From PLI’s Online ProgramSovereign Wealth Funds: A New Challenge for FCPA Compliance#19949

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INTELLECTUAL PROPERTY ASPECTS OF DOING BUSINESS IN CHINA

Elizabeth Chien-HaleInstitute 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.

The Intersection ofSovereign Wealth FundsThe Intersection ofSovereign Wealth Funds

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and the Foreign Corrupt Practices Actand the Foreign Corrupt Practices Act

William B. Jacobson, Fulbright & Jaworski, L.L.P.Lucinda Low, Steptoe & Johnson, LLPKevin M. Loftus, Paul Weiss

William B. Jacobson, Fulbright & Jaworski, L.L.P.Lucinda Low, Steptoe & Johnson, LLPKevin M. Loftus, Paul, Weiss, Rifkind, Wharton &

DATE TIMEPLACE

f ,

Tuesday October 7 2008

f , , , f ,Garrison LLP

PLACEADDRESSTuesday, October 7, 20081:00 p.m. – 2:00 p.m. EDTPractising Law Institute Audio Briefing

What is a Sovereign Wealth Fund?

• The term “Sovereign Wealth Fund” (SWF) encompasses• The term “Sovereign Wealth Fund” (SWF) encompassesa number of different kinds of government-owned orcontrolled investment vehicles created or owned bygovernments to hold foreign assets for long-termpurposes

• SWFs are often grouped according to either theirpurpose/objective, or according to the source of theirfunding

Some Key Statistics

• Estimates put SWF assets in the $1.9 - $2.9 trillion range,p g ,larger than total assets under management by hedge fundsor 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 billionin assets – Abu Dhabi ($250B - $875B estimates);Norway ($397B); Saudi Arabia Monetary Agencyy ( ); y g y($250B); Kuwait ($160 - $250B); Singapore (2 fundswith $100+B); China ($250B); Russia ($127B)

Other International Financial Institutions

SWFs must be distinguished from private commerciali hi l h h d f d d iinvestment vehicles, such as hedge funds and privateequity investors, and international financial institutions,such as the World Bank and IADB.

Examples of Investments and Partnerships by SWFsp y

• Citigroup: The Abu Dhabi Investment authority purchased$7.5 billion of convertible securities from Citigroup in$7.5 billion of convertible securities from Citigroup inNovember 2007. The Government of Singapore InvestmentCorp. (“GIC”) bought $6.88 billion worth of Citigroup inDecember 2007. Kuwait Investment Authority invested $3billion in Citigroup in January 2008billion in Citigroup in January 2008

• Merrill Lynch: Singapore’s Temasek Holdings fund purchased$4 4 billion of Merrill Lynch stock in December 2007 Kuwait$4.4 billion of Merrill Lynch stock in December 2007. KuwaitInvestment Authority invested $2 billion in Merrill Lynch inJanuary 2008

• Morgan Stanley: China Investment Co. bought $5 billion ofconvertible securities of Morgan Stanley in December 2007

Recent FCPA Enforcement Activity

• Unprecedented growth in the number of FCPAinvestigations and enforcement actions in the last fiveinvestigations and enforcement actions in the last fiveyears 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; and4. Actions against individuals

• Increasing coordination and cooperation among U.S.and foreign regulators

• Increasing world-wide focus on anti-corruption issues

How do SWFs Relate to the FCPA?

• FCPA prohibits payments to a “foreign official” to obtain or retain businessto obtain or retain business

• FCPA definition of “foreign official” includesFCPA 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

Doing Business with SWFs

Travel and entertainment considerations:• Employees of SWFs cannot be treated as other

commercial partnersT t t ffi i l h id i• Treat as government officials when consideringtravel and entertainment– Limit to reasonable expenses directly related to theimit to easonable expenses di ectly elated to the

promotion, demonstration or explanation of productsor servicesWhatever policies your organization has with regard– Whatever policies your organization has with regardto travel and entertainment of government officialsmust be adhered to vis a vis employees of SWFs

Doing Business with SWFs

Scenario 1: SWF combining with U.S. company to form commercial finance fundcommercial finance fund

SWF U.S. Company++

Commercial Finance Fund•Assuming equal ownership and control, fund employees should be considered foreign officialsshould 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 officialslikely to be considered foreign officials

Doing Business with SWFs

Scenario 2: SWF invests in U.S. company

SWFU.S. Company• Employees are now foreign officials if SWF has large percentage ofif 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

Doing Business with SWFs

Scenario 3: SWF invests in Company X, giving it a largeshare of Company X and/or control of the company andshare of Company X and/or control of the company andthe company then tries to win business from samegovernment that has an interest in SWF

SWF > Company X

Home Government

Doing Business with SWFs

Importance of Pre-Closing Due DiligenceFCPA d M&A d dili h i d– FCPA and M&A due diligence has improveddramatically over the past few years

– This may not be true for transactions involvingequity investments

– Before accepting an investment from a SWF,companies need to consider what steps to take fromcompanies need to consider what steps to take froma diligence perspective1. Understand ownership structure2 Seek representatives/warranties regarding compliance with2. Seek representatives/warranties regarding compliance with

FCPA as you would with other business partners3. Conduct background diligence on other SWF activities and

key management personnel