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global perspectives CHEMICAL INDUSTRY: Facing a Mix of © Corbis Regulatory Challenges Three major regulatory issues—REACH, FCPA and homeland security—raise new challenges for the chemical industry. Carolyn J. Buller, chair of the Global Chemicals Practice at Squire, Sanders & Dempsey, believes companies should consider proactive steps now to mitigate negative impacts on global competitiveness. James C. Diggs, senior vice president and general counsel of PPG Industries, a leading chemical products company with operations in more than 20 countries, agrees and also suggests that properly prepared companies may realize new advantages from these challenges. A New REACH The European Union’s new Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) program requires registration of up to 30,000 chemicals sold in Europe (see Inside REACH), with up to several thousand of these expected to be identified as hazardous and requiring further testing and authorization. “Chemical By John M. Toth manufacturers must test not only the chemicals themselves, but also how they are modified by downstream users to identify exposure risks,” Buller says. “This raises confidentiality and other business issues on how much competitive information suppliers and distributors are required to disclose.” Buller believes that collaboration on compliance will be feasible, given existing industry relationships. However, confidentiality agreements among these companies are essential to protect trade secrets. “REACH also gives us an opportunity to differentiate ourselves from our competitors by developing innovative ways of improving our products for REACH compliance.” “One potentially burdensome aspect of the regulation,” she says, “is that downstream companies must go beyond assessing the impact of REACH on their own products. They must also assess the products of key suppliers who may remove product from the supply chain if test and authorization costs become too burdensome. Until this is sorted out,” Buller cautions, “companies must keep in close communication with their suppliers.” For prepared global chemicals producers, REACH may also offer promise of new opportunities. PPG’s Diggs agrees that REACH compliance means a substantial effort but adds, “REACH also gives us an opportunity to differentiate ourselves from our competitors by developing innovative ways of improving our products for REACH compliance.” Diggs notes that Asia-Pacific countries often model their industry regulations after Europe’s, so REACH-compliant companies may be well positioned in that region. 16 www.martindale.com
Inside REACH The FCPA Effect Foreign Corrupt Practices Act compliance is neither new nor unique to the chemical industry. However, the global production and growing emerging market activities of chemical companies are increasingly affected by FCPA disclosure rules. One industry-leading company recently agreed to a $225,000 FCPA settlement for selfreporting payments in India to encourage completion of a new product’s regulatory review before the growing season. Also, as the industry consolidates through mergers and acquisitions, transactional due diligence uncovers offshore practices that may be questionable but do not technically violate the law—raising issues of what disclosure is necessary. Diggs notes that FCPA compliance reflects “the extent to which companies like ours are allowed to operate more fully in emerging markets where local or state-owned companies previously dominated.” As these countries integrate into the global economy (for example, through World Trade Organization membership), they increasingly follow accepted global business practices—“not by adopting the FCPA in its totality,” he says, “but by adapting to its basic tenets.” Buller believes that managing such FCPA issues during this integration should emphasize frequent and thorough communications with offshore managers concerning their compliance responsibilities. “Personal general counsel visits, plant by plant and sales office by sales office, are the best way to get the word out, particularly in emerging markets where these concepts may still be new,” she says. Technology should be an important addition to personal contact, particularly the use of computerized testing (in local languages) to demonstrate compliance knowledge and create a record of instruction. Such actions are the most effective at preventing a problem from occurring. They also demonstrate an active compliance program that can help mitigate sanctions if disclosure of proscribed or questionable practices is necessary. Security Matters On the issue of security, Diggs sees the industry taking leadership in ensuring more Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) was adopted in December 2006 and took effect June 1, 2007. It has been called the most important European Union legislation in 20 years. Businesses that manufacture or import more than one ton of a chemical annually will be required to register such chemicals. Substances of “very high concern”— chemicals that cause cancer, infertility, genetic mutations or birth defects, and those which are persistent and accumulate in the environment—may be used only if they have authorization from the new European Chemicals Agency. Authorization will be granted only after extensive testing and a registration process that includes regular assessment and review. Estimates are that as many as 30,000 chemicals must be registered over the next 11 years, with perhaps from 2,500 to as many as 10,000 chemicals in the “very high concern” category. secure production and transportation of chemical products that are critical to the U.S. economy. At the same time, he adds, it is important to avoid an impression that the industry dominates the evolution of security standards to the exclusion of stakeholders in government and society. “Improved security will require a collaborative effort on the part of all constituencies,” Diggs asserts. “If the process is handled cost-effectively, both the industry and our country will benefit.” New federal Homeland Security regulations cover the production and transportation of Franz Pfluegl/iStockphoto chemicals, but Buller says that many state officials do not consider the regulations to be strong enough. “A number of states, such as New Jersey, may be moving to create their own security requirements, although these are still being developed,” she notes. As both federal and state security standards evolve, Buller believes that industry best practices can play a model role in shaping the regulatory environment. On issues such as transportation of chemicals by pipeline, truck and rail, the industry has been out front in establishing safeguards—reflecting concerns over legal liability and disrupted production as well as homeland security. Because REACH, FCPA and homeland security concerns continue to evolve, chemical industry companies must develop flexible compliance strategies that can be modified as regulatory provisions change. However, it is imperative to move ahead with compliance efforts today. Waiting until all rules are finalized will likely put any company too far behind the curve in fulfilling its legal obligations. James C. Diggs is senior vice president, secretary and general counsel of PPG Industries. He is Peer Review Rated. James may be reached at diggs@ppg.com. Carolyn J. Buller is a partner and chair of the Global Chemicals Practice at Squire, Sanders & Dempsey L.L.P. She is Peer Review Rated. Carolyn may be reached at cbuller@ssd.com. Among the strongest global law firms, Squire, Sanders & Dempsey L.L.P. combines sound legal counsel with effective, visionary leadership to resolve legal challenges. With approximately 800 lawyers in 30 offices worldwide, Squire Sanders offers one of the most global legal service platforms answering business, advocacy, regulatory and capital market requirements. JULY 2007 17
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