Berkshire Hathaway Guilty of Iranian Sanction Violations?

Berkshire Hathaway Violation of Sanctions

Berkshire Hathaway is an American holding company that is headquartered in Omaha, Nebraska and is led by Warren Buffet who is chairman and chief executive.  As a multinational conglomerate, the company has many business investments and dealings throughout the world.  From the years 2012 to 2016, a Turkish subsidiary of Berkshire known as Iscar Kesici Takim Ticareti ve Imalati Limited Sirket (Iscar Turkey) was found to have been operating against long standing US sanctions imposed on the nation of Iran.  The subsidiary knowingly sold orders of various restricted materials to Iranian channels that the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) classified as being essentially the government of Iran.  The mother company Berkshire Hathaway was uninformed and unaware of these unsanctioned dealings but was subsequently fined by the US four years after the illegal dealings had subsided. 

            This case analysis paper will examine the four different aforementioned ethical theories (Individualism, Utilitarianism, Kantianism, and Virtue Theory) and whether the situation is ethical or unethical based off each theory.  According to Individualism, the company technically did not meet the requirements of being ethical because they maximized their profits but at the cost of using unlawful and illegal actions to obtain success.  The Utilitarian approach would view this case as also being unethical because most of the parties involved in the situation are negatively impacted and experience no increase in happiness, rather an increase in problems.  Based off Kantianism is can be stated that Iscar Turkey most certainly operated unethically because they secretly did illegal dealings without the knowledge or consent of their parent company which was a betrayal of their trust and loyalty to them.   Lastly, Virtue Theory claims this case is unethical as well considering the company did not display or satisfy any of the 4 characteristics of courage, honesty, temperance, or justice.  According to these theories, the company needs to undergo serious change in the way in which international assets and subsidiaries are monitored in order to combat illegal dealings that may vary region to region in the world.  Also, there must be systems in place to deal with dissidence that will discourage subsidiaries from attempting these types of actions in the first place.

Ethics Case Controversy

Berkshire Hathaway is known in the financial industry for being a strong figure that runs an exceptionally tidy business in which their reputation is an especially important factor in keeping themselves competitive and profitable both domestically and abroad.  The holding company has come under recent fire for actions committed by a subsidiary company (Iscar Turkey) operating out of Turkey which had been involved in 144 known transactions that violated sanctions imposed on Iran.  These 144 orders of goods had been sold from 2012 to 2016 with clear knowledge that Iran had been under sanction since 1995 prohibiting the import or purchase of certain equipment and goods until a deal could be made regarding the enrichment of uranium and other nuclear programs going on within Iran.  These goods included metal-cutting tools and related disposable inserts and were sold to two other Turkish companies despite knowing that the goods would later get supplied to an Iranian distributor. From there, the goods were sent to entities later identified by Berkshire as meeting the definition of the government of Iran, according to the settlement (Egan CNN). 

These actions seriously harmed the United States government who said, “The sales had the effect of undermining US leverage in negotiations with Iran” and Berkshire Hathaway itself, who had no involvement in the violations in the first place but was required to pay a fine of $4.1 million.  During investigations brought forward by OFAC and with the help and cooperation of Berkshire Hathaway itself, light was shed upon the true nature of what had occurred between Iscar Turkey and Iran, how it had occurred, and why.   Senior management at the Turkish subsidiary "sought out business" in Iran with the "express purpose of building a foothold" in the market when it was prohibited from doing so according the US Treasury’s report, and executives at Iscar Turkey stated they “wanted to capitalize on their belief that sanctions on Iran would eventually get lifted by establishing a small-volume commercial relationship with an Iranian distributor” (Egan CNN).

To add insult to injury, Iscar Turkey was not only supplying goods to Iran but was filling said orders with supplies and goods from other Berkshire subsidiaries as well.  Out of this supply chain, only one Berkshire subsidiary did not provide Iscar Turkey with goods because of the suspicious nature of the order.  It was also discovered that several methods of deception and concealment were used by Iscar Turkey to hide illegal dealings from both government entities and Berkshire Hathaway.  In the OFAC statement regarding the settlement on the issue, it was mentioned that Iscar employees “allegedly used private email addresses to bypass controls and visibility of the company email system, false names in internal records and provided false assurances in response to compliance inquiries. Iscar Turkey also received payments in euros to obfuscate its transactions with Iran” (Sayari.com).  The political aspect of the case plays a major role in the infractions committed considering US sanctions were slightly lifted in 2016 from Iran but reinstituted in 2018 under the Trump administration which certainly played a role in the OFAC punishing these violations so quickly because of new policy changes regarding our present relationship with Iran.

Stakeholders

The stakeholders in this case include the holding company Berkshire Hathaway, and its subsidiary company Iscar Turkey. These two parties are those held responsible for the sanction violations because they would have profited the most off these dealings, although it should be noted that they act as if they are 2 separate entities based off their actions regarding the violations.  Other stakeholders include the United States and Iranian governments, both of which have interest in the situation politically and economically.  It can also be noted that the people of Iran themselves are stakeholders in this case because the sanctions lower the value of their currency and their basic ability to import certain goods for themselves.  Even US citizens and the international community is affected by the policies in place regarding trade with Iran because it limits them from being able to economically interact with a big market in the world.

Individualism

            Individualism according to Milton Freedman is that companies should have the goal of maximizing their profits and sales within the constraints of the law.  Another view on individualism is the idea put forward by Machan, who believed the only direct goal of a business was to maximize profits as well, and the primary responsibility of businessmen or woman is to maximize those profits.

            Analyzing the Berkshire Hathaway case from this theories perspective, individualist can conclude that the company did not follow the guidelines of the theory.  Although, the practices displayed by Iscar Turkey most certainly reinforces the idea of maximizing profits, it is not done so within the confines of the laws that were set.  Profits were achieved through the sale of goods to a previously untapped market, however, US and UN sanctions on Iran were ignored completely although Iscar Turkey was well aware of the laws governing what they could and could not sell to certain buyers.

            The major concern regarding this case was not the money made off of dealings involving the Iranian government, but rather the fact that imposed sanctions were ignored illegally.  Under individualism they were acting correctly to try to increase the money their company was bringing in by obtaining new customers who had no previous business with the.  However, it cannot be stated that individualism was followed because of legal infractions committed by the company in order to realize those new profits which clear violates the idea that you should make as much money as you can, but within the rules set for you and everyone else.  Because of the laws imposed regarding to case, no it does not adhere to individualism. 

 

Utilitarianism

            Utilitarianism follows an approach that is from a stakeholders’ perspective in which it states you should maximize happiness for yourself and all other people involved in a situation.  The theory calls for actions whose goal is to maximize happiness for all parties involved in a situation, while at the same time minimizing dissatisfaction for all effected groups or stakeholders.  Utilitarianism is simply the idea that actions are okay as long as they benefit a majority of the people involved. 

            Taking a look at the parties affected by the situation regarding Iscar Turkey’s violations, there are several stakeholder’s with quite different interests.  The first stakeholder would be Iscar Turkey and they reaped some of the only happiness from this situation initially because they sold $383,433 of goods to Iran and established a business foothold in a region untapped and without competitors for them (Forbes Magazine).  Another stakeholder was the government of Iran, in which they experienced happiness as well because they were able to purchase equipment usually unavailable to them which benefited the country tangibly and also served to decrease their oppositions leverage on their domestic actions.  Berkshire Hathaway was fined $4.1 million and received unwanted legal attention when they are otherwise a historically upstanding company.  The US government is also a stakeholder, and they experienced unhappiness in this case because their political leverage against a hostile Iran was compromised when third parties disregarded previously organized sanctions and sold goods deemed dangerous for possession by Iran to them.  As far as the happiness of normal Iranian citizens and US citizens they both are unhappy with the sanctions because often private citizens still wish to trade and do business with one another, however, long imposed sanctions make that an impossibility for both because of government disagreement, not so much a lack of desired interest for interaction between the two peoples.  Overall, utilitarianism is not followed because most parties involved in the case are negatively affected and are caused much more harm than happiness.

Kantianism

            Kantianism is a theory that prioritizes focusing on rationality and goodwill.  According to Kantianism, it is wrong to manipulate or exploit others for an advantage or personal gain.  The four basic principles of Kantianism and are defined as to act rationally, to help others make rational decisions, to respect people, and to be motivated by Good Will which is looking to do the right thing because it’s right.  Also, the categorical imperative is a test that is used to determine whether an action is impermissible or permissible.  A major formulation within the categorical imperative is the Formula of Humanity in which you should act in such a way that you treat humanity, whether in your own person or in the person of another, always at the same time as an end and never simply as a mere means.  Or in other words, it is wrong to use people as a means of getting what you want because it involves exploiting them. 

            Therefore, according to this ethical theory, the actions involved within the case would not be permissible at all and would fail the categorical imperative test.  This is because, Iscar Turkey violated a key principle of Kantianism which states that you should not deceive or lie to others for your own gain.  In their case, they lied to their mother company Berkshire Hathaway regarding these transactions and used several mediums through which they tried to hide information so they could continue to operate illegally and make money.  It can also be said that the actions taken by Iscar Turkey were not in good will and most certainly were not rational choices to make.

Virtue Theory

            Virtue Theory is an ethical theory whose focus is on rationality and whether an individual is virtuous or not.  According to Alexandre Harvard, there are certain characteristics that make a leader successful and virtuous.  These are referred to as the four cardinal virtues.  The first of which is justice or acting honestly and fair.  The next is prudence or the ability to discern the appropriate course of action to be taken in each situation at the appropriate time.  There is also temperance which is one’s ability to keep calm and in control of themselves.  And the last virtue is fortitude which pertains to one’s persistence and ability to deal with adversity.

            Analyzing my case with virtue theory actually shows Berkshire Hathaway (not IScar Turkey) could indeed be categorized a virtuous company.  In terms of honesty, Berkshire Hathaway was more than willing to divulge any information they had to the OFAC because they were interested in weeding out bad apples who were doing business in their name that was illegal.  Also, Berkshire Hathaway displayed extremely good prudence by cooperating with the authorities before being asked which shed a good light on the parent company during the settlement.  The temperance of the company was also quite strong considering there was little residual effect from this case on the rest of their business and the only loses reported came from the $4.1 million fine.  As for fortitude, Berkshire Hathaway was consistent in their quest to find wrongdoing by their subsidiary and expose these actions so they could not occur again which is a display of them dealing with diversity well.  Overall, Berkshire Hathaway acted as professionally and efficiently as possible to fix issues they were bearing the brunt of for their subsidiary which shows that the company is well led.

 

Justified Ethics Evaluation

            In this case with Iscar Turkey violating sanctions in place on Iran, it can be concluded that they were individually acting unethically, but Berkshire Hathaway itself was not conducting such dealings themselves meaning they actually acted quite ethically in the grand scheme of events.  Iscar Turkey acted unethically because they knowingly provided equipment to a country that may or may not use their products to reinforce actions or policies in which other nations see as dangerous.  In the company’s pursuit to improve profits they irrationally ignored the problems of many other people that brought about sanctions on Iran in the first place.  It should also not be forgotten that Iscar Turkey themselves knew that their actions were unethical while they were committing them.  Otherwise, there would have been no use for having fake emails, names, and accepting payment in Euros to hide them.  Ultimately, this is a situation where Berkshire Hathaway was collateral damage in action taken by a rogue company.

 

Company Action Plan

            The primary concern with the Berkshire Hathaway case is not an issue of undeclared revenue that had no taxes paid on it, but rather a problem with companies in certain regions of the world operating under different pretenses than that of American companies.  This led to issues regarding both transparency and control between Iscar Turkey and Berkshire Hathaway in which the subsidiary acted in its own self interest which harmed its parent company.  I have several procedures and suggestions that I believe could combat any future issues regarding a similar situation.  The first step that Berkshire Hathaway should take is to create a system in which all of its subsidiaries have a branch within their company headed by a representative from the parent company whose job is to report all information they deem important or detrimental.  This would create a company environment in which all information and dealings are recorded by the conglomerate in order to have continuity among their entire range of businesses.  Another policy that could be put into place is one that would provide a punishment to any subsidiary caught doing illegal actions in which the parent company could reorganize management or redistribute that companies assets elsewhere in order to deter other’s from trying to profit off shady dealings.

            As far as implementation of these suggested solutions, it would be best if Berkshire created algorithms to keep track of sales and inventory orders that may be suspicious and to flag them.  The company could also make sure they are explicitly warning subsidiaries in certain regions of the world that there is to be no dealings with certain nation regardless of the relationship between the subsidiary company’s nation and the nation in question.  Ultimately, controlling information among all of its assets will be the key to Berkshire Hathaway fixing this problem.

 

 

References

Egan, Matt. “Berkshire Hathaway Fined for Alleged Iran Sanctions Violations.” CNN, Cable News Network, 20 Oct. 2020, www.cnn.com/2020/10/20/business/berkshire-iran-sanctions/index.html.

Nicodemus2020-10-21T16:59:00+01:00, Aaron. “Berkshire Hathaway Fined $4.1M for Iran Sanctions Violations.” Compliance Week, 21 Oct. 2020, www.complianceweek.com/sanctions/berkshire-hathaway-fined-41m-for-iran-sanctions-violations/29632.article.

Ponciano, Jonathan. “Warren Buffett's Berkshire Hathaway Will Pay $4.1 Million For 144 Alleged Iranian Sanctions Violations.” Forbes, Forbes Magazine, 20 Oct. 2020, www.forbes.com/sites/jonathanponciano/2020/10/20/billionaire-warren-buffetts-berkshire-hathaway-will-pay-41-million-for-144-alleged-iranian-sanctions-violations/?sh=1f6e767728ab.

“Public Records Connect Additional Associates of Berkshire Hathaway Turkish Subsidiary Fined for Iran Sanctions Violation.” Sayari, 5 Nov. 2020, sayari.com/blog/public-records-connect-additional-associates-of-berkshire-hathaway-turkish-subsidiary-fined-for-iran-sanctions-violation/.

Stempel, Jonathan, and Susan Heavey. “Berkshire Hathaway to Pay $4.14 Million to Settle Iran Sanctions Violations Claims.” Reuters, Thomson Reuters, 20 Oct. 2020, www.reuters.com/article/berkshire-hathaway-usa-iran/berkshire-hathaway-to-pay-4-14-million-to-settle-iran-sanctions-violations-claims-idUSKBN2752ET. 

By Alexander Krawiec