Fraud in Sharp Business Practices

This paper examines the issue of bringing in criminal intent into business dealings known as sharp business practices and to bring out the issues involved, the existing precedents on the subject and future directions. It has generally been held that for to establish criminal charges in sharp business practices, courts require proof of a quid pro quo arrangement between the sources of information and the person trading on it.1 A high proof of evidence is required for establishing the criminal charge; a US court of appeal overturned the conviction in a case where it found that the evidence was insufficient to establish the knowledge of the available benefits.2

In specialized trades the issue of fraud has been reviewed by US courts, and currently the courts are of the opinion that in specialized transactions element of deceit does not exist. Recently, a US court of appeals has quashed the sentence awarded in such a case. Courts are reluctant to term sharp business practices involving sophisticated parties as fraudulent on grounds that these transactions do fall within the domain of breach of contract and do not constitute a criminal offence.3 A corporate officer's fiduciary duty when combined with a mail or wire communication is not sufficient to establish mail or wire fraud.4

Issues involved Interesting it would be to review the facts of HSBC executive case in which a criminal complaint stands lodged in the US Federal District Court 5 in Brooklyn, New York. As per the facts available, the NY prosecutors have accused two former bank executives at HSBC 6 of a conspiracy to defraud a company by deliberately buying pounds ahead of the customer's sterling purchase and by reselling it to the client at a higher price. It has been alleged that by doing so, traders made $3 m in profits in their own trading book. The bank received $5 m in fees. The bank executives are now being accused of 'wire fraud'7, 'front running'8 and 'trading ahead'.9

The prosecution of bank executives has raised a number of important questions of law, say for example, whether or not taking advantage of a client's decision to engage in a currency transaction by trading ahead 10 of customer's larger order does constitute a fraudulent scheme? Did the act of ramping the price in bank controlled accounts due to less favorable exchange rate cause a loss to the bank's clients through the use of inside information which as is alleged provided an opportunity to bank executives to reap a nice profit? Another question is whether or not the narrated facts lead to commission of a wire fraud.

As per wire fraud statute, the prohibitions include: 

i. Scheme or artifice to defraud another person of money or property ie a deliberate misrepresentation of facts or false promises that are likely to affect the decision of a party on other side of the deal. However, not all conduct that strikes a 'sharp dealing' or 'unethical conduct' can be termed a scheme or artifice to defraud.11

ii. False or fraudulent pretenses, representations or promises.

iii. Such fraudulent information is transmitted or causes to be transmitted by means of wire etc;

The offenders in this case are also accused of committing: 

i. The act of front running;12 and

ii. Inside trading 13

Existing precedents The debate is over the act of fraud alleged to have been committed by the accused. What is an act of fraud has been elaborated by a United States Court of Appeals for Second Circuit in Manhattan;14 the court held that in absence of evidence of an act of misleading, defrauding, or deceiving one's clients, the charge of fraud cannot be established. It may also be noted that in various other cases the US Courts have explained the requirements to constitute an act of 'Fraud': These requirements include:

a. A deliberate misrepresentation of facts or making of false promises that are likely to affect the decision of a party on the other side of the deal.

b. Some form of deception and not just taking advantage from client's actions, [this element is necessary for establishing the violation of law].15 In fact a party may not misrepresent material facts about an asset during a negotiation to sell it.16

c. An act of communication by wire etc with the customer on the deal.17

d. Existence of a lie

Future directions The complaint in the present case alleges that all the elements necessary to constitute a fraud are present in the case. The prosecutors have alleged that:

i. The bank executives misled the company about the best way to execute the currency transaction and about the price increase at a specific time;

ii. The bank executive told a lie by stating that the increase in price was the result of a heavy buying by a Russian;

iii. The bank executives failed to disclose to the client that the bank was ramping the price of the pound;

iv. There was an element of 'joy' in the mutual communications of bank executives after the deal was over;

v. The executives told a lie by stating that the bank was 'taking action' regarding the issue of ramping the price of currency and failed to explain how bank's earlier trade affected the price;

vi. The said acts of bank executives dissembled to keep the customer form learning how HSBC was taking an advantageous position ahead of the expected large trade;

The moot points in this case are likely to be as follows: 

i. Whether any of the statement described in the complaint adds up to a fraud or a misrepresentation?

ii. Were there misstatements about the price of the pound?

iii. Whether anything actually deceived the company which was important for its dealings?18

Even in cases where insider trading is alleged, the requirement for such an offence includes something tangible and concrete. And there must be proof of a quid pro quo arrangement between the source of the information and the person trading on it.19

It may be noted that in an alleged fraud case an appeals court found insufficient evidence to convict an accused where the available evidence did fail to prove a planned knowledge of the accused about the benefit gained; and since the pre knowledge is a requirement for establishing a criminal violation; hence in absence of such evidence the court concluded that the offence of fraud does not stand established.20

This interesting debate which challenges SEC's attempt to criminalize sharp business practices and to bring the culprits within the domain of fraud is likely to the settled by the US Supreme Court when it decides a pending case namely, Salman v. United States, which is likely to be heard in October 2016.21

Conclusion The present trend of the judicial precedent is tilted towards the requirement of presence of planned scheme to deceive, pre knowledge of benefits or personal gains to be reaped and the character necessary to show benefit through insider trading. It is thus required to find something tangible to establish mens rea or criminal intent of the accused. It is evident from existing precedents in financial services sector that the courts are of the view that contractual obligations be treated as falling outside the scope of criminal liability. The existing standards laid down by courts in this regard treat financial services sector as an outcome of contractual obligations and away from criminal liability unless and until proved so with the support of clear evidence.

(The writer is an advocate and is currently working as Managing Partner at Azim-ud-Din Law Associates Karachi)

1. Dirks v. Sec 463 US 646 [1983]

2. US v. Newman Nos.13-1837-cr (L), 13-1917 [2014]

3. In United States v. Weimert No 3:14-cr-0002,-JDP-1 decided April 3, 2016 the seventh circuit in Chicago held that lies told by a bank officer to both side during negotiations for selling a property investment could not be the basis for wire fraud conviction. The court found insufficient evidence of fraudulent intent at the time of sales.

4. US v. Kwiat 817 F.2d 440 [7th Cir. 1987].

5. See, Petter J. Henning, 'Finding the Fraud in the HSBC Currency Trading Case, The New York Times, July 25, 2016".

6. HSBC itself is not accused of any wrongdoing.

7. See 18 US code § 1343, whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. However, the law does not cover all behavior which strays from the ideal, [See US v. Colton, 231, F. 3d 901].

8. Someone with advance knowledge of a specific market order in shares, bonds or currency from a client steps in ahead and buys for their own account. When the client's usually much larger order is executed it drives up the prices, the private purchase is sold at ramping prices leading to a profit. Front-running thus occurs when a firm trades ahead of a customer's large order that is likely to move the market, profiting off the inside knowledge of the impending change in the price. As per rules issued by Financial Industry Regulatory Authority, the act of front running is prohibited.

9. Trading ahead occurs when a specialist trades from his proprietary account before executing trades for public customers.

10. See Finra Rule 10 b-5 which is the primary anti-fraud provision in cases relating to securities, and protects persons who are deceived in securities transactions to make sure that buyers of securities get what they think they are getting.

11. [US v. Colton, 231 F.3d 890 (4th Cir 2000)]

12. Because the trading is not necessarily deceptive, even though it breaks the rules for brokerage firm

13. In order to prove inside trading there must be the existence of a fiduciary duty

14. See United States v. Finnerty 474 F. Supp 2d 530 [S.D.N.Y. 2007]; the principal issue considered in this case was whether the conduct of the trader of inter positioning amounted to deception within the meaning of federal securities law.

15. Not just taking advantage of clients even if it costs them money.

16. For example, a seller or his agent may not falsely tell potential buyers or investors that a piece of property has no history of environmental problems if soil and groundwater contamination on the property was disallowed the year before. The buyer would be led to purchase a property worth far less than she was led to believe, given the looming remediation cost. The information not revealed would be material to the price buyers of security are willing to pay, See United States v. Morris 80 F. 3d 1151 [7th Cir. 1996].

17. Though the bank was not obliged to disclose the escalating costs

18. HSBC'S own review of the transaction found no violation of its code of conduct and this fact would be used by the accused to argue that they did not commit a crime.

19. Dirks v. SECP

20. Id. n2

21. Peter J. Henning, "Supreme Court may redefine insider trading law", The New York Times August 03, 2016.

 AMERICAN JURISPRUDENCE AND INTERNATIONAL LAW


 In an age of a conflict arising out of individual liberty and national security, the US Supreme Court has maintained a balanced approach towards interpreting the presidential actions concerning national security and in many instances, the court restrained to intervene following the principle that laws are silent during wartime. During major wars namely, civil war, World War I and World War II, the US Supreme Court restrained itself to intervene in matters relating to protection of individual liberty. The lower courts, however, invoked the political question doctrine as a basis for declining to decide issues concerning Vietnam War. Nevertheless, the Supreme Court, showed willingness to resolve cases of national security but interpreted presidential powers very broadly, for example, Curtis-Wright decision,1 and in the infamous Korematsu decision, the court showed broad deference to executive powers.2

It was the steel case in which the US Supreme Court held that President Truman had exceeded his powers by seizing the steel mills in the country during the Korean War.3 The case marked a shift in the court's approach. The court took the view that during the war, President does not have a 'blank check'. Similarly, the decisions on war on terror lead to the development of contextual case-by-case approach.

Compared to the past and in order to decide national security cases, the US courts nowadays seek information on the subject matter in more detail. The US courts also consider the fact that how other countries in the world have sorted out similar problems, as their examples can enable the US courts to find out the real constitutional problems.

In American jurisprudence, the subject of international commerce revolves around four important cases, namely, F. Hoffman-La Roche Ltd v. Empagran S.A.,4 Intel Corp v. Advance Micro Devices Inc,5 Morrison v. National Australia Bank Ltd,6 and Kirtsaeng v. John Wiley & Sons Inc 7 In these cases the Supreme Court was confronted with the following problems:

a) The extra-territorial application of the US anti-trust law;

b) The ability to obtain discovery of evidence relating to foreign proceedings;

c) Extra-territorial application of the securities fraud statute; and

d) Application of 'first sale' doctrine in the US copyright law in respect of goods first sold outside the United States.

In these cases, the US Supreme Court considered the reciprocity of the application of the US laws abroad and the court came to the following conclusions: 

a) The US Supreme Court ordinarily construes ambiguous statutes to avoid unreasonable interference with the sovereign authority of other nations.8

b) The Supreme Court may consider the international comity in deciding whether and to what extent to apply US laws abroad. In the court's conception of comity, the view one emphasizing the more formal objective of simple conflict avoidance to the more practical objective of maintaining co-operative working arrangements with corresponding enforcement authorities of different nations is generally favored.

In the case of Filartiga v. Pena-Irala 9, the US Supreme Court was confronted with the issue of human rights and in the case of Sosa v. Alvarez-Machain 10 the court closed this open issue. The Sosa case was misinterpreted by lower courts as suits under ATS law against multinational corporations continued to increase and led to emergence of conflict in foreign relations.

Attention is drawn towards the US Supreme Court's decision namely, Kiobel v. Royal Dutch Petroleum Co 11 in more detail where the Court had held that: 

i. Under ATS law, the claims are subject to presumption against extra-territoriality;

ii. Relief sought in the case was refused as these claims demanded a relief for the violations of the laws of foreign nations occurring outside United States.12

Many readers interpreted this case in a narrow sense; the fact is that the decision does not bar claims by victims of foreign human rights abuses when brought against individuals residing in the United States.

In a few notable cases, the emphasis has been on the Hague convention and on the civil aspects of international child abduction.13 In another case, Abbott v. Abbott the US Supreme Court considered the custody right under the international convention.14 In Lozano v. Montoya Alvarez, the court considered whether or not in the given time frame and under the convention, the case fell within the framework of equity.15 These cases show that how the court extended its learning scope with regard to foreign laws, customs and practices.

A special note had been taken by the Supreme Court in the case of BG Group PLC v. Republic of Argentina.16 In this case, the court concluded that:

I. A US court should give deference to an arbitrator panel's interpretation of a local litigation requirement provided in an investment treaty arbitration clause.

II. How can courts exercise judicial review of arbitrator decisions to ensure that awards are fair and consistent with domestic laws, without undermining the efficiency and neutrality of the arbitrator system?

Many international organisations have now taken over the traditional tasks of domestic governments. And an element of uncertainty did emerge that to what extent the National Constitution permits the role assumed by the international organisations or in other words, to what extent the Constitution permits delegation of authority to such international institutions. For example, in the case of NRDC v. EPA17 a circuit court questioned the validity and binding effect of a decision made on the basis of Montreal Protocol on certain chemical substances. The issue of international delegation has not yet been dealt by the US Supreme Court.18 In Sanchez-Llamas v. Oregon, the court gave respect and full consideration to the ICJ's reasoning concerning the effect of Article 36 on domestic rules of procedural default but ultimately disagreed with that reasoning.19

The issue, "whether or not a Judgement of the International Court of Justice was self executing," also came for consideration before the US Supreme Court in the case of Modellin v. TeXes, and the Court took the view that commitment of the United States under Article 94 of the United Nations Charter to undertake to comply with ICJ's decision was not self-executing and did not cause to preempt state's law.20

In the US Supreme Court's decision in the case of Bond v. United States, the issue involved a federal criminal prosecution relating to chemical weapons convention.21 The court did not address the constitutional scope of treaty power and the earlier decision on this subject namely; Missouri v. Holland 22 still remains valid in the field, in that case the court had held that the treaty power is not subject to constraints of federalism that apply to domestic legislation.23

One must keep in mind the fact that the Supreme Court of the United States is a domestic court, not an international court. And the court intended to learn and apply foreign laws and practices and in this regard, one justice of Supreme Court shows his sympathy towards this attitude of the court, and though he rejects the critics of the court's such practices on ground that new realities of the world are to be accepted, he is of the view that decision-making is a kind of problem solving.

The US institutions are showing interest that how they can take benefit from ECJ's practice of proportionality analysis and its approach towards regulations relating to commerce, and that of Indian court's experience with ADR to decrease the pend-ency.

In respect of the US Supreme Court's approach towards international cases, following trends are emerging: 

a) A serious judicial engagement;

b) Contextual case by case deliberation 26 A

In many cases, the US Supreme Court has gone for a categorical approach rather than contextual.24 Even in cases related to war on terror, barring a few, the court allowed the government to work and avoided review on detention and use of force.25

Even in Kiobel case, the extra-territorial presumption though became applicable, yet in view of the majority; the claimants living in the United States could still sue for compensation.26 However, as per majority where the conduct under review took place outside US, the claims under ATS become liable for rejection.27

However, despite the said arguments, in Kiobel case, the decanting point of view states that:

a. The approach of limiting the ATS to situations in which relevant conduct occurs outside the United States is not correct;

b. The statute should be applied whenever defendant's conduct implicates an important American national interest 28; and

c. The country is to be prevented from becoming a safe harbor for a torturer or other common enemies of mankind.29

(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates Karachi)

1. See United States v. Curtis-Wright Export Corp, 299 US 304, 319 (1936). Recently in Zivotofsky v. Kerry, 135 S.Ct. 2076, 2090 (2015), the Supreme Court distanced itself from some of the dicta in Curtis Wright.

2. See Korematsu v. United States, 323 US 214, 218-19 (1944).

3. See Youngstown Sheet & Tube Co V. Sawyer (Steel Seizure), 343 US 579 (1952)

4. Empagran, 542 US 155

5. Intel Corp v. Advanced Micro Devices, Inc, 542 US 241 (2004)

6. Morrison v. Nat'l Austl. Bank Ltd, 561 US 247 (2010)

7. Kirtsaeng v. John Wiey & Sons, Inc, 133 S.Ct 1351 (2013)

8. Empagran, 542 US at 164.

9. Filartiga v. Pena-Irala, 630 F.2d 876 (2d Cit. 1980)

10. Sosa v. Alverez-Machain, 542 US 962 (2004)

11. Kiobel v. Royal Dutch Petroleum Co, 133 S.Ct 1659 (2013)

12. Id. At 1669

13. Convention on the Civil Aspects of International Child Abduction opened for signature October 25, 1980, TIAS 11,760, 1343 UNTS 98.

14. See Abbott v. Abbott, 560 US 1 (2010).

15. See Lozano v. Montoya Alvarez, 134 S. Cr. 1224 (2014).

16. BG Group PLC v. Republic of Argentina, 134 S. Ct. 1198 (2014)

17. See NRDC v. EPA, 464 F.3d 1, 9 (D.C. Cir. 2006) (discussing Montreal Protocol on Substances That Deplete the Ozone Layer, September, 16, 1987, S. Treaty Doc. No 100-10 (1987), 1522 UNTS 3, 26 ILM 1550 (1987).

18. Vienna Convention on Consular Relations, Article 36, Apr. 24 1963, 21 UST 77596 UNTS261. The closest that it has come has been in cases considering the effect of decisions by the International Court of Justice (ICJ) concerning. US non-compliance with Article 36 of the Vienna Convention on Consular Relations, which provides that when a party country arrests nationals from another party country, the former is supposed to advise them of their right to have their consulate notified of the arrest and to communicate with the consulate.

19. Medellin v. Texas, 552 US 491, 508-10 (2008) (quoting UN Charter Art. 94 (1)). Despite being a dissenter in Sanchez Llamas, Justice Breyer fairly presents the majority's reasoning and usefully underscores that the majority was not claiming that the United States may ignore ICJ judgments.

20. Modellin v. Texas 552 US 491, 508-10 (2008) (quoting UN Charter Art. 94 (1)). Again despite not having joined the majority opinion, Justice Breyer treats it with respect noting: "Naturally, since I wrote the dissent, I am persuaded by its reasoning, but that is beside the point. The Courts majority opinion is authoritative, not the dissent. So it is more important to consider the significance of that opinion".

21. See Bond v. United States, 134 S. Ct. 2077 (2014) (discussing ratification of the Convention on the prohibition of the Development, Production, Stockpiling and use of Chemical Weapon and on their Destruction, January 13, 1993, S. Treaty Doc. No 103-21 (1993), 1974 UNTS 45, 32 ILM 800 (1993)).

22. Missouri v. Holland, 252 US 416 (1920)

23. See Bond, 134 S. Ct at 2091; see also Curtis A. Bradley, Bond, Clear Statement Requirements, and Political Process, AJIL. UNBOUND (June 3, 2014). Instead, the Court in Bond made use of statutory interpretation to cut back on the domestic application of the Chemical Weapons Conventions, reasoning that even a statute implementing a treaty should not be presumed to alter the usual balance of federal and state power absent a clear indication of congressional intent to do so.

26A In Morrison and Kiobel the court opted for a categorical approach to extra territoriality rather than more contextual approach.

24. Compare Medellin, 552 US at 550-51 (Breyer, J., dissenting), with id. At 514-15 (majority opinion) (rejecting the dissent's proposed approach on the ground that it is too indeterminate and ad hoc).

25. See Curtis A. Bradley, Foreign Relations Law and the Purported Shift Away from "Exceptionalism," 128 HARV. L. REV. F. 294, 298-99 (2014)

26. Kiobel v. Royal Dutch Petroleum Co, 133 S.Ct 1659, 1669 (2013)

27. Id. (emphasis added).

28. See Id at 1674 : Breyer, J., concurring.

29. Id at 1671

                                  The Interpretation of the term "Like Product" under GATT Law


In a recent trade related dispute, Indonesia complained to WTO's Dispute Settlement Body (DSB) against US by alleging that US did ban imports of Indonesia's clove cigarettes by invoking the provisions of  section 907(a) (1) (A), of the United States Family Smoking Prevention and Tobacco Control Act, 2009 (FSPTCA). :The said Law provides that :



'… a cigarette or any of its components (including the tobacco, filter, or paper) shall not contain, as a constituent … or additive, an artificial or natural flavor (other than tobacco or menthol) or an herb or spice, including strawberry, grape, orange, clove, cinnamon, pineapple, vanilla, coconut, liquor-ice, cocoa, chocolate, cherry, or coffee, that is a characterizing flavor of the tobacco product or tobacco smoke.'(1)

 To understand the meanings of the above quoted provision of US law attention is invited to a   report prepared by the Energy and Commerce Committee of the congress under the title ,the "House Report", the report articulates both the objectives of the said report overall, and in particular of Section 907(a)(1)(A) . According to the House Report, "the objectives of the FSPTCA include to provide the Secretary with the proper authority over tobacco products in order to protect the public health and to reduce the number of individuals under 18 years of age who use tobacco products.This House Report also explains the purpose of Section 907(a)(1)(A) in the following terms:

    'Consistent with the overall intent of the bill to protect the public health, by reducing the number of children and adolescents who smoke cigarettes, Section 907(a)(1)(A) is intended to prohibit the manufacture and sale of cigarettes with certain 'characterizing flavors' that appeal to youth.'

 In order to solve the dispute, a panel was constituted by the DSB, who after considering the issue and listening the arguments of both the parties came to the conclusion that the complaint of Indonesia was legally sustainable and upheld it,by declaring that  the US measures fall within the framework of Technical Barriers to Trade (TBT)  and US action did contravene the provisions of GATT 1994.

In a review filed by US, the appellate body through its detailed findings upheld the panel’s decision. From the ensuing debate on the moot point an interesting issue came to light,that is, what is  the true meaning of the term, “like products” as used in the GATT law. Through its findings the  appellate body did define the parameters to interpret the term  "like Products" the findings  of the appellate body in this regard  are important and note worthy. (2 )

The appellate body came to the conclusion that for  the interpretation of the term "like products" as used in Article 2.1 of the Technical Barriers to Trade (TBT) Agreement, the said phrase is to be read in conjunction with the other provisions of the text as provided in Article 2.1 along with  other provisions of the TBT Agreement. As per appellate body, Article 2.1 applies to technical regulations, as the regulations lay down the characteristics of products. Furthermore, the preamble of the TBT Agreement recognizes a Members' right to regulate its trade through technical regulations though, yet these contextual elements and the object and purpose of the TBT Agreement suggests that for the interpretation of the phrase  "like products" as used in Article 2.1 of the TBT Agreement, the same may not be approached from a competition-oriented perspective.(3)The problem is that the very concept "treatment no less favorable", expressed in Article III: 4 of GATT 1994 has long been marked by legal indeterminacy. Just consider what Article III:4 provides: 

'The products of … any contracting party imported into … any other contracting party shall be    accorded treatment no less favorable than that accorded to like products of national origin in respect of all laws, regulations and requirements ...'

 

  

.The products produced in the territory of any Member state and imported into the territory of any other  Member state is required to be accorded treatment no less favorable than that is accorded to like products of national origin under regulations and requirements affecting the internal sale, offerings for sale, purchases, transportation, distribution and the use.(4)

 The fact is that article 2.1 of the TBT Agreement, provides the basis for the determination of the term 'likeness'. The said regulation suggests that term' likeness' is used about the "nature and extent of a competitive relationship between and among products offered for sale". The appellate body accordingly explained the phrase, "treatment no less favorable" by stating that it indeed links the products to the marketplace, where it can be determined that how the measure adopted treats alike imported and domestic products.  And while determining likeness on the basis of competitive relationship between and among the products, the appellate body proposed that an adjudicator is supposed to discount any distortion or effect of the disputed measures on the competitive relationship. And he may reserve the consideration of such effects for the analysis of less favorable treatment. For the purpose of deciding 'likeness' in isolation , and the disputed measure,  the nature and the extent of the competitive relationship is to be determined to the extent that the latter tells the physical characteristics of the products and consumers' preferences.

As per appellate body, the meaning and the concept of "likeness" in Article 2.1 of the TBT Agreement focuses on the legitimate objectives and purposes of the technical regulations, and it can not be determined on the basis of text and context of the TBT Agreement; rather it can be determined on the basis of competitive relationship which the competing products have among themselves.

The appellate body observed that complainant or adjudicators can not always identify all the objectives of a measure and one can not be in a position to determine which among multiple objectives are relevant for the determination of ‘likeness’ among the two products.(5)

It was the opinion of the appellate body that the concept of "like products" in Article 2.1 of the TBT Agreement lends itself to distinctions between products that are based on the regulatory objectives of a measure and it will however be wrong to assume such a fact. For the scope of products which are being compared to establish whether less favorable treatment is being accorded to the one, the concept of like products provides easiness to define it. Where products are in a sufficiently strong competitive relationship far to be considered ‘like’ the same are excluded from the group of ‘like products’ on the basis of a measure's regulatory purposes, and such products would not be comparable in order to ascertain whether less favorable treatment has been accorded to the imported ones.

Ordinarily, the determination of likeness may not be based on the regulatory purposes of technical regulations, and the regulatory concerns underlying technical regulations should not play a role in the determination of whether or not products are like. In EC – Asbestos case , adjudicators found, regulatory concerns and considerations may play a role in applying certain criteria of the "likeness" (that is, physical characteristics and consumer preferences), thus making it easy for the determination of likeness under Article III: 4 of the GATT 1994.

The appellate body observed that all relevant evidence must be evaluated while examining whether products are like, including evidence relating to the health risks associated with a product, that was the underlying concern of the challenged measure in EC - Asbestos dispute. Such evidence may not be examined as a separate criterion, rather such evidence be examined taking into consideration of the traditional "likeness" criteria. A product's health risks, in particular are relevant for the determination of the competitive relationship between products, and the process of determination may address health risks as the products' physical characteristics, as well as the tastes and habits of consumers.(6) The process should also consider the physical properties of products, in particular, those physical properties that are likely to influence the competitive relationship between products in the marketplace. For this purpose physical properties such as that make a product toxic or otherwise dangerous to health are also included.(7 ) It may be noted, health risks associated with a product could influence the preference of consumers.(8)

The appellate body further observed that for consideration of criteria under Article III: 4 of the GATT 1994, as well as under Article 2.1 of the TBT Agreement, the regulatory concerns underlying a measure, such as the health risks associated with a given product, become relevant for analysis of the "likeness" since they have an impact on the competitive relationship among the competing products.

The appellate body came to the conclusion that WTO legal instruments contain a similarly worded national treatment obligation and the same is applicable to laws, regulations, and procedural requirements including technical regulations. In the light of this context and of the object and purpose of the TBT Agreement, as expressed in its preamble, the determination of likeness under Article 2.1 of the TBT Agreement, as well as under Article III: 4 of the GATT 1994, is a determination about the nature and extent of a competitive relationship between and among the products at issue. To the extent that they are relevant to the examination of certain "likeness" criteria and are reflected in the products' competitive relationship, regulatory concerns underlying technical regulations may play a role in the determination of likeness. (9) The end-uses describe the possible functions of a product, while consumer tastes and habits reflect the consumers' appreciation of these functions. In EC – Asbestos, the Appellate Body of DSB held that the end-uses tell us the extent to which products are capable of performing the same, or similar, functions as well as consumer tastes and habits as the limit to which consumers are willing to use the products to perform these functions.*(10)

Thus the consumer preference to smoke to satisfy an addiction or pleasure are relevant to the examination of both end-uses and consumer tastes and habits, although different aspects are addressed by the appellate body in their determination for the analysis of said "likeness" criteria.

The appellate body observed that by forming a complete picture of the various end-uses of a product, a panel can assess the significance of the fact that products share a limited number of end-uses.(11)

And for determination whether such products are like products within the meaning of Article 2.1 of the TBT Agreement, the end use both of clove and menthol cigarettes becomes an appropriate tool for guidance. 

The appellate body further observed that there are more specific permutations and functions of "smoking", which are relevant to the end-uses of cigarettes, such as "satisfying an addiction to nicotine" and "creating a pleasurable experience associated with the taste of the cigarette and the aroma of the smoke".

Hence the context of the TBT Agreement and its object and purpose do not suggest that the regulatory objectives of a technical regulation should play a role that is separate from the determination of a competitive relationship between the competing products. Determining likeness primarily in the light of the regulatory objectives of the measure is further complicated by the fact that measures, including technical regulations, often have multiple objectives. A determination about the nature and the extent of a competitive relationship between competing can be determined by considering the intention of regulation or measure adopted to the extent that what impact it will create on the competitive relationship.(12)

And in order to evaluate the degree of substitut-ability among these products, the adjudicators are required to assess the tastes and habits of all relevant consumers of the products at issue. 

It is not necessary to demonstrate that the products are substitut-able for all consumers or those they actually compete in the entire market. Rather, if the products are highly substitut-able for some consumers but not for others, this may also support a finding that the products are like. In Philippines – Distilled Spirits dispute, the Appellate Body had considered the standard of direct competition or substitution. It may be noted, second sentence, of Article III: 2 GATT 1994 stands satisfied even if competition does not take place in the market as a while, and it is limited to a segment of the market only.In the said case, it was reasonable for the adjudicators to draw, from the Philippines' argument that imported distilled spirits are only available to a 'narrow segment' of its population, the inference that there is actual competition between imported and domestic distilled spirits at least in the segment of the market that the Philippines admitted has access to both imported and domestic distilled spirits".(13) In that dispute, the Appellate Body found that Article III: 2, does not require that competition be assessed in relation to the market segment that is most representative of the "market as a whole", and that Article III of the GATT 1994 "does not protect just some instances or most instances, but rather, it protects all instances of direct competition".(14)

Article 11 of the DSU requires adjudicators to make an objective assessment of the matter before it, including an objective assessment of the facts of the case. Article 11 requires adjudicators to consider all the evidence presented to it, assess its credibility, determine its weight, and ensure that its factual findings have a proper basis in that evidence.(15 ) Adjudicators are not required to accord the same meaning with regard to evidence presented by parties as is emphasized by the parties.(16) The Appellate Body accordingly did not interfere with the panel's fact-finding powers, and did not base its findings of inconsistency (under Article 11) simply on the ground that it can reach to a different factual finding.(17)

It may be added, in some segments of the market, there exists a sufficient degree of sustainability between clove and menthol cigarettes, and for the support of the argument, element of likeness as defined in Article 2.1 of the TBT Agreement,  and it becomes a relevant consideration.Therefore, the overall conclusion of the moot point is supported by the Likeness criteria and its claim that clove and menthol cigarettes are like products within the meaning of Article 2.1 of the TBT Agreement is also correct.


 REFERENCES;

1. Under Section 907(a)(1)(A), beginning three months after the enactment of the FSPTCA—that is, as from 22 September 2009:
2. See Appellate Body Report, United States-Measures Affecting the Production And Sale of Clove Cigarettes: WT/DS406/AB/R dated 4.4.2012.
3. Article 2.1 of the TBT Agreement provides:
Members shall ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favorable than that accorded to like products of national origin and to like products originating in any other country.
4. Article III:4 of the GATT 1994 reads, in relevant part:

5. See Panel Report, Japan – Alcoholic Beverages II, para. 6.16

6. Appellate Body Report, EC – Asbestos, para 113.
7. The Appellate Body noted that a characteristic of chrysotile asbestos fibers was that the microscopic particles and filaments of these fibers were carcinogenic for humans when inhaled. Thus, the Appellate Body concluded that the carcinogenicity, or toxicity, constituted a defining aspect of the physical properties of chrysotile asbestos fibers as opposed to polyvinyl alcohol, cellulose, and glass (PCG) fibers, which did not present the same health risk. (Appellate Body Report, EC – Asbestos, para. 114).
8. The Appellate Body found that the health risks associated with chrysotile asbestos fibers influenced the behavior of both manufacturers (who incorporate fibers into another product) and ultimate consumers. The Appellate Body noted that a manufacturer cannot ignore the preferences of the ultimate consumers of a product and, if the risks posed by a particular product are sufficiently great, the ultimate consumers may simply cease to buy that product. (Appellate Body Report, EC – Asbestos, para. 122).
9. Article 2.1, and Article III: 4 of the GATT 1994. See also relevant provisions of TBT Agreement.
10. Appellate Body Report, EC – Asbestos, para. 117. 
11. Appellate Body Report, EC – Asbestos, para. 119.
12. See n.1.
13. Appellate Body Reports, Philippines – Distilled Spirits, para. 220.
14. Appellate Body Reports, Philippines – Distilled Spirits, para. 221 (referring to Panel Report, Chile – Alcoholic Beverages, para. 7.43). 
15. Appellate Body Reports, Philippines – Distilled Spirits, para. 135 (quoting Appellate Body Report, Brazil – Retreaded Tyree, para. 185, in turn referring to Appellate Body Report, EC – Hormones, paras. 132 and 133).
16. Appellate Body Report, Australia – Salmon, para. 267.
17. Appellate Body Reports, Philippines – Distilled Spirits, para. 136 (quoting Appellate Body Report, US Wheat Gluten, para. 151).

Zafar Iqbal:Azimuddin Law Associates, Pakistan : www.azimuddinlawassociates.com

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