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    Ethics and Exchange Controls

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    Scenario 2: You have a long-standing client in a country that imposes foreign exchange controls. The client asks you to pad your invoices by 25%. For example, you would ship the client $100,000 worth of goods but would invoice the client for $125,000. On the basis of your invoice, the client would obtain the $125,000 from the country's central bank. The client would then pay you $100,000 and have you put the remaining $25,000 in a Swiss bank account in the client's name. Should you do it? Would it make a difference if your client is a member of a politically unpopular minority and might have to flee the country at a moment's notice?

    Scenario 2 is more straightforward than Scenario 1.

    For Scenario 1, we are dealing with two issues: the need to use an intermediary in some countries like Japan and China where who you know is as important as what you know. As stated in the textbook, conducting business in Asia involves development of trusting relationships rather than relying on contractually-binding agreements. So there is no problem as far as paying the intermediary. We are also dealing with a suspected bribe. If you recall, the Foreign Corrupt Practices Act makes it illegal to bribe a foreign government official. There is a loophole if a payment is "reasonable and customary," meaning that it is a small sum, almost like a tip, that is needed to facilitate matters.

    The DQ mentions a 10% payoff to a government official. That's fine if the total amount of the deal is $100 or $200 since it will be a small amount of money. However, what if the deal is worth a few million? In that case, the payoff will not longer be a "reasonable" amount. However, if serious money is involved, then it will be obvious that an intermediary would not be able to earn so much for his services and that this is really a bribe being funneled through the intermediary to the government official.

    The U.S. company should NOT make the payment in the latter case. Many companies do illegally launder their payments by hiding them as "salary" to intermediaries which the intermediary then passes on the the government official. Wal-Mart in Mexico is involved in just such a scandal right now. The New York Times has done an explosive and fascinating series about it. You can find one of the articles at


    The title is "The Bribery Aisle: How Wal-Mart Got Its Way in Mexico."

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    Solution Preview

    I agree, but for a different reason. Money laundering is illegal in the U.S. and is a federal offense. While the party affiliation might make it more attractive and seem ...

    Solution Summary

    This solution provides a brief opinion piece on the scenarios being discussed.