Much of the world’s population, and many of the world’s most vital resources, are located in conflict zones or in countries where the rule of law is not well developed. In fact, most of the world’s population lives under regimes that are either corrupt or tolerant of corruption. This poses significant challenges for American or Western companies and individuals that wish to pursue business opportunities in these regions: doing business in Southern Asia or Central Africa or even in certain locations in Europe or Latin America is not like doing business in the United States or the European Union. The run-of -the-mill compliance programs used by U.S. companies operating in the United States or in the European Union are not sufficient to protect a company when it comes to operating in one of these frontier legal markets.
This is not to suggest that corruption does not exist in the United States. In fact, as this article is being written, a former President, a sitting Senator, and at least two members of the House of Representative face criminal trials. However, the U.S. Department of Justice (DOJ) is more aggressive at enforcing its laws extraterritorially that any other law enforcement agency in the world. Laws such as the Foreign Corrupt Practices Act (FCPA), the International Emergency Economic Powers Act (IEEPA) and the violations of Export Control Regulations carry substantial civil as well as criminal penalties. It would be unwise to assume that something that happens “over there” is not going to be discovered by DOJ. In addition to DOJ’s vast resources, there is the ever-present danger of a whistleblower coming forward and reporting the violation.
There are other challenges to conducting business in these frontier markets as well. Many countries do not have a legal system that is capable of fairly addressing issues that arise in a complicated breach of contract case, especially if there are allegations of fraud or corruption. Prosecutorial authorities in these regions may lack the will, the resources, or the legal framework to deal with these allegations, which, unfortunately arise in frontier markets. Overlaying all of this is the ever-present sector of corruption. If a dispute arises, how is it going to be resolved? And who is going to resolve it? Too often, companies fail to consider these questions before the dispute arises, often leaving them in a poor position to resolve the dispute.
Although these are all serious considerations, there are many more that anyone wishing to engage in business in these regions must consider. The mail fraud and wire fraud statutes and the various money laundering statutes all need to be considered. There may be international treaties, such as the Kimberley Process, concerning conflict diamonds, that need to be considered. There are also local laws and customs that must be navigated. Attempting to understand and navigate these laws is a daunting task.
However, for those willing to navigate this labyrinth of laws and customs, the rewards can be spectacular. Vast amounts of gems and strategic minerals are found in these regions of the legal frontier—business opportunities are, for all practical purposes, unlimited. There are also substantial human rights reasons to conduct business in these areas (and international human rights laws to consider as well). Many Western companies decide that the risk of conducting business in these areas is too great, and they simply abandon development of these regions. This denies the local population the benefits of a fair development of the communities’ resources and results in the abandonment of these regions to unscrupulous, corrupt companies from corrupt or ambivalent regimes around the world.
Is it Possible to Conduct Business in These Legal Frontier Regions?
The short answer is “yes”. The longer answer is “yes, but companies wishing to do so must be both sophisticated and careful in these transactions”. This begins with a clear understanding of the objective of any agreement. Americans cannot bribe foreign officials. There are no exceptions, and hiring local fixers, politicians, children of politicians, etc., is a non-starter. This does not mean that discussions with foreign officials or others are prohibited. They are not. In fact, it is perfectly appropriate to meet with foreign officials to outline the benefits of a project to the foreign official, both to the country and to him or her personally, if it is done properly.
There are also opportunities to sell goods or services to governments and companies operating in these legal danger zones, but sometimes, these companies may simply be fronts for sanctioned entities set up as a means of avoiding sanctions or export controls. It is therefore important to know with whom you are dealing with. This includes not only the name of the entity but its legal and beneficial owners. There are reports of Russian intelligence services setting up companies in jurisdictions where the rule of law is weak for the purpose of obtaining American or Western technology the Russian government could not otherwise access. If one is not careful, they may find themselves under investigation or indictment in the U.S. for aiding and abetting a sanctioned entity or a violation of export controls.
It is also self-evident that not everyone is who they appear to be, and frauds may be rampant. It is therefore important to ensure that the company or individual is who they say they are. We have seen cases where companies have invested millions of dollars into foreign developments only to find that a joint-venture partner does not own the land being developed. We have seen forged government permits and licenses and government officials well a nation’s resources even though they were prohibited from doing so by that nation’s constitution.
Occasionally, we are contacted by one of these companies that has been victimized. In most of these cases, the problem the companies encountered seems obvious in retrospect, but the solution is usually elusive. They may flail around, hiring local attorneys to represent them in a corrupt local court system, or they may go to the U.S. Embassy only to find that the U.S. government is not going to help them out. In fact, the U.S. Embassy is as likely to report the matter to DOJ as they are to do anything positive.
Avoiding, or at Least Minimizing Risks
It is probably impossible to avoid all risk in life, but it is possible to minimize most risk. The minimization of risk, however, begins with understanding the risk and then taking steps to avoid it. This begins with understanding the subject matter involving the risk and knowing the individuals or companies that are going to be involved in the transaction. Investigating the individuals and entities involved in the matter is a start. If a company involved in the transaction is an undercapitalized Chinese shell company, it does not matter how iron-clad the contract is. If they have no ability to pay, an aggrieved party has no ability to collect. It is also important to make sure that neither the foreign entity nor its legal or beneficial owners are under U.S. sanctions. Dealing with a sanctioned company or individual can result in substantial penalties in the U.S.
Next, it is important that the foreign party understand the limitations an American entity has in dealing with foreign governments or partners, and it is important for the American entity to understand that there may not be a clear-cut distinction between a foreign government and a corporation domiciled in that country. Under the FCPA any payments made to entities outside the contract could constitute a violation of U.S. law.
Language and culture are also obstacles that can result in conflict, and misunderstandings stemming from unclear language or cultural differences need to be minimized. They are important in the negotiating phase of the agreement, but culture and language perinate everything throughout the business relationship. In some regions of the world, for example, negotiations are never viewed as over, and even after the contract is signed, some people will believe that they can renegotiate its terms, a cultural phenomenon unknown in the United States.
After the contract has been signed, local laws or customs may interfere with contract performance. Local labor laws may grant rights to workers that are shocking to U.S. corporate executives. Ongoing management of the relationship should be a major priority for the contracting parties.
Resolving Conflicts when they Arise.
Perhaps my background makes me jaded, but conflicts seem to arise in almost every international agreement. It is therefore important to anticipate conflicts and build mechanisms into an agreement to resolve conflicts as efficiently as possible. Many times, conflicts can be resolved at the time the conflict arises through skillful communications and negotiations. Conflicts usually result from a misunderstanding. Finding and correcting the source of that misunderstanding can go a long way toward ensuring a successful resolution of the problem. This often requires flexibility.
Negotiations are the best way to resolve conflict; however, skillful negotiators are hard to find. Having the wrong person involved in negotiations at the beginning of a conflict can increase both the cost of a dispute and make resolution less likely. An attorney skilled in international negotiation and who is familiar with U.S. law and local law and custom is usually the best negotiator. Sometimes a company will rely on a local manager to resolve an issue to save money. This can result in even greater attorney’s fees later. Our blog article, Understanding Dispute Resolution: Negotiations, explains this topic in greater detail.
If negotiations fail, there must be a meaningful way to resolve disputes. Parties can generally agree to court jurisdiction and venue, as well as arbitration or mediation in the contract itself. Without these provisions, any disputes may be resolved in local court systems. These court systems can be corrupt, or they may be staffed with judges that favor the local party. It is generally recommended that the agreement contain a provision requiring arbitration before the International Chamber of Commerce International Court of Arbitration, the London Court of International Arbitration, the International Center for Dispute Resolution of the American Arbitration Association, or some other recognized international arbitration center. These arbitrational fora offer a fair and efficient way to resolve disputes when they arise.
Fraud is a constant risk in frontier legal markets, and fraud and corruption often arise in the course of international dispute resolution. Understanding how theories of fraud and corruption, and defense to the two, interact with the international arbitration is vital in these cases.
Choosing the Right Law Firm in these Unique Markets.
Not many firms are equipped to work in regions of the world where fraud and corruption are prevalent. Their expertise, though formidable, is usually restricted to the United States or Western European jurisdictions where the rule of law is well-established and predictable. When confronted with situations where fraud, corruption, and sanctions violations are common, they normally advise their clients to forgo the opportunity. From a law firm management perspective, this makes sense. These firms give safe, risk adverse advice. When problems do arise, they do not understand the legal environment where the conflict arose and are ill-prepared to provide appropriate representation.
Unfortunately, the world is filled with conflict zones that are never safe, and as one conflict ends, others arise. It is also true that a calculated risk could result in vast rewards. Our goal at Boyle & Jasari is to advise clients on these risks and how to minimize them. We have represented white-collar defendants and victims of fraud for decades. We have handled multiple cases under the FCPA and IEEPA. We have also successfully represented claimants in international arbitrations. We have been to conflict zones and negotiated the resolution of disputes in regions where the rule of law is weak. We also represent entities accused of or are under investigation for the alleged violation of U.S. law, and we represent victims of fraud and/or corruption.
Our focus is and always has been on providing the best advice possible to our clients. Our background and experiences make us uniquely qualified to respond to matters arising in the frontier regions. Rather than look for reasons to say no, or worse yet, offer criticism after the fact, we look for ways to make things work. If you are contemplating a transaction in one of these regions or are already facing issues, please feel free to contact us. We may be able to help.