News from the IBA - April/May 2013

IBA President meets with Aung San Suu Kyi as part of Southeast Asia tour

IBA President Michael Reynolds recently visited Myanmar (Burma) in February to meet senior legal and political figures including Daw Aung San Suu Kyi, former political prisoner, Nobel Peace Prize-winner and leader of the National League for Democracy, for preliminary discussions on how the IBA can assist in the country. The IBA President’s trip also included meetings with the Attorney-General, Chief Legal Adviser to the President, Chief Justice, several justices of the Supreme Court, the President of the Rangoon Bar Association and HM British Ambassador and his staff.

Before travelling to Burma, Reynolds had been in Thailand and Vietnam. In Thailand, he met with the leadership of the Lawyers Council of Thailand and a number of practising lawyers in Bangkok, including the Council’s President and Vice-President, Khosangruang and Boonma Tejavanija respectively, and Dej Udom Krairit. They discussed increasing cooperation between the two organisations, with Khosangruang stating that the Lawyers Council of Thailand would be pleased to see more specialist conferences organised by the IBA in Thailand, a jurisdiction with more than 50,000 qualified lawyers.

In Hanoi, Vietnam, the IBA President met with Pham Quoc Anh, the President of the Vietnamese Lawyers Association (VLA), members of its Council and its international liaison officers. He also met Le Thuc Anh, President of the Vietnam Bar Federation (VBF) – which regulates the legal profession in Thailand; VBF Council members; Nguyen Sy Hong, the officer in charge of international relations; and a number of practising lawyers in Hanoi. Both organisations stressed that they would like to participate more fully in IBA activities, particularly with regard to the IBA Annual Conference in Tokyo in 2014, and intend to apply for membership of the IBA.

IBA and Nippon Foundation launch Global Appeal 2013

On 24 January the Global Appeal 2013 to end stigma and discrimination against people affected by leprosy was launched by the IBA and The Nippon Foundation in London, at the Law Society of England and Wales.

Yohei Sasakawa, The Nippon Foundation’s Chairman, WHO Goodwill Ambassador for Leprosy Elimination and Japanese Government Goodwill Ambassador for the Human Rights of People affected by Leprosy, hosted the event alongside the IBA’s immediate Past President, Akira Kawamura. They were joined by Vagavathali Narsappa and Guntreddy Venugopal, representatives of an Indian organisation of recovered leprosy patients.

Sasakawa and The Nippon Foundation have worked for more than 30 years toward the goal of eliminating the scourge of leprosy (‘Hansen’s disease’) from the world. The Nippon Foundation has partnered with the IBA in its capacity as ‘the global voice of the legal profession’.

Together, the organisations will work towards increasing awareness about discriminatory laws and lobby governments for their repeal to ensure that the human rights of people affected by leprosy are upheld in accordance with the principles enshrined in the United Nations Universal Declaration of Human Rights.

BBC presenter Reeta Chakrabarti compered proceedings. The President of the Law Society, Lucy Scott-Moncrieff, welcomed the audience and Baroness Helena Kennedy gave the keynote address.

To view images, films and speeches from this event, go to tinyurl.com/NipponGlobalAppeal2013.

US prosecutes Standard & Poor’s as tide turns against ratings agencies

Tom Wicker

The tide of opinion has turned against the ‘big three’ credit rating agencies. Downgraded governments worldwide have been protesting ever more loudly about being held to ransom by organisations they blame for aggravating the financial crisis. But all of this huffing and puffing has been just that.

So, the Department of Justice’s (DoJ) decision in February to prosecute Standard & Poor’s (S&P) for allegedly defrauding investors out of $5bn in mortgage-related securities between 2004 and 2007 is a landmark action. So what has emboldened the US government?
The DoJ’s civil court suit alleges that S&P deliberately ignored internal warnings about the housing market, issuing inflated ratings to make itself and its parent company, McGraw-Hill, a profit, while falsely claiming commercial objectivity.

Cynics might argue that it’s no coincidence that the US government has singled out the agency responsible for its bruising downgrade from AAA two years ago. But whatever the reason, such a claim would have been difficult to bring in previous years due to the First Amendment.

Ratings issued by S&P, Moody’s and Fitch Ratings had long been considered constitutionally protected opinions. But in a summary judgement ruling in a fraud case last August – which included Moody’s and S&P as defendants – Judge Shira Scheindlin of the Southern District of New York cast doubt over this. She argued: ‘When a rating agency issues a rating, it is not merely a statement of that agency’s unsupported belief, but rather a statement that the rating agency has analyzed data, conducted an assessment, and reached a fact-based conclusion as to creditworthiness.’

Bill Carmody, a leading trial lawyer responsible for Susman Godfrey’s New York office, believes this paved the way to the DoJ’s action. ‘Once judges start to carve out pure opinions that are constitutionally protected into something less, it’s a way under existing legal precedent to put credit issuers in a potentially precarious position.’
The DoJ’s suit against S&P is novel for its use of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) as a stick with which to beat the agency. Other sovereign states lack such a statute ‘already on the shelf,’ says Jeffrey Manns, Associate Professor of Law at George Washington University.

‘The key from the standpoint of the S&P suit is that the government is leveraging the Act’s ambiguity. It recognises that there is not much in the way of precedent or for guidance to defendants as to the scope of FIRREA.’

Enacted in response to the 1980s banking crisis, FIRREA was dusted off by the US government in 2009 to ‘encourage’ banks into settling claims. Advantageously, a civil claim doesn’t need evidence beyond all reasonable doubt to be filed. And the Act enables the DoJ to subpoena S&P for documentation.

A win for the DoJ would set a major precedent in other cases in courts all around the country. ‘But the hard part will be to find a smoking gun,’ Manns explains. ‘The government has lots of evidence of underlings running amok. But that’s not the same as showing what happened at the corporate policy level.’

Put simply, colourful emails between employees may be embarrassing but – in and of themselves – don’t equal a slam-dunk guilty verdict. The US government’s burden s, as Manns says, ‘that it has to show both that S&P knowingly committed fraud and that this fraud affects a federally insured financial institution.’

The DoJ is also facing a scenario aptly compared by Manns to ‘the pot calling the kettle black.’ In part, the central concern of the suit is that the rating agencies failed to anticipate the nature and scope of the financial crisis. But neither did the US government or any number of international monetary funds.

Philip Wood, Special Global Counsel at Allen & Overy and a leading expert in cross-border financial law, argues that scapegoating the rating agencies is, at best, disingenuous. ‘Maybe people have short memories, but in April 2007 the IMF released a statement to say that conditions were benign! That was three months before the market froze.’

Overly conservative ratings issued by agencies fearful of being targeted ‘could turn out to be almost as bad as being reckless,’ Manns suggests. The ‘chilling effect’ of this on the debt markets currently lubricating the global economy might actually impede future growth.

Manns goes on to suggest that knocking S&P out of the picture entirely, through bankruptcy, could have the ironic consequence of turning an oligarchy of rating agencies into a monopoly – simply tightening a noose that governments claim is already chafing at their necks.

‘FIRREA is’, Manns has argued, a ‘blunt and inadequate tool to deal with systematic conflicts of interest.’ Ultimately, comprehensive regulatory reform via statutes such as the Dodd-Frank Act is the way forward. But whether the US government is willing to stop taking pot shots and truly tackle Wall Street is another story.

Omani British Lawyers Association launched

The IBA has welcomed the launch of the Omani British Lawyers Association (OBLA). The newly-formed association aims to provide a forum for lawyers working in Oman and the United Kingdom to share views on topics of mutual interest, hold conferences and seminars covering current issues and develop other opportunities.

At an event at the Law Society of England and Wales held on 6 March 2013, Paul Sheridan, Chair of OBLA and Managing Partner of SNR Denton, addressed a large group of attendees, including representatives from the Embassies of the Sultanate of Oman and the Kingdom of Saudi Arabia, private practitioners, law students and other interested parties. IBA Senior Staff Lawyer Mitzi Huang attended on behalf of the IBA.

More information on OBLA can be found at their website at www.omanbritishla.com.

PRIME Finance Annual Conference

IBA Executive Director Mark Ellis introduced a forthcoming joint IBA/PRIME Finance project for South Korea and Japan at a plenary session of the PRIME Finance Annual Conference from 28–29 January 2013.

PRIME Finance (the Panel of Recognised International Market Experts in Finance) is an independent organisation based in The Hague. It was established in 2012 to assist judicial systems in the settlement of disputes in complex financial transactions. The IBA has supported and been involved with the project from its inception under the leadership of William Calkoen and Jeffrey Golden.

In his address to over 150 participants, the IBA’s Executive Director highlighted the importance of an independent and competent judiciary and legal profession to maintain a stable global derivatives market. The IBA expects to engage the judiciary and legal profession in South Korea and Japan in these discussions in order to explore the opportunities and needs of complex financial dispute resolution in those regions.

Ellis emphasised that the IBA/PRIME Finance joint project is symbolic of the IBA’s growing interest in and commitment to the region. Since the opening of an IBA office in Seoul in 2011, the organisation has held conferences on international commercial arbitration, international sale of goods and competition law in East Asia.

More information on PRIME Finance is available at their website at www.primefinancedisputes.org .

The latest developments in the Anti-Corruption Strategy for the Legal Profession

In the next phase of the Anti-Corruption Strategy for the Legal Profession – a joint initiative of the IBA, Organisation for Economic Co-operation and Development (OECD) and the United Nations Office on Drugs and Crime (UNODC) – the IBA aims to inspire bar associations to take a more active role in leading the legal profession in the global fight against corruption.

With this in mind the IBA is delighted to welcome the launch of the Canadian Bar Association’s Anti-Corruption Team (CBA-ACT), a specialist unit created to monitor and respond to all matters pertaining to anti-corruption policy, programmes and compliance, while also providing anti-corruption educational resources for Canadian lawyers.

Having a team of this nature provides a strong focus and organisational structure for the CBA’s continued development of their anti-corruption initiatives – as will be demonstrated by their forthcoming International Law Conference entitled ‘Emerging Issues in International Corporate Social Responsibility, Corruption and Compliance’, due to take place in June 2013.

James Klotz, one of the CBA-ACT’s members, and a member of the IBA Management Board, has also been a key figure in a specialist IBA working group, which is currently developing guidance to help all bar associations improve their anti-corruption policies, and become a strong voice on behalf of the legal profession in the global high-level discourse surrounding the issue of corruption.

We hope this initiative will encourage other bar associations to take similar measures. For further details see tinyurl.com/CBA-Anticorruption.

The IBA is keen to learn of any anti-corruption initiatives implemented by bar associations. Please send any information regarding such programmes to the IBA’s Legal Projects Team at lpt@int-bar.org.

India: multinationals in the spotlight as officials get tough on tax

Pia Heikkila

Multinational corporations such as Vodafone, Shell and Nokia are rarely out of the business pages as the Indian tax officials seemingly never-ending chasing of unpaid taxes gives daily fodder to the Indian press.

But, while it’s tempting to lump all three companies’ cases together under the headline ‘unpaid taxes’, each is, in fact, very different. Take Shell, the Anglo-Dutch fuel giant. Indian tax officials are claiming unpaid taxes of over £1bn over an equity infusion undertaken four years ago worth £120m. The tax authorities are claiming that Shell underpriced its shares and as a result paid less tax on the internal shares transaction.

Shell India has described the demands as ‘absurd’ and says it will challenge the notion that alleged tax evasion is done by underpricing share transfer between member firms. ‘We do need the right signal that India is going to be a stable fiscal, legal, tax regime. We are not going to have surprises along the way,’ said Yasmine Hilton, the India Head of Royal Dutch Shell in a report by Firstpost.

The Finnish handset maker, Nokia, however, has come under fire for an entirely different reason. Nokia, the Indian tax department alleged, has violated the country’s transfer pricing rules. According to unanimous sources in the local media, Nokia’s case is related to tax payments the company made for supplying software from its parent company in Finland for devices produced in India.

Nokia India objected to officials entering its factory in Chennai, one of its biggest facilities and described the incident as ‘excessive, unacceptable and inconsistent with Indian standards of fair play and governance’.

Vodafone, on the other hand – the world’s largest mobile operator – is fighting a case over paying taxes of nearly £2bn on its 2007 majority stake buy in a local telecom company from Hutchinson. The company is also facing a charge from Indian authorities for underpricing an issue of shares of its Indian unit to a Mauritius-based group company by about INR13bn (£200m). But Vodafone is fighting back and denies the charges.

These cases have one thing in common: the tax is being collected on transactions retrospectively. It seems, the experts say that India has gone on a hunt for unpaid taxes to boost its coffers. ‘With the slowdown of the global economy – and, more so, the Indian economy – tax collections in the country have been below estimates. Further, with rising concerns over the fiscal deficit scenario, every attempt is being made by the tax authorities to shore up tax collections to bridge the gap,’ said Girish Vanvari, partner and Co-Head of Tax at KPMG in Mumbai.

It could look like a witch hunt for foreign of multinationals operating in India. But, says Devangshu Dutta, CEO of Third Eyesight, a Mumbai-based consultancy, ‘there is valid reasoning behind the government’s stand that for value gained on assets that are primarily in India, tax should be paid in India, and should not be avoided/evaded purely through offshore corporate structures that have no inherent value of their own.’

The lines between what is tax evasion and what is tax planning appear increasingly blurred today. ‘Each country should have their own rules but ultimately the idea is that you should pay appropriate taxes within the framework of law in that country,’ said Vanvari. ‘There is global trend by each country to increase their tax bases by taxing the superrich, transfer pricing adjustments, off shoring taxes and so on. Transitioning into these new concepts especially for years gone by is leading to debates, chaos and confusion.’

But continuing tax debacles can seriously tarnish India’s image and alienate foreign investors and companies alike. ‘Retrospective changes such as this affect the image of India as an investment destination not only in the eyes of foreign investors, but domestic investors as well,’ said Dutta.

Business leaders say there is much more to be gained from creating a policy environment that allows entrepreneurial and social energy to be unleashed – rather than be subjected to a constant barrage of rules and regulations.

Sadly, however, these cases and other tax-related litigation are not going to disappear any time soon experts warn.

‘However good or bad the case is, legal battles in India usually tend to be long. Once a tax demand is raised, a portion of the same needs to be deposited whilst litigation is ongoing,’ said Vanvari.

Ultimately India is still trying to get to grips with its own speed of change. But the government should be wary of sending out the message that it can bend the law at will.
‘In that environment, business and non-businesses that can contribute to positive changes and growth feel stifled and don’t do enough to achieve their own fullest potential, or otherwise they just move to another jurisdiction where they can,’ Dutta noted.

More news analysis stories from the IBA can be found at tinyurl.com/IBANewsAnalysis.