NOVEMBER 1986 - VOLUME 7 - NUMBER 15
L E V I S I N A R A B I A
Levi's in Arabia
Risky Business in the Middle Eastby Russell Mokhiber
In July of 1985, Peter Haas, chairman of the board of Levi Strauss & Co., the world's largest clothing maker, rode through the Hungarian countryside on his way to Yugoslavia. Haas, the great-great-grand-nephew of the company's founder, was an executive with a mission: turn the tide on Levi's slumping sales.
As he sat in the limousine beside his wife Mimi and Donald MacNeill, general manager of Levi Strauss Geneva, Haas discussed the company's presence in the expansive East European market. Haas was looking for a way to increase the company's international sales and was counting on MacNeill to develop a winning game plan for Eastern Europe and the Middle East.
The past year wasn't a good one for Levi Strauss. Net income for 1984 was its lowest since 1974, as the company scrambled to reorganize and harness its growth. Overall sales plummeted 8 percent below the previous year, and on the international market they were down 16 percent.
MacNeill oversaw sales for Eastern Europe, Africa, and the Middle East. Although sales to Eastern Europe were problematic, the Middle East was a particularly troublesome region for Levi Strauss. Since 1976, Levi Strauss has been on a list of companies boycotted by the Arab world because its jeans were being manufactured and sold in Israel. Because of the continuing state of war between Israel and its Arab neighbors, the Arab world boycotts companies doing business in Israel. The boycott had the potential of closing off the entire multi-million dollar Arab market to Levi's sales.
In response to the boycott, the United States passed the Export Administration Act of 1979-the anti-boycott law. Under that law, and a parallel amendment to the Internal Revenue Code, any U.S. company or person convicted of participating in the Arab boycott of Israel risks fines of up to $50,000 per violation, loss of export privileges, five years in jail, and denial of foreign tax benefits. (See Trading in the Law, page 10.)
The boycott and the anti-boycott law made sales to the Middle East difficult. If a company did business with Israel it risked being boycotted by much of the Arab world. If a company complied with the Arab world's terms of trade, it risked violating U.S. law.
During their ride through Eastern Europe, MacNeill broached a subject with Haas that had consumed much of MacNeill's time: Levi's position on trade with the Arab world. Although Haas wanted to do business with the Arab world, he stressed that he wanted to do nothing "illegal" to break into that market. MacNeill says he then asked Haas whether he had any objection to being removed from the boycott list, and Haas replied, "Provided we do not contravene what I just said, no objection." But according to MacNeill, the company-with or without Haas' approval-was "already doing several things that were probably illegal."
To open up the Arab market to Levi's, MacNeill says the company funneled jeans into two Arab countries, Lebanon and the United Arab Emirates, by way of a third party. MacNeill also charges that Levi Strauss Geneva, a wholly-owned subsidiary of Levi Strauss & Co., sought to purge its name from a list of companies boycotted by the Arab world.
These allegations have prompted the U.S. Commerce Department's Office of Anti-Boycott Compliance to look into Levi's practices in the Middle East. Director William V. Skidmore recently told the Multinational Monitor that his office would decide soon whether the allegations warranted a full scale legal investigation of the company.
Levi Strauss & Co. officially denied the allegations. "Materials are circulating about Levi Strauss & Co. alleging that the company has engaged in business activity in the Middle East which violates U.S. anti-boycott legislation," said Robert Dunn, Vice President of Corporate Communications for Levi Strauss. "These allegations are false."
Made In Israel
As part of the Arab boycott, many Arab states require importers to state on their shipping invoices that the imported goods are not of Israeli origin and contain no Israeli material-statements that are prohibited by the U.S. anti-boycott law. "Evasions" of the law are also prohibited.
Although Levi's apparently never made such statements, MacNeill claims that Levi Strauss Geneva paid a three percent commission to a Belgium forwarding agent, Bayet, N.V., which then made the anti-Israeli statements and shipped the company's products into the Arab world.
Despite Levi's recent claims that the company made no effort to get off the Arab boycott list, MacNeill says that it was a company business objective to explore ways of removing Levi's from that list. With the approval of their superiors, MacNeill says, he and other corporate officials traveled to boycott offices in Syria and the United Arab Emirates to get the company's name off the list.
MacNeill and another former Levi's executive Murshid Bustani, say management used them to circumvent the Arab boycott and to remove the company's name from the boycott list. They claim they then were fired after a disgruntled Lebanese middle man threatened to expose Levi's efforts to break into the Arab market.
Paying the Middleman
According to Bustani, Levi's used Bayet to make the anti-Israeli statements that Levi's didn't want to make under its own name. Bayet was only used "to make the [anti-Israeli] boycott statement," said Bustani. "We were paying Bayet the 3 percent to do things we (Levi's) were not allowed to do."
Internal Levi Strauss records and other documents obtained by the Multinational Monitor describe the Levi Strauss/Bayet arrangement. One Bayet sales invoice, dated November 27, 1984, and signed by Bayet director Van Bougernaught, shows a shipment of 6,995 mens jeans worth $95,674 to Dubai, a small state within the United Arab Emirates. At the bottom of the invoice is the required anti-Israeli statement.
It reads: "We certify that the goods mentioned in this invoice are manufactured in E.E.C. [European Economic Community] United Kingdom and that they are of English origin at 100%. Consequently, these goods are neither of Israeli origin nor linked to an Israeli-German [reparations] agreement nor do they contain any Israeli material."
In 1983, Bustani and MacNeill claim that Levi's manufactured in the United States were shipped by Bayet into the United Arab Emirates. "When I ship to Dubai," Bustani said, "I have to ask Bayet to send the certificate of origin and the invoices to make the boycott statement." On the other hand, when Levi's shipped to Egypt, a country which has normalized relations with Israel, it used its own Antwerp shipping department for documentation purposes since an anti-Israeli disclaimer was not needed.
Levi's shipped jeans into the Arab world through Bayet as early as 1982, one year before MacNeill took over responsibility for the Middle East and two vears before Bustani joined the company. A May 6, 1983 letter from Stan Weynants, then Levi's area manager for the Middle East, to a potential Lebanese customer, BAKO, outlined the arrangement.
"[U]nder the present boycott rules applicable in Lebanon, and for that matter in the whole of the Arab world ... we cannot officially deal with any organization in that area, at least not in a formalized and legally binding manner ... We will continue to supply BAKO with our products for distribution in Lebanon even when it means we have to make special arrangements to allow us to do so under the present circumstances."
"[W]e have arranged that the Antwerp forwarding agents Bayet N.V, will in future make all shipments to the Middle East and as such take title of our merchandise and fulfill all requirements imposed by your government. However, since this company is an independent organization, the problem of the payment of goods becomes vital since in fact Bayet will do the actual selling to BAKO and therefore should be guaranteed the payment of the merchandise."
Tailor Made for Dubai
Because of the wide reach of the U.S. anti-boycott law, legal experts advise U.S. companies to offer comprehensive guidelines to employees so as to avoid the law's stiff penalties. But MacNeill claims that no such guidance was given to Levi's employees who worked the Middle East market.
MacNeill says he was skeptical of the legality of the Bayet transaction from the beginning. "I always felt it was somewhat illegal," MacNeill said. "That's why on several occasions I brought it up and said, `Are you aware that we are doing this? because it seemed contrary to my understanding of the law."
MacNeill questioned the "correctness of tha mechanism," he says, because he knew "how sensitive Levi's was to the whole boycott issue." But, he says, he was told by his superiors that "it's perfectly O.K., it's in order, we've been doing it for a long time now, everybody, agrees." Specifically, MacNeill says he cleared the Bayet arrangement with his immediate superior, Jack Gerrish who presided over Levi's development division in Europe.
Levi's top corporate officers met in Geneva to discuss the arrangement in the summer of 1984, said MacNeill. At that meeting MacNeill consulted with Gerrish, and Lee Smith, then president of Levi Strauss, Europe and currently president of Levi Strauss, International.
Levi's Vice President Robert Dunn now admits that the company used Bayet to make the "negative certification statements," but argues that the arrangement was legal. "Because the company views the Arab boycott as repugnant, it has taken actions consistent with U.S. laws to circumvent the purpose of the boycott," Dunn said.
"In 1983 and 1984, this included selling goods to Middle Eastern customers through a freight forwarder. The forwarder made accurate representations that these European made goods were not of Israeli origin and not carried on Israeli ships. The freight forwarder transactions do not violate U.S. law. They were initiated with the advice of legal counsel. Outside counsel has recently reconfirmed that opinion."
Clearing the Company's Name
On October 1, 1986, Levi's Vice President Dunn said that his company "has not, cannot, and will not sanction any activity intended to have the company removed from the so-called blacklist." Dunn stressed "company management had no advance knowledge and did not approve of any contact between [Levi Strauss] employees and any Arab boycott office."
But in 1984, according to an internal memo, Bustani was given the task of preparing "a final appraisal on methods of either circumventing the boycott or being removed from the list," for fiscal year 1985. In April 1984, Bustani, MacNeill, and Weynants, traveled to the Middle East to visit officials at the boycott offices who are charged with implementing Arab boycott policy.
Both MacNeill and Bustani say their trip was cleared by superiors even though such dealings raise serious legal questions-the anti-boycott law prohibits U.S. businesses from releasing information on their operations in Israel. "Don MacNeill requested the approval and got the approval of Gerrish to go to the boycott office and discuss ways of removing Levi's from the boycott list," says Bustani.
"We informed San Francisco and Brussels and Gerrish that we were going to Syria," said Bustani. "Everybody knew why we were going." According to MacNeill, Gerrish told him "to investigate the reasons why we [Levi's] were on the boycott list and what possibilities there may be to get off it."
While in Syria, the Levi's team met with a Mr. Ahmad Al Ajami of the local boycott office in Damascus, according to Bustani. "Mr. Al Ajami explained to us that Levi's was on the boycott list because we had a licensee in Israel." To get off the list, Al Ajami told them, Levi's would have to terminate that licensee and fill out a questionnaire.
According to MacNeill, the questionnaire asked about the nationalities of the company's shareholders and business relationships with Israel. When MacNeill returned to Geneva he met with Gerrish. "I was told by Gerrish that we would not reply to the questionnaire since that would constitute an offense under the U.S. anti-boycott laws," MacNeill said.
Under U.S. anti-boycott law, any questionnaires received from an Arab boycott office must be reported to the Commerce Department.
"Gerrish and I then decided that we could only use methods which circumvented the boycott," MacNeill said. "We further decided that I was to investigate new methods of circumventing the boycott in addition to those which had been in use, namely, supplying through third parties to avoid making statements."
MacNeill wrote up a trip report and presented it to both Gerrish and Smith. It summarized the Levi team's visit to the boycott offices in the United Arab Emirates and Damascus. "I handed a copy personally to Lee Smith [then-president Levi Strauss Europe] when he visited Geneva," MacNeill said. "He put it in his bag and said `Pll read this later."
In September 1984, Lee Smith met with Gerrish and MacNeill in Geneva. Bustani and Weynants, who also attended the meeting, briefed Smith on the Damascus trip. "We told them that in Damascus they told us that if we terminate the licensee in Israel, we can come back freely to the Arab countries."
"I was asked by Lee Smith to prepare a report about what the Arab League markets represented in terms of units and profitability," Bustani said. The report would be used "for the benefit of senior management to decide in view of this whether they terminate or don't terminate the Israeli licensee."
"Isn't this a problem because of the boycott?"
Toward the end of 1984 and beginning of 1985, Levi's European offices underwent a shuffle. Rather than report directly to Gerrish and Smith, MacNeill now reported to two newcomers -- Robert Rockey, president, Levi's Europe and Vice President Rudolph Deutekom.
In January 1985, MacNeill met with Rockey and Levi attornev Seth Herbert. 'I pointed out again our activities in the Middle East." MacNeill recalls. "Rockey then, rather innocentl%,. said 'Isn't this a problem because of the boycottT I then pointed out to him the mechanism that had been used for several years to circumvent the boycott. He seemed very surprised that we were using third parties to do business in the Arab world and we were actually attempting to get off the boycott list." Rockey took note and said he would get back to MacNeill with further instructions. He didn't, according to MacNeill.
Although Rockey initially was surprised at Levi's attempt to get off the boycott list, only a month later, he wired a proposal for a new Lebanese connection to Lee Smith in San Francisco. The idea was to offer a licenseeship to an Arab League country to demonstrate Levi's non-discrimination against Arabs.
"While I don't think its necessarily required above our level," read the wire from Rockey. "We do need a position statement from Bob [Haas] and/or Tom [Tusher] relative to their willingness for us to attempt to find means to get around the boycott."
MacNeill claims that he was never provided with the company's interpretation of the anti-boycott law and was expected to use "his own interpretation but still produce results."
The Nohra Connection
In 1985, Khalil Nohra, an independent Lebanese businessman, entered the picture. Nohra's connection with Levi's triggered a series of events that eventually led to the firing of MacNeill and Bustani.
Upon hearing that Levi's Israeli licensee had gone bankrupt in 1985, Nohra contacted Bustani proposing that the company appoint a Middle East agent. Nohra nominated himself for the post. The bankruptcy of the
Israeli licensee meant that Levi's would no longer have operations in Israel, a situation that could open the Arab market to Levi sales if the company's name was removed from the boycott list.
Today, Levi's says this was never a consideration. "The company's former licensee went bankrupt," said Dunn. And the "company is negotiating an agreement with a new licensee," and expects to "re-establish [its] presence in Israel shortly."
But since Levi's terminated the Israeli licensee in June 1985, says MacNeill, with the exception of one small shipment, there have been no "legal [non-counterfeit] Levi's" in Israel. According to MacNeill, by July 1985 Nohra claimed he had already made considerable progress toward removing Levi's from the boycott list and was confident the task could be completed.
Nohra requested a letter from Levi's indicating that the company would be interested in dealing with him. On October 7, 1985, MacNeill responded with a two-line letter to Nohra. It read: "We hereby confirm our interest in your offer to develop the Arabian Gulf market for our products, and accordingly we request you to prepare the general business situation in order that we may enter into specific agreements for sales to the Territory. Each specific agreement will be subject to approval based on its validity."
That same day, after some discussion between Nohra and Bustani, MacNeill agreed to confirm in writing what the world already knew, that Levi's had lost its Israeli licensee through bankruptcy. MacNeill typed out a second letter to Nohra, this time a one liner dated the same day, October 7. It read: "In confirmation of our various discussions we hereby confirm that the Licensed Manufacturing Agreement between Levi Strauss & Co. and ATA [Israel] for the Israeli market, was terminated with effect June 24, 1985."
Levi's prospects for increased sales in the Arab world looked bright. But a routine contract dispute between Nohra and Levi's flared in early 1986. In January, Levi's sold 16,000 jeans that they had put on the Cyprus market to a customer other than Nohra and withdrew all other offers. The sale angered Nohra, who had hoped to buy the jeans, and he obtained a lien on the goods preventing their shipment.
During litigation, Nohra filed an affidavit in a Cypriot court in which he claimed Levi Strauss Geneva "authorized me to have their name removed from the [boycott] list" and that "my agreed remuneration, in case my relevant efforts should succeed, was fixed to U.S. $200,000."
MacNeill urged Seth Herbert, Levi's legal counsel for Europe, to fight the Nohra case because, he said, Nohra's allegations were false. But the company settled the case out of court by agreeing to pay Nohra $6,000. Today, Levi's claims that Nohra's lawsuit was a "nuisance suit" and that the company decided that it would be cheaper to make a nominal payment than to litigate the claim and delay the shipment of the goods. But MacNeill says at the time of the suit he was told that the case was settled because the company preferred not to have arguments of this kind taking place in a public court.
After the Nohra affair Levi's was more cautious in its attempts to enter the Arab market. In December 1985, i both Robert Rockey and Rudolph Deutekom signed an Employee Performance Appraisal of MacNeill in which MacNeill's year-long business objective of preparing "a final appraisal on methods of either circumventing the Boycott or being removed from the list" was "cancelled with Sr. Mgt. approval."
On April 23, 1986, Levi Strauss fired both MacNeill and Bustani. Rockey claimed that MacNeill's letters to Nohra seriously violated the U.S. anti-boycott law because they furnished information about Levi's business relations with Israel.
But MacNeill says he routinely provided such information to business contacts on the company's relationship with Israel. "Presumably, I had broken the law many times, if that was the law," MacNeill said. But MacNeill considered it a normal business practice and one that was acceptable to Levi's.
According to Bustani and MacNeill, Rockey told them that outside legal counsel had confirmed that, by writing the two letters to Nohra, the company had violated U.S. anti-boycott laws. Rockey told them that Levi's would have to file a violation with U.S. officials which would subsequently be followed by a press conference and public coverage. "Because of the serious nature of the offense," MacNeill recalls Rockey saying, "because of the particular climate in the United States, having just recently directly attacked Libya, because of the embarrassment it would cause the Haas family, because of the potential loss of tax havens that the company enjoyed, because of potential large fines, the company considered it a very serious offense and we were therefore both fired."
"The firing was very specifically tied to the letters to Nohra," MacNeill said. "They were firing us as scapegoats in the hope that they could say they had nothing to do with it."
As of this date, Levi's has yet to report to the U.S. Commerce Department's Office of Anti-Boycott Compliance, the chief enforcer of the anti-boycott laws. Nor has Levi's held a press conference to discuss boycott related matters.
Russell Mokhiber is a freelance writer based in Washington, D.C.