Whistleblowing in a foreign key: the consistency of ethics regulation under Sarbanes-Oxley with the WTO GATS provisions.

• Author: Young, Stewart M.
• Position: World Trade Organization, General Agreement on Trades in Services

INTRODUCTION

Over the past two years, the United States has been hit hard by a number of scandals involving public companies, including mismanagement and ethical violations by company management and lawyers alike. Certain company names are now synonymous with ethical issues and inept management, including such giants as Enron, Tyco, WorldCom and Adelphia. (1) Due to the problems created by the bankruptcy and the scandal-plagued management of these companies, the public is calling for greater transparency and reporting, a better system of director oversight, and a higher degree of separation between compensation given to managers and the board, on the one hand, and actual performance of the company, on the other. (2) There is a sense within the general community that the balance sheets of companies need to reflect fairly and accurately the actual state of the companies' financial situation. The public is simply tired of managers ruining public companies while they profit at the expense of the shareholders. Elected officials are responding to this public outcry with a number of different reform proposals, emphasizing the responsibilities management of public companies owe, both to shareholders and the public at large. Included in these reforms are ethical standards for attorneys who have public companies as clients. (3) These new ethical standards will apply to any lawyer representing companies listed on the American stock exchanges and will be imposed on domestic and foreign lawyers alike. (4) Additionally, foreign firms giving advice to foreign

companies attempting to be listed on American stock exchanges would also be subject to the same ethical standards. (5)

The principal legal manifestation of these heightened concerns is found in the Sarbanes-Oxley Act of 2002. (6) Congress passed the Sarbanes-Oxley Act to assuage the public's concern over the recent management and accounting scandals, hoping that the reforms in the Act would create a better atmosphere for transparency and ethical reporting. (7) The Sarbanes-Oxley Act bestows the SEC with the authority to impose ethical standards on attorneys practicing before it, while the Sarbanes-Oxley Act itself spells out the minimum standards that would be acceptable to Congress. (8) The details of those standards are to be elaborated by the SEC and then enforced by that agency. (9) Thus, a dichotomy exists between the standards stated in the Sarbanes-Oxley Act and the proposed rules offered by the SEC for comment.

The overall purpose of this Article will be to examine the consistency of the legal regime established by the Sarbanes-Oxley Act, and the ethical regulations proposed by the SEC, in relation to the legal services portion of the World Trade Organization's (WTO) General Agreement on Trades in Services (GATS). Part I will discuss the GATS and its effect on the legal services market in general. Part II will then examine an overview of how the ethics requirements stated in the United States Schedule of Commitments to GATS are treated and how those ethics requirements are locked in by GATS and the WTO. Part III will examine the new ethical responsibility requirements imposed by the Sarbanes-Oxley Act of 2002 and the subsequent rules proposed by the Securities and Exchange Commission (SEC) regarding ethical reporting and "noisy withdrawal." (10) Part IV will demonstrate that the new ethical requirements imposed by the Sarbanes-Oxley Act and the SEC are not consistent with the United States' obligations under GATS regarding legal services. This Article will also discuss possible approaches to reconciling the proposed rules with GATS and action that might be taken by WTO member countries, including under the dispute resolution provisions of the WTO agreements. The ultimate conclusion of this Article is that the SEC proposed standards as applied to non-domestic law firms are potentially irreconcilable with GATS, and likely to create friction between the United States and a number of our trading partners. The most important purposes of this Article are to analyze the inconsistency of the Sarbanes-Oxley Act and the proposed SEC rules with GATS. Second, this Article can be read as a case study for the domestic imposition of ethical standards on the trade in services and legal services field in general. Third, this Article will potentially add fuel to the fire for implementing international ethical standards in certain global service industries, including the legal services field in particular.

1. GATS AND THE LEGAL SERVICES MARKET IN GENERAL

   1. The WTO Overview

      The WTO was created in 1995 as the only global organization dealing with trade among nations. (11) It includes in its membership 146 countries (as of April 4, 2003) and addresses trade issues in a number of different areas. (12) The WTO acts as a forum for negotiating trade agreements, administers WTO trade agreements, monitors national trade policies and handles trade disputes between member nations. (13) Over the past years the WTO has gained prominence and importance as the organization continues to shape the law of international trade and reshapes the notion of citizen participation in international organization through its sometimes raucous membership meetings. (14) The recent accession of China to the WTO certainly enhances the influence of the WTO, extending its reach even beyond solely capitalistic economies. (15) As many other nations, including Russia, Belarus and the Maldives seek to enter the WTO, its influence upon the international community and trade matters, as well as its capacity to guide and control international and economic relations, will grow even greater. (16)

      In the wake of World War II, the term "international community" was not invested with quite the same meaning that it has assumed today. At that time, the leaders of a small handful of nations drew up blueprints for a number of international organizations, around which the international community would coalesce and through which it would develop. (17) These leaders initially proposed the creation of three international economic organizations: The World Bank, the International Monetary Fund (IMF), and the International Trade Organization, all part of the "Bretton Woods" international economic cooperative movement. (18) Prior to the ratification of the International Trade Organization, portions of the Protocol of Provisional Application from the International Trade Organization Charter were taken and ratified by a number of countries. (19) However, the Charter implementing the International Trade Organization was never ratified, and the initial ratified portions became known as the General Agreement on Tariffs and Trade (GATT). (20) The WTO was created in 1995 through the action of a majority of the GATT party countries, resulting in the termination of GATT. (21)

   2. The Creation of GATS

      In addition to creating the WTO, the Uruguay Round (22) accomplished two other very important things. First, it brought under one umbrella all previously existing multilateral global agreements and codes--bringing all of these under one umbrella organization and structure. (23) Second, it significantly expanded the areas in which the countries reached agreements regarding trade related matters. (24) Among these expansions included the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), (25) the Agreement on Trade-Related Investment Measures (TRIMS) (26) and the General Agreement on Trade in Services (GATS). (27) GATS would be the official trade agreement governing international trade in services among WTO members. Since the service industry accounts for over eighty percent of GDP and employment in the United States, industries subject to GATS have a unique position in the economy. (28) Additionally, cross-border transactions of trade in services accounts for more than twenty-two percent of worldwide trade, illustrating the large arena in which GATS could potentially affect in international trade. (29) Because of the increasing importance that trade in services plays within international trade and the large monetary value of such services, GATS can have potential impact on the restrictions and regulations that member countries place upon its service industries.

      The world is changing, and according to Sheldon Novick, the great American legal scholar Oliver Wendell Holmes felt that "change should be made consciously, even scientifically, to accommodate new purposes." (30) Historically speaking, the GATT did not deal with trade in services, but only dealt with trade in goods. (31) It did that in part because trade in goods was more straightforward and easier to regulate than international trade in services. (32) Additionally, trade restrictions in goods generally took the form of tariffs and quotas, both of which are much more straightforward and simple to deal with than the various domestic rules and regulations related to the provision of services. In addition, as trade in goods between countries increased under the GATT regime, so did trade in services. (33) The importance of trade in services became more apparent, as did the need to introduce some order to domestic regulation of services. Accordingly, GATT member countries began to call for limitations on new restrictions and the liberalization of current restrictions on trade in services. (34) By 1995, the Uruguay negotiations concluded an agreement governing international trade in services, thereby cementing the importance of GATS among WTO members. (35)

      The GATS includes the regulation of a number of different services, especially including trade in legal services for cross-border transactions of WTO member countries. (36) This agreement explains the general terms for trade in services, including such services as accounting, financial services, air transport, maritime transport and legal services, and it specifically spells out the goal that countries are to...