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Monday, July 6, 2015

Compliance integrity: the too hard basket

Trade Agreement prevents policing of government contractors?

U.S. Sided With Tax-Avoiding Companies Over Contracting Ban
The Obama administration quietly handed a victory to U.S. companies that avoid taxes by claiming a foreign address, suggesting that virtually all of them are still eligible for government contracts. A March 2013 memo was submitted to Homeland Security by one of the country’s largest inverted companies, the manufacturer Ingersoll-Rand Plc. The company argued in part that U.S. trade agreements with foreign governments invalidated the law that would prohibit it from winning federal contracts.

It’s unclear whether Homeland Security endorses all three of Ingersoll-Rand’s arguments or just one or two of them. In addition to arguing the entire law is invalid, the memo puts forth two other arguments that would cripple the contracting prohibition. Ingersoll-Rand argued that companies like itself that inverted to one foreign country and then switched to a third shouldn’t be considered inverted anymore. Under the law, it said, companies have to start out as U.S. firms to be inverted, and during its 2009 address change Ingersoll-Rand wasn’t American anymore.

That logic would also apply to many other inverted companies that fled Bermuda and the Cayman Islands to Switzerland or Ireland, such as oil-services providers Weatherford International Plc and Transocean Ltd. It would also mean that inverted companies could qualify for contracts simply by switching their legal address a second time.

Ingersoll-Rand also argued that firms that have business operations in their new corporate homes -- even modest ones -- should be allowed to bid on contracts under an exception in the law for companies with “substantial business” in their new domicile.

Ingersoll-Rand’s decision to switch its tax address from New Jersey to Bermuda in 2001, after more than a century as an American industrial icon, helped cut hundreds of millions of dollars from its tax bills and spur Congress to pass the 2002 contracting ban.

The company later changed addresses again, to tax-friendly Ireland in 2009, after increased U.S. scrutiny of tax havens. The top executives never left the U.S., and Chief Executive Michael Lamach now runs the company from a suburb of Charlotte, North Carolina. The company makes Club Car golf carts, Trane air conditioners, and Thermo King refrigerated trucks.

The Department of Homeland Security last year endorsed a legal memorandum that argued in part that a 2002 law banning such companies from federal contracts was invalid, according to a copy of the memo obtained by Bloomberg News. Although President Barack Obama later began publicly criticizing the tax maneuvers known as inversions, there’s no sign that he has reversed the department’s decision.

In a written response last year, a Homeland Security lawyer cleared Ingersoll-Rand for government work without explaining his reasoning, saying only that “we do not have reason to disagree” with the company’s argument. While it was known that Ingersoll-Rand received a green light, it hadn’t been reported that the government accepted a line of reasoning that called the whole law into question.

The correspondence came during a record wave of corporate address changes, including moves by Burger King and medical device-maker Medtronic Plc. Almost 50 companies have now inverted, most of them in the past five years, and a Congressional panel estimated last year that future inversions would cost the Treasury $19.5 billion in forgone revenue over the following decade. That’s good news for corporate expatriates like Medtronic, Eaton Corp. and Tyco International Plc.

Ottawa relaxes integrity rules for firms doing business with government
Procurement rules, introduced in March of 2014, made Canada far stricter than the U.S. and Europe, where convicted companies can win reinstatement and reduce their disbarment for coming clean and taking action to fix the problems. It also created the possibility that several major contractors – including Hewlett-Packard Co., Siemens AG and Montreal’s SNC Lavalin Group Inc. – would find themselves on Ottawa’s black list. That prompted SNC CEO Robert Card – who has been cleaning up the scandal-plagued engineering company he joined in 2012– to threaten that his company could “cease to exist” if Ottawa’s “meat cleaver” approach stood.

Canada’s business lobby lined up to pressure Ottawa to ease up and adopt the carrot-over-stick approach used elsewhere. Last February, the chiefs of Canadian Manufacturers & Exporters, the Canadian Council of Chief Executives and the Information Technology Association of Canada jointly wrote Ms. Finley that the integrity rules were “significantly out of step with Canada’s trading partners” and “negatively affecting investment in Canada now.”

Now, the Canadian federal government has softened the tough new anti-corruption rules. The changes ease what were considered draconian standards for suppliers who sell products and services to government, ranging from BlackBerrys to bridges. Under the new procurement rules, a supplier can still be barred from winning Public Works and Government Services Canada contracts for 10 years if it or any board members have been convicted or discharged in the past three years of a range of offences here or abroad. Those include bribery, money laundering or extortion. However, the decade-long ban can now be cut in half if the supplier co-operates with authorities and takes remedial action. With the previous regulations, no reprieve existed unless there were no other suppliers to do work deemed in the public interest.

“Under this new regime, companies who are criminally convicted or face ethical violations will bear the cost of proving to the government that they are a reliable business, not taxpayers,” Public Works Minister Diane Finley said in a statement.

The move comes after intense lobbying from industry, which warned of spreading economic damage because of the regulations introduced just 16 months ago. The changes could open the Conservatives to pre-election criticism that it has caved to corporate interests. “The government can rightly say it has improved some of the more blatant deficiencies of the previous system,” said Paul Lalonde, a Toronto lawyer who chairs the legal committee of Transparency International Canada, an anti-corruption group. “Will some critics say that it has watered it down in some ways? Likely yes.”

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