United States: International Client Alert, October 11, 2006

OPIC ANNOUNCES NEW ANTICORRUPTION PROGRAM

The Overseas Private Investment Corporation ("OPIC") announced on September 21 a new initiative to combat corruption and promote transparency. OPIC is a U.S. Government-owned corporation that provides financing and political risk insurance to U.S. businesses to assist them to compete in emerging markets and invest overseas when private sector support is not readily available. As part of the initiative, OPIC announced that it was endorsing the guidelines of the Extractive Industries Transparency Initiative ("EITI"). The EITI guidelines seek to enhance transparency in payments made by resource-rich countries in the developing world to companies in the oil, gas and mining industries. In addition, the EITI program promotes the use of revenues from extractive projects for sustainable development and ameleorating poverty, rather than the enrichment of individual officials.

OPIC has also announced that it will publish an Anti-Corruption Handbook that describes the requirements of the U.S. Foreign Corrupt Practices Act (the "FCPA") for project sponsors participating in overseas investments. The FCPA, among other things, prohibits U.S. companies from paying anything of value to foreign officials to obtain or retain business. In addition, OPIC indicated that it will establish a corruption ‘hotline’ to provide guidance to project sponsors and to allow the reporting of concerns on OPIC-supported projects.

OPIC’s announcement indicates that increased attention is being placed on anticorruption compliance in overseas infrastructure projects. For example, the World Bank recently announced plans to implement a voluntary disclosure program pursuant to which contractors in World Bank-supported programs can report unethical conduct. The Bank has also announced in recent years a growing number of debarments for companies found to have engaged in corruption on Bank-funded projects. Companies investing in or sponsoring overseas infrastructure projects should expect growing scrutiny of the industry by bilateral and multilateral lenders as well as U.S. enforcement officials.

For additional information on anti-corruption matters, please contact Bill Steinman,

The Court of Appeals for the Federal Circuit ("CAFC") in two recent decisions has largely upheld penalties assessed against Ford Motor Company for failure to properly declare the entered value of numerous imports over a period of years. In United States v. Ford Motor Company, slip op. 05-1584 (Fed. Cir. Aug. 30, 2006), the CAFC agreed with the Court of International Trade ("CIT") that Ford had violated the law by negligently failing to report assists and lump-sum direct payments "at once." However, the CAFC reversed two findings of the CIT. Specifically, the CAFC found that while the law required Ford to disclose the existence of provisional pricing at entry, Ford could not be penalized for that failure under the Fifth Amendment’s due process clause. At the time of the entries, the U.S. Customs Service had no regulations concerning anticipated pricing changes, such as were at issue in this case, and therefore, Ford was not on notice that it had a duty to disclose. While Customs argued that Ford’s internal procedures at the time requiring the disclosure of provisional pricing indicated that Ford had knowledge of the requirement, the court rejected this argument. According to the court the existence of an internal procedure does not create an inference that the defendant knew the procedure to be required by law and that to hold otherwise would create a disincentive to companies to adopt internal compliance procedures.

Additionally, the CAFC found that the CIT erred when it included entries for the 1992 model year in its calculation of penalties. Thus the CAFC remanded the case for recalculation of the $17 million in penalties consistent with its decision. In a companion case, United States v. Ford Motor Company, slip op. 05-1593 (Fed. Cir. Aug. 30, 2006), the CAFC again found that the due process clause of the Fifth Amendment prohibited assessing penalties for failure to disclose the existence of provisional pricing at entry, but found that this reversal had no impact on the penalties assessed. The court upheld the finding of gross negligence in certifying declared entry values as true and correct when they were not and in failing to notify Customs "at once" of post-entry payments. The court also affirmed the assessment of $3 million plus interest in penalties.

In recent months, on two separate occasions two CIT judges have found the "affected domestic producer" provision of the CDSOA¹ unconstitutional, although for different reasons. At issue in both cases is the requirement that in order to qualify as an "affected domestic producer" and be potentially eligible to receive payments under the CDSOA a company must have supported the original petition. In SKF USA Inc. v United States, slip op. 06-139 (Ct. Int’l Trade Sept. 12, 2006), Senior Judge Tsoucalas determined that this requirement that otherwise similarly situated companies had to have supported the petition in order to be eligible to receive benefits violated the Equal Protection guarantees of the Fifth Amendment to the Constitution. In the case SKF, a domestic producer at the time of the original investigation that opposed the petition, applied for a portion of the 2005 payment of duties on Antifriction Bearings from Japan.

The ITC had refused to certify SKF as eligible because SKF had opposed the petition, while certifying Timken, another domestic producer, that had supported the petition. The CBP ("Customs") refused to pay any of the funds to SKF because SKF was not certified as an affected domestic producer. The court found that the purpose of the antidumping law was to "equalize competitive conditions between foreign exporters and domestic industries affected by dumping." (emphasis in the decision) Noting that the antidumping statute ensures the competitiveness of industries not individual companies, the court determined that there was no rational basis to distinguish between those members of the domestic industry that supported the petition and those that did not. The court found that this portion of the Act was severable and remanded the decision to the ITC and Customs to review SKF’s application for a portion of the 2005 disbursement.

In the other case, PS Chez Sidney, L.L.C. v. United States, Slip Op. 06-103 (Ct. Int’l Trade July 13, 2006), Judge Wallach found that the "affected domestic producer" provision of the Act violated the free speech provisions of the First Amendment to the Constitution. According to the decision, a critical element to this country’s democracy is "the ability to speak about proposed government action on pressing public issues without fear of government retribution and without the requirement that a particular position be supported." The court was concerned with the dilemma faced by companies that in order to receive benefits they must publicly support the petition, but are also required by law to give their honest opinion, even if that adversely affects their ability to receive funds under the CDSOA. Thus, the court reviewed the provision under the strict scrutiny standard and in so doing found that while the government needed to seek certain information, the request for such information could be more narrowly drawn (e.g., asking the companies to indicate whether they were injured by the subject imports) than is the question whether the companies support the petition. Therefore, the court found that under the strict scrutiny test the requirement that a company publicly state its support for the petition in order to be eligible for the disbursement of funds under the CDSOA violated the First Amendment to the Constitution. However, unlike the more recent decision, in this case the court reserved judgment on the questions of severability and remedy. The court also stated that there was no reason to delay appeal of its decision to the CAFC. Therefore, we can expect to hear more on this issue.

A series of defeats in the WTO dispute settlement arena is causing the United States to revise the methodology it uses to determine whether a foreign exporter is dumping. The WTO Appellate Body has issued three separate decisions where it found that the use of zeroing to calculate dumping margins violates the United States’ obligations under the WTO Agreement. In previous rulings, the WTO has found the Department of Commerce’s ("DOC") use of zeroing when comparing weighted averages to weighted averages in investigations, and when comparing individual transactions to weighted averages in an administrative review violates the WTO Agreement.

In its most recent ruling on zeroing, issued on August 15th, the Appellate Body of the WTO determined that the DOC’s use of the "zeroing" method when calculating antidumping duties in investigations where DOC calculates the dumping margin using the "transaction-to-transaction" method also violates its WTO obligations. The Appellate Body’s ruling overturned a WTO panel ruling issued on April 3, 2006 that upheld the use of "zeroing" in antidumping investigations where the dumping margin is calculated by using the "transaction-totransaction" method.

The United States’ use of zeroing has been a controversial and long-disputed issue. "Zeroing" is the term given to a practice that DOC employs to calculate the margin in antidumping cases. In an investigation, DOC most commonly uses the "weighted average" method of calculating dumping margins. Under the "weighted average" method, DOC divides the specific products under investigation into comparable groupings based on physical characteristics. DOC then compares the average export price of those products to the average normal value. In cases where the average normal value is higher than the average export price, and no dumping is found, the DOC would set the value at zero before averaging that group’s margin with other groups’ margins, instead of using the negative value. The Appellate Body has found on two occasions that the use of "zeroing" in investigations that use the "weighted average" method violated the WTO Agreement. In response, DOC has begun the rulemaking process to determine how to calculate margins in such circumstances.

In April 2006, the Appellate Body ruled that DOC’s zeroing practice in administrative reviews also violated the WTO Agreement because it resulted in the assessment of duties in excess of the margin of dumping for individual companies. In reviews, DOC typically calculates average normal values to which it compares individual U.S. sales. If the U.S. sales price is below the normal value that creates a positive margin. If the U.S. sales price is above the normal value that creates a negative margin. The United States then aggregates the individual margins to calculate the overall margin of dumping; however, in aggregating the values it sets the negative margins to zero. This increases the margin of dumping above what it would be if all the values were fully reflected in the aggregation.

The Appellate Body’s August 15 decision overturned the WTO compliance panel’s decision regarding the use of "zeroing" when the "transaction-to-transaction" method is used to calculate dumping margins. On April 3, 2006 a WTO compliance panel had ruled that using "zeroing" in investigations that calculated the dumping margin using the "transaction-to-transaction" method did not violate the Appellate Body’s prior rulings. In its opinion, the Appellate Body stated that the use of "zeroing" violates both Article 2.4.2 and Article 2.4 of the WTO Antidumping Agreement. The Appellate Body found that the use of "zeroing" even when using the "transactionto- transaction" method to calculate the dumping margin was prohibited under Article 2.4.2. of the WTO Antidumping Agreement because that provision requires the investigating body to consider the results of all comparisons and it may not disregard the results of comparisons where the export prices are greater than normal value. In addition, the Appellate Body found that the practice also violates Article 2.4 of the WTO Antidumping Agreement, which requires a "fair comparison" of products.

The underlying issue in all three margin calculation methodologies in these cases is the method used to aggregate individual margins. The DOC’s methodology inflates that aggregate value by not reflecting fully the individual margins found when some of those individual margins are negative. In April 2006, DOC sought comments on proposed rules regarding the appropriate method of calculating dumping margins after the Appellate Body ruled that its use of zeroing in conjunction with the "weighted average" methodology for calculating dumping margins violated the WTO Agreement. Moreover, in August 2006 the United States and the EU announced agreement that the United States has until April 2007 to comply with the ruling that found that DOC’s use of zeroing in a weighted average-to-individual transaction comparison during a review violated the WTO Agreement.

Confusing the situation, a WTO dispute resolution panel issued a report on September 20, 2006 finding that the United States’ use of zeroing when calculating margins using the "transaction-to-transaction" methodology does not violate the WTO Agreement. The panel did find that the use of zeroing when making weighted- average-to-weighted-average comparisons in an original investigation violated the WTO Agreement. This most recent panel, however, in order to find no violation of the other methods relied heavily on the reasoning employed by the panel in the April 2006 decision that was recently overturned on appeal. Given the Appellate Body’s August 15 determination, it is almost certain that this most recent panel’s finding will be overturned on appeal. In addition, the European Union has initiated a new complaint against the United States regarding DOC’s use of zeroing in 37 cases, including investigations, administrative reviews, and sunset reviews. These cases were not covered by the Appellate Body’s April 2006 decision.

For practical purposes, DOC no longer has the ability to use "zeroing" when calculating dumping margins without violating the WTO Agreement. How the United States will adjust its methodologies to meet its obligations has yet to be determined. Only once the methodology is determined can its impact on future cases be known.

Lucent Technologies
On September 5, Lucent Technologies reported in its filing with the Securities and Exchange Commission (the "SEC") that it received a "Wells" notice from the SEC arising from alleged violations of the FCPA. In 2004, Lucent fired all of the top executives of a Chinese subsidiary following an internal investigation into allegedly improper payments to Chinese officials to secure contracts.

Former ITXC Corp. Executives
On September 6, the DOJ announced that Yaw Osei Amoako, a former regional manager of ITXC Corporation, pleaded guilty to one count of conspiring to violate the anti-bribery provisions of the FCPA and to violate the Travel Act in connection with the payment of approximately $266,000 in bribes disguised as "commissions" to senior officials of government-owned telephone companies in Nigeria, Rwanda and Senegal. The alleged bribes were intended to influence the officials’ decision to award ITXC contracts for the transmission of telephone calls in those countries. The sentencing is scheduled for December 11, 2006.

On the same date, the SEC announced that it filed a complaint against two other former ITXC executives for their role in same bribery scheme in Nigeria, Rwanda and Senegal. Steven J. Ott, the former Vice President for Global Sales, and Roger Michael Young, the former Managing Director for the Middle East and Africa, were charged with violating the FCPA by allegedly approving, and in some cases negotiating, bribes that ITXC paid to the officials of telecom companies in the three countries. The complaint also alleges that the defendants caused ITXC to record improper payments of $267,468.95 as legitimate business expenses on its books and records in violation of the FCPA.

Former Willbros Employee
On September 14, Jim Bob Brown, a former supervisory employee of Willbros International Inc., pleaded guilty to conspiring to violate the FCPA. According to the Department of Justice, Brown engaged in three separate bribery schemes to secure government contracts in Nigeria and Ecuador on behalf of Willbros.

Specifically, Brown and another Willbros International executive arranged for the payment of approximately $1.5 million in cash in Nigeria as part of a conspiracy to make corrupt payments to officials of Nigerian National Petroleum Corporation and its joint venture, in order to obtain gas pipeline construction business in Nigeria. The payment was allegedly part of a larger, multi-million dollar foreign bribery scheme involving a Willbros consultant and Nigeria-based employees of a German engineering and construction company. In addition, Brown admitted that he conspired with a Willbros consultant to pay at least $300,000 to officials of PetroEcuador, the Ecuadorian government oil company, to obtain a gas pipeline rehabilitation contract and other potential future business. Finally, Brown admitted to participating in a scheme between 1996 and 2005 in which Willbros employees fabricated company invoices and submitted them to its corporate parent in Houston to obtain cash that was used for bribing Nigerian tax and court officials. Brown is scheduled to be sentenced on November 30. He is facing up to 5 years in jail and $250,000 in criminal penalties.

On the same day, Brown settled civil charges brought against him by the SEC for the same conduct. The court has yet to determine whether to order Brown to pay a civil penalty or the amount of any such penalty. As reported in our October 2005 client alert, Willbros Group is under on-going investigations by the DOJ and SEC for alleged FCPA violations.

Right before the Labor Day Holiday, BIS issued amendments to the EAR which changed considerably the treatment of exports of items on the CCL to Libya. These changes were the inevitable result of the action of the State Department on June 30, 2006, which rescinded the designation of Libya as a state sponsor of terrorism.

Under the new rules a license will no longer be required for commodities that are EAR99 or that were controlled for anti-terrorism ("AT") reasons. All other items on the CCL will require a license to Libya. Foreign made items on the CCL that incorporate a minimum of 25% U.S. origin content also will require a license. BIS has indicated that license applications for these commodities will be considered on a case-by-case basis and will not be subject to a presumption of denial.

A number of significant controls on exports to Libya remain unchanged after the BIS amendments. First, the BIS action has no effect on DDTC’s continuing policy of banning exports of defense articles and services to Libya.

Second, the BIS action does not affect existing restrictions on exports related to "installed base" items in Libya. "Installed base" items are items that were exported to Libya prior to April 29, 2004, the date on which the comprehensive embargo against Libya was lifted. U.S. companies cannot engage in any activities with respect to the "installed base" without a prior license or report to BIS. Whether or not a license or report is required depends upon the type of export. Exports of items that weren’t on the CCL, were on the CCL and were controlled for reasons other than anti-terrorism ("AT") or national security ("NS") reasons, or are subject to export to Libya pursuant to a license exception, only require a report. All others require a license prior to engaging in any activities regarding such "installed base" items.

Third and finally, although OFAC removed a number of Libyan enterprises and government officials from the SDN list back in April 2004 when the comprehensive embargo was lifted, there are still a number of Libyan individuals and entities who remain on the list. Unlicensed transactions with Libyan SDNs remain prohibited notwithstanding the BIS amendments.

On September 12, OFAC announced new restrictions it is imposing on Iran’s Bank Saderat. The bank, which is state-owned, is one of the largest banks in Iran.

Under the new rules, effective retroactively to September 8, 2006, exceptions in the Iranian Transaction Regulations ("ITR") which permit certain Iran-related transactions will no longer be applicable to Bank Saderat. Iran responded by calling the U.S. actions "childish." Under the new rules, Bank Saderat will no longer be eligible for the exception in Section 560.516(a)(1) of the ITR which permits "U-Turn" transactions. These are transactions which involve transfers between a U.S. branch of a foreign bank and an overseas branch of a foreign bank. For example, Bank Melli Iran can send funds from its account at a German bank through the German bank’s correspondent in New York to an Italian bank. This is called a "U-turn" transaction because the instructions from Bank Melli do a "U-turn" in New York and route the funds immediately back outside the United States.

In addition to such "U-turn" transactions, the new rules eliminate Bank Saderat’s eligibility for the exceptions in sections 560.516(a)(2)-(4). These exceptions permit U.S. financial institutions to handle certain other transfers, including transfers relating to licensed transactions, family remittances and humanitarian donations, between U.S. financial institution and foreign banks (including Iranian banks). These are permissible as long as no U.S.-based accounts of Iranian residents or the Government of Iran are credited or debited.

Effective September 8, 2006 (but with certain exceptions for transactions already in process by that date), the above exceptions will no longer apply to Bank Saderat. OFAC premised this action on its finding that Bank Saderat had been a "significant facilitator" of the financial activities of Hizballah and had been a conduit between the Government of Tehran and various terrorist organizations including Hizballah and Hamas. Other Iranian financial institutions are not covered by the amendment, so that licensed transactions, family remittances and humanitarian donations will not be affected; they will simply have to be handled by other Iranian banks.

Supermicro, Inc., a computer hardware manufacturer based out of San Jose, California, pleaded guilty on September 18 to a criminal export violation and agreed to pay a criminal penalty of $150,000. Supermicro admitted that on or about December 28, 2001, it shipped 300 motherboards, worth just under $30,000, to a company in the U.A.E. knowing that the motherboards would be immediately re-exported to Iran. At the time of the export, the motherboards were subject to National Security controls and required a license for export to Iran.

Previously, on September 7, Supermicro and BIS agreed to settle claims made by BIS in a charging letter alleging violations arising out of other exports by Supermicro that were destined to Iran. The charging letter lists exports by Supermicro of motherboards, superservers and computer chassis. Supermicro settled these allegations in the charging letter by an agreement to pay a civil penalty of $125,400. Interestingly, the exported computer chassis referred to in the BIS charging letter are EAR99, i.e. not subject to a BIS license requirement. BIS premised the violations for the exports of the chassis on EAR § 746.7 which notes that OFAC authorization is required for shipments to Iran under the Iranian embargo. Failure to obtain that authorization for an EAR99 item was then viewed by BIS as a violation of EAR § 764.2(a).

On August 18, 2006 the Department of Commerce and the Bureau of Customs and Border Protection ("CBP") suspended the antidumping and countervailing duty bonding privilege for new shippers from April 1, 2006 until June 30, 2009. The suspension of the new shipper bonding privilege was passed as part of the pension reform bill that the President signed into law on August 17, 2006. New shippers from Canada and Mexico are exempted from this law and may still post bonds.

Before the suspension, shippers that did not export the goods that were subject to the antidumping or countervailing duty order during the period of investigation and were not affiliated with any exporter or producer who did were allowed to post a bond or security instead of a cash deposit of estimated duties. Critics of the new shipper bonding privilege claimed that it allowed evasion of antidumping or countervailing duties. According to the critics, new shippers who posted bonds often defaulted on the bonds and avoided paying the duties.

Under the new provision, new shippers must post a cash deposit of estimated duties for each entry made during the new shipper reviews. The suspensions will have a direct impact on some cases from China including crawfish, honey, garlic, and shrimp that have several on-going new shipper reviews.

Office of Trade: U.S. Customs and Border Protection ("CBP") is forming a new office to oversee its national trade policy. The new Office of Trade will begin operating on October 15, 2006. The office will combine the functions of trade policy, program development, and compliance measurement. Currently these functions are split between the Office of Strategic Trade, the Office of Regulations and Rulings, and the Office of Field Operations. Dan Baldwin, currently the Assistant Commissioner for CBP’s Office of Strategic Trade will lead the new office.

Counterfeit Nikes: September 5, 2006 the Departments of Justice and Homeland Security announced that they had busted a smuggling ring that between May and July of this year had imported 135,000 pairs of counterfeit Nike Air Jordan shoes with a retail value of $16 million. Six men have been charged in connection with the operation, which is one of the largest counterfeit goods busts in recent years. Charges include bribery of a public official and trafficking in counterfeit goods.

Textile Seizures: CBP is wrapping up an active year in tracking apparel quota violations. CBP announced that it had seized over $100 million in wearing apparel and textile goods since October 2005. CBP has been giving its import specialists extensive training to enable them to target violations of various Free Trade Agreement requirements. As part of its stepped up enforcement efforts, CBP has conducted verifications at nearly 450 factories in 12 countries to verify that wearing apparel shipped to the United States was actually produced at the claimed facility.