From PLI s Online Program Sovereign Wealth Funds: A New Challenge for FCPA Compliance #19949 INTELLECTUAL PROPERTY ASPECTS OF DOING BUSINESS IN CHINA

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1 From PLI s Online Program Sovereign Wealth Funds: A New Challenge for FCPA Compliance # INTELLECTUAL PROPERTY ASPECTS OF DOING BUSINESS IN CHINA Elizabeth Chien-Hale Institute for Intellectual Property in Asia Copyright 2007 Attachment I: Copyright 2006 Peter K. Yu. Reprinted with permission of the author Attachment II: Copyright 2005 Peter K. Yu. Reprinted with permission of the author.

2 The The Intersection of of Sovereign g Wealth Funds and and the the Foreign Corrupt Practices Act Act William B. Jacobson, Fulbright & Jaworski, L.L.P. Lucinda Low, Steptoe & Johnson, LLP Kevin M. Loftus, f, Paul, Weiss, Rifkind, Wharton & Garrison LLP DATE TIME PLACE Tuesday, October 7, 2008 ADDRESS 1:00 p.m. 2:00 p.m. EDT Practising Law Institute Audio Briefing

3 What is a Sovereign Wealth Fund? The term Sovereign Wealth Fund (SWF) encompasses a number of different kinds of government-owned or controlled investment vehicles created or owned by governments to hold foreign assets for long-term purposes SWFs are often grouped according to either their purpose/objective, or according to the source of their funding

4 Some Key Statistics Estimates put SWF assets in the $1.9 - $2.9 trillion range, g, larger than total assets under management by hedge funds or private equity funds Some estimates indicate that total SWF assets could reach $12 trillion by 2015 Seven SWFs are estimated to have more than $100 billion in assets Abu Dhabi ($250B - $875B estimates); Norway ($397B); Saudi Arabia Monetary Agency ($250B); Kuwait ($160 - $250B); Singapore (2 funds with $100+B); China ($250B); Russia ($127B)

5 Other International Financial Institutions SWFs must be distinguished from private commercial investment vehicles, such as hedge funds and private equity investors, and international financial institutions, such as the World Bank and IADB.

6 Examples of Investments and Partnerships by SWFs Citigroup: The Abu Dhabi Investment authority purchased $7.5 billion of convertible securities from Citigroup in November The Government of Singapore Investment Corp. ( GIC ) bought $6.88 billion worth of Citigroup in December Kuwait Investment Authority invested $3 billion in Citigroup in January 2008 Merrill Lynch: Singapore s Temasek Holdings fund purchased $4.44 billion of Merrill Lynch stock in December Kuwait Investment Authority invested $2 billion in Merrill Lynch in January 2008 Morgan Stanley: China Investment Co. bought $5 billion of convertible securities of Morgan Stanley in December 2007

7 Recent FCPA Enforcement Activity Unprecedented growth in the number of FCPA investigations and enforcement actions in the last five years by U.S. authorities (DOJ and SEC) Increasing scope of U.S. enforcement as it relates to: 1. Definition of foreign official; 2. Scope of activities against remote and foreign incorporated subs; 3. Foreign entities; and 4. Actions against individuals Increasing coordination and cooperation among U.S. and foreign regulators Increasing world-wide focus on anti-corruption issues

8 How do SWFs Relate to the FCPA? FCPA prohibits payments to a foreign official to obtain or retain business FCPA definition of foreign official includes any employee of a foreign government or any department, agency or instrumentality thereof. DOJ/SEC interpret these terms broadly 12/07: SEC Chairman Cox of the SEC specifically noted the corruption risk potentially posed by SWFs

9 Doing Business with SWFs Travel and entertainment considerations: Employees of SWFs cannot be treated as other commercial partners Treat as government officials i when considering i travel and entertainment Limit to reasonable expenses directly related to the promotion, demonstration or explanation of products or services Whatever policies your organization has with regard to travel and entertainment of government officials must be adhered to vis a vis employees of SWFs

10 Doing Business with SWFs Scenario 1: SWF combining with U.S. company to form commercial finance fund SWF + U.S. Company Commercial Finance Fund Assuming equal ownership and control, fund employees should be considered foreign officials If U.S. company holds vast majority of share in enterprise and SWF does not exercise control, employees are not likely to be considered foreign officials

11 Doing Business with SWFs Scenario 2: SWF invests in U.S. company SWF U.S. Company Employees are now foreign officials if SWF has large percentage of ownership and/or control SWF U.S. Company Employees are not foreign officials if SWF has minority control and/or ownership

12 Doing Business with SWFs Scenario 3: SWF invests in Company X, giving it a large share of Company X and/or control of the company and the company then tries to win business from same government that has an interest in SWF SWF > Company X Home Government

13 Doing Business with SWFs Importance of Pre-Closing Due Diligence FCPA and M&A due diligence has improved dramatically over the past few years This may not be true for transactions involving equity investments Before accepting an investment from a SWF, companies need to consider what steps to take from a diligence perspective 1. Understand ownership structure 2. Seek representatives/warranties regarding compliance with FCPA as you would with other business partners 3. Conduct background diligence on other SWF activities and key management personnel