Herbert Smith Freehills Tokyo office is preparing a Japanese Investor's Guide to corruption risk in overseas investment in the energy and natural resources sector (the "Guide") which will be made available soon. In this newsletter we provide an overview of the content of the Guide and identify briefly the potential corruption risks that Japanese companies often face when carrying out investments in overseas energy and natural resources projects.
Introduction to corruption risks
Japanese companies have a long and successful record in investing in overseas energy and natural resource projects. Deal structures will differ from project to project, but will commonly involve the investor taking a part interest, with other commercial partners, in a national asset under licence or equivalent from the local state. The corruption risk associated with such transactions has long since been recognised, and increasingly the risk is one which Japanese investors examine closely prior to investment.
Often, however, it is far from easy to confidently assess the risk. The target of the investment may be in a country with a reputation for corruption problems, and yet it may be a challenge to find out very much at all specifically about the target project in that context. If the initial due diligence does not identify specific concerns associated with the project, there can be an understandable temptation to press on with the deal and hope for the best. From a business perspective, however, it remains critical that such decisions are made on an informed basis with an understanding of what the risks may be, and what the consequences could be, in the event that the target project is compromised by corruption.
The concerns can relate to historical, current and future activity:-
- Historical: What are the possible consequences for you if you acquire an interest in national assets that were historically procured through bribery of the relevant government?
- Current: What is happening to the purchase monies you are agreeing to pay? Is any, through intermediaries or otherwise, being paid on to state officials or others, as bribes to facilitate your deal?
- The future: What happens after your investment? Could the joint venture or entity, which you intend to co-own or have an interest in, and/or one of your joint venture parties, or a sub-contractor, commit new acts of bribery with local government to ensure the on-going success of the venture?
Sources of Law
The picture is complicated because a Japanese corporate investor asking itself these questions may need to consider the position under at least three different sources of law with its qualified legal advisers:-
- The law of Japan: For example, the Act on Punishment of Organised Crimes and Control of Crime Proceeds (Act No. 136 of August 1999) is capable of applying to Japanese nationals and companies who acquire overseas assets that represent the proceeds of a historical crime. Companies can be fined, and individuals can be sentenced to terms of imprisonment and/or fined. The Unfair Competition Prevention Act (Act No. 47 of May 19, 1993, as last amended by Act No. 12 of March 31, 2012) also imposes a foreign bribery offence on Japanese companies and individuals, and forbids the bribery of foreign public officials.
- The law of the target country: The anti-bribery laws in the target country will also need to be considered. Anti-bribery laws are common, particularly in relation to the bribery of state officials. Often there can be a historical lack of enforcement in difficult jurisdictions, but that is not a reliable assurance that the same will continue to be the case in the future. It is far from uncommon for incoming governments in developing states to initiate "anti-corruption" drives, usually in order to improve international business confidence in the country in question and sometimes also to embarrass the previous regime. Such initiatives will often start with an examination of the circumstances in which national assets were previously licensed to investors.
- The principal "international" laws: Both the US Foreign Corrupt Practices Act (the "FCPA") and the UK Bribery Act 2010 (the "UK Bribery Act") are capable of applying in circumstances where, at first review, the business and the parties involved have very little to do with either the US or the UK. Fines and settlements with the US authorities for FCPA violations can run into the tens and hundreds of millions of US dollars. Fines under the UK Bribery Act will be unlimited, and commentators have suggested the size of fines in practice could be unprecedented.
Potential consequences associated with corruption issues
An assessment of these different sources of law will need to be made on the facts of each case, but the typical consequences which may arise in cases where corruption is in issue can include:-
- Criminal charges. Heavy fines for corporations and fines and/or terms of imprisonment for individuals.
- Confiscation of assets. If the interest acquired is deemed to represent the proceeds of bribery, then it may be at risk of confiscation, without compensation. Similarly, there may be questions as to the enforceability of contracts or licences procured through bribery and corruption.
- Commission of new related criminal offences. Where the investor, before or after investment, becomes aware of grounds to suspect that the assets represent the proceeds of bribery, he or his advisors may be subject to an obligation to report their suspicion to relevant authorities. Failure to do so, even by an innocent party unconnected with the suspected crime, can itself amount to fresh criminal offence, punishable by fines and/or terms of imprisonment.
- Wider prejudice to your business. A corruption finding can cause enormous reputational and economic damage to a business. It can give rise to events of default or breaches of continuing warranties in unrelated business contracts. Offenders can be barred from future government contracts.
- Loss of defences to criminal charges in connection with unrelated business. Even if the investment in question ultimately results in no direct exposure to corruption problems, there can still be adverse consequences for the investor who proceeds with an acquisition without adequately assessing the risks or by ignoring obvious "red flags". Under the UK Bribery Act an overseas company which carries on part of its business in the UK can be made strictly liable for acts of bribery made on its behalf by its third party service providers in relation to any business, anywhere in the world. The only defence to such an offence is for the company to show that it had "adequate procedures" in place which were intended to prevent such conduct. A company which makes investments in areas of high risk, without adequately assessing and taking steps to mitigate those risks, may find it difficult to demonstrate that its anti-corruption procedures should qualify it for such a defence.
As identified above, corruption issues can be difficult to identify, the relevant sources of law complicated and the consequences they may give rise to potentially damaging to the investment and the investor's reputation and wider business. In the Guide, we will assess some of the principal corruption risks which may arise in the energy and natural resources sector, and then consider in that context what practical steps a potential investor can take before and after investing to seek to minimise those risks.