The Securities and Exchange Commission has raised disclosure issues with regard to Ford Motor operations in several countries deemed by the U.S. to be state sponsors of terrorism. In a letter fired off on July 5—but released last Friday by the regulator—the Commission asserted that the automaker’s website and news accounts suggest that Ford has operations in Sudan and Syria, and that a subsidiary has operations in Iran and Syria.
“Your annual report does not include any information about these operations,” SEC Division of Corporation Finance Branch Chief David R. Humphrey said in the letter to Ford Chief Financial Officer Don Leclair. The SEC further points out that Iran, Sudan, and Syria are identified as state sponsors of terrorism by the State Department, and are subject to economic sanctions and controls administered by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) and the U.S. Commerce Department’s Bureau of Industry and Security (BIS).
In the letter to the automaker, the SEC demands that Ford “describe” its past, current, and anticipated operations in Sudan, Syria, and Iran, including whether the operations involve subsidiaries, affiliates, joint ventures, or other direct or indirect arrangements. “Include in your response a description of the products and services you sell, and the nature and extent of your business operations in each country,” continued the missive.
The SEC also requested that the automaker reveal whether any of the distributorships through which its products are sold into the countries are owned or controlled by the governments of Sudan, Syria, and Iran, or whether the governments of these countries have a financial interest in the sale of Ford products to local customers. Further, the SEC asks Ford to discuss the materiality of its contacts with the trio of countries in light of their status as state sponsors of terrorism.
According to its website, Ford currently has five dealers in Syria. However, the company currently does not indicate that it has any operations in the Sudan.
In a response letter sent to the SEC’s Humphrey, and dated July 18, James C. Gouin, Ford’s vice president and controller asserts that Ford and its majority-owned subsidiaries “do not directly or indirectly conduct business in Sudan or Iran, except that our Land Rover subsidiary has a contractual relationship with a distributor in the United Kingdom that sells Land Rover models into various markets, including Sudan.” Gouin also said that laws administered by OFAC and BIS permit Ford to sell products into Syria as long as the products contain less than 10 percent of U.S.-made content In addition, Gouin’s letter said that the rules also permit any U.S. “persons”—for example, Ford—to do business with Syrian nationals who are not government officials.
“Specifically, we have one authorized Ford-brand dealership in Syria,” the letter further states. Also, the letter points out that non-U.S. subsidiaries Volvo, Land Rover, and Jaguar each have an authorized dealership in Syria. “These companies sell only products with less than 10 percent U.S. content to their authorized dealerships,” the letter notes.
The finance executive also wrote that Ford owns about 33.4 percent of Mazda. He explains that although the two companies share strategic cooperation, Mazda is a separate legal entity with a majority of board members independent of Ford, and Ford’s equity interest in Mazda does not meet the requirements for consolidation. “However, as indicated on Mazda’s public website, we are aware that Mazda distributes its products in Iran and Syria through distributors located in those countries,” Gouin conceded.
Treasury Department spokeswoman Molly Millerwise said there is no general prohibition on a U.S. company doing business in Syria, reported the Associated Press. However, she stressed that American companies cannot do business in Iran or Sudan unless licensed or exempted from economic sanctions.
Nevertheless, in its letter, the automaker contends that it does not believe that the activities of Ford and its subsidiaries “should be considered material from a quantitative standpoint,” since the amount of revenue generated by these activities in 2005 came to $50 million—a fraction compared to Ford’s global revenues of about $177 billion. Although Ford may be correct that on a percentage basis, $50 million is not material to a company of its size, the word “qualitative” raises further questions.
Indeed, in a
follow-up letter to Leclair dated July 26, the SEC called on the CFO to expand his materiality analysis to “discuss the possibility that, notwithstanding the legality of your direct and indirect contacts with those countries, your reputation and share value may be negatively impacted by the fact that you do business in these countries that have been identified as terrorist-sponsoring states.” Humphrey also asks Ford to address the potential impact upon the company’s reputation and share value of the fact that Mazda does business in Iran and Syria, pointing out that the Ford website home page includes a link to “mazdausa.com,” among links to other vehicle brand websites, under the heading “Great Products – our family of brands.”
In the July 5 letter, the SEC also asked for additional information regarding other matters. It questioned, for example, Ford’s disclosure about future pension fund contributions. Rather than just cross-referencing a footnote on the subject, the SEC asked Ford to discuss the expected sources of pension funding in the Liquidity and Capital Resources segment of Management’s Discussion and Analysis section of its annual report. The SEC also requested that in its disclosures related to Aggregate Contractual Contributions, the automaker includes a discussion of, or an appropriate cross reference to, descriptions of other obligations, such as its expected future pension plan contributions. The regulator also called on Ford to explain why it has not accounted for Hertz as a discontinued operation.
In its response letter, Ford promised that beginning with its 2006 Annual Report, it will include a cross-reference that takes readers to the discussion of its pension and other post-employment benefit obligations. It also said its sale of Hertz did not meet the criteria under SFAS No. 144 for presentation as a discontinued operation.