International Business: Before You Enter a New Market, Do Your Due Diligence

COMMENTARY

As an attorney who has spent the majority of his career litigating and settling international commercial disputes, I have experienced several instances where U.S. companies jump at the opportunity to expand operations into a new market and later become a victim of that country’s unique judicial system. Many of those cases have involved power generation or fuel companies.

Before expanding to a new market, the most important action for companies to take is due diligence. This research should be done on both the country’s judicial system and your business partner—whether that is the government or a private entity. It may sound obvious, but this exercise can be extremely detailed and require extensive analysis into the history of the country and the partner, because some important steps and red flags can easily be overlooked.

Companies seeking to expand into new markets should turn over every stone before signing on the dotted line. Here are some notable issues, laws, and regulations that companies could—and have—fallen victim to overseas.

Personal Property Securities Act

Adopted in Australia, New Zealand, and several provinces in Canada, the Personal Property Securities Act (PPSA) has revolutionized the legal landscape for secured transactions and ownership interest in companies’ owned assets. The law does not just apply to traditional security interests in personal property. It also impacts suppliers, lessors, or bailors to a point where the PPSA can literally override a company’s general ownership rights if the company does not register itself as the owner of the assets in-country.

For example, let’s say you are leasing or loaning equipment to a company operating in Australia. If you have not registered your company as the owner of that equipment in Australia and your lessee goes bankrupt, you may lose title to your own equipment and it becomes property of the creditors of the bankrupt entity in Australia. The title transfers automatically and vests in the debtor upon the filing of insolvency.

Needless to say, the PPSA is extremely dangerous legislation that few companies understand. It could cost your business significant resources to recover your assets.

Discrepancies Among In-Country Government Agencies

While not a specific law, discrepancies among the procedures of different in-country government agencies can place you in an impossible position, even if you followed every law or regulation that your primary business partner expected you to follow.

An example of this occurred in Tanzania. Several years ago, an energy company entered into a contract with a Tanzanian utility. All was well until the company was preparing to remove the plant from the country. At that point, the Tanzania Revenue Authority (TRA) sent the company a $12 million tax bill. Despite being a clear violation of the original contract with the government-owned utility, which clearly stated the contract was tax-free and that the utility would pay the tax if any was owed, the TRA impounded the power plant, locked it, and barred the company from entering.

The issue was resolved through numerous legal strategies, which were significant enough to bring legislation to the U.S. Congress to block funding of about $690 million to the Tanzanian government.

Here’s the key takeaway: when entering into a contract with one government agency, ensure you or your counsel understand the laws and regulations of every other agency within that government, beyond just the one that is contracting you.

Money Laundering Laws

Money laundering is a serious offense, and U.S. companies can easily be charged without directly committing the crime.

If you are doing business with a foreign company or individual who either intentionally or even accidentally is receiving laundered funds that move through a U.S. bank or financial institution, and those funds end up in your account, you could have your well-earned money seized. Money laundering laws are so far-reaching that even if your business partner did not launder money, but one or two of its customers did, the penalty still comes back to you.

Over the years, more than 25 of my clients—including major financial institutions in the U.S. and throughout the Americas—have been a victim of this offense without even knowing the money paid to them was laundered. A close look at how and where your potential business partner receives its money is critical, especially if you do not know them well. You could wind up a victim if you make any assumptions.

Lack of proper due diligence on a foreign market can cost you more than just money—you can lose access to valuable business assets and jeopardize your company’s reputation. Companies in the energy industry would be wise to hire knowledgeable counsel or engage existing counsel to conduct thorough due diligence on any given country or entity prior to a deal to ensure its interests remain protected. ■

—Ed Patricoff is a partner in Shutts & Bowen’s Miami, Florida, office, where he heads the firm’s International Dispute Resolution Practice Group.