Saturday, January 24, 2009

TARP Relief Law Might Discriminate against Offshore Call Centers and Customer Support

“The change we need.” That was the campaign slogan of Barack Obama in 2008. It's time to explore what change is really needed.

TARP. After his Presidential inauguration on January 20, 2009, an early item on the Democratic Party’s legislative agenda is to change the way in which the U.S. Government monitors and controls the $700 billion in TARP funds used to recapitalize banks and other “assisted institutions” (such as broker-dealers converted into banks) under the TARP relief program. H.R. 384, “An Act to reform the Troubled Assets Relief Program of the Secretary of the Treasury and ensure accountability under such Program,” 111th Cong., 1st Sess., H. Rep. 111-3. While not directed against offshore outsourcing, the new “accountability” legislation could adversely affect offshore outsourcing and violate U.S. obligations on multilateral free trade under the WTO.

A Tool for Bashing Offshore BPO. On Day 1 after the inauguration, now comes Rep. Sue Wilkins Myrick (Republican, North Carolina) with an anti-outsourcing amendment from the floor. Her Amendment no. 8 to the TARP reform act would prohibit any “assisted institution that became an assisted institution on or after October 3, 2008,” from entering into “a new agreement, or expand a current agreement, with any foreign company for provision of customer service functions, including call-center services, while any of such assistance is outstanding.” Fed. Reg., Jan. 21, 2009, page H407. That’s right, if it receives U.S. capital contribution as shareholder or lender, it can’t expand its use of a “foreign company” (including a captive) as provider of call center or “customer service functions.” The scope of such a prohibition could capture a large portion of the BPO global services industry.

Rep. Myrick argued this protectionism is justified by a high local unemployment rate and the principle that U.S. taxes should not fund foreign jobs.

Parliamentary Circumvention of WTO? Parliamentary rules of courtesy invite speakers in opposition to such floor amendments. Well, Rep. Barney Frank (D, Massachusetts) rose in opposition, nominally, saying he supported the amendment but explained that it could result in a breach of WTO obligations. Rep. Frank hit the nail on the head:

But I do want to point out a difficulty that Members of this House should contemplate. We run the risk here that this may violate our obligations under the World Trade Organization. As someone who voted against joining, and I say that without any embarrassment, I would say to Members who will be joining, I believe, virtually every Member of this House in supporting the gentlewoman's amendment that perhaps it should lead them to rethink to having so enthusiastically subscribed to the WTO agreement without some changes. It certainly seems to us that while we do know the government is directly involved, spending its own money, you can have a requirement for domesticity. It is unclear what the interpretation will be here. The interpretation be not be purely an American one. It will be in the dispute resolution procedures of the WTO.

So as we go forward in this Congress and we are told about the advantages of a multilateral approach to trade, and I agree that, properly done, that is very advantageous, I hope Members who more enthusiastically than I embraced this principle will stop to think about it.

Some of us who were worried about the job impact of international economic relations have been derided as the reincarnation of Smoot and Hawley. Well, I guess Smoot and Hawley would have been with us on this one because it says companies who do business in America cannot go overseas for hiring. …

But the fact that we have the hook in the TARP doesn't change what the economics would be. So I welcome what I think is a renewed recognition for some and a belated recognition for others that a regime in which none of these considerations of local employment can be considered is not necessarily in our best interest. [Emphasis added.] Fed. Reg., Jan. 21, 2009, page H408.

Impact on Global Services Business. Providers and users of global services should monitor the legislative process to ensure the U.S. does not revert to the high-tariff exclusionary trade practices of the Smoot-Hawley tariff act of 1930 that spawned the Great Depression.

o The anti-call center TARP amendment passed by voice vote. No one called any one else to stand and be counted in support of a law that violates U.S. international obligations.

o Those voting for the anti-call center TARP amendment were warned about such a violation, and disregarded the warning.

o This issue will reappear and may disappear when the House and Senate adopt similar bills and meet behind closed doors in conference to adopt a single bill that each can then approve for transmittal to the President for signature.

o Maybe if the government were exercising rights as a shareholder in a TARP “assisted institution” such restrictions might be valid under WTO rules.

o This debate about TARP and offshore call centers and customer service functions is only a side show to new U.S. legislation on outsourced manufacturing and international trade regulation. Cong. Charles Rangel (Dem., New York) introduced a H.R. 496 on January 14, 2009, a bill “To amend United States trade laws to eliminate foreign barriers to exports of United States goods and services, to restore rights under trade remedy laws, to strengthen enforcement of United States intellectual property rights and health and safety laws at United States borders, and for other purposes.”

o This is also a side show to President Obama’s projected $850 billion stimulus package. If the terms of financial assistance will include banning new work for offshore call centers and offshore customer service functions, the U.S. can expect no mercy by foreign governments in retaliation against U.S. services.

Impact on U.S. Business and Workers. American businesses and even workers should consider the possibility of foreign retaliation. If the terms of U.S. governmental financial assistance will include banning new work for offshore call centers and offshore customer service functions, the U.S. can expect no mercy by foreign governments in retaliation against U.S. services. That could be another Smoot-Hawley wall-building exercise.

Valid Alternatives. There might be alternatives that do not violate the WTO rules. Consider (i) amending the terms of American accession to the WTO agreement, involving restructuring the global economic system, or (ii) adoption of special shareholder rights giving the government some rights in management, or (iii) identifying a justification under WTO rules for taking such action. But legislation like this TARP encrustation could raises concerns globally about the willingness of the U.S. to enter into the hard dialogues that need to be addressed to deal with these political issues consistent with existing U.S. multilateral obligations. Incidentally, the U.S. Trade Representative, who represents the President, is authorized to negotiate international trade agreements, not Congress. Of course, Congress approves trade agreements, so maybe this is just an opening invitation by Congress to have the USTR start some negotiations.
For info on U.S. obligations under WTO, see the General Agreement on Trade in Services and Government Procurement Code of the World Trade Organization

Friday, January 23, 2009

“NABOPIA” against Identity Theft:“ “Notifying Americans before Outsourcing Personal Information Act”

Worried about foreign governmental rules that might discriminate against American-sourced IT services? You should be.

Here’s a cute draft U.S. law that would require discrimination against foreign service providers processing personally identifiable information regarding American citizens. H.R. 427, 111th Cong., 1st Sess., introduced by Rep. Ted Poe (R., Tex.) would prohibit any “business” (defined as a financial institution collecting personally identifiable information) from transferring “personally identifiable information regarding a citizen of the United States to any foreign affiliate or subcontractor located in another country without providing that citizen written notice that such information may be transferred to such foreign affiliate or subcontractor.”

It gets better. The proposal would create a private right of action “to obtain damages, including compensatory and punitive; to obtain injunctive relief; and to obtain any other compensation, … in State court.”

The “NABOPIA” bill would nab all financial transactions. U.S. financial institutions would be liable for a reporting error (NABOPIA) rather than for actually transferring data across borders. Sort of like nabbing Al Capone on tax evasion rather than other crimes. Never mind that Canada, Switzerland and the European Union don’t discriminate against IT service providers based on the location of the service delivery center. Never mind that such discrimination violates the WTO Agreement on Trade in Services.

NABOPIA – sounds like UTOPIA.

Thursday, January 8, 2009

Outsourcing Law for Restoring Trust in the Global Services and Outsourcing after the Raju / Satyam Financial Fraud

What should an enterprise customer do to protect itself from a grand financial fraud by senior manager(s) of a globally respected IT or BPO outsourcing company?

This astounding question arises from the reported confession on January 7, 2009, by B Ramalinga Raju, founder and CEO of Satyam Computer Services, India’s fourth largest IT and outsourcing firm. Raju reportedly confessed to an abuse of trust involving understating assets and income and overstating liabilities, about a month after he made a failed proposal to engage in quasi-insider trading by using Satyam to acquire some real estate companies owned by his sons. The shockwaves from the confession sent the Mumbai stock market down 7.2% in a day on January 8, 2008.

The Raju / Satyam Shock Wave.
More likely, further shock waves will usher in a new era of global regulation covering securities issued by ITO and BPO service providers, auditing standards, conflicts of interest and thoughtful contractual precautions in outsourcing contracts for global services. I call will call it the Raju / Satyam Shock Wave. The Raju / Satyam Shock Wave will forever change the landscape for supply chain management, the global services industry and outsourcing contracts. We can expect globalization of new regulations, procedures, contractual provisions and software for corporate governance, risk management and compliance (“GRC”).

Restoring Confidence. Like auditors, consultants and advisors, lawyers play a role in creating a legal framework of trust, transparency and accountability in global services economy. Any such abuse of trust refocuses attention on tools for escaping from similar abuses in the future. So, what does the global services community need to do to restore confidence?

There are the inescapable lessons that came after the massive Enron fraud in early 2000’s, in which a few individuals inside the company and in the auditing firm were responsible for the collapse of both the company and the auditing firm and the loss of value by investors, employees, retirees and suppliers. In the U.S., the lessons learned were encapsulated and promulgated in the massive Sarbanes-Oxley Act of 2002.

A New Discipline.
In its visceral response, Nasscom hit the nail on the head: it’s time to install more discipline into corporate governance of BPO service providers in India. This begs the question: why not a more global, holistic approach to governance, risk and compliance? Many other questions arise too.

What Losses Have Been Suffered?
If Satyam’s reputation is damaged, what loss has Satyam’s clientele suffered? Is such loss compensable? What other rights do the clients have? This line of inquiry suggests a number of possible solutions.

New Contractual Clauses. Outsourcing contracts contain several standard clauses designed to protect against financial frauds by service providers.

New Audit Rights.
These contracts generally involve technical and operational audits, but not broad financial audits, of the service provider. Enterprise customers of BPO services generally rely upon the service provider’s corporate auditors to ensure the financial statements are not fraudulent.

Rights of Customers against Auditors. This is not new. Already, the Institute of Chartered Accountants of India (“ICAI”) reportedly filed a show-cause notice under its internal rules demanding that PricewaterhouseCoopers, Satyam’s auditors, face discipline. What rights do customers have against auditors?

New Representations and Warranties. Purchasers of goods and services from foreign suppliers generally do not ask for representations or warranties that the financial statements of the supplier are true, accurate and complete in all material respects. But major investors, banks and other lenders ask for such assurances. Should enterprise customers ask for such assurances? How can suppliers deal with these concerns? What should be the remedies for a breach? Termination rights? Partial termination? Change in pricing? Damages? Injunctive relief? Release from non-hire and non-solicitation covenants? It will be some time before new “best practices” are adopted to rebalance the risks of a huge financial fraud.

Choice of Applicable Law. Must the foreign service provider meet the local laws of the service recipient’s country? Or should there be differences, just like wage differences for “wage arbitrage,” where service recipients can shop based on “legal system arbitrage”?

New Termination Rights.
What rights can an enterprise customer legitimately ask for to protect against the risk a global services provider will implode? Implosions can come from disasters, unsustainable business operations, lack of redundancy, securities fraud and violations of applicable law by the CEO or by the enterprise. Termination rights might now include clauses taken from other industries, such as Hollywood (and maybe now Bollywood):

- “Morals” Clause. This clause allows termination of a contract if the “star” is caught up on scandal. It’s only a question of definition, and who decides when a scandal has occurred.
- A Special “Raju / Satyam” Clause. I’d like to know if anyone thinks a special clause is needed to protect against future frauds.
- Cross-Defaults. Bankers, famous for lending you an umbrella on a sunny day, understand implosion. They use cross-default clauses. Of course, such clauses are self-fulfilling prophecies, since any single default could trigger bankruptcy, hurting all customers.
- Code of Conduct. A breach of a code of conduct could be an omnibus termination right. But most Codes of Conduct are vague, and might be so vague as to be ineffectual against some frauds.
New Internal Controls. Happily, “governance, risk and compliance” software is now available from ERP vendors. Oracle touts its suite as complete, integrated business intelligence and analytics for GRC. Enterprise customers will now want to know more about those internal controls at their service providers.

New Auditing Principles.
India’s auditors will face the same music that American auditors did after the Enron debacle. Any conflicts of interest between giving consulting advice and auditing should be shut down.

New Corporate Governance Rules.
India’s securities laws for the protection of investors are nowhere near as stringent and pervasive as the American securities laws. The Raju/Satyam debacle has already inspired Nasscom and others to call for a sea change in regulation of BPO service providers. New Sarbanes-Oxley-type regulations will likely follow those that were adopted in the United States following the Enron debacle. So we can expect globalization of regulation of BPO service providers:

- Separation of Roles of CEO and Chairman.
- Development of a culture of corporate compliance (as a factor in the rules for
determining whether a criminal offense was aggravated and thus merits harsher punishment of white collar crime.
- Personal certification by CEO and CFO of quarterly financial statements.
- Internal reporting rules for “up the line” responsibility from each person in a managerial or financial role.
- Imposition of protections for whistleblowers, and designation of in-house attorneys as the whisteblower.

New National Legal Regimes. All this boils down to one conclusion. Legislators in countries promoting local outsourcing service providers need to play by new emerging global rules for restoring trust through corporate governance, risk management and compliance frameworks. In short, it’s also time to understand that differences in legal regimes constitute real economic risks. And harmonization of investor-protection laws can restore trust locally and globally.

New Headquarters.
Many Indian, Chinese, Russian and other outsourcing companies have incorporated in other jurisdictions to establish trust in their corporate governance regimes. The Raju / Satyam Shock Wave will tilt the selection process to favor such truly global companies who select predictable, “secure,” transparent and democratic legal regimes for their place of incorporation.

Developing New Strategies. These are issues for discussion with strategic lawyers who understand the outsourcing process, the role of outsourcing in corporate operations and risk management. Everyone in the sourcing industry should take advice on practical and legal solutions and strategies.. It’s never too early to review your rights, remedies, roles and responsibilities or to develop new strategies in response.