traffic in

protect their essential security interests in the

states may adopt safeguards; however,

arms, ammunition and implements

three matters enumerated here. Nonetheless,

the exercise of this possibility is legally

of war and to such traffic in other

the panel held that the rest of the elements,

conditioned and restricted in terms of time

goods and materials as is carried

such as the question of necessity for instance,

and purview. If increased imports generated

on directly or indirectly for the

are not reviewable,23 but for the extremely

by unforeseen developments cause a serious

purpose of supplying a military

vague and deferential requirement of good

injury to the domestic production of like

establishment; (iii) taken in time

faith. As a corollary, member states are free

or directly competitive products, safeguard

of war or other emergency in

to adopt any measure they wish, provided

measures may be issued as to particular

international relations.

this measure comes under the scope of the

products and maintained as long as necessary.

A reading of the security exception is

matters listed here.24

The use of this exception comes, however,

that member states are allowed to step out of

When specifically applying the reference

Currents 24.2 2021

to actions “taken in time of war or other

The competence to define the scope

arguments that deserve no necessity and

emergency in international relations,”

of unilateral action was kept in the realm

proportionality analysis at all (let alone

included in Article XXI(b)(iii), the panel

of law. The panel defined “emergency

that the panel specifically confirmed that,

conceived this requirement as a question

in international relations,” the relevant

according to the travaux preparatoires,

of timing. Once it is established that a

category in the case at stake, as referring to

Article XX and Article XXI “have a different

war or emergency exists, the respondent

war-like situations that go beyond simple

character”)30 and certainly cannot oppugn

only needs to prove that the measure was

political or economic differences and “give

the textbook evidence that anything the army

adopted during the war or emergency. This

rise to defence and military interests, or

may need (“from shoes to watches, radios to

is a purely technical question, which does

maintenance of law and public order

beef production”)31 is privileged under the

not involve even the most rudimentary

interests.”26 The panel established that “the

security exception.

necessity or “relatedness” analysis. It would

existence of an emergency in international

Second, the security exception must be

be difficult to imagine a more deferential

relations is an objective state of affairs,

used in good faith32 and Article XXI must

approach than exempting everything that was

[hence,] the determination of whether the

not be turned into a means of disguised

adopted during a period of war or emergency.

action was ‘taken in time of ’ an ‘emergency in

protectionism.

Applying this approach by analogy to Article

international relations’ under subparagraph

The obligation of good faith

XXI(b)(i)-(ii) of the GATT, national security

(iii) of Article XXI(b) is that of an objective

requires that Members not use the

may be used to restrict trade in any product

fact, subject to objective determination.”

exceptions in Article XXI as a means

that is relevant, indirectly and remotely,

—————————————————

to circumvent their obligations

In sum, while the existence of the

All in all, there are two legal clogs that follow from the panel’s report: the definition of the scope of Article XXI(b) of the GAT T and the requirement of good faith.

privileged circumstances is subject to

—————————————————

multilateral trading system simply

“objective determinations,” member states

The panel noted that the room of

by re-labelling trade interests that it

have a blank cheque as to whether the

interpretation is more restricted as to the rest

had agreed to protect and promote

measure is necessary (that is, reasonably

of the categories of Article XXI(b) GATT, as

within the system, as “essential

related and proportionate) to protect the

they are specific and leave very little room to

security interests”, falling outside

public interest. The only requirement that

judicial construction.28 Concerning Article

the reach of that system.33

limits this discretion is the requirement of

XXI(b)(ii) GATT, which refers to measures

Unfortunately, a closer look at the

“veracity” in which member states must

“relating to” products relevant for military

analysis carried out by the panel reveals that

not refer to national security for purely

purposes, the panel made a reference to the

this requirement puts no meaningful check

protectionist purposes (a circumstance

interpretation of this term in Article XX

on member states’ protectionism-driven

intensely difficult to demonstrate).

GATT. At first glance, this may appear to

exercise of their prerogative. Although this

All in all, there are two legal clogs that

be promising, given that this term has been

excerpt may be conceived as an allusion

follow from the panel’s report: the definition

construed here as requiring a “close and

to Trump section 232 tariffs on steel and

of the scope of Article XXI(b) of the GATT

genuine relationship of ends and means,”

aluminum, the idea that the requirement

and the requirement of good faith. However,

which does involve some “relatedness”

of good faith is capable of screening out

a closer examination shows that both are

analysis. However, this is a rudimentary

disguised protectionism in the context of

feeble, if not token, confinements.

examination, which is meant to filter out

the security exception simply does not hold

for military purposes or is connected to fissionable materials. The panel’s textual, systematic, and historical analysis revealed that there was no warrant for a different interpretation of Article XXI(b) of the GATT.

Currents 24.2 2021

under the GATT 1994. A glaring example of this would be where a Member sought to release itself from the structure of “reciprocal and mutually advantageous arrangements” that constitutes the

water. The legal test set out by the panel is so

— Measures Concerning the Protection of

architecture has a synallagmatic economic

deferential that it is hardly conceivable that

Intellectual Property Rights. Here, the panel

deep structure built up of mutually made

this could lead to a condemnation. On the

established that “when a group of States

concessions. Fortunately, this tension not

one hand, the member state need not prove

repeatedly accuses another of supporting

only raises questions of fairness but, at the

but merely “articulate” that the measure is

terrorism and extremism … that in and of

same time, does find reflection in WTO

related to the emergency.

Furthermore,

itself reflects and contributes to a ‘situation

law. Owing to the concept of non-violation

it suffices if “the measures at issue meet[s]

… of heightened tension or crisis’ between

claims, member states that use their liberties

a minimum requirement of plausibility in

them that relates to their security interests.”

in an unexpected way lose the benefits they

relation to the proffered essential security

The panel found that Saudi Arabia could

received in consideration of the nullified or

interests, i.e. … they are not implausible as

lawfully prevent beIN, a Qatari enterprise,

impaired concessions. The conventional use

measures protective of these interests.”35

from obtaining legal representation in

of WTO law’s exceptions is considered to

The application of the requirement of

civil and administrative procedures, as this

be within the contemplation of the parties.

good faiths is the more difficult because the

measure “may be viewed as an aspect of

However, measures frustrating legitimate

gist of the textbook example for Article XXI(b)

Saudi Arabia’s umbrella policy of ending

expectations, such as exaggerated references

(ii) is that member states are authorized to

or preventing any form of interaction with

to national security, even if technically lawful,

pursue a genuine protectionist policy to

Qatari nationals.”39

are not considered to have been within the

maintain local production capacities, hence,

The panel found no connection between

the protectionist aim is not the abuse but the

Saudi Arabia’s essential security interests and

The ultimate reason why Trump tariffs

very essence of this rule. This makes it highly

its non-application of criminal procedures

are considered to be unfair and sparked an

difficult to question the good faith of member

and penalties to beoutQ, a “commercial-

outcry is not necessarily their introduction

state action that otherwise comes under the

scale broadcast pirate.”40 The reason for this

but the fact that the U.S. increased tariffs

scope of Article XXI(b)(ii). Furthermore,

was that Saudi Arabia’s “non-application of

while it expected others to continue to

as duly noted by the panel, Article XXI

criminal procedures and penalties to beoutQ

honor their tariff promises (tariff-bindings).

encompasses no necessity analysis: Article

… affect[ed] not only Qatar or Qatari

The pith of the world trade system is the

XXI(b)(ii) does not say that member states

nationals, but also a range of third-party

complex set of binding commitments

may maintain a sufficient production

right holders,”41 and had no genuine temporal

member states made in regards to tariffs

capacity in products relevant for military

connection to “the severance of all relations

concerning goods43, market access,44 These

purposes; instead, it says once it is about

with Qatar.”42

commitments were made in consideration

products relevant for military purposes, a

—————————————————

of each other. Although member states are

member state may adopt “[a]ny action which

IV. Do Security Exceptions Enable Member States to Eat Their Cake and Have It Too? Th e C o n c e p t o f N o n Vi o l at i o n C l a i m s a n d t h e " U n co n ve n t i o n a l " Use of National Security

expected to be aware that the competitive

—————————————————

the reciprocal balance of concessions and

The intensive use of the immense (in

are irreconcilable with WTO law.45 This

—————————————————

some regards nearly limitless) discretion

consideration is accommodated for in the

The above approach was confirmed, in the

under the security exceptions seems to be

concept of non-violation claims embedded

context of Article 73 TRIPS, in Saudi Arabia

irreconcilable with the fact that WTO law’s

in Article XXIII(1)(b) GATT.

it considers necessary.”36 —————————————————

State measures that go against legitimate expectations i m p a i r t h e re c i p ro c a l balance of concessions and are irreconcilable with WTO law.

parties’ contemplation.

opportunities of foreign products and services are dependent on various contingencies beyond the commitments themselves, as well as the fact that WTO law does contain a good deal of exceptions. State measures that go against legitimate expectations impair

Currents 24.2 2021

World trade is not about free cakes, but

but cannot use this prerogative to circumvent

relevant. Second, characterization as a

about quid pro quo, so tariff-bindings cannot

their freely assumed obligations.

safeguard measure (definitional requirements)

be dried out without consequences. The

—————————————————

and its permissibility under Article XIX

concept of non-violation claims emanates

GATT (legality requirements) must not be

not reasonably have been anticipated.48

V. Can member states have recourse to "self-help" under Article XIX GATT (safeguards) to rebalance against the protectionist use of national Security?

The textbook example of such plights

—————————————————

protects a domestic industry against imports.

is the introductions of subsidies to nullify

In US – Steel and Aluminum Products,

The measure’s effects are not determinant.

or impair the benefits of promised tariff

in response to the Trump tariffs, many

The characterization takes into account both

cuts. Nonetheless, in EC–Asbestos

the

countries adopted “rebalancing” duties.

the object and the effects (“design, structure,

Appellate Body noted that non-violation

Although the United States did not refer

and expected operation”). Hence, not all

claims may emerge from the employment of

to this provision when justifying the tariffs,

measures that, in terms of effect, protect

any . This implies that while the exceptions

it was argued that the Trump tariffs qualify

the local industry qualify as safeguards.

embedded in various provisions of WTO law

as a safeguard measure and, contrary to the

To be labelled as such, it also needs to be

may legally exonerate a member state from

general rules, Article XIX GATT allows states

demonstrated that the measure’s design and

its obligations, state measures may still be

to unilaterally withdraw concessions to offset

structure confirms its quality as a safeguard.

actionable if the state employs the exception

the loss of benefits. This raises a question of

This implies that a measure adopted to

in a way that was not reasonably anticipated

first impression: can protectionist measures,

protect the local industry may qualify as a

and frustrates legitimate expectations.

adopted with reference to Article XXI(b)(ii)

safeguard measure, even if the state did not

It is submitted that it is conceptually

GATT and aiming to maintain a certain level

refer to Article XIX GATT and even if the

more consistent to address exaggerated

of production capacity, at the same time,

measure is not legal under Article XIX GATT

security measures under Article XXIII(1)

qualify as safeguard measures (Article XIX

and the Agreement on Safeguards.

(b) GATT, instead of Article XXI GATT.

GATT), notwithstanding the member state’s

On the one hand, member states never

self-characterization.

the different exceptions WTO law offers

restricted their national security policy and

—————————————————

to member states to depart from their

from the international law principle of pacta sunt servanda, which prevents 46

Non-

violation claims emerge from the nullification and impairment of benefits that “could

conflated. A safeguard remains a safeguard even if it is illegal. Third, a safeguard needs to violate a provision of GATT. Fourth, it is the protectionist gravity that makes a safeguard measure: the essence of a safeguard is that it

It may be reasonably assumed that

back from its freely assumed commitments

[I]t is conceptually more c o n s i s t e n t t o a d d re s s exaggerated security measures under Article XXIII(1)(b) GATT, instead of Article XXI GAT T.

and compensating the affected trading

—————————————————

of the possibility to benefit from Article

partners for the rescission of obligations they

The interpretation is framed by four

XX GATT (general exceptions) or Article

“payed for,” it dishonors its obligations while

tenets that may be deduced from the Appellate

XIX GATT (safeguards). While the various

expecting others to honor their obligations.

Body’s recent decision in Indonesia–Safeguard

exceptions overlap, they apparently have

The concept of non-violations claims implies

on Certain Iron or Steel Products. First, the

equal rank. For instance, the national

that states are completely free to adopt any

characterization of the state adopting the

steel industry suffering from unexpected

measure they please to foster national security

safeguard measure is not decisive, although

difficulties because of increased imports

never subjected it to judicial review. On the other hand, the trouble with using national security as a pretext to protect the local industry is that with this a state wants to eat its cake and have it too Instead of stepping

Currents 24.2 2021

obligations operate in parallel. There is no reason to assume that if a measure is capable of benefitting from one of the exceptions, it loses the chance to benefit from another one. A measure meeting the requirements of Article XXI GATT should not be deprived

may be protected by way of increased tariffs

undermine the system based on the rejection

to serious difficulties, or it is but these were

on the basis of both Article XIX GATT and

of unilateral self-help.

not brought about by imports or were not

Article XXI GATT. Both provisions sanction

—————————————————

unforeseeable, the safeguard will not fulfill

protectionism but for different purposes.

the legality requirements of Article XIX

sic stantibus: the state may temporarily

VI. How to Define the Intersection of Article XXI Gat t: The N otio n of Protective Security Measures and the Distinction Between Naked and Ancillary Restrictions

suspend some of its concessions because new,

—————————————————

of the state to maintain a certain level of

unexpected circumstances emerged after the

Evidently, not all measures that restrict

production capacity in industries key to the

concessions had been made. Article XXI

trade do this in the way and for the motives

country’s military defense embraces a truly

enshrines a different rationale: the state has a

on which safeguards may be justified.

protectionist logic.

vital interest in maintaining some production

Theoretically, all measures that restrict

“Security+safeguard” measures meet

capacities in industries that are essential to

trade foster a domestic industry. However,

the definitional requirements of both Article

supply the army.

safeguards have a distinctive conceptual

XIX and Article XXI. The intersection of

—————————————————

feature, which distinguishes them from

these two sets is made up of protective

all other restrictions of trade: they are

measures adopted because an industry is in

purely protectionist and bluntly strive to

trouble and needs to be preserved through

shelter domestic producers from import

sheltering it from imports. What defines

competition. Contrary to all other exceptions

“security+safeguard” measures is that the

of WTO law, which condone state restrictions

protection of the domestic industry is not

—————————————————

of trade for some legitimate purpose (e.g.

ancillary to a main goal but it is the main

Normally, it should make no practical

public morals under Article XX GATT,

goal itself. All other exceptions of WTO law

difference which exception sanctions the

public security under Article XXI GATT,

authorize member states to adopt measures

restriction of trade. However, Article XIX

unfair trade under Article VI GATT), Article

for purposes different from protectionism

empowers member states to use self-help and

XIX GATT allows trade-restrictions for itself.

and the protectionist repercussions are simply

move unilaterally. This is a huge advantage, as

Put it otherwise, this is the only exception

collateral damages. Article XIX and Article

compared to the general rule which requires

that permits the adoption of protective

XXI(b)(ii) may sanction state intervention

injured member states to have recourse to

measures merely because the domestic

for the purpose of protectionism.

the WTO’s dispute settlement procedure and

industry is losing out in international

This distinction between naked and

not to retaliate before the Dispute Settlement

competition. Article XIX GATT authorizes

ancillary restraints may draw on antitrust

Body’s authorization. The difference between

states to temporarily suspend a commitment,

law’s similar conceptual distinction.52 The

rebalancing under Article XIX and retaliating

provided they “refund the price” they were

term “naked restraint” circumscribes collusive

under Article 22.2 of the Dispute Settlement

paid (that is, they lose trade benefits of an

arrangements that have no pro-competitive

Understanding can be measured in years. At

equal value). As established by the Appellate

purpose and are purely about restricting

the same time, this circumstance also gives

Body in Indonesia–Safeguard on Certain Iron

competition. On the other hand, “ancillary

rise to an important structural requirement:

or Steel Products, the identity of a safeguard

restraints” are implemented in furtherance of

the definition of “security+safeguard”

measure and its legality are two separate

a legitimate cooperation and are considered

measure has to be clear-cut, so that it does not

things. If the local industry is not subject

to be collateral damage to attain a higher pro-

The very same restrictive measure may be justified under both provisions, the difference between the two being that they give room to different motivations. Article XIX GATT is based on the concept of clausula rebus

“Security+safeguard” measures meet the definitional requirements of both Article XIX and Article XXI.

GATT; nonetheless, it will keep fulfilling the definitional requirements of Article XIX GATT and remain a safeguard measure. A r t i c l e X X I ( b ) ( i i ) G AT T m a y accommodate a similar rationale. The notion that it is in the security interest

Currents 24.2 2021

competitive purpose, such as a joint venture

whose legitimacy may be considered under

of Article XXI GATT all confirm that

or a research & development collaboration.

Article XXI(b)(iii) GATT: the main goal

member states have never surrendered the

The distinction between naked and ancillary

was to put economic pressure on Mexico in

exercise of security policy to judicial review.

restraints does not depend on how intensive

an inter-state conflict to obtain a political

Furthermore, national security is an issue

the restriction is. A joint venture may restrict

result. The protective effects were the

which is not capable of judicialization and,

the founders’ entry into a market in a way

by-products of this.

According to the

in reality, it would be devastating for the

that otherwise, if it were not ancillary, it

proposed doctrine, this measure would not

rule-based system’s legitimacy if the Dispute

would amount to per se illegal market-

amount to a safeguard. In the same vein, if a

Settlement Body intruded into this reserved

sharing.

country embargos British products because,

field. The expectation that member states

—————————————————

allegedly, an epidemic of mad cow disease

abstain from abuse of the security exception

rages in the United Kingdom (a restriction

is well-placed in the world trade system’s

clearly justified under Article XX(b) GATT),

unwritten constitution.

While WTO law comprehensively judicialized international economic relations, the national security exception embedded in Article XXI GATT was largely left out of this process.

this should not be considered a safeguard

Nonetheless, the above conclusion does

measure, although it certainly protects the

not mean at all that exaggerated references to

local beef industry. On the other hand, if the

national security are without consequences

measure’s primary objective is to secure the

and dishonest techniques may allow member

existence of a local steel or aluminum industry

states to eat their cake and have it too. On

—————————————————

of a certain size to guarantee the supply of

the one hand, the concept of non-violation

Accordingly, an import ban introduced

the arms industry during times of war or

claims addresses state acts that are technically

for facially plausible moral, public health or

other emergency, that would be a “naked

lawful but go against other member states’

environmental protection reasons does not

restriction” of trade and rebalancing under

legitimate expectations and, as such, makes

amount to a safeguard, although in terms of

Article XIX should be available. Although

the “unconventional” use of national security

effects, it protects the local industry in the

the policy to maintain a local mining capacity

actionable. WTO law contains a good

same way as a safeguard measure introduced

of iron because that is needed for military

number of exceptions whose use was within

in response to the unexpected skyrocketing of

equipment may be perfectly legitimate

the contemplation of the member states.

imports. In the same vein, a counter-vailing

under the national security exception (Article

This implies that member states reckoned

duty introduced to counter-balance subsidies

XXI(b)(ii) GATT), as a form of “legitimate

with these qualifications to the binding

provided in the country of origin may not

protectionism”, its primary purpose is to

engagements (tariff-bindings under the

be regarded as a safeguard, even though it

protect the local industry against imports.

GATT and commitments under the GATS).

does not differ from the Trump tariffs in

—————————————————

On the contrary, the “unconventional” use

terms of effects in the market. On the other

VII.

Conclusions

of the exceptions falls outside member states’

hand, if maintaining a sizable production

—————————————————

contemplation and, hence, gives rise to non-

capacity is considered to be a legitimate aim

While WTO law comprehensively

and gives rise to a restriction of trade, the

judicialized international economic relations,

When national security is used to

measure meets the definitional requirements

the national security exception embedded

maintain a certain level of production

of safeguards.

in Article XXI GATT was largely left out

capacity, with the argument that this may

For instance, when the US government

of this process. Although its scope is duly

be needed to supply the arms industry in

threatened Mexico with a major increase

judicialized, unilateral measures coming

case of war or other emergency (Article

in tariffs if Mexico did not halt illegal

under this provision are not (except the elusive

XII(b)(ii) GATT), the measure may also

immigrants across the southern border, this

requirement of good faith). The textual,

qualify as a safeguard under Article XIX

could be regarded as an ancillary restraint

systematic and historical interpretation

GATT and, as such, may be rebalanced.

Currents 24.2 2021

violation claims.

The borderline between “security+safeguard” and “security only” measures is described by the notional dichotomy of “naked” versus “ancillary” restraints. Safeguards are blunt protectionist measures, whose only purpose is to protect the domestic industry (“naked” restraint), contrary to measures where the restriction of trade is collateral damage to the attainment of a main objective (e.g. protection of public morals, public health, environmental protection, prevention of unfair trade). Hence, a security measure adopted under Article XXI(b)(ii) may meet the definitional requirements of Article XIX, even if it fails to meet its legality requirements. The intersection of Article XIX and Article XXI(b)(ii) is made up of cases where protecting and preserving domestic productions capacities is an objective that is legitimate in itself. In such cases, as an exception to WTO law’s general prohibition of self-help, affected member states have the right to rebalance right away.

Currents 24.2 2021

End Notes 1.

Panel Report, Russia—Measures Concerning Traffic in Transit, WTO Doc. WT/DS512/R (adopted Apr. 5, 2019). Id. See Tom Miles, Tr ump’s Extraordinary Tariffs, Reuters (Mar. 5, 2018, 10:16 AM), https://www. reuters.com/article/us-usa-tradeexplainer/trumps-extraordinarytariffs-idUSKBN1GH2IR (The national security exception has never been used as a defense in a trade dispute since the establishment of the WTO in 1995. In the pre-WTO era, it was touched upon in two cases emerging from the NicaraguaUS controversy in the 1980’s, but the panels did not provide any interpretation on Article XXI GATT). Cf. Report of the Panel, US – Imports of Sugar from Nicaragua, ¶ 3.10, L/5607 (Mar. 13, 1984), GATT B.I.S.D. (31st Supp.), at 67, (1985) (the US refused to invoke any exception under the GATT, because its action “was not taken for trade policy reasons.” Hence, the panel report did not examine the measure’s justifiability under Article XXI GATT. L/5607, adopted on 13 March 1984) and Report of the Panel, US – Trade Measures affecting Nicaragua, ¶ 5.1-5.3, L/6053 (Oct. 13, 1986) (unadopted) (the interpretation of Article XXI was not within the panel’s terms of reference.). World Trade Organization, Saudi Arabia—Measures Concerning the Protection of Intellectual Property Rights, WTO Doc. WT/DS567/R (adopted Jun. 16, 2020). See Jinguyan Zhou, New WTO Ruling on National Security in Qatar-Saudi Arabia Case and its Impact on South Korea-Japan Dispute, 24(22) ASIL Insights (September 03, 2020). See Proclamation No. 9705, 83 Fed. Reg. 11,625 (Mar. 8, 2018) (allowing the adjustment of imports of an article and its derivatives, if it “[is] being imported into the United States in such quantities or under such circumstances as to threaten to impair the national security”). See also Proclamation No. 9704, 83 Fed. Reg. 11,619 (Mar. 8, 2018) (both proclamations are based on the Trade Expansion Act of 1962 § 232, 19 U.S.C. § 1862 (1962)). See John H. Jackson, William J. Davey & Alan O. Sykes, I n t e r n at i o n a l E c o n o m i c Relations: Cases, Materials, and Text 1199-1203 (West, 6th ed. 2013). WTO Members Raise Concerns

Over US Tariffs on Steel and Aluminium at Goods Council, World Trade Organization (Mar. 23, 2018), https://www. wto.org/english/news_e/ news18_e/good_23mar18_e. htm#:~:text=WTO%20 members%20expressed%20 c o n c e r n % 2 0 ov e r, U S % 2 0 measure%20came%20into%20 effect [https://perma.cc/GHE4SAWE]. See Request for Consultations by China, United States – Certain Measures on Steel and Aluminium P r o d u c t s , W TO D o c . W T / DS544/1 (Apr. 5, 2018); Request for Consultations by the European Union, United States – Certain Measures on Steel and Aluminium Products, WTO Doc. WT/DS548/1 ( June 1, 2018); Request for Consultations by Canada, United States – Certain Measures on Steel and Aluminium Products, WTO Doc. WT/DS550/1 (June 1, 2018); Request for Consultations by India, United States – Certain Measures on Steel and Aluminium Products, WTO Doc. WT/DS547/1 (May 18, 2018); Request for Consultations by Mexico, United States – Certain Measures on Steel and Aluminium Products, WTO Doc. WT/DS551/1 ( June 5, 2018); Request for Consultations by Norway, United States – Certain Measures on Steel and Aluminium Products, WTO Doc. WT/DS552/1 ( June 12, 2018); Request for Consultations by the Russian Federation, United States – Certain Measures on Steel and Aluminium Products, WT/ DS554/1 (June 29, 2018); Request for Consultations by Switzerland, United States – Certain Measures on Steel and Aluminium Products, WTO Doc. WT/DS556/1 (July 9, 2018); Request for Consultations by Turkey, United States – Certain Measures on Steel and Aluminium Products, WTO Doc. WT/DS564/1 (Aug. 15, 2018). See Saleha Mohsin, China Tariff Retaliation Threatens Key States in Trump Country, Bloomberg (May 10, 2018), https://www.bloomberg. com/news/articles/2018-05-10/ china-tariff-retaliation-threatenskey-states-in-tr ump-countr y; Jonathan Stearns, EU Retaliation Against U.S. Over Metal Tariffs to Start June 22, Bloomberg (June 20, 2018), https://www.bloomberg. com/news/articles/2018-06-20/euretaliation-against-u-s-over-metaltariffs-to-start-june-22. See World Trade Organization, World 58

Currents 24.2 2021

Trade Report 2007—Six Decades of Multilateral Cooperation: What Have We Learnt? 221 (2007), https://www. wto.org/english/res_e/booksp_e/ anrep_e/world_trade_report07_e.pdf. 10. See Tariffs: More Bindings and Closer to Zero, World Trade Organization, h t t p s : / / w w w. w t o. o r g / e n g l i s h / thewto_e/whatis_e/tif_e/agrm2_e. htm (last visited July 25, 2020). 11. General Agreement on Trade in Services, art. XVI, XVII, XX, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, 1869 U.N.T.S. 183 [hereinafter GATS]. 12. See Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, 1868 U.N.T.S. 201. See also Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, 1869 U.N.T.S. 14. 13. See Agreement on Safeguards, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, 1869 U.N.T.S. 154. 14. See Report of the Panel, Swedish Anti-Dumping Duties, L/328 (Feb. 26, 1955), GATT B.I.S.D. (3rd Supp.), at 81, 89 ¶ 28 (“The Panel was of the opinion that if the Swedish authorities considered that it was not possible to find ‘a comparable price in the ordinary course of trade for the like product when destined for consumption in the exporting country’, no provision in the General Agreement would prevent them from using one of the other two criteria laid down in Article VI.”). 15. General Agreement on Tariffs and Trade, art. VI ¶ 3, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194 [hereinafter GATT]. 16. See Appellate Body Report, Korea— Measures Affecting Imports of Fresh, Chilled and Frozen Beef, ¶ 164, WT/ DS161/AB/R and WT/DS169/AB/R, (Dec. 11, 2000). 17. GATT art. XII(1); see Report of the Appellate Body, India—Quantitative Restrictions on Imports of Agricultural, Textile and Industrial, WT/DS90/ AB/R (Aug. 23, 1999). 18. See Karen McCusker, Are Trade Restrictions to Protect the Balance of Payments Becoming Obsolete?, 35 Intereconomics 89, 89-90 (2000). 19. See, e.g., Devas v. India, PCA Case No. 2013-09, Award on Jurisdiction and Merits (July 25, 2016). “Indeed,

it is well established by judgments of the International Court of Justice (the ‘ICJ’) and investment arbitration awards that, unless a treaty contains specific wording granting full discretion to the State to determine what it considers necessary for the protection of its security interests, national security clauses are not self-judging.” Id. ¶ 219. “Self-judging ‘essential security interests’ provisions are far from being unknown in international law.” Id. at 58 n.286. “We gave a good deal of thought to the question of the security exception which we thought should be included in the Charter. We recognized that there was a great danger of having too wide an exception and we could not put it into the Charter, simply by saying: ‘by any Member of measures relating to a Member’s security interests,’ because that would permit anything under the sun. Therefore, we thought it well to draft provisions which would take care of real security interests and, at the same time, so far as we could, to limit the exception so as to prevent the adoption of protection for maintaining industries under every conceivable circumstance. . . . [T] here must be some latitude here for security measures. It is really a question of balance. We have got to have some exceptions. We cannot make it too tight, because we cannot prohibit measures which are needed purely for security reasons. On the other hand, we cannot make it so broad that, under the guise of security, countries will put on measures which really have a commercial purpose.” The Chairman of Commission A suggested in response that the spirit in which Members of the Organization would interpret these provisions was the only “guarantee against abuses of this kind.” U.N. ESCOR, 2nd Sess., 33rd mtg. at 20-21, U.N. Doc. E/ PC/T/A/PV/33 (July 24, 1947). 20. Russia—Measures Concerning Traffic in Transit, supra note 1. For an account on the pre-2019 history of the national security exception, see Lukasz Gruszczynski & Marcin Menkes, The Legality of the EU Trade Sanctions Imposed on the Russian Federation under WTO Law, in The Case of Crimea’s Annexation under International Law 237, 245-255 (Wladyslaw Czaplinski et al. eds, 2017). 21. The panel considered that the chapeau’s phrase “which it considers”

22. 23.

24.

25. 26. 27. 28. 29. 30. 31.

may be conceived in three ways. First, it may be interpreted as qualifying Article XXI(b) at large, including “the determination of the matters described in the three subparagraphs.” Second, it may qualify the determination of the member state’s “essential security interests.” Third, it may be “read to qualify only the word ‘necessary’, i.e. the necessity of the measures for the protection of ‘its essential security interests’.” Interestingly, it was beyond all question that once it is confirmed that there is a national security predicament, states’ prerogative to decide what is necessary is not limited. Put it otherwise, it was out of question that security measures are unilateral actions, the only legal question being the scope of unilateral action. Russia—Measures Concerning Traffic in Transit, supra note 1, ¶ 7.63. The panel’s conclusion was that it is not the chapeau of Article XXI(b) (including the term “which it considers”) that qualifies the rest of the provision but it is the rest of the provision (including the enumeration of the three matters where unilateral action may be taken) that qualifies the prerogative constituted by the chapeau. Id. ¶ 7.82. Id. ¶¶ 7.101, 7.71, 7.98, 7.100. Id. ¶7.131 (“[I]t is left, in general, to every Member to define what it considers to be its essential security interests.”); ¶ 7.146 (“Once acting in bad faith can be ruled out, it is for Russia to determine the ‘necessity’ of the measures for the protection.”). Id. ¶ 7.101. (“The Panel concludes that the adjectival clause ‘which it considers’ in the chapeau of Article XXI(b) does not extend to the determination of the circumstances in each subparagraph. Rather, for action to fall within the scope of Article XXI(b), it must objectively be found to meet the requirements in one of the enumerated subparagraphs of that provision.”). Id. ¶ 7.124-7.125. Id. ¶ 7.74-7.76. Id. ¶ 7.77. Id. ¶ 7.71. Id. ¶ 7.69. Id. ¶ 7.98. See John H. Jackson, William J. Davey & Alan O. Sykes, Legal Problems of International Economic Relations 11991203 (West 2013) (“The problem with a national security exception in international agreements, however, is that it is virtually

impossible to define its limits. Almost every sector of economic endeavor can and does argue that it is necessary for national security, from shoes to watches, radios to beef production”). 32. Russia—Measures Concerning Traffic in Transit, supra note 1, ¶ 7.132. 33. Id. ¶ 7.133. 34. Id. ¶ 7.135-7-136. 35. Id. ¶ 7.138. 36. GATT art. XXI(b)(ii). 37. World Trade Organization, supra note 3. 38. Id. ¶ 7.263. 39. Id. ¶ 7.286. 40. Id. ¶ 7.291. The panel was “unable to discern any basis for concluding that the application of criminal procedures or penalties to beoutQ would require any entity in Saudi Arabia to engage in any form of interaction with beIN or any other Qatari national.” Id. ¶ 7.289. 41. Id. ¶ 7.291. 42. Id. ¶ 7.292 (emphasis added). 43. See, World Trade Organization, Current Situation and Schedules of WTO Members, https://www.wto. org/english/tratop_e/schedules_e/ goods_schedules_table_e.htm (last visited July 17, 2020) (illustrating the Schedule of Concessions and Commitments annexed to the Marrakesh Protocol to the GATT 1994). 44. See World Trade Organization, WTO Legal Texts, https://www.wto.org/ english/docs_e/legal_e/26gats.pdf (last visited July 26, 2020) (highlighting article XX, the Schedules of Specific Commitments annexed to GATS). 45. Sungjoon Cho, GATT NonViolation Issues in the WTO Framework: Are They the Achilles’ Heel of the Dispute Settlement Process?, 39 Harv. Int’l L.J. 311, 315–316 (1998). 46. Panel Report, Korea—Measures Affecting Government Procurement, ¶7.93, WTO Doc. WT/DS163/R, (adopted May 1, 2000) (“In our view, the non-violation remedy as it has developed in GATT/ WTO jurisprudence should not be viewed in isolation from general principles of customary international law. As noted above, the basic premise is that Members should not take actions, even those consistent with the letter of the treaty, which might serve to undermine the reasonable expectations of negotiating partners. This has traditionally arisen in the context of actions which might undermine the value

47.

48.

49.

50. 51.

of negotiated tariff concessions. In our view, this is a further development of the principle of pacta sunt servanda in the context of Article XXIII:1(b) of the GATT 1947 and disputes that arose thereunder, and subsequently in the WTO Agreements, particularly in Article 26 of the DSU.”). Panel Report, EEC—Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-feed Proteins, ¶ 144, 148, WTO Doc. L/6627 - 37S/86 (adopted Jan. 25, 1990) (“[T] hese provisions, as conceived by the drafters and applied by the CONTRACTING PARTIES, serve mainly to protect the balance of tariff concessions. The idea underlying them is that the improved competitive opportunities that can legitimately be expected from a tariff concession can be frustrated not only by measures proscribed by the General Agreement but also by measures consistent with that Agreement. In order to encourage contracting parties to make tariff concessions they must therefore be given a right of redress when a reciprocal concession is impaired by another contracting party as a result of the application of any measure, whether or not it conflicts with the General Agreement. . . . The Panel considered that the main value of a tariff concession is that it provides an assurance of better market access through improved price competition. Contracting parties negotiate tariff concessions primarily to obtain that advantage. They must therefore be assumed to base their tariff negotiations on the expectation that the price effect of the tariff concessions will not be systematically offset. If no right of redress were given to them in such a case they would be reluctant to make tariff concessions and the General Agreement would no longer be useful as a legal framework for incorporating the results of trade negotiations.”). Working Party Report, The Australian Subsidy on Ammonium Sulphate, ¶ 1(d), GATT/CP.4/39 (March 31, 1950), GATT B.I.S.D. II/188 (adopted April 3,1950). Appellate Body Report, European Communities–Measures Affecting Asbestos and Asbestos-Containing Products - AB-20000-11, WTO Doc. WT/DS135/AB/R (adopted Mar. 12, 2001). Id. ¶¶ 187–89. Appellate Body Report, Indonesia—Safeguard on Certain Iron or Steel Products, AB-2017-6,

WTO Doc. WT/DS490/AB/R/ Add.1 & WT/DS496/AB/R/ Add.1 (adopted Aug. 15, 2018). 52. See Addyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899); Polk Bros., Inc. v. Forest City Enterprises, 776 F.2d 185 (7th Cir. 1985); Allen G. Haroutounian, Shedding Light on the Federal Courts’ Treatment of Horizontal Restraints Under Section 1 of the Sherman Antitrust Act, 45 Loy. of L.A. L. Rev. 1173, 11801181 (2012); Csongor István Nagy, EU and US Competition Law: Divided in Unity? 69-70 (Ashgate Publishing, 2013). 53. Statement from the President Regarding Emergency Measures to Address the Border Crisis (May 30, 2019), https://www.whitehouse. gov/briefings-statements/ statement-president-regardingemergency-measures-addressborder-crisis/.

Currents 24.2 2021

Legal Scrutiny of an Indirect Advertising Ban on Tobacco Products under WTO Laws P E I - K A N

YA N G

—————————————————

Associate Professor of Law, Department

Entered into force on 27 February

Abstract

of International Business, College of

2005, the FCTC provides various tobacco

—————————————————

Commerce, National Chengchi University,

control measures relating to the reduction of

Banning tobacco advertising and

Taipei, Taiwan. The author can be reached

demand and supply of tobacco. Including a

via pkyang@nccu.edu.tw.

comprehensive ban on tobacco advertising,

promotion is proved to be effective in reducing the amount of tobacco use.

promotion, and sponsorship, a policy

With more countries prohibiting direct

argues that banning brand stretching and

intertwined public health concerns with

tobacco advertising, the tobacco industry

sharing is much in line with WTO laws

other societal values or legal interests such

often switched tactics to take advantage

such as Article 20 of TRIPS, Article III:4 of

as freedom of expression and protection of

of “indirect advertising” techniques to

GATT, and relevant rules under GATS and

intellectual property, has become one of the

circumvent outright bans on tobacco

TBT Agreements. While a strict meaning of

most controversial issues in implementing

advertising. Among others, brand stretching

such ban could run afoul of Article 15.1 and

a comprehensive and effective tobacco

and brand sharing have been used to associate

15.4 of the TRIPS Agreement regarding the

policy. Every state desiring to impose a

tobacco brands with non-tobacco products

obligation to register a trademark.

total ban on tobacco advertising is likely to

or services as a secretive way to maintain

—————————————————

confront a variety of legal challenges from

or reinforce the image or value of tobacco

Introduction

brands with the aim to promote tobacco

—————————————————

or international forum. Unlike direct

products. While the Framework Convention

Smoking kills and liberalization of

advertising, countries face more difficulties

on Tobacco Control recommends that brand

tobacco trade is much to blame. Globalization

to implement a total prohibition on “indirect

stretching and brand sharing should be

has inevitably made the tobacco pandemic a

advertising” of tobacco products, i.e., brand

banned as they are also means of tobacco

world-wide problem with particular impact

stretching and brand sharing, if no exceptions

advertising and promotion, the tobacco

on developing or low-income countries.

are provided to accommodate societal

industry may contrive to challenge this

Collective efforts at the international level

interests other than public health. A ban on

ban at domestic or international level by

are essential to combat tobacco pandemic

indirect tobacco advertising tends to be easily

claiming violations of constitutional laws or

through international cooperation, rule-

challenged for the lack of proportionality in

international trade rules. Given the impact

making, and implementation of tobacco

infringing the freedom of expression and

of trade rules on preserving tobacco control

control measures across borders. The

intellectual property rights either under

measures, this article explores the concept

Framework Convention on Tobacco Control

constitutional laws or international trade

of brand stretching and brand sharing and

(FCTC), as the first treaty negotiated and

agreements.

the rationale of a ban on indirect advertising

concluded under the auspices of the World

Despite the controversy, international

with particular emphasis on its consistency

Health Organization (WHO), can be

efforts are taken to develop a comprehensive

with relevant trade rules under the World

portrayed as an achievement in organizing

ban on all tobacco advertising based on the

Trade Organization (WTO). This article

global efforts to tackle the imminent tobacco

evidence that a total prohibition of tobacco

epidemic at the international level. 60

Currents 24.2 2021

the tobacco industry either at the domestic

advertising would reduce the consumption

the World Trade Organization.

A. Origins of Indirect Advertising in

of tobacco products. As Article 13 of the

Therefore, this article aims at exploring

FCTC provides, each Party shall adopt a

whether and how a ban on indirect tobacco

The tobacco industry has heavily relied

comprehensive ban on all types of tobacco

advertising will sustain the potential legal

on tobacco advertising, promotion and

advertising, promotion, and sponsorship

challenges under relevant WTO agreements.

sponsorship to attract new customers (non-

subject to its constitution or constitutional

Part II will expound the notion of indirect

smokers) to its additive and deadly products.3

principles. At its third session, the Conference

advertising and the definition of brand

Especially, the youth, being the most

of the Parties (COP) adopted a guideline for

stretching and brand sharing, two types

vulnerable group to tobacco advertisements,

implementation of Article 13 (the Guideline)

of indirect advertising. Part III examines

becomes the target population the tobacco

which clearly recommends Parties should ban

the regulatory rationale for a ban on

company is eager to attract. Therefore,

“brand stretching” and “brand sharing,” as

indirect advertising of tobacco products

banning all forms of tobacco advertising,

they are means of tobacco advertising and

and the limitations of the Guideline for

promotion, and sponsorship is considered

promotion.

implementation of Article 13 of the FCTC.

to be one of the most effective policies to

—————————————————

Moreover, several national experiences on

reduce tobacco use, especially among new

banning brand stretching and brand sharing

smokers. 4 However, few countries have

of tobacco products will also be briefly

enforced a comprehensive ban on all forms

discussed. Part IV will examine if and how a

of direct tobacco advertising, 5 let alone

ban on brand stretching and brand sharing

brand stretching and brand sharing.6 Brand

of tobacco products will sustain the scrutiny

stretching and sharing are considered indirect

under relevant WTO agreements such as

forms of advertising that the tobacco industry

—————————————————

the Agreement on Trade-Related Aspects

utilizes to circumvent direct advertising bans

The tension between public health

of Intellectual Property Rights (TRIPS),

and promote their products to younger

and international trade has deepened with

General Agreement on Tariffs and Trade

generations. With more countries imposing

the world becoming more interdependent.

1994 (GATT), General Agreement on

total or partial bans on direct advertising on

On tobacco control, trade liberalization

Trade in Services (GATS), and Agreement

tobacco products, the tobacco industry has

has been criticized for moving the tobacco

on Technical Barrier to Trade (TBT). Part V

found creative ways to market their brand

pandemic from the rich northern countries

concludes this article.

names without association to the original

to the more populous southern countries.

—————————————————

tobacco products, so that brand images

Moreover, trade rules are often used by the

can be maintained or even reinforced via

of certain governmental measures to reduce

II. Origins and Concept of Indirect Advertising o f To b a c c o P r o d u c t s

tobacco consumption. The infringement of

—————————————————

brand itself rather than cigarettes or tobacco

trade rules or property rights is a common

Before examining potential legal

products. 7 Through indirect advertising

argument made by the tobacco industry

challenges under trade rules, this article will

may not specifically mention the tobacco

resisting a total ban on tobacco advertising.

first explore the origin of indirect advertising

product, such advertising can circumvent

Given the potential threat of international

and delineate the concept and legal criteria

a tobacco advertising ban or restriction by

trade rules, this article focuses on discussing

of two types of indirect advertising, i.e.,

using the overall brand, trade marks, or other

legal issues involved in a ban on brand

brand stretching and brand sharing as the

distinctive features of tobacco products to

stretching and brand sharing of tobacco

basis for further discussion on regulatory

promote a tobacco product.”8

products with particular emphasis on its

issues involved with indirect advertising of

consistency with relevant trade rules under

tobacco products.

The infringement of trade rules or property rights is a common argument made by the tobacco industry resisting a total ban on tobacco advertising.

tobacco industry to challenge the legality

Marketing Tobacco Products

products other than tobacco. This indirect marketing strategy appears to advertise the

The technique of brand extension or product diversification has been commonly

Currents 24.2 2021

used by manufacturers to either expand the

promote its brand names or images by

indirectly,” they are considered as a “means

brand’s traditional market boundary or to

connecting cigarette brands with totally

of tobacco advertising and promotion” and

avoid the immense cost of launching a new

different products or services, such as

should be prohibited as recommended in the

brand in the market.9 It may also be used to

clothes, boots, or travel. These techniques

Guideline.14

save a value-declining trademark or make

are designed to maintain public awareness

Similar marketing techniques compared

use of the residual value of a trademark.

of the so-called “values” or “images” linked

Despite the possibility of diluting the original

to the original tobacco product.

stretching and brand sharing should be

brand or trademark,

—————————————————

distinguished from other indirect advertising

brand extension

As a form of indirect advertising, brand

to marketing tobacco products or are

These advertising methods called “brand stretching” and “brand sharing” will frustrate the effectiveness of tobacco advertising ban if no ban or restrictions are imposed to counteract the negative effects on tobacco control.

utilized by the tobacco industry. The tobacco

—————————————————

by the FCTC in a separate section. Article

company often applies cigarette brand

According to the Guideline, “brand

1(g) defines “tobacco sponsorship” as “any

names, logos, or other distinctive elements

stretching” has been defined as a situation

form of contribution to any event, activity

of cigarette brands to non-tobacco products

where “a tobacco brand name, emblem,

or individual with the aim, effect or likely

aiming at circumventing a comprehensive

trademark, logo or trade insignia or any other

effect of promoting a tobacco product or

ban on direct tobacco advertising activities.

distinctive feature (including distinctive

tobacco use either directly or indirectly.”

These advertising methods called “brand

color combinations) is connected with a

Therefore, sponsorship aims at regulating

stretching” and “brand sharing” will frustrate

non-tobacco product or service in such a

the contribution to any “event, activity or

the effectiveness of tobacco advertising ban

way that the tobacco product and the non-

individual” while brand stretching and brand

if no ban or restrictions are imposed to

tobacco product or service are likely to be

sharing focus on the promotional efforts done

counteract the negative effects on tobacco

associated.”

on the products or services through branding.

is generally considered to be a legitimate business practice with no need for regulatory interventions if no significant public interests are involved such as marketing based on fraud or misleading information. However, such genuine business practices could raise health concerns when they apply

techniques, such as sport sponsorship, free sample distribution, product placement, packaging, and point of sale display, etc. These new techniques are outside the coverage of this article even though they share similar characteristics as forms of indirect marketing strategy. First, sport sponsorship has been covered

control. Based on such understanding, the

As for “brand sharing," it is defined as

Sponsorship and advertising/promotion

Conference of Parties to the FCTC at its

a situation where “a brand name, emblem,

can be distinguished by promoting tobacco

third session adopted the Guideline, which

trademark, logo or trade insignia or any other

product or use through different objects or

explicitly regulate brand stretching and brand

distinctive feature (including distinctive color

media, i.e., either via events, or products, or

sharing of tobacco products.

combinations) on a non-tobacco product or

services. The former refers to sponsorship

B. The Concept of Indirect Advertising:

service is connected with a tobacco product

while the latter refers to advertising.

Brand Stretching and Brand Sharing

or tobacco company in such a way that the

Secondly, the technique of providing a

Brand stretching and brand sharing

tobacco product or company and the non-

“free sample” is often utilized to distribute

are two indirect advertising methods

tobacco product or service are likely to be

tobacco products in places where young

that the tobacco company creatively uses

associated.”13

people gather most and disguised as a

to circumvent a direct ban on tobacco

To the extent that brand stretching

consideration for conducting a market

advertisements. In other words, the tobacco

and brand sharing are used with “the aim,

research. For tobacco companies, giving free

industry, instead of focusing on advertising

effect or likely effect of promoting a tobacco

samples of tobacco products actually costs

tobacco products, shifts its strategy to

product or tobacco use either directly or

little but immensely helps to recruit new

Currents 24.2 2021

consumers, especially the youth. Article 16.2

tobacco products. Nonetheless, the Guideline

Red & White bravery awards, Wills lifestyle,

of the FCTC provides that “[e]ach Party

distinguishes these two concepts by the type

Four Square white water rafting in India;17

shall prohibit or promote the prohibition of

of original brand names used to associate

Salem Power Station music stores, Benson &

the distribution of free tobacco products to

with tobacco products. In other words, the

Hedges coffees and coffee shops, etc.18

the public and especially minors.” Sampling

Guideline provides two categories of indirect

The second category is “brand sharing,”

techniques can be distinguishable from

advertising associated with tobacco products.

which refers to brands that originally

brand stretching and brand sharing as this

The first category, called “brand

registered or used non-tobacco products or

problem should be solved by regulating the

stretching,” refers to those brands that have

services that are used in connection with

distribution or sale of tobacco products.

originally been registered or used for tobacco

tobacco products as well as other products

The third technique, product placement,

products that are also used in connection

or services. In other words, the original

refers to the inclusion of or reference to a

with other non-tobacco products or services.

brand used for non-tobacco products or

tobacco product, service or trademark in the

The original brand used for tobacco products

services is shared with tobacco and non-

context of print media, television and radio,

is extended to other non-tobacco products or

tobacco products or services. Although

theater, or other live performances in return

services so that two products or services can

brand stretching also shares the brand name

for payment or other consideration. This

be associated.

with other non-tobacco products or services,

technique aims at placing tobacco products

—————————————————

the original brand used in brand sharing is

consumers. Moreover, how tobacco products

The third technique, product placement, refers to the inclusion of or reference to a tobacco product, service or trademark in the context of print media, television and radio, theater, or other live performances in return for payment or other consideration.

are displayed at the point of retail sale is also

—————————————————

(1) the nominal brand; (2) at least two

contributory to the advertising or promotion

For example, R. J. Reynolds tries to

separate products or services; and (3) the

of tobacco products. Despite bearing similar

promote its cigarette brand “Camel” through

level of association between the brand and

promotional elements, these techniques are

the advertisements for Camel boots, Camel

the products or services.

different from brand stretching and sharing

watches, Camel expeditions, Camel Trophy,

First, there must be a brand which

as the tobacco product is promoted through

etc. 15 Philip Morris likewise promotes

denominates a real product or service and

packaging and display in the former while

its cigarette brand, “Marlboro,” through

links certain product or services with its

through the brand name or image in the

advertisements for Marlboro Classics and

manufacturers or service providers. The

latter.

Marlboro Leisure Wear. British American

scope of the brand is as broad as covering

Classifications and examples

Tobacco promotes its cigarette brands by

any emblem, trademark, logo or trade

As types of indirect advertising methods,

establishing “Benson & Hedges Bistro,”

insignia, or any other distinctive feature

brand stretching and brand sharing are

a shop selling coffee products instead of

such as distinctive color combinations. Such

sometimes used interchangeably to refer to

cigarettes. Other examples include: plain

expansive coverage of brand prevents the

the use of a tobacco brand name on a non-

pan masala as an advertising surrogate for

tobacco companies from circumventing the

tobacco product with a view to promote

tobacco containing pan masala in India;

indirect advertising ban by confining the

or trademarks in other communicational platforms or media channels instead of other products or services that can be distinguished from brand stretching and brand sharing. Finally, tobacco products may also be advertised through the pack or at the point of sale. Another technique the tobacco company often used to circumvent advertising bans is using packaging or product features to attract

simply for the use of non-tobacco products or services. For example, the brand “Boss” or “YSL” were originally used for clothes and wears, and later shared with tobacco products. Legal criteria for brand stretching or brand sharing According to the Guideline, three legal criteria can be further analyzed to constitute a brand stretching or brand sharing practice:

Currents 24.2 2021

brand in certain forms. However, it remains

indirectly.”21 Brand stretching and brand

order to realize why and to what extent such

questionable if the scope is broad enough

sharing are also considered as tobacco

marketing technique should be restricted or

to cover the “image-stretching” techniques.

advertising and promotion if they have such

prohibited.

The second criterion requires that there

aim, effect or likely effect of promoting

Public Health Rationales

must be two separate products or services

tobacco products and only for this reason

The reason for regulating indirect

that are connected through the brand. One

or to such extent are condemned by the

advertising relates to the effectiveness of

of them must be a tobacco product while

Guideline.

such a ban on tobacco advertising. If brand

the other must be a non-tobacco product or

—————————————————

stretching and brand sharing of tobacco

service, such as boots, toys, watches, matches

products are not regulated, it will weaken

Finally, the use of the brand must be

I I I . R e g u l at i o n o f Indirect Advertising o f To b a c c o P r o d u c t s

in a way that the tobacco product and the

—————————————————

partial advertising ban contains a loophole for

non-tobacco product or service are “likely”

With the knowledge of indirect

tobacco industry to evade from regulations

to be associated. The level of association

advertising described above, this article will

and makes the advertising ban ineffective in

depends solely on the likelihood or possibility

discuss the regulatory issues on the practice

reducing the amount of tobacco use.

of connection between the tobacco and

of indirect advertising of tobacco products,

In other words, imposing a

non-tobacco products or services. Such

including the regulatory rationales, the

comprehensive ban on indirect advertising

intermediate level of association can avoid

limitations of current rules under FCTC

practices can eliminate regulatory loopholes

being condemned in a situation where a

Guideline, and illustration of selected

that tobacco companies often take advantage

brand which is independently registered for

national legislative experiences.

of and make the overall tobacco advertising

a tobacco product and for another product

—————————————————

ban more effective to reduce the tobacco

or travel agent.

without any connection between the two such as Finnish “Downtown tobacco” and “Downtown” clothes.

In other words,

according to this criterion, if a tobacco brand and non-tobacco product or service, or a non-tobacco brand and a tobacco product are connected in a way that is not likely to be associated, such practice is not prohibited pursuant to the Guideline.

[I]mposing a comprehensive ban on indirect advertising practices can eliminate regulatory loopholes that tobacco companies often take advantage of and make the overall tobacco advertising ban more effective to reduce the tobacco use.

the effectiveness of the original ban on direct advertising of tobacco products. As such,

use. Researches have shown that tobacco advertising attributes to an increase in tobacco consumption.22 Tobacco advertising also has an immense influence on young people.23 A comprehensive ban on tobacco advertising will reduce the amount of tobacco use while partial bans have proven ineffective.24 If the government only bans tobacco advertising in one or two media platforms, the tobacco

Most importantly, brand stretching

—————————————————

companies will simply shift their advertising

and brand sharing of tobacco products is

A. Regulatory Rationales and

expenditures to other media, with no or little

condemned for its “aim, effect or likely

Counterarguments

effect on overall consumption.25

effect of promotion a tobacco product or

Since indirect advertising does not

It has been argued that it is irreverent

physically attach to tobacco products,

to distinguish direct and indirect advertising

As Article 1(c) of the FCTC indicates,

regulating such practice has to find legitimate

techniques applied to the tobacco products.26

“tobacco advertising and promotion” refers

reasons or policy rationales in order to

Like partial advertising bans, if only certain

to “any form of commercial communication,

impose a restriction or even prohibition

form of direct tobacco advertising are

recommendation or action with the aim,

on this marketing technique. This article

prohibited, the tobacco industry will

effect or likely effect of promoting a tobacco

examines the public health rationales and

inevitably shift its expenditure to other

product or tobacco use either directly or

the tobacco industry’s counter-arguments in

advertising, promotion, and sponsorship

tobacco use either directly or indirectly.”

Currents 24.2 2021

strategies, and use creative, more subtle, and

However, brand stretching and sharing

indirect ways to promote tobacco products

practice done by tobacco industry has

From the document, it can be firmly

and tobacco use, especially among young

nothing to do with product diversification,

believed that brand stretching and sharing

people.27

but rather it aims at promoting tobacco

only serves the purpose to promote tobacco

Therefore, if no ban or restriction is

products and brand images. The tobacco

products and increase tobacco brand

imposed on brand stretching and brand

industry’s diversification argument can be

recognition by advertising non-tobacco

sharing, the tobacco advertising ban will

easily defeated by their internal documents.

products, such as clothing or toys affixed

become less effective as the tobacco industry

According to these internal documents,

with tobacco brand names, allowing tobacco

will simply switch its marketing strategy to

the real objective of brand stretching and

companies to circumvent traditional tobacco

indirect advertising techniques by making

sharing is to promote tobacco products.30

advertising bans.

use of such loopholes.

The purpose of indirect tobacco advertising,

In addition, the tobacco industry

Ostensible Counterarguments

while not specifically mentioning the

consistently argues that a ban on indirect

In response to public health concerns

tobacco product, is to circumvent a tobacco

advertising of tobacco products may have a

over the direct advertising ban on tobacco,

advertising ban or restriction by using brand

negative impact on the advertising industry as

the tobacco industry often argued that

names, trade names, trademarks, emblems

multiple products or services are potentially

tobacco advertising had either a weak

or other distinctive features of tobacco

covered and plenty of market players in

influence on smoking behaviors or simply

products with the aim or the indirect effect

advertisement sector are also affected. The

targeted existing smokers to switch brands;

of promoting a tobacco product.

ban on indirect advertising of tobacco

none of such arguments can be sustained

—————————————————

products will have serious economic impact

forms of communication are denied.”32

non-tobacco products or services by using

The global health community has clearly demonstrated a clear policy strateg y towards a comprehensive ban on tobacco advertising, promotion and sponsorship w h e n t h e F C TC w a s negotiated at the third session of Intergovernmental Negotiating Body (INB) and concluded with Article 13 of the FCTC .

existing brands with stronger images to

—————————————————

to the constitutional principles claiming that

assist extended products in accessing a new

For example, British American Tobacco

the right to “freedom of expression” has

with real marketing strategy revealed in their internal documents. As for indirect 28

advertising, it is believed that the tobacco industry may raise similar arguments that are ostensibly sound but conceal their real intension to promote brand image of tobacco products. The tobacco industry can stress that the strategy of brand stretching or sharing is a common and legitimate business practice designed to diversify their product lines or the whole industry. The goal is to promote

market. Such practice has nothing to do with

clearly indicated in a 1979 document that:

on the advertising business or even the whole economy. For example, the media, advertiser, or publisher will lose revenue for a ban on tobacco advertisements. However, tobacco advertising constitutes only a small percentage of total advertising revenue. The economic impact on the advertising industry is not as serious as the tobacco industry claims, and it is only the pretext for tobacco industry to resist a ban on tobacco advertising.33 Finally, the tobacco industry often resorts

been excessively infringed as one of the legal

the promotion of tobacco products, and this

“Opportunities should be explored by

arguments against such advertising ban.

argument can be more persuasive if a separate

all companies so as to find non-tobacco

They claim that advertising, as commercial

subsidiary or division is established by law to

products, and other services which can be

speech, provides product information for

deal exclusively with non-tobacco products

used to communicate the brand or house

consumer’s choice, and advertising should

or services in order to avoid any possible

name, together with their essential visual

be allowed as selling tobacco products is

connection with their parent company selling

identities . . . to ensure that cigarette [lines]

not illegal under domestic law.34 However,

tobacco products.

can be effectively publicized when all direct

such an argument can also be defeated by

Currents 24.2 2021

demonstrating that such commercial speech

obligations under Article 13 of the WHO

effect, or likely effect” of promoting a tobacco

can be legally regulated if authorized by law

FCTC and gives Parties “guidance” for

product or use?

and serves a legitimate governmental interest

introducing and enforcing a total ban or

Thirdly, the Guideline provides little

with a proportional means to achieve public

applying restrictions on tobacco advertising,

guidance on alternatives to a ban on brand

health objectives.

promotion and sponsorship. While these

stretching and brand sharing if a total

B. Limitations of the FCTC Guideline

guidelines provide recommendations on

prohibition is unattainable due to the

The global health community has

the best way to implement Article 13 of

constitutional constraints of the Party. In

clearly demonstrated a clear policy strategy

the FCTC, each Party has the discretion

other words, the Guideline does not indicate

towards a comprehensive ban on tobacco

to decide whether and how to implement

any possible exceptions to a total ban on

advertising, promotion, and sponsorship

these guidelines. In other words, it is not

brand stretching and sharing or if restrictions,

when the FCTC was negotiated at the third

a mandatory obligation for Parties to

instead of prohibition, are sufficient to

session of Intergovernmental Negotiating

follow these recommendations suggested

preserve the effectiveness of tobacco control.

Body (INB) and concluded with Article 13 of

in the Guideline. Such a limited function

Although a comprehensive ban is preferred

the FCTC. During INB, Ireland particularly

of the Guidelines can also be seen as the

and recommended, a useful guideline should

emphasized the importance of banning

word “should” instead of “shall” is used in

contain the guidance on the best ways to

indirect advertising, i.e., the use of non-

its recommendations. Despite the lack of

prohibit as well as the methods to “restrict”

tobacco products to promote tobacco brand.

strong legal effect, the Guideline makes a

brand stretching and brand sharing.

An Irish delegate stated that “in our view, the

clear political assertion to “eliminate tobacco

The Guideline provides guidance on

aim of indirect advertising is to encourage

advertising, promotion and sponsorship

possible exceptions to tobacco advertising

the consumption of tobacco products and

effectively at both domestic and international

ban such as legitimate journalistic, artic or

to circumvent the direct ban on advertising

levels.”

academic expression and communication

of tobacco products.”35

Secondly, the Guideline provides little

within the tobacco trade. However, there are

guidance on the ways to examine relevant

no similar exceptions or recommendations

legal criteria or elements of a ban on brand

made particularly for “restricting” brand

stretching and brand sharing such as “likely

stretching and brand sharing. It is then up

association,” “aim,” “effect” and “likely

to each state to decide the boundary of legal

effect,” etc. The Guideline will be more

diversification of product and illegal brand

useful if more delicate legal standards or

stretching and brand sharing if domestic

tests are provided to examine the application

constitution disallows a comprehensive ban

of these legal criteria to real situations. For

on tobacco advertising. National efforts

example, how likely will a tobacco brand

to draw the boundary can be feasible and

—————————————————

being associated with non-tobacco products

desirable but may suffer incoherent policy

With the adoption of the Guideline by

or services be considered as falling into the

implementation among different countries.

the COP, a ban on brand stretching and band

concept of brand stretching or brand sharing?

C. Patterns of National Legislative

sharing has been incorporated in the legal text

How to evaluate the purpose or aim of

Experiences

as a basis for implementation. However, this

brand stretching and brand sharing? Who

It is noteworthy to discuss specific

article finds that there are several limitations

bears the burden of proof if such an indirect

national experiences of implementing a

of the Guideline that may constrain further

advertising technique is to be banned?

comprehensive ban on indirect advertising as

implementation by each Party.

Under what standards or to what extent can

a basis for further examining its consistency

Firstly, the Guideline only serves the

the government allow brand stretching and

with relevant WTO rules.

purpose of assisting parties in meeting their

brand sharing as they do not have the “aim,

—————————————————

Although a comprehensive b a n i s p re f e r re d a n d recommended, a useful guideline should contain the guidance on the best ways to prohibit as well as the methods to “restrict” brand stretching and brand sharing.

Currents 24.2 2021

Not all countries regulate brand

stretching and brand sharing even if they have

done in “bad faith”. However, this Directive

the brand feature was first used in connection

laws prescribing tobacco advertisings. For

relating to the advertising and sponsorship

with a non-tobacco product or service on or

those regulated, two patterns can be found

of tobacco products was annulled by the

before 1st September 2002, the prohibition

as the extent in which brand stretching and

European Court of Justice. 42 A newly

on brand sharing is not applied.

brand sharing is banned or restricted. Some

promulgated Directive 2003/33/EC provides

—————————————————

countries provide a comprehensive ban on

no specific provisions on banning brand

all forms of tobacco advertising including

stretching and brand sharing.

However, it allows the Secretary of State

have adopted a comprehensive ban on all

promulgating regulations which certain

forms of tobacco advertising including

exceptions can be offered. According to

indirect advertising of tobacco products.

the Tobacco Advertising and Promotion

While there has been no case specifically dealing with indirect advertising so far under the WTO, tobacco advertising bans or restrictions on the protection of trademark could run against several trade rules under the GATT, GATS and TRIPS agreements.

Brand stretching and brand sharing is

(Brandsharing) Regulations 2004, there

—————————————————

prohibited either through incorporating

are four directions for drawing the legal

Finally, the Regulation tries to draw the

indirect advertising into the definition of

boundary that offer legitimate exemptions

line based on the appearance of the brand

tobacco advertising or defining the concept

for brand sharing bans.

name on non-tobacco products or services. It

indirect advertising while others only provide

Another example can be found in the

restrictions on brand stretching and brand

United Kingdom. Article 11 of Tobacco

sharing of tobacco products.

Advertising and Promotion Act of 2002

Among others, Finland37, Norway38, New Zealand , Thailand 39

and France

has clearly provided rules on brandsharing.

of indirect advertising (brand stretching and

First, the Regulation tries to draw the line

should not be prohibited if the presentation

brand sharing) with a prohibition thereafter.

based on the subjective intent of the person

of the feature of the non-tobacco product

For those only restricting brand

conducting brand sharing. If the purpose of

or service does not make it appear that it

stretching and brand sharing, countries

such use is not to promote a tobacco product

belongs to the same brand as any tobacco

have tried to find a legitimate legal boundary

and the person could not reasonably have

product or the use of the feature does not

to distinguish legal practices of product

foreseen the promotional effect of such use,

make it appear that the same person, firm

diversification and illegal brand stretching

the prohibition is exempted.

or company is responsible for the branding

and sharing of tobacco products.

Second, the Regulation tries to draw the

of both the tobacco product and the non-

For example, the EU had tried to find

line based on the institutional relationship

tobacco product or service.

exemptions for advertising of non-tobacco

between the person conducting brand

—————————————————

products brought to the market before 30

sharing and the tobacco company. In other

July 1998 with tobacco brand names. Article

words, the person conducting brand sharing

3.2 of the Directive 98/43/EC allows such

should not be connected, employed or

advertising if it is done with “good faith” and

commissioned by a tobacco producer or

IV. Consistency of Indirect Advertising Ban on Tobacco Products with WTO Laws: A Preliminary Analysis

“clearly distinct” from the tobacco branding.

promoter, a tobacco company or a company

—————————————————

Therefore, by setting an applicable date,

which has a common parent company with a

With an international trend towards a

Directive 98/43/EC allows brand stretching

tobacco producer or promoter. The rationale

comprehensive ban on all forms of tobacco

done before 30 July 1998 as long as such

has been that disassociation of non-tobacco

advertising, the tobacco industry, instead of

advertising is made in good faith and in

companies with tobacco companies provides

fighting from the public health ends, turns

clearly distinct form tobacco brand, whereas

a legitimate excuse for brand sharing.

to undertake a legal approach to challenge

it is presumed illegal for those done after that

Third, the Regulation tries to set a date

the legality of a ban on tobacco advertising.

date as brand stretching is considered to be

for applying new ban on brand sharing. If

In addition to resorting to domestic forum

Currents 24.2 2021

based on constitutional laws, the tobacco

the prohibition of brand stretching and

on either brand stretching or brand sharing

industry often utilizes international trade

sharing has to deal with the legal issue derived

is involved in specific cases.

rules to challenge governmental measures on

from the principle of trademark laws.

tobacco control.

Registration of Trademark

It is noteworthy that the timing factor should be taken into account in assessing

While there has been no case specifically

Trademark-related problems may have

whether a ban on brand stretching and sharing

dealing with indirect advertising so far under

two aspects of legal issues: one relates to the

may be inconsistent with the obligation to

the WTO, tobacco advertising bans or

registration of a trademark and the other

restrictions on the protection of trademark

regards the use of a trademark. Whether a ban

trademark becomes an issue only when there

could run against several trade rules under

on indirect advertising of tobacco products

is a lag of time applying the registration to

the GATT, GATS and TRIPS agreements.43

is likely to infringe the rights of a trademark

a particular product or service. In other

Given the potential controversy may arise

owner largely depends on the examination of

words, there is a difference in the time of

as more countries adopt bans on indirect

which aspect of legal issues, i.e., registration

trademark application between a registered

advertising, this article finds it is necessary

or use of a trademark, and which type of

product or service and an unregistered one.

to preliminarily examine whether a ban

indirect advertising, i.e., brand stretching

If a trademark has been registered in tobacco

on brand stretching and brand sharing of

or sharing. While some may hold the view

and non-tobacco products or services, the

tobacco products is consistent with relevant

that the registration and use of trademark are

legal question about the indirect advertising

trade rules under WTO agreements.

intertwined as the trademark owner has the

ban then turns to address the legality over

A. Protection of Trademark under TRIPS

absolute right to use its trademark as long as

the use of trademark instead of registration.

Agreement

registered, most hold the view that the use

—————————————————

or services of one undertaking from those

In terms of registration, Article 15.1

of other undertakings, shall be capable of

further provides that “[s]uch signs, in

If a b a n o n i n d i re c t advertising is understood as a prohibition of the simultaneous or consecutive designation of tobacco and non-tobacco products or services covered by a trademark, it could be likely to run against Article 15.1 and Article 15.4 [of the TRIPs Agreement].

constituting a trademark”. The concept

particular words including personal names,

—————————————————

of “sign” includes words such as “personal

letters, numerals, figurative elements and

For a ban on brand stretching, while a

names, letters, numerals and figurative

combinations of colours as well as any

specific sign has been firstly registered for a

elements”, “combinations of colors” and any

combination of such signs, shall be eligible

tobacco product, the same sign is not allowed

combination of such signs. Such signs shall be

for registration as trademarks.” Moreover,

to be registered later for any non-tobacco

eligible for registration as trademarks.44 Since

Article 15.4 provides that “[t]he nature of the

products. If so understood, it can be argued

the scope of brand has much overlapped

goods or services to which a trademark is to

that such a ban may run against Article

with the scope of signs such as brand

be applied shall in no case form an obstacle

15.1 of the TRIPS Agreement unless such

name, emblem, logo or trade insignia or

to registration of the trademark.” Whether

sign is not eligible for registration because

the combination of colors, these brands are

a ban on indirect advertising may violate the

of its indistinctive nature being unable to

eligible to register as a trademark. Therefore,

obligation to register a trademark depends

distinguish non-tobacco products or services.

The infringement of intellectual property

of a registered trademark is not an absolute

rights especially trademarks could be the first

right and can be restricted in accordance with

legal problem the tobacco industry would

the rule. The issue regarding the registration

argue against a ban on brand stretching and

is different from that of the use of a trademark

sharing of tobacco products.

as they bear different policy objectives and

Brand as a Trademark

principles. This section examines the issue

Article 15.1 of the TRIPS Agreement

over the registration of the trademark and

provides that “[a]ny sign, or any combination

leaves the issue over the restriction on the use

of signs, capable of distinguishing the goods

of a trademark for the next section.

Currents 24.2 2021

For a ban on brand sharing, such sign already

of Paris Convention. 50 Countries may

to protect. If a ban on brand stretching and

registered for a non-tobacco product or

provide legitimate grounds for registration

sharing fails to fall into the contour of right

service is not allowed to be registered again

of a trademark so long as the law does not

to use trademark under Article 20, it will

for a tobacco product. Then, a possible

disqualify it simply based on the identical

be unlikely to infringe the right to use a

violation of Article 15.1 may also be argued

appearance of such sign to that of tobacco

registered trademark at all.

for the same reason with brand stretching.

products.

Based on the wordings, it is “the use of a

When applying a particular sign to

While a ban on brand stretching

trademark” that Article 20 desires to protect.

and sharing is likely to violate WTO

Moreover, such trademark should be used “in

designate particular items or scope of products

Members’ obligation to register an eligible

the course of trade” to be within the contour

or services as the object the trademark is going

sign as a trademark, it will be a different

of protective right. It may be arguable if

to be used. If a ban on indirect advertising

issue if a registered trademark can be used

applying tobacco brands (trademarks) to

is understood as a prohibition of the

for advertising or marketing of tobacco

non-tobacco products or services (brand

simultaneous or consecutive designation of

(brand sharing) or non-tobacco products or

stretching) is within the course of trade.

tobacco and non-tobacco products or services

services (brand stretching). Therefore, the use

In other words, whether the meaning of

covered by a trademark, it could be likely to

of the trademark will ultimately become the

“trade” should be corresponding to the

run against Article 15.1 and Article 15.4.

key legal issue, especially for those existing

type of business in which the trademark has

Despite the Panel’s positive ruling in favor

products or services to follow advertising

been registered? A narrow interpretation of

of Australia’s plain packaging requirement in

bans on brand stretching and sharing.

“trade” may preclude the necessity for further

Australia – Tobacco Plain Packaging regarding

Use of Trademark

discussion as prohibiting brand stretching

the registration issue under Article 15.4, the

The tobacco industry may refer to

and sharing does not come into the scope

situation of indirect advertising is different

Article 20 of the TRIPS Agreement to argue

of protective right to use trademark under

from that of plain packaging as there are

that the right to use a trademark has been

Article 20. Nonetheless, this article tends to

two types of products or services (tobacco

infringed by a ban on brand stretching and

take the view that the word “trade” should

and non-tobacco) involved with indirect

sharing of tobacco products.

not be so narrowly interpreted for following

advertising while only tobacco products are

provides that: “The use of a trademark in

reasons.

regulated under plain packaging laws. This

the course of trade shall not be unjustifiably

—————————————————

article finds that the ruling in Australia –

encumbered by special requirements, such

Tobacco Plain Packaging, despite a favorable

as use with another trademark, use in a

precedent, can be distinguishable from the

special form or use in a manner detrimental

scenario of indirect advertising.

to its capability to distinguish the goods or

Article 20

trademark on “other grounds” so long as they

It has been argued that whether a right

do not derogate from the provisions of the

to use trademark has been triggered may

The tobacco industry may refer to Article 20 of the TRIPS Agreement to argue that the right to use a trademark has been infringed by a ban on brand stretching and sharing of tobacco products.

Paris Convention. Therefore, countries may

depend on different points of views based

—————————————————

provide legitimate causes for disqualifying the

on a broad or narrow interpretation of

First, the course of trade refers to the

registrability under the domestic legislation

Article 20.53 Before jumping into the issue

process of engaging in business activities. It

of trademark law. For example, legitimate

of infringement, it is necessary to examine

should not be limited to specific products

grounds can be the lack of use of a trademark

the contour of the right to use trademark.

or services in which the trademark has been

or lack of distinctive nature, as indicated

Therefore, this article first tries to explore

registered. Second, as a trademark may be

under Section B of Article 6quinquies

what kinds of right, if any, Article 20 desires

registered for multiple products or services,

However, Article 15.2 provides that a Member may deny registration of a

services of one undertaking from those of other undertakings.”52

Currents 24.2 2021

a narrow interpretation will complicate

Before analyzing the infringement issue,

Firstly, ban on brand stretching and

the whole trademark system. Third, the

it is noteworthy that there are conceptually

sharing is well in line with the trademark

requirement of use in the course of trade

two categories of products or services

principles of preventing consumers’

is designed to distinguish those uses of

that might be affected by a ban on brand

confusion over the product or service a

trademark in private capacity or in a non-

stretching and sharing, i.e., the original and

trademark represents. For a trademark being

commercial manner that won’t necessitate

new products or services. While the use of a

of commercial value, it can make products

the protection of trademark laws. While

trademark on original products or services is

or services recognizable for consumers

such narrow interpretation may help a

unlikely to trigger legal concern over Article

attributing the product or service to

quick examination on the legality of brand

20, attaching the original trademark to a

certain manufacturers or service providers.

stretching or sharing, it will generate more

new product or service becomes the major

Trademarks also help consumer distinguishing

implications than expected on the integrity

issue over the potential violation of Article

the goods or services of one undertaking

of whole trademark system. Therefore,

20. Given that a ban on brand sharing will

from those of other undertakings. The

this article prefers to a broader approach

prevent any new tobacco product from

trademark law has been designed to protect

interpreting the term “in the course of trade”.

bearing the brand or trademark of existing

not only the effort taken by the owner to

In sum, as brand stretching and brand

non-tobacco products or services, a ban on

increase the value of its trademark, but also

sharing involves the use of brand or trademark

brand stretching will prevent any new non-

the consumers from confusing the given

of either tobacco or non-tobacco products or

tobacco products or services from bearing

goods or services with others. If a tobacco

services, and such brand or trademark has

the brand or trademark of existing tobacco

brand or trademark is “likely” associated

been used in the ordinary course of business,

products. The question lies at whether

with non-tobacco products or services or

Article 20 should be triggered to further

preventing the original trademark from using

vice versa, it would create more confusion

examine if the right to use trademark has

on new products or services, despite being

for consumers to make a meaningful and

been infringed or “encumbered”.

registered, constitutes an infringement of the

genuine connection between the trademark

Infringement of Right to Use a Trademark

right to use a trademark.

and the corresponding products or services.

The next question turns to examine

—————————————————

Secondly, brand extension has the implications to dilute the value of a trademark.

trademark may be used” rather than governing

Given the unclear scope of right under Article 20 due to different interpretative approaches, it is useful to examine whether there are any plausible causes to justify a government measure banning brand stretching and brand sharing of tobacco products within the TRIPS Agreement.

those regulating “whether a trademark can be

—————————————————

on brand stretching and sharing, despite

used in certain circumstances”.54 Along the

This article offers following reasons for

restricting the freedom of the owner’s use of

same line of argument, a ban brand stretching

holding a view that a ban on brand stretching

trademark, is pretty much in line with the

and sharing is also consistent with Article 20

and sharing is not incontinent with Article

principle of trademark laws to prevent the

as such ban only restrict a trademark being

20 of TRIPS Agreement as there is no

value of trademark being diluted.

used in certain circumstances.

infringement of right to use a trademark.

whether the right to use trademark has been infringed or encumbered under Article 20. The outcome may vary largely depending on different views on a broad or narrow interpretation of Article 20. It has been argued that plain packaging and health warning requirements are consistent with Article 20 by narrowly interpreting Article 20 as prohibiting governmental measures restricting “how a

Currents 24.2 2021

The commercial value of a trademark may be depreciated if a brand or trademark has been applied to various products or services. Unless the value of certain trademark is declining or direct marketing of certain product or service is prohibited, extending brand name or trademark to other products or services would have the likely effect of impeding the owner’s efforts to enhance the commercial value of its trademark. The ban

Finally, the purpose of Article 20 is to

approaches, it is useful to examine whether

exception to the GATT. Therefore, GATT

prevent members from adopting “positive”

there are any plausible causes to justify

jurisprudence in applying Article XX can be

or “add-on” requirement imposed on the

a government measure banning brand

utilized to interpret Article 8. As indicated

trademark owner to use the trademark.

stretching and brand sharing of tobacco

in GATT Panel Report on Restrictions in

As indicated in Article 20, the prohibitive

products within the TRIPS Agreement.

Thailand, the term “necessary” should be

government measures are all related to those

As Article 20 indicated, the use

interpreted narrowly and requires that the

imposing positive obligations (the term used

of trademark cannot be “unjustifiable”

measure is effective to achieve the proclaim

is “specific requirement”) on the trademark

encumbered by specific requirement. The

policy objectives and there are no less trade

owners such as use with another trademark,

provision offers the possibility of a justified

restrictive measures reasonably available to

use in a special form or use in a manner

restriction to the use of trademark. Based on

achieve the same goal.57

detrimental to its capability to distinguish.

this provision, if certain government measure

The policy objective is to protect the

However, banning brand stretching and

is found to infringe the use of trademark, it

public health, specifically, the reduction of

sharing imposes “negative” obligation on

is necessary to examine if such measure can

tobacco consumption. Considering the fact

trademark owners. In other words, no

be justified so as to be consistent with the

that smoking is a serious risk to human health,

additional requirement has been added onto

TRIPS Agreement. Given the ambiguity and

the Panel accepted that measures designed to

trademark owner whereas such ban only

difficulty in evaluating the justifiability of

reduce the consumption of cigarettes fell

restrict the product or service the trademark

certain measure, Article 7 and 8 of the TRIPS

within the scope of Article XX(b).58 Because

can be associated with.

Agreement provides better interpretative

a ban on brand stretching and sharing also

guidance than general WTO Agreements.

aims at reducing the amount or quantity of

and sharing may not infringe the right

Unlike Article 7 which only states the

tobacco use, the policy objective is at least a

to use trademark under Article 20 if this

objectives of the protection of intellectual

legitimate, if not compelling, governmental

provision is narrowly interpreted. However,

property rights, Article 8 provides more

interest within the scope of protecting the

one may hold a broad view that restrictions

substantive standards for examining if a

public health.

to the use of trademark in any forms will

ban on brand stretching and sharing is a

—————————————————

constitute an infringement of the right to

justifiable restriction to the use of trademark

use trademark under Article 20. The use of

under Article 20.

In sum, a ban on brand stretching

tobacco trademarks will be infringed since a

Article 8 provides that “[m]embers

ban on brand stretching prohibits them from

may, in formulating or amending their laws

applying to any other non-tobacco products

and regulations, adopt measures necessary

or services. The use of non-tobacco trademark

to protect public health and nutrition, and

will also be infringed since a ban on brand

to promote the public interest in sectors of

sharing prevents them from applying to

vital importance to their socio-economic

tobacco products. To the extent that a broad

and technological development, provided

interpretation is hold, such ban will be more

that such measures are consistent with the

[A] comprehensive advertising ban on tobacco products has proven to be effective in reducing the consumption of tobacco products, which is one of the effective means to control the demand of tobacco provided in the FCTC and the Guideline.

likely to constitute an infringement of the

provisions of this Agreement.”

—————————————————

right to use the trademark under Article 20,

According to Article 8, a ban on brand

The next issue is whether such ban is

and further finding of justifiable causes will

stretching and sharing can be justified if such

an effective measure to reduce the tobacco

be necessary.

measure is “necessary to protect public health

consumption. As previously indicated, a

Justifiable Infringement

and nutrition.” Such term used in Article 8

comprehensive advertising ban on tobacco

Given the unclear scope of right under

is similar to that provided in Article XX(b)

products has proven to be effective in

Article 20 due to different interpretative

of the GATT, despite the latter being an

reducing the consumption of tobacco

Currents 24.2 2021

products, which is one of the effective means

restrictive to the use of trademark, cannot

Article 8 of the TRIPS Agreement.60 As such,

to control the demand of tobacco provided

be reasonably expected to be independently

even if such ban constitutes an infringement

in the FCTC and the Guideline. The

employed to replace a comprehensive tobacco

of the use of trademark under Article 20, it

effectiveness of a comprehensive advertising

advertising ban.

is a measure that can be justified as being

ban demands less inquiry in comparison

The Appellate Body implied a “weighing

necessary to protect human life and health let

to an indirect advertising ban. To achieve a

and balancing” approach instead of a rigid

alone Article 20 only provides a “justifiable”

comprehensive and effective implementation

test of finding the least trade restrictive

standard to demonstrate the connection

of advertising ban on tobacco products,

measure in determining whether a WTO-

between the ends and means which is less

an indirect advertising ban would require

consistent alternative measure is reasonably

stringent than the necessity test.61

closing the loopholes. Therefore, the problem

available under Article XX of the GATT. In

B. National Treatment under GATT

lies in the final question—whether there is

other words, such “weighing and balancing”

In addition to trademark issues, the

any alternative measure less restrictive to the

approach should consider the significance

principle of non-discrimination is another

use of trademark that is reasonably available

of governmental interests and the extent to

potential problem involved in a ban on brand

to achieve the same public health policy.

which the alternative measure “contributes to

stretching and sharing of tobacco products.

the realization of the end pursued.”59

Specifically, the national treatment obligation

—————————————————

provided under Article III of the GATT

Other measures can be found in various tobacco control measures in reducing the

measures are not associated with the

Accordingly, a ban on brand stretching and sharing is a measure necessary to protect the public health through the reference to Article 8 of the TRIPS Agreement.

trademark or have less restrictive effect on

—————————————————

contracting party shall be accorded treatment

the use of trademark. It could be argued that

Therefore, “the more vital or important

no less favorable than that accorded to like

they are possible alternatives to achieve the

the common interests or values” pursued, the

products of national origin in respect of all

same policy result with less inconsistency by

easier the measure would be considered as a

laws, regulations and requirements affecting

restricting the use of trademark. Moreover,

necessary measure designed to achieve those

their internal sale, offering for sale, purchase,

a method of counter-marketing with fewer

needs. There is sufficient evidence to establish

transportation, distribution or use.”62

restrictions on the use of trademark could be

that smoking kills. And since human life and

Article III:4 applies to indirect

used to off-set the negative effect of tobacco

health is at stake, a more restrictive measure is

advertising ban on tobacco products because

advertising. However, it remains doubtful

justified as a necessary measure instead of an

such ban constitutes a law or regulation

if they are still reasonably available if the

indirect advertising ban. Moreover, counter-

“affecting the internal sale or use” of tobacco

governmental interest is vital and partial

marketing or other alternatives would not be

products. It is hard to find a country

advertising ban makes the whole tobacco

sufficient to eliminate all types of tobacco

adopt a ban on indirect advertising in a

advertising regulation ineffective.

advertising and promotion. Such policy

manner of de jure discrimination against

An analogy can be drawn in European

objective can only be achieved by banning

imported products. The potential arguments

Communities—Measures, a later WTO case

any indirect advertising techniques including

would be the competitive conditions for

shaping a different jurisprudence in applying

brand stretching and brand sharing.

imported products are affected by such

demand of tobacco under the FCTC such as educational campaigns to raise the public awareness, mandatory health warnings, and disclosure of the content of tobacco products. Beside plain packaging requirement, these

requires members not discriminating foreign goods by according less favorable treatment than domestic like product. Article III:4 provides that “The products of the territory of any contracting party imported into the territory of any other

the last prong of the necessity test under

Accordingly, a ban on brand stretching

indirect advertising ban causing de facto

Article XX of the GATT. This article argues

and sharing is a measure necessary to protect

discrimination against foreign products.

that other alternatives, despite being less

the public health through the reference to

The situation may occur when transnational

Currents 24.2 2021

tobacco company wish to market their

might give domestic products or tobacco

stretching and sharing of tobacco products

tobacco products into a domestic market

companies more comparative advantages

under the scrutiny of the GATS and TBT

dominated by domestic tobacco brands.

than foreign competitors. So, banning

Agreement.

Given direct advertising on tobacco products

indirect advertising can level the playing

Trade in Services

is prohibited, foreign tobacco brands can

fields for domestic and foreign tobacco

only use indirect advertising to market their

companies and their products.

In GATS, some provisions, such as most-favored nation treatment, are general

product in the domestic market. If indirect

Moreover, as indicated in Thailand—

obligations imposed on members for all

advertising is banned, foreign brands have

Cigarette, the Panel upheld a comprehensive

service sectors while others like market access

relatively less competitive advantages against

ban on tobacco advertisement being consistent

and national treatment applies to certain

domestic brands as consumers are more

with national treatment principle,63 which

sectors in which individual members have

familiar with domestic brands even if direct

states that: “A ban on the advertisement of

made specific commitments in its schedule.

advertising is not allowed. Such de facto

cigarettes of both domestic and foreign origin

It has been argued that tobacco

discrimination can be expected to allege if

would normally meet the requirements of

advertising ban could be challenged as

a dispute arises.

Article III:4. It might be argued that such a

trade violations under GATS if a member

However, above argument may

general ban on all cigarette advertising would

agrees to be covered by GATS rules affecting

counter oppositions from the public health

create unequal competitive opportunities

advertising services. 66 Such argument

perspective, arguing that it will be under-

between the existing Thai supplier of

based on the precondition that specific

inclusive if brand stretching and brand

cigarettes and new, foreign suppliers and

commitment of advertising sector has been

sharing is not prohibited or partially banned

was therefore contrary to Article III:4. Even

made to follow relevant trade rules under

while only direct tobacco advertising is

if this argument were accepted, such an

GATS such as Article XVI governing market

banned. In other words, this article argues

inconsistency would have to be regarded as

access of specific service sectors and Article

that without banning brand stretching and

unavoidable and therefore necessary within

XVII governing national treatment of foreign

sharing of tobacco products, it may otherwise

the meaning of Article XX(b) because

services and service suppliers.67

violate Article III based on a finding of

additional advertising rights would risk

—————————————————

a de facto discrimination against foreign

stimulating demand for cigarettes.”

imported tobacco products. For example,

Therefore, tobacco advertising ban

imagine a cigarette market structure where

should be as comprehensive as possible

transnational tobacco companies constitute

to include all forms of advertising such as

less market share than domestic tobacco

brand stretching and sharing to avoid legal

companies; for foreign companies being

challenge from violating national treatment

able to penetrate domestic cigarette market

under Article III of the GATT.

Specifically, governments have to exercise due care in negotiating the progress of liberalizing their service sectors by taking relevant tobacco control measures into account.

was through direct tobacco advertising

C. Potential Issues under GATS and TBT

—————————————————

via broadcasting, internet and mass media

Agreement

However, tobacco advertising ban

while domestic companies are comfortable

In spite of being the first case addressing

has little to do with Article XVI and

to advertise through other indirect ways as

the cigarette dispute under GATT/WTO,

Article XVII as such ban involves with the

domestic cigarette brands has been heavily

the Thailand—Cigarette case did not address

regulation of the content of advertising

inculcated into the people’s mind. In

potential issues involved with the GATS

services rather than the maximum amount of

situation like this, a de facto discrimination

and TBT Agreement as this case occurred in

services or the number of service providers.

can be found if a member only prohibits

1990 predated the enactment of GATS and

Therefore, the issue would lie at Article VI

direct tobacco advertising without banning

TBT Agreement. This article will identify

of the GATS which requires members to

all indirect advertising techniques, which

possible legal problems for a ban on brand

ensure their domestic regulations (including

Currents 24.2 2021

tobacco advertising ban) “do not constitute

of liberalizing their service sectors by taking

one or more product characteristics being laid

unnecessary barriers to trade in services.”

relevant tobacco control measures into

down and mandatory compliance. Whether

More specifically, for those requirements to

account. Members may have negotiated

a ban on brand stretching and sharing can

ensure the quality of services, they should

for specific commitment in service sectors

be seen as technical regulations depends

not be “more burdensome than necessary to

such as entertaining services or travel

largely on the first two criteria. First, such ban

ensure the quality of the service.” By analogy

agent whereas GATS obligation may make

applies not only to tobacco products but also

to previous argument on the interpretation

members impossible to adopt a ban on brand

to other non-tobacco products. It is arguable

of necessary, this article argues that a ban on

stretching because the commitment has been

if the first criterion has been met as such ban

brand stretching and sharing should meet

made in the schedule. Such difficulty and

does not apply only to an identifiable product

such requirement provided under Article VI

uncertainty are derived from brand stretching

or group of products. All products other than

of the GATS.

practices which tobacco brands may apply to

tobacco may be affected or governed by such

various services.

ban on indirect advertising.

Technical Barrier to Trade

—————————————————

Despite so, a ban on brand stretching may have special problems regarding the classifications of services.68 As brand

TBT measures constitute common

stretching applies tobacco brands to other

non-tariff barriers to trade. For the TBT

non-tobacco services such as entertainment

Agreement to apply, a governmental

or tourism services, potential legal problems

measure has first to be within the scope of

may occur in those service sectors other than

TBT measures which includes “technical

Whether a ban on brand stretching and sharing can be seen as technical regulations depends largely on the first two criteria.

sectors of advertising or health care.

regulation”, “standard” and “conformity

—————————————————

For example, British American

assessment procedure” as provided in Annex

Even if identifiable product or group

Tobacco’s subsidiary Brown & Williamson

1. In other words, a ban on brand stretching

of products need not be expressly identified

International Tobacco has undertaken a

and sharing has to fall within the definition

in the document, the question turns to

strategic marketing plan for the period

of “technical regulation”, the most relevant

the second criterion if such ban stipulates

1985-1989 to use alternative communication

in case of indirect advertising ban, as a

“product characteristics”, namely, any

means to promote tobacco brand in Malaysia

precondition to apply the TBT Agreement.

objectively definable ‘features’, ‘qualities’,

such as setting up “Benson and Hedges”

As Annex 1 provides that technical

‘attributes’, or other ‘distinguishing mark’

Bistro, Kent Travel, Kent Leisure Holidays,

regulation is defined as: “Document which

of a product. Such ‘characteristics’ might

and Salem Cool Planet record stores, etc. It

lays down product characteristics or their

relate to a product’s composition, size, shape,

could be difficult to determine which service

related processes and production methods,

color, texture, hardness, tensile strength,

sectors they might be specifically categorized

including the applicable administrative

flammability, conductivity, density, or

as advertising, food or entertainment services.

provisions, with which compliance is

viscosity. While regulation of the content

It has been argued that “countries may find

mandatory. It may also include or deal

of tobacco product and tobacco packaging

the service sectors that they had intended

exclusively with terminology, symbols,

and labeling will constitute the meaning of

to protect from progressive liberalization

packaging, marking or labelling requirements

technical regulation, it is arguable if tobacco

may be affected by the unforeseen breadth

as they apply to a product, process or

advertising ban falls within the scope of

of a specified classification or overlapping

production method.”71

technical regulation as such ban does not

ones.70 So, it may depend on Members’ policy

In EC — Sardines, the Appellate Body

positively require lying down any “product

preference and dynamic negotiation results

set out three criteria that a document

characteristics”. Instead, the ban requires a

with other Members.

must meet to fall within the definition

negative mandate by not using the brands

Specifically, governments have to

of “technical regulations”, namely, an

associated with tobacco products onto other

exercise due care in negotiating the progress

identifiable product or group of products,

non-tobacco products.

Currents 24.2 2021

However, relevant terms such as

these measures may enjoy the presumption

of such ban may violate the obligation to

“symbol” or “marking” illustrated as examples

that they are “necessary” and “least restrictive”

of relevant features of products do not

under the TBT agreement. If not, tobacco

the TRIPS Agreement, this article finds that

explicitly indicate a particular form of

control measures are subject to challenge

such ban can be implemented consistently

requirement. It can be interpreted that

under language comparable to GATT Art.

with Article 20 of the TRIPS Agreement

such characteristics may be prescribed or

XX(b). While supporting the FCTC to be

and considered to be in line with national

imposed in either a positive or a negative

recognized as an international standard under

treatment obligation under Article III of

form; therefore, a ban on brand stretching

the TBT Agreement, this article argues that

the GATT. Moreover, this article also finds

and sharing could be within the scope of

indirect advertising ban on tobacco products

several potential problems that implementing

technical regulation.

can still meet the necessity test under Article

such ban may involve under the GATS and

2.2 of the TBT Agreement based on before-

TBT Agreement.

If indirect advertising ban is considered

to be a technical regulation, according to

mentioned arguments.

Article 2.2 of TBT Agreement, Members

—————————————————

government would face less legal challenges

shall ensure that such ban is not applied to

Conclusions

based on relevant trade rules under the

create “unnecessary obstacles to international

—————————————————

WTO than those based on regional trade

trade”. To achieve this purpose, such ban

Tackling tobacco epidemics becomes

agreements or domestic constitutional

shall not be “more trade-restrictive than

a never-ending tug-of-war between health

laws. Based on examinations of relevant

necessary to fulfill a legitimate objective.”

authority and tobacco industry. Whenever

international trade rules under the WTO,

However, it shall be presumed not to create

there is an effective policy enforced by the

they seem not to formulate a firm obstacle for

an unnecessary obstacle to international

health authority to control tobacco use,

members to adopt indirect advertising ban

trade if technical regulation is applied in

there is an elusive strategy contrived by the

on tobacco products. Instead, it is suggested

accordance with relevant international

tobacco industry to evade such control. A ban

that special care should be cast and further

standards. In other words, TBT Agreement

on indirect advertising of tobacco products

examination would be needed on legal issues

encourages the use of international standards

is such a vivid example. With the science

involved in regional trade agreements (such

as the basis for technical regulations that

uncovered the evidences of negative effects of

as investment treaty) or the constitution

affect trade. If technical regulation is adopted

smoking on the health of human beings, the

(such as freedom of expression) of individual

based on internationally recognized standards

tobacco industry shifts the battleground from

country.

such as those of the International Standards

the laboratory to the courtroom especially

—————————————————

Organization (ISO), it is presumed not

on the issue involved with constitutional

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End Notes 1.

See Neil Collishaw et al., Trade Agreements and Tobacco Control: How WTO Agreements May Stand in the Way of Reducing Tobacco Use, in 2 Canadian Center for Policy Alternatives Briefing Paper Series: Trade and Investment 1 (Oct. 2001), https://www.policyalternatives. ca/sites/default/files/uploads/ publications/National_Office_ Pubs/brief2_7.pdf. See Cynthia Callard et al., An Introduction to International Trade Agreements and Their Impact on Public Measures to Reduce Tobacco Use §1, at 1–2 (2001), http://www.smokefree.ca/pdf_1/Trade&TobaccoApril%202000.pdf; see also Allyn Taylor et al., The Impact of Trade Liberalization on Tobacco C o n s u m p t i o n , i n To b ac c o Control in Developing Countries 343, 343 (Prabhat Jha & Frank Chaloupka eds., 2000), http://documents. worldbank.org/curated/ en/602821468330954036/f/709 670WP0tobac00Box370064B00 PUBLIC0.pdf. See generally Ruth Roemer, Legislative Action to Combat the World Tobacco Epidemic, 24–30 (2nd ed. 1993), https:// apps.who.int/iris/bitstream/ ndle/10665/37823/9241561572_ eng. pdf?sequence=1&isAllowed=y. Article 13 of the FCTC first explicitly recognizes the importance of the effect of banning tobacco advertising on the reduction of tobacco consumption. WHO Framework Convention on Tobacco Control, at 11 (pt. III, art. 13(1)), opened for signature June 16, 2003, 2302 U.N.T.S. 166, https:// apps.who.int/iris/bitstream/ andle/10665/42811/9241591013. pdf?sequence=1. It fur ther requires Parties to “undertake a comprehensive ban of all tobacco advertising, promotion and sponsorship” within five years of ratifying the treaty. Id. at 11 (art. 13(2)). For countries unable to undertake a comprehensive ban due to constitutional constraints, they shall still “apply restrictions on all tobacco advertising, promotion and sponsorship” in a way consistent with their constitutional principles. Id. at 11 (art. 13(3)). In any event, all Parties are obliged to, at a minimum,

prohibit false, misleading or deceptive information on tobacco advertisements, require health warning message accompany with tobacco advertising, restrict the use of direct or indirect incentive to encourage the purchase of tobacco product, and require the disclosure to the government the expenditure spend on tobacco advertising, promotion and sponsorship, etc. Id. at 11–12 (art. 13(4)(a)–(f )). 5. World Health Organization, The State of Global Tobacco Control: Implementation of Effective Measures is Just Beginning, in WHO Report on the Global Tobacco Epidemic, 42, 50-52 (2008), http://www.who.int/ tobacco/mpower/mpower_report_ global_control_2008.pdf. 6. See Institute of Medicine, G r o w i n g U p To b a c c o Free: Preventing Nicotine Addiction in Children and Youths 115-22 (Barbara S. Lynch & Richard J. Bonnie eds., The Nat’l Acad. Press 1994). 7. S e e W o r l d H e a l t h Organization, supra note 5, at 52 (describing various methods of direct and indirect marketing and their relevance whe certain methods are banned). 8. See Tobacco Advertising, Promotion and Sponsorship: Essential Facts, Tobacco-Free Kids, https:// www.tobaccofreekids.org/assets/ global/pdfs/en/APS_essential_ facts_en.pdf (last visited June 16, 2020). 9. See Hosein Vazifeh Doust & Hakimeh Niky Esfahlan, The Effect of Brand Extension Strategies on Brand Image: An Integrative Model and Research Propositions, 6 Afr. J. Bus. Mgmt. 4234, 4234 (2012). 10. See also Barbara Loken & Deborah Roedder John, Diluting Brand Beliefs: When Do Brand Extensions Have a Negative Impact?, 57 J. of Mkg. 71 (1993). 11. Other techniques or efforts done by the tobacco industry to undermine tobacco control measures such as political campaigning or corporate social responsibility. See generally World Health Organization, Regional Office for South-East Asia, A Guide to Comprehensive Tobacco Control (July 2004). https:// apps.who.int/iris/bitstream/ handle/10665/204731/B3678. pdf?sequence=1&isAllowed=y (last visited June 15, 2020);

Thomas Zeltner, et. al., World Health Organization, Tobacco Company Strategies t o U n d e r m i n e To b a c c o Control Activities at the World Health Organization (2000), https://www.who.int/ tobacco/en/who_inquiry.pdf?ua=1 (last visited June 11, 2020). 12. World Health Organization, Guidelines for Implementation of Article 13 of the WHO Framework Convention on Tobacco Control (Tobacco Advertising, Promotion and Sponsorship) ¶ 22 (2008), h t t p s : / / w w w. w h o . i n t / f c t c / guidelines/article_13.pdf?ua=1. 13. Id. ¶ 23. 14. Id. ¶ 24. 15. See Foong Kina et al., How the Tobacco Industry Circumvented Ban on Tobacco Advertising, Promotion and Sponsorship: Observations from Selected Asean Countries, 5 Asian J. WTO & Int’l Health L. & Pol’y 449, 459-462 (2010) (providing other examples in Asia). 16. See Nat’l Cancer Inst., Types and Extent of Tobacco Advertising and Promotion in 19 The Role of the Media in Promoting and Reducing Tobacco Use 105, 106 (Stephen E. Marcus et al. eds., 2008), https://cancercontrol. c a n c e r. g o v / s i t e s / d e f a u l t / files/2020-08/m19_complete. pdf. Other examples of indirect cigarette advertising include, Pall Mall matches and Peter Stuyvesant Travel in France, and Liggett & Myer (L&M) matches, Camel scooters, Gauloises travel excursions, and Bastos cassettes in Belgium. Id. at 105. 17. See Rim Bhardwaj, Surrogate A d v e r t i s e m e n t s b y To b a c c o and Liquor Industry, Legal Service India, http://www. legalserviceindia.com/article/l346Surrogate-Advertisements.html (last visited June 11, 2020). 18. See Nadine Jelsing, WHO FRAMEWORK CONVENTION ON TOBACCO CONTROL HEARINGS 2, https://www. who.int/tobacco/framework/ public_hearings/F5890582.pdf (last visited Nov. 4, 2020). 19. See Jukka Palm, The New Finnish Tobacco Act from a Trade Mark Point of View, 28 Int’l Rev. Indus. Prop. & Copyright L. 706, 709 (1997). 20. S e e W o r l d H e a l t h Organization, supra note 12, at 78

Currents 24.2 2021

¶ 24. 21. WHO Framework Convention on Tobacco Control, art. 1(c), supra note 4. 22. See Frank J. Chaloupka & Kenneth E. Warner, The Economics of Smoking 30 (Nat’l Bureau of Econ. Rsch., Working Paper 7047, 1999), https://www.nber.org/system/files/ working_papers/w7047/w7047.pdf (last visited Nov. 5, 2020). 23. See generally Crawford Moodie, Anne MacKintosh, Abraham Brown & Gerard Hastings, Tobacco Marketing Aw a re n e s s o n Yo u t h Sm o k i n g Susceptibility and Perceived Prevalence Before and After an Advertising Ban, 18 Eur. J. Pub. Health 484, 484 (2008). 24. See generally, Luk Joossens, The Effectiveness of Banning Advertising for Tobacco Products, 2nd Edition, UICC (July 2000), http://www. globalink.org/tobacco/docs/eudocs/9710joos.html (last visited Aug. 23, 2009); Henry Saffer & Frank Chaloupka, The Effect of Tobacco Advertising Bans On Tobacco Consumption, 19 J. Health Econ. 1117, 1117 (2000). 25. The World Bank, Curbing the Epidemic: Governments and the Economics of Tobacco Control 49–51 (1999), https:// documents.worldbank.org/pt/ publication/documents-reports/ umentdetail/914041468176678949/ curbing-the-epidemic-governmentsand-the-economics-of-tobaccocontrol. 26. See Joossens, supra note 21. 27. World Health Organization, supra note 12, at ¶ 5. 28. See generally Marvin E Goldberg, Ronald M Davis & Anne Marie O’Keefe, The Role of Tobacco Advertising and Promotion: Themes Employed In Litigation By Tobacco Industry Witnesses, Tobacco Control 2006;15(Suppl IV):iv54–iv67. doi: 10.1136/tc.2006.017947. 29. See generally Clive Bates & Andy Rowell, Tobacco Explained: The Truth About the Tobacco Industry...In Its Own Words, London-based Action on Smoking and Health (1999), https://www.who.int/tobacco/media/ en/TobaccoExplained.pdf. 30. See id. 31. See Tobacco Advertising & Youth: Marketing Tactics, The Campaign for Tobacco-Free Kids (2008), https://www.tobaccofreekids.org/ assets/global/pdfs/en/APS_youth_ tactics_en.pdf [https://perma/cc/ NRK7-SFN8]; see also Tobacco

32.

33.

34. 35.

36. 37.

38.

39.

40.

41.

42.

Adver tising, Promotion and Sponsorship: Essential Facts, The Campaign for Tobacco-Free Kids (Nov. 2008), https://www. tobaccofreekids.org/assets/global/ pdfs/en/APS_essential_facts_ en.pdf [https://perma.cc/4NYDHWXX]. Guidelines on Communication Restrictions and New Opportunities in Marketing 9 ( 1 9 7 9 ) , h t t p s : / / w w w. industrydocuments.ucsf.edu/docs/ hsjl0132 [http://legacy.library. ucsf.edu/tid/fqr03f00]. See Tobacco Advertising and Promotion: Countering Industry Arguments, The Campaign for Tobacco-Free Kids (Feb. 2011), https://www.tobaccofreekids. org/assets/global/pdfs/en/APS_ industr y_arguments_en.pdf [https://perma/cc/G5MK-RV49]. See id. Ireland Breaks Ranks and Speaks the Truth, Alliance Bulletin INB-3 5 (2001), https://www.fctc.org/ wp-content/uploads/2018/05/ fca_bulletin_015.pdf. World Health Organization, supra note 12, at ¶ 2. Tobacco Act No. 693/1976, S.8 (Fin.) (Jan. 1, 2012), https:// www.tobaccocontrollaws.org/files/ live/Finland/Finland%20-%20 Tobacco%20Act.pdf. Act No. 14 of 9 March 1973 relating to Prevention of the Harmful Effects of Tobacco, S.2 (Nor.), https:// www.who.int/fctc/reporting/ Annextwonorway.pdf; Regulation on the prohibition of tobacco advertising etc., (Nor.) https:// www.tobaccocontrollaws.org/ files/live/Norway/Norway%20 -%20Advertising%20Regs%20 %28No.%20989%20of%20 1995%29.pdf. Smoke-free Environments Act 1990, S.24 Pt. 2 (N.Z.) http:// www.legislation.govt.nz/act/ public/1990/0108/latest/ DLM223998.html (last visited Oct. 27, 2020) [https://perma.cc/ AJN5-63BU]. World Health Organization [Who], Tobacco Products Control Act B.E.2535 (1992), h t t p s : / / w w w. w h o . i n t / f c t c / reporting/Thailand_annex3_ tobacco_act1992.pdf. Loi nº91-32 due 10 janvier 1991 relative à la lute contre le tabaqisme et l’alcoolisme [Law 9132 of January 10, 1991 Relating to the Fight Against Smoking and Alcoholism] Journal Officiel de la République Française [J.O.] [https://perma.cc/DDZ7-9AH9]. Federal Republic of Germany v. European Parliament and Council

43.

44.

45.

46. 47. 48. 49.

50.

of the European Union, Case C-376/98, [2000] ECR 1-8419, 1-8532. See Simon Lester, Domestic Tobacco Regulation and International Law: The Interaction of Trade Agreements and the Framework Convention on Tobacco Control, 49 J. World Trade 19, 26 (2015) (With respect to tobacco advertising, arguing that the chance of trade conflict is limited, and tobacco companies may be concerned, but they probably do not have a great trade complaint. Such bans are common and are not usually challenged.). General Agreement on TradeRelated Aspects of Intellectual Property, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299 [hereinafter TRIPS]. See Panel Report, Australia Certain Measures Concerning Tr a d e m a r k s , G e o g r a p h i c a l Indications and Other Plain Packaging Requirements Applicable to Tobacco Products and Packaging, ¶ 7.1738-7.1750, WTO Doc. WT/DS435/R; WT/DS441/R; WT/DS458/R; WT/DS467/R (adopted June 28, 2018). The complaints in Australia—Tobacco Plain Packaging hold the view that the definition of registration under Article 15.1 of TRIPS and Article 6quinquies(A)(1) of Paris Convention includes the protection of use flow from the registration; Id at ¶ 7.1746. TRIPS Agreement, supra note 44, at 15.1. TRIPS Agreement, supra note 44, at 15.4. TRIPS Agreement, supra note 44, at 15.2. Appellate Body Report, United States – Section 211 Appropriations Act, ¶ 132, WTO Doc. WT/ DS176/AB/R (adopted Jan. 2, 2002). Appellate Body Report, United States–Section 211of the Appropriations Act, ¶ 132, WTO Doc. WT/DS176/AB/R (adopted Jan. 2, 2002). Paris Convention for the Protection of Industrial Property, art. 6, Mar. 20, 1883 (as revised as Stockholm, July 14, 1967), 21 U.S.T. 1583, 828 U.N.T.S. 305 (“Trademarks covered by this Article may be neither denied registration nor invalidated except in the following cases: 1. when they are of such a nature as to infringe rights acquired by third parties in the country where protection is claimed; 2. when they are devoid of any distinctive character, or consist

51.

52.

53.

54. 55.

56.

57.

58. 59.

exclusively of signs or indications which may serve, in trade, to designate the kind, quality, quantity, intended purpose, value, place of origin, of the goods, or the time of production, or have become customary in the current language or in the bona fide and established practices of the trade of the country where protection is claimed; 3. when they are contrary to morality or public order and, in particular, of such a nature as to deceive the public. It is understood that a mark may not be considered contrary to public order for the sole reason that it does not conform to a provision of the legislation on marks, except if such provision itself relates to public order.”). Neil Collishaw et al., supra note 1, at 4 (“TRIPS may be used to challenge restraints on tobacco marketing as unjustified re s t r i c t i o n s o n t h e u s e o f trademarks.”). Tr a d e - R e l a t e d A s p e c t s o f International Property Rights (TRIPS) Agreement art. 20, Jan. 1, 1995 (Further providing that “[t]his will not preclude a requirement prescribing the use of the trademark identifying the undertaking producing the goods or services along with, but without linking it to, the trademark distinguishing the specific goods or services in question of that undertaking.”). See Benn McGrady, TRIPS and Trademarks: The Case of Tobacco, World Trade Review, 3(1), 53-82, 60, 63 (2004). See id. at 64. See Panel Report, Australia – Tobacco Plain Packaging (Cuba), ¶ 7.2402 & 7.2403–7.2404, WTO. Doc. WT/DS435/R (adopted June 28, 2018). TRIPS Agreement, supra note 39, at art. 7 (“the protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligations.”). See Report of the Panel, Thailand— Restrictions on Importation of and Internal Taxes on Cigarettes, ¶¶ 74–75, DS10/R–37S/200 (Nov. 7, 1990), [hereafter Thailand Restrictions]. See id. at ¶ 73. See Appellate Body Report,

European Communities—Measures Affecting Asbestos and AsbestosContaining Products, ¶ 172, WTO Doc. WT/DS135/AB/R (adopted Mar. 12, 2001). 60. See Daniel Gervais, Analysis o f t h e C o m pat i b i l i t y o f certain Tobacco Product Packaging Rules with the TRIPS Agreement and the Paris Convention 18 (2010), https://www.jti.com/sites/default/ files/key-regulatory-submissionsdocuments/expert-reports/ intellectual-property/1-gervais. pdf (last visited June 24, 2020) (arguing Article 8 informs the analysis of justification and necessity test despite not being written as an exception to the rules in a WTO agreement). 61. For similar analysis on justification and necessity see id. at 23-30 (applying to the tobacco plain packaging measure). 62. General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194. 63. See Joseph N. Eckhardt, Balancing Interests in Free Trade and Health: How the WHO’s Framework Convention on Tobacco Control Can Withstand WTO Scrutiny, 12 Duke J. Comp. & Int’l L. 197, 226 (2002). 64. Thailand–Restrictions, supra note 48, at 22, ¶ 78. 65. S e e E . R . S h a f f e r, e t a l . , International Trade Agreements: A Threat to Tobacco Control Policy, 14 Tobacco Control (Supp. II) ii22-ii23 (2005) [doi: 10.1136/ tc.2004.007930]. 66. See id. 67. See also Collishaw, et al., supra note 1, at 3-4 (arguing The GATS may be used to challenge government attempts to regulate cigarette advertising … if these activities are in sectors which are in the schedule of sectors where national treatment and market access provisions apply). 68. See Callard, et al., supra note 2, at 29. 69. See M. Assunta & S. Chapman, The Tobacco Industry’s Accounts of Refining Indirect Tobacco Advertising in Malaysia, 13 (Supplement 2) Tobacco Control 64 (2004). 70. See Callard et al., supra note 1, at 29–30. 71. World Trade Organization, The WTO Agreement Series, Technical Barriers to Trade (1995), https://www.wto.org/ english/res_e/publications_e/ tbttotrade_e.pdf. 72. In Australia – Tobacco Plain Packing, the Panel finds that “while the Article 11 and Article

Currents 24.2 2021

13 FCTC Guidelines provide important guidance to FCTC parties in addressing packaging, and, as relevant, implementing plain packaging as an element of a comprehensive scheme of effective tobacco control policies”, they do not constitute a “standard” under Annex 1.2 of the TBT Agreement with respect to tobacco plain packaging given that these guidelines are not mandatory. See Panel Report, paras. 7.396-397; 7.390-7.395. 73. See E R Shaffer, J E Brenner and T P Houston; supra note 50, at 22.

Currents 24.2 2021

COVID-19 and International Economic Law Issues and and Annotated Bibliography C U R R E N T

Global events, such as the current pandemic, change law. International economic law will be no different. International economics—with the increased trade of goods and services, the explosion of new technologies and intellectual property, the need for increased regulation, and the expansion of foreign direct investment—

E V E N T S

CURRENTS: JIEL Editorial Staff: Gisela Aguilar, Timothy Bond, Serena Cansler, Yee Cheung, Alan Galloway, Cienna Hancock, Joitza Henriquez, Caleb Johnston, Alexandria Monroe, Amir Nazarian, Vikesh Patel, Ashley Segura, Chance Siller, Sameeha Vaid The areas we have chosen to highlight

has expanded since the post-World War II

in trade and global markets by improving transparency, keeping global supply chains going, avoiding making things worse by implementing restrictions, and focusing on policy actions for immediate and long-term effect. First, boost confidence in trade and global markets by improving transparency. A strong, shared, transparent information base

period even through other crises. Countries

in this first effort are:

is critical in underpinning sound national

have developed both soft law and treaties

•

International Trade

policy responses and the international

and agreements to deal with all these

•

International Investment and Finance

cooperation to keep trade flowing. The

changes. International organizations have

•

International Business Transactions

Organisation for Economic Co-operation

been created and operate to facilitate and

•

Workers/Heavily impacted sectors

and Development (OECD) is sharing

regulate every area of international economic

•

Governance

information on trade-related country

law. Now that the COVID-19 pandemic

•

Developing Countries

actions on COVID-19 with World Trade

has struck, the question becomes just how

—————————————————

Organization (WTO) and assessing the likely

much international economic activity

International Trade

will be impacted and how governments,

—————————————————

international organizations and businesses

Issue: What

are the actions that

Second, keep global supply chains

will respond.

countries can take during the

going, especially for essentials. An important

What follows is an early list of some of

pandemic to keep trade moving?

the international economic law issues posed

impact of these actions to help support policy makers dealing with the crisis.

priority is keeping the key supply chains for essential goods for the crisis open and

by the COVID-19 crisis. In addition, we

Source: Organisation for Econ.

functioning. There are several challenges

offer a selected and annotated bibliography

Co-operation & Dev., COVID-19

in keeping the supply chains going in the

of diagnoses of the problems posed by

and International Trade: Issues and

business of trade. Challenges that arise, for

COVID-19 and the prescriptions being

Actions (June 2020), https://read.oecd-

example, include: the availability and price

suggested by international organizations

ilibrar y.org/view/?ref=128_128542-

of air cargo, changed port protocols, rise in

and scholars of international economic law.

3 i j g 8 k f s w h & t i t l e = C OV I D - 1 9 - a n d -

prices of shipping containers, the availability

CURRENTS: JIEL will continue to work

international-trade-issues-and-actions

of labor to unload ships at ports, supply

on this project and expand these offerings

[https://perma.cc/FL25-VRJ9].

chains being affected by the need to ensure

in future issues of the journal.

additional health and safety measures for all Annotation:

participants in the supply chain, to name

There are four actions that countries can take to promote trade: boosting confidence

a few. There are some practical things that

Currents 24.2 2021

governments, in coordination with the private

Fourth, focus on policy actions that

International trade provides MSMEs

sector, can do to keep trade flowing and to

would have not only an immediate but a

with an opportunity to diversify their revenue

increase how trade can support the fight

long-term effect. How support is provided

stream and better navigate the COVID-19

against COVID-19 including speeding up

will also have important implications for the

crisis. Currently, MSMEs need transparency

border checks for medical products, food and

distribution of the gains from interconnected

more than ever. Access to information is

minimizing the need for physical interaction

markets at the national level. It will be critical

critical for MSMEs to navigate the current

by digitizing processes to the extent possible;

to ensure that support given now is—and is

rapid changes in policies, to effectively use

expediting standard formalities to leave room

seen to be—targeted at the public interest,

available support measures, and to identify

for any necessary additional COVID-19

rather than vested interests, and at public

new market opportunities.

controls; boosting international cooperation

welfare, rather than corporate welfare.

on risk management; making it cheaper and easier for people to stay connected to jobs and markets; temporarily increasing de minimis thresholds to cut delays in cross-border e-commerce; keeping trade moving without

Moreover, access to affordable trade finance is of utmost importance to ensure

Issue: How can the governments and World Trade Organization help micro, small and medium-sized enterprises navigate the pandemic?

physical contact through enacting regulations

that cashless MSMEs can trade. Streamlined customs procedures, rapid clearance of customs, and support of trade digitalization efforts are also conditions for success in international trade. To limit the impact of

to enable e-payments, e-signatures and

Source: World Trade Organization

the current crisis on MSMEs and to build

e-contracts; and helping medical researchers

Secretariat, Helping MSMES Navigate the

their resilience, it is critical that MSMEs

cooperate on COVID-19 through enabling

COVID-19 Crisis, (Sept. 24, 2020) [https://

have better access to regulatory and market

data flows.

perma.cc/MC5E-D7KX].

information and affordable trade finance, as

Third, avoid making things worse. The most significant action to avoid is

well as to streamlined customs procedures and requirements. Greater use of digital tools

Annotation:

export restrictions on essential goods, such

Micro, small, and medium-sized

and e-commerce would also benefit MSMEs.

as medical equipment and food products.

enterprises (MSMEs) are among those facing

Governments have primarily introduced

Export restrictions risk undermining

some of the greatest economic difficulties

urgent stimulus and backstop measures for

confidence in international markets and

from the COVID-19 pandemic. MSMEs

MSMEs, such as liquidity support to address

can precipitate hoarding and panic buying,

have less resilience and flexibility in dealing

cash flow issues, with the aim of preserving

further accentuating problems in import-

with the costs of massive shocks to demand

jobs and ensuring business continuity,

dependent countries. To maintain confidence

and supply resulting from COVID-19

as well as measures to support MSMEs

in global markets and cooperation, there is a

because of their size which makes it more

engaged or interested in international

need to avoid further escalation in ongoing

challenging for them to survive the crisis

trade. Governments have also introduced

trade tensions. Imposing additional costs on

than larger firms. How MSMEs will be

measures aimed at developing the resilience

firms and consumers through tariffs not only

able to navigate this economic downturn

of MSMEs and building their capacity to

causes hardship for those already suffering

will determine the extent to which jobs,

overcome future shocks to demand and

from lost income due to the crisis, but also

productivity and trade can be preserved.

supply chains. Lastly, some governments

risks increasing the size of the government

Statistics show, 50 percent of MSMEs in

have taken measures to improve the business

assistance needed to support those same firms

the United States have already shut down or

environment.

and consumers. A positive step in boosting

have laid off or furloughed employees, and

The WTO can contribute to supporting

confidence and reducing burdens would be

27 percent stated that they will be obliged to

MSMEs in several ways, such as through

for governments to commit not to impose

take such measures in the next few weeks if

transparency mechanisms in W TO

new tariffs or trade restrictive measures.

the situation does not improve.

committees and bodies, as well as in the

Currents 24.2 2021

Informal Working Group on MSMEs;

In practice, however, compliance with

foreigners. The restrictions on exportation

through the exchange of good practices

the QR Decision’s requirements amidst

are made possible because the World Trade

in terms of MSME support measures;

COVID-19 have been poor, both in terms

Organization and the General Agreement

through full implementation of the Trade

of timeliness and completeness. As a result,

on Tariffs and Trade (GATT) do not

Facilitation Agreement; through continued

there is an added degree of uncertainty as

prohibit them. Rather, international trade

efforts in enhancing access for MSMEs to

it relates to international trade. To improve

agreements specifically authorize short supply

trade finance; by harnessing transparent,

transparency, the WTO created a specific

restrictions as an exception to ordinary

fair and open procurement markets; and

webpage on COVID-19 and world trade to

trade commitments where the restrictions

by supporting trade digitalization efforts,

monitor and provide up-to-date information

are employed to protect human health.

including through the development of

on notifications. Additionally, the WTO

The authority for a nation to unilaterally

e-commerce rules.

has provided a list of recommendations

impose export restrictions during periods of

for national governments that include, for

global shortage of critical products tends to

Source: World Trade Organization,

example, ensuring new export-restricting

exacerbate trade externalities. In turn, the

Export Prohibitions and Restrictions

measures are published at the national

ideology that nations are to promote global

(2020) [https://perma.cc/PGX9-MLXW].

level. Irrespective of what the WTO can do,

welfare through international cooperation is

international cooperation and transparency

frustrated. A “simple solution” would be to

in the area of export restrictions is necessary

allocate scarce materials so that their marginal

The W TO has recognized that

to avoid risks associated with the global

utility is the same everywhere. However, this

responding to COVID-19 requires a sharp

supply response of essential medical products

solution would be overridden by a nation’s

increase in global production of essential

during the COVID-19 pandemic.

self-interest, which highlights the principle

Annotation:

that “[c]ooperation will be sustained only

medical products. However, the WTO has reported that at least 80 countries and separate

Issue: Export restrictions on

as long as the parties believe cooperation

customs territories have enacted export

medical supplies and equipment

to be in their self-interest.” This principle

restrictions—most of which have focused on

during

COVID-19.

is strengthened by the fact that, “[w]hen a nation violates its commitments under a

medical supplies and equipment. While new restrictions are being implemented almost

Source: Alan Sykes, Short Supply Conditions

trade agreement, no enforcement authority

daily, some national governments have failed

and the Law of International Trade: Economic

will force it to reverse its policies or put its

to maintain a system of transparency with the

Lessons from the Pandemic, 114 Am. J. Int’l

officials in jail.” Instead, “the penalty for

WTO. In principle, all export restrictions

L. 647 (2020).

non-compliance is at most some degree of retaliation from complaining nations.”

should be notified to the WTO pursuant to the Decision on Notification Procedures

Therefore, instead of attempting to create

Annotation:

for Quantitative Restrictions, which is

In the face of COVID-19, many national

a “simple solution” based on fair allocation,

commonly referred to as the “QR Decision.”

governments have imposed temporary

the better approach would be to allow for

Since its adoption in 2012, the QR Decision

export restrictions on medical supplies

deviation in the form of export restrictions

has required national governments to notify

and equipment. These export restrictions

where exigent circumstances make trade

the WTO of export restrictions “as soon

are motivated by actual shortages or feared

commitments untenable. In effect, this

as possible, but not later than six months

shortages related to medical products

approach would “legalize” deviation where

from their entry into force.” The QR

amidst COVID-19. Nations imposing such

exigent circumstances require it and provide

Decision also requires national governments

restrictions do so to ensure the well-being

for “GATT safeguard measures” or “GATT

to include the “WTO justification” that

of domestic constituents while ignoring,

escape clause.” Understanding there is “little

supports enacting the restrictive measure.

or giving less deference to, the welfare of

consequence for the behavior of signatories”

Currents 24.2 2021

who impose export restrictions, “trade

it.” While the “wholesale exit” approach “is

protocols have caused considerable delays in

agreements should include the flexibility to

gaining ground as a viable alternative[,]” one

the transportation of goods. Many countries

respond to changing circumstances that make

forward-thinking commentator has argued

have changed port protocols, including

commitments untenable.”

that the “proliferating demands for pausing

reducing the number of accessible ports

or even exiting international economic

and physical examination of crew members

Source: Julian Arato et al., The Perils of

agreements under-score a need to reconsider

from countries significantly impacted by

Pandemic Exceptionalism, 114 Am. J. Int’l

the field across the board.” Undoubtedly, a

COVID-19. All these issues have disrupted

L. 647 (2020).

structural reprisal would be difficult, but it

shipping services and will continue to do so

is not a foregone conclusion. “By revisiting

until the pandemic is resolved.

the primary substantive rules in international

Mitigation measures, including the

While the widespread use of the export

economic law, and by re-calibrating away

closure of border posts and sanitary measures,

restrictions exception to international

from a reactive model” based on post hoc

have created considerable risks that have

trade agreements demonstrates how the

dispute settlements, international trade “may

resulted in a lack of drivers to transport

international trade system is flexible in the

yet serve as [a] source[] of strength in times

goods. Since there has been a reduction of

short term, there are long-term concerns for

of need.” In the same vein, “the pandemic

drivers, this has caused delays in road cargo

allowing exceptions to justify COVID-19

provides an unprecedented opportunity to

transportation. However, many countries

response measures. For example, some

develop a truly integrated regime for global

have alleviated these issues by increasing

commentators anticipate legal challenges

health and economic prosperity.”

transportation by rail because it requires

Annotation:

to export restrictions imposed by national

fewer drivers and controls per amount of

governments. Admittedly, however, this

Issue: The costs of COVID-19 to

concern is speculative as parties could agree to

the trade regime and the impact

Travel restrictions have impacted air

a “glass house theory of mutual forbearance”

to freight transportation and

travel the most. It has led to a reduction

or “turn away from dispute settlements.”

business travel

of passenger flights that account for

Nevertheless, national governments may

cargo.

around half of air cargo volume. Since the

take “diverging measures to repair their

Source: World Trade Org., Trade Costs

implementation of travel restrictions, global

national economies, nationalize industries,

in the time of Global Pandemic (2020)

air travel has shrunk around 25 percent and

or reorganize supply chains” in the post-

[https://perma.cc/S5LB-K6RN].

air cargo yields are two times as high as they

pandemic recovery phase. The pandemic may also enshrine exceptionalism—an exceptions-

were in 2019. This disruption to air travel will also intensify the impact on manufacturing

Annotation:

oriented paradigm of justifications—as a

COVID-19 has had a detrimental

permanent feature to the international trade

impact on the global economy as countries

system because nations will “increasingly

have struggled to find trade policies

Governments with mid to high

consider self-sufficiency to be an overriding

that protect their citizens and allows

regulatory capacity have begun to exempt

security priority.” In other words, the narrative

economies the opportunity to flourish. The

truck drivers, cargo aircraft crews, and

that “economic security is national security, .

implementation of mitigation measures, such

other freight transport staff from entry

. . could create a permanent state of exception

as border closures and travel restrictions, to

restrictions and quarantine requirements.

in economic law[.]” Such an “exceptionalist

counteract COVID-19 has curtailed the

These exemptions will alleviate the delays that

approach” to threats like COVID-19 could

freight transportation sector of the economy,

COVID-19 mitigation measures have caused

lead to other long-term issues that might,

including maritime, land, and air transport.

to trade costs in freight transportation.

for example, undermine “economic law’s

Maritime transportation has remained

However, countries with low regulatory

legitimacy, and may even further destabilize

largely functional; however, changes in port

capacity and small-scale traders who cannot

Currents 24.2 2021

supply chains, which rely on just-in-time fast delivery for inputs.

implement nuanced measures will continue

policies that are minimally disruptive.

participating debtor countries’ reputation

to feel the effects of the disruption to trade

The PSF would allow for a more flexible

should not be tarnished by obtaining debt

severely.

application of the Fund’s policies, focusing

relief due to COVID-19.

—————————————————

on ensuring adequate emergency spending

Issue: Investment

International Investment and Finance

on health care, support for the vulnerable,

mechanisms are spurring during the

stabilization of the financial system, and

pandemic. COVID-19

—————————————————

mobilization of external financing. The

I ssue : COVID-19

has produced

duration of the proposed PSF would be

a global downturn that is

no more than 3 years. Further, it would

unprecedented in modern times

provide for more lenient repayment periods

with profound supply and severe

as opposed to the Stand-By Arrangement

the pandemic is imposing severe adverse effects on emerging-market economies with uncertainty regarding the magnitude and duration of the resulting downturn.

or Extended Fund Facility. Lastly, financing

demand shocks.

arrangements for individual countries should be determined on a case-by-case basis considering whether the country was stable prior to the pandemic as opposed to imbalanced and needs financial cushioning to address the financial shock from the

Source: Matthew Fisher & Adnan

screening

will require governments to overcome the economic crisis by requiring openness to foreign capital with adjustments to investment screening mechanisms. International investment helped economies recover from the global financial crisis in 2008. The same can be done during this pandemic, but the investment policy response must be markedly different this time.

COVID-19 pandemic. Source: Organisation for Econ. Co-

Mazarei, 20-11 A Possible IMF Pandemic Support Facility for Emerging-Market

Source: Patrick Bolton et al., A Debt

Operation & Dev., Investment Screening

Countries 1–8 (Peterson Inst. Int’l

Standstill for Developing and Emerging

in Times of COVID-19 and Beyond 1-7

Econ. 2020) [https://perma.cc/UX3L-

Market Countries 317–28 (Simeon

(2020) [https://perma.cc/TH6P-JTKJ].

8RMM].

Djankov et al. 2020) [https://perma.cc/ Annotation:

F4JE-N5JY].

Investment screening mechanisms

Annotation: According to this proposal, a unique

have existed for a long time. Prior to the

Annotation:

Pandemic Support Facility (PSF) needs to

The pandemic has led to a collapse of

pandemic, the share of OECD countries

be developed by the International Monetary

capital flows to emerging-market economies

that have any investment review mechanism

Fund. This should be employed rather

in developing countries. For these developing

and cross- or multi- sectoral investment

than the traditional Stand-By Arrangement

countries to withstand the pandemic shock,

screening mechanisms has been surging. Most

or Extended Fund Facility as a temporary

all private creditors must be included as part

mechanisms have allowed for intervention in

lending instrument to primarily serve EMCs.

of a future debt standstill. It is inevitable that

a much broader section of the economy. The

Dedicated PSFs for countries devastated

many countries will exit the COVID-19

COVID-19 pandemic has further accelerated

by COVID-19 would allow short-term

pandemic with unsustainable public debts.

policymaking in this area, prompting broader

flexibility with minimized risks to the IMF’s

This proposal does not answer this issue,

and additional mechanisms.

operations over the long term. A PSF would

rather, it will postpone the decision to a

have significant humanitarian and economic

moment when a proper debt sustainability

benefits during the pandemic. It will help

analysis can be conducted. In addition, it

design policies that assist in laying the

highlights the importance of treating all

foundation for strong growth and adjustment

creditors equally while ensuring that the 85

Currents 24.2 2021

I ssue : W ith

no end in sight ,

Kichel, The IMF and the World Bank

International Business Transactions:

the COVID-19 pandemic has put

Can Do More 374–383 (Simeon Djankov

A Preliminary Diagnosis (Cambridge

additional pressures on all

et al. 2020) [https://perma.cc/F4JE-N5JY].

Univ. Press 2020) [https://perma.cc/ W9SS-HLZV].

major sources of development finance. Low-

and middle-income countries may struggle to finance their public health, social and economic responses to the pandemic. To avoid a development finance collapse that would send millions back into poverty, the IMF, World Bank, and other actors in developmental finance must build back better with a common goal to aid national sustainable development strategies.

Annotation: The IMF has claimed they will do

Annotation: This article offers a threefold

“whatever it takes” to resolve the crisis, and

analysis of force majeure clauses in light of

the World Bank has made available $14

COVID-19 restrictions. First, it proposes

billion. With this willingness and financial

an overview of force majeure clauses

support, it is imperative that these two

and their effects. Second, it assesses the

institutions devise a strategic plan. The plan

possible use of such clauses in relation to

should ensure that money and resources

Covid-19 restrictions. Finally, it examines

are directly impacting the vulnerable

the possible extraterritorial reach of such

populations. In order to achieve this goal,

restrictions.

the institutions should establish an advisory program or the low and middle-income

Source: Shannon Selden et al.,

countries to discuss ways to tackle insolvency

Roundtable: Contract Enforceability

and implement payment plans to creditors.

in the Age of COVID-19 1-13 (2020)

Source: Organisation for Econ. Co-

More so, the institutions should emphasize

[https://perma.cc/27RS-F7JP].

Operation & Dev., The Impact of the

immediate containment of the spread of the

Coronavirus (COVID-19) Crisis on

virus to the rest of the country. Next, they

Development Finance 1-22 (2020)

should help people who are in dire need of

Since the spread of COVID-19, countries

[https://perma.cc/LNS6-DMGX].

financial assistance and then concentrate on

have implemented mitigation measures

assisting corporations.

such as border closures, travel restrictions,

—————————————————

and social distancing to combat the virus’s spread. These mitigation measures have

sustainable development was already in

International Business Transactions

a critical condition. No single source of

—————————————————

can perform their contractual obligations.

financing will be enough to close the

Issue: Countries are inconsistently

However, businesses may raise contractual

COVID-19 financing gap in the short

handling force majeure clauses

doctrines such as force majeure, frustration

term. The plunge in global and domestic

and what to do about maintaining

of contract, or hardship to avoid liability for

economic activity affects both tax and non-

contract performance obligations

nonperformance of contractual obligations.

tax revenues. Domestic resource mobilization

i n l i g h t o f COVID-19 , b o t h

This roundtable article addresses the different

and domestic private investment will likely

internally and internationally .

standards in which countries apply force

decline due to the high degree of economic

Wh e n t h e a p p roac h e s a re inconsistent, there can be severe ramifications FOR POPULATIONS and economies.

majeure clauses and to the doctrines of

Annotation: Prior to the pandemic, financing for

uncertainty. As shown by the 2008 Global Financial Crisis, external private finance will not only fall, but it will be greater and more

frustration and hardship of contract. Force majeure clauses allocate the risk of liability by excusing a party’s nonperformance

Source: Marco Torsello & Matteo

expectations have been frustrated by

Wi n k l e r, C o ro n av i r u s - I n f e c t e d

unforeseen events beyond its control.

Currents 24.2 2021

impacted businesses regarding whether they

of contractual obligations when its reasonable

immediate as a result of COVID-19. Source: Simeon Djankov & Anne-Laure

Annotation:

Generally, in jurisdictions, for a business or

In addition, relevant information on a

corporation to demonstrate that an event

country-by-country basis is given. Overall,

constitutes a force majeure event, it must:

the article gives a comprehensive view of the

Issue: The International Labor Organization assesses the possible impacts of COVID-19 on the

1. Demonstrate that performance is not

policy responses which are crucial to any

world of work and proposes a

SME attempting to endure this pandemic.

range of policy options to mitigate

possible or hindered under the event causing the circumstances. 2. The occurrence of the event is beyond the party’s control. 3. The event was not reasonably foreseeable at the time of the contract. 4. Has effects that cannot be avoided by

these impacts to facilitate a strong

I ssue : H ow (jr) schemes

can job retention

and swift recovery.

succeed and remain

effective in responding to the

Source: Int’l Lab. Org., COVID-19 and

employment fallout caused by the

the world of work: Impact and policy

COVID-19 pandemic?

responses (2020) [https://perma.cc/D4LY-

appropriate measures.

S25Y].

—————————————————

Source: Organisation for Econ. Co-

Workers/Heavily Impacted Sectors

operation & Dev., Job Retention Schemes

The International Labor Organization

During the COVID-19 Lockdown and

(ILO) considers the importance in protecting

—————————————————

Beyond (2020) [https://perma.cc/32MR-

workers’ health and providing economic

Issue: What

A54M].

support for the global labor work force

response should be

implemented by Small and Medium

Enterprises (SMEs) to combat the unique impact of COVID-19?

Annotation:

through coordinated and decisive policies Annotation:

and measures from the local level to the

Job retention schemes have been

global level for a rapid global economic

a main policy tool in OECD countries

recovery. Key policies that will mitigate

Source: Organisation for Econ.

to combat the economic impact of

the negative impact of COVID-19 on the

Co-operation & Dev., Coronavirus

COVID-19. JR schemes seek to preserve

global work force include: (1) establishing

(COVID-19): SME Policy Responses

jobs while countries are experiencing

international labor standards to provide a

(2020) [https://perma.cc/PHB7-2FYG].

reduced economic activity. The OECD

strong foundation for key policy response;

examines the effectiveness of these schemes

(2) focusing on health protection measures

through the first phase of the pandemic

and economic support on both the demand

where government restrictions limited

and supply side; (3) implementing proactive,

from the OECD, the ongoing influence of

economic activity. Restrictions are now

large-scale and integrated measures that

COVID-19 on SMEs is highlighted. SME’s

being withdrawn, and these schemes must

make strong and sustained impacts; and

size leaves them vulnerable to the pandemic’s

adjust to better target the jobs which are

(4) building confidence through trust and

effect on supply, demand, and downturns

currently at risk. The OECD gives their

dialogue for effective policy measures. The

in financial markets. The most current data

insight to how JR schemes can remain

ILO identifies three key elements to combat

shows the severe impact on these firms and

effective in this transition to a new, less

COVID-19 based on International Labor

estimates future effects. Policy responses

restrictive, phase of the pandemic.

Standards: (1) protecting workers in the

Annotation: In the latest SME-specific update

carried out around the world have taken

workplace by strengthening Occupational

countless forms due to the continuing

Safety and Health measures, adapting

extraordinary economic circumstances. The

flexible work arrangements, preventing

OECD breaks down each type of response

discrimination and exclusion related to

and gives detailed information on how

COVID-19, and expanding health benefits

specific countries have implemented them.

for all workers; (2) stimulating the economy 87

Currents 24.2 2021

and labor demand through economic and

This paper focuses on the economic impact

grim. After quantifying this relevant data,

employment policies; and (3) supporting

of lost tourism income in both major

the authors give thoughts on the direction

employment and incomes with financial

tourist destinations and countries highly

governments must take to recover and

and tax relief and other income soothing

dependent on tourism. Labor and capital

resume tourism operations. These recovery

measures, refinancing to overcome liquidity

are assessed, with special consideration

efforts must match the strength of the

constraints, and credit mediation to support

on finding alternative employment

pandemic for the LAC’s tourism industry

business continuity, particularly small

opportunities and focusing on individuals’

to survive.

businesses and self-employed workers.

health and safety. Policy implications are discussed, including government supported

Issue: Current schemes and policies

Issue: COVID-19 has disrupted the global economy rapidly, with many

economic diversification and increased

for assisting those who became

integration, education, and training

unemployed due to the COVID-19

countries that depend on tourism

programs.

pandemic do not address the

as a major source of employment

unique needs of workers in the

experiencing a drastic contraction

I s s u e : W h at

(gdp) a n d a r i s e i n u n e m p loy m e n t . Governmental assistances, measures, and policies are keys to mitigate these negative impacts to the tourism industries affected by the pandemic directly or indirectly and to begin a lengthy and turbulent road to recovery.

COVID-19 pandemic had on the

in gross domestic product

i m pa c t h a s t h e

Latin America and the Caribbean (LAC) region’s economies that are highly dependent on tourism?

cultural and creative sectors.

Source:Organisation for Econ. Coop. & Dev., Culture shock: COVID-19 and the cultural and creative sectors (2020) [https://perma.cc/9PHW-58T6].

Source: Henry Mooney & Maria Alejandra

Annotation:

Zegarra, Extreme outlier: The pandemic’s

Cultural and creative sectors (CCS)–

unprecedented shock to tourism in

including the arts, entertainment, and

Latin America and the Caribbean

recreation– are among the hardest hit

Source: United Nations Conf. on Trade &

(Simeon Djankov & Ugo Panizza, 2020)

industries by the COVID-19 pandemic.

Dev., COVID-19 and tourism: Assessing

[https://perma.cc/WY8Z-DTZG].

Governments around the world have

the economic consequences (2020) [https://perma.cc/B2ST-P9PQ].

allocated funding towards employment and income support measures. Artists and

Annotation: This article addresses the

individuals with creative jobs are often

unprecedented economic shock the

non-standard forms of work, combining

LAC region is experiencing during the

many different jobs throughout the year.

international economy, accounting for 29

COVID-19 pandemic due to its reliance

However, few temporary unemployment

percent of the worlds services exports and

on the tourism sector. The authors

schemes supporting those who have lost

300 million jobs in 2019. By mid-2020,

create an index measuring the region’s

their jobs due to the pandemic directly

COVID-19 resulted in international

dependency on tourism and compare other

target CCS worker. These government

travel restrictions on 100 percent of

historical shocks to the tourism industry

measures do not address multiple or second

global destinations. Global and domestic

to COVID-19. Next, they simulate the

jobs that these creative workers hold when

tourism have had devastating economic

potential effects of this global crisis on the

calculating their unemployment, nor do they

consequences, especially in developing

LAC. While none of the historical shocks

account for dividends when determining

countries where tourism accounts for more

truly compare to COVID-19, the outlook

income. Some administrative procedures

than half of the gross domestic product.

given using relevant data is overwhelmingly

have been implemented to assist CCS

Annotation: Tourism is an important sector in

Currents 24.2 2021

organizations, such as deferring tax payments

the performance of the United States, while

support is focused on helping countries

for organizations to keep their liquidity. It

also drawing lessons from other countries,

not only address the crisis, but also help

is suggested that structural change policies

including several whose outcomes contrast

it transition to recovery through different

focus on long term solutions for CCS, such

favorably with the U.S. experience

factors, such as saving lives, protecting the poor and vulnerable, securing foundations

as training and employment of creative works and increasing digital infrastructure to adopt

Source: Cynthia Balloch et al.,

of the economy, and strengthening policies

online platforms to reach a broader public.

COVID-19 in Developing Economies:

and institutions for resilience based on

Regions can also consider supporting a green

A Restart Procedure to Deal with

transparent, sustainable debt and investments.

transition by cultivating a sustainable cultural

COVID-19, (Simeon Djankov et al. eds.,

Source: Peterson institute for

and creative tourism industry.

2020).

international Economics, How the G20 Can Hasten Recovery from

—————————————————

Governance —————————————————

Issue: What

issues have countries

COVID-19, (Maurice Obstfeld & Adam S.

Annotation: A Restart Procedure to Deal with

Posen eds., 2020) [https://perma.cc/9GA7TLGE].

COVID-19

and international groups ignored

COVID-19 has successfully disrupted

that were exposed by COVID-19

the global economy. Governments are

crisis?

often relying on international institutions

PIIE focused its April 2020 briefing on

to jumpstart their economy, but debt keeps

how the G20 should and can be useful in

Source: Sylvia Mathews Burwell et

accumulating. For the jumpstart to be

the COVID-19 recovery process. The brief

al., Improving Pandemic Preparedness,

effective, the business sector must be able to

outlines ten, low-cost, policy areas that the

Lessons

stand on its feet. This can be done through

G20 can invest in that would yield the most

the innovative procedure and above standard

benefits across the board. Specifically, the

insolvency procedures. A protentional

authors believe the G20 should begin with

policy to accomplish this includes extending

aiding the poorest populations first, in order

bankruptcy stay for firms and a negotiated

to prevent rapid growth of the disease. World

Improving Pandemic Preparedness, Lessons

write-down of firms’ obligations to their

leaders should focus on the commonality of

from COVID-19

private creditors, incentivizes by a write-

the threat, and the solution is for economies

down on government claims.

to move the same way at the same time.

from

COVID-19 2-7 (Patricia Lee

Dorff et al. eds., 2020). Annotation: Independent Task Force Report No. 78:

The world was not prepared for the

Annotation:

Moreover, governments should use their

COVID-19 pandemic despite international planning and a decade of warnings. However,

Source: World Bank Group, Saving

fiscal space to invest in healthcare and the

it is not too early to evaluate where countries,

Lives, Scaling-up Impact and Getting

preservation of business.

like the United States, went wrong and

Back on Track World Bank Group

use the information to prepare for future

COVID-19 Crisis Response Approach

Source: Tom Bernes, et al., Challenges

pandemics. This report focuses on three

Paper (2020) [https://perma.cc/3LWA-

of Global Governance Amid the

key subjects: the inevitability of pandemics

9KTC].

COVID-19 Pandemic (2020) [https:// perma.cc/E2RX-BXQJ].

and the logic of preparedness; an assessment of the global response to COVID-19,

Annotation: Annotation:

including the performance of the World

The World Bank Group has created an

Health Organization (WHO), multilateral

approach to tackle unprecedented threats

In May 2020, The Council on Foreign

forums, and the main international legal

by COVID-19 by providing support in

Relations released a paper series discussing

agreement governing pandemic disease; and

exceptional speed, scale, and selectivity. The

the COVID-19 pandemic. The series was

Currents 24.2 2021

broken into two parts: a) The Broader

—————————————————

during COVID-19 are prone to more

Implications of the COVID-19 Pandemic

Developing Countries

significant economic harm than developed

for Governance and b) COVID-19 and

—————————————————

countries even though the number of cases

Global Health Governance. Part one focuses

Issue: Should developing countries

in these developing countries is manageable.

on the G20s response, and lack thereof,

apply the same measures as developed

As a result, developing countries lack the

to the pandemic. Additionally, part one

countries to combat fatalities and

resilience needed to implement effective

discusses how the pandemic demonstrates

the adverse economic risks created

policies and procedures that will protect said

the importance of international cooperation

by the COVID-19 crisis?

countries from the adverse economic effects

and how to prepare for the future. Part two

of COVID-19.

includes analysis of COVID-19 in Latin

Source: Ilan Noy et al., The Economic

America, Indonesia, and more generally in

Risk of COVID-19 in Developing

Source: Norman V. Loayza, Costs and

order to show and analyze the gaps in public

Countries: Where is it Highest? 38-52

Trade-Offs in the Fight against the

health planning that led to the crisis.

(Simeon Djankov & Ugo Panizza eds., 2020)

COVID-19 Pandemic: A Developing

Source: Julia M. Puaschunder et al.,

(ebook) [https://perma.cc/CMS4-MA54].

Country Perspective 1-9 ( World

COVID-19-Shock: Considerations on SocioTechnological, Legal, Corporate, Economic

Bank Group 2020) [https://ssrn.com/ abstract=3602355].

Annotation:

and Governance Changes and Trends 82–93

In this chapter, the authors measure the

(Fordham Law Legal Studies, Research

economic risks of COVID-19 in developing

Paper No. 3679326, 2020) [http://dx.doi.

countries. Using a disaster risk modeling

Costs and Trade-Offs in the Fight against

org/10.2139/ssrn.3679326].

framework, the authors find that the most

the COVID-19 Pandemic: A Developing

significant economic risk from COVID-19

Country Perspective

Annotation:

is not concentrated in China, where the virus

This policy brief first documents the

This article discusses the effects a

originated, or in countries with the most

global economic contraction and its potential

historical pandemic has on individual and

confirmed cases such as the United States

impact on developing countries regarding

large-scale decision making. Additionally,

and Western Europe. On the contrary, the

macroeconomic performance, poverty rates,

the article explores the differences between

authors argue that the highest economic

and incomes of the poor and vulnerable.

reactionary and precautionary national

risks are in countries and regions that do

The author argues that the pandemic crisis

governance. The authors assert that the

not get much global attention during non-

may hurt low- and middle-income countries

pandemic also requires growing acceptance of

pandemic times and even less international

disproportionately. Most of these countries

artificial intelligence. Furthermore, firms are

attention due to the “frantic reporting” of

lack the resources and capacity to deal with a

analyzed under the evolutionary dynamics

the pandemic’s spread, such as sub-Saharan

systemic shock of this nature. The countries’

market perspective to predict which ones

Africa and South Asia. For example, countries

large informal sectors, limited fiscal space,

will survive the pandemic and which will

that rely heavily on tourism receipts and

and poor governance make them particularly

fail. Lastly, the international differences

have limited fiscal space for combating the

vulnerable to the pandemic and the measures

in public healthcare are discussed and the

effects of COVID-19 are at a greater risk of

needed to contain it. There is also a review of

recommendations are given.

experiencing economic harm even though

recent epidemiological and macroeconomic

they might have fewer than a couple dozen

modeling as well as evidence on the costs

reported cases and no mortality. Additionally,

and benefits of different mitigation and

developing countries with little access to

suppression strategies. Finally, the author

resources to extend the safety nets required

explores how said cost-benefit considerations

to support their vulnerable populations

differ across countries of varying income

Annotation:

Currents 24.2 2021

levels. Overall, this policy brief argues

immediate health crisis and initial economic

that by having more limited resources

fallout. Next, the World Bank Group plans

and capabilities and younger populations,

to protect the poor and vulnerable impacted

developing countries face different trade-offs

by the social and economic crisis set off

in their fight against COVID-19 compared

by the pandemic by helping developing

to more advanced countries.

countries expand existing social protection delivery systems to reach excluded groups

Issue: What are the international

or the newly poor. Then, the World Bank

economic law institutions doing to

Group plans to aid developing countries in

assist developing countries during

securing the foundations of their economy

COVID-19?

through public-private joint interventions that channel resources at a larger scale,

Source:

leveraging public and private sector resources

World Bank Group, Saving Lives,

as well as World Bank and International

Scaling-up Impact and Getting

Financing Corporation financing advisory

Back on Track: World Bank Group

products. Finally, the World Bank Group

COVID-19 Crisis Response Approach

plans to strengthen policies and institutions

Paper (World Bank Group ed., 2020)

for resilience through police-based lending to

[https://perma.cc/3JMW-SW2V].

support a limited and feasible set of policy actions. Further, the World Bank Group

Annotation:

describes its overall “dual goals” of assisting

The World Bank Group’s report sets out

developing countries in addressing the health

the organization’s operational framework

threat and the social and economic impacts

to help developing countries address the

of the COVID-19 crisis while maintaining

health, economic, and social impacts of

a line of sight on the developing countries’

the COVID-19 pandemic. The World

long-term development visions. Overall,

Bank Group details the four thematic

the World Bank Group’s report aims to help

pillars of its crisis response: (1) to provide

developing countries assist at least one billion

emergency support to health interventions

people impacted by the COVID-19 crisis

for saving lives threatened by the virus; (2)

and to restore forward momentum towards

to protect the poor and vulnerable; (3) to

its “dual goals.”

secure foundations of the economy; and (4) to strengthen policies and institutions for resilience based on transparent, sustainable debt and investments. In order to provide emergency support to health interventions for saving lives threatened by the virus, the World Bank Group plans to make $14 billion in emergency support available to developing countries in their efforts to contain and mitigate the 91

Currents 24.2 2021

International Law in the Arctic: Looming Conflicts Over Resources, Shiping, and Regional Influence G R E TA

—————————————————

I. Introduction

C A R L S O N

to uproot the region’s governance traditions

mi2) of the Earth’s surface.3 Of this, almost

of cooperation and low tensions.

“8 million km2 (3.1 million mi2) is onshore

—————————————————

This comment explores the Arctic

and more than 7 million km2 (2.7 million

The Arctic region’s strategic location and

governance legal frameworks, considers

mi2) is [comprised of ] continental shelves.”4

natural resources make it a place of increasing

international sovereign claims, and examines

Eight countries have territory within the

interest for many countries—both Arctic and

the impacts climate change has had on

Arctic Circle: the United States by way of its

non-Arctic. Global warming has revealed

geopolitics. This comment explores the

state, Alaska; Canada; the Russian Federation

previously inaccessible sea routes and natural

changing geopolitical environment of the

(Russia); Norway; Denmark by way of its

resources. The United Nations Convention

Arctic. It is divided into three Parts—resource

territory, Greenland; Finland; Sweden; and

on the Law of the Sea (UNCLOS) provides

attribution, navigation, and politics. The

Iceland.5 The United States, Canada, Russia,

a mechanism by which Arctic coastal

remainder of this section provides an

Norway, and Denmark are the only Arctic

countries may establish sovereignty rights

overview of the Arctic’s changing climate and

States that abut Arctic waters. The region is

in Arctic waters adjacent to their coastline.

natural resources and an introduction to the

sparsely populated and characterized by its

As a result, disputes among Arctic States as

Arctic governance system. Section II discusses

harsh climate.6

to which sovereign rights apply to which

resource attribution in the Arctic, beginning

The Arctic plays an essential part

regions of the Arctic Ocean are increasing.

the evolution of sovereignty principles and

in regulating global climate. Due to the

Few mechanisms exist to ensure the peaceful

concluding with an evaluation of current

interrelated nature of Earth’s climate system,

resolution of such disputes.

continental shelf claims. Section III examines

the Arctic influences climate patterns around

Arctic States are not the only countries

the potential for trans-Arctic transportation

the world. Recent warming trends in the

seeking to assert and protect interests in the

and discusses ongoing disputes over the

Arctic have been linked to extreme weather

Arctic—non-Arctic States are increasingly

classification of Canada’s and Russia’s Arctic

events in the mid-latitude continents, such

gaining influence in the region. Though non-

sea routes. Section IV addresses the mounting

as the heat waves and fires in Russia, severe

Arctic countries cannot claim sovereignty

political tension in the Arctic resulting from

winters in the eastern United States and

over Arctic resources or sea routes, they

Chinese influence, increased militarization

Europe, and extreme summer monsoons and

can invest in Arctic development and

of the region, and the absence of peaceful

droughts in India.7 These extreme weather

influence Arctic governance. Which nations

methods for dispute resolution. Section V

events are predicted to be more dramatic as

begin exploitation first and who funds

concludes the discussion.

the Arctic continues to warm.

those ventures will likely determine which

A. Climate Change and the Arctic

The average global temperature has

countries are best positioned to exert

According to the most common

been increasing since the late 1800s, with

economic dominance in the region in the

definition, the Arctic region is the area

“[e]ach of the last three decades . . . [being]

coming decades. Increased competition,

north of the 66.34° North latitude line,

successively warmer at the Earth’s surface

emerging sovereignty disputes, militarization

known as the Arctic Circle.2 The Arctic Circle

than any preceding decade since 1850.”8

of the region, and foreign influence threaten

encompasses 21 million km2 (8.2 million

According to the Intergovernmental Panel

Currents 24.2 2021

on Climate Change, the warmest 30-year

increase and ice melts, more solar radiation is

lands containing mineral deposits that were

period in the last 1400 years was likely

absorbed and temperatures increase further.

previously undetectable and inaccessible

from 1983 to 2012. Global warming is the

Newly exposed biomass exacerbates

below the ice.24 Access to Arctic fish stocks and

result of anthropogenic radiative forcing;

warming further by increasing methane

tourism via cruise ships are also increasingly

essentially, human activities have altered the

emissions. Methane is a greenhouse gas with

available as sea ice becomes less prevalent in

balance of incoming and outgoing energy

a warming potential thirty-two times greater

the Arctic Ocean.

in the Earth-atmosphere system, causing

than that of (CO2). Scientists estimate that

However, the two most enticing Arctic

more solar energy to be absorbed. The largest

fifty gigatons of methane could be released

resources are subsurface hydrocarbons and

contribution to global warming is caused by

as the methane-rich soils of the tundra and

trade routes. Approximately 13% of the

increases in atmospheric greenhouse gases,

seafloor warm are exposed.17 Such a release

world’s undiscovered oil and 30% of the

particularly carbon dioxide (CO2).10

would increase the amount of atmospheric

world’s undiscovered natural gas are in the

Currently, the rate of warming in

methane by a factor of twelve. Again, a

Arctic.25 The majority of these reserves (84%)

the Arctic is more than double that of the

feedback loops occurs because warming

are located offshore, on continental shelves

rest of the world, a phenomena known

results in further warming. Changes to

less than 500 m under the water’s surface.26

as “polar amplification.” 11 A number of

ocean circulation and acidification also

The steady recession of sea ice continues to

positive feedback loops are responsible for

create warming feedbacks in the Arctic.

open new waters in the summer months,

this increased rate of surface warming in

Scientists struggle to understand the way

creating opportunities for oil and gas

the Arctic. A positive feedback occurs in

these processes interact with each other.

exploration and extraction.27 Ships towing

nature when the effects of a certain type

It is difficult to predict future regional and

seismic arrays can locate these subsurface

of disturbance results in more occurrences

global climate due to the uncertainty in the

resources and transport the heavy equipment

of that specific disturbance. In regard to

rate of ice retreat, its extent, and its associated

needed for extraction to remote locations.

climate change, “[a]ny process that responds

feedback effects.

to temperature change and directly or

B. Natural Resources and Sea Routes

The reduction of Arctic sea ice also

exposes potential intercontinental trade

indirectly affects the radiative balance may be

The unforgiving nature of the Arctic’s

routes. Trans-Arctic passages could provide

considered a feedback.” Scientists generally

climate, ocean, and terrain has historically

shorter trade routes between 80% of most

agree that polar amplification is caused by

limited access to and interest in Arctic

industrialized countries, decreasing fuel

atmospheric and surface processes associated

resources. Much of the Arctic is essentially

consumption, carbon emissions, and delivery

with temperature, water vapor, and cloud

unexplored with respect to its subsurface

time.28 These routes would lower shipping

feedback effects.13 Though there is much

resources.21 However, global warming is

costs for products manufactured in China,

debate over which mechanisms contribute

changing the landscape of the Arctic, making

Japan, and South Korea and exported to

most to polar amplification, the ice-albedo

resources more accessible. The recession of

Europe or North America.29

feedback is generally considered to have the

the Arctic ice caps coupled with technological

The ability of States to control and

greatest impact.

advances have made exploitation of Artic

economically benefit from the Arctic region

The ice-albedo feedback occurs due to

minerals, oil and gas reserves, living marine

hinges on their ability to establish sovereign

the difference in the reflectivity of white ice

resources, and trans-Arctic trade routes more

rights to these resources and within these

and the dark surfaces beneath them. Ice caps,

feasible.22

trade routes. Under the UNCLOS, coastal

glaciers, and sea ice reflect incoming solar

The Arctic contains a variety of minerals

Arctic States have the right to exploit

energy. However, as temperatures rise, the

that are of pervasive use in industrialized

resources and regulate certain aspects of sea

reflective ice and snow melts, revealing dark

economies, such as phosphate, bauxite,

travel found within their territorial lands

ocean and land which absorb solar energy

iron ore, copper, nickel, and even diamonds

and the waters immediately surrounding

rather than reflect it. Thus, as temperatures

and gold. As glaciers recede, they expose

their shorelines. A continental shelf is the

Currents 24.2 2021

relatively shallow seabed extending from

certain sovereign rights.36 Sovereignty rights

Article 76. If a disagreement arises between

a coastal state’s land territory. UNCLOS

relate to a state’s authority to exploit, and

UNCLOS members over the interpretation

provides the mechanism by which a coastal

exclude others from exploiting, its territories

or application of any UNCLOS provision,

state may extend its sovereignty along its

and resources. Under UNCLOS, coastal

one of the members may unilaterally submit

continental shelf and establish its sovereign

states have automatic jurisdiction over their

the dispute for compulsory settlement

right to the resources therein. Coastal Arctic

internal waters, territorial sea, contiguous

by binding adjudication or arbitration. 40

States could theoretically declare control

zone, and exclusive economic zone. The

However, UNCLOS members have the

over the largest unexplored prospective area

UNCLOS proscribes the extent of a state’s

option to exclude disputes involving sea

for petroleum on Earth.31 Motived by the

sovereign rights within these zones. A state

boundary delimitation or historic titles

desire to secure such control, coastal Arctic

may extend its jurisdiction if it can show

from the compulsory dispute settlement

States are mapping their continental shelf

that its continental shelf extends beyond

mechanism.41 As such, disputes involving

and seeking recognition of their sovereign

the exclusive economic zone. On the other

the drawing of baselines, the classification of

rights to such submerged lands. Ultimately,

hand, a state may lose some sovereign rights

coastal waters as internal, or the designation

the impacts of climate change have made

over territorial waters if they are classified

of waters as an international straight are

the Arctic “a significant economic and

as an “international strait.” Thus, the rights

unlikely to be resolved under the UNCLOS

geopolitical region.”32

of foreign vessels seeking transit and the

dispute resolution procedures.42

C. Governance in the Arctic Region

rights of coastal states over oceanic resources

Finally, the UNCLOS established the

depend upon the legal status of coastal waters

International Seabed Authority (Authority)—

at that distance from the coast.

an intergovernmental entity that regulates

The Arctic is governed by the domestic laws and regulations of each Arctic State

and a patchwork of international treaties.33

Maritime zones are measured by their

mineral exploration in the international

Most international agreements applicable to

distance from the coast’s baseline. Baselines

waters. All parties to UNCLOS are ipso

the Arctic region are “non-binding, address

are the imaginary lines that traverses along

facto members of the Authority.43 As of this

only part of the Arctic, or are not specifically

a state’s coast and separate a state’s internal

writing, 168 nations ratified the treaty.44 The

tailored to the Arctic.”34

waters from its territorial waters. Baselines are

United States is the only Arctic State that has

1. United Nations Convention on the Law

generally determined by the low water mark,

not ratified UNCLOS, but it has publicly

of the Seas

but adjustments may be made outward for

declared that it accepts the key provisions

The UNCLOS was signed in 1984

certain land features.38 Coastal states with

as customary international law.45 Notably,

after the longest-running negotiations in

broadly drawn baselines have the greatest

in May 2008 the United States joined the

UN’s history. The treaty codified hundreds

jurisdictional reach.

four other coastal Arctic states in signing the

of years of sovereignty principles and

Article 76 provides the mechanism

Ilulissat Declaration, which reaffirmed the

maritime custom and effectively established

by which a coastal state may extend its

primacy of UNCLOS over regulation of the

an overarching governance system applicable

sovereignty into the adjacent sea and along

Arctic Ocean and territorial disputes.46 The

to approximately three-quarters of the

its continental shelf.39 Motived by a desire to

Declaration asserts that there is “no need to

earth’s surface. The UNCLOS delineates the

extend their sovereignty pursuant to Article

develop a new comprehensive legal regime to

maritime jurisdiction, and sovereign rights

76, coastal Arctic States are mapping their

govern the Arctic Ocean,” thereby rejecting

therein, of coastal states. The treaty provides

continental shelves and seeking recognition

any attempt to undermine the authority of

the primary mechanisms for resolving

of their sovereign rights to such submerged

UNCLOS or develop a new framework for

seabed resource attribution and freedom of

lands.

Arctic governance.47

navigation issues in the Arctic.

All signatories of the UNCLOS have

2. Arctic Council

Maritime zones are the oceanic

agreed to delineate the outer limits of

In 1996 the eight Arctic States

jurisdictions in which coastal states have

their continental shelf in accordance with

created the Arctic Council 48 to provide

Currents 24.2 2021

an “intergovernmental forum promoting

involvement in Council decisions.60 Second,

nations at lower latitudes, influencing the

cooperation, coordination and interaction

Observer states are prohibited from exercising

agriculture, forestry, fishery, and other sectors

among the Arctic States, Arctic indigenous

their financial power to control Arctic

of non-Arctic states.67 Thus, the economic

communities and other Arctic inhabitants

projects; Observers may propose projects

interests of all nations are arguably impacted

on common Arctic issues.”49 Only states

through a Member or Permanent Participant,

by activities in the Arctic. There has been

with territory within the Arctic Circle

but their total financial contribution may not

a recent push for greater inclusiveness of

can be Members of the Arctic Council.

exceed the financing from Arctic States.

non-Arctic states in Arctic decision-making,

Additionally, six indigenous peoples’

Non-Arctic, developed countries are

organizations are included on the Council

increasingly declaring their interest in

as Permanent Participants.51 The Permanent

the region and seeking admittance to the

Despite its “iconic status in Arctic

Participation category was created to provide

exclusive Arctic Council. 62 The United

governance,” the Arctic Council is designed

for active participation with the Arctic

Kingdom has declared itself “the Arctic’s

to be a soft law instrument.69 The Council

indigenous groups in Council meetings and

nearest neighbor” and China considers itself

merely promulgates assessments and

activities.

to be a “near-Arctic” nation, even though

recommendations regarding Arctic issues

Organizations and non-Arctic states

its northernmost point is 900 miles south

based on the findings of the Council’s six

may participate in Council activities as

of the Arctic Circle.63 Both countries have

Working Groups and ad hoc Task Forces

Observers, though they have minimal

been granted Observer status in the Council.

or Expert Groups.70 The Council lacks the

influence in the Council. There are currently

However, access to the Council is

power to implement its guidelines or enforce

thirty-nine Observers on the Council—

granted sparingly. In 2015, the Arctic

its agreements, leaving such tasks to the

thirteen states and twenty six organizations.53

Council denied all Observer applications,

Arctic States themselves.71 Thus, the Council

Their engagement is largely confined to

including one submitted by the European

serves as more of a forum for negotiating

participation at the Working Groups

Union. An application for Observer status

agreements than a source of binding,

level. All Council meetings and activities

is granted only if the Council determines

enforceable international law.72 However,

are open to Members and Permanent

that the state or organization can contribute

in the last ten years the Arctic Council has

Participants, while Observers’ inclusion is

to the Council’s work. Further, in evaluating

produced three legally binding agreements.73

subject to the discretion of the Senior Arctic

an application the Council considers “the

These agreements indicate that the Council

Officials.56 Furthermore, when invited to

extent to which the applicant . . . recognizes

is evolving “from its advisory mandate into

meetings of the Council’s subsidiary bodies,

Arctic States’ sovereignty, sovereign rights and

a more influential body.”74

Observers may only make “statements after

jurisdiction in the Arctic” and the “extensive

—————————————————

Arctic States and Permanent Participants,

legal framework [that] applies to the Arctic

present written statements, submit relevant

Ocean including, notably, the Law of the

II. Resource Attribution in Arctic Seabeds

documents and provide views on the issues

Sea.”65 Once obtained, Observer status may

—————————————————

under discussion” with approval from

be suspended if the Council determines that

With a few exceptions, most of the

the Chair.

Observers may only submit

an Observer engaged in activities inconsistent

disputed continental shelf claims for

written statements at Ministerial meetings

with the Council’s Declaration or Rules of

historically accessible portions of the Arctic

and propose projects through a Member or

Procedure.66

Ocean were resolved prior to the UNCLOS

Permanent Participant.58

but the eight Council Members have been reluctant to dilute their control.68

The effect of these rules is a system of

treaty entering into force. However, with

There are two important limitations on

Arctic governance in which non-Arctic states

the resurgence of interest in the unclaimed

Observers in the Council. First, Observers

have very limited rights. Yet, the condition of

Arctic territories in recent years, territorial

have no voting rights;

only Members

the Arctic has a direct impact on the climate

disputes have returned to the Arctic region.

and Permanent Participants are guaranteed

systems and ecological environments of

Even the North Pole, which was generally

Currents 24.2 2021

accepted as res communis, is now subject to

possession.85 Thus, the people of Europe

upheld such assertions of sovereignty in 1969

sovereignty claims.

“were lawfully entitled to take possession

North Sea Continental Shelf Cases.94 The ICJ

A. Development of Sovereignty Principles in

of it.”86

held that a contiguous state had sovereignty

Under terra nullius, sovereign rights

over the area “that constitutes a natural

Traditionally, international law has

could be gained by mere “symbolic”

prolongation of its land territory.”95 Thirteen

categorized unclaimed property as either res

occupation.87 This allowed nations to lay

years later, this perspective validated by the

communis, a “common thing,” or res nullius,

claim to lands without first establishing actual

UNCLOS.96 Modern international law thus

“nobody’s thing.”75 Under the res communis

occupation of such lands. This relaxation

recognizes that “territorial waters” are part of

doctrine, some things belong to mankind

of the actual occupation requirement has

a state’s territory.

and no individual nor state can exercise

persisted in modern international law.

B. Sovereignty Under Article 76

the Arctic

sovereign rights over it.76 The Roman rule

Today, all of land within the Arctic Circle

A member to the UNCLOS can

held that “the air, running water, the sea, and

belongs to one of the eight Arctic States. The

have its claim to an extended continental

consequently the shores of the sea” were all

only lands that remain unclaimed are those

shelf recognized by submitting supporting

things “common to mankind.”77 Res nullius,

beneath the Arctic Ocean. Traditionally, the

documentation to the Commission

on the other hand, is the concept of ownerless

high seas themselves were considered res

on the Limits of the Continental Shelf

but appropriable property.78 The method of

communis and the lands submerged therein

(Commission).97 The Commission’s approval

acquiring ownership under res nullius was

could not be subject to occupation by even

of a state’s extended continental shelf is

actual occupation with the intent to own.

the most liberal conception of symbolic

“important for obtaining international

occupation.

However, the concepts of

recognition and legal certainty” of the limits

accepted in international law, it did not

sovereignty and property ownership are

of the state’s sovereignty.98 The Commission

support European sovereignty claims in the

elastic in the face of determined and powerful

reviews submissions and, with a two-thirds

Arctic for two reasons. First, the inhospitable

interests. Just as the Europeans finessed

majority, makes a recommendation regarding

nature of the terrain and climate in the Arctic

legal theory to support the acquisition of

the claim.99 Recommendations from the

made actual occupation of much of the land

Arctic lands, international law has again

Commission are “final and binding.” 100

impossible.80 Second, the regions that could

evolved to justify the extension of sovereignty

Commission recommendations consist of

be occupied had already been inhabited by

to previously unavailable, resource-rich,

technical and scientific advice designed to

indigenous tribes for almost 20,000 years.81

submerged lands.

aid the state in their delineation.101 If the

Though res nullius was generally

At the beginning of the 20th century,

Using the Sector Principle, a coastal

Commission disagrees with a submitted

a new concept emerged. Terra nullius,

state could demarcate submerged boundaries

claim, the state is given a reasonable amount

meaning “nobody’s land,” was concocted

by extending straight lines from its coast.

of time to resubmit.102 However, a member

by European nations to justify their claims

Under this approach, sovereignty did not

state must make its initial submission within

to Arctic lands. 82 Building upon John

depend upon occupation or even an express

ten years of ratifying the UNCLOS.103

Locke’s labor theory, terra nullius served to

proclamation of ownership; rather, rights to

As a nonparty to the UNCLOS, United

delegitimized indigenous claims to Arctic

submerged lands existed by virtue of a state’s

States nationals may not serve on the

territories.83 Under John Locke’s theory,

sovereignty over the adjacent land. Using

Commission. It is unclear whether or not the

property ownership is acquired when an

the Sector Principle, Canada became the

United States may make submissions to the

individual or nation “removes [the land] out

first Arctic country to extend its maritime

Commission104 and United States nationals

of the state that nature has provided.”84 Terra

boundaries in 1925.92 It was followed shortly

may not serve on the Commission.105 It is

nullis asserts that the “unsettled habitation”

after by the USSR, Norway, and the United

important to note, however, that a country

of indigenous peoples in the vast Arctic lands

States.

need not go through the UNCLOS process

could not support a true and legal claim for

The International Court of Justice (ICJ) 96

Currents 24.2 2021

to establish sovereignty over their extended

continental shelf. As the ICJ established in

must follow the low-water line along the

authority over fishing, pollution prevention,

the 1969 North Sea Continental Shelf Cases,

coast.

However, all coastlines are not linear;

scientific research, and the construction and

continental shelf rights exist as a matter

they often have bays, archipelagos, harbor

use of certain structures on the sea.122 Foreign

of fact and do not need to be expressly

works and other geographic shapes that

vessels in the EEZ have an obligation of

claimed.106 The UNCLOS itself indicates that

complicate baseline delimitation. Here, states

due regard for the coastal state’s rights and

the rights of coastal states to the continental

may generally use straight lines connecting

interests but are generally given full freedom

shelf and resources therein exist ipso facto and

points along the coast instead.

States have

of navigation, fishing, scientific research,

ab initio, meaning by the very fact or act and

incentives to draw their baselines broadly for

construction of installations, and laying of

from the beginning, respectively.

Further,

two reasons: first, broader baselines mean

cables and pipelines.123

the UNCLOS does not prohibit states from

more coastal waters are classified as internal

Finally, coastal states have certain rights

entering into agreements determining the

waters; second, broadly drawn the baselines

with regard to their extended continental

maritime boundaries between them. As such,

mean a state’s territorial waters, such as

shelf. The continental shelf is the seabed

the United States may negotiate the extent

the EEZ and continental shelf, will extend

jurisdictional zone over which a coastal state

of its jurisdiction with its Arctic neighbors.

further into the sea.

has full sovereignty.124 A state’s continental

107

1. Sovereign Rights in Submerged Lands

112

113

The territorial sea* refers to the waters

shelf is defined as “the seabed and subsoil

Modern international law recognizes

adjacent to the coastal state which extend

of the submarine areas that extend beyond

that state sovereignty extends beyond

up to twelve nautical miles (nm) of the

its territorial sea throughout the natural

occupied land territories and internal waters

baseline.

A state has full sovereignty within

prolongation of its land territory to the

to include regions of the sea adjacent to

its territorial sea, just as it does in its internal

outer edge of the continental margin.”125

coastal states. A state’s jurisdiction is at its

waters; it may enforce domestic laws and

Coastal states have exclusive sovereign rights

maximum in its terrestrial territory and

has the exclusive right to extract subsoil

over the continental shelf “for the purpose

decreases the further it extends into the sea.

resources, conduct scientific research, and

of exploring it and exploiting its natural

Internal waters are those that are legally

engage in fishing and commercial activities.

115

resources.”126 It is presumed to extend 200

assimilated to the land because they are

States have qualified sovereignty

nm from the baseline.127 Note that, even

inland waterbodies or coastal waters on the

over their contiguous zones and exclusive

though the default continental shelf region

landward side of the baseline.108 Generally,

economic zones (EEZ).116 The contiguous

and the EEZ both address the same area,

they are comprised of rivers, canals, and

zone is the maritime zone stretching from

they are associated with different rights; the

small, coastal bays.

outer limit of the territorial sea up to 24

EEZ rights apply to all resources beneath

subject to full and exclusive sovereignty rights

nm from the baseline.

In this region,

the water’s surface, whereas continental shelf

as the mainland.

the state can enforce regulations related to

rights concern only the natural resources

Coastal states also have jurisdiction

customs, taxation, immigration, sanitation,

within the seabed and subsoil.128

over their territorial waters, which lie

and pollution.118 The EEZ119 is the area

Continental shelf rights can be extended

on the seaward side of coastal baselines.

beyond the contiguous zone, up to within

beyond the default 200 nm if the shelf

Territorial waters are comprised of the

200 nm from the baseline.

Within the

naturally continues beyond that point; the

territorial sea, contiguous zone, exclusive

EEZ, coastal states have rights over living

continental shelf area may be extended to

economic zone, and the continental shelf.

resources found in the water column, such

the outer edge of the continental shelf.129

The degree of authority the coastal state

as fish, and nonliving seabed resources, like

States have the right to control all offshore

has over its territorial waters varies between

hydrocarbons; that is, states retain the right

drilling that occurs within their continental

the four maritime zones, with the greatest

to explore, exploit, conserve, and manage

shelf, including the authority to “grant and

authority existing in the zones closest to the

natural resources in this zone.

deny leases to private actors seeking drilling

baseline.

states also have regulatory and enforcement

109

Internal waters are

110

111

The general rule is that baselines

114

117

120

121

Here,

opportunities.”130

Currents 24.2 2021

Under UNCLOS, all states that

2. Delimiting Continental Shelves

the continental shelf up to 350 nm from the

exploit mineral resources in their extended

Article 76 of the UNCLOS provides

baseline.151 Submarine elevations allow an

continental shelf beyond their EEZ

the four-step method for continental

extension of the continental margin for the

are required to make payments to the

shelf delineation: a three-step delineation

entire length of the shelf.152 Thus, whether

Authority.131 The Authority provides for the

procedure and the Test of Appurtenance.141

a seafloor high can support an extension

equitable sharing of these payments to state

The first step in delimitation is determination

of a coastal state’s continental shelf, and by

parties, “taking into account the interests

of the “formulae lines,” which are the

how far, depends on the classification of the

and needs of developing [s]tates, particularly

outer limits of the continental margin.

seafloor high.

the least developed and the land-locked

Paragraph 4 of Article 76 describes the two

It is difficult to determine the likelihood

among them.”132 The UNCLOS does not

line drawing method to be used in making

of a submission’s success because under

differentiate between signatories and non-

this determination.143 For the second step in

the UNCLOS submissions are protected

signatories with regard to the payment

delineation, the submission must map the

by certain confidentiality rules. However,

obligation.

“constraint lines” and prove that the formulae

publicly available scientific information

The “high seas” are the waters beyond

lines drawn in the first step do not go

about seafloor highs may be used to determine

any state’s territorial waters.133 All nations

beyond them. The constraint lines, defined

whether the proffered extension passes the

have the freedom of navigation, fishing, and

in paragraphs 5 and 6 of Article 76, are 350

Test of Appurtenance.153

scientific research as well as the freedom to

nm from the baselines or 100 nm from the

Seafloor highs are often classified by

construct installations and lay submarine

point at which water is 2500 meters deep,

using several factors: its crustal composition,

cables and pipelines within the high seas.134

known as the 2500 meter isobath.

In the

which may be oceanic crust, continental

The “seabed and ocean floor and subsoil

third step, the outer limits of the continental

crust, or both; its morphology, which

thereof, beyond the limits of national

shelf are delineated using the formulae lines

describes its topographical characteristics;

jurisdiction” is referred to as “the Area.”

145

and the constraint lines in the fourth step.

or its genesis, which refers to the tectonic

These waters and their resources represent the

Additionally, the submission must

process by which the seafloor was created.154

modern application of res communis.136 Under

prove that the putative extended continental

It is important to note that the legal concept

the UNCLOS, mineral resources in the Area

shelf satisfies the “Test of Appurtenance.”

of continental shelf differs from the scientific

are “the common heritage of mankind” and

This requires proving that the continental

one.155 To that end, the UNCLOS terms

are subject to strict restrictions.137

shelf extends “throughout the natural

“oceanic ridges,” “submarine ridges,” and

The UNCLOS designates the Authority

prolongation of its submerged land territory

“submarine elevations” do not readily

to organize and control “all activities of

to the outer edge of the continental margin,”

correspond with their scientific definitions.156

exploration for, and exploitation of, the

which is beyond 200 nm from the coastal

Rather, the UNCLOS Training Manual

resources of the Area” and to ensure that

state’s baselines.146 Essentially, supporting

states that classification of seafloor highs

such activities are carried out “for the benefit

evidence must show that the seafloor high

“shall be based on such scientific and legal

of mankind as a whole.”

Mineral resource

the state claims to be extended continental

considerations as . . . ‘Natural prolongation

exploration and exploitation activities in the

shelf is a natural prolongation of the state’s

of land territory and land mass; . . . [m]

Area are limited to state signatories (or their

land territory. Three types of seafloor

orphology[;] . . . and [t]he continuity of

nationals) and the Enterprise, the mining arm

highs are identified in Article 76: oceanic

ridges.’”157 The Commission’s Scientific and

of the Authority.139 Financial and economic

ridges,147 submarine ridges,148 and submarine

Technical Guidelines (Guidelines) explicitly

benefits derived from exploitation of mineral

elevations.

states that crustal composition is not the sole

resources in the Area are to be distributed

excluded as components of the continental

by the Authority on the basis of equitable

margin.150 Continental margins defined as

The Training Manual suggests that the

sharing.140

submarine ridges support an extension of

classifications have the following definitions:

138

135

142

144

149

Oceanic ridges are expressly

Currents 24.2 2021

factor in the science-based classification.158

A submarine elevation is seafloor high

The nearest landmass to the North Pole is

Official recognition of sovereignty by the

that is a morphological continuation of

162

Kaffeklubben Island, a Greenland territory.

Commission could give legal effect to Canada

the continental margin and has the same

The nearest permanently inhabited place is in

and Russia’s previously unsubstantiated

geological and genetic characteristics as

Nunavut, Canada.163 The ocean surrounding

claims. However, recognition of these claims

the continental landmass throughout its

the North Pole has gradually been divided

would effectively lock up the entirety of the

entirety. A submarine ridge is a ridge that

between Arctic States. Canada was the first to

Arctic seabed and the energy resources found

is a morphological continuation of the

claim sovereignty over a portion of the North

within.

continental margin; it may share genetic and

Pole in 1925.

165

Russia submitted the first claim to

geological characteristics with the coastal

Canada claimed the triangle-shaped area

the North Pole to the Commission in

landmass or the seafloor. An oceanic ridge

between its northwest and northeast borders

2001. In its submission, Russia claimed

is one that “lacks morphological continuity

up to the North Pole.166 The Soviet Union

portions of the Alpha-Mendeleev Ridge

with the continental margin and shares

followed suit the next year and claimed

and the Lomonosov Ridge. 175 However,

genetic and geological characteristics with

sovereignty over the analogous “sector” on

the Commission rejected Russia’s claim for

the deep sea floor.”

its side of the Arctic.

insufficient documentation.176 Following this

159

164

Using the Sector Principle,

167

The extent to which a coastal Arctic State

Russia re-staked its claim to the North

rejection, Russia has conducted extensive

may extend its continental shelf depends

Pole in 2007 when a submersible research

research in order to chart the ridges.177 In

on the classification of the underwater

vessel planted a Russian flag on the seabed.168

2015, Russia presented a revised submission,

structures. At the center of the Arctic Ocean

The general international reaction was,

again claiming portions of the Alpha-

is a basin—a depression in the seafloor. The

as aptly stated by the Canadian foreign

Mendeleev and Lomonosov Ridges.178 Russia

structures primarily at issue in the Arctic

minister Peter MacKay, that “[t]his isn’t the

showed some self-restraint in its submission,

UNCLOS submissions are the Lomonosov

15th century. You can’t go around the world

claiming only three-fifths of the Ridge—just

Ridge, the Alpha-Mendeleev Ridge, the

and just plant flags and say, ‘We’re claiming

enough to cover the North Pole.179 However,

Yermak Plateau, and the Chukchi Plateau.

this territory.’”169 Though gaining media

both submissions assert that the ridges

The Lomonosov Ridge and the Alpha-

attention around the world, the act was

are submarine elevations, which would

Mendeleev Ridge are parallel ridges that

purely symbolic.

allow Russia to extend its continental shelf

170

traverse the Arctic Ocean’s central basin.

Despite Canada and Russia’s claims to

beyond 350 nm. The Commission initially

The Amundsen Basin is located between the

the North Pole, the area has traditionally been

indicated that the Lomonosov Ridge was

Lomonosov and Alpha-Mendeleev Ridges,

accepted by the international community as

not a submarine elevation, but it is currently

with the Canada Basin on the Canadian

being beyond the sovereign jurisdiction of

reviewing additional evidence regarding this

side of the Alpha-Mendeleev Ridge and the

any nation.

Essentially, there is a “donut-

conclusion.180 The United States has argued

Nansen Basin on the Eurasian side of the

hole” of international waters in the center of

that both ridges are oceanic ridges, supporting

Lomonosov Ridge.160 Within these basins are

the Arctic Ocean.172 However, as resources

no extension of Russia’s continental shelf.181

borderlands—underwater regions adjacent

in the region are becoming increasingly

However, most commentators believe the

to a continent and comprised of ridges,

accessible, the area is attracting much

ridges both constitute submarine ridges.182

plateaus, and spurs. The Yermak and the

interest. If an Arctic State can prove that the

If the Lomonosov Ridge is found to be

Chukchi Plateau are in the Amundsen Basin

North Pole is within its extended continental

a submarine ridge or submarine elevation, it

and Canada Basin, respectively.

shelf, it would have economic control over

would constitute a natural prolongation of

C. UNCLOS Submission for the North Pole

the seabed and subsoil resources.

not only Russia’s continental shelf, but also

171

173

The geographic North Pole is the the

The coastal Arctic States have begun

the Canada’s and Greenland’s.183 In 2014,

center of the Northern Hemisphere and

staking overlapping claims to the center of the

Denmark, on behalf of Greenland, submitted

the northernmost point on the Earth.

Arctic in submissions to the Commission.

its claim to the North Pole. It included

161

174

Currents 24.2 2021

the entirety of the Lomonosov Ridge as

the continental shelf extending from Alaska

their coastlines. However, uncertainty as to

an extension of Greenland’s northeastern

to the North Pole

and planned further

which States have the authority to impose

continental shelf.184 To collect data to support

research

indicate that the United States

regulations within the trade routes further

its claim, Denmark spent $55 million dollars

is considering a claim. Though the United

complicates Arctic shipping.

over the course of twelve years. Finally,

States has not asserted a formal claim, it has

A. Trans-Arctic Transportation

Canada views a portion of the Ridge as its

maintained its rights to do so.

1. Future Trade Routes

193

192

194

It submitted

As of this writing, the Commission has

Access to the Arctic Ocean is limited to

preliminary information for its delineation

not issued a response to Russia, Canada, or

three “chokepoints”: the Bering Strait, the

claim just before its deadline for submission

Denmark’s Arctic claims. If these claims are

Davis Strait, and the Greenland-Iceland-

passed in December 2013. The Russian,

accepted, the entirety of the Arctic will be

United Kingdom Gap.199 The Bering Strait

Canadian, and Danish submissions are all

subject to the sovereignty of the eight Arctic

lies between Alaska and Russia, connecting

still under review.

States exclusively, with the exception of two,

the Atlantic Ocean to the Arctic Ocean.

small, relatively resource-poor areas of the

Vessels traveling from East Asian countries

assert its own claims to the central region

Arctic Ocean.

Non-Arctic states would

to Europe or North America could enter the

of the Arctic Ocean, it has indicated that

have no right to independently exploit any

Arctic through the Bering Strait and travel

it does not seek sovereignty over the North

significant amount the mineral wealth in

along one of three routes: the Northwest

Pole.

the Arctic.

Passage, the Northern Sea Route, and the

—————————————————

Transpolar Sea Route.200

extended continental shelf.

185

Though Norway could conceivably

186

Rather, Norway claimed that the

Yermak Plateau in the Western Nansen

195

196

of its continental shelf.187 The Plateau is

III. Navigation on Arctic Trade Routes

along Canada’s northern archipelago,

likely a submarine elevation because it

—————————————————

from the Bering Strait to the Davis Strait

is in morphological continuity with the

The steady recession of sea ice continues

between Canada and Greenland. Thus,

continental margin and shares the geological

to open new waters in the summer months.

the NWP connects the Pacific Ocean and

and genetic characteristics of the Norwegian

Researchers predict that by the 2030s the

the Northwest Atlantic. It presents an

landmass throughout its entirety.188 Norway’s

Arctic Ocean will be ice-free in most late

alternative to the Panama Canal for trade

claim, submitted to the Commission in

summers.197 Arctic shipping routes could

between northeast Asia and the eastern coast

2006, was approved by the Commission

save thousands of miles and multiple days

of North America.201 Not only is the NWP

in 2009.189 It is the only state to receive a

of sailing between major trading blocs.

7,000 km shorter than the route through the

recommendation from the Commission with

Non-Arctic states have an interest in the

Panama Canal, it can accommodate larger

regards to the Arctic thus far.190

economic benefits associated with these

vessels than the Panama Canal.202 The NWP

The United States also has a potential

potential trade routes. Lower shipping costs

actually consists of several potential routes.

claim to the North Pole. Unlike Norway, the

would be advantageous for Northeast Asian

The southern route “has been open in recent

United States may have an interest in making

coastal countries because it would make

summers and contains mostly one-year ice,”

asserting the claim. The Chukchi Plateau

their exported products less expensive for

but it is circuitous and “shallow enough to

in the Canada Basin, north of Alaska, is a

importers in North America and Europe

impose draft restrictions on ships.”203 The

likely natural prolongation of the Alaskan

than those of their competitors in Southeast

northern route is “more direct . . . but more

continental shelf.191 Similar to the Yermak

Asia. 198 However, the region still faces

prone to ice blockage.”204 In 2013, the first

Plateau, the Chukchi Plateau is likely a

technical and environmental impediments

foreign bulk carrier used the NWP, saving

submarine elevation, capable of supporting

to safe, lucrative trans-Arctic travel. Coastal

approximately $80,000 in fuel.205 To date,

a claim for extension of the continental

Arctic States have an interest imposing their

cargo ship transportation via the NWP

shelf beyond 350 nm. Recent research on

own regulations on ships traveling along

has been extremely rare, but excursions by

Basin, adjacent to Svalbard is an extension

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Currents 24.2 2021

The Northwest Passage (NWP) extends

cruise vessels and research vessels are more common.

non-Russian-flagged ships.215

further complicated by the adverse weather

However, both NWP routes are

The Transpolar Sea Route is the most

associated with the region, including severe

currently less commercially viable than the

direct route through the Arctic. The 2,100-

storms, intense cold, and heavy fog. 225

Northern Sea Routes.

mile mid-ocean corridor stretches across

This harsh climate not only inhibits ships’

The Northern Sea Route (NSR) connects

the North Pole. However, this route is not

transportation abilities, it also impairs deck

the Pacific Ocean to the Northeast Atlantic

currently accessible during any season due

machinery.226

via the opposite coastline of the Arctic Ocean.

to heavy sea ice in the region.216 Analysts

Though it is currently possible to design

The NSR extends from the Bering Strait to

predict that trans-North Pole shipping

vessels capable withstanding the harsh Arctic

the Greenland-Iceland-United Kingdom

lanes will not open until 2050 and will not

climate, it is not yet economically feasible.227

Gap, along Russia’s northern coastline. This

become commercially viable until later in

Existing cargo ships could traverse the Arctic

route could serve as an alternative to the

the century.217 Thus, control over the NWP

without any upgrades, but only if they are

Suez Canal and Panama Canal for trade

and NSR is of greater strategic significance

accompanied by two icebreakers.228 The

between East Asia and Northern Europe.208

for the next several decades.

increased number of vessels per journey

It is particularly enticing to Asian countries

2. Limitations on Arctic Transportation

increases the amount of fuel required for

206

as it avoids the choke point at the Suez Canal

Though the Arctic Ocean is more

each excursion.229 Smaller vessels may only

and the heavily pirated waters of the Strait

than a decade away from ice-free summers,

require one icebreaker but would transport

of Malacca.

water need not be entirely ice free to allow

less cargo and, therefore, increase the cost per

The navigation season in the NSR is

passage. Whether a ship can traverse a sea is

ton of freight.230 Finally, ice-class cargo ships,

relatively long, generally lasting from July

predominately a matter of ice thickness; cargo

which could travel without an icebreaker,

to November.209 There are five major routes

ships can travel through thinner ice if they

would have to sail at slower speeds.231 This

through the NSR that can be used depending

are either designed specifically for navigating

is an issue because the shipping season in

on ice conditions and the vessel size and ice-

in ice-infested waters or accompanied by

the Arctic currently lasts only a few weeks.

breaking capability.

icebreakers.

In colder regions ice is formed

Thus, commercial ships would face higher

over multiple years and can be over ten feet

operating costs on Arctic routes than

Unlike the NWP, the NSR has been open to

thick.

elsewhere.

domestic shipping since 1931.

“one-year ice” that is typically no more than

208

210

Three of these routes

have the greatest commercial viability.

211

Russia recognizes the economic potential

218

219

Warmer regions are associated with

three feet thick.220

Additionally, Arctic trade routes still require a staggering amount of

in developing the NSR and is actively

In addition to reducing the thickness

infrastructure investment before they

working to transform it into “a commercial

and abundance of sea ice, global warming

can start yielding profits. The absence of

shipping route of global importance, capable

is predicted to change the character of ice

Arctic ports and refueling stations present

of competing with more traditional routes

coverage, making it more regionally variable

significant limitations.232 A 2013 report

in price, safety, and quality.”212 Unlike the

and unpredictable.221 For example, blocks

by the United States Committee on the

largely undeveloped NWP, Russia already has

of multiyear ice from the North Pole and

Marine Transportation System prioritized

sixteen deep-water ports along the NSR.

213

icebergs from Greenland have traveled to

improvements to information infrastructure,

Russia is developing a fleet of icebreaker

regions of the NWP that were once covered

such as “weather forecasting, nautical

escorts and refueling posts for commercial

in one year ice.222 Moreover, it is difficult

charting, [and] ship tracking.”233 Marine

ships, and is reportedly seeking to reserve

to forcast the flow patterns of sea ice.223

surveys and ice charts will also be required for

carriage of oil and gas extracted along the

Even with appropriately outfitted ships, the

navigation because the moving ice sheets in

NSR to Russian-flagged ships.

A growing

dynamic and unpredictable movement of

the Arctic Ocean prevent the use of channel

number of large cargo ships have transited

ice will continue to make Arctic transport

marking buoy and other floating visual

the NSR in recent summers, including several

dangerous.

aids.234 However, existing surveys are often

214

224

Trans-Arctic shipping is 101

Currents 24.2 2021

steps necessary “to prevent passage which

to the waters, coupled with the long-term

D e v e l o p m e n t o f s h i p - t o - s h o re

is not innocent,” including temporarily

acquiescence by other countries of that

communication infrastructure is also essential

suspending innocent passage in its territorial

classification.253

in the Arctic, “where conditions are often

waters.243

out of date or otherwise inaccurate.235

Whether a waterbody constitutes an

On the other end of the spectrum

international straight requires an examination

are waterways classified as international

of the geographical and functional

in some cases, save “a week’s time and 40%

straits.

Bodies of water characterized as

characteristics of the waterbody. The ICJ

in freight shipping costs,” the savings of

international straits offer foreign vessels a

established criteria for such a determination

a shorter route may be offset by increased

more permissive navigation regime than

in the Corfu Channel Case. There, the ICJ

operating costs, including labor costs for

internal waters and territorial waters. Here,

defined international straits as passages that

mariners specialized in ice navigation and

foreign vessels are granted the right of

connect “two parts of the high seas,” which

the high premiums of marine insurance for

transit passage.

Transit passage offers

are “used for international navigation.”254 The

polar routes.237 Despite the harsh, hazardous,

greater freedom of navigation than innocent

court held that the functional criterion was

and expensive operating environment in

246

passage, but less than that of the high seas.

not necessarily a measure of “the volume of

the Arctic, there is still substantial interest

Like innocent passage, transit passage

traffic passing through the Strait or . . . [its]

in polar sea routes by governments and the

must be continuous and expeditious. 247

importance for international navigation.”255

private sector alike.238

However, transit passage generally only

Rather, it placed greater importance on the

B. Freedom of Navigation in the Arctic

requires adherence to international law rather

fact that the strait had actually been used

1. The Right of Passage in Coastal Waters

than the coastal state’s domestic laws and

for international navigation. The functional

As discussed in Part II, a state has

regulations.248 Further, the right of innocent

criterion thus requires that a passage is

varying degrees of control over transportation

passage may be temporarily suspended in

actually used for international navigation.

within its internal waters and territorial

territorial waters, but the right of transit

Since Corfu, whether a route has been

seas, and limited control, if any, over the

passage in international straits may not.

historically acknowledged as “useful” for

hazardous due to the harsh and changing environment.”

236

Though polar routes would,

244

245

249

transportation in the high seas or through

The adjacent coastal state will prefer

international straits. Foreign vessels may only

the sea route be classified as internal waters,

pass through internal waters with express

which would exempt it from the requirements

The UNCLOS clarified the criteria for

permission from the coastal state and are

of peaceful and transit passage.250 All other

transit passage in Article 37. The geographic

subject to all of the domestic laws of the

nations with some interest in transportation

criterion requires the strait to connect a part

state.

along the route would prefer the passage

of the high seas or an EEZ with another part

Foreign vessels are granted the “right of

be designated as an international strait, if

of the high seas or an EEZ.257 However, to

innocent passage”240 within a state’s territorial

not classified as high seas.251 Because states

meet the functional criterion, the strait must

sea.241 Though foreign vessels in the territorial

have the authority to deny passage within

be “used for international navigation.”258 In

sea must still comply with the applicable

their internal waters and regulatory rights

light of Corfu, scholars have interpreted the

domestic regulations, they are not required to

in their territorial waters, they have an

functional criteria to require actual use of the

first obtain permission from the coastal state

incentive to draw their baselines broadly.

passage as an international strait.259

provided that the passage is “continuous and

However, states are bound by the customary

expeditious” and is “not prejudicial to the

international rules for delimiting baselines.

Canada and Russia claim that the

peace, good order or security of the coastal

One alternative to traditional baseline

majority of the NWP and NSR lie within

[s]tate.”

A coastal state may not deny or

delimitation is classification by reason of

their internal waters. Unlike most sovereignty

impair the innocent passage of foreign ships

historic title. Historic claims are based on

disputes in the Arctic, however, this centers

within its territorial sea, but it may take any

the state’s consistent and enduring claim

on the legal status of the passages under

239

242

102

Currents 24.2 2021

252

international navigation has been given greater consideration.256

2. Internal Waters or International Straits?

the 1982 UNCLOS.260 Recognition of the

Anglo-Norwegian Fisheries case, the ICJ held

passageways as internal waters would grant

that states with complex coastlines may use

Canada and Russia the discretion to allow

the straight baselines.

This approach is

sovereignty in the Arctic because of historical

or deny passage to foreign vessels and the

permissible under the UNCLOS “where the

rights has [been] a guiding principle . . . since

authority to require ships passing through

coastline is deeply indented and cut into, or

the inception of the historic waters doctrine.”

to obey their domestic regulations. For

if there is a fringe of islands along the coast

277

example, Russia’s laws require ships to follow

in its immediate vicinity,” provided that

around its Arctic archipelagos as internal

its navigation standards and Canada requires

the baselines “not depart to any appreciable

waters in official handbooks in the late

the same for its environmental regulations.

extent from the general direction of the

1940s.278 The Soviet Union did not formally

coast.”268

declare a legal claim to the waters on the

Many states have rejected Russia and

267

from other nations.276 For Russia, the “wish to expand

The Soviet Union first claimed the waters

Canada’s internal waters classifications.261

However, it is only permitted for

basis of historic title until 1965.279 However,

These critics argue that the NWP and NSR

archipelagic states269 and neither Canada nor

the United States promptly challenged the

should be subject to an “international straits”

Russia meet the definition of archipelagic

claim by sending icebreakers to the contested

regime.

states.

Though, there is some judicial

waters each summer from 1962 to 1967.280

vessels a broader right of transit passage

discretion regarding the use of straight

Though United States icebreakers have not

which could not be suspended. In response

baselines for a “fringe of islands along the

returned to the Russian Arctic straits since

to Canada’s claim over the NWP, the United

coast,” most experts agree that the baselines

1967, it periodically reiterates its rejection

States Department of State urged that

at issue use “inappropriate base-points, are

of the Soviet claim.281

recognition of the NWP as Canadian internal

excessive in length and depart from the

Canada’s historic title claim relies on

waters “would jeopardize the freedom of

general direction of the coast” and “there

British exploration of the Arctic Archipelago

navigational essential for the United States

is no basis [in international law] to support

that began in 1576 and continued until

naval activities worldwide.”

justification of the straight baselines.”

Britain assigned the region to Canada in

262

This approach would give foreign

263

270

271

272

As discussed, disputes among UNCLOS

Should Canada and Russia’s straight

1880.282 However, none of this early activity

members over their sovereignty in the sea are

baseline argument fail, both states will

was accompanied by an explicit claim to the

normally subject to the compulsory dispute

rely on claims that the respective passages

straits and channels between the islands.283

settlement mechanism. However, Canada

lie within their historic internal waters.273

It was not until the 20th century that the

and Russia’s claims involve sea boundary

The historic title approach is accepted as

Canadian government claimed the NWP

delimitation, which are beyond the scope

customary international law, supported

as internal waters, and these assertions have

of compulsory dispute settlement under

by ICJ precedence, and allowed by the

consistently been denounced by the United

the UNCLOS.

UNCLOS.

States.284

264

Since Canada and Russia

274

The 1962 U.N. Secretariat

have evoked the exception to compulsory

Study outlined three factors for evaluating

Opposition to Russian and Canadian

dispute settlement, the issue will likely

the legitimacy of a historic waters claim:

historic internal water claims by other

remain unresolved until it is brought before

the authority exercised over the area by the

states, particularly the United States, present

an international court or tribunal.

coastal state; the continuity of such exercise

a potentially fatal flaw for both states’

Internal Waters

of authority over a considerable amount of

argument. 285 The two states’ best, and

Canada and Russia both drew straight

time; and the reaction of foreign states.275

perhaps only, chance at claiming the passages

baselines around the outmost islands of their

Sovereignty claims based on historic title

lie within historic internal waters requires

respective Arctic Archipelagos under the

are often difficult to substantiate because

partnership with the indigenous Arctic

“straight baselines” doctrine.

Typically,

they require the coastal state to prove that

peoples, whose historical occupation and

states must delimit their baselines in parallel

it exercised jurisdiction over the waters for a

use of the Arctic lands and waters has existed

to their actual coastline, however, in the

considerable period of time without protest

for thousands of years.286 The ICJ released

265

266

103

Currents 24.2 2021

an advisory opinion declaring that nomadic

sea lanes in circumstances of absent ice.”293 An

increasingly expressing interest in the region

peoples can acquire and transfer sovereign

increase in amount of international transiting

and demanding a voice in management of

rights over land.287

through both straits would further support

the region. Under the current legal regime,

the finding that they are useful international

distant nations possess very limited rights

straits.294

in the Arctic relative to regional ones. Non-

Canada could have a strong claim to the NWP through a partnership with the Inuit people. The Inuit tribes surrendered

Second, once a channel gains the status

Arctic states cannot claim Arctic territory or

their sovereign rights to Canada in the 1993

of international strait, that status cannot be

sovereign rights, and have extremely limited

Nunavut Land Claims Agreement.

negated by the demarcation of new boundary

rights, if any, in the Arctic Council. Non-

lines.

As such, even if Canada and Russia’s

Arctic states have only a general legal claim

governments to work together with the

straight baselines are found to be consistent

to arctic resources in the largely inaccessible

indigenous tribes. This may be more difficult,

with international law, they will not prevail

high seas at the center of the Arctic Ocean.

given the sordid history of the treatment

if the passageways were previously used for

Though the region surrounding the North

of Arctic natives. The convolutions Arctic

international transportation.

Prior to both

Pole is rich in subsurface hydrocarbons, it is

States used to bolster their sovereignty claims

states’ baseline demarcation in 1985, United

likely the most expensive place in the world

ignored the rights of the original Arctic

States ships entered the NWP and NSR

to drill for oil.302 As such, Non-Arctic states

inhabitants. As some scholars have noted,

without obtaining prior authorization from

are seeking alternative methods of gaining

these “countries refused to grant property

Canada and Russia, respectively.

As such,

control and exerting influence in the region.

rights based on natives’ traditional land use

the United States is the only country that

Disputes over navigational regimes and

but now they want to rely on traditional uses

is positioned to dispute both Russian and

resource attribution create tension in the

of arctic lands to support their sovereignty

Canadian claims that the NSR and NWP

region. These disputes may be influenced

claims in the region.”289

constitute internal waters.298

and exacerbated by non-Arctic states seeking

288

However, this approach requires these

295

296

297

Neither passage will have a definitive

to gain power in the region. There is

C a n a d a a n d Ru s s i a m u s t a l s o

legal status unless, and until, this matter

concern that mounting tensions, in light

defeat claims that the NWP and NSR

is settled between the principal states or is

of the changing geopolitical environment,

are international straits. There are two

adjudicated by the ITLOS or the ICJ.

The

present an emerging security issue. Further,

arguments supporting the classification of

NWP and NSR would both likely be declared

the UNCLOS fails to provide adequate

the passageways as international straits. First,

“straits used for international navigation” if

dispute settlement mechanisms to ensure

the plain meaning of an international strait

the questions was brought before a court.

300

that disagreements among Arctic States are

in Article 37 of the UNCLOS, in light of the

However, there is no assurance that a decision

resolved in a peaceful manner. Given foreign

Corfu criteria, indicates that an international

by any tribunal would be accepted by the

involvement and the recent militarization

strait classification may hinge on the strait’s

aggrieved country. For example, China

of the region, the risk of multinational

“usefulness” consideration.290 Both the NWP

refused to accept the decision of the arbitral

armed conflict is a growing concern. The

and NSR meet the geographic criteria of an

tribunal regarding the South China Sea in

shift in the Arctic’s international security

international strait.

the Philippines v. China.

environment, combined with resource

—————————————————

competition and sovereignty disputes, has created an increasingly volatile environment.

the “usefulness” of the route for international

IV. The Arctic Geopolitical Environment

navigation and the actual use of the route for

—————————————————

Despite its geographic limitations,

Both Arctic sea lanes would likely

Arctic issues have generally been resolved

China has employed creative methods to

qualify as international straits based on the

through international cooperation by the

establish leverage in Arctic governance,

“overwhelming practicality of the northern

eight Arctic States. Non-Arctic states are

buying stakes and influence wherever it seems

International Straits

291

As discussed, since the

decision in Corfu, more emphasis has been placed on the functional criterion, namely

such.

292

301

104

Currents 24.2 2021

299

A. China in the Arctic

wise. In its 2018 White Paper, China declared

to develop its shipping capability in the Arctic

Though the majority of Chinese

its intention to gain a more active role in

region, particularly along the NSR. In its

investment is aimed at developing mining

Arctic governance and declared itself “an

White Paper, China announced the extension

and transportation infrastructure, China

important stakeholder in Arctic affairs.”303

of its 2013 Belt and Road Initiative (BRI) to

has enhanced its economic ties with Arctic

China bases its right to participate in Arctic

the Arctic region.310 The “Polar Silk Road”

states through other various investments and

governance on the fact that, as a self-declared

would be the third major transportation

agreements. For example, China injected a

“Near-Arctic State,” it is impacted by trans-

corridor under the BRI.

A trading route

large sum of money in the Icelandic economy

regional and global issues in the Arctic.

304

through the Arctic along the NSR would

after its 2008 collapse.320 Iceland and China

These declarations are in keeping with

trim nearly 2500 miles off the route from

entered a free trade agreement with each

China’s desire to play a more influential role

China to Iceland and save $60-120 billion

other in 2013.321 China has also entered a

in matters of global governance.305

per year.312 China has also begun building

joint agreement with Finland regarding polar

China has diplomatically, scientifically,

ice-capable vessels. It is currently completing

research, environmental protection, and

and economically positioned itself with

construction of its second icebreaker and has

shipping and maritime safety.322

regard to Arctic development in order to

announced its intention to build a 30,000-

1. China’s Influence on Arctic Disputes

ensure it shares in the benefits of Arctic

ton nuclear-powered icebreaker.313

311

The conversation regarding sovereignty

resources. China’s expansive moves in the

Third, China is establishing economic

claims in the Arctic is generally one that

region have taken three forms. First, it

ties with Arctic Council member states.

occurs only between Arctic States. The

has increased its influence in the region

China has made significant investments

recent “turning of the capitalistic tide” in

by participating in Arctic governance by

in developing Russia’s Arctic oil and gas

the Arctic, coupled with the ambition of

obtaining Observer status in the Arctic

industry.314 Russia and China entered an

the non-Arctic states to gain access to Arctic

Council and drafting international laws and

agreement that allows China to purchase

resources by currying favor with Arctic States

regulations applicable to the region. China

oil from Russia in exchange for exploration

will “undoubtedly turn what has been a

first joined the Arctic Council as an ad hoc

licenses in the Arctic.

The Chinese

moderate disagreement into a more intense

observer in 2007. It applied for Permanent

National Petroleum Corporation signed

dispute, as states seek to exercise their rights”

Observer three times before its application

an agreement with Russian national oil

to disputed waters.323

was accepted in 2013.306 China has also

company to explore three Arctic areas for

Even among Arctic States, one State

expressed its interest in contributing to the

oil.316 Further, China owns at least 20% of a

may influence the outcome of a sovereignty

research of the Arctic Council’s Working

Russian natural gas megaproject on the Arctic

dispute by publicly accepting or rejecting the

Groups, which develop proposals for Arctic

Yamal Peninsula, which includes “onshore

claim. The Soviet Union, for instance, sought

Council projects and recommendations.

and offshore natural gas wells, a deepwater

to legitimize its use of straight baselines to

China views the patchwork of Arctic

port, liquefied natural gas (LNG) storage

claim control over the NSR by supporting

governance as an opportunity “for new ideas,

and feeder lines, permafrost-resilient support

Canada’s claim to the NWP under the same

rules and participants.”

buildings, and rail lines.”

rule.324 Foreign nations, such as China, can

307

China participated

in drafting rules for ships operating in polar

315

317

China has also pursued the possibility

influence sovereignty disputes by simply

and fisheries in the Central Arctic

of oil exploration in Iceland’s territorial

acquiescing to an Arctic State’s jurisdictional

Ocean.309 It is also actively engaged with the

waters as well as drilling of mineral deposits

claim.325

Authority regarding regulation of mineral

in Greenland.318 China has even signed a

Chinese and Russian collaboration in

exploitation in the Area. It is no surprise that

Joint Development Agreement with governor

developing shipping lanes in the NSR tends to

there is an increasing number of Chinese

of Alaska for an estimated $43 billion

support Russia’s claim that the NSR traverses

attorneys specializing in Arctic law.

investment in Alaska’s liquified natural gas

internal waters rather than an international

development.

strait. In September 2013, a Chinese cargo

waters

308

Second, China has launched programs

319

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Currents 24.2 2021

ship became the first commercial vessel to

Paper requires China to establish relations

presence on the island with strong opposition.

326

use the NSR to travel from Asia to Europe.

with all Arctic states and stakeholders. The

Danish politicians have warned that China

China and Russia declared their commitment

rationale is that if all Arctic actors are tied

is a threat to the overall security of political

to carrying out major cooperation projects

to China through agreements on scientific

interests, stating that the consequences of

in areas such as trade, energy, infrastructure,

research, resource extraction, infrastructure

China’s expansion on the global balance

and the NSR in 2017.

In 2018, China

development, and trade, then China is in a

of power are “incalculable and even more

entered a credit agreement with Russia

position “to manage unforeseen developments

ungovernable.”340 The annual risk assessment

wherein China agreed to provide up to $9.5

and future attempts to marginalise China in

reports published by the Danish Defense

billion for the construction of infrastructure,

the region.”

Intelligence Service have expressed concerns

327

333

including projects along Russia’s NSR.328

Second, Greenland has rich iron, zinc,

that Chinese investment will introduce

By acquiescing to Russia’s claim of control

rare earth elements, and uranium deposits,

dependencies and vulnerabilities to

over the NSR, China is supporting Russia’s

and erosion of the Greenland ice sheet allows

Greenland’s economy.341 Michael Sfraga, the

claim that the NSR is within internal waters.

greater area for mining projects. Though

Director of the Polar Institute, has said that

China has not reached similar agreements

China has large mineral reserves, Chinese

“[i]f you invest a lot in a small island country,

with Canada regarding the NWP.329 Though

iron ore is generally low grade.334 Further,

you could have a lot of sway there.”342

an arrangement with China would benefit

China produces over 80% of the global

Canada’s NWP claims, Canada has expressed

output of rare earth elements.

China has

criticism with skepticism, viewing it as an

concerns about China’s evolving position on

invested in Greenland’s Kvanjefjeld Project,

attempt to stymie Greenlandic independence

the status of the strait.330

where an estimated 270,000 tons of uranium

rather than a good faith concern. 343

China’s involvement in establishing

are deposited.336 Such investments have been

Disagreements between Denmark and

international recognition of Arctic sea

made possible by changes in the Greenland-

Greenland over which nation has jurisdiction

routes exacerbates conflict among Arctic

Denmark power structure. For example, the

over what types of foreign investment are

States that dispute Russia’s and Canada’s

Self-Government Act shifted responsibility

already a source of tension. China’s economic

claims. However, China’s influence over

for the administration of mineral and oil

interest in mining and infrastructure projects

semi-sovereign Greenland presents a more

extraction in Greenland from Denmark to

further strains relations between Denmark

direct source of conflict for the region.

Greenland.337 Pursuant to its new authority,

and Greenland.344

Greenland is a territory of Denmark that is

Greenland was able to diversify its economy

These tensions are exemplified by

moving toward independence.

by repealing a law that banned mining of rare

Danish interference in Greenlandic-Chinese

earth elements and radioactive material.

development plans. In 2016, Denmark

331

To obtain

economic independence from Denmark

335

338

Greenlandic politicians have met Danish

without compromising the level of welfare,

Finally, Greenland presents an

attempted to sell the aforementioned naval

Greenland must necessarily invite foreign

opportunity to enhance global infrastructure.

base but took it off the market when a

development and investment.332 Greenland

The nation marks the arrival point of the

Chinese company expressed an interest in

is looking for investments to further develop

Polar Silk Road and is the only route that

buying it. The Danish government claimed

and diversify its economy. It has shown a

339

does not pass through territorial waters.

the reversal was based on a determination

willingness to accept Chinese investment,

China has expressed interest in establishing

that the base was still of use in Denmark’s

which it perceives as an opportunity to move

an Arctic research hub in Greenland.

Arctic defense. However, leaks released to the

toward full Greenlandic independence.

Further, Chinese firms have made attempts

Danish media indicated that the real reason

to buy an abandoned naval base and finance

was to avoid selling the base to the Chinese

commercial airports in Greenland.

firm. The scandal enforced Greenlandic

Greenland is of interest to China for three reasons. First, investment in Greenland enhances Chinese influence in the Arctic. The

However, Denmark thwarted these

mistrust towards Denmark and strengthened

“win-win” strategy espoused in the White

attempts and has generally met Chinese

suspicions that the Danish government is

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Currents 24.2 2021

continuing to make unilateral decisions

by using predatory lending practices and

regarding Greenlandic interest.

penalizing companies and countries that

Similarly, companies dependent on the

Denmark and Greenland had similar

don’t bend to their will. China’s manipulative

Chinese market have already begun to shift

reactions to the potential involvement of a

lending practices have been a cause of

narratives to placate Beijing.358 Hollywood

Chinese state-owned construction firm in

concern, particularly in light of the explosion

regularly self-censors films. Even sports

the development of airport infrastructure

of Chinese-financed projects associated with

enterprises are subject to the influence

in Greenland in 2018. Following the

the BRI. The large, government-backed

of Chinese power; recently, the Chinese

Chinese firm’s bid, and concern expressed

loans to targeted states do not adhere to

government demanded that the NBA fire the

by the Pentagon, the Danish prime minister

the internationally recognized and generally

Houston Rockets general manager after he

suddenly presented an agreement offering

accepted debt sustainability practices and

tweeted support for the protestors in Hong

investment in the project. 346 The U.S.

“come with political strings attached.”353 The

Kong.359 In response to the tweet, Chinese

Department of Defense then also expressed

destructive economic consequences of these

state-run television canceled broadcasts of

its interest in investing in military/civilian

practices “breeds long-term dependence on

NBA games, jeopardizing the NBA’s decades-

dual-use airports in Greenland.

China and expands Beijing’s influence.”

long efforts to develop China into its biggest

345

347

China’s

354

presence in the region thus influences the

In the context of the Arctic, these concerns

ongoing negotiations between Danish and

arise with regard to Chinese investment in

Greenlandic governments—particularly by

Greenland.

increasing mistrust and tension between the

would not be tolerated.

overseas market.360 Arctic States—often under public pressure—have begun setting their own

China’s increased global influence

limits when it comes to welcoming Chinese

has had, and will continue to have, the

presence.361 A general question for Arctic

Both Denmark and the U.S. have

effect of stifling free speech. States which

nations is “whether and how to link China’s

perceived Chinese investment in Greenlandic

are financially beholden to China are less

activities in the Arctic to its activities in other

infrastructure as an attempt by China to gain

inclined to denounce or even acknowledge

parts of the world.”362 Some policymakers

a military foothold.349 Under the Trump

Chinese human rights violations.355 For

warn that attempts “to maintain the Arctic

administration, the U.S. has increasingly

example, in 2017 Greece refused to support

as a region of cooperation and low tensions”

viewed China as its greatest power rival and

the EU’s condemnation of Chinese human

could encourage aggressive behavior by China

Greenland as a significant strategic ally.350

rights abuses shortly after Greece received a

in other parts of the world by legitimizing

Notably, Trump expressed an interest in

“massive” influx of Chinese investment.356

those actions.363 Rather, Arctic States should

buying Greenland in 2019.351 Greenland will

It was the first time the EU failed to issue

try to shape the Polar Silk Road and other

likely find itself at the center of a bidding

a joint condemnation of Chinese abuses at

Chinese expansions through a combination

war, wherein “the closer Chinese direct

the U.N. Human Rights Council. China has

of engagement and pressure.364 One possible

investment and physical presence” appears,

already begun to exert pressure in the Arctic

method of exerting counter-influence is

the more enthusiastic Denmark and the U.S.

in order to quell unfavorable discord. The

to impose punitive costs on China in the

are to make favorable investment offers to

Chinese government threatened penalties

Arctic for unwanted actions that China takes

Greenland.

Chinese expanding influence

against Greenlandic shrimp exports in

elsewhere.365 Arctic States could move to

in the Arctic has thus exacerbated tensions

response to a soccer match between Tibet

suspend China’s Observer status on the Arctic

between Denmark and Greenland, brought

and Greenland.357 The soccer match was

Council for the atrocities committed against

scrutiny from the United States, and changed

viewed as an act of anti-colonial solidarity

the Uyghurs in the Xinjiang “re-education”

the power dynamic between Arctic States.

between two nations of indigenous peoples

camps.366 Alternatively, Canada and Russia

2. China’s Arctic Policy in the Global Context

that have been denied access to official FIFA

could refuse to allow Chinese ships access to

China is becoming a bigger global player

tournaments. China made it clear that any

the NWP and NSR in retaliation for China’s

and is showing its willingness to “fight dirty”

negative casting of the Chinese government

mishandling of the COVID-19 outbreak.367

two governments.

348

352

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B. Militarization of the Arctic The international security environment

as a top strategic priority.374

environment of the Arctic.

However, Russo-Western relations have

Russia’s increased militarization of

in the Arctic has undergone significant

been gradually deteriorating since 2012.

375

the Arctic in recent years has prompted

changes in the last 30 years. Though the

The Russian government began citing

concerns that the Arctic is again headed to

region has been generally marked by low

militarization of the Arctic as a perceived

a security environment of military tension

tensions, a recurring central concern is the

threat that year.

Soon thereafter, Russia

and power competition. Some observers

deep fracture between Russia, the State with

identified NATO’s expanding influence as

fear this changing security environment may

the largest territory in the Arctic, and the

one of its top security threats and emphasized

threaten the United States-led international

remaining seven Arctic States.368

its perceived need to defend its Arctic

order that has existed since World War

During the Cold War, the military

interests.377 The Ukraine Crisis in 2014,

II. 381 Two elements of this world order

tension between the United States and the

which culminated in Russia’s annexation of

that are particularly relevant to the Arctic

Soviet Union was reflected in the Arctic.

the Ukrainian Crimean Peninsula by force,

are: the principle that force should be a

Both countries operated “nuclear-powered

caused a shift in the West’s threat perception

last-resort measure for settling disputes

submarines, long-range bombers, and tactical

of Russia. Soft security initiatives involving

between the countries and the belief that the

aircraft in the region.”369 In the 1990s, the

the Arctic States were derailed as a result of

world’s oceans are within the international

collapse of the Soviet Union ended the Cold

the crisis. This breakdown of cooperation

commons.382 Further, the “Arctic’s tradition

War, the Arctic region underwent a period

promoted “distrust, misunderstanding, and

of cooperation and low tensions, and the

of disarmament and military tensions in the

overreaction in the Arctic context.”

Russia

Arctic Council itself, can be viewed as

region subsided. The post-Cold War Arctic

has since significantly increased its military

outgrowths of the U.S.-led order,” leading to

has been generally marked by “cooperation,

capabilities and operations in the Arctic.

concerns over what new world order would

low tensions, peaceful resolution of disputes,

376

378

China’s cooperation with Russia on

replace that led by the United States.383

Arctic development exacerbates tensions

It is unclear how to de-escalate the

Russia’s Arctic security policy has

among the Arctic States. There is already

growing tensions between Russia and the

undergone four phases during the post-Cold

a general uneasiness among Arctic States

seven Arctic NATO States. The Arctic

War era. The first, was the dismantling of

that an increased Chinese presence could

Council, which is the traditional forum for

Russian military forces in the Arctic in the

upend the status quo. As discussed, Chinese

addressing issues in the Arctic and among

1990s.371 This was followed by a period of

acquiescence to Russian jurisdiction over

its States, has explicitly excluded issues

national power restoration in the second half

the NSR would tend to support Russia’s

relating to military security.384 Though several

of the 2000s. Particularly, Russia announced

claim that the NSR is within its internal

multilateral discussions of Arctic security

a program to spend $723 billion by 2020

waters. Countries have the authority to

issues have taken place in other forums,

to modernize its military forces in its State

restrict passage of vessels within their

such as the Northern Chiefs of Defense

Rearmament Program.372 Its 2013 Arctic

internal waters, including warships. Russia

or Arctic Security Forces Roundtables, the

Strategy included maintaining combat

has already announced plans to restrict the

Ukraine Crisis exhibited the ease with which

readiness and enhancing infrastructure to

passage of foreign warships in the Arctic

such discussions can breakdown in response

support troop deployment in the Arctic as

Ocean.

Furthermore, in 2018, a Chinese

to conflicts in other regions.385 Further,

primary goals.373 Beginning in 2008, Russia’s

naval commander and Russian officials met

other forums may lack the traditions for

Arctic policy entered a period of attempted

in Russia’s northern naval base, prompting

peaceful dispute resolution and respect for

cooperation. Key Russian security documents

speculation that there may be military

international law that have been a staple of

indicated Russia lowered its perceived threat

cooperation between the countries in the

Arctic governance.386

level in the region and listed “keeping the

future.380 Thus, Chinese investment in and

C. Gaps in the UNCLOS Dispute Resolution

Arctic as a zone of peace and cooperation”

use of the NSR could affect the military

The Arctic Council is not alone in

and respect for international law.”370

379

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Currents 24.2 2021

offering subpar resolutions to ensure peace

claim and is bound to obey Commission

to Russia’s activities, as they have done

in the Arctic. The UNCLOS provides no

recommendations.

consistently in the past. However, it is unclear

certainty that sovereignty disputes will be

Even still, the Commission does not

what methods of peaceful dispute resolution

resolved in a peaceful manner. Though the

have the authority to enforce its decisions

treaty declares that delineation based on

against any state, submitting or otherwise.

The specter of armed conflict in such

Commission recommendations are “final

The Commission is “powerless to stop a

a scenario is possible, if not imminent. The

and binding,” it does not specify upon

coastal State from developing oil and gas

events following Russia’s flag-planting claim

whom its recommendations are final. A

on the seafloor highs it claims are natural

to the North Pole in 2007 show the reality

careful analysis of the UNCLOS reveals

prolongations of its land territory, but which

of such an outcome. One week following

that Commission is not binding upon all;

the Commission determines are not.” 390

the Russia’s claim to the center of the

rather, it has an incredibly limited role in the

Thus, Commission recommendations are

Arctic Ocean, the Canadian Prime Minister

ultimate success or failure of claims. First,

more akin to nonbinding scientific, technical

announced plans to protect Canada’s

the Commission cannot alter the rights of

advice. Only other coastal states have the

sovereignty rights by increasing its military

non-parties to UNCLOS. The nature of a

power to prevent exercises of sovereignty

presence in the Arctic.391 In response, Russia

“recommendation” indicates that it is not

contrary to Commission recommendations.

sent bomber planes into the Arctic for the

compulsory on all states. The principle of

Accordingly, the true determining factor

first time since the Cold War.392

pacta tertiis (nec nocent nec prosunt) states

regarding whether a claim will be binding

The continental shelf disputes, as well

that treaties are binding on the parties and

on other states is whether other states accept

as the sea route disputes, create points of

only the parties—they do not create any

or protest the claim of sovereignty within a

tension with unclear resolution. Given the

obligations for third-party states without their

reasonable amount of time.

militarization of the Arctic over the last

would be available.

consent.387 Thus, non-member states preserve

It is unclear how disputes between states

their legal right to protest other states’ claims.

over Commission-backed delineation are to

over sovereignty claims is possible.

Second, the Commission decisions cannot be

be resolved. The Commission may not issue

—————————————————

binding on member states because it is not a

a recommendation without the consent of all

V. Conclusion

representative organization, like the United

relevant parties and such recommendations

—————————————————

Nations.388 Since the Commission does not

may not prejudice the position of any

In just a few decades, the Arctic has

represent its member states, it cannot make

of the parties involved in a delimitation

become the front-line for the global scramble

binding decisions that alter their rights.

dispute. The UNCLOS encourages states to

for natural resources. The UNCLOS

The ambiguity regarding the mechanism

resolve disputes by agreement. Alternatively,

established rules regarding sovereign rights,

by which recommendations are “final and

the compulsory settlement mechanism is

but provided no effective system to settle

binding” upon members and non-members

available. However, states may opt out of

disputes or enforce recommendations.

alike suggests that reacting states maintain

compulsory settlement for issues regarding

The navigational disputes in the Arctic

full political and legal autonomy to dispute

delimitation. This exception has been

cannot be solved without a court order

Commission decisions.

invoked by Canada, Denmark, and Russia

or multilateral agreement. Continental

The most likely interpretation of Article

with regard to the Lomonosov Ridge dispute.

shelf disagreements may be influenced by

76 is that Commission decisions are final

Should the Commission reject Russia’s

Commission recommendations, but cannot

and binding only upon the submitting

claim to Lomonosov Ridge, Russia could

be resolved with any certainty absent a

state, which has availed its delineation

nevertheless develop oil and gas along

delimitation agreement. Disagreement

decision to the Commission.

In other

those ridges as though they were part

over Russia’s asserted continental shelf

words, submissions are “binding” in that

of its continental shelf. Canada and the

claim or the applicable navigational regime

the submitting state cannot later change its

United States would almost certainly object

for the NSR threaten to further escalate

389

decade, the threat of nonpeaceful disputes

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Currents 24.2 2021

the already growing tensions between Russia and the other Arctic States. China’s increased diplomatic presence may cause further exacerbation if China continues to interfere with intra-Arctic relations by lending its influence to whichever States offer the greatest returns, as it has done with Russia and Greenland. Increasing territorial disputes and competition for resources may lead to a new Cold War wherein the Arctic traditions of peace and cooperation are replaced by power competition and increased militarization.393

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End Notes *

The definitions of “territorial waters” and “territorial sea” vary across literature and are sometimes used interchangeably. However, for the purposes of this comment, “territorial sea” shall be consistent with the UNCLOS definition and refer only to the waters within 12 nautical miles of the baselin. The term “territorial waters” shall refer to all maritime waters over which the State has jurisdiction (e.g. waters extending out from the baseline subject to State control). See Britannica Encyclopedia, Territorial Waters (2019), https://www.britannica.com/ topic/territorial-waters. 1. United Nations Convention on the Law of the Sea, Dec. 10, 1982,1833 U.N.T.S. 397 (entered in force 16 November 1994) [hereinafter UNCLOS] https://www.un.org/depts/los/con vention_agreements/texts/unclos / unclos_e.pdf. 2. Cong. Research Serv., R41153, C h a n g e s i n t h e A rc t i c : Background and Issues for Congress 1 (2019) [hereinafter Changes in the Arctic] https:// w w w. f a s . o r g / s g p / c r s / m i s c / R41153.pdf. 3. United States Geological Survey, Fact Sheet 2008-3049, Circum-Arctic Resources A p p r a i s a l : E s t i m at e s o f Undiscovered Oil and Gas North of the Arctic Circle (2008), https://pubs.usgs.gov/ fs/2008/3049/fs2008-3049.pdf. 4. Id. 5. Changes in the Arctic, supra note 2, at 2. 6. Only 4 million people, or 0.05% of the world’s population, lives in the Arctic. Roughly half of this population reside in Russia’s Arctic territory. Arctic People, National Snow & Ice Data Center [https://perma.cc/6SQUZSYU]. 7. Changes in the Arctic, supra note 2, at 21. 8. Intergovernmental Panel on Climate Change, Working Group 1, Summary for Policymakers, in Climate Change 2013: The Physical Science Basis, at 5 (Stocker, T.F., D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex & P.M. Midgley eds., 2013) [hereinafter Summary for Policymakers]. 9. Id. at 4.

10. Id. at 13. 11. See Sukyoung Lee, A Theory for Polar Amplification from a General Circulation Perspective, 50 AsiaPac. J. Atmospheric Sci. 31, 31 (2014). 12. Julia A. Crook, Piers M. Forster & Nicola Stuber, Spatial Patterns of Modeled Climate Feedback and Contributions to Temperature Response and Polar Amplification, 24 J. Climate 3575, 3575 (2011). 13. Kiwoong Park, et al., Contrasting Local and Remote Impacts of Surface Heating on Polar Warming and Amplification, 31 J. Climate 3155, 3155 (2018). 14. Id. at 3164–65; E. Beer, I. Eisenman, & T. J. W. Wagner, Polar Amplification Due to Enhanced Heat Flux Across the Halocline, Geophysical Res. Letters, Feb. 3, 2020, at 1. 15. Donald K. Perovich et al., Increasing Solar Heating of the Arctic Ocean and Adjacent Seas, 1979–2005: Attribution and Role in the Ice‐Albedo Feedback, Geophysical Res. Letters, Oct. 11, 2020, at 9–10; American Meterological Society, The State of Climate in 2012, Bull. Am. Meteorological Soc’y, Aug 2013, at S42 (Aug. 2013). 16. Summary for Policymakers, supra note 8, at 142. 17. N. Shakhova et al., Anomalies of Methane in the Atmosphere Over the East Siberian Shelf: Is There Any Sign of Methane Leakage From Shallow Shelf Hydratess?, 10 Geophysical Res. Abstracts, 2008, at 2, https://meetings. copernicus.org/www.cosis.net/ abstracts/EGU2008/01526/ EGU2008-A-01526.pdf. 18. Id. 19. Park, supra note 13, at 3156. 20. Kristina Pistone et al., Radiative Heating of an Ice‐Free Arctic Ocean, Geophysical Res. Letters, June 20, 2019, at 7474–75. 21. United States Geological Survey, supra note 3. 22. Changes in the Arctic, supra note 2, at 23, 52, 117. 23. See id. at 56, 116; Joel K. Bourne, In the Arctic’s Cold Rush, There Are No Easy Profits, Nat. Geographic, (Mar. 1, 2016) https://www. nationalgeographic.c om/ magazine/2016/03/new- arcticthawing-rapidly- circle- work-oil/. 24. Changes in the Arctic, supra note 2, at 61. 25. Donald L. Gautier et al., Assessment of Undiscovered Oil and Gas in

the Arctic, 324 Science 1175, 1175–76, (2009) [https://perma. cc/B63B-D7BK]; e.g., United States Geological Survey, supra note 3 (stating that these untapped reserves amount to “approximately 90 billion barrels of oil, 1,669 trillion cubic feet of natural gas, and 44 billion barrels of natural gas liquids”). 26. United States Geological Survey, supra note 3, at 1, 4. 27. Changes in the Arctic, supra note 2, at 11. 28. Willy Østreng, The Future of Shipping & Trade in Arctic Waters, World Policy, (Apr. 8, 2015) [https://perma.cc/67Z4-NNCQ]. 29. Changes in the Arctic, supra note 2, at 23. 30. See id. at 20 n.54. 31. United States Geological Survey, supra note 3. 32. Kyle Mercer, Maritime Law: Sovereignty in the Arctic, 68 U.N.B.L.J. 365, 365 (2017). 33. By contrast, the Antarctic is comprehensively regulated under the 1959 Antarctic Treaty. 34. Henri Féron, A New Ocean: The Legal Challenges of the Arctic Thaw, 45 Ecology L. Quarterly 83, 87 (2018). 35. Julie Franki, Seize the Sea: The Territorial Conflict Between the United States and China Over Military Operations in the South China Sea, 31 Emory Int’l L. Rev. 1021, 1022 (2017). 36. UNCLOS, supra note 1, arts. 5, 7, 14; Office of Legal Affairs, Div. for Ocean Affairs and the Law of the Sea, The Law of the Sea: Training Manual for Delineation of the Outer Limits of the Continental Shelf Beyond 200 Nautical Miles and for Preparation of Submissions to the Commission on the Limits of the Continental Shelf, at I-4 to I-5 (2006) [hereinafter Training Manual]. Maritime zones consist of: (1) internal waters, which is the zone landward of the baseline of the territorial sea; (2) the territorial sea, which is the zone seaward of the territorial sea extending up to 12 nm; (3) the contiguous zone, which is the zone seaward of the territorial sea extending up to 24 nm from the baseline; (4) the exclusive economic zone, which is the zone seaward of the territorial sea that overlaps with the contiguous zone and extends up to 200 nm; and (5) the high sea, which are the waters seaward of the EEZ. Brent Carpenter, Warm is the

New Cold: Global Warming, Oil, UNCLOS Arcticle 79, and How an Arctic Treaty Might Stop a New Cold War, 39 envtll. l. 215, 222 n. 52 (2009). 37. Mercer, supra note 32, at 365, 370. 38. UNCLOS, supra note 1, art. 7. 39. Id. at art. 76. 40. Id. at art. 286. 41. Id. at art. 298(1)(a). 42. Féron, supra note 34, at 96-97. 43. Id. at art. 156. 44. Chronological Lists of Ratifications of, Accessions and Successions to the Convention and the Related Agreements, United Nations, https://www.un.org/depts/los/ reference_files/chronological_ lists_of_ratifications.htm (last updated Mar. 9, 2020). 45. Changes in the Arctic, supra note 2, at 18. 46. Arctic Ocean Conference in Illulissat, Greenland, Ilulissat Declaration (2008). 47. Id. 48. Arctic Council, Declaration on the Establishment of the Arctic Council (1996) [ h e r e i n a f t e r O t tawa Declaration]. 49. Arctic Council, The Arctic Council: A Backgrounder 1 (updated January 3, 2018) [hereinafter Arctic Council Backgrounder]. 50. The Ottawa Declaration, supra note 48. 51. The six organizations with Permanent Participant status are the Aleut International Association, the Arctic Athabaskan Council, Gwich’in Council International, the Inuit Circumpolar Council, Russian Association of Indigenous Peoples of the North, and the Saami Council. Arctic Council Backgrounder, supra note 49, at 1. 52. A r c t i c C o u n c i l , A r c t i c Council Rules of Procedure 4 (1998) [hereinafter Rules of Procedure]. 53. The thirteen countries with observer status in chronological o r d e r a r e : G e r m a n y, t h e Netherlands, Poland, the United Kingdom, France, Spain, China, India, Italy, Japan, South Korea, Singapore, and Switzerland. Observers, Arctic Council, https://arctic-council.org/en/ about/observers/ (last updated Jul. 21, 2019). 54. Rules of Procedure, supra note 52, at 9. 55. Id. at 4.

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56. 57. 58. 59. 60.

Id. at 9. Id. Id. Id. at 9. Arctic Council Backgrounder, supra note 49, at 2. 61. Arctic Council, Observer Manual for Subsidiary Bodies, 9 (updated Oct. 4, 2016). 62. See Eric Roston & Blacki Migliozzi, How a Melting Arctic Changes Everything, Part II: The Political Arctic, Bloomberg (May 16, 2017), https://www.bloomberg. com/graphics/2017-arctic/thepolitical-arctic/. 63. Id. 64. Id. 65. Rules of Procedure, supra note 52, at 14. 66. Id. at 9. 67. See State Council Info. Off. of China, China’s Arctic Policy (2018), http://www. xinhuanet.com/english/201801/26/c_136926498.htm [hereinafter White Paper]. 68. See Roston & Migliozzi, supra note 61. 69. Féron, supra note 34, at 87. 70. Arctic Council Backgrounder, supra note 49, at 1-2. The working groups are the Arctic Contaminants Action Program, the Arctic Monitoring and Assessment Programme, the Conservation of Arctic Flora and Fauna Working Group, the Emergency Prevention, Preparedness and Response Working Group, the Protection of the Arctic Marine Environment, and the Sustainable Development Working Group. Id. 71. Id. at 2. 72. The Ottawa Declaration, supra note 48; Féron, supra note 34, at 87. 73. Arctic Council Backgrounder, supra note 49, at 2. The three legally binding agreements among the eight Arctic States are the 2011 Agreement on Cooperation on Aeronautical and Maritime Search and Rescue in the Arctic, the 2013 Agreement on Cooperation on Marine Oil Pollution Preparedness and Response in the Arctic, and the 2017 Agreement on Enhancing International Arctic Scientific Cooperation. Id. 74. Gudmundur Alfredsson et al., Polar Law Textbook II 29 (Natalia Loukacheva, ed., Nordic Council of Ministers, 2013). 75. Louis de Gouyon Matignon, The Res Communis Concept in Space Law, Space Legal Issues (Feb. 28, 2019), https://www. spacelegalissues.com/space-lawthe-res-communis-concept-inspace-law/.

76. Paul Barresi, Mobilizing the Public Trust Doctrine in Support of Publicly Owned Forests as Carbon Dioxide Sinks in India and the United States, 23 Colo. J. Int’l Envtl. L. & Pol’y 39, 47 (2012) (citing the sixth-century codification of Roman law). 77. Id. 78. de Gouyon Matignon, supra note 75. 79. Id. 80. Rebecca M. Bratspies, Human Rights and Arctic Resources, 15 Sw. J. Int’l L. 251, 262-63 (2009). 81. A r c t i c : L o c a t i o n a n d Geography, Arctic Discovery, polardiscovery.whoi.edu/arctic/ geography.html (last visited Jan 5. 2019). Arctic indigenous peoples’ contact with Europeans began in: Scandinavia, Finland, and northwestern Russia as early as the 9th century CE, if not before; Canada (Labrador) in the 16th century; US (Alaska) in the 18th century; and Greenland late 10th century, but those Europeans died out during the 15th or 16th century and Europeans did not return permanently until the 18th century. Iceland is the only country that did not have indigenous tribes. Id. 82. Some historians argue that the term terra nullius was first used during legal disputes over the Arctic region, though there is debate regarding its first use. Andrew Fitzmaurice, The Genealog y of Terra Nullius, Australian Historical Studies, Sept. 29, 2008, at 2. 83. Id. at 252 n.3. 84. John Locke, Two Treatises of Government, 329 (Cambridge University Press 1965) (1689). 85. Emmerich de Vattel, The Law of Nations ch. XVII, § 209 (Joseph Chitty ed., 1879). 86. Id. 87. Bratspies, supra note 80, at 262. 88. Id. at 264. 89. Id. 90. V i v i a n Fo r b e s & Pa t r i c k Armstrong, Int’l Boundaries Res. Unit, The Sector Principle: Two Indian Ocean Examples, Boundary & Security Bull., Jan. 1995, at 9. 91. Loukacheva, supra note 74, at 78-79. 92. T. E. M. McKitterick, The Validity of Territorial and Other Claims in Polar Regions, 21 J. Comp. Legis. & Int’l L. 89 (1939). 93. Id. 94. North Sea Continental Shelf Cases (F.R.G. v. Den., F.R.G. v. Neth.) 1969 I.C.J. 3 (Feb. 20). 95. Id. 96. Bratspies, supra note 80, at 265.

97. UNCLOS, supra note 1, art. 76; Annex II, art. 4. 98. Changes in the Arctic, supra note 1, at 17. 99. Id. at 16. 100. UNCLOS, supra note 1, at art. 76(8). 101. Id. at art. 76, para. 8. 102. Id. at Annex II, art. 8. 103. Id. at Annex II, art. 4. 104. The State Department issued a statement questioning whether UNCLOS allows non-member states to make submissions and concluding that the issue will likely remain unsettled until a nonParty makes a submission. Email from U.S. Department of State, Legal Counsel for U.S. Extended Continental Shelf Project, to Cong. Res. Service (Jan. 20, 2016) (on file with the Congressional Research Service). 105. Changes in the Arctic, supra note 2, at 17. 106. North Sea Continental Shelf Cases (Fed. Republic of Ger. v. Den.; Fed. Republic of Ger. v. Neth.) 1969 I.C.J. 3, 22 (Feb. 20). 107. UNCLOS, supra note 1, at art. 77. 108. Mercer, supra note 32, at 371–72. 109. The Fletcher School Tufts University, Law of the Sea: A Policy Primer, Chapter 2: Maritime Zones, https://sites. tufts.edu/lawofthesea/chaptertwo/ (2020) [hereinafter Policy Primer]. 110. Mercer, supra note 32, at 371. 111. Policy Primer, supra note 109. 112. UNCLOS, supra note 1, at art. 5;. 113. Carpenter, supra note 36, at 22223. 114. UNCLOS, supra note 1, at art. 3. 115. Id. at art. 2. 116. Training Manual, supra note 36, at I-7 to I-8; Carpenter, supra note 36, at 223. 117. UNCLOS, supra note 1, at art. 33. 118. Id. at art. 33. 119. A map of the EEZs in the Arctic can be found at: https://perma.cc/ DE3U-48NY. EEZ & Arctic High Seas Map, Arctic Inst., https:// www.thearcticinstitute.org/wpcontent/uploads/2016/07/EEZarctic-high-res.jpg (last visited Nov. 3, 2019) . 120. UNCLOS, supra note 1, art 55, 57. 121. Id. at art. 56. 122. Id. at arts. 56(1), 60(1), 60(2). 123. Id. at art. 58. 124. Id. at art. 77; Carpenter, supra note 36, at 223. 125. Id. at art. 76. 126. Id. at art. 77. 127. Id. at art. 76 (1). 128. Id. at art. 77. 129. Id. at art. 76. 130. Thomas Hunt, Note: Left out in 112

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the Cold: Contemporary Policy and International Property Issues in the Arctic Circle, 40 Suffolk Transnat’l L. Rev. 327, 339 (2017); see also UNCLOS, supra note 1, at art. 81; Lea Brilmayer & Natalie Klein, Land and Sea: Two Sovereignty Regimes in Search of a Common Denominator, 33 N.Y.Univ. J. Int’l L. & Pol. 703, 733 (2001) (explaining how nation states often lease their sovereign sea territory to firms for oil drilling). 131. UNCLOS, supra note 1, at art 82. 132. Id. at art 82. 133. See id. at arts. 86, 87. 134. Id. at art. 87. 135. Id. at art. 1. 136. See supra Part II.A. 137. UNCLOS, supra note 1, at art. 136. 138. Id. at 26 at art. 1 (defining “Authority” and “activities in the Area”); Id. at art. 140 (describing the Authority’s role). 139. Id. at 78 at art. 153. The Enterprise is “the organ of the Authority which shall carry out activities in the Area directly, . . . as well as the transporting, processing and marketing of minerals recovered from the Area.” Id. at art. 170. 140. Id. at art. 14. 141. See generally Training Manual, supra note 36, at I-26; UNCLOS, supra note 1, at art. 76. Article 76 requires utilization of several scientific methodologies including: geology, geodesy, geophysics, geomorphology, hydrography, and bathymetry. Training Manual, supra note 36, at I-41, I-55 to I-56. 142. Training Manual, supra note 36, at I-26; UNCLOS, supra note 1, at art. 76. 143. Training Manual, supra note 36, at I-27. The two methods are the Gardiner formula for sediment thickness and Hedberg formula for distance. Id. at I-27, I-29, I-31; UNCLOS, supra note 1, at art. 76. 144. Training Manual, supra note 36, at I-26, I-37 to I-38; UNCLOS, supra note 1, at art. 76. 145. Training Manual, supra note 36, at I-26; UNCLOS, supra note 1, at art. 76. 146. Training Manual, supra note 36, at I-26; UNCLOS, supra note 1, at art. 76. 147. UNCLOS, supra note 1, at art. 76. 148. Id. 149. Id. 150. Id. (stating that the continental margin “does not include the deep ocean floor with its oceanic ridges or the subsoil thereof ”). 151. Id. (stating that “on submarine ridges, the outer limit of the continental shelf shall not exceed 350 nautical miles from the

baselines”). 152. Id. (exempting from the 350 nautical mile limitation “submarine elevations that are natural components of the continental margin, such as its plateaux, rises, caps, banks and spurs”). 153. Carpenter, supra note 36, at 225–226. 154. Training Manual, supra note 36, at VII-18. 155. Training Manual, supra note 36, at I-12. 156. Carpenter, supra note 36, at 227. 157. Training Manual, supra note 36, at VII-34. 158. Commission on the Limits of the Continental Shelf (CLCS), Sci. & Tech. Guidelines of the Commission on the Limits of the Continental Shelf, at para. 7.187.2.10, U.N. Doc. CLCS/11/7.1.8 (May 13, 1999). 159. Carpenter, supra note 36, at 22930; Training Manual, supra note 36, at VII-31 to VII-33. 160. Note: only basins and ridges relevant to the continental shelf delineation are discussed. 161. N o r t h P o l e , N a t i o n a l Geographic, https://www. nationalgeographic.org/ encyclopedia/north-pole/ (last visited Jan. 7, 2019). 162. Don C. Braun & John C. Warren, The Arctic Fox: Bush Pilot of the North Country 193-94 (2000). 163. North Pole, supra note 161. 164. Seth Millstein, Who Owns the Arctic? And Who Doesn’t?, Timeline (Nov. 27, 2016), https://timeline. com/who-owns-the-arctic2b9513b3b2a3 [https://perma. cc/9HD8-8V68]. 165. See supra Part II.A. 166. Ivan L. Head, Canadian Claims to Territorial Sovereignty in the Arctic Regions, 9 McGill L. J. 200, 212 (1963). 167. Thomas Hunt, Left Out in the Cold: Contemporary Policy and International Property Issues in the Arctic Circle, 40 Suffolk Transnat’l L. Rev. 327, 331 (2017). 168. Changes in the Arctic, supra note 2, at 132. 169. C.J. Chivers, Russians Plant Flag on the Arctic Seabed, N.Y. TIMES, Aug. 3, 2007, at 1. 170. Id. 171. This region has been generally accepted to be the property of one Kris Kringle, though this claim has been hotly debated by juvenile scholars and international law experts alike. Compare Rudolph the Red-Nosed Reindeer (NBC television broadcast Dec 6, 1964)

with Hilary Brueck, Santa Claus Would Be far More Likely to Live at the South Pole—Here’s what the North Pole Really Looks Like, Business Insider (Dec. 24, 2018) https://www.businessinsider.com/ what-the-north-pole-looks-likephotos-2018-12 [https://perma. cc/PJ7R-P2GA]. 172. Féron, supra note 34, at 111. 173. See supra Part II.B.1; see also Millstein, supra note 163. 174. Changes in the Arctic, supra note 2, at 131. 175. Russian Federation, Partial Revised Submission of the Russian Federation to the Commission on the Limits of the Continental Shelf In Respect of the Continental Shelf of the Russian Federation in the Arctic Ocean: Executive Summary (2002). 176. C o m m i s s i o n o n L i m i t s o f Continental Shelf, Statement by the Chairman of the Commission on the Limits of the Continental Shelf on the Progress of Work in the Commission, CLCS/34 (Jul. 1, 2002). 177. Changes in the Arctic, supra note 2, at 132. 178. Russian Federation, Partial Revised Submission of the Russian Federation to the Commission on the Limits of the Continental Shelf in Respect of the Continental Shelf of the Russian Federation in the Arctic Ocean (2015) https://www.un.org/Depts/los/ clcs_new/submissions_files/ rus01_rev15/2015_08_03_Exec_ Summary_English.pdf. 179. Id. at 12. 180. Id. at 5. 181. Carpenter, supra note 36, at 233-35; CLCS, United States of America: Notification Regarding the Submission Made by the Ru s s i a n Fe d e r a t i o n t o t h e Commission on the Limits of the Continental Shelf, 2-3, U.N. Doc. CLCS.01.2001.LOS/USA (Mar. 18, 2002). 182. Alexander Proelss & Till Müller, The Legal Regime of the Arctic Ocean, 68 Heidelberg J. of Int‘l L. 651, 668 (2008). 183. Id. at 681. 184. Th e G ove r n m e n t o f t h e Kingdom of Denmark and the Government of Greenland, Outer Limits of the Continental Shelf Beyond 200 Nautical Miles From the Baselines: Submissions to the Commission, Submission by the Kingdom of Denmark - The Northern Continental Shelf

of Greenland (2012). 185. Canada, Outer Limits of the Continental Shelf Beyond 200 Nautical Miles From the Baselines: Submissions to the Commission, Partial Submission by Canada Regarding Its Continental Shelf in the Arctic Ocean (2019). 186. Shiloh Rainwater, International Law and the “Globalization” of the Arctic: Assessing the Rights of NonArctic States in the High North, 30 Emory Int’l L. Rev. 115, 135 (2015). 187. See Norway, Continental Shelf Submission of Norway in Respect of Areas in the Arctic Ocean, the Barents Sea and the Norwegian Sea: Executive Summary (2006), https://www. un.org/Depts/los/clcs_new/ submissions_files/nor06/nor_ exec_sum.pdf; Carpenter, supra note 36, at 217, 232. 188. Carpenter, supra note 36, at 23536. 189. U.N. Div. Ocean Affairs & Law Sea, Commission Limits Cont’l Shelf, Summary of the Recommendations of the Commission on the Limits of the Continental Shelf in Regard to the Submission Made by Norway in Respect of Areas in the Arctic Ocean, the Barents Sea & the Norwegian Sea on 27 November 2006 (2009). 190. Submissions to the Commission on the Limits of the Continental Shelf, United Nations, https:// www.un.org/Depts/los/clcs_new/ commission_submissions.htm (last updated Oct. 16, 2020). 191. Candace L. Bates, U.S. Ratification of the U.N. Convention on the Law of the Sea: Passive Acceptance Is Not Enough to Protect U.S. Property Interests, 31 N.C. J. Int’l L. & Com. Reg. 745, 780 (2006) (stating that the United States may have a claim to Chukchi Plateau). 192. See id. 193. See id. 194. Ekrem Korkut & Lara B. Fowler, Melting Ice & Deep Waters: The United States & Deep Seabed Mining in the Arctic, ABA Section of Environment, Energy, & Resources (Nov. 13, 2019). 195. Féron, supra note 34, at 98-99. 196. Changes in the Arctic, supra note 2, at 135. 197. Id. at 13. 198. Id. at 52. 199. Féron, supra note 34, at 91. 200. See Arctic Shipping Routes, The Arctic Institute, https:// www.thearcticinstitute.org/wp-

content/uploads/2016/07/ArcticShipping-Routes-high-res.jpg (last visited Nov. 3, 2019) (showing the Northwest Passage in red, the Transpolar Sea Route in green, and the Northern Sea Route in cyan) [https://perma.cc/DE3U-48NY]. 201. Changes in the Arctic, supra note 2, at 52. 202. Whitney Lackenbauer & Adam Lajeunesse, More Ships in the Northwest Passage Will Boost Our Arctic Claim, Globe & Mail (Jan. 5, 2015), https://www. theglobeandmail.com/opinion/ more-ships-in-the-northwestpassage-will-boost-our-arcticclaim/article22294408/. 203. Changes in the Arctic, supra note 2, at 52. 204. Changes in the Arctic, supra note 2, at 25. 205. Historic Sea Route Opens Through Canadian Arctic Waters, Nordic Bulk Carriers A/S http://www. nordicbulkcarriers.com/services/ nwp-project (last visited Oct. 27, 2020). 206. Changes in the Arctic, supra note 2, at 52. 207. U.S. Committee on the Marine Transportation System, U.S. Arctic Marine Transportation System: O verview and Priorities for Action 19 (2013) [hereinafter Arctic MTS]. 208. Changes in the Arctic, supra note 2, at 29. 209. Jeanne L. Amy, Comment, Historically Iced Out: Calling on the United States to Resolve Its International Law Disputes in the Arctic Ocean, 40 Tul. Mar. L. J. 137, 139 (2015). 210. Mercer, supra note 32, at 367-68. 211. Id. 212. Arctic MTS, supra note 207, at 19. 213. Amy, supra note 209, at 140. 214. Changes in the Arctic, supra note 2, at 52. 215. Arctic MTS, supra note 207, at 19; see Latest News, Northern Sea Route Info. Off. https:// arctic-lio.com/ (last visited Oct. 27, 2020) (publishing monthly NSR shipping traffic activities). 216. See Féron, supra note 34, at 91. 217. See id. at 91, 111. 218. Changes in the Arctic, supra note 2, at 53. 219. Id. 220. Id. 221. Changes in the Arctic, supra note 2, at 53; Strategic Importance of the Arctic in U.S. Policy: Hearing on S. 111-259 Before the Subcomm. on Appropriations, 111th Cong. 15 (2009) (statement of Thad W. Allen, Admiral, U.S. Coast Guard) [hereinafter Congressional

113

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Hearing]. 222. Changes in the Arctic, supra note 2, at 53. 223. Id. 224. Congressional Hearing, supra note 221, at 15. 225. Changes in the Arctic, supra note 2, at 53; Congressional Hearing, supra note 221, at 19. 226. Changes in the Arctic, supra note 2, at 53. 227. Id. at 54. 228. Id. 229. Id. at 53-54. 230. Id. at 53. 231. Id. at 53-54. 232. Id. at 54. 233. Id. at 55. 234. Changes in the Arctic, supra note 2, at 54. 235. Id. 236. Arctic MTS, supra note 207, at 35. 237. Changes in the Arctic, supra note 2, at 54; Arctic MTS, supra note 207, at 18-19. 238. Arctic MTS, supra note 207, at 14. 239. Mercer, supra note 32, at 371. 240. Innocent passage allows foreign vessels to sail through territorial waters without express permission from the coastal state, on condition that the passage is continuous, expeditious, and not prejudicial to the peace, good order, or security of the coastal state. UNCLOS, supra note 1, at arts. 18-19. 241. UNCLOS, supra note 1, at art. 8 (explaining that a right of innocent passage only exists in internal waters when “the establishment of a straight baseline . . . has the effect of enclosing as internal waters areas which had not previously been considered as such.”); see also Féron, supra note 34, at 95. 242. UNCLOS, supra note 1, at art 18, 19. 243. Id. at art 24-25. 244. Féron, supra note 34, at 95. 245. UNCLOS, supra note 1, at art. 37. 246. Féron, supra note 34, at 95. 247. UNCLOS, supra note 1, at arts. 38, 39. 248. Id. at art. 39. 249. Compare UNCLOS, supra note 1, at art. 25(3) with art. 44. 250. UNCLOS, supra note 1, at art. 35. 251. Féron, supra note 34, at 95. 252. Id. at 94. 253. S e e C a s e C o n c e r n i n g t h e Continental Shelf (Tunisia/Libyan Arab Jamahiriya), [1982] ICJ Rep 18 at para 100; Fisheries Case (United Kingdom v Norway), [1951] ICJ Rep 116 at 131; see also Mercer, supra note 32, at 372-73. 254. Corfu Channel (UK v. Albania), Judgment, Merits, 1949 I.C.J. Rep. 4, at 28-29 (Apr. 9, 1949).

255. Id. at 28. 256. Mercer, supra note 32, at 374. 257. UNCLOS, supra note 1, at art. 37. 258. Id. at art. 37. 259. Michael Byers, Who Owns the Arctic? Understanding Sovereignty Disputes in the North 55 (2009); Mercer, supra note 32, at 382. 260. Mercer, supra note 32, at 371. 261. Id. at 367. 262. Id. at 371. 263. Id. 264. Féron, supra note 34, at 104. 265. Id. at 96-97. 266. See Christopher R. Rossi, Russian Arctic Straits and the Temptation of Uti Possidetis, 24 Transnat’l L. & Contemp. Probs. 19, 38 (2014); Mercer, supra note 32, at 371; Willy Østreng, The Northern Sea Route and Jurisdictional Controversy, Ocean Futures (2010), www.arctis-search.com/ Northern+Sea+Route+and+Juris dictional+Controversy. 267. Fisheries Case (United Kingdom v Norway), [1951] ICJ Rep 116 at 128-30, 133. 268. UNCLOS, supra note 1, at art. 7; Mercer, supra note 32, at 372. 269. Archipelagic States are thoses that are constituted “wholly by one or more archipelagos.” The term does not include States mainly continental but contain coastal archipelagos. UNCLOS, supra note 1, at art. 46. 270. Jonas Attenhoffer, Navigating along Precedence: How Arctic Sovereignty Melts with the Ice, 54 German Y.B. Int’l L. 125, 154 (2011). 271. Id. 272. Mercer, supra note 32, at 378; see also Attenhoffer, supra note 270, at 136-37. 273. See Rossi, supra note 266, at 38; Mercer, supra note 32, at 371. 274. UNCLOS, supra note 1, at art. 7(1); Fisheries Case (United Kingdom v Norway), [1951] ICJ Rep 116 at 131. 275. United Nations Secretariat, Juridical Regime of Historic Waters, Including Historic Bays, 3 Y.B. Int’l L. Comm’n 1, 13 (1964). 276. See Mercer, supra note 32, at 383. 277. Pier Horensma, The Soviet Arctic 113 (2003). 278. Id. 279. See Rossi, supra note 266, at 39. 280. Suzanne Lalonde & Frederic Lasserre, The Position of the United States on the Northwest Passage: Is the Fear of Creating a Precedent Warranted?, 44 Ocean Dev. & Int’l L. 28, 38 (2013). 281. Id. at 38-9. 282. See Byers, supra note 259, at 55. 283. Id. at 50. 284. Id. 285. Id.

286. Id. at 50; Mercer, supra note 32, at 379. 287. We s t e r n S a h a r a , A d v i s o r y Opinion, (1975) ICJ Rep 12 at 56. 288. Nunavut Land Claims Agreement Act, SC 1993 § 2.7.1(a)-(b). 289. Bratspies, supra note 80, at 263. 290. Mercer, supra note 32, at 382. Article 37 states that transit passage “applies to straits which are used for international navigation between one part of the high seas or an exclusive economic zone and another part of the high seas or an exclusive economic zone.” UNCLOS, supra note 1, at art. 37 (emphasis added). 291. See supra Part III.A. 292. Id. 293. Attenhoffer, supra note 270, at 154. 294. See Mercer, supra note 32, at 382. 295. See Byers, supra note 259, at 54. 296. Id. 297. See Byers, supra note 259, at 56; Ben Werner, Zukunft: U.S. Presence in Arctic Won’t Stop Chinese, Russian Encroachment Without Law of the Sea Ratification, USNI News (Aug. 1, 2017), https://news. usni.org/2017/08/01/zukunftwarns-u-s-presence-in-arctic-notenough-to-stop-chinese-russianencroachment-without-law-ofthe-sea-ratification. 298. Mercer, supra note 32, at 368. 299. Id. at 367. 300. Attenhoffer, supra note 270, at 154. 301. Ministry of Foreign Affairs of the People’s Republic of China, Statement on the Award of 12 July 2016 of the Arbitral Tribunal in the South China Sea Arbitration Established at the Request of the Republic of the Philippines, XINHUA (July 12, 2016), https:// www.fmprc.gov.cn/nanhai/eng/ snhwtlcwj_1/t1379492.htm. 302. Carolyn Clarkin, China Positions f o r A r c t i c Ac c e s s , M a r i n e Resources Committee Newsl. (ABA Sec. of Env’t, Energy, & Res., Chicago, Ill.), May 2014, at 18, 18. 303. White Paper, supra note 67. 304. Id. 305. Harriet Moynihan, China Expands Its Global Governance Ambitions in the Arctic, Chatham House (Oct. 15, 2018), https://www. chathamhouse.org/expert/ comment/china-expands-itsglobal-governance-ambitionsarctic#. 306. Clarkin, supra note 302, at 19. 307. Id. 308. International Convention for the Prevention of Pollution from Ships, Nov. 2, 1973, 1340 U.N.T.S. 61. 309. Fishery Management Plan for 114

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Fish Resources of the Arctic Management Area, N. Pac. Fishery Mgmt. Council (Aug. 2009), https://www.npfmc.org/ wp-content/PDFdocuments/fmp/ Arctic/ArcticFMP.pdf. 310. The BRI is China’s attempt to “knit Eurasia and parts of Africa together in a Chinese-anchored or Chinese-led infrastructure and economic network.” Changes in the Arctic, supra note 2, at 70. 311. W h e n t h e B R I w a s f i r s t announced, it was comprised of only two corridors—the “belt,” a land corridor running east to west across Eurasia, and the “road,” a sea corridor connecting the South China Sea and the Mediterranean Sea. Changes in the Arctic, supra note 2, at 70 n.283. 312. Clarkin, supra note 302, at 18. 313. Changes in the Arctic, supra note 2, at 69. 314. Id. at 70. 315. Id. 316. Clarkin, supra note 302, at 19 317. Changes in the Arctic, supra note 2, at 70. 318. Changes in the Arctic, supra note 1, at 69, 71; Clarkin, supra note 302, at 19 (stating that stateowned Chinese energy corporation “announced plans to partner with an Icelandic oil company to search for oil off Iceland’s northeast coast.”). 319. Marco Volpe, The Tortuous Path of China’s Win-Win strategy in Greenland, Arctic Institute (Mar. 24, 2020), https://www. thearcticinstitute.org/tortuouspath-china-win-win-strategyg re e n l a n d / [ h t t p s : / / p e r m a . cc/9NWN-FRLM]. 320. Id. 321. Clarkin, supra note 302, at 19. 322. Joint Declaration Between the Republic of Finland and the People’s Republic of China on Establishing and Promoting the Future-Oriented New-Type Cooperative Partnership, President of the Republic of Finland (May 4, 2017), https://www.presidentti.fi/en/ news/joint-declaration-betweenthe-republic-of-finland-and-thepeoples-republic-of-china-onestablishing-and-promotingthe-future-oriented-new-typecooperative-partnership/ [https:// perma.cc/6UK5-3ADK]. 323. Mercer, supra note 32, at 366. 324. Roy A. Perrin III, Crashing Through the Ice: Legal Control of the Northwest Passage or Who Shall be ‘Emperor of the North’, 13 Tul. Mar. L.J. 139, 143 (1988). 325. Russia is promoting the NSR for use by others. In that regard, Russia presumably would welcome

increased use of the route by ships moving between Europe and China. However, Russian officials are said to be wary of China’s continued growth in wealth and power, and of how that might eventually lead to China becoming the dominant power in Eurasia, and to Russia being relegated to a secondary or subordinate status in Eurasian affairs relative to China. Increased use by China of the NSR could accelerate the realization of that scenario. Changes in the Arctic, supra note 1, at 73. 326. Id. at 70. 327. China, Russia Agree to Jointly Build “Ice Silk Road,” XinhuaNet, ( July 4, 2017), http://www. xinhuanet.com//english/201707/04/c_136417241.htm. 328. Changes in the Arctic, supra note 2, at 70. 329. See id. at 75. 330. Nong Hong, China’s New Arctic Policy Legal Questions and Practical Challenges, Nat’l Bureau of Asian Res. (Mar. 16, 2018), https://www.nbr.org/publication/ chinas-new-arctic-policylegal-questions-and-practicalchallenges/. 331. Changes in the Arctic, supra note 2, at 69. 332. Ulrik Pram Gad et al., Imagining China on Greenland’s Road to Independence, 2018 Arctic Y.B. 6, 12. 333. Camilla T. N. Sørensen, China is in the Arctic to Stay as a Great Power: How China’s Increasingly Confident, Proactive and Sophisticated Arctic Diplomacy Plays into Kingdom of Denmark Tensions, 2018 Arctic Y.B. 43, 48. 334. Nicholas Hunnewell, China’s Control of Rare Earth Metals, Nat’l Bureau Asian Res., (2019), https://www.nbr.org/publication/ chinas-control-of-rare-earthmetals/ [https://perma.cc/YY2CDMDB]. 335. Id. 336. Clingendael Institute, Ties Dams et al., Greenland: What Is China Doing There and Why? in Presence Before Power: China’s Arctic Strategy in Iceland and Greenland, 20, 30 (2020). 337. A c t o n G r e e n l a n d S e l f Government, No. 473 (2009) (Den.). 338. K r i s t i n A r c h i c k , C o n g . Research Serv., IN11161, Greenland, Denmark, and U.S. Relations (2019). 339. Volpe, supra note 319. 340. Gad et al., supra note 332, at 8 341. Danish Def. Intelligence Serv., Intelligence Risk Assessment (2017).

342. Jordan McDonald, Here’s Why Trump Wants to Buy Greenland, CNBC (Aug. 21, 2019, 5:44 PM) https://www.cnbc. com/2019/08/21/heres-whytrump-wants-to-buy-greenland. html [https://perma.cc/4JHRN9R4]. 343. Sørensen, supra note 333, at 11. 344. Clingendael Institute, supra note 336, at 37. 345. Sørensen, supra note 333, at 54. 346. Clingendael Institute, supra note 336, at 34. 347. Gad et al., supra note 332, at 12. 348. Id. at 13. 349. Clingendael Institute, supra note 336, at 37. 350. Robbie Gramer, Trump’s Budget Puts Down Stakes in Greenland, Foreign Policy (Feb. 13, 2020, 12:24 PM) https://foreignpolicy. com/2020/02/13/trump-budgetproposal-greenland-consulate/ [https://perma.cc/6FPC-4P7X]. 351. McDonald, supra note 342. 352. Gad et al., supra note 332, at 14. 353. Richard Fontaine & Daniel Kliman, On China’s New Silk Road, Democracy Pays A Toll, Foreign Policy (May 16, 2018, 10:10 AM), https://foreignpolicy. com/2018/05/16/on-chinasnew-silk-road-democracy-paysa-toll/ [https://perma.cc/XGX8YDZW]. 354. Id. 355. Id. 356. Id. 357. Gad et al., supra note 332, at 6. 358. Id. 359. Sopan Deb, Adam Silver Commits to Free Speech as Chinese Companies Cut Ties With N.B.A., N.Y. Times (Oct. 8, 2019) nytimes. com/2019/10/08/sports/adamsilver-nba-china-hong-kong.html [https://perma.cc/QFF3-T3CV]. 360. Id. 361. Changes in the Arctic, supra note 1, at 71, 75. 362. See id. at 31; Arctic Council, Observer Manual for Subsidiary Bodies 5 (2013). 363. See Changes in the Arctic, supra note 1, at 15. 364. See id. at 54. 365. Id. at 31. 366. Uighur Intervention and Global Humanitarian Unified Response Act of 2019, S. 178, 116th Cong. (2019), https://www.congress. gov/bill/116th-congress/senatebill/178/text?format=txt; see also U.S. Dep’t of State, Bureau of Democracy, H.R. and Lab., 2019 Report on International Re l i g i o u s Fre e d o m : C h i n a – Xinjiang (2019), https:// www.state.gov/wp-content/ uploads/2020/06/CHINA-

INCLUDES-TIBET-XINJIANGHONG-KONG-AND-MACAU2 0 1 9 - I N T E R N AT I O N A L RELIGIOUS-FREEDOMREPORT.pdf. 367. See Olivia Enos, Holding the Chinese Communist Party Accountable for Its Response to the COVID-19 Outbreak, Heritage Foundation (May 12, 2020) heritage.org/ asia/report/holding-the-chinesecommunist-party-accountable-itsresponse-the-covid-19-outbreak. 368. Féron, supra note 34, at 120. 369. Changes in the Arctic, supra note 1, at 36. 370. Id. at 15. 371. Ekaterina Klimenko, Russia’s Arctic Security Policy: Still Quiet in the High North?, Policy Paper No. 45, Stockholdm Int’l Peace Research Institute, Feb. 2016, at 18, https://www.sipri.org/sites/ default/files/SIPRIPP45.pdf. 372. Chatham House, Richard Connolly & Mathieu Boulègue, Russia’s New State Armament Programme: Implications for the Russian Armed Forces and Military Capabilities to 2027 (2018) https://www. chathamhouse.org/sites/default/ files/publications/research/201805-10-russia-state-armamentprogramme-connolly-bouleguefinal.pdf. 373. Klimenko, supra note 371, at 18–19. 374. Id. at 14. 375. Id. at 15. 376. Id. at 15. 377. Féron, supra note 34, at 120 (referencing “key Russian security documents such as the 2014 Military Doctrine, the 2015 Maritime Doctrine, and the 2015 National Security Strategy”). 378. Féron, supra note 34, at 120–21. 379. Changes in the Arctic, supra note 1, at 24. 380. Thomas Nilsen, Chinese Navy Commander Talks Cooperation in Severomorsk (Li Jiayao ed.), chinamil (Jul. 31, 2018), eng. chinamil.com.cn/view/201807/31/content_9237410.htm. 381. Changes in the Arctic, supra note 1, at 14. 382. Id. at 61. 383. Id. at 62. 384. The Ottawa Declaration, supra note 48. 385. Klimenko, supra note 371, at 30. 386. Changes in the Arctic, supra note 1, at 20. 387. Féron, supra note 34, at 103. 388. Carpenter, supra note 36, at 236-37. The Commission lacks impartiality because its budget is provided by member States and Commission members are

involved in making decisions regarding their home countries. Id. 389. Féron, supra note 34, at 103; Carpenter, supra note 36, at 236– 37. 390. Carpenter, supra note 36, at 238. 391. Id. at 239 (describing Canada’s plan to “construct two new military facilities in the Arctic, build six to eight navy patrol ships to guard the area, and increase its military forces by 900 troops.”). 392. Carpenter, supra note 36, at 239. 393. See, e.g., Eva Dou, A New Cold War? China Declares Itself a ‘NearArctic State’, Wall St. J. (Jan. 26, 2018, 6:15 AM), https:// www.wsj.com/articles/a-new-coldwar-china-declares-itself-a-neararctic-state-1516965315[https:// perma.cc/2KGE-DHYY]; James Stavridis, Avoiding a Cold War in the High North, Bloomberg (May 4, 2018, 6:00 AM), https:// www.bloomberg.com/opinion/ articles/2018-05-04/russia-isgearing-up-for-a-cold-war-in-thearctic[https://perma.cc/33RTLMZP]; Council on Foreign Relations, The Emerging Arctic, https://www.cfr.org/interactives/ emerging-arctic?cid=otr_ marketing_use-arctic_ Infoguide%2523!#!/emergingarctic?cid=otr_marketing_usearctic_Infoguide%2523! (last visited Nov. 2, 2019).

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Tales from the Crypt: Global Trends in the Taxation of Cryptocurrency E L I Z A B E T H

N E V L E

—————————————————

very few papers that look at the intersection

countries with regard to their taxation of

I. Introduction

between tax law and the evolving capabilities

cryptocurrency transactions. Part IV will

—————————————————

of technology. The scope of this paper focuses

examine the compliance issues with taxing

Cryptocurrency has captured the world’s

on how countries have temporarily addressed

cryptocurrency and the obstacles that

attention given its permeating, yet elusive,

the issue of taxing cryptocurrency and

countries may face in taxing gains or losses

nature. However, it raises the question

how governments should reformulate their

from the use of cryptocurrency. In all, this

on everyone’s mind: how is it taxed? This

approaches to understanding and levying

paper seeks to show that cryptocurrency is

question vexes the international community

taxes in an era of improved technology.

both a currency and a type of property. As

because cryptocurrency is not tied to any

B. Overview

such, taxpayers should be able to treat their

single currency, nor is it a tangible piece of

This Comment will argue that treating

transactions under both taxing regimes based

property that can be sold, exchanged, nor

cryptocurrency as property is the most

on the type of transaction in which the

disposed. Generally, income that is tied to a

effective method in taxing cryptocurrency,

taxpayer is involved.

currency is taxed as gross income. Property

even though it will leave modern taxpayers

—————————————————

sales, exchanges, and dispositions are treated

unhappy. Although cryptocurrency is used

II. What is Cryptocurrency?

depending on its use. Given the unique

as one would use physical currency, such as

—————————————————

nature of cryptocurrency, countries around

the dollar, yen, or euro, many countries treat

At its simplest, a cryptocurrency can

the world struggle with identifying the best

cryptocurrency as “property,” in the sense

be t hought o f as a d igital a sset that is

method in taxing cryptocurrency. As recently

that the sale or exchange of this “property”

constructed to function as a medium of

as July 2018, the G-20 finance ministers and

triggers an analysis of one’s gain or loss

exchange—premised on the technology of

central bank governors met in Buenos Aires,

attributable to such property. Countries that

cryptography—to secure thetransactional

Argentina to discuss international tax topics,

treat cryptocurrency as property have done so

flow, as well as to control the creation of

including the expansion of cryptocurrencies

because it minimizes the disparate treatment

new units of the currency.4 Cryptocurrency

and the need for government regulatory

of the virtual currency based on the timing

is commonly used interchangeably with

oversight. The development and success of

of the taxpayers’ transactions. However, it

“bitcoin,” “virtual currency,” and “digital

Bitcoin has prompted questions as to how

raises several issues given that its purpose was

currency,” but these terms have distinct

Bitcoin and other cryptocurrencies should

to allow for a currency that was free from the

definitions. A “digital currency” refers to an

be subject to taxation.2

regulations of financial institutions.3

internet-based medium of exchange with

A. Limitations and Context of This Article

Part II of this Comment will discuss

characteristics similar to physical currencies.5

Existing scholarship can primarily be

the general history of cryptocurrency, the

“Virtual currency” is a subcategory of digital

grouped into describing proposals for how

general taxation regimes, and what is the

currency which is defined by the European

to change particular tax provisions or those

difference between currency and property

Banking Authority as a “digital representation

that discuss the impact of technology on

for the purposes of taxing cryptocurrency.

of value, not issued by a central bank, credit

certain areas of law. However, there are

Part III sets out the perspectives from varying

institution or e-money institution, which

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Currents 24.2 2021

in some circumstances can be used as an

to undo, which protects the parties from

account and add it to the receiver’s account)

alternative to money.” The Internal Revenue

fraud.

meant that digital currency could be spent

Cryptocurrency is kept in a ledger that

twice, or transactions could be altered,20

a digital representation of value that

is commonly referred to as a “blockchain,”

rendering such digital currency unreliable.

functions as a medium of exchange,

which is a decentralized ledger of all

However, after the 2008 circulation of

a unit of account, and/or a store

transactions in each cryptocurrency network.

Satoshi Nakamoto’s “Bitcoin” white paper

of value. In some environments, it

Cryptocurrency users may confirm their

and the 2009 launch of the Bitcoin, a new

operates like “real” currency—i.e.,

transactions with blockchain technology—

system for electronic transactions emerged.

the coin and paper money of the

thus, eliminating the need for validation from

Bitcoin’s invention was revolutionary because

United States or of any other

trusted third parties such as banks. Users

for the first time the double-spending

country that is designated as legal

may see all information within a blockchain

problem could be solved without the

tender, circulates, and is customarily

when a distributed ledger is released and

necessity of third-party intermediaries.21

used and accepted as a medium of

allows every participant to access and view it.

Bitcoin made this possible by distributing a

exchange in the country of issuance

Financial structures have been built onto this

ledger among all system users via a peer-to-

-- but it does not have legal tender

distributed ledger to reward and incentivize

peer network.22 Every transaction that occurs

status in any jurisdiction. Virtual

people to keep those interconnected copies of

in the bitcoin economy is then registered in

currency that has an equivalent

the ledger up to date. Those keepers of the

a public, distributed ledger, which is called

value in real currency, or that acts

ledger solve computing puzzles and receive

the blockchain;23 thus, Bitcoin eliminated the

as a substitute for real currency, is

cryptocurrency, Bitcoin15 and otherwise,

need for third-party intermediaries.

referred to as “convertible” virtual

in return.”16 Although the mechanics of

The Nakamoto white paper was first

currency. Bitcoin is one example

cryptocurrency are more complicated,

circulated on a cryptography listserv in

of a convertible virtual currency.

blockchain is a way of relaying data by time-

2008, and Bitcoin officially launched on

The term “cr yptocurrency” is a

stamping a transaction into a record and

January 3, 2009.24 The author’s name, Satoshi

subcategory of virtual currency in which

then trusting a distributed system—not a

Nakamoto, is believed to be a pseudonym,

encryption techniques are used to regulate

sole entity—to keep that record. The idea

as no living person has come forward nor

the various generations of units of currency

of a new database may seem hyper-technical

been found under such alias.25 In the white

and verify the transfer of funds.8

and unnecessary. However, many consider

paper, Nakamoto used Haber and Stornetta’s

A cryptocurrency is a method of creating

the extent to which modern capitalism and

concept of a time-stamped ledger and built

virtual “coins” and providing for their

nation-state structures are built on trust in

upon it to establish Bitcoin. Nakamoto

secure ownership and transaction using a

central banking authorities—even within

evolved the concept by adding a financial

cryptographic problem.9 This cryptographic

robust democracies; blockchain stands to

incentive for users to maintain connected

problem is designed to be easy to verify

invert deeply rooted power structures.18

copies of the blockchain. By maintaining

but difficult to reverse engineer. Thus,

A. Background on the “Creation” of Cryp-

the ledger via “mining,” that is solving

cryptocurrency is an electronic payment

tocurrency

mathematical puzzles tied to verifying

Service defines “virtual currency” as

system based on cryptographic proof, instead

Prior to the “creation” of cryptocurrency,

transactions in the blockchain, people could

of trust, allowing any two willing parties to

transacting parties had to transfer funds

be financially rewarded with bitcoins.26 The

transact directly with one another without the

through a third-party intermediary, such

purpose behind this system was to allow

need for a trusted third party, such as banks.

as banks or other financial institutions.

for “an electronic payment system based on

The underlying purpose for cryptocurrency

Systems without third-party intermediaries

cryptographic proof instead of trust, allowing

is to ensure that financial transactions based

to maintain a ledger of transactions (i.e.,

any two willing parties to transact directly

on such are “computationally impractical”

subtract the balance from the sender’s

with each other without the need for a trusted

117

Currents 24.2 2021

third party,”27 such as a banking institution

a system for electronic transactions without

that imposes additional costs.

relying on trust.”35

CoinBase, Litecoin, etc.44 B. Modern Use

Transactions are verified, and double-

Cryptocurrency is exchanged between

Although cryptocurrency is not as

spending is prevented, through the use

users on cryptocurrency exchanges. An

commonly used as fiat currency, it has become

of public-key cryptography. 28 Public-key

exchange allows users to purchase and sell

a common term and is considered common

cryptography requires that each transacting

virtual or cryptocurrencies with other virtual

knowledge throughout households around

party be assigned two “keys”—one private

currencies or fiat currency—legal tender

the world. As of 2019, the United States,

key that is kept secret like a password, and

whose value is backed by the government

Japan, and South Korea were the leading

one public key that can be shared with the

that issued it.

users of cryptocurrencies.45 Generally, the

world. 29 The transaction—and thus the

A cryptocurrency exchange is an online

uses of cryptocurrencies can be grouped into

transfer of ownership of the bitcoins—is

exchange platform that facilitates trading

four major categories: investment, medium

recorded, time-stamped, and displayed in

between cryptocurrencies, fiat currency,

of exchange, payment rail, and non-monetary

one “block” of the blockchain. Public-key

and other virtual currencies, i.e., bitcoins in

use cases.46 While a growing number of

cryptography ensures that all computers in

exchange for U.S. dollars.36 The exchange

merchants worldwide, such as PayPal,47

the network have a constantly updated and

connects buyers and sellers respective to their

the Miami Dolphins,48 and Microsoft,49

verified record of all transactions within the

‘bid’ and ‘ask’ price.37 The users deposit fiat

are accepting cryptocurrency as a payment

Bitcoin network, which prevents double-

money with the exchange by sending funds

method, it appears that cryptocurrencies

spending and fraud. This network depends

(including money order, wire transfer, PayPal

are not primarily being used as a medium

on users who provide their computing

payment, or credit card) to the exchange prior

of exchange for daily purchases.50 This lack

power to do the logging and reconciling of

to the execution of their trade.38 Exchanges

of use for daily purchases “is due to several

transactions.31 These users are commonly

play an essential role in the cryptocurrency

factors, including price volatility and the lack

referred to as “miners” because they are

economy by offering a marketplace for

of a ‘closed loop’ cryptocurrency economy,

rewarded for their work with newly created

trading, liquidity, and price discovery.

in which people or businesses would get

bitcoins.

The most commonly known

paid in cryptocurrency and then use such

Many people believe the 2008 circulation

cryptocurrency exchange is Bitcoin. The

cryptocurrency as a primary payment

of Satoshi Nakamoto’s “Bitcoin” white

second cryptocurrency exchange to come

method for everyday expenses.”51

paper and the 2009 launch of the Bitcoin

about was Namecoin, which did not emerge

Nonetheless, the use of cryptocurrency

blockchain introduced the technology of

until two years later in April 18, 2011.

presents the issue of how to tax these

blockchain, Bitcoin has roots in much earlier

Today, there are hundreds of forms of

transactions when cryptocurrency is not fiat

work. Nakamoto’s Bitcoin white paper has

cryptocurrencies that are currently being

currency nor property that is commonly used

eight footnotes in total.33 Three of those eight

traded, and to date, there are thousands

in day-to-day transactions. Fiat currency is

footnotes cite to the work of Stuart Haber

of cryptocurrencies that have existed since

easy to approach from a taxation perspective

and W. Scott Stornetta, who developed a

2009. Ultimately, the common element of

because there are essential traits of currency:

time-stamping mechanism upon which the

these different cryptocurrency systems is the

portability, durability, divisibility, liquidity,

modern blockchain is built nearly twenty

use of the blockchain. However, the majority

and security.52 Property transactions are also

years before Nakamoto’s paper. Haber

of cryptocurrencies are largely duplicates

easy to tax because there is calculable gain

and Stornetta’s central concern—trust in

of Bitcoin and simply feature different

or loss from such dealings by evaluating the

information in the digital age—serves as an

parameter values. These cryptocurrencies

cost of the property and the price at which

inspiration to how cryptocurrency developed.

show little to no innovation and can be

the property is disposed of. Cryptocurrency

Nakamoto used Haber and Stornetta’s

referred to as “altcoins,” which includes

belies both traditionally used mediums for

time-stamping methodology to “propose[]

Ethereum, Tether, XRP, Bitcoin Cash,

taxpayers to interact with one another; that

118

Currents 24.2 2021

is, because cryptocurrency straddles the

defined as “instances of undeniable accessions

When property is sold at a price higher than

line between what is commonly defined

to wealth, clearly realized, and over which

its basis, it results in a gain; when the asset is

as ‘money’ and ‘property,’ it poses unique

the taxpayers have complete dominion.”

sold for less than its basis, it results in a loss.69

taxation issues that countries struggle to

As such, when a citizen or resident of the

However, a distinguishing characteristic

definitively confront.

United States receives money or property,

of income from the disposition of property

C. What are the Various Taxation Regimes?

they are generally deemed as having income.

in contrast to income in the form of cash is

Ta x a t i o n i s t h e i m p o s i t i o n o f

Under the Internal Revenue Code, citizens

that income from the disposition of property

compulsory levies on individuals or entities

and residents of the United States are subject

can be subject to preferential tax treatment

by governments.53 Taxes are levied in almost

to tax liability upon their taxable income.

if it the income derived is from the sale of

every country of the world upon the income

Taxable income is defined as gross income

a non-inventory asset—commonly referred

of its citizens and residents with the primary

minus the standard deduction or the amount

to as capital assets.70 Capital assets generally

purpose of establishing a tax base to raise

of the taxpayer’s itemized deduction.64 Gross

include everything a person owns and uses for

revenue for government expenditures,

income means “all income from whatever

personal purposes, pleasure, or investment,

although they serve other purposes as well.

source derived.” Thus, when a person has

including stocks, bonds, homes, cars, jewelry,

The first income tax is generally attributable

income, they generally have gross income

and art.71

to Egypt, which has a recorded history from

unless an exception applies; that gross income

Most countries have adopted a tax

approximately 3200 B.C. The first record

constitutes taxable income—once the proper

regime whereby gains from capital assets

of organized taxation comes from Egypt in

adjustments are made. The amount of taxable

are subject to a lower tax rate than that

3000 B.C.55 and is mentioned in numerous

income that a taxpayer has is subject to tax

of orindary income.72 For example, in the

historical sources including the Bible, which

liability. Most taxpayers have taxable income

United States, the highest tax rate for a

explained that the Pharaoh would send

based on their compensation from their

capital gain is generally 20%.73 Generally,

commissioners to take one-fifth of all grain

respective jobs. This income is commonly

most long-term capital assets are taxed at

harvests as a tax. The concept of taxation

referred to as ordinary income, as ordinary

a rate of 20%. However, there are some

continued to spread from the Egyptians to

income is subject to taxation at normal

capital assets that are taxed at a rate of 25%

the Greeks.57 As Greek civilization overtook

tax rates and is not subject to preferential

or 28%, but those tax rates are generally not

much of Europe, North Africa, and the

treatment, like capital assets.

used by a person with gains from dealings in

Middle East, the practice of levying and

One of the most common forms of

on ordinary income—income that is not

Throughout the Roman age and through

Generally, the gain from the sale or other

subject to capital treatment and subject to

medieval European history, new taxes on

disposition of property shall “be the excess

taxation at the ordinary rates—in the United

inheritance, property, and consumer goods

of the amount realized therefrom over the

States stands at 37%.74 In comparing the

were levied.59 Ancient China also levied taxes

adjusted basis provided in 26 U.S.C. §

income tax rates and the capital gains tax

under the authority of a strong centralized

1011 for determining gain, and the loss shall

rates in the United States, most individuals

government. The Chinese T’ang and Song

be the excess of the adjusted basis provided

who have gains from long-term investments

Dynasties employed a census record to

in such section for determining loss over

are subject to a significantly lower tax rate of

track their populace and impose the proper

the amount realized.”67 Simply put, gains or

only 20% compared to a potential tax rate

taxes on them.61 In modern times, taxing

losses are the difference between the amount

37% on ordinary income.

regimes generally follow similar principles

at which the property is sold at and the

The relevance of determining the nature

with regards to the taxation of income for

amount that the taxpayer paid to acquire such

of cryptocurrency is significant because in

individuals or entities.

property. The purchase price of a piece of

most tax regimes, income from dealings in

property is typically referred to as its ‘basis’.

cryptocurrency can be subject to significantly

collecting taxes spread across the world.

In the United States, income has been

income is gains from dealings in property.

property. In contrast, the highest tax bracket

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Currents 24.2 2021

different tax treatment, as exemplified above.

in trade.77 Coins that are used in everyday

price at which a party receives income for

Because of its relatively new presence in the

transactions have been in existence since a

tax purposes. Cryptocurrencies also have

world, countries continue to struggle to

at least 700 B.C., when they were used by a

a level of cloaks and mirrors that is not

issue definitive statements and guidelines

society located in what is now modern-day

found in other online payment methods,84

by which taxpayers know the standard by

Turkey.78 Paper money is attributable to the

an important feature both for those seeking

which their cryptocurrency transactions

Tang Dynasty, which lasted from A.D. 618–

privacy and organizations that require it. This

are taxed. Furthermore, because of its

907. Today, most currencies such as the

quality makes it difficult for governments’

inherently distrustful nature in intermediary

U.S. Dollar or Euro are fiat currencies—

treasuries to pinpoint the exact identity

third parties, it is significantly harder for

that is, not backed by any commodities,

of the transacting parties. Furthermore, it

countries to assess and audit cryptocurrency

but rather they are deemed to have value

diminishes the need for a centralized currency

transactions with sufficient clarity to levy an

because people generally accept that the

in each country.

accurate tax.

currency has value. Under these principles,

According to Black’s Law Dictionary,

D. Is it Currency or is it Property?

cryptocurrency has the attributes of currency

property is defined as “[c]ollectively, the rights

Currency and property are two distinct

such that it is an item that circulates

in a valued resource such as land, chattel, or

concepts in relation to how they are subject

amongst transacting parties as a medium

an intangible.”85 Classifying cryptocurrency

to taxation. Generally, income that is derived

of exchange—no different than a dollar

as property may result in discouraging its use

from currency or money is subject to taxation

or a Euro. Furthermore, cryptocurrency is

and impeding the advancement of digital

at the normal rates in each country, and

not a fiat currency because it is not backed

commerce. Classifying cryptocurrencies

income that is derived from property—

by any commodity. As such, there are valid

as property raises several taxation issues or

capital assets—is treated at preferential tax

arguments for it to be treated as a currency,

practices that may complicate ownership and

rates.75 As such, how does cryptocurrency

rather than property. Cryptocurrency, such

use—issues that are not present with currency

fit into either of these tax regimes?

as Bitcoin, is attractive as a currency because

transactions. When a taxpayer disposes of

Different countries have taken widely

it offers a low-transaction cost alternative

property, the taxpayer must determine what

divergent approaches as to how to tax gains

to other forms of payment, such as credit

the gain or loss is on the transaction.86 The

from cryptocurrency transactions and tax

cards.80 Even United States cases have drawn

character of that gain or loss is dependent

taxpayers who “earn” virtual currency. Part

similarities between cryptocurrencies and the

upon whether the asset was a capital asset

of this divergence may be attributable to the

U.S. dollar.81

in the hands of the taxpayer. 87 Thus, if

fact that governments are attempting to fit a

The creators of bitcoin recognized

cryptocurrency is deemed property—rather

square peg into a round hole. That is, because

that in today’s transactions increasingly

than currency—it would be subject to the

cryptocurrency and the realm of digital

occur across borders and involve multiple

same rules as when a taxpayer disposes

transactions did not exist when tax policies

currencies, whose values can fluctuate

of other forms of property. It would also

first came about in 3000 B.C., it is impossibly

wildly.82 The theory was to develop a currency

force taxpayers to pinpoint the price in the

difficult to apply traditional concepts to ever

that would facilitate efficient transactions and

taxpayer’s own currency at the exact time of

evolving and highly technical transactions.

eliminate the need for trust in third parties

acquisition and disposition because of highly

According to Black’s Law Dictionary,

(in this case, governments whose actions can

volatile nature of cryptocurrency.

currency is defined as “an item (such as a

directly or indirectly affect its currency) to

—————————————————

coin, government note, or banknote) that

sustain its value.83

Ho w e v e r, i s s u e s a r i s e b e c a u s e

III. How are Countries Taxing Cryptocurrency?

The development of currency as a concept

cryptocurrencies are highly volatile—

—————————————————

may trace back to 2500 B.C., when the

more so than currencies— which makes

Over thirty countries have stated that

Egyptians used metal rings as consideration

it difficult for countries to pinpoint the

Bitcoin and other cryptocurrencies are not

circulates as a medium of exchange.”

120

Currents 24.2 2021

considered to be money or currency and are

the cryptocurrency as a property transaction

United States government to contend with.

not acceptable as legal tender. This includes:

such that capital treatment is available to the

After the release of Nakamoto’s white paper

Egypt, Nigeria, South Africa,

taxpayer. However, if the cryptocurrency is

in 2008, there was a six-year period where

Bangladesh, China, Hong Kong,

exchanged in a sale or exchange of goods or

U.S. taxpayers who used cryptocurrency

India, Indonesia, Kyrgyzstan, South

services, like money, then the cryptocurrency

were left unregulated in their cryptocurrency

Korea, Philippines, Singapore,

should be treated as money at the moment

transactions as there was no guidance from

Thailand, Taiwan, Vietnam,

that the transaction occurred. In addition,

the Department of Treasury nor the Internal

Bolivia, Colombia, Ecuador,

if the taxpayer “mines” virtual currency and

Revenue Service (IRS).93 However, this was

Mexico, United States, Finland,

earns cryptocurrency as a result of their work,

not the first time where the Department of

Iceland, Luxembourg, Norway,

the fair market value of the Bitcoin should

Treasury was behind with modern advances

Poland, Spain, Switzerland, Israel,

be included in the taxpayer’s gross income

in technology. This delay had already been

Jordan, Lebanon, Turkey

and taxed at ordinary income rates for

seen with the collection of sales tax from

Despite these declarations that

taxable income. Although this takes a high-

e-commerce providers, such as PayPal and

cryptocurrency is not recognized as currency

level view of a hyper technical transection

Amazon.94

or money, Bitcoin is still a prevalent device

of tax law and financial technology, this

In early 2014, the National Taxpayer

in transactions for goods and services or for

approach to the taxation of cryptocurrency

Advocate urged the IRS to issue guidance

investment purposes in several countries.

allows individuals to obtain the benefits that

as to how cryptocurrency should be treated

Additionally, Taiwan went so far as to state

come with evolving transactions. However,

for taxation purposes.95 Finally, in April

that Bitcoin is not a real currency, but a

countries will need to adapt and create groups

2014, the IRS released Notice 2014-21,

”highly speculative virtual commodity.”89

to oversee such transactions that involve

which described “how existing general tax

Echoing this sentiment includes countries

cryptocurrency as a reassurance that taxpayers

principles apply to transactions using virtual

such as South Africa, Hong Kong, Indonesia,

are being honest about their transactions.

currency.”96 The IRS stated in Notice 2014-

Philippines, the United States, Finland, The

Like any invention that has changed human

21 that virtual currencies, such as Bitcoin,

Netherlands, Norway, Poland, etc. Despite

interactions throughout the centuries, people

will be treated as property for federal tax

these declarations that cryptocurrency

and governments must adapt to the changing

purposes.97 While the IRS acknowledges

is not recognized as currency or money,

circumstances to thrive.

that cryptocurrencies can operate “like

cryptocurrency is still a prevalent device in

A. United States

‘real’ currency in some circumstances and

Under Article I of the U.S. Constitution,

can be used to sell or purchase goods and

Congress has the sole power to coin

services, it noted that Bitcoin (at that time)

Countries have taken varied positions

money. As such, individual states and local

did not have legal tender status in any U.S.

on the classification of cryptocurrency.

governments do not have the power to coin

jurisdiction.98 According to IRS, the value

As part III of this Comment will show,

money or otherwise declare a currency in

of cryptocurrency can be determined based

most countries are attempting to force

contravention with the federal government.

on the fair market value in U.S. Dollars

old taxing regimes into pre-existing tax

However, advances in technology have

listed on a cryptocurrency exchange at

structures. Ultimately, the most effective

allowed consumers to use payment

the time of the transaction in a reasonable

classification of cryptocurrency straddles

platforms such as credit cards and PayPal

manner that is consistently applied. 99

both the categorization as currency and

without contradicting the Constitution.

Using this method would establish the

property. For transactions where a taxpayer

Certainly, cryptocurrency was not on the

valuation of a cryptocurrency based on a

acquires cryptocurrency in the same manner

founding fathers’ minds when drafting the

market-supply-and-demand method.100 In

and with the same intent as investment

Constitution, and as such, cryptocurrency

addition, a miner could be deemed engaged

property, taxpayers should be able to classify

presented a wholly unique issue for the

in a trade or business, resulting in more tax

transactions for goods and services or for investment purposes.

121

Currents 24.2 2021

implications.101 Furthermore, the IRS stated

to penalties unless there is reasonable cause

forms of cryptocurrency can then be spent—

that the character of the gain or loss in the

shown with the Commissioner of the Internal

creating a hard fork in the cryptocurrency.

sale of exchange of cryptocurrency

Revenue Service.

Following a hard fork, transactions involving

generally depends on whether the

The United States’ method of taxing

the new cryptocurrency are recorded on

virtual currency is a capital asset

cryptocurrency seems to be all encompassing,

the new distributed ledger and transactions

in the hands of the taxpayer. A

but it also leaves several gaps that have still not

involving the legacy cryptocurrency continue

taxpayer generally realizes capital

been answered by the IRS. However, there

to be recorded on the legacy distributed

gain or loss on the sale or exchange

are counterarguments to be made regarding

ledger. The IRS in Rev. Rul. 2019-24 ruled

of virtual currency that is a capital

the taxation of “miners.” Unlike artists who

that, as long as the hard fork results in the

asset in the hands of the taxpayer.

create their works of art from scratch as a

blockchain creating a new separate coin for

For example, stocks, bonds, and

result of their direct efforts, miners receive

those who held the currency before the hard

other investment property are

bitcoins as a result of their validation of

fork (an “airdrop” of the new coin), the hard

generally capital assets. A taxpayer

the transactions in the blockchain; these

fork will result in the creation of additional

generally realizes ordinary gain

transactions are not a result of their own

income.107

or loss on the sale or exchange of

efforts like an artist with a paintbrush. It

However, the IRS’s treatment may

virtual currency that is not a capital

can be said that the IRS uses too broad of a

appear to favor taxpayers, but it presents a

asset in the hands of the taxpayer.

brush to categorically deem that miners have

multitude of record-keeping and enforcement

Inventory and other property held

income upon being rewarded with a bitcoin

challenges. It undermines the use of

mainly for sale to customers in a

for their validation efforts.

cryptocurrency as a transactional currency.

trade or business are examples of

There are three issues that are still

The IRS has also placed a substantial burden

property that is not a capital asset. .

unanswered that Congress has asked the IRS

on bitcoin users because it requires them

. [and] when a taxpayer successfully

to answer. First, which specific methods does

to keep a record of every purchase made

“mines” virtual currency, the fair

the IRS consider to constitute a “reasonable

and to perform burdensome calculations to

market value of the virtual currency

manner that is consistently applied,” with

account for the changing value of a bitcoin.

as of the date of receipt is includible

regards to calculating the cost basis of virtual

More importantly, it requires consumers,

in gross income.102

currencies?103 Second, what type of specific

businesses, and service providers to maneuver

In one sense, the IRS’s approach to

identification must taxpayers make whenever

through complex and unclear tax reporting

cryptocurrency allows the taxpayer to

they spend or exchange virtual currency, or

requirements that are ambiguous at best.

distinguish its transactions based on the use

are other methods, such as first-on-first-out

The lack of guidance for determining the

of the cryptocurrency. However, this also

104

or average cost basis, acceptable as well?

cost basis of cryptocurrency leaves taxpayers

necessarily requires taxpayers to report all

Lastly, how is the IRS treating the 2017 “hard

with the possibility of facing tax penalties for

of their cryptocurrency transactions for the

fork”105 of the Bitcoin blockchain?106

underpayment if their calculations prove to

taxable year given the extensive nature of

The United States addressed the issue

be incorrect. As such, more clarification is

the IRS’s Notice. Furthermore, the Notice

of hard forks in Revenue Ruling 2019-24.

necessary from the IRS, further burdening

mandates that taxpayers may be subject

Generally, a hard fork occurs when the

an agency whose limited resources are

to penalties for failure to comply with tax

protocols governing the operation of a

already under considerable strain during a

laws, which includes underpayment of

blockchain are changed. When the rules

pandemic.108 These challenges will serve only

taxes. The ambiguity of this threat of penalty

governing the operation of a blockchain

to limit the growth and use of cryptocurrency.

cautions that if taxpayers do not comply with

change, it is possible that some persons will

B. United Kingdom

amending their tax returns in compliance

continue using the old set of rules while

Section 2A of the Bank of England Act

with Notice 2014-21, they will be subject

others use the new set, so that two separate

1998 specifies that the Bank of England has

122

Currents 24.2 2021

responsibility to both protect and enhance

corporate entities, an income tax is levied

as “property,” it leaves significant room for

the stability of the financial system of the

on the profits and losses attributable to any

interpretation for future developments in the

United Kingdom.109 The Bank of England

cryptocurrency transaction.

taxation of cryptocurrency.

has evaluated the risk cryptocurrencies pose

the United Kingdom taxes the gains from

to the stability of the United Kingdom’s

transactions where an individual purchases

financial markets and determined that the

and sells cryptocurrency as an investor.

If a

the United States. On June 19, 2014, the

size of the cryptocurrency market is currently

taxpayer derives gains from such transactions,

Governor General of Canada approved

not large enough to pose a “material risk to

these gains fall within capital gains tax, and

bill C-31,124 which regulates Bitcoin as a

monetary or financial stability in the UK.”

this tax is levied against any gain made that

money-services business.125 Canada also

As such, the United Kingdom has become

involves a cryptocurrency.118 If a miner is

takes the position that cryptocurrency is

a leader in cryptocurrency integration, and it

not involved in a sale or exchange involving

not a currency and is not recognized as legal

is one of the most favorable and comfortable

cryptocurrency, “the pound sterling value

tender.126 Rather, it is a digital representation

jurisdictions for conducting cryptocurrency

(at the time of receipt) of any cryptoassets

of value that is a digital asset that functions

business.110 However, the United Kingdom

awarded for successful mining will be taxable

as a medium of exchange for goods and

has not issued a final regulation as to the

as income (miscellaneous income) with any

services.127 Furthermore, taxpayers have to

legal status of cryptocurrency, and it does

appropriate expenses reducing the amount

establish if a cryptocurrency activity results

not consider cryptoassets to be currency

chargeable.”

Furthermore, the United

in income or capital because this affects the

or money.

Regarding the taxation of

Kingdom’s guidance provides that fees or

way the revenue is treated for income tax

cryptocurrency, Her Majesty’s Revenue

rewards received “in return for mining

purposes.128 Not all taxpayers who buy and

and Customs (the equivalent of the United

(for transaction confirmation) are also

sell cryptocurrency are carrying on business

States’ Department of Treasury) notes that

chargeable to Income Tax, either as trading

activity, and such determinations are made on

“[c]ryptocurrencies have a unique identity

or miscellaneous income depending on the:

a case by case basis.129 For miners, the income

and cannot therefore be directly compared

degree of activity, organization, risk, and

tax treatment is different depending on

to any other form of investment activity or

commerciality.”

whether their mining activities are a personal

111

payment mechanism.”112

116

Generally,

117

119

120

In evaluating the United Kingdom’s

C. Canada Canada regulates Bitcoin similarly to

activity (a hobby) or a business activity; this

If a taxpayer receives income from

regime for the taxation of cryptocurrency, it

cryptocurrencies, taxation of that income is

closely resembles that of the United States

A unique feature about the

dependent upon the “activities and parties

in many ways, including the ambiguity

Canada Revenue Agency’s treatment of

involved.”

Furthermore, a value added

and the penalties. However, the United

cryptocurrency involves barter transactions.

tax, which is essentially the equivalent to

Kingdom does not go so far as to say that

A barter transaction occurs when two parties

a sales tax in the United States) is only

cryptocurrency is property, as the United

exchange goods or services and carry out

applicable when suppliers sell goods or

States has declared.121 The United Kingdom

that exchange without using legal currency.

services in the United Kingdom in exchange

has released a statement deeming that

When a taxpayer uses cryptocurrency to pay

113

is decided case by case.130

For corporate entities,

cryptocurrencies are “cryptographically

for goods or services, the Canada Revenue

if any company enters into transactions

secured digital representations of value or

Agency treats it as a barter transaction for

that involves cryptocurrencies, these

contractual rights that can be transferred,

income tax purposes.131 That is, the taxpayer

transactions are treated in the same manner

stored, and traded electronically.” 122

must include in their income the amount

as normal transactions under the current

However, the United Kingdom “does not

of income they would have received if the

corporate tax rules; thus, any gains made

consider cryptoassets to be currency or

taxpayer had been paid in dollars rather than

are taxed accordingly under the United

money.”

Because the United Kingdom

cryptocurrency. However, Canadian citizens

Kingdom’s corporate tax rules.115 For non-

has not definitively declared cryptocurrency

who use cryptocurrency in Canada need

for cryptocurrency.

114

123

Currents 24.2 2021

to be vigilant as to how they conduct their

release on December 24, 2013 cautioning

legal status of an income is of no consequence

transactions. The Canada Revenue Agency

users of cryptocurrency about the dangers

to the applicability of tax laws in India.143 If

has been targeting Canadian citizens who

of such use which could include exposure

a taxpayer is regularly engaged in the trading

use cryptocurrency by requiring such users

to potential financial, operational, legal,

of cryptocurrency for profit, the trader will be

to fill out a comprehensive questionnaire

consumer protection, and security related

liable to pay taxes as a business.144 Likewise,

regarding their cryptocurrency use over the

risks.136 The creation, trading, or usage of

if a miner is regularly engaged in the business

past years.

cryptocurrencies as a medium for payment

of mining for cryptocurrency, the miner will

are not authorized by any central bank

also be considered as engaged in a commercial

cryptocurrency is treated, the Canada

or monetary authority.

undertaking, and will be subject to a tax as

Revenue Agency leaves plenty of questions

there have been no regulatory approvals,

unanswered as to how to tax cryptocurrency.

registration, nor authorization by the entities

132

Despite Canada’s guidance as to how

137

Furthermore,

a business.145 However, there is still ambiguity as to

Furthermore, Canada has not stated whether

concerned for carrying on such activities.

138

whether exchanges involving cryptocurrency

cryptocurrency is property or currency.

However, in March 2020, the Supreme

are subject to a Goods and Services Tax

Rather, Canada has taken an approach like

Court of India overruled the Reserve Bank of

framework. In large part, this issue stems

the United Kingdom—that is, it is not a

India’s ban on the companies transacting in

from the determination of whether

currency but rather a digital representation

cryptocurrency.139 In May 2020, the Reserve

cryptocurrency is a form of currency to

of value. However, Canada does treat

Bank of India provided further clarity as to

pay for goods or services or whether it is

cryptocurrency like property by applying

the legal status for the use of cryptocurrency,

property that is subject to the Goods and

the capital asset rules and treatment to

declaring that there is no prohibition on

Services Tax framework. Nonetheless, with

certain dispositions of cryptocurrency. 133

banks providing accounts to traders dealing

the reversal of bans on bank accounts for

This ambiguity allows for Canadian citizens

in cryptocurrencies.140 Given that the use

cryptocurrency users, there will be an influx

to operate in areas that are undefined, but

of cryptocurrency is now legal in India, this

of tax issues that arise in India. As such, India

because of Canada’s application of barter

raises the question as to how transactions are

will need to issue more guidance as to how

transactions to cryptocurrencies, there are

taxed in India.

to tax transactions involving cryptocurrency.

fewer undefined areas compared to the

Cryptocurrency users are doubtful as to

There will inevitably be a tightened grip and

United States and the United Kingdom.

how to show their investments in their income

higher level of scrutiny on cryptocurrency

However, there is still significant room for

tax returns given that, until now, banking

transactions, which has been seen over the

interpretation for future developments in

institutions could not provide accounts to

past three years in India.146

the taxation of cryptocurrency in Canada.

such users. However, India’s Income Tax

E. Brazil

D. India

Department nevertheless sees that the use of

In Brazil, virtual currencies are not

In India, the power to levy taxes is

cryptocurrency can increase its tax base. In

considered as legal tender in Brazil’s

prescribed under Article 246, which grants

2020, India’s Income Tax Department sent

regulatory framework, but it is considered

power to Parliament and state legislatures to

detailed notices to some cryptocurrency users

as “other financial assets” that can be

impose taxes.

Furthermore, under Article

that requested details on the last three years

classified as a good.147 Thus, Brazil treats

265, no tax can be imposed or collected

of income tax returns in addition to details

cryptocurrency as property in determining

without the authority of law.135 The turmoil

of their investment in cryptocurrency.141 The

the tax consequences for transactions

over the use and treatment of cryptocurrency

Income Tax Department submitted similar

involving cryptocurrency. That is, income

in India has been lingering since its inception

requests in 2017 and 2018 to thousands

from cryptocurrency transactions are treated

in 2008.

of cryptocurrency users and traders.

142

as property transactions. Any gains or losses

The Reserve Bank of India, the central

Nevertheless, income earned from dealing

are calculable by determining the difference

banking authority of India, issued a press

in cryptocurrency is taxable income, and the

between the cost basis at the time of

134

124

Currents 24.2 2021

acquisition and the amount realized upon

users must report their cryptocurrency

this tax structure encourages cryptocurrency

the disposition of the cryptoassets.

transactions in each taxable year or face a

users to underreport their transactions, which

fine, such users may defer taxation until a

has been seen in recent years. 156 Despite

a dedicated law to deal with cryptocurrency,

time that is best suited for their interests.

employing a bright line rule for the treatment

all exchanges fall under the purview of

F. Japan

and taxation of cryptocurrency transactions

However, because Brazil does not have

Normative Instruction No. 1888, which was

Japan became the first country to

and recognizing it as legal tender, Japan still

issued by the Department of Federal Revenue

recognize bitcoin and other virtual currencies

faces numerous issues with compliance from

on May 7, 2019.

as legal tender when it passed the Payment

its cryptocurrency taxpayers. As a result,

out crypto transactions in Brazil must report

Services Act in early 2017

and required

Japanese lawmakers are now suggesting

them or face penalties.149 Beyond that, Brazil

virtual currency exchange operators to

changes to this tax regimes to allow for

leaves much room for interpretation as to the

tax breaks and benefits for cryptocurrency

treatment of cryptocurrencies. Generally,

exchange businesses operating in Japan have

users. These changes suggest that a taxing

Brazil treats cryptocurrency as property

been regulated by the Payment Services Act.

regime where different transactions involving

transactions. The general rule is that the

Cryptocurrency exchange businesses must

cryptocurrency need to be treated under

cost basis shall be the purchase price of an

be registered, keep records, take security

different mechanisms–depending on the

asset. Given that virtual currencies are not

measures, and take measures to protect

taxpayer’s use and intent.

officially quoted, the taxpayer shall provide

customers and users alike.

G. Switzerland

148

All companies carrying

150

152

reliable information of said purchase price.

Japan’s National Tax Agency provides that

Switzerland classifies virtual currencies

Unrealized gain of a virtual currency should

profit earned by the sales of cryptocurrency

as property. Switzerland has defined a virtual

not be reported either on the assets schedule

shall be treated as miscellaneous income,

currency as “a digital representation of a value

or as income of the individual taxpayer. Such

rather than capital gains, under the Income

which can be traded on the Internet and

appreciation will only be taxed and reported

Tax Act.

When a person’s taxable income

although it takes on the role of money – it can

upon the realization of the virtual currency.

is calculated and taxed, miscellaneous income

be used as a means of payment for real goods

Any such gains or losses that are realized are

is added to the amount of other income,

and services – it is not accepted as legal tender

subject to capital treatment.

which excludes specified capital gains.

154

anywhere.”157 These currencies have their own

Brazil’s treatment of cryptocurrency

The significance of treating gains from the

denominations, but they differ from e-money

seems to favor the taxpayer in the sense that

sale of cryptocurrency stems from Japan’s

in that they are not based on a currency with

the taxpayer does not have taxable income

tax structure where “miscellaneous income”

legal tender status.158 Virtual currencies only

until there has been a disposition of the

is subject to tax rates up to 55%, rather than

exist as a digital code and therefore do not

cryptocurrency. Furthermore, the lack of

the tax rates for stocks and commodities at

have a physical counterpart such as coins

guidance as to how miners should treat

20%.155

or notes.159 Due to their tradability, virtual

153

their income of cryptocurrency for their

Japan’s taxation of cryptocurrency is

currencies should be classified as an asset.160

work allows them to escape taxation until

unique compared to other countries with a

If a taxpayer is engaged in the trading

they have disposed of the cryptocurrency.

prominent use of cryptocurrency; Japan taxes

of cryptocurrency for profit, such profit

Furthermore, because cryptocurrency is

cryptocurrency income at a higher rate than

is subject to business tax, depending on

subject to preferential tax treatment at the

its capital gains rate for income from stocks

whether or not somebody is qualified

capital gains rates as a result of its status as

or property exchanges. As such, this may

as a professional trader.161 If a taxpayer

“other assets.” Because of this, Brazil’s lack of

be a mechanism to dissuade taxpayers from

receives cryptocurrency as wage income, that

regulatory guidance provides cryptocurrency

engaging in cryptocurrency transactions—

cryptocurrency will still need to be declared

users in Brazil to defer taxation for years until

despite its legal status in Japan as legal tender

as income tax.162 However, if a taxpayer is one

a gain is realized. Although cryptocurrency

and currency. However, a major pitfall in

who invests and trades for their individual

125

Currents 24.2 2021

account, cryptocurrency gains are treated as

transactions because Switzerland provides a

early years of adoption, cryptocurrencies

tax-exempt capital gains.

value for each cryptocurrency—eliminating

were not considered a potential risk by

In Switzerland, the owning of

the discrepancies between taxpayers.

tax regulatory bodies because there was

cryptocurrencies, as well as the realization

Furthermore, the elimination of taxation

considerably low-market capitalization and

of capital gains of cryptocurrencies, must

for taxpayers who invest for personal gain and

low mainstream adoption. 171 In the late

be announced in a tax return.164 In order to

not for business may have added benefits in

2010s, this situation changed considerably,

declare them correctly, the value and to the

the long run, such as continued investment

with many new investors exercising extremely

source must be announced. Each year, the

in the country.

high returns, forcing tax regulators to

Federal Tax Administration defines the tax

—————————————————

rethink their rules and approaches. 172

value of the most common cryptocurrencies

IV. Compliance Issues

Various regulators, such as the International

as of December 31.165 Taxpayers are required

—————————————————

Accounting Standards Board, Financial

to refer to this tax value in order to declare

Since the inception of cryptocurrency in

Accounting Standards Board, Accounting

If the Federal Tax

2008, the concept has attracted users from

Standards Board of Japan and Australian

Administration does not provide a value

varying groups who use this cryptocurrency

Accounting Standards Board have started

for a cryptocurrency in the given year, the

platform for purposes that may be benign.

their cryptocurrency assessments in order

taxpayer is required to report the value as of

However, because cryptocurrency is

further regulate the use of cryptocurrency in

December 31 based on the value provided by

inherently distrustful and does not rely on

transactions for the purpose of tax evasion.173

the platform on which the assets are held.167 If

any third-party intermediary as a conduit

Poor compliance is primarily due

the platform does not determine the value of

for the transaction, cryptocurrency attracts

to three reasons: Poor to no information

the virtual currency, the taxpayer must report

users who want to use it for nefarious

reporting, reconciliation challenges, and

the purchase value.168

purposes. As a result, cryptocurrency has

crypto holders’ ideology coupled with lack

Thus, in Switzerland, if a taxpayer is

been used often and frequently in illicit

of education.174 However, with this in mind,

a qualified individual that buys, sells, or

transactions for the purpose of evading

the Group of 20 (G-20) aims to regulate this

holds cryptocurrencies for personal benefit,

taxation. Furthermore, because of its global

relatively new sector because of its wealth of

such taxpayers are not required to pay tax

character without allegiance to any particular

tax revenue for each member country. These

on their capital gains. However, income

country, countries’ attempts at regulating

governments hope to end the anonymity that

from mining is considered self-employment

cryptocurrency face compliance issues upon

currently characterizes the digital currency

income and is taxed through the income

attempting to tax intangible transactions.

sphere, by compelling reporting of income

tax. Profitable cryptocurrency trading by

However, regulatory authorities will be

or capital gains made through trading.175

qualified professionals is subject to corporate

driven to find a way to regulate the taxation

However, these desires to tax cryptocurrency

tax while wages paid in bitcoin must be

of cryptocurrency transactions because

are slow to have any distinct effect.

declared for income tax purposes.169

it is a means of increasing a country’s tax

Many countries have provided some

Switzerland’s treatment is highly

base. Cryptocurrency is a largely untapped

guidance as to what each country defines as

attractive to any cryptocurrency user engaged

resource of tax revenue as the cryptocurrency

cryptocurrency, but there are often no bright

in numerous transactions. However, cantons

markets’ value is upwards of $800 billion.

170

line rules for taxpayers to follow. Furthermore,

in which taxpayers reside may impose an

As a result of the lack of uniformity

because countries are treating cryptocurrency

additional tax upon the cryptocurrency users.

and clarity as to the tax treatment of

in varying ways, these differences create an

Nonetheless, Switzerland’s guidance and

c r y p t o c u r re n c y a ro u n d t h e w o r l d ,

environment that is rich for tax arbitrage.

regulations allow taxpayers to easily discern

cryptocurrency transactions have become

For example, in Germany, it has confirmed

the amount of taxable income they have in

attractive to taxpayers who are looking for

that it has two separate positions on when

each taxable year from their cryptocurrency

new mechanisms to avoid taxation. In the

to tax cryptocurrency,176 but more work

163

their virtual assets.

166

126

Currents 24.2 2021

is needed to make these effective. “In the

The report also stated that the tax rules

direct tax field, we have literally nothing,”

should not only be fair and transparent, but

cryptocurrency transactions.

said Jens Schaeperclaus, director of tax and

also inclusive, clear, and consistent in their

—————————————————

legal at Deloitte in Germany.177 In the United

application.183 Additionally, it is important

V. Conclusion

States, taxpayers need to be more cognizant

to have certainty in tax matters to preserve

—————————————————

about their tax returns as the I.R.S. now

the integrity and credibility of the tax system

Due to cryptocurrency’s complex

includes a question on Schedule 1 to list

and to ensure that overly complex or obscure

and distrusting nature, countries must

every cryptocurrency transaction in which

tax rules do not impede economic innovation

undertake a thorough analysis and versatile

the taxpayer engaged for the taxable year.178

and investment.

exploration in order to understand the

184

attaining compliance with tax regulations of

The IRS is actively working on initiatives to

Countries should attempt to heed the

full potential in taxing cryptocurrency.

police this space and improve compliance.179

recommendations made by the Organization

Countries must evaluate the taxing regime

In late 2019, the IRS started sending out

for Economic Cooperation and Development

of other countries to better understand what

letters that reached 10,000 taxpayers by the

in order to harmonize the tax rules regarding

constitutes an effective taxing regime for

end of August 2019.180 The list of names

the treatment of cryptocurrency transactions.

cryptocurrency transactions. Furthermore,

was obtained through “various ongoing IRS

Potential avenues for harmonization of tax

because cryptocurrency is still a relatively

compliance efforts.” In some cases, the IRS

regulations and increased compliance of

new concept that continues to evolve,

said taxpayers could be subject to criminal

such rules include modifying tax treaties

governments must readily adapt its taxing

prosecution.

between countries to allow for uniform tax

regimes of cryptocurrency regimes in

Organizations, such as the Organisation

treatment of cryptocurrency transactions.

order to take advantage of increasing

for Economic Co-operation and

This mechanism allows for contracting

the tax bases in each country. Treating

Development, are in the “preliminary phase”

countries to minimize the potential for tax

cryptocurrency transactions as property

of assessing cryptocurrency tax questions,

arbitrage while enforcing taxation regulations

transactions and setting forth standards by

Pascal Saint-Amans, who heads the OECD’s

in countries where taxpayers engage in

which taxpayers may report their transactions

Center for Tax Policy and Administration,

cryptocurrency transactions. Further

are the most reliable means of taxing

told Bloomberg Tax September 7, 2019.181 In

mechanisms may include implementing

cryptocurrency transactions, similar to how

the Organisation for Economic Co-operation

greater repor ting requirements for

the United States and Switzerland have taxed

and Development’s report to the G-20

corporations, partnerships, and individuals

cryptocurrency transactions. Nonetheless,

Finance Ministers, the Organization stated:

in their yearly tax returns and increasing the

taxing cryptocurrency transactions requires

Some work is already underway to

oversight over such transactions. If countries

cooperation between countries in order to

better understand and address these

wish to take advantage of the potential

promote effective regulation and compliance

developments, but further work is

increase in their tax base, such countries need

with tax laws. There are possible risks

required to ensure that governments

to increase their taxing regulatory bodies

and proper measures which can likely

can harness the opportunities these

in order to obtain compliance with its tax

prevent corrupt practices and still contribute

changes bring while ensuring the

regulations with regards to cryptocurrency

to the sustainable development of the

ongoing effectiveness of the tax

transactions. Because countries have been

cryptocurrencies’ innovations.

system. It will also be important

slow to enact guidelines and regulations

to give specific consideration to

for such transactions, compliance with

how advances can be implemented

these rules will not be uniform nor strictly

in developing countries to take

adhered to. Furthermore, with increases in

into account their particular

technology, countries will need to be able to

circumstances.182

readily adapt in order to achieve its goals of 127

Currents 24.2 2021

End Notes 1.

Organization for Economic Cooperation and Development, Secretary-General Report to G20 Finance Ministers and Central Bank Governors 5, 7 (2018). 2. See generally Richard Rubin & Carter Dougherty, Bitcoin Tax Rules Needed for Clarity, FUTURES (June 9, 2014), http://m. futuresmag.com/2014/01/09/ bitcoin-tax-rules-needed-clarity. 3. See Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, Bitcoin (2009), https://bitcoin. org/bitcoin.pdf. 4. Usman W. Chohan, Cryptocurrencies: A Brief Thematic Review, Notes on the 21st Century, Aug. 4, 2017, at 1. 5. Sahel Ahyaie Assar, Taxation of Cryptocurrencies: In Anticipation of the IRS’s Call, Tax Management Memorandum, Bloomberg Tax & Accounting, Sept. 23, 2019 at 2. 6. European Central Bank, Virtual Currency Schemes—A Further Analysis (February 2015), https:// www.ecb.europa.eu/pub/pdf/ other/virtualcurrencyschemesen. pdf. 7. I.R.S. Notice 2014-21, 2014-16 I.R.B. 8. Assar, supra note 5, at 3. 9. Cameron Hardwick, Cryptocurrency and the Problem of Intermediation, 20 The Ind. Rev. 569, 570 (2016), www.jstor.org/ stable/44000162. 10. For the sake of brevity and clarity, many technical details are not discussed as they are immaterial to the analysis of this Comment. This information can be found more in depth at: Satoshi Nakamoto, Bitcoin: A Peer-to-Peer Electronic Cash System, The Bitcoin Project (Nov. 1, 2008), https://bitcoin. org/bitcoin.pdf. 11. Nakamoto, supra note 3, at 1; see generally Assar, supra note 5, at 2. 12. Nakamoto, supra note 3, at 1. 13. Assar, supra note 5, at 2. 14. Amy Whitaker, Art and Blockchain: A Primer, History, and Taxonomy of Blockchain Uses in the Arts, 8(2) U. Arkansas Press 21, 22 (2019). 15. Regarding capitalization, “Bitcoin” describes the currency and “bitcoin” describes the unit of currency. 16. Whitaker, supra at 14, 22. 17. Id. 18. Id. 19. Deidre A. Liedel, The Taxation of Bitcoin: How the IRS Views Cryptocurrencies, 66 Drake L. Rev. 107,

110 (2018). 20. Jerry Brito & Andrea Castillo, Bitcoin: A Primer for Policymakers 3 (2013), https:// www.mercatus.org/system/files/ Brito_BitcoinPrimer.pdf. 21. Id. at 4. 22. Id. 23. Id. 24. See Chris Burniske & Jack Tatar, Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond 7 (2017). 25. See generally Daniel Roberts, Who is Satoshi Nakamoto, Inventor of Bitcoin? It Doesn’t Matter, Fortune (Dec. 9, 2015 2:52 PM CST), https://fortune.com/2015/12/09/ bitcoin-satoshi-identity/. 26. Nakamoto, supra note 3, at 3. 27. Id. at 1. 28. See generally Christof Paar & Jan Pelzl, Understanding Cryptography: A Textbook for Students and Practitioners 149 (2010). 29. Id. at 151. 30. Id. See Nakamoto, supra note 3 at 1. 31. Id. 32. See id. at 4. 33. Id. at 9. 34. See Stuart Haber and W. Scott Stornetta, How to Time-Stamp a Digital Document, 3 Journal of Cryptology 2, 99–111 (1991); Dave Bayer, Stuart Haber, and W. Scott Stornetta, Improving the Efficiency and Reliability of Time-Stamping, in Sequences II: Methods in Communication, Security and Computer Science 329–334 (Capocelli, Renato, DeSantis, Alfredo, Vaccaro, Ugo eds., 1993); Stuart Haber and W. Scott Stornetta, Secure Names for Bit-Strings, in Proceedings of the 4th ACM Conference on Computer and Communications Security 28–35 (1997). 35. Nakamoto, supra note 3, at 8. 36. Assar, supra note 5, at 3. 37. Id. 38. Id. 39. Dr. Garrick Hileman & Michel Rauchs, Global Cryptocurrency Benchmarking Study 28 (2017) (available at https://ssrn. com/abstract=2965436). 40. Andreas Lobil, Namecoin 108 (2014), https://www.net.in.tum. de/fileadmin/TUM/NET/NET2014-08-1/NET-2014-08-1_14. pdf. 41. CoinMarketCap lists hundreds of cryptocurrencies that have a market capitalization above $1,000

42.

43. 44.

45.

46. 47.

48.

49.

50.

51. 128

Currents 24.2 2021

(available at https://coinmarketcap.com/all/views/all/). CryptoCoinCharts has indexed 6,860 cryptocurrencies, of which many are unclear to still exist (available at http://www.cryptocoincharts. info/coins/info). Danny Bradbury, Altcoins: A Basic Guide, The Balance (Dec. 18, 2018), https://www.thebalance.com/altcoins-a-basicguide-391206. Id. See Top 100 Cryptocurrencies by Market Capitalization, CoinMarketCap, https://coinmarketcap. com (last visited May 14, 2020). William Suberg, Research Shows US Users Visit Cryptocurrency Exchanges 22 Million Times Each Month, CoinTelegraph (April 30, 2019), https://cointelegraph. com/news/research-shows-us-users-visit-cryptocurrency-exchanges-22-million-times-each-month. Hileman & Rauchs, supra note 39, at 24. Jose Pagliery, PayPal Now Lets Shops Accept Bitcoin, CNN (Sept. 26, 2014), https://money.cnn. com/2014/09/26/technology/ paypal-bitcoin/. Samantha Radocchia, Ballers and Bitcoin: Miami Dolphins Set to Accept Cryptocurrencies for Payments, Forbes (July 11, 2019), https:// www.forbes.com/sites/samantharadocchia/2019/07/11/ballersand-bitcoin-miami-dolphins-setto-accept-cryptocurrencies-forpayments/#2b721c667e5f. See How to Use Bitcoin to Add Money to Your Microsoft Account, Microsoft, https://support.microsoft.com/en-us/help/13942/ microsoft-account-how-to-usebitcoin-to-add-money-to-your-account (last visited May 16, 2020). A 2016 report studying payment relationships based on transaction flows on the bitcoin network has estimated that the use of cryptocurrency as a medium of exchange for online gambling and dark-net black markets has been most popular from mid-2012 until late 2013, but that the ‘legitimate’ economy has taken over since. Paolo Tasca, Shaowen Liu & Adam Hayes, The Evolution of the Bitcoin Economy: Extracting and Analyzing the Network of Payment Relationships (2016) (available at https://ssrn.com/ abstract=2808762). Hileman & Rauchs, supra note 39, at 24.

52. Hardwick, supra note 9, at 573. 53. Fritz Neumark, Maria S. Cox & Charles E. McLure, Taxation, Encyclopaedia Britannica, https:// www.britannica.com/topic/taxation (last visited May 15, 2020). 54. PricewaterhouseCoopers, Doing Business in Egypt: A Tax and Legal Guide 4 (2019), https://www.pwc.com/m1/en/ tax/documents/doing-businessguides/egypt-tax-and-legal-doingbusiness-guide.pdf. 55. A Brief History of Taxation, Northeastern University: D’AmoreMcKim School of Business, https://onlinebusiness.northeastern.edu/blog/a-brief-history-oftaxation/ (last visited May 15, 2020) [https://perma.cc/3FMLY34M]. 56. Genesis 47:24. 57. Northeastern University: D’Amore-McKim School of Business, supra note 55. 58. Id. 59. Id. 60. Id. 61. Id. 62. Comm’r v. Glenshaw Glass Co., 348 U.S. 473, 477 (1955). 63. 26 U.S.C. § 1 (2018). 64. 26 U.S.C. § 63 (2018). 65. 26 U.S.C. § 61 (2018). 66. See generally 26 U.S.C. § 61(a)(3) (2018). 67. 26 U.S.C. § 1001(a) (2018). 68. 26 U.S.C. § 1011 (2018); 26 U.S.C. § 1012 (2018). 69. 26 U.S.C. § 1001(a) (2018). 70. See generally 26 U.S.C. § 1(h) (2018); 26 U.S.C. § 1222 (2018); 26 U.S.C. § 1223 (2018); 26 U.S.C. § 1231 (2018); 26 U.S.C. § 1245 (2018); 26 U.S.C. § 1250 (2018); Capital Gains Tax Rates, PricewaterhouseCoopers, https://taxsummaries.pwc.com/ quick-charts/capital-gains-tax-cgtrates (last visited May 16, 2020) [https://perma.cc/SGU5-K2ZY]. 71. See I.R.S. Publication 550 (2019). 72. Capital Gains Tax Rates, PricewaterhouseCoopers, https:// taxsummaries.pwc.com/quickcharts/capital-gains-tax-cgt-rates (last visited May 16, 2020). 73. See 26 U.S.C. § 1(h) (2018). 74. See 26 U.S.C. § 1(j) (2018). 75. See 26 U.S.C. § 1 (2018); PricewaterhouseCoopers, supra note 72, at 10. 76. Currency, Black’s Law Dictionary (5th Pocket Ed. 2016). 77. Daniel Kurt, How Currency Works, Investopedia (Aug. 19, 2020), https://www.investopedia.com/

articles/investing/092413/howcurrency-works.asp. 78. Id. 79. Id. 80. See Brito & Castillo, supra note 20, at 5. 81. See, e.g., United States v. Petix, No. 15-CR-227A, 2016 WL 7017919, at *6 (W.D.N.Y. Dec. 1, 2016); SEC v. Shavers, NO. 4:13-CV416, 2013 WL 4028182, at *2 (E.D. Tex. Aug. 6, 2013) (“[B] itcoin can be used as money. It can be used to purchase goods or services . . .”). 82. See Nakamoto, supra note 3, at 1–2. 83. Id. 84. See Brito & Castillo, supra note 20, at 5. 85. Property, Black’s Law Dictionary (5th Pocket Ed. 2016). 86. See 26 U.S.C. § 1001(a) (2018). 87. See generally 26 U.S.C. § 1(h) (2018); 26 U.S.C. § 1222 (2018); 26 U.S.C. § 1223 (2018); 26 U.S.C. § 1231 (2018); 26 U.S.C. § 1245 (2018); 26 U.S.C. § 1250 (2018). 88. See Claire Groden, Edoardo Saravalle, and Julia SolomonStrauss, Uncharted Waters A Primer on Virtual Currency Regulation Around the World (Center for New American Security 2018). 89. Stan Higgins, Taiwan Financial Regulator Says Bitcoin Isn’t Banned, CoinDesk.com (Nov. 13, 2015), http://www.coindesk.com/taiwanfinance-regula-tion-bitcoin-ban/. 90. See Groden, Saravalle, Solomon Strauss, supra note 88, at 13. 91. U.S. Const. art I, § 8. 92. See U.S. Const. amend. X. 93. See generally I.R.S., supra at 7, at 3. 94. See Jeff Milchen, To Help Mainstreet, Close the Sales Tax Loophole, Bloomberg Bus. (Apr. 28, 2011), https://www.bloomberg.com/ news/articles/2011-04-28/to-helpmain-street-close-the-internetsales-tax-loophole. 95. Ryan Tracy, Clarity Sought for Bitcoin Treatment, Wall St. J. (Jan. 9, 2014), https://www.wsj.com/ articles/clarity-sought-for-bitcointreatment-1389298672. 96. See I.R.S., supra note 7. 97. See I.R.S., supra note 7. 98. See I.R.S., supra note 7. 99. See I.R.S., supra note 7, A-5. 100. See I.R.S., supra note 7, A-5. 101. See I.R.S., supra note 7, A-9. 102. I.R.S., supra note 7, A-7–8. 103. Letter from Congress to Charles P. Rettig, Commissioner of the Internal Revenue Service (Apr. 11, 2019) (available at https://src. bna.com/HhY) [hereinafter Letter to Rettig].

104. Id. 105. See Rev. Rul. 2019-24, 2019-44 I.R.B. 106. Letter to Rettig, supra note 103. 107. Rev. Rul. 2019-24, 2019-44 I.R.B. 108. At the time of this article, COVID-19 has wreaked havoc on the world—inundating governmental agencies with other severe issues that threaten millions of lives. 109. Bank of England Act, 1998, c. 11, § 2A, http://www.legislation. gov.uk/ukpga/1998/11 [https:// perma.cc/A3KP-XSF9]. 110. Kateryna Solodan, Legal Regulation of Cryptocurrency Taxation in European Countries, 6 Eur. J. L. & Pub. Admin. 64, 69 (2019). 111. HM Revenue & Customs, Cryptoassets: Tax for Individuals (Dec. 20, 2019), https://www.gov.uk/ government/publications/taxon-cryptoassets/cryptoassets-forindividuals. 112. HM Revenue & Customs, Revenue and Customs Brief: Bitcoin and Other Cryptocurrencies (Mar. 3, 2014), https://www.gov. uk/government/publications/ revenue-and-customs-brief9-2014-bitcoin-and-othercryptocurrencies/revenue-andcustoms-brief-9-2014-bitcoinand-other-cr yptocurrencies [https://perma.cc/MP2EGQKV]. 113. Id. 114. Id. 115. Id. 116. Id. 117. Id. 118. HM Revenue & Customs, Revenue and Customs Brief: Bitcoin and Other Cryptocurrencies (Mar. 3, 2014), https://www.gov. uk/government/publications/ revenue-and-customs-brief9-2014-bitcoin-and-othercryptocurrencies/revenue-andcustoms-brief-9-2014-bitcoinand-other-cr yptocurrencies [https://perma.cc/MP2EGQKV]. 119. HM Revenue & Customs, Cryptoassets: Tax for Individuals (last updated Dec. 20, 2019), https://www.gov.uk/government/ publications/tax-on-cryptoassets/ cryptoassets-for-individuals. 120. Id. 121. Id.; see also I.R.S. Notice 2014-21, 2014-16 I.R.B. 122. Id. 123. Id. 124. Regulatory Approaches to Cryptoassets: Canada, Libr. Congress (last updated July 24, 2020), https://www.loc.gov/law/help/ cryptoassets/canada.php. 125. Regulation of Bitcoin in Selected Jurisdictions, Libr. Congress (last

updated July 23, 2018), https:// www.loc.gov/law/help/bitcoinsurvey/. 126. David George-Cosh, Canada Says Bitcoin Isn’t Legal Tender, Wall St. J. (Jan. 16, 2014), http://blogs.wsj. com/canadarealtime/2014/01/16/ canada-says- bitcoin-isnt-legaltender/. 127. Guide for Cryptocurrency Users and Tax Professionals, Can. Revenue Agency (last updated June 27, 2019), https://www.canada.ca/ en/revenue-agency/programs/ about-canada-revenue-agencycra/compliance/digital-currency/ cryptocurrency-guide.html. 128. Id. 129. Id. 130. Id. 131. Id. 132. Kyle Torpey, Bitcoin Investors Targeted with Audits by Canada’s Federal Tax Agency, Forbes (Mar. 6, 2019), https://www.forbes. com/sites/ktorpey/2019/03/06/ bitcoin-investors-targeted-withaudits-by-canadas-federal-taxagency/#5761e2d0656e. 133. See Guide for Cryptocurrency Users and Tax Professionals, Can. Revenue Agency (Aug. 6, 2019), https://www.canada.ca/ en/revenue-agency/programs/ about-canada-revenue-agencycra/compliance/digital-currency/ cryptocurrency-guide.html. 134. See India Const. art 244A(2)(c); India Const. art. 245 135. India Const. art. 265. 136. Press Release, Reserve Bank of India, RBI Cautions Users of Virtual Currencies Against Risks (Dec. 24, 2013), https://www.rbi.org.in/ SCRIPTs/BS_PressReleaseDisplay. aspx?prid=30247. 137. Id. 138. Id. 139. Saloni Shukia and Sachin Dave, RBI to Seek Review of Supreme Court Order on Cryptocurrency, The Economic Times (Mar. 6, 2020), https://economictimes. indiatimes.com/news/economy/ policy/rbi-to-seek-review-of-supreme-court-order-on-cryptocurrency/articleshow/74503345.cms. 140. Anandi Chandrashekhar & Ashwin Manikandan, RBI Says No Curbs in Providing Bank Accounts to Crypto Traders, The Economic Times (May 26, 2020), https:// economictimes.indiatimes.com/ small-biz/startups/newsbuzz/rbisays-no-curbs-in-providing-bankaccounts-to-crypto-traders/articleshow/75990202.cms?from=mdr. 141. Vireshwar Tomar, India’s Income Tax Department is Secretly Training Its Officials to Investigate Cryptocurrencies, Cointelegraph (Dec.

18, 2019), https://cointelegraph. com/news/indias-income-taxdepartment-is-secretly-trainingits-officials-to-investigate-cryptocurrencies. 142. Id. 143. Kevin Helms, Indian Tax Authority Sends Probing Questions to Crypto Owners – Experts Weigh In, Bitcoin.com (Aug. 7, 2019), https:// news.bitcoin.com/indian-tax-authority-probing-questions-cryptoowners-experts/. 144. Id. 145. Id. 146. See 1 Lakh Income Tax Notices Sent to Bitcoin Investors: CBDT Chairman, The Times of India (Feb. 7, 2018), https://timesofindia. indiatimes.com/business/indiabusiness/1-lakh-income-tax-notices-sent-to-bitcoin-investors-cbdtchairman/articleshow/62807082. cms (referencing the Indian government’s tough stance on cryptocurrencies and initiatives taken to regulate earnings in light of recent notices sent to individuals who had not declared cryptocurrency in their income taxes). 147. See Imposto Sobre a Renda – Pessoa Física [Individual Income Tax], Ministério da Fazenda (2017), http://receita.economia.gov.br/interface/cidadao/ irpf/2017/perguntao/pir-pf2017-perguntas-e-respostas-versao-1-1-03032017.pdf. 148. Turner Wright, Brazilian Cryptocurrency Exchanges Hit Hard by Tax Regulations, CoinTelegraph (Feb. 17, 2020), https://cointelegraph. com/news/brazilian-cryptocurrency-exchanges-hit-hard-by-taxregulations. 149. See generally Decreto No. 1888, de 3 de Maio de 2019, Diário Oficial Da União [D.O.U] de 7.5.2019, http://normas.receita. fazenda.gov.br/sijut2consulta/ link.action?visao=anotado&idA to=100592. 150. See Garrett Keirns, Japan’s Bitcoin Law Goes into Effect Tomorrow, CoinDesk (Mar. 31, 2017) https://www.coindesk. com/japan-bitcoin-law-effecttomorrow/. 151. Emiko Terazono, Bitcoin Gets Official Blessing in Japan, Financial Times (Oct. 17, 2017), https:// www.ft.com/content/b8360e86aceb-11e7-aab9-abaa44b1e130. 152. Sayuri Umeda, Regulation of Cryptocurrency: Japan, Libr. of Congress (July 24, 2020), https:// www.loc.gov/law/help/cryptocurrency/japan.php. 153. Id.; see 所得税法 [Income Tax Act], Act No. 33 of 1965, amended by Act No. 74 of 2017, art. 35

129

Currents 24.2 2021

(Japan). 154. Id. 155. Daniel Palmer, Japan’s Crypto Traders May Face Closer Scrutiny Over Tax Avoidance, CoinDesk (June 5, 2019), https://www.coindesk. com/japans-crypto-traders-mayface-closer-scrutiny-over-taxavoidance. 156. Japan Crypto Traders Are Underreporting $93M Worth of Income; Tax Authorities Plan Crackdown, TokenPost (June 6, 2019), https:// tokenpost.com/Japan-cryptotraders-are-underreporting-93Mworth-of-income-tax-authoritiesto-deploy-agents-to-crack-themdown-2114. 157. See Swiss National Bank, Federal Council report on virtual currencies in response to the Schwaab (13.3687) and Weibel (13.4070) postulates (2014), https://www.news.admin.ch/ NSBSubscriber/message/attachments/35355.pdf. 158. Id. 159. Id. 160. Id. 161. Id. at 25. 162. Roger Huang, Seven Countries Where Cryptocurrency Investments Are Not Taxed, Forbes (Jun. 24, 2019, https://www.forbes.com/ sites/rogerhuang/2019/06/24/ seven-countries-where-cryptocurrency-investments-are-nottaxed/#127493e77303. 163. Id. 164. Daniel Spitz, The Taxation of Cryptocurrencies, RSM (Sept. 10, 2018), https://www.rsm.global/ switzerland/news/taxation-cryptocurrencies. 165. Id. 166. Id. 167. Id. 168. Id. 169. Jeffrey Gogo, Eight Countries That Don’t Tax Your Bitcoin Gains, Bitcoin.Com (May 25, 2020), https://news.bitcoin.com/eightcountries-that-dont-tax-yourbitcoin-gains/. 170. Isabel Gottlieb & Allyson Versprille, G-20 Eyes Tax Gold Mine in ‘Sexy’ Crypto Market, Bloomberg Tax (Oct. 19, 2018), https://news. bloombergtax.com/daily-tax-report-international/g-20-eyes-taxgold-mine-in-sexy-crypto-market. 171. Ciupa Katarzyna, Cryptocurrencies: Opportunities, Risks and Challenges for Anti-Corruption Compliance Systems, 2019 OECD Global Anti-Corruption & Integrity Forum (2019), https://www.oecd. org/corruption/integrity-forum/ academic-papers/Ciupa-Katarzyna-cryptocurrencies.pdf. 172. Id.

173. Id. 174. Shehan Chandrasekera, INSIGHT: Why is Cryptocurrency Tax Compliance So Low?, Bloomberg (Jan. 15, 2020), https://www.bloomberglaw.com/product/tax/document/ XBAM9J3O000000?bna_news_ filter=daily-tax-report&jcsearch= BNA%25200000016fa093d182 a77fffd3e6b60000#jcite. 175. Gottlieb & Versprille, supra note 170. 176. Id. 177. Id. 178. Shehan Chandrasekera, 2020 is the Year of Crypto Tax Compliance, CoinTracker (Oct. 15, 2019), https://www.cointracker.io/ blog/2020-is-the-year-of-cryptotax-compliance. 179. Chandrasekera, supra note 174. 180. Kate Rooney, The IRS is warning thousands of cryptocurrency holders to pay their taxes, CNBC (July 26, 2019), https://www.cnbc. com/2019/07/26/irs-is-warningthousands-of-cryptocurrencyholders-to-pay-their-taxes.html. 181. Gottlieb & Versprille, supra note 170. 182. OECD, Secretary-General Report to G20 Finance Ministers and Central Bank Governors 12 (2018). 183. Id. at 13. 184. Id.

130

Currents 24.2 2021

The FCPA Enforcemnt Landscape: What Corporate Counsel and Compliance Departments Need to Know for Effective Compliance in the New Decade K Y L E

V E N T O

—————————————————

annual FCPA investigations have increased

I. Introduction

II. The Evolving Landscape

exponentially, with the average number of

—————————————————

enforcement proceedings brought by the

A. Background

SEC and the DOJ reaching an all-time high

This Note examines key issues and developments in the enforcement of the

For decades, foreign corruption has

Foreign Corrupt Practices Act (FCPA or the

posed a substantial legal and economic

While enforcement trends indicate

“Act”) and considerations for implementing

danger for international business. Enacted

that the number of DOJ enforcement

an effective corporate compliance program.

in 1977 via an amendment to the Securities

proceedings has slightly dropped,8 the SEC

Part I of this Note backgrounds the FCPA

Exchange Act of 1934 (Exchange Act), the

has steadily increased its proportional share

enforcement landscape, discusses the

FCPA was Congress’s means to the end of

of investigations into alleged FCPA violations

evolution of the Department of Justice’s

combating the corporate bribery culture

since 2013, with no sign of slowing down.9

(DOJ) role, and notes the expansion of

rampant at the time.1 Indeed, for over forty

In 2017, of a combined thirty-nine actions

the FCPA enforcement regime through

years, the Federal Government has remained

initiated by the SEC and the DOJ, the DOJ

intergovernmental participation between the

committed in its mission to put an end to

was responsible for bringing twenty-nine of

DOJ, the Securities Exchange Commission

bribery and corruption—acts having “no

them, the second-highest number of DOJ

(SEC), and the Commodity Futures Trading

place in society” which “often go hand-in-

enforcement proceedings per-year yet. 10

Commission (CFTC). Part II of this Note

hand with many other societal ills . . . [like]

In 2016, corporate wrongdoers paid the

backgrounds the FCPA and examines

instability, inequality, and poverty, and have

highest amount of criminal penalties in the

the various theories of liability in light of

anti-competitive effects, including putting

Act’s history—an average of $223.4 million

today’s FCPA enforcement administration

honest businesses at a disadvantage.” And,

per violator.11 Nevertheless, as enforcement

and highlights the exposures prevalent

under the Trump Administration today,

actions increased, so did companies’ questions

in the energy sector—an industry most

FCPA enforcement still appears to be strong.

on how to remain compliant and outside of

vulnerable to FCPA liability. Lastly, Part III

The SEC and the DOJ are the primary

the agencies’ crosshairs, subsequently creating

details the features of an effective corporate

enforcers of the FCPA. However, in the

a need for compliance guidance and insight

compliance program and offers practical

Act’s first year, the agencies brought a mere

into the Department’s investigative processes.

guidance corporate counsel and compliance

two actions. Indeed, for the first twenty-

B. The DOJ as a Provider of Compliance

officers can use to build a robust compliance

two years of the FCPA’s existence, the

Guidance

program, ensuring FCPA compliance in the

agencies jointly averaged three prosecutions

Since 1955, the DOJ Fraud Section has

new decade.

annually. However, the increased corporate

sought to investigate and prosecute complex

fraud scandals occurring in the late 2000s

white-collar crimes and to develop DOJ

prompted additional agency action to

enforcement policies.12 While both the SEC

expand the DOJ’s authority in interpreting

and DOJ play a vital role in interpreting the

the FCPA. 6 Since then, the number of

FCPA’s provisions, Congress’s amendment

of seventy-four in 2010.7

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Currents 24.2 2021

to the FCPA in 1998 expressly granted

deferred prosecutorial agreements (DPA).18

a company need to launch a full-scale and

authority to the Attorney General to decide

Such agreements often obligated companies

expensive investigation for every time some

whether further clarification of the Act’s

to make significant concessions to avoid

level of misconduct appeared to occur?24

requirements would enhance statutory

being indicted and hence provided incentives

In 2015, Deputy Attorney General

compliance and better assist the business

to disclose to the DOJ any potential FCPA

Sally Yates’s memorandum gave companies

community.

violations voluntarily.

some sense of relief as to how they are

Through this substantive

and interpretive rule-making authority, the

The Thompson Memorandum came on

to respond. The Yates memo established

DOJ has since issued numerous guidance

the cusp of the enactment of the Sarbanes-

that “a corporation has to provide all

documents and policy memoranda aimed at

Oxley Act of 2002 (SOX), wherein Congress

relevant facts regarding the individuals

providing such clarification.14

demonstrated its emphasis on self-disclosure

involved in the corporate misconduct

Logically, the agency tasked with

of corporate wrongdoing.20 Accordingly,

before the prosecutor would consider or

enforcing the FCPA would begin to provide

building upon its predecessors, the Filip

provide any credit for cooperation.”25 Yates

insight into the factors that its prosecutors

Memorandum resulted in nine “Filip

emphasized that the DOJ is not seeking

consider when investigating corporate

Factors” that prosecutors should consider

to “burden corporations with longer or

misconduct. It was a series of memoranda

when making charging decisions. It also

more expensive internal investigations than

that ultimately resulted in an official DOJ

shifted the focus to a corporation’s willingness

necessary.”26 Instead, Yates clarified that the

program focusing on corporate cooperation

to disclose relevant facts and the sufficiency of

DOJ “expect[s] thorough investigations

and self-disclosure. The DOJ’s role thus

its disclosure when evaluating a corporation’s

tailored to the scope of the wrongdoing.”27 In

pivoted from one of a strict enforcer to a

cooperation.21 Thus, there became not only

addition, the memo supported the cause for

provider of compliance guidance. By way of

a quantitative aspect but also a qualitative

intergovernmental participation and urged

its eventual Corporate Enforcement Policy,

aspect to the disclosure and cooperation

various federal agencies to seek accountability

the DOJ has become the agency the majority

actions of a company under investigation.

from individuals perpetrating corporate

of international businesses turn to for FCPA

With many enforcement principles

compliance guidance, and the evolution of

now public, an official document became

Culminating in an official program,

the Department’s role provides insight in

necessarily apparent. Hence, in 2012, the

in April 2016, former Assistant Attorney

of itself.

DOJ and SEC culminated their policies

General Leslie Caldwell announced the

The Holder Memorandum was the

and published their first FCPA guidance

DOJ Criminal Division’s temporary Pilot

first DOJ memorandum to standardize the

document: “A Resource Guide to the US

Program.29 The Pilot Program was aimed to

factors that the Department considers when

Foreign Corrupt Practices Act.” 22 The

increase the transparency and accountability

making corporate charging decisions.

Resource Guide covers all FCPA related

between the Department and companies

While of some assistance, the Holder

topics, from its historical background

to ensure compliance under the FCPA.30

Memorandum only gave a glimpse of

to details on its provisions, principles of

The program provided corporations with

the DOJ’s investigative processes. Later

enforcement, and the “hallmarks of an

a range of mitigating options that, when

supplementing the Holder Memorandum,

effective compliance program.” Companies

pursued, resulted in fine reductions, no

the Thompson Memorandum stipulated

across the United States (U.S.) responded

corporate monitor requirement, or some

that prosecutors are required to scrutinize the

mostly positively to the guidance, but some

combination thereof.31 In this way, the

authenticity of a corporation’s cooperation in

felt that not all of their questions were

program encouraged self-reporting of FCPA

making charging decisions. Furthermore,

answered as to how to receive credit for

violative conduct in exchange for reduced

the Thompson Memorandum enabled

cooperation. For example, businesses had no

criminal penalties.

prosecutors to resolve corporate violations

answers from the agencies as to how extensive

Under the program, for example, a

via non-prosecutorial agreements (NPA) and

a company’s cooperation needed to be—did

firm might receive up to a fifty percent fine

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Currents 24.2 2021

wrongdoing.28

reduction when the company voluntarily self-

not self-report but later fully cooperate and

reduction off of the low end of the USSG

disclosed, fully cooperated, and remediated

timely remediate. For the first category, the

fine range.45

the violation.32 The DOJ believed that the

CEP provides a presumption that a company

Under the CEP, self-disclosure requires

Pilot Program would encourage greater

will receive a declination (a statement from

disclosure of all pertinent information

corporate self-disclosure of bribery occurring

the DOJ indicating it has closed its inquiry

within a reasonably prompt time after

overseas, given the less risky option of

of the FCPA violation) when it has indeed

the wrongdoing’s discovery, but before

paying reduced fines. The Pilot Program,

voluntarily self-disclosed misconduct of

an imminent threat of a government

however, was critical in that it provided a

an FCPA matter, fully cooperated with

investigation or disclosure by a third party.46

framework that would spur similar programs

the agency, and timely and appropriately

Full cooperation requires identifying every

in other government agencies: questions

remediated the violation.38 The presumption

individual involved in or responsible for the

that prosecutors consider when evaluating

will stand unless there are aggravating

misconduct and providing all facts relating

corporate conduct, and the incentives

circumstances involving the seriousness of

to that misconduct.47 Once met, cooperation

available to corporations cooperating and

the offense.39 Those companies in the second

is evaluated by the corporation’s general

meeting ethical standards. While the Pilot

category do not receive the presumption but

proactivity and timely disclosure of any

Program established a specific mechanism by

may be eligible for lesser criminal penalties.40

additional facts uncovered in its internal

which multinational corporations could turn

Aggravating circumstances include

investigations or prioritization of interviews

to as a way to remedy foreign corruption,

involvement in the misconduct by

still questions remained as what actions

executive management, significant profit

As described above, the CEP sets

constituted full cooperation or remediation.

to the company from the misconduct,

forth definitions and the requirements for

The Pilot Program’s success led the

the misconduct’s pervasiveness within

the self-disclosure, full cooperation, and

DOJ to refine the program. In an effort to

the company, and criminal recidivism. 41

remediation elements, though leaves unclear

further encourage corporate cooperation and

Still, however, the company is required

the ramifications of a corporation’s partial

voluntary self-disclosure, the DOJ reformed

to pay all disgorgement, forfeiture, or

cooperation and remediation.49 One thing

the Pilot Program in November 2017 into

restitution resulting from the misconduct

that is quite clear, however, is that timely

the now known Corporate Enforcement

under investigation.

Under aggravating

and appropriate remediation of FCPA

Policy (CEP).34 The new FCPA Corporate

circumstances, the DOJ may pursue criminal

matters largely depends on the company’s

Enforcement Policy further clarified the

resolution of the matter, but incentives are

establishment of an effective corporate

incentives available under the program but also

still available to a company that has satisfied

compliance program.50 Though it is within

expanded its application into an evaluation

the disclosure, cooperation, and remediation

the prosecutor’s discretion to balance the

of corporate compliance programs.35 Like

requirements. In such a case, the DOJ will

factors and consider the relevant policies

the Department’s memoranda and Pilot

accord a 50% reduction off of the low end

when making charging decisions, the DOJ’s

Program, the CEP incentivizes companies to

of the U.S. Sentencing Guidelines (USSG)

guidelines to corporations provide some

self-disclose, cooperate with, and remediate

fine range, except in the case of a criminal

insight into the hallmarks of an effective

FCPA investigations and “is aimed at

recidivist, and will not require a monitor be

corporate compliance program that protects

providing additional benefits to companies

appointed if the company implemented an

the company from FCPA liability.51 Part III

based on their corporate behavior once they

effective compliance program at the time of

of this Note covers compliance programs in

learn of misconduct.”36

the criminal resolution.44 On the other hand,

greater detail.52

of employees with DOJ officials.48

The CEP distinguishes and varies the

when a company did not voluntarily disclose

Since the announcement of the CEP,

benefits for two types of companies: (1)

its misconduct to the DOJ, but later fully

the Department has seen a substantial

those who self-report, fully cooperate, and

cooperated and appropriately remediated

uptick in self-disclosures; thus, it has

timely remediate; and (2) those who do

it, the company will receive up to a 25%

been worth the DOJ’s time to further

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Currents 24.2 2021

fine-tune and publish its policy goals and

Corporate Enforcement Policy,

total penalties collected by the agencies (a real

incentives. More importantly, perhaps, the

CFTC’s Advisory on self-reporting

motivator to bringing enforcement actions).

Department’s CEP efforts not only laid the

and cooperation will make clear to

For example, in U.S. v. Société Générale S.A.,

foundation and provided a model framework

companies the significant benefits

the DOJ announced an FCPA resolution

for other government agencies to create

of voluntarily self-disclosing

in which the company, Société Générale (a

programs of their own, but also inspired open

misconduct, fully cooperating with

French financial services company), agreed to

intergovernmental participation in policing

the government’s investigation, and

pay over $860 million in penalties.63 On the

corrupt foreign practices.

remediating the misconduct. We

same day, the CFTC accepted a settlement

C.Intergovernmental Participation and

look forward to working in parallel

offer ordering the company to pay $475

the CFTC

with the CFTC in cases involving

million in penalties and disgorgement in

foreign corrupt practices, as well

connection with charges for interest rate

enforcement landscape expanded further. In

as others.”

manipulation.64 The chance of facing almost

an announcement by Enforcement Director

Interestingly, however, the exact reach

$1.5 billion in fines demonstrates that

James McDonald, the Commodities Futures

of the CFTC’s authority to pursue foreign

compliance in this area is, without a doubt,

Trading Commission (CFTC) made public

corruption under the CEA faces some

critically important.

its commitment to investigating foreign

uncertainty. The FCPA does not authorize

Aggressive enforcement of the FCPA

corrupt practices involving violations of

the CFTC to pursue foreign bribery cases,

and other laws intended to deter international

the Commodities Exchange Act (CEA).

nor does the CEA grant such authority.

corruption remains a fundamental activity of

Piggybacking on the framework established

But it appears, as one commentator noted,

the governmental agencies. The foregoing

by the DOJ Corporate Enforcement Policy

the agency takes the position that “foreign

demonstrates the broad and coordinated

and previous DOJ memoranda, the CFTC

conduct that somehow touches U.S.

efforts the government is willing to undertake

published its own incentive-based reporting

commodities and futures markets may

in order to seek corporate accountability in

system in its 2019 Enforcement Advisory,

be within the Enforcement Division’s

foreign corrupt practices. And it is fair to say

which provides leniency for companies who

purview.” As such, the CFTC is sure to

that other agencies are likely to follow suit.

self-report corrupt practices.

explore potentially broad (perhaps tenuous)

—————————————————

While the CFTC has previously

theories of liability for foreign corrupt

investigated foreign corrupt practices, its

practices violative of the CEA.61 Illuminating

renewed commitment derives from the

in this regard is the case Morrison v. National

III. FCPA Liability Under the Current Enforcement Regime

agency’s tendency to charge cases in parallel

Australia Bank Ltd., a civil action by a private

—————————————————

with FCPA investigations by the DOJ and

plaintiff, where the Court indicated that

As discussed in Part I of this Note,

SEC—a demonstration of intergovernmental

Congress primarily did not intend for the

since its enactment, the FCPA has had a

participation in combatting foreign corrupt

CEA to apply extraterritorially.62 Though it is

substantial impact on businesses globally.

practices. In the announcement, Director

unclear if this holding will extend to agency

Furthermore, the open collaboration

McDonald made apparent that “combatting

enforcement actions, it demonstrates that

occurring within the various U.S. regulatory

misconduct that affects [] financial markets

the CFTC is eagerly exploring the avenues

agencies will inevitably result in the most

has truly become a team effort, and that

to become more involved in policing foreign

robust enforcement efforts to date. Given the

is particularly true with respect to foreign

corrupt practices.

expanded enforcement regime, corporations

On March 6, 2019, the FCPA

corrupt practices.” In approval, Assistant

Notwithstanding the above, the CFTC

conducting transactions abroad are the most

Attorney General of the Department of

as a new regulator of corrupt foreign practices

vulnerable today than ever before, making

Justice’s Criminal Division commented:

is sure to cause, not only an increase in self-

an understanding of the FCPA’s provisions

reporting (a good thing), but an increase in

an imperative for all companies, both small

“Together with the Department’s

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Currents 24.2 2021

and large. The following sections provide

standard provided in the Act, a company’s

officials under the FCPA.

an overview of the FCPA’s provisions and

system of internal controls must provide

The term “payment” is sufficiently broad

the theories of liability arising thereunder,

“reasonable assurances” that transactions are

to cover virtually any benefit conferred on an

including liability as a result of third-party

recorded accurately.72

official to affect the business dealings with a

conduct, and the areas for FCPA liability

Knowingly falsifying any book or record

foreign government.79 There is no threshold

particularly troublesome for the energy

will undoubtedly lead to liability under

of monetary value in order to constitute a

sector.

the Act, but the same is true for directly

prohibited bribe; even the smallest bribes are

A. Legal Background and General Issues

or indirectly causing an issuer’s books or

prohibited payments.80 Though the agencies

The FCPA contains accounting

records to be falsified. Nevertheless, the

are unlikely to initiate an investigation over

provisions and anti-bribery provisions

SEC is not required to prove any intent

such small benefits like payment for cab

that work in concert to impose liability

to mislead or violate the law to enforce

fare or a cup of coffee, it is crucial to keep

on individuals and entities who engage in

the books and records provisions; thus,

in mind, that what is considered a modest

corrupt accounting practices or foreign

liability in this context is strict liability.

payment in the U.S. could have a much

bribes.65 These provisions broadly apply

Liability, here, also arises when an issuer

higher value in developing and transitioning

to U.S. companies, citizens, nationals or

fails to implement accounting controls

countries.81

residents, and to companies that have a class

for a non-issuer it controls.74 Non-issuers

The payment to the foreign official must

of securities registered in the U.S. or are

include officers, directors, and subsidiaries

have been made with the intent to secure an

required to file periodic reports with the SEC,

of an issuer, and may be criminally or civilly

improper advantage by influencing an act or

and all officers, directors, employees, agents,

liable if they knowingly circumvent or fail

decision by the official in his or her official

and shareholders acting on behalf of such

to implement an internal accounting and

capacity or causing a failure to act in violation

companies.66 Moreover, the FCPA applies

controls system.75 Liability in this context

of an official’s lawful duties.82 “Improper

to foreign nationals and entities that directly

frequently arises via successor liability as a

advantages” usually benefit the payor’s

or indirectly (through an agent) “engage in

result of a merger or acquisition transaction

business interest in obtaining or retaining

any act in furtherance of a corrupt payment”

since buyer companies in merger and

business in general, though the payment

within the U.S. territory.67

acquisition transactions usually assume the

need not be in connection with a business

seller company’s FCPA liability, which may

arrangement with the government or a

go undetected during due diligence.76

government-owned entity.83 For example,

The accounting provisions are primarily enforced as civil violations by the SEC, given the SEC’s expertise in accounting matters,

The FCPA’s anti-bribery provisions

the Fifth Circuit held in United States v.

archives of company information, and critical

make it illegal for certain individuals and

Kay that a payment to Haitian government

role in protecting the veracity of the financial

entities to “make, offer, promise, or authorize

officials to reduce the payor’s tax liabilities

markets.68 The accounting provisions require

corrupt payments or transfers of anything

were designed to obtain or retain business per

that issuers not only make and keep accurate

else of value to foreign officials to obtain or

the FCPA because Congress did not intend

and reasonably detailed books and records,

retain business.” Thus, a violation can occur

to limit the scope of the FCPA’s language to

but also require the establishment of a

even when a payment is not actually made.

only procurement of government contracts

system of internal controls—recognizing

“Foreign official” is broadly defined under

or business.84

the fact that bribes are likely to be disguised

the Act, and not only includes employees

Violations are enforced by the DOJ in

on a company’s books as valid or routine

and officers of a foreign government or

criminal proceedings and civil proceedings

payments.

Such internal controls must

agency, but also anyone operating on behalf

by the SEC and both agencies may seek an

entail a system of internal accounting

of such an entity or public international

injunction order to cease FCPA violating

measures sufficient to assure control over

organization.

Thus, employees of state-

conduct.85 In addition to hefty fines, the

the company’s assets.71 While there is no set

owned business enterprises are foreign

risks among companies for FCPA liability

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Currents 24.2 2021

include time-consuming and expensive

T h e re a s o n a b l e a n d b o n a f i d e

Like misconduct by employees, third

investigations, indictments, debarment,

expenditure defense involves a payment

parties may bring legal and reputational risk

court-appointed monitors, reputational

or benefit regarding a legitimate business

under the FCPA to the companies engaging

damage, and follow-on civil ligation. 86

expenditure like travel and lodging expenses

them. Vicarious liability for wrongful

However, it is essential to note that the

that are directly related to the performance

conduct performed by an employee within

FCPA anti-bribery provisions prohibit

of a contract with a foreign government or

the scope of the employee’s work is usually

issuers (including all public companies)

demonstration of products and services.

a deterrent to misbehavior since employees

from paying any criminal and civil fines that

Even still, travel and lodging expenses

could face termination and the firm would

the government imposes on the company’s

intended to influence a foreign official’s

have to internalize any costs resulting

officers, directors, employees, agents, and

actions can give rise to FCPA liability, if, for

from the bad behavior. 99 However, the

stockholders; in other words, indemnification

example, the travel expenses are luxurious

susceptibility to FCPA liability intensifies

of such persons is forbidden.

under the circumstances or appear in

when a company and its third-party agents’

connection with recreational activities.

interests diverge.

In the event a corporation is unsure of

whether a proposed course of action violates

Also known as the “grease payment”

The government asserts that a company

the FCPA’s anti-bribery provisions, the DOJ

exception, the facilitating payment

is liable for FCPA violations if the company

has created a procedure (detailed in the

exception to the FCPA includes facilitating

provides something of value to a third-

Resource Guide) for corporations to obtain

payments that are made to foreign officials

party while aware or substantially certain

an opinion from the Department on whether

in order to cause them to perform routine,

that the third party will offer, give, or

the proposed conduct conforms with the

nondiscretionary governmental actions.

promise something of value to a foreign

DOJ’s current enforcement policy.88 Though

Such governmental actions include issuing

official.100 Thus, the FCPA prohibits not

unavailable under the accounting provisions,

routine licenses (though not an award of

only direct corrupt payments to a foreign

the government’s approach to such fact-

new or continued business with a party),

official to obtain or retain business, but also

specific scenarios has become a valuable

providing phone, power, or water service,

indirect corrupt payments, with the latter

resource for any company considering a

providing police protection or mail delivery,

prompting many of the most significant

similar course of conduct.

and inspections associated with contract

FCPA enforcement actions to date.101

There are two affirmative defenses to

performance or the shipment of goods.96

The government can pursue FCPA

the FCPA and one exception: the local

Here, the purpose of the payment controls,

actions against companies for the conduct

law defense, the reasonable and bona fide

not the amount. While the payment may

of their third-party business partners under

promotional expense defense, and the

escape the FCPA, it may still be unlawful

multiple theories of liability, including direct

facilitating payment exception. The local

under local laws in the jurisdiction.

participation, authorization, knowledge,

law defense makes lawful any payment or

B. Liability for Third-Party Conduct

agency, aiding and abetting, or conspiracy

promise of value to a foreign government

International business transactions

liability.102 Although the FCPA does not

official if it was made under the laws and

frequently necessitate corporations to engage

define authorization, the statute’s legislative

regulations required in the foreign recipients’

and use third-party business partners. Such

history suggests that authorization can be

country.

Rarely invoked, this exception

persons include the likes of consultants,

express or implied.103 Knowledge under

would apply in the scenario that a foreign

distributors, or other agents who assist with

this section of the Act is defined as a “high

country has local guidelines allowing for

the delivery of goods or services and provide

probability of the existence” of misconduct

lawful financial arrangements with managers

local expertise, experience, and connections.

unless the defendant “actually believed” the

or officials of state-owned enterprises, though

Indeed, some jurisdictions require that

misconduct was not occurring.104 Thus,

no country has yet to write a law permitting

foreign companies collaborate with local

corporations can be held liable for not only

outright bribery.

entities.

knowing about the misconduct of its third-

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Currents 24.2 2021

party agents but also for ignoring signs of

it may suggest that the manufacturer

many third parties have no obligation

corruption, which can be challenging to

deliberately sold its products at such a price

to cooperate with a company’s internal

identify or prevent from abroad.105

in order to give the distributor funds to use

investigation. Moreover, some companies

for improper bribes.109

may not have the commercial bargaining

In its published guidelines, the DOJ identified several “red flags” associated with

International companies sometimes

power to persuade their third-party partners

third-party business partners, which signal

engage freight forwarders to assist with

to cooperate with their investigations. To

an unusual situation and potential FCPA

moving cargo for the company and advising

make matters worse, the company may

misconduct.

Such red flags include a close

about import rules, shipping methods, and

have varying degrees of access to crucial

association between the third party and a

required documents for transporting cargo

information like emails, telephone logs,

foreign official; agent fees and payments of

involved in international transactions. 110

calendar entries, sales data, and paperwork,

a much more significant than average size;

Compensation arrangements for freight

or other information critical to investigating

payments requested by a third party to be

forwarders are frequently based on a success

alleged third-party wrongdoing due to the

made to offshore bank accounts; payments

fee—a premium paid for navigating cargo

jurisdiction’s local culture, political situation,

to persons outside the normal scope of the

through foreign territories successfully.

and local privacy and data protection laws.

type of transaction the company is usually

Such arrangements could result in the freight

C. Vulnerabilities Specific to the Energy

involved; large bonuses, lack of standardized

forwarder making an improper payment

Sector

invoicing or over-invoicing, unusual credits

to a foreign official to ensure the cargo

The energy sector is particularly

or discounts granted to new customers, and

gets through, which would then guarantee

susceptible to FCPA violations. This is

checks drawn down to cash; and significant

the freight forwarder’s fee.

Thus, freight

not because the individuals or companies

and frequent fourth-quarter adjustments.107

forwarders could pose a higher risk of FCPA

who operate in this sector are more corrupt

Hence, the multitudes of red flags and

liability than other third-party agents.

or prone to perform bribes; instead, it is

106

112

111

Similar to freight forwarders, customs

because there are characteristics unique to

agents or brokers help companies bring

the energy sector that increases the risks

However, certain types of third parties

merchandise into foreign countries, including

of foreign corruption, namely the fact that

present a higher risk of corrupt foreign

the payment of any duties, taxes, or other

energy companies find oil and operate in

practices than others. For example, sales

charges related to the merchandise’s entry.113

some of the most corrupt regions of the

agents and consultants are often relied upon

Customs agents, however, may have closer

world.115

by companies operating overseas. Often, the

relationships with foreign government

As the natural resources of developed

sales agent’s compensation is tied to their

officials than other kinds of agents. Thus,

countries become scarce, energy companies

successful sales, thus providing an incentive

requests for excessive commissions or

are increasingly looking to explore and

to sell as much product as possible even with

contractual agreements that only vaguely

operate in developing countries containing

the resort to misconduct.108 The Resource

describe the services the customs agent or

rich, untapped oil deposits.116 Africa, Latin

Guide provides that third party “consulting

broker will perform may be indicative of

America, Asia, and the Middle East are each

agreements” that include overly general or

corruption.

key growth regions for the energy business;

theories of liability offer ample avenues for agency enforcement in this regard.

114

poorly described services is a red flag signaling

As will be discussed further in Part III

however, countries in these parts of the world

potential for foreign corruption. Relatedly,

of this Note, corporate counsel must ensure

have tended to rank lower on Transparency

distributors are similarly incentivized to make

due diligence is performed before engaging

International’s Corruptions Perceptions

sales, given that they are paid from the profit

third-party business partners. However, a

Index.117 For example, Nigeria is one of the

left over after covering the purchase cost of the

company’s internal investigation of third-

largest oil producers in the world, but from

product they resale. If a manufacturer prices

party misconduct can present unique and

2005 to 2014, seventy foreign corruption

its goods artificially low to the distributor,

challenging circumstances. For example,

enforcement actions were brought against

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Currents 24.2 2021

the country, representing the highest total

are deemed to be foreign officials within the

foreign members of the joint venture’s board

of any other country.

scope of the FCPA. Consequently, when an

of directors can also be held accountable for

Of the top ten highest recorded FCPA

energy company or its contractors desire

FCPA violations resulting from their conduct

fines, currently five are related to the energy

to extract oil deposits in a country whose

in U.S. territory.126

sector.119 Accordingly, the increased risk

oil is controlled by an SOE, the company

Furthermore, some jurisdictions contain

of bribery and corruption for energy and

must deal with foreign government officials

local content regulations that obligate or

energy-related companies has resulted in

regularly.

highly incentivize foreign businesses to use

118

increased scrutiny by the regulatory agencies,

In developing countries with SOEs

or partner with local, private companies

and thus the sector will continue to be a key

dominating oil reserves, it is not uncommon

for the services or products related to

focus for agency investigations. In addition

for the country to require that energy

its operations.127 For example, in Brazil,

to the previously discussed risks regarding

companies partner with an SOE to tap the

companies participating in public bids usually

bribery and corruption, the energy industry

oil deposits under the state’s control. Such

partner with local Brazilian companies to

is also particularly vulnerable to foreign

partnerships often take the form of an equity

satisfy Brazil’s local content requirement. This

corruption due to both the international

joint venture partnership where the energy

requires a certain percentage of the contract

nature of the energy industry as well as the

firm and the SOE agree to partner together

to be performed with Brazilian labor and

complexity of its transactions. These factors

and form a new, separate entity of which

resources. Such relationships with foreign

distinguish the energy industry from other

the SOE maintains a specified ownership

private companies can be quite valuable to

industries facing FCPA compliance issues.

percentage.

Under such arrangements, the

energy companies because the local private

State-owned enterprises, local content

government entities have partial control and

entity may have market knowledge, contacts,

regulations, mandatory joint venture

influence over the very product the energy

or infrastructure that make a joint venture

partners, and government procurement

company is in the business of producing.

business relationship more desirable and

projects are standard components to oil and

The energy company, its employees, and

cost-effective than the energy firm starting

gas operations, however this designation

third-party contractors are thus in direct

operations in an unfamiliar jurisdiction from

places energy companies in close and

business relationships with and are near,

scratch.128

dangerous proximity to foreign government

foreign government agencies and their

While business dealings with foreign

officials, thus intensifying their FCPA

representatives, increasing the energy firm’s

private companies may not entail the same

vulnerability.

FCPA exposure.123

closeness to foreign government officials

122

When a joint venture involves an

as would operations with a SOE, energy

SOE, the venture risks FCPA liability for

companies considering entering such joint

In developing countries, oil, gas, and

compensating directors appointed by the

ventures must still ensure FCPA compliance

other natural resources are valuable assets

SOE. The DOJ or SEC may allege that this

in the same manner as it would with a SOE.

and thus serve as a vital source of income

compensation to foreign directors who are

In addition to the implementation of an

for their economies. Recognizing this fact,

close to government officials, were appointed

effective compliance program (as discussed

the local governments in such emerging

by government officials, or are government

below) and an examination of the local

markets often control the country’s natural

officials themselves, constitutes an improper

entity’s compliance and reputation with both

resources via mandatory partnerships with

payment under the Act.124 Should such a

the local and U.S. governments, corporate

state-owned enterprises (SOE) or foreign

violation occur, the government can hold the

counsel should ensure that partners to

private companies.

A SOE is generally

joint venture, the U.S. company or individual

such joint ventures can walk away from the

described as a company or organization that

that is a party to the joint venture, and all

partnership and terminate the enterprise in

a non-U.S. government owns or controls.

of the directors on the joint venture’s board

the event the foreign private company or

liable for the violation.

the SOE fails to comply with the FCPA and

1. State-Owned Enterprises, Joint Ventures, and Local Content Regulations

120

121

SOEs and individuals employed by SOEs

125

138

Currents 24.2 2021

This goes to say that

other applicable anti-corruption laws.

with the SOE, but with any locally owned

retained the Angolan company causing the

2. Government Procurement of Oil and

business to satisfy the government’s local

bribes and consequential FCPA violation

Gas Production

content regulations. Such regulations stem

was charged with and paid a $75,000 civil

Another FCPA compliance challenge

from the remote locations of operations,

penalty.135

that U.S. energy companies face while

mandated government requirements, or a

3. Customs, Licensing, and Permitting

operating abroad involves the government

general commitment to supporting local

Issues

procurement process of oil and gas

communities. The same principles with

Energy businesses are particularly

exploration and production contracts.

regard to the public tender process also apply

vulnerable when beginning operations in

The risk of noncompliance is particularly

where U.S. energy companies procure the

an unfamiliar jurisdiction because energy

elevated during the public tender phase of the

services of local firms via a similar public

firms regularly hire third parties to navigate

SOE’s procurement process because energy

bidding process. As such, U.S. energy

their on-the-ground transactions such as

companies must have extensive contact with

companies must ensure that they award

importing drilling equipment, crews, and

foreign officials themselves or through their

subcontracts to foreign private firms in a

infrastructure. Emerging markets tend

third parties when the local government is

similarly ethical manner.

to have highly bureaucratic government

As an illustration, in SEC v. Halliburton,

bodies that pay relatively low salaries to

A public tender is a contract that a

Sonangol, the Angolan SOE, ordered

their employees compared with those in the

government or public entity issues inviting

Halliburton to work with a local Angolan-

private sector.136 Due to their government’s

competing offers for the productions of

owned business to fulfill the local content

bureaucratic nature, many oil-rich evolving

goods, services, products, or utilities the

regulation required for firms operating

markets have import and export licensing

sovereign or public entity needs.130 Foreign

in Angola.133 Rather than performing a

and other regulatory requirements that lack

government officials in developing countries

competitive bidding process of its own, where

transparency.This makes moving merchandise

often have broad discretion in awarding

Angolan firms could bid on the project or

and equipment in and out of those countries

contracts during the bidding process. As so,

substantiating the need for a single source—

time-consuming, complicated, and costly.137

government officials have taken advantage

per Halliburton’s internal controls—a

As such, staff and equipment may already

of the situation by seeking valuable items

Halliburton executive retained an Angolan

be in a position to begin operations but

from the competing companies. 131 For

company that was owned by a former

are unable to work as they await critical

example, foreign officials have been known

Halliburton employee. The former employee

equipment to be cleared through customs.

to seek donations to a charity, personal gifts,

was also a neighbor and friend of the Angolan

Customs officers in some areas hold

and job opportunities for their relatives

government official who was to approve the

a high amount of control and may solicit

as a condition to receive an award of a

award of the contracts to Halliburton on

bribes to perform routine duties. When

government contract.132 Given the FCPA’s

Sonangol’s behalf. In exchange for several

cash-rich, U.S. energy companies seek

broad language, such solicitations qualify

subcontracts, Halliburton paid the official

to operate in these jurisdictions, there

as a benefit provided to a foreign official.

over $3 million in bribes.

becomes an increased risk of FCPA liability

soliciting foreign investment.129

134

Therefore, energy companies must adopt

The SEC brought a civil action under

through extortion. This is especially true in

policies and procedures to ward against its

the FCPA’s accounting provisions (the

light of the enormous pressure to appease

employees’ payment of favors or gifts during

books and records, and internal controls

host government officials controlling the

the public tender phase of a government

requirements) against Halliburton. The

importation and exportation of equipment,

project.

SEC and Halliburton ultimately settled the

and issuance of licenses necessary to conduct

As previously mentioned, in some

case without an admission or denial of any

extractive activities in the country. A customs

jurisdictions, the government may order

wrongdoing and paid $29.2 million dollars

broker or other third-party intermediary

an energy company not to work specifically

in penalties. Moreover, the executive who

may thus be tempted to make payments or

139

Currents 24.2 2021

provide other benefits to local government

developing markets, and dealings with

have policies and procedures, and other

officials in order to “assist” its customers (the

customs brokers and other third parties

compliance efforts that: (1) promote a culture

energy firm) in enhancing its competitive

assisting with import/export and licensing

within the organization that encourages

position in the country of importation by

operations, U.S. energy companies must be

ethical behavior and a commitment to

unlawfully expediting the import or export

on the lookout for business arrangements

compliance with the law; (2) ensure that

of materials and goods.

that suggest materials and equipment are

employees understand and comply with

not being imported into those countries

the applicable laws and regulations relating

Panalpina is an international

in strict adherence with local import laws

to their daily work; (3) prevents and can

logistics services company, that amongst

and timeframes for similar transactions.

detect violations of any laws, regulations,

other things, provides freight forwarding and

Customs documents indicating the goods

and governmental policies; (4) addresses the

custom clearance services for its clients.139

were classified under an incorrect tariff

specific risks of an organization with concrete

Panalpina had several energy companies as its

classification, valued substantially lower than

actions steps to reduce or mitigate those

clients who requested that Panalpina provide

the sales price stated on the U.S. supplier’s

identified risks. The proceeding sections

services in connection with oil exploration

invoice for those goods, or other unusual or

and subsections explore these principles and

and production contracts taking place in

vague administrative service fees, or special

their importance in greater detail and provide

Nigeria. One of Panalpina’s customers

handling charges are red flags companies

practical guidance for creating a compliance

needed to expedite the importation of certain

must be aware of in their dealings with such

program that implements them.

supplies and drilling equipment needed to

third-party customs agents.

A. General Themes

sustain operations. To expedite the customs

—————————————————

Per the Resource Guide, when it comes

process—which it later admitted to—

to compliance, there is no one-size-fits-all

treatment. These bribes not only involved

I V. D e s i g n i n g a n d Implementing an Effective C o r po r ate C o m pliance Program

expedited customs clearance, but also allowed

—————————————————

upon. For example, before establishing a

Panalpina to avoid paying taxes and duties

Considering the expanding FCPA

corporate compliance program, corporations

enforcement regime and trend of increased

must adopt a mindset and top-down

Government licenses and permits are

enforcement proceedings brought

company culture, focusing on compliance

critical to an energy company’s successful

by the federal agencies through their

and knowing the FCPA risks their business

operations in a country because permits

interdepartmental collaboration, some form

practice presents.

are often required for activities like drilling,

of a legal compliance program is essential

Executive commitment and support

construction, and for using state-owned

for any organization seeking or already

are vital to the successful development of

infrastructure in extractive activities.

conducting business internationally. A robust

ethical business practices. As such, one of

Furthermore, it is also necessary for energy

legal compliance and ethics program can

the hallmarks of an effective compliance

firms to engage with local government

most often be the best way to navigate the

program per the Resource Guide is “a

officials to secure and retain leases and

complicated FCPA enforcement landscape,

commitment from senior management”

tenements to operate within the country’s

protect the business from liability, and reduce

to ensuring compliance.144 The company’s

territory.141 Obtaining these permissions

the costs associated with FCPA violations.142

senior management should provide visible

also necessitates interactions with foreign

That being so, corporate counsel and

and robust support for the company’s

government officials who hold the keys to

compliance departments who avoid FCPA

compliance initiative and code of conduct,

successful operations.

liability themselves or while working with

and instill a culture of integrity by being

third-party business partners typically

an example modeling the company’s values

On point is the case United States v. Panalpina.

138

Panalpina paid bribes to Nigerian customs officials to obtain preferential customs

for goods imported into Nigeria.140

Accordingly, in high-risk countries,

140

Currents 24.2 2021

program.143 However, there are overarching general themes that form the foundation any good compliance program is built

for doing the right thing.145 Maintaining

operates. A fundamental understanding of

for FCPA violations and the DOJ continues

FCPA awareness through discussions with

the organization’s enterprise-wide business

to place a high priority on individual

management (the “tone at the top factor”)

activities is vital for corporate compliance

accountability as a part of its investigative

is critical in DOJ prosecutors’ charging

departments to be able to stay apprised of and

process. Corporate compliance programs

decisions under the FCPA, so an influential

identify high-risk compliance areas in their

foster legal and ethical business practices

compliance culture starting from the higher-

operations.

Each business sector has its

by increasing employee awareness of the

ups is a great way to keep the company in

own risk profile and unique characteristics for

applicable laws and conduct that is in the best

ethical standing.

counsel to keep in mind while formulating a

interest of the corporation and therefore serve

Companies sometimes have various

compliance program because, as previously

to keep employees out of imprisonment.149

forms of compliance initiatives within and

discussed, certain business activities can

Compliance programs also benefit

led by separate departments across the

present more significant corruption risks.148

companies in building stakeholder trust.

organization like legal, human resources, or

B. The Importance and Advantages of

Being transparent about compliance activities

the audit committee. While an uncoordinated

Compliance Programs

and initiatives helps the company establish

147

initiative may be better than not having

In some organizations, compliance is

credibility within its industry and boosts

any initiative at all, the most compliant

seen as a cost center that burdens or distracts

morale. The mere announcement of a

companies focus on synergizing their

the business from its core function. However,

criminal or civil investigation into a company

compliance efforts within their organizations

a higher number of businesses recognize

for corrupt foreign practices can result in

to eliminate inefficiencies or duplicative

that an effective compliance program

negative publicity and reputational harm

efforts. Inefficiencies or duplication can be

consisting of an integrated framework

to the organization, which in turn inhibits

costly to the business, which may, in turn,

and internal controls helps the company

growth. Lost business opportunities and a

cause budget reductions in the compliance

prevent violations of the law and therefore

decreased stock price as a result of negative

space and thus a considerable increase in

saves money that would otherwise be spent

public perception can seriously harm the

risk. Businesses who establish dedicated

on the resulting penalties arising from a

company’s financial standing with customers,

compliance departments headed by a Chief

violation. Hence, compliance programs are

business partners, and the investing public.

Compliance Officer—who has many years’

increasingly seen as a mechanism to support

Being known as a company that puts ethics

experience in the legal compliance field—

business growth by mitigating liabilities and

first, and proactively demonstrates its ethical

can better synergize, coordinate, and

implementing cost-saving protections.

practices through a robust compliance

effectively promote a unified compliance

As discussed in Part I of this Note,

program is a surefire way to gain the public’s

Thus,

enforcement of foreign corrupt practices is

confidence.

in addition to the “tone at the top,” attaining

steadily increasing, and so are the criminal

C. The Hallmarks of an Effective Compliance

synergy should be kept in mind when

and civil fines to settle a DOJ, SEC, or

Program and How to Implement Them

designing a compliance program.

CFTC investigation. Furthermore, collateral

In their 2012 Resource Guide, the DOJ

A d d i t i o n a l l y, a n o t h e r g e n e r a l

civil shareholder lawsuits which parallel a

and SEC published ten general factors they

compliance theme that ethical businesses

company’s public disclosure of an FCPA

consider to be the minimum requirements

embody is an understanding and an ability

violation and are becoming increasingly

and “hallmarks of an effective compliance

to anticipate the compliance risks that

common. As such, the cost to induvial

program:” (1) strong organizational

may present themselves in the relevant

companies and their employees between

leadership and ethical culture; (2) the

business field. For example, one company

agency actions and private litigation can

existence of standards and procedures for an

may face different compliance challenges

be staggering. Monetary penalties aside,

effective program; (3) oversight, autonomy,

than another in a similar field, depending

companies must not forget that criminal

and resources for the compliance function;

on the geographic areas where the business

indictments and liability is always possible

(4) ongoing training and communication on

mindset throughout the company.

146

141

Currents 24.2 2021

compliance matters; (5) internal reporting

are not, and will not engage in bribery or

Due Diligence

mechanisms; (6) incentives and discipline to

corrupt practices, but also serve the purpose

Risk-based due diligence is the process

promote and enforce compliance; (7) follow-

of providing notice to counterparties of the

by which a company evaluates and determines

ups and investigations of complaints and

anti-corruption laws and their applicability

the level of due diligence to conduct based on

violations; (8) due diligence and oversight

to the transaction under consideration.

the risk that may be posed.155 In performing

of third-party relationships; (9) monitoring

Furthermore, counsel should always

due diligence for ensuring compliance

and auditing of program effectiveness; and

structure contractual agreements to allow for

under the FCPA, a company should gather

(10) ongoing risk assessments to maintain

some reasonable degree of oversight. Such

information on a business party via credit

program effectiveness.

oversight could take the form of approval

checks, online public information, or in

As the ultimate enforcers of the FCPA,

rights of subcontractors, the right and ability

industry publications to determine any

what the agencies consider necessary should

to exercise an audit, and representations

connection to foreign government officials

form the cornerstone of a company’s legal

and warranties concerning anti-corruption

or history of corruption. For instance, an

compliance program. While the previous

compliance. Audit rights, especially in any

initial level of due diligence would involve

sections of this Note have referred to many of

engagement with a third-party agent, should

screening the third party’s principals or

the hallmarks already, this section highlights

include the company’s ability to access and

critical employees against global watch lists

a selected few particularly relevant to this

analyze the books and records of the other

like the System for Award Management,

Note’s discussion. Still, corporate counsel

contractual party.

Counsel should also

the Denied Persons List, and the Specially

should always consult the Resource Guide for

consider drafting the right to select the

Designated Nationals and Blocked Persons

an in-depth examination of all the hallmarks

auditor and specific details like the type of

List.156 The company should maintain a file

when implementing a compliance program.

information and documentation required in

on the potential third-party business partner

1. Oversight Through Contractual and Record-

the performance of the audit.

and continually document the steps it has

150

Keeping Safeguards

152

The provisions could also contain the

taken to mitigate any identified risks that the

Contractual safeguards can be an

right to conduct internal investigations or

effective means in strengthening compliance

periodic evaluations of the other party’s

measures; thus, any corporate compliance

compliance measures in place.

Record

depth the due diligence should be. For

program should include a checklist of

keeping is statutorily required under the

example, the next layer of due diligence could

considerations and provisions that counsel

FCPA; thus, corporations must make

include comprehensive background checks,

ensures are drafted into the organization’s

and keep records that in reasonable detail

telephone or in-person interviews of the

commercial contracts. For example, the

accurately reflect the transactions and

third-party’s managers or colleagues, or an in-

program should require in-house counsel to

dispositions of the company’s assets.

154

depth review of the party’s financial records.

review all contractual terms to ensure they

However, via contractual representations and

If the relationship is particularly salient

accurately describe the business relationship

warranties, a company could require third

or ongoing, a final level of due diligence

of the parties or services the third-party

parties to provide periodic certifications of its

should include on-site inspections of a third-

was hired to perform, that payment terms

compliance with the FCPA’s record-keeping

party’s facilities, in-country investigations by

were appropriate, and that the counterparty

provisions and the anti-corruption laws of

undertaking inquiries to local embassies and

actually performed the work contracted

all jurisdictions where the third-party will

chambers of commerce, or the performance

for.151 Additionally, counsel should carefully

provide services under the contract. Each

of an audit before the business relationship

draft a template of an “ethical business

certification could include copies of the

commences.157

practices” provision and implement it in any

company’s code of conduct and FCPA policy

relevant agreement. Under such provisions,

as attachments.

due diligence procedures, it is important

the parties warrant that they have not,

2. Ongoing Internal and External Risk-Based

that businesses also conduct due diligence

142

Currents 24.2 2021

153

third-party may pose. The higher the risk, the more in-

In addition to the above external

on their own internal controls by consistently evaluating the compliance program’s effectiveness in a risk-identifying procedure. Should the company identify any shortcomings, the compliance program should be amended and revised to reflect and respond correctly to the company’s identified risk areas. Importantly, the establishment of any remedying procedure is only the first step as a failure to adhere to a company’s compliance controls is likely to trigger severer penalties than having no compliance program at all.158 —————————————————

V. Conclusion ————————————————— The landscape and enforcement of the FCPA are broadening, and intergovernmental actions to combat corrupt foreign practices have increasingly charged international companies with crippling penalties. Still, after forty years, the FCPA is a force to be reckoned with, and a statute with provisions that U.S. firms, particularly those in the energy sector, cannot ignore. Though adopting a mindset for compliance and implementing a corporate compliance program embodying all of the hallmarks and safeguards discussed in this Note, will foster growth and ensure FCPA compliance in the new decade and beyond.

143

Currents 24.2 2021

End Notes 1.

S. Rep. No. 95-114, at 3-4 (1977); Foreign Corrupt Practices Act of 1977, Pub. L. No. 95-213, 91 Stat. 1494 (codified as amended at 15 U.S.C. §§ 78dd). 2. Nomination of Jay Clayton: Hearing Before the S. Comm. On Banking, Hous. & Urb. Affs., 115th Cong. 90, 99 (2017) (Responses to Written Questions of Sen. Tester from Jay Clayton). 3. U.S. Dep’t of Justice & U.S. Sec. & Exch. Comm’n, A Resource Guide to the U.S. Foreign Corrupt Practices Act 2 (2012) [hereinafter Resource Guide]. 4. See U.S. Sec. & Exch. Comm’n, SEC Enforcement Actions: FCPA Cases, https://www.sec.gov/ spotlight/fcpa/fcpa-cases.shtml (last visited Oct. 29, 2020). 5. Bridget Vuona, Foreign Corrupt Practices Act, 56 Am. Crim. L. Rev. 979, 981 (2019). 6. See Madeleine DeGeorges, Comment, Indecent Disclosure: Has the Department of Justice Provided Sufficient Clarity to Incentivize Corporations to Admit Wrongdoing?, 5 Admin. L. Rev. 53, 63–64 (2019). 7. Vuona, supra note 5, at 981. 8. See Mike Koehler, Foreign Corrupt Practices Act Statistics, Theories, and Beyond, 65 Clev. State L. Rev. 157, 160, 170 (2017). 9. See Id. (showing the number of yearly FCPA prosecutions has steadily increased since 2013). 10. Vuona, supra note 5, at 981. 11. Id. 12. DeGeorges, supra note 6, at 62. 13. 15 U.S.C. § 78dd-1(d)-(e). 14. See generally DeGeorges, supra note 6. 15. See infra text accompanying note 30. 16. Memorandum from Eric H. Holder, Jr., Deputy Att’y Gen., U.S. Dep’t of Justice, to All Component Heads and U.S. Att’ys (June 16, 1999) [hereinafter Holder Memorandum]. 17. Memorandum from Larry D. Thompson, Deputy Att’y Gen., U.S. Dep’t of Justice, to Heads of Departments Components and U.S. Att’ys (Jan. 20, 2003) [hereinafter Thompson Memorandum]. 18. Id. As to civil penalties, the SEC subsequently announced that companies subject to FCPA

19. 20.

21.

22. 23. 24. 25.

26.

27. 28. 29.

30.

31. 32. 33. 34.

35.

enforcement investigations must self-report their potential violative misconduct in order to be eligible for an NPA or DPA. Andrew Ceresney, Director, SEC Division of Enforcement, Remarks at the American Conference Institute’s 32nd Annual FCPA Conf. (Nov. 17, 2015). See DeGeoges, supra note 6, at 66-67. See Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified as amended at 18 U.S.C. § 1514 (2020)). See Memorandum from Mark Filip, Deputy Att’y Gen., to Heads of Department Components and U.S. Att’ys (Aug. 28, 2008) [hereinafter Filip Memorandum]. See generally Resource Guide, supra note 3. Id. at 2, 58. See DeGeorges, supra note 6, at 72. Memorandum from Sally Quillian Yates, Deputy Att’y Gen., U.S. Dep’t of Justice, to All Component Heads & U.S. Att’ys 2(Sep. 9, 2015) [hereinafter Yates Memorandum] See Deputy Att’y Gen. Sally Quillian Yates, Remarks at N.Y.U. Announcing New Policy on Individual Liability in Matters of Corporate Wrongdoing (Sept. 10, 2015). Id. Yates Memorandum, supra note 25. Caldwell Release, Leslie Caldwell, Assistant Att’y Gen., Criminal Division Launches New FCPA Pilot Program (Apr. 5, 2016) [hereinafter Caldwell Release]. Memorandum from Andrew Weissman, Chief Fraud Section Crim. Div., U.S. Dep’t of Justice (Apr. 5, 2016) [hereinafter Pilot Program] Id. Id. See id. See Deputy Attorney Gen. Rosenstein, U.S. Dep’t of Justice, Remarks at the 34th International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017); U.S. Dep’t of Justice, Justice Manual § 9-47.120 (2018) [hereinafter CEP]. See Deputy Attorney Gen. Rosenstein, U.S. Dep’t of Justice, Remarks at the 34th

International Conference on the Foreign Corrupt Practices Act (Nov. 29, 2017); U.S. Dep’t of Justice, Crim. Div., Fraud Section, Evaluation of Corporate Compliance Programs: Guidance Document (last updated June 2020) [hereinafter Guidance Document]. 36. CEP, supra note 34. 37. Id. 38. Id. (“A declination . . . is a case that would have been prosecuted or criminally resolved except for the company’s voluntary disclosure, full cooperation, remediation, and payment of disgorgement, forfeiture, and/ or restitution. . . . Declinations awarded under the [CEP] will be made public.”). 39. Id. 40. Id. 41. Id. 42. Id. 43. Id. 44. Id. 45. Id. 46. Id. 47. Id. 48. Id. 49. Id. Adequate disclosure requires the company to make the disclosure within a reasonable time after becoming aware of the offense but prior to an imminent threat of government investigation. Id. The Department requires a multitude of elements that constitute full cooperation, including timely updates on the company’s internal investigation and responses to the Department’s investigation, proactivity of the company, making available for interviews and timely preservation, collection and disclosure of relevant documents an information. Appropriate remediation essentially requires the company to implement an effective compliance program. See id. 50. See id. 51. Guidance Document, supra note 35. 52. See infra Part III. 53. Erica Williams, et al., Avoiding FCPA Liability: Practical Compliance Considerations for Energy Companies, 13 Energy & Min. L. Inst. 370, 376 (2018). For the eighteen-month period the Pilot Program was in place, the DOJ received thirty voluntary disclosures, marking 144

Currents 24.2 2021

a dramatic increase compared to the eighteen voluntary disclosures recorded during the eighteen months prior to implementing the program. 54. DOJ, FBI, and CFTC Announce FCPA Policy Revisions and Initiatives, Paul Weiss (Mar. 15, 2019), https://www.paulweiss. com/media/3978517/15mar19doj-fcpa-revs.pdf. 55. See id. at 3. 56. David Yeres, et al., FCPA and the Commodity Exchange Act: A New Relationship, Harv. L. School Forum on Corp. Governance (Apr. 2, 2019), https://corpgov.law.harvard. edu/2019/04/02/fcpa-and-thecommodity-exchange-act-anew-relationship/; Press Release, CFTC, CFTC Division of Enforcement Issues Advisory on Violations of the Commodity Exchange Act Involving Foreign Corrupt Practice (Mar. 6, 2019), https://www.cftc.gov/PressRoom/ PressReleases/7884-19 [hereinafter CFCT Press Release] (“We at the CFTC will do our job as part of the team to identify this type of misconduct in our markets and hold wrongdoers accountable, working closely with our enforcement partners domestically and abroad.”). 57. CFCT Press Release, supra note 56. 58. Id. 59. Yeres, supra note 56. 60. Id. 61. Id. 62. Morrison v. Nat’t Austl. Bank Ltd., 561 U.S. 247 (2010). 63. Deferred Prosecution Agreement at ¶¶ 7-8, U.S. v. Société Générale S.A., No. 18-CR-253 (DLI) (E.D.N.Y. June 5, 2018). 64. In re Société Générale, CFTC No. 18-14, 2018 WL 2761752, at *55 (June 4, 2018) In re Societe Generale, CFTC No. 18-14, 2018 WL 2761752. 65. See 15 U.S.C. §§ 78dd (2018), et seq. 66. Williams et al., supra note 53, at 371. 67. Id. 68. Id. at 373. 69. Reasonably detailed is defined as “that which would satisfy prudent officials in the conduct of their own affairs.” Vuona, supra note 5, at 981–82. 70. Id. 71. Id. at 986. 72. Id.

73. Williams et al., supra note 53, at 373. 74. See 15 U.S.C. § 78m(b)(6) (2020). 75. See 15 U.S.C. § 78m(b)(5) (2020); 17 C.F.R. §240.13b2-1 (2020); Vuona, supra note 5, at 999. 76. Daniel J. Grimm, The Foreign Corrupt Practices Act in Merger and Acquisition Transactions: Successor Liability and its Consequences, 7 N.Y.U J.L. & Bus. 247, 292–330 (2010). 77. 15 U.S.C. § 78m(b)(6) (2018); see Robert C. Blume et al., FCPA Liability for Third-Party Conduct: Identifying Pitfalls and Minimizing Risk, Practical Law, Dec. 2018, at 30. 78. Williams et al., supra note 53, at 372. 79. R. Christopher Cook et al., The Foreign Corrupt Practices Act: Overview, Jones Day, https://www.jonesday.com/en/ insights/2010/01/the-foreigncorrupt-practices-act-anoverview#:~:text=Under%20 the%20terms%20of%20 the,with%20a%20 %22corrupt%22%20motive (Jan. 2010) [https://perma.cc/ E28T-U5ZZ] 80. Id. 81. Id. 82. Williams et al., supra note 53, at 388. 83. Id. at 372. 84. United States v. Kay, 513 F.3d 432, 432 (5th Cir. 2007). 85. Williams et al., supra note 53, at 372. 86. Id. at 375–76. 87. See 15 U.S.C. § 78ff(c)(3) (1977). 88. 28 C.F.R. § 80.1 (1992). 89. Id. 90. Williams et al., supra note 53, at 374. 91. Id. 92. Id. 93. See 15 U.S.C § 78dd-3(c)(2) (2020). 94. See Williams et al., supra note 53, at 388. 95. See Vuona, supra note 5, at 998. 96. Id. 97. Id. at 999. 98. See infra SOE discussion pp. 18 20. 99. Veronica Root, The Compliance Process, 94 Ind. L. J. 203, 216–17 (2019). 100. 15 U.S.C. §§ 78dd-1(f )(2), -2(h) (3), -3(f )(3) (2020); see Blume et al., supra note 77, at 3. 101. Largest U.S. Monetary Sanctions by Entity Group, Foreign Corrupt Practices Act Clearinghouse (FCPAC),

http://fcpa.stanford.edu/ statistics-top-ten.html (last visited May 11, 2020) [https:// perma.cc/9T8J-SY37]. 102. See Vuona, supra note 5, at 1022– 23. 103. See H.R. Rep. No. 95 –640, at 7 (1977). 104. 15 U.S.C. § 78dd-2(h)(3)(B) (1977). 105. Cook et al., supra note 79. 106. Guidance Document, supra note 35, at 8. 107. Id. 108. Resource Guide, supra note 3, at 60. 109. Id. at 64. 110. See U.S. Commercial Service, A Basic Guide to Exporting 221 (Doug Barry ed.,11th ed. 2015). 111. Blume et al., supra note 77, at 34. 112. Id. at 33. 113. Id. at 34. 114. Id. at 33. 115. Managing Bribery and Corruption Risks in the Oil and Gas Industry, EY, https:// www.ey.com/Publication/ vwLUAssets/EY-Managingbribery-and-corruption-risk-inthe-oil-and-gas-industry/$FILE/ EY-Managing-bribery-andcorruption-risk-in-the-oil-andgas-industry.pdf (last visited June 2, 2020). 116. Id. 117. See generally Transparency International, http://www. transparancy.org (last visited June 6, 2020). 118. Enforcement Actions in Nigeria, Stanford L. School, fcpa. stanford.edu/geography. html?country=NG (last visited Nov. 9, 2020). 119. See Largest U.S. Monetary Sanctions by Entity Group, supra note 101. 120. Williams, supra note 53, at 388. 121. Id. at 389. 122. Id. at 390–91. 123. See Blume et al., supra note 77, at 33. 124. Id. at 36. 125. Id. at 35. 126. Id. at 36. 127. See id. at 35. 128. Id. at 35. 129. Id. 130. Id. 131. Id. at 36. 132. Id. 133. See Press Release, U.S. Sec. & Exch. Comm’n, Halliburton Paying $29.2 Million to Settle FCPA Violations (July 27, 2017) (available at https://www.sec.gov/ news/press-release/2017-133) [https://perma.cc/RMU3-7389].

134. Id. 135. Williams et al., supra note 53, at 394. 136. Id. at 385. 137. John F. McKenzie, Foreign Corrupt Practices Act Compliance Issues for Import/Export Operations, 47 Int’l Lawyer 43, 44 (2013). 138. Deferred Prosecution Agreement B2-3, United States v. Panalpina, No. 10-CR-765 (S.D. TexNov. 4, 2010) (payments made to Nigerian Customs Service employees to avoid Nigerian customs duties and taxes). 139. Id. 140. Id. 141. See EY, Managing Bribery and Corruption Risks in the Oil and Gas Industry 8 (2014). 142. See Vuona, supra note 5, at 1019–20. 143. Resource Guide, supra note 3, at 57. 144. Id. 145. See id. . 146. See id. 147. See Guidance Document, supra note 35, at 2. 148. See generally Williams et al., supra note 53. 149. See Vuona, supra note 5, at 1022. 150. See Resource Guide, supra note 3, at 57–63. 151. See id. 152. Williams et al., supra note 53, at 386. 153. Id. 154. Id. at 373. 155. Roy K. McDonald & Vishali Singal, Risk-Based Due Diligence of Third-Party Intermediaries: A Scorecard Approach, DLA Piper (Oct. 24, 2013), https://www. lexology.com/library/detail. aspx?g=de707d62-3611-425095e7-8201756c6107. 156. See generally TransUnion, https://www.tlo.com/globalwatch-list (last visited June 2, 2020). 157. Thomas R. Fox, What Level of Due Diligence Should You Perform, FCPA Compliance & Ethics (Jan 19, 2018), fcpacompliancereport. com/2018/01/14974/. 158. Vuona, supra note 4, at 1019–21.

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Currents 24.2 2021

CURRENTS Vol XXIV, No. 2 | 2021

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Career Paths in International Corporate Legal Practice

Nick Cornor

Are Changes to the U.S. Patent System Objectively Killing Innovation?

Chief Compliance Officer Roundtable

Present and Future Data Privacy Outlook

General Data Protection Regulation and California Consumer Privacy Act: Background

Managing Cross Border Internal Investigations

Changing Landscape of International AntiBribery and Corruption Compliance

Anti-Bribery Laws and Investigation: Background

Cross Border Trade Compliance

Cross Border Trade Compliance: Background

Free Trade Areas for China's Belt and Road