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Executive Summary

When reviewing the legal framework governing a foreign investment, investors must take into account not only the host state’s laws, but also the laws and regulations of their home states that have extraterritorial reach. Two of the most significant examples are laws and regulations concerning economic sanctions and anti-corruption. Investors should take appropriate steps to ensure compliance with these laws when considering foreign investment.

1.0 Introduction

While the diligence associated with the pre-investment phase often, for good reason, focuses on the host state’s laws — including those affecting establishment and admission of the investment, licensing, etc. — it is at the same time important to keep in mind how the investor’s home state laws may also apply to foreign investment activity.

There are a number of ways in which an investor’s home state laws can have extraterritorial reach. Home state prohibitions and restrictions may affect not just the conduct of the investor and investment in the host state, but whether an investment can be made at all. Accordingly, home state laws are a critical element of an investor’s legal diligence in the pre-investment phase.

Below are two important examples of how the home state’s laws can have extraterritorial reach: economic sanctions and anti-bribery and anti-corruption laws. Economic sanctions are also discussed in Chapter 9 of Volume 1 of this series (Trade).

2.0 Economic Sanctions

As economic sanctions have become both more targeted and more sophisticated, they have developed into an increasingly attractive foreign policy tool, particularly for the governments of the United States and the European Union. For example, as of August 2018, the United States operated approximately 35 sanctions programmes.¹ These included country/territory-based sanctions programmes (Iran, Sudan, Syria, Cuba, North Korea, and the Crimea Region of Ukraine) that broadly prohibit transactions involving a given jurisdiction. They also include other more limited “listbased” programmes that identify specific individuals and entities — such as those associated with a targeted regime (such as Venezuela or Zimbabwe), narcotics traffickers (such as the Sinaloa Cartel), or foreign terrorist organisations (such as Al-Shabab) — with which transactions are prohibited.

In general, US sanctions apply to “US persons”, who are defined as “any United States citizen, permanent resident alien, entity organised under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.”² Most importantly, they apply to US persons wherever they are located, thus reaching extraterritorially to impact the activities of US companies and

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US citizens investing or transacting business overseas. In similar fashion, the European Union applies its sanctions restrictions to all nationals of Member States (wherever located) as well as to non-EU nationals who are physically located in the European Union.³

Extraterritorial sanctions can limit the activities of the overseas investment itself if its transactions involve sanctioned parties or jurisdictions. In limited cases, US sanctions directly restrict the activities of foreign-incorporated subsidiaries of US companies. As of December 2017, such restrictions on foreign-incorporated subsidiaries applied only in the case of the Iran and the Cuba sanctions programmes.⁴ However, all US sanctions programmes include either an explicit or an implicit prohibition on “facilitation”, which prohibits indirect sanctions violations. Specifically, a US person (wherever located) is prohibited from facilitating the activities of a non-US person or entity that would violate sanctions prohibitions if undertaken directly by a US person. Penalties for violations are often heavy and can include fines or, in certain cases, criminal prosecution of the companies or the individuals involved.

Sanctions restrictions may not ultimately bar an investment. For example, most sanctions programmes contain certain defined exceptions and general authorisations that limit their scope. Likewise, specific licences authorising activity that would otherwise be subject to prohibition are possible upon application to the appropriate authority of the home state government.⁵ For example, in September 2016, the aircraft manufacturers Boeing and Airbus each obtained licences from the US Treasury Department’s Office of Foreign Assets Control (OFAC) to deliver planes to Iran.⁶

Due to the broad jurisdictional reach of these sanctions programmes during the pre-investment phase investors should:

• As an initial matter, ensure that the country in which you are considering an investment is not subject to a general embargo or country-based sanctions imposed by your home state’s laws that would prohbit you from doing business there at all;
• With regard to list-based sanctions programmes, the governments that impose them (such as the United States and the EU) maintain public and searchable databases of sanctioned individuals and entities.⁷ As part of your diligence on potential business partners or other counterparties in a transaction, ensure that you screen them against these lists to determine whether they are subject to sanctions restrictions; and
• When considering the business activities of your foreign investment, recognise that even if it is a foreign-incorporated entity, its transactions may be restricted by virtue of the sanctions prohibitions that apply to you. Keep in mind, in particular, the prohibition on facilitation of sanctions violations by US persons.

3.0 Anti-Bribery/Anti-Corruption Laws

Another area where enforcement can have extraterritorial reach — and significant implications for a foreign investment — is in the application of anti-bribery/anticorruption laws. In the United States the applicable law is the Foreign Corrupt Practices Act (FCPA); in the United Kingdom, it is the UK Bribery Act. Both are similar in that they criminalise bribes or corrupt payments by US or UK citizens (respectively) to foreign government officials when doing business overseas. A multilateral agreement — the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions⁸ — has also resulted in several other countries enacting and enforcing similar laws targeting corrupt conduct by their own citizens who undertake investments and business transactions in other countries.

As a consequence of these national laws, a foreign investor must maintain effective oversight over the activities of its employees as well as third parties acting on the investor’s behalf in order to prevent corrupt transactions or payments overseas. Not

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only can such conduct invalidate the foreign investor’s ability to seek redress under an international investment agreement,⁹ it may also subject the investor to criminal enforcement by his or her home state government, targeting both the entity and the individual.

During the pre-investment phase:

• Understand the requirements o f y our home state’s anti-corruption/ant bribery laws and how they may impact your need to invest in compliance and financial controls to prevent violations;
• Create a plan to communicate these requirements to any employees, agents, or third parties acting on behalf of the company overseas and to monitor compliance; and
• Evaluate the corruption risk associated with the country in which you are considering an investment (Transparency International’s Corruption Perceptions Index,¹⁰ published annually, is a commonly referred-to publication). If a country is high-risk, consider whether and how you can effectively mitigate the risk of a violation occurring during the period of your investment there.

Notes

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