JOHNSON ACT-EXPORT SALES TO COUNTRIES IN DEFAULT IN PAYMENT OF THEIR OBLIGATIONS TO THE UNITED STATES

The Johnson Act (April 13, 1934, 48 Stat. 574, 18 U.S.C. 955) does not prohibit transactions by United States firms or banking institutions for the financing of export sales of particular goods or services, provided that the terms of such transactions are based upon bona fide business considerations and do not involve a public distribution of securities.

The applicability of this criminal statute should depend upon the economic function of a transaction, rather than on its "purely formal characteristics." 42 Op. A.G. 229.

The Johnson Act prohibits general purpose loans to defaulting foreign governments made with moneys obtained through the sale of their instruments of indebtedness to the American public.

THE SECRETARY OF STATE.

MAY 9, 1967.

MY DEAR MR. SECRETARY: This is in response to Acting Secretary Nicholas deB. Katzenbach's request for my opinion concerning the applicability of the Johnson Act (April 13, 1934, c. 112, 48 Stat. 574), now codified as 18 U.S.C. 955,1 to certain kinds of transactions for financing export sales by American firms of nonstrategic goods or services. The prospective buyers would include the governments of the Soviet Union and certain Eastern European countries, which are in default in payment of their obligations to the United States. The Johnson Act makes it an offense, with exceptions not material here, for any person in the United States to purchase or sell "the bonds, securities, or other obligations"

118 U.S.C. 955 provides:

"Whoever, within the United States, purchases or sells the bonds, securities, or other obligations of any foreign government or political subdivision thereof or any organization or association acting for or on behalf of a foreign government or political subdivision thereof, issued after April 13, 1934, or makes any loan to such foreign government, political subdivision, organization or asso

of, or to make “any loan" to, such a government or any organization acting on its behalf.

Commercial sales for export can be financed in various ways. For example, American sellers may extend credit directly to foreign buyers. They may also assign or negotiate to financial institutions the contract rights or commercial paper resulting from such sales. Alternatively, export sales may be financed through lines of credit extended to foreign buyers or their banks, as when letters of credit are issued by American banks in favor of American exporters at the request of such foreign buyers or banks. And today, as Acting Secretary Katzenbach's letter points out, export sales to some of the countries in question may have to be financed through receipt of payment from foreign buyers in kind rather than in currency, or through deferrals of payment pending the development of earnings from joint enterprises. The types of arrangements involving lines of credit, barter transactions and deferrals pending development of earnings are specifically included within the Acting Secretary's inquiry concerning the scope of the Johnson Act. He expressed the view of the Department of State that if a credit transaction, regardless of its form, is connected with an export sale of products or services, it does not fall within the prohibitions of the act unless it is so unreasonable in the commercial sense as to constitute a circumvention of the purposes of the

act.

There have been two formal opinions of the Attorneys General on the application of the Johnson Act to various export financing transactions: 37 Op. A.G. 505 (1934) (At

ciation, except a renewal or adjustment of existing indebtedness, while such government, political subdivision, organization or association, is in default in the payment of its obligations, or any part thereof, to the United States, shall be fined not more than $10,000 or imprisoned for not more than five years, or both.

"This section is applicable to individuals, partnerships, corporations, or associations other than public corporations created by or pursuant to special authorizations of Congress, or corporations in which the United States has or exercises a controlling interest through stock ownership or otherwise. While any foreign government is a member both of the International Monetary Fund and of the International Bank for Reconstruction and Development, this section shall not apply to the sale or purchase of bonds, securities, or other obligations of such government or any political subdivision thereof or of any organization or association acting for or on behalf of such government or political subdivision, or to making of any loan to such government, political subdivision, organization, or association."

torney General Homer Cummings); and 42 Op. A.G. 229 (Attorney General Robert F. Kennedy).

Shortly after passage of the act, Attorney General Cummings ruled that the prohibition against the purchase and sale of bonds, securities, and other obligations was intended to encompass instruments of the kind "which had been sold to the American public to raise money for the use of the foreign governments issuing them-not contemplating foreign currency, postal money orders, drafts, checks, and other ordinary aids to banking and commercial transactions, which are 'obligations' in a broad sense but not in the sense intended. It was obviously not the purpose of the Congress to discontinue all commercial relations with the defaulting countries." 37 Op. A.G. at 512. He went on to say that the comments just quoted apply to acceptance or time drafts, provided that such trade financing transactions are "conducted in good faith *** and not as mere subterfuges to circumvent" the purpose of the act. Id., at 513.

Attorney General Kennedy's opinion dealt with the application of the act to contemplated sales on credit of agricultural commodities to the Soviet Union and Eastern European bloc countries. He concluded that "neither sales transactions by American exporters on a deferred-payment basis, nor payments made to such exporters by third parties in return for an assignment of the right to payment in connection with such sales," were "loans" within the meaning of the act. He further concluded that the "forms of credit transactions in which private exporters commonly engage in connection with export sales on credit, involving the assignment or negotiation of contract rights or commercial paper," would not violate the act's prohibition against the purchase or sale of bonds, securities, or other obligations of defaulting governments. He drew a sharp distinction between obligations of a type widely distributed to the public, which are covered by the act, and “obligations which are not covered because they are issued in the ordinary course of trade and normally move exclusively within the relatively restricted channels of banking and commercial credit." 42 Op. A.G. 229, supra.

Attorney General Kennedy went on to say:

"Direct recourse to the legislative history of the act confirms that both distinctions here made that between loans and commercial credit, and between securities and commercial paper-reflect accurately the intention of Congress and the policy it sought to implement. As noted by Attorney General Cummings, it was obviously not the purpose of the Congress to interfere with the ordinary incidents of trade relations with the defaulting nations as distinguished from participation by them in the capital markets of the United States."

The legislative history referred to in both opinions supports the conclusion that there is no valid distinction under the Johnson Act between the particular types of export financing considered in those opinions and the other types of export financing mentioned above.

The purpose of the Johnson Act is made clear in the Senate Committee report, which stresses that this legislation was designed to prevent a recurrence of the practice of selling to the American people "billions of dollars of securities of certain foreign countries, *** with little thought of final payment * * *." S. Rept. 20, 73d Cong., 1st sess. 1 (1933). Similarly, Representative Sam D. McReynolds, of Tennessee, who was in charge of the bill during its consideration by the House, explained that the transactions at which the bill was aimed were loans to foreign governments made with moneys obtained through the sale of their instruments of indebtedness to the American public. 78 Cong. Rec. 6048-6049. These were general purpose loans, not financing arrangements tied to specific export sales, even though in some cases it had been anticipated in a general way that the moneys raised by the loans would be used to purchase American products. See 78 Cong. Rec. 6055 (remarks of Representative Thomas F. Ford, of California); Hearings before the Senate Committee on Finance on the Sale of Foreign Bonds or Securities in the United States, 72d Cong., 1st sess. 133, 357 (1931-32). Representative

2 In this connection it may be noted that section 2 of the Johnson Act makes an exception for activities, otherwise prohibited, when they are performed by Federal Government corporations. Apparently this exception was designed, in part, to permit the making of general purpose loans to defaulting foreign

Hamilton Fish, Jr., of New York, noted that the bill was not intended to "prevent the free flow of commerce between defaulting nations and ourselves." 78 Cong. Rec. 6050.

***

The scope of the Johnson Act, I believe, is not to be measured in terms of distinctions among the various forms of financing export trade. The applicability of this criminal statute should depend on the economic function of a transaction, rather than on its "purely formal characteristics." 42 Op. A.G. 229. Although the cited opinion did not deal with the three forms of financing about which Acting Secretary Katzenbach's letter explicitly inquires-lines of bank credit, barter arrangements, and deferrals of payment pending development of earnings-I can discern no valid ground of distinction, from the standpoint of the applicability of the Johnson Act, between these forms of financing and the ones which in that opinion were found to be generally permissible under the act. The reasoning of the opinion supports the general conclusion that financing arrangements lie beyond the scope of the act if they are directly tied to specific export transactions, if their terms are based upon bona fide business considerations, and if the obligations to which they give rise "move exclusively within the relatively restricted channels of banking and commercial credit."

On the other hand, as the same opinion suggests, if the financial form of a transaction is a subterfuge to conceal what is, in effect, a general purpose loan, it would violate the act. Nor does the act permit any arrangement that contemplates the marketing of foreign government obligations to the American public.

As a criminal statute, the Johnson Act is to be narrowly construed: "The act is a criminal statute, and therefore must be construed strictly, 'lest those be brought within its reach who are not clearly included,' United States ex rel. Marcus v. Hess, 317 U.S. 537, 542 (1943); United States v. Resnick, 299 U.S. 207 (1936); Kraus & Bros. v. United States, 327 U.S. 614, 621-622 (1946)." 42 Op. A.G. 229.

governments through such agencies as the Export-Import Bank, originally authorized by Executive Order 6581 of February 2, 1934, issued shortly before enactment of the Johnson Act.

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