Dear Friend of Snell & Wilmer,
International trade is critical to our global economy and importers and exporters should stay apprised of new developments, restrictions and potential pitfalls to ensure they remain in compliance with a myriad of laws and regulations.
This edition of the Global Connection offers special insight into trade concerns, including a top ten list of information that exporters should know and advice on avoiding and coping with U.S. customs detention and seizure of counterfeit electronic components. It also includes new developments in U.S. immigration enforcement and compliance, information on DOJ enforcement of the Foreign Corrupt Practices Act, a Ninth Circuit Court of Appeals decision invalidating a $45 million class action settlement, and an update on U.S. iGaming expansion.
We hope this edition of Global Connection proves useful as you continue to seek out new opportunities at home and abroad. Please feel free to contact me if you have any questions regarding information provided in Global Connection or if you would like to be included in future international events hosted by the Firm.
Lindsey E. Martínez
The Top Ten Things a 21st Century Exporter Should Know
There are a myriad of things a U.S. company seeking to export will want to consider prior to entering the global marketplace, but, because I am a big David Letterman fan, and the fact that exporting has never been easier, I am limiting the topics discussed in this article to a Top Ten list. Listed below are the top ten things an exporter in the 21st Century should know:
Number 10: Perfect Planning Makes Perfect
Venturing into international trade is like starting a new business: you need good organization, financial planning/support, dedication and a long-term commitment to the target market. Careful, detailed planning should occur prior to entering a foreign market, not after a company has already committed significant resources and commenced exporting.
Companies that have successfully penetrated foreign markets have spent time formulating a viable export plan. The ingredients of a successful export plan have as much to do with a company internally as it does with understanding global markets. The exporter should spend time identifying a number of internal and external factors that impact its potential for success. The exporter should perform a “SWOTT” analysis, which stands for Strengths, Weaknesses, Opportunities, Threats and Trends. Strengths are factors that lean in the exporter’s favor, such as a hot product or a sustained period of domestic growth. Weaknesses hinder the exporter’s ability to enter a global market and can obviously be troublesome, but, over time, these things can be corrected. Opportunities are changes that build on a company’s strengths. Threats can be as damaging as weaknesses, but are largely outside the control of the exporter. Trends are changes occurring within the marketplace. A successful exporter will perform a SWOTT analysis and set a course of action that, to the extent possible, maximizes strengths and opportunities and minimizes weaknesses and threats.
Another key component of an export plan is for the exporter to conduct a market analysis of the target market. There are numerous resources available to the exporter to obtain helpful, relevant information, including the National Trade Data Bank and www.export.gov. The National Trade Data Bank is the quickest, single source to see where goods and services are going and who is shipping them. The bottom line is that for an exporter to be successful, it must have a good export plan.
Number 9: Diversification Pays Off
It is estimated that by 2050, the world’s population will reach over 7.4 billion people. Most of the people (i.e. potential customers) will be living outside the United States. Currently, approximately 75 percent of all exports are done by large companies, and these large companies represent only about 20 percent of all the companies that could be exporting.
Entering global markets will enable a company to remain competitive and can balance out uneven or seasonal demand in the domestic market and prolong the production cycle for its products. Over 5,000 jobs are created domestically with every $1 billion increase in exports. Thus, one key to economic prosperity in the U.S. is to promote global exports. One need only look at countries that enjoy a trade surplus (i.e., they export more goods and services than they import) to see the advantages and prosperity that exporting brings. Germany exports upwards of 65 percent of the goods it produces, while the United States exports only around 12 percent. Reversing a massive trade deficit through expanding exports will benefit the United States as a whole and the individual U.S. companies that enter global markets.
Number 8: Information Technology Levels the Playing Field
In the past, larger companies had a competitive advantage over smaller companies in the export arena, because larger companies could absorb the significant costs associated with researching, preparing and beginning to export before ultimately turning a profit in their foreign markets.
Now, the Internet and other forms of information technology have made obtaining information for developing an export plan and communicating with potential customers easier than ever. The Internet has become the great equalizer and enables small and mid-sized companies to compete with the big boys.
Number 7: Less Competition in Global Markets Means Greater Opportunities
Only about one percent of all U.S. companies export outside of the United States, while over 70 percent of the world’s purchasing power resides outside the United States. This means there are vast and varied markets waiting to be penetrated by U.S. companies. Because so few U.S. companies currently export, there is also likely to be less competition for an exporter’s products abroad.
Over 80 percent of small and medium-sized businesses could begin exporting now. By seeking a presence in foreign markets where there is little domestic competition, an exporter can build a competitive advantage, as products bearing the “Made in the USA” sticker are well regarded. Through due diligence and careful planning, as above, a company can have a good sense of whether its products are likely to have less competition in foreign markets.
Number 6: FTZs and FTAs Can Reduce Export Costs
There are over 4,600 free trade zones in the world, which have been established to encourage international trade. A free trade zone, also called a foreign trade zone (FTZ), is an area in or near a port within which goods may be landed, warehoused, handled, manufactured or reconfigured and re-exported without the intervention of customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties or tariffs. FTZs can be used to delay, minimize or eliminate the payment of customs duties and tariffs, among numerous other cost-saving benefits. There are over 250 FTZs in the United States and these areas can be extremely useful in a company’s export plan.
Free trade agreements (FTA), such as NAFTA or the U.S.-Israel Free Trade Agreement, minimize trade barriers among participating nations and promote increased commerce. A U.S. company seeking to enter a particular global market should research whether a FTA is in effect with the United States, as this agreement could provide valuable costs savings on tariffs and duties accruing to the company.
Number 5: Avoid Ethnocentrism
Long gone are the days when people viewed and judged the world strictly through the lens of their own country, culture, language and experience. The world has become much more open and accessible with the proliferation of communication and information technologies. These advances should allow companies and company executives to have the information needed to make well-reasoned and unbiased business decisions.
Understanding linguistic and cultural differences in a foreign market can help a company avoid making damaging or insensitive decisions. Before engaging in business travel to a foreign market to meet with global partners, company executives should become well versed in business etiquette for that market. An exporter should be prepared to modify its products and company literature to meet foreign cultural preferences and regulations.
For example, Heineken engaged in a special promotional campaign during the 1994 World Cup soccer tournament. Among other activities, the company had the flags of all of the countries qualifying for World Cup Finals imprinted under the bottle cap of their leading brand of beer. Among the numerous flags portrayed was that of Saudi Arabia, which depicts a holy verse. In response to this, Muslims from all over the world reacted angrily to the fact that holy verse was associated with an alcoholic beverage. Subsequently, the brewer had to recall all bottles and discontinue its promotion.
Once a foreign market has been poisoned by poor marketing or a poor product, it can take years to undo the damage, if ever, so it pays to think globally when one exports globally.
Number 4: Choose Global Partners Carefully
Numerous sources of information exist for companies seeking to find out about potential global partners. The U.S. Commercial Service exists for the sole purpose of helping U.S. companies to export. With offices located at consulates around the globe, and in most states in the United States, the U.S. Commercial Service has people on the ground who can help make introductions to potential global partners. For a relatively small fee of $700, face-to-face meetings with potential partners can be arranged through the U.S. Commercial Service.
Also, the Agent/Distributor Service (A/DS) may be used to locate foreign import agents or distributors, and the World Trader Data Reports supply credit data on potential agents, distributors, customers and suppliers.
All contracts that an exporter signs with a global partner should be reviewed by experienced counsel to avoid adverse or unintended contractual obligations.
Number 3: Logistics Management is Key
Distribution of and payment for shipments can be complicated for a first-time exporter. Fortunately, there are numerous experts who can help the uninitiated, including international freight forwarders, third-party logistics specialists (3PLs), international bankers, international carriers, customs brokers and legal counsel.
Also, supply chain management tools allow exporting companies to obtain efficiencies in manufacturing, warehousing, transportation and sales, and increase the sharing of information among supply chain actors, so that variability in the supply chain decreases and profits increase.
Number 2: Rely On Experts
Embarking upon an export strategy may seem a bit overwhelming for a U.S. company, especially one that is new to exporting. An exporter can rely on experts to assist in complying with applicable rules and regulations, such as a sophisticated accountant, an experienced law firm, an international banker, a customs broker, a freight forwarder, an international insurance company, and local, state and federal agencies established to promote exports.
These experts can guide an exporter through the export process and help the exporter avoid the pitfalls that may exist in reaching global markets.
Number 1: Ask the Question: Am I Ready?
A company seeking to export should ask itself a number of critical questions: Is the company’s CEO and senior management on board? Does the company have sufficient capacity to expand manufacturing and sales globally (i.e., financial, capital and human resources capabilities)? Has the company conducted sufficient market research and formulated an honest evaluation of its current products’ export potential and created a viable export plan? Does the company know where to obtain financing? Can the company make a profit selling its products abroad? If a company is able to answer in the affirmative to each of these questions, then it may be ready to export.
As with any domestic business enterprise, it will take time before a profit is achieved in global markets, maybe even years; however, the most competitive and enduring companies in America have successfully exported globally. It could happen to your company, but you’ll have to take the plunge. Wayne Gretzky, the greatest hockey player of all time and scorer of 894 goals, said, “You’ll always miss 100 percent of the shots you don’t take.” Now is the time for U.S. companies to take a shot at exporting.
Counterfeit Electronic Components in the Supply Chain—Avoiding and Coping with U.S. Customs Detention and Seizure
On May 21, 2012, the Senate Armed Services Committee issued a report of its inquiry into counterfeit parts in the Department of Defense Supply Chain. The Committee’s report stated that the problem of counterfeit electronic parts was widespread, noting approximately 1,800 cases of suspect counterfeit parts including over one million individual counterfeit components. While the counterfeit electronic component problem was already well known, the Senate Committee’s concern for the safety of sophisticated U.S. aircraft being compromised by cheap (primarily) Chinese counterfeit components has further raised the level of government scrutiny.
The main focus of this U.S. government scrutiny takes place at the border, where Customs & Border Protection (“CBP”), a division of the Department of Homeland Security, has the authority and opportunity to examine imported goods and accompanying shipping documents. It has been said that there is no Constitutional right to import and it is certainly clear that a person’s right to avoid search and seizure doesn’t apply to their Customs transactions.
CBP has recently established a Center of Expertise and Excellence at the port of L.A./Long Beach, California to deal with issues involving electronic goods. One of the Center’s main tasks has been to establish strategies and priorities to prevent entry of counterfeit electronic components. Not surprisingly, CBP has directed its inspection and enforcement efforts on components from China, focusing on particular origin points in China that have become known as centers of the trade in counterfeits.
The Customs Regulations, at 19 CFR 133, provide a very detailed framework for the treatment of imports bearing suspected counterfeit trademarks. The Regulations define a “counterfeit mark” as a “spurious mark that is identical with, or substantially indistinguishable from, a mark registered on the Principal Register of the U.S. Patent and Trademark Office.” Electronic components bearing U.S. registered trademarks that have been reclaimed and refurbished by unauthorized parties are considered to be counterfeit by Customs. These refurbished components often do not perform to the exacting quality standards guaranteed by the original component manufacturer (and owner of the trademark.) All such counterfeit items are subject to detention, seizure and forfeiture by Customs. A significant problem with the entire Customs process is determining whether or not a particular suspect electronic component import is indeed “counterfeit.”
The Legal Gray Market:
While counterfeit component imports continue to be a significant problem for the integrity of the supply chain, there is a robust, legal trade in importing “genuine” electronic components outside of the Original Component Manufacturer’s authorized distribution channels. It is usually perfectly legal for an independent distributor to import genuine electronic components without the blessing or authorization of the U.S. trademark owner. While in particular instances a U.S. trademark owner may be able to exclude unauthorized imports of genuine product, this is usually not the case with electronic components manufactured overseas by its affiliates or licensees. Independent component distributors regularly import genuine trademarked product sourced primarily in China. Not surprisingly, it is sometimes difficult for Customs to distinguish between genuine, legal gray market components and illegal counterfeit components. Since the counterfeiters are starting with discarded genuine components, the differences between genuine and counterfeit components can be elusive.
U.S. Customs Procedures:
If a Customs officer suspects that an item presented for entry is counterfeit, he will “detain” the goods. Within five (5) days, Customs notifies the importer of the detention and the importer then has seven (7) days to convince Customs that the trademarked component is not counterfeit. The Customs detention presents two major difficulties for the independent distributor/importer. First of all, once delivery of the component is delayed, even by a few weeks, the ultimate purchaser of the component has often found an alternate source or otherwise no longer wants to buy the item. And the second problem is that the independent distributor, having no relationship with the U.S. trademark owner and usually only a tenuous relationship with its source in Asia, has no way of proving that the component is genuine. After detention, Customs will often send samples of suspected counterfeits to the U.S. trademark owner for verification. However, verification is not often a high priority for the U.S. trademark owners, who have no relationship with the independent distributor/importer. Further delay usually ensues.
If the U.S. trademark owner verifies the authenticity of the goods, they are eventually released to the importer. If authenticity is not verified, the goods are legally “seized” by Customs and proceed to forfeiture (usually accomplished by destruction.) The importer can challenge the seizure, both by administrative petition and in a judicial proceeding. However, the time and expense of petition and hearing often make the legal remedy commercially useless.
Some Practices to Consider:
An independent electronic component distributor can check the Customs protection status of a trademark prior to placing its order overseas. The CBP website contains a search function for all trademarks “recorded” with the agency. This search can determine whether or not a trademark has been recorded with Customs and whether the recording provides gray goods exclusion protection to the U.S. trademark owner.
If possible, the importer/distributor can try to condition payment for the goods upon Customs clearance. As a practical matter, this is not the customary arrangement for payment and may be very difficult, if not impossible, to negotiate with the supplier. Alternatively, the component distributor can condition its resale obligations to its U.S. buyer upon Customs clearance. Again, this arrangement may be difficult to negotiate with the U.S. customer.
The distributor can also enlist the help of its overseas supplier in verifying that the components are genuine. This diligence could involve contract language, certificates of authenticity, other documentation proving source and general vetting of the supplier. Unfortunately, none of these measures are fool proof.
New Compliance Concerns for Employers of Foreign Workers
This article discusses the current immigration enforcement climate for U.S. employers, which involves a shift away from worksite raids and toward more I-9 audits. Companies can and should adopt “best practices” in the immigration area long before they are faced with responding to an ICE audit. Issues such as internal I-9 audits, joining E-Verify, and responding to an ICE audit are all discussed in this article.
Trends and Legal Issues in Immigration Enforcement
Until the last few years, the area of immigration enforcement in the workplace was largely occupied by the federal government and its enforcement of the Immigration Reform and Control Act of 1986 (IRCA). However, many states have recently become active in the immigration area both by passing state laws that attempt to regulate immigration issues and in enforcing those laws. For example, in Arizona, the state legislature passed the Legal Arizona Workers Act (LAWA), A.R.S. 23-211- 214, in 2007 with an effective date of January 1, 2008. LAWA was intended to ensure that no business in Arizona knowingly or intentionally hired or employed undocumented workers. Violation of the law carries with it the potential penalty of a violating company losing its state and local business licenses. LAWA also required all Arizona employers to begin using E-Verify as of January 1, 2008. To date, only four cases have resulted in authorities prosecuting an Arizona employer pursuant to LAWA, with only one business being shut down for two days. These activities are most likely to continue given current political sensitivities and the fact that the U.S. Supreme Court has upheld LAWA.
At the county level, the Maricopa County Sheriff’s Office (MCSO) (the infamous “Sheriff Joe”) has continued to actively investigate leads concerning fraud and stolen identities, which often leads to an employer’s place of business. While such leads can manifest through a variety of ways, spanning tips from the public to undercover sting operations, the target of these investigations have so far focused on apprehending individuals with fraudulent or stolen identities. If necessary, MCSO has raided businesses to round up multiple individuals working as employees.
The federal government has also been more active in pursuing employers through a series of “silent raids” or “desk audits” as opposed to large-scale worksite raids. A desk audit involves a comprehensive review of Form I-9 (employment eligibility verification form) triggered by tips, investigations, and/or policy initiatives. Recently, for example, Immigration and Customs Enforcement (ICE) initiated a new round of Form I-9 audits that targeted 1,000 employers throughout the country. The employers targeted included small and large businesses alike in all industries, with a focus on those businesses related to critical infrastructure. This audit initiative came in the wake of several other waves of audits: July 2009 (652); November 2009 (1,000+); March 2010 (180); September 2010 (500). Since the start of the 2010 fiscal year, ICE has collected more than $5.3 million in penalties, initiated more than 2,500 cases, and has arrested almost 200 employers, with many of those arrests leading to convictions.
Since immigration issues go hand in hand with potential discrimination issues, the increased ICE activity has also led to an increase in activity from the Office of Special Counsel for Immigration-Related Unfair Employment Practices (OSC). OSC enforces the anti-discrimination provision of the Immigration and Nationality Act (INA), which prohibits:
Citizenship status discrimination in hiring, firing, or recruitment or referral for a fee;
National origin discrimination in hiring, firing, or recruitment or referral for a fee;
Document abuse (unfair documentary practices during the employment eligibility verification process);
Retaliation or intimidation.
Of course, discrimination cases can also lead to an investigation from the Equal Employment Opportunity Commission (EEOC), which enforces the anti-discrimination provision of Title VII of the Civil Rights Act of 1964, as amended. For those employers using E-Verify, U.S. Citizenship and Immigration Services (USCIS) has announced enhanced monitoring in its systems, collectively called the Compliance Tracking and Management System (CTMS). CTMS is designed to curtail abuse, fraud or misuse of E-Verify through a range of monitoring and compliance activities that includes reviewing documentation and researching and documenting certain non-compliant employer categories of behaviors, such as employer’s pattern of issuing fraudulent A numbers and/or social security numbers or an employer’s failure to consistently use E-Verify, if at all, once registered.
States that rely heavily on industries providing manual and menial labor jobs (construction, service industry/hotels and fast food/casual dining) seem to have been hit the hardest by recent immigration enforcement activities. This is true not only because they seem to have been the industries targeted by local law enforcement raids, but also because of stepped-up ICE enforcement. Additionally, even those who have not been the subject of raids or ICE audits know the risks they run by ignoring the makeup of their workforce. As a result, we have seen more of these employers (those employing manual and menial labor) become more proactive in trying to ensure that they employ only individuals authorized to work in the United States.
States with strong immigration laws will most likely continue to prosecute individuals with stolen identities while the federal government will continue to investigate and prosecute employers.
Economic Factors Influencing the Employment of Immigrants
There is a direct relationship between the state of the economy and the hiring of foreign nationals, both at the professional level and at the manual labor level. If companies can fill their hiring needs with individuals who are already in the United States and have authorization to work, it makes both practical and economic sense to do so. Sponsoring foreign nationals so they can obtain non-immigrant work visas is an expensive proposition with current filing fees alone for an H-1B visa (used to bring professionals to the United States to work) reaching over $2,300 with an extra $1,225 if the employer wants to utilize premium processing, which guarantees some response from USCIS within 15 calendar days. Moreover, with so many people still unemployed and looking for manual labor types of jobs, companies are less likely to engage in questionable hiring practices that can result in a portion of its workforce being unauthorized.
Although the United States continues to graduate thousands of individuals from institutions of higher education, many of whom cannot find employment after graduation, there still appears to be a shortage of highly qualified workers with specialized skill sets, particularly in the computer area. Within the last year, there has been an increase in the number of companies willing to sponsor foreign nationals for work-related visas such as the H-1B, TN, and L visas. These visas are generally reserved for highly educated foreign nationals or individuals who fit into unique positions or are managers/executives or individuals with specialized skills.
Certainly, there was a dramatic decrease in the number of foreign nationals sponsored for non-immigrant work visas when the economy first faltered. This was seen perhaps most dramatically in the number of H-1B visas that were available long after the April 1 date when such petitions could be filed. In past years (prior to the economic downturn), we had years in which all of the 65,000 available H-1Bs were used up the very first day on which petitions could be filed (April 1) and USCIS had to use a lottery system to determine who would get the visas. These past few years the H-1Bs were available only until the summer months.
Employers who are considering using the H-1B visa category for any of its employees should strongly consider having those applications ready to be filed on April 1. Because successful H-1B petitioners cannot start working on their H-1B visas until the beginning of the fiscal year (October 1), there is generally no need to incur the extra expense ($1,225) of premium processing when filing the H-1B petition.
Key Compliance Issues for Employers of Foreign Workers
The current focus from the federal government in the immigration enforcement area is now on conducting I-9 audits versus conducting large-scale workforce raids. One could conclude that the government’s shift in focus to conducting I-9 audits rather than large-scale raids is due to the fact that it is financially lucrative to conduct audits that can result in large fines to employers.
Among the hardest compliance requirements for employers to meet are the problems associated with hiring only authorized aliens—and the explosion of individuals who engage in identity theft. Even for employers who properly complete I-9s and use E-Verify, there is no way to be absolutely sure that their employees are authorized to work in the United States. Individuals who steal another person’s identity can still pass the E-Verify system and may have stolen documents that are actually originals. The employers who unknowingly or unintentionally employ these individuals may still find themselves losing a large portion of their workforce if the government uncovers the identity theft.
The Lawyer’s Role in the Investigation Process
If the attorney represents the employer in an immigration investigation, the attorney’s primary role is to minimize the client’s liability and exposure. The first step is to carefully review the Notice of Inspection to determine the breadth and scope of the information requested. The attorney should carefully examine how to limit the responses to ICE, including determining the corporate entities that must respond. Often the Notice of Inspection will refer to parent companies or other affiliated companies and indicate that the response should include all of their information also. The attorney needs to determine if there is a good faith argument to limit the response to the company at hand. For example, it is quite possible that the parent company or affiliated company keeps its own I-9 records. Thus, the company served with the Notice of Inspection can legitimately contend that it does not have access to those records and therefore will not be responding on behalf of any other company. It is almost always in the client’s best interests to limit the scope of the audit as narrowly as possible.
Once the company has properly interpreted and possibly narrowed the scope of the audit, the attorney needs to quickly get a handle on whether the company has I-9s for all of the employees and ex-employees to the extent required, and determine in what type of shape those I-9s are in. If the company has previously conducted periodic internal audits, the work at this stage should be minimal in terms of reviewing and making any necessary and appropriate changes. However, if the company has never completed an internal audit, the attorney will need to oversee a quick but thorough audit to determine the potential liability from the apparent technical and/or substantive violations. To the extent changes can be made to the I-9s, they should be made with the person making the change dating and initialing the change. The date should be contemporaneous with the correction and no backdating should otherwise occur. Special consideration should be given to unionized workforces in order to not breach any collective bargaining agreements.
It is rare that an I-9 audit does not uncover problems with the I-9s. Typically the attorney will find substantive, technical, and procedural violations. Substantive and procedural violations include things such as failing to have any I-9 for the employee, late preparation of the I-9 (not within three days of hire), failure to include employee’s name or signature in section 1, failure to provide the document title, ID number or expiration date of a List A, B or C document, failure to date Section 2, etc. Examples of technical violations include failure of employee to list his address or birth date in Section 1, failure of the translator to print his name in the certification box, failure to provide date employment began in Section 2, etc. For technical violations the employer has a 10 day correction period. No such correction period exists for substantive violations.
The civil penalty for paperwork violations ranges from $110 to $1,100 per violation. Thus, it is possible for there to be multiple violations on one I-9 form. Unfortunately, ICE then also applies an “enhancement matrix” that can increase or decrease the amount of the fine by up to 25 percent. The five factors that are to be considered in the enhancement matrix include:
Given the above, it is important for the lawyer to address these issues up front, especially if they are favorable to the company. If the lawyer has a preexisting relationship with the company (i.e., was not hired just to assist with the investigation) then hopefully the company has already adopted several best practices that can be used as mitigating measures if a violation is found.
In addition to the five factors discussed above, the types of best practices that should be emphasized in the response if a company is facing an ICE audit include the following:
A policy/practice of centralizing the I-9 process with the person(s) in charge receiving periodic I-9 training from either DHS or other sources conducting regular audits;
Records demonstrating that the company has terminated new hires who present obviously false documentation, or existing employees who the company learns through some other means are not authorized to work for the company;
An explanation of the system the company uses to track expirations of work authorizations for individuals with time sensitive work visas or other work authorizations;
Evidence of prior voluntary in-house audits and explanation of how the company attempted to correct previously identified problem areas;
Records demonstrating steps the company took if it received any “no-match” letter from the Social Security Administration or notices from local law enforcement or state agencies that an employee was suspected of identity theft. This might simply include cooperation with the local authorities.
If the audit requests information about subcontractors and temporary labor, describe the efforts you have made to ensure that anyone contracting with you also complies with federal, state, and local immigration laws. This may include letters or other provisions in contracts in which the company has required the subcontractors to confirm adherence to the immigration laws;
If you are in a state that does not already require use of E-Verify and your client utilizes E-Verify, be sure to mention this fact. If you are in a state that already requires E-Verify, and your client uses E-Verify, you should mention it but do not expect to get any extra credit for complying with state law;
Using Social Security Number Verification Service (SSNVS) for wage reporting purposes. Make a good faith effort to correct and verify the names and social security numbers of the current workforce and work with employees to resolve any discrepancies;
Establishing a written hiring and employment eligibility verification policy;
Establishing a tip line mechanism for employees to report activity relating to the employment of unauthorized workers and a protocol for responding to credible employee tips;
Establishing and maintain appropriate policies, practices, and safeguards to ensure that authorized workers are not treated differently with respect to hiring, firing, or recruitment or referral for a fee, or during the I-9 E-Verify or SSNVS process because of citizenship status or national origin;
Arranging for regular I-9 audits by an experienced and knowledgeable third party.
Sometimes a lawyer is called into an ICE audit that quickly escalates into something more than a simple audit of I-9s. If you believe that there may be criminal aspects to the investigation, you need to recognize this early on and immediately bring a competent criminal attorney on the team from the beginning of the investigation. Because very few criminal attorneys have a substantive background in immigration law, it will be imperative that both the immigration attorney and the criminal attorney work hand in hand to ensure the best result for the client.
Challenges of the Enforcement Process
The fact that the government need only give three days’ notice to the employer when conducting an I-9 audit presents challenges for clients and lawyers. This is especially true if the company being audited has not been conducting regular internal audits and catching and correcting mistakes as they go along.
If the employer has a large workforce, but a relatively small Human Resource (HR) department, it is very challenging for that employer to get their hands around all that needs to be accomplished within the three-day period and ICE rarely gives extensions. The audit typically asks for much more than simply the employer’s I-9 forms. Quarterly tax statements, copies of contracts with subcontractors, and other reports usually are included in the audit request.
As a preliminary matter, the company’s payroll records need to be compared to the I-9s to ensure that there is an I-9 for each person on the payroll and that an I-9 exists for ex-employees if their termination date requires an I-9 still be retained. (I-9s must be retained for three years from date of hire or one year from date of termination, whichever is longer). Moreover, the I-9s need to be reviewed to ensure that any corrections that can be made are in fact made before turning them over to ICE. The person tasked with pulling this information together has a monumental task, especially if the workforce is large.
In order to meet these challenges, clients should ensure that the I-9 process is centralized if at all possible, and that the person responsible for having the I-9s completed is properly trained. Clients should also conduct internal audits yearly and take the opportunity in the course of those audits to correct any mistakes on their I-9s (while properly documenting those changes) and make any necessary corrections regarding how I-9s are completed. The audit should be handled by a third party (outside the company) to ensure that the auditor is not checking his/her own work.
Immigration Investigation Triggers and Responses
The triggers for an immigration investigation can include any number of things―a disgruntled ex- or current employee of the company; a competitor (in one case, an HR person in one company turned in a competitor company); a follow-up investigation by ICE because a previous audit resulted in a Warning Notice or Notice of Intent to Fine; selection due to industry type (construction/ service, etc.); relationship to critical infrastructure (nuclear plants or companies that serve critical infrastructures), or any various policy-driven initiatives, to name just a few.
When a client is apprised of an investigation, the client should call their immigration attorney; carefully review what is being asked for in the audit; assemble an internal team who has the ability to address the various items being requested; call a meeting with their attorney and internal team; determine the scope of the request and what can be objected to (not produced); delegate responsibilities and a timetable to ensure all information is gathered; appoint a point person and report any issue to that point person; have all I-9s reviewed and corrected to the extent possible; and assemble the materials for production, and produce them.
The lawyer’s role in the process depends, in large part, on the sophistication of the client and the client’s resources. The lawyer may have to serve as the “coordinator” and take charge of the process, ensuring that tasks are being accomplished in a timely manner. In other situations, the lawyer may just be reviewing I-9s and indicating what corrections need to be made. Typically, the lawyer will prepare the cover letter to ICE, explaining the basics of the company, what its “best practices” are, and how it prepared for the audit.
Immigration Compliance Concerns—and Consequences of Non-Compliance
The primary compliance concerns for employers of a foreign worker include ensuring that the foreign worker has the proper work authorization; that the work authorization does not lapse, rendering the foreign national unable to work; that the proper amendments are filed if the foreign national’s work responsibilities or job location change; and that the company considers its needs for the foreign national on a long-term basis (i.e., whether the company wants to sponsor the foreign national for a green card).
Failure to pay attention to these concerns can result in the need for the company to remove the foreign national from the payroll. The foreign national may fall out of status and begin accruing unlawful presence. If the company does not remove him/her from the payroll once their work authorization has expired, the company is in violation of the law as well and could face both civil and/or criminal penalties. Failure to engage in long- term planning can also result in the alien running out of time to process his green card and the need for the alien to leave the United States. For example, a non-immigrant on an H-1B visa must have filed his PERM labor certification before the beginning of his sixth year of H-1B eligibility or he will not be able to extend his H-1B beyond the normal six-year limit.
In order to address these concerns, companies are meeting with immigration counsel earlier and are including long-term planning issues in those discussions. Companies are also instituting “tickler” systems that remind human resource personnel of upcoming visa expirations (usually six months out).
The E-Verify System
The E-Verify program is an Internet based system that provides a link to government databases to determine the eligibility of new hires. The program is administered by the USCIS and the Social Security Administration.
The federal government does not currently require all employers to utilize the E-Verify system. However, some states, such as Arizona, have passed legislation that does require companies to utilize E-Verify. Additionally some federal and state contractors and subcontractors are required to utilize it.
Early in the program, there was a high degree of incorrect non-confirmations, which led to distrust in the program. Some employers also rebelled against the extra work since companies are still required to complete the I-9s before running names through the E-Verify system. Still, a large majority of companies that have utilized the E-Verify program for a period of time have positive reviews for the program, despite an occasional non-confirmation mistake. Many of the tentative non-confirmations are due to clerical mistakes—frequently involving individuals with two last names. The vast majority of these are eventually cleared to work. Also, E-Verify is now available to individuals to self-check their information to reduce the likelihood of encountering difficulties when the individual actually applies for a job.
The one problem with the E-Verify system is that there is really no way to protect against identity theft within the current system. This problem arises when a new employee steals not only the identity but also the documentation accompanying that identity and uses it to complete the I-9. Because the documentation is actually valid (just not for the individual using it), the employer does not suspect anything, particularly if the identifying information closely resembles the person using the false documents. When the employer then inputs the name and other identifying information into E-Verify, the system confirms that the information provided matches the name. Thus, even though a company correctly completes their I-9 forms and uses the E-Verify system, an employee could still not be authorized to work in the United States. That said, as Congress pours more resources into E-Verify, it is evolving to address this concern through the increased use of biometric tools and features.
Priorities for Immigration Law Worker Compliance
The priorities for maintaining immigration law worker compliance should be ensuring that the company fully complies with its I-9 requirements and, if applicable in their state, their E-Verify requirements; ensuring that workers with employment authorization expiration dates are tracked and managed so that there is no break in work authorization and no unintended unauthorized employment; and having a system in place for handling investigations if credible evidence is obtained that an existing employee may not be authorized to work.
Companies cannot afford to be told (pursuant to an ICE audit and findings) that a large percentage of their workforce does not have work authorization, leaving the company with no choice but to terminate them. The business cost of losing a large number of employees, and then having to train a new set, makes compliance a necessity.
Ultimately, the commitment for identifying the priorities in this area must come from the highest executive level within the company. However, there must also be a commitment from the human resources department, and ultimately, from the hiring managers/supervisors. A checklist that is used to maintain compliance in this area is intended not only as a document that should be used when first developing immigration compliance procedures, but should also be reviewed periodically to ensure that best practices continue to be followed. Again, it is important to keep in mind that any employee with a time limited work authorization must have their I-9 form updated, and all non-immigrant work visas have expiration dates.
There is a new and welcomed transparency occurring at the federal immigration level as government officials charged with revising and interpreting regulations are reaching out to attorneys and other “stakeholders” in an effort to solicit input and educate. These efforts are definitely a step in the right direction as they not only create dialogue between the government and attorneys and other stakeholders, but also help shape the interpretation of the regulations. The need for reform of the immigration laws is great. For the first time in many years, members of both parties seem intent on engaging in real discussion about the undocumented individuals in the United States and possible ways to address this issue.
Ensure that the government knows of all of the ways in which a client company has attempted to fully comply with the federal and state immigration laws.
Encourage clients to adopt “best practices” before they are facing an I-9 audit
Recognize when there is a need to call in lawyers with other specialties. If there appears to be the possibility of criminal allegations, make sure a competent criminal attorney is on the team from the beginning of the investigation.
Advise clients to ensure that the I-9 process is centralized and that the person responsible for having the I-9s completed is properly trained. Clients should also conduct internal audits yearly and correct any mistakes on the I-9s while properly documenting those changes. The employer has this responsibility even if they use a professional employer organization to complete their I-9s.
Take charge of the investigation process if necessary, ensuring that tasks are being accomplished in a timely manner. Indicate what corrections need to be made. Prepare the cover letter to ICE, explaining the basics of the company, what its “best practices” are, and how it prepared for the audit.
Join the American Immigration Lawyers Association (AILA) and be an active participant in the email exchanges that occur between AILA members on the state or local level. Participate in free webinars and seminars that are available to practitioners and invest in some good reference materials.
Austin Fragomen, Jr., Careen Shannon & Daniel Montalvo, Immigration Employment Compliance Handbook 2011-2012 (West, Thomson Reuters, 2011)
U.S. Immigration and Customs Enforcement (Worksite Enforcement, Guide to Administrative Form I-9 Inspections and Civil Monetary Penalties Nov.25, 2008)
Handbook for Employers (Form M-274) (U.S. Citizenship & Immigration Services, June 1, 2011 version)
Guide to Selected U.S. Travel and Identify Documents (Form M-
396) (Prepared by the Forensic Document Laboratory, U.S. Immigrations and Customs Enforcement
E-Verify Employer Do’s and Don’ts, Office of Special Counsel for Immigration-Related Unfair Employment Practices (U.S. Department of Justice, Civil Rights Division)
I am an Employer, How Do I Complete Form I-9, Employment Eligibility Verification, (Form M-584) (U.S. Citizenship and Immigration Services Aug. 2008).
DOJ Investigation of a Media Company Shows that FCPA Is Best Viewed Broadly; Sting Operations Will Continue To Ensnare the Unwary
The news this month that the FBI will continue to use sting operations to net Foreign Corrupt Practices Act (FCPA or the Act) violators only serves to emphasize that the FCPA is best viewed broadly. The net cast by the federal statute with provisions that aim to prevent bribery of foreign officials and to standardize accounting among companies with listed securities in the United States is a wide one.
Dow Jones, publisher of The Wall Street Journal, and a company whose website promises “News to Profit By,” announced last month that a thorough review of its operations in China found no impropriety. The Journal itself reported that the DOJ has investigated allegations that staffers in its China bureau had bribed local officials in a gifts-for-information arrangement. Mere meals and drinks between reporters and sources would not typically violate the FCPA; the allegations included that expensive entertainment and travel were lavished on the officials.
The Wall Street Journal allegations show that enterprises whose leaders likely never contemplated that they would have occasion to be viewed as attempting to corrupt a foreign official can find themselves ensnared in a government investigation, potentially preceded by a federal sting operation. Or, perhaps because of its well-known financial constraints, the media may be particularly ripe for FCPA scrutiny. Desperation for business or information leading to it can tend to set the climate for improper bribes.
As the DOJ states, the FCPA was enacted to make it unlawful for certain classes of persons and entities to make payments to foreign officials to assist in obtaining or retaining business. The business of information is not excepted, and though journalists are not usually viewed as those trying to grease the wheels of business, the government tends to view payments to foreign-official sources for publishable information the same as payments to foreign officials for other business reasons.
Business interests, including the U.S. Chamber of Commerce, have called for reforms to the Act, including the building in of a compliance defense for companies that believe a charged bribery occurred despite all possible efforts to prevent it. But many see any reform as unlikely during the current administration.
Meanwhile, FCPA charges and settlements have more than tripled over the past decade. The DOJ’s somewhat aggressive interpretation of the FCPA’s terms and its vow to continue using intensive enforcement techniques, like sting operations, should put all types of businesses on notice that dealings with foreign officials can have weighty consequences.
Knowledgeable counsel, familiar with the FCPA and the government’s use and interpretation of it, can assist enterprises in navigating the Act before issues arise, even with no compliance defense on the horizon. Specifically, even though there may not be a “compliance defense,” companies can mitigate possible risk through a good compliance program that involves senior management buy-in, a strong policy, an active training program and effective contractual agreements.
Ninth Circuit Strikes Down $45 Million Class Action Settlement and Issues Warning About Use of Incentives
Citing a conflict of interest between class representatives and a class, the Ninth Circuit Court of Appeals recently invalidated a $45 million class action settlement that had previously been approved by the district court. The case, Radcliffe v. Experian Information Solutions, Inc., concerned, among other issues, allegations that certain consumer credit reporting services issued consumer reports with negative entries for debts that had been discharged in bankruptcy. In 2009, the parties settled the case for $45 million dollars. As structured, the settlement provided an incentive of up to $5,000 for named class representatives who supported the settlement (the Court stated other class members were eligible for payouts between $26 and $750). Several class members objected to the settlement, including former class representatives.
On appeal, the Ninth Circuit Court of Appeals invalidated the settlement. The Court recognized that it had validated previous settlements with incentives to class representatives, but it cautioned that courts must carefully scrutinize those awards to ensure that class representatives remain adequate representatives for the class at large. In relation to the settlement at issue, the Court held that “the incentive awards here corrupt[ed] the settlement by undermining the adequacy of the class representatives and class counsel” because it: (1) conditioned the incentives for the representatives on support for the settlement, therefore changing the motivations for the class representatives; (2) created significant disparity between the payouts to certain class representatives and other class members; and (3) created a circumstance where counsel for the class simultaneously represented class members with conflicting interests. (Emphasis added). Ultimately, the Court remanded the matter for further proceedings and warned that courts “must be vigilant in guarding against conflicts of interest in class-action settlements because of the unique due process concerns for absent class members who are bound by the court’s judgments.”
Radcliffe serves as a reminder of how carefully class action settlements must be structured to protect unnamed members of a class. This is particularly true when incentives are given to class representatives as part of the settlement. While Radcliffe did not prohibit those incentives altogether, it demonstrates that those incentives cannot create improper disparities between class representatives and a class itself.
More than 25 years ago, gaming in the United States faced a conundrum as Indian Tribes and States debated the legality of gambling on tribal lands. The issue culminated in a landmark decision in the United State Supreme Court, California v Cabazon Band of Indians, 480 U.S. 202 (1987), and eventually led to the passage of the Indian Gaming Regulatory Act (IGRA), Pub. L. 100-497.
The Obama Administration's 20 September 2011 opinion, made public on 23 December 2011, has now created a similar uncertainty in the realm of online gaming. The Department of Justice reversed its long-held position regarding the Wire Act of 1962. In a new opinion, the Executive Branch concluded that the Wire Act applies only to sport-related gambling activities in interstate and foreign commerce.
Many have now taken the view that virtually all federal barriers to internet gaming have been removed. The reach of the DOJ's new position, however, remains unclear. Regardless, in this brave new world without a clear federal roadblock, iGaming expansion in the United States will occur in one of two ways: (1) patchwork, state-by-state laws, or (2) a federal 'opt-in' framework.
The DOJ's new memorandum opinion of the Wire Act paved the way for states to do what they want with intrastate internet gaming, and it didn't take long for states to react. Since January, bills that might legalise online gaming have been proposed in almost a dozen states, including California, Iowa, Maryland, New Jersey, Mississippi, Hawaii, Missouri and the District of Columbia. Most of these bills, however, died in session because of infighting among stakeholders.
Three States and the America Virgin Islands succeeded in their quest to legalise and regulate online gaming. On 28 June 2012, Delaware's Gov. Jack Markell signed a bill allowing the State Lottery to operate full-scale online casinos. At the same time, Nevada's Gaming Commission begun issuing licenses to internet gaming operators; on 20 June 2012, Bally Technologies, Inc. and International Game Technologies were the first to receive licenses. Earlier this year, New Jersey’s Gov. Christie also signed a bill to allow Atlantic City casinos to offer gaming through the internet.
This type of patchwork legalization may be problematic. For one, without a federal framework, tribal gaming interests are left at the mercy of individual states, with small gaming operators unlikely to participate in any expansion. Moreover, without players from other states, states with small populations will likely struggle to create an efficient and popular cyber gaming environment. In fact, Nevada Governor Sandoval has pledged to lead the charge of interstate agreements for online gaming. Larger states, like California, will still not agree to pool players with smaller states. Finally, Variations in laws across the nation will also lead to a labyrinth of differing regulations for operators of online gaming. A Federal framework that allows interstate wagering is, thus, the most efficient avenue for iGaming expansion.
Failed Federal Efforts
Federal movement on iGaming has shown little promise. At the end of 2012, the industry watched as Congress, yet again, failed to pass a law that regulates online gambling.
The House of Representatives introduced at least two bills: H.R. 1174 and H.R. 2366. Both failed to gather support to even allow for a hearing. In the Senate, during the lame duck session, Majority Leader Harry Reid (D-Nev) indicated that another bill would be introduced that was co-authored by outgoing Minority Whip Jon Kyl (R-Ariz). A few days after the elections, a draft of the Reid-Kyl online gaming bill leaked to the public and optimism that a federal framework would develop was at an all-time high. The Reid-Kyl bill would regulate online poker, but would also ban all other forms of internet gambling. History, however, repeated itself: despite growing support from both sides of the aisle, the lame duck session of the 112th Congress mirrored the failed efforts of 111th Congress. Senate was not able to slide internet gaming into any other pending legislation or the fiscal cliff negotiations.
The biggest opposition to the bill came from the States. Because states are now free to legalize intrastate internet gaming, local and state legislators saw federal action as being unnecessary. To that end, the National Conference of State Legislatures (NCSL) on 9 August 2012, passed a policy resolution urging the federal government to respect state sovereignty. The North American Association of State and Provincial Lotteries also announced that there is now no need for federal legislation. In the waning days of the Congressional session, officials from Kentucky, Idaho, Washington state, Missouri, New Hampshire, Georgia and Iowa traveled to Washington, DC to protest the Reid-Kyl bill. On 14 December 2012, Senator Reid officially pulled the plug on the draft iGaming bill. It is now clear that legalisation of gambling in the United States can likely only occur on a state-by-state basis.
Meanwhile, the American Gaming Association remains optimistic of a forthcoming federal gaming bill.
Prediction for the Future
Despite the benefits of a nationwide framework for iGaming, the current Congressional stalemate and state-by-state legislative progress make federal action highly unlikely. State lotteries, casino operators and game makers across the United States will likely turn to their state's legislators for any gaming expansion into cyberspace.
Legislation is currently pending in several states. California's Sen. Wright has already introduced SB 51, to regulate internet gaming in the golden state. Similarly, Sen. Correa has introduced a “shell” bill, SB 678, that will likely move forward with tribal support. Massachusetts, Iowa, New York, and Illinois are also considering similar laws to regulate online poker, but ban other forms of internet gambling. Additionally, the state of Washington is considering proposals to repeal its criminalisation of internet gambling.
Just as the IGRA was a boon for tribal gaming, leading to over 460 Indian gaming establishments across the United States, iGaming expansion promises to lead to a proliferation of gaming across the states. The question is not if, but rather how online gaming will be legalized in the United States.