United States: Avoiding Legal Pitfalls And Cultural Considerations When Conducting International Business In Asia

Doing Business Abroad – 6 Tips From Our Experiences
Last Updated: September 23 2016
Article by Michael E. Slipsky and Saad Gul

The Foreign Corrupt Practices Act

Detailed technical definitions and explanations of what constitutes corrupt practices are available. A simple explanation is that furnishing a foreign government official with anything of value for favorable treatment is considered illegal. FCPA compliance is a highly specialized area requiring the assistance and advice of counsel. It is also fraught with potential difficulty in reconciling some countries' notions of "how business gets done" with the restrictions that FCPA imposes on American businesses.

The cliché of envelopes of cash changing hands in smoky backrooms is outdated. That kind of conduct will certainly trigger FCPA issues, but so will less egregious activities. For instance, providing lavish hospitality, hiring family members of foreign officials, or excessive entertainment can all result in FCPA violations.

In addition to potential criminal and civil liability, which can be considerable, FCPA violations can trigger related problems. For instance, in the M&A context, selling companies (and their owners) are often required to make representations and warranties regarding FCPA compliance. Similarly, FCPA violations can result in SEC enforcement action. Tread carefully.

Intellectual Property

Respect for intellectual property is not universal. There have been cases where outsourced manufacturers have used the intellectual property of their American customers to manufacture and distribute products in their own right. Others have set themselves up as competitors to their former partners after gaining access to key IP assets.

Tackling this problem requires both a legal and a practical approach. From a legal perspective, you should ensure that you have strong non-compete, non-disclosure and non-use provisions in your contracts. Even if you think that it's unlikely that you'll have the time or resources to enforce these kinds of contractual provisions, it is worth spending the time and money to protect your legal position. For example, if you subsequently try to sell your company, prospective buyers will want to see these kinds of contractual protections, and they may have the resources to vindicate those contractual rights.

From a practical perspective, you could start with due diligence on your partner—i.e., is the partner well-established and reputable in the international business community? You could also structure the proposed relationship so the key IP assets remain in the United States – Coca-Cola was famously excluded from India for years because it would not divulge its recipe to local bottlers.

Cyber-Issues

Asia is in the unique position of being relatively technologically advanced but also undersecured from a privacy and security perspective. The Asia Pacific region is most vulnerable to malware threats, according to Microsoft's Malware Infection Index 2016. In addition to national security issues – defense contractors are targeted via hotel networks – industrial espionage is a significant problem.

The optimal approach is to use separate electronics for travel in the region. These should be bare-bones, with enough material to enable you to transact your business and no more. If you take your regular devices with you, make sure you have backups, use strong passwords, avoid public networks, update your protection software, and do not accept any software updates even if they appear to originate from safe sources such as Adobe.

While in a foreign country, you are subject to its laws. Laws and policies regarding online security and privacy may be different in other countries than in the United States. If you would like to become familiar with other laws, the State Department website contains safety information for every country in the world.

It is important to keep in mind that cybersecurity is not just an "identity theft" problem for you. If your device is hacked, you will have breach notification obligations under U.S. law to the extent that personally identifiable information of U.S. citizens was compromised. (And similarly for any other individuals from other countries who have breach notification laws.) Your company may also have various contractual indemnification obligations that would be triggered by a data breach. Likewise, a security breach could tie you up in knots if third-party plaintiffs allege that your cybersecurity practices were negligent or if your own shareholders allege that it constituted a breach of the fiduciary duty of care.

Know Your Partner

Be careful who you do business with. Most partners are regular businesspersons seeking to make a few dollars (or dinars, rupees, dirhams, yuan or yen). However, contrary to the Hollywood stereotype, unsavory characters do not always advertise themselves by sending limousines and Armani-wearing henchmen to your hotel late at night. Therefore, you cannot rely on appearances alone. You have to do your own diligence to ensure that your partner is a legitimate businessperson. You do not want to be connected to any issues involving money laundering, narcotics, espionage, or other problems that will put you on a law enforcement agency's radar. Even if you ultimately walk away with no issues, being listed as an "unindicted co-conspirator" or dealing with law enforcement investigations is stressful and will damage your business prospects.

The best vetting is generally by reputation. The economic affairs section of the local U.S. Embassy or Consulate should be able to guide you. Another excellent resource is the local U.S.-local country Chamber of Commerce. Chamber officials and prominent members can assist you in evaluating the suitability of your proposed partner.

Government Financing and Insurance Options; International Arbitration

The United States encourages American companies to do business abroad. Government agencies, such as the Export-Import Bank, exist to finance American exports and businesses. In addition, a number of international organizations such as the World Bank and MIGA are potential sources of finance. Additionally, these entities can offer insurance coverage for political risk, which is not available through most insurance companies.

The United States is also party to Bilateral Investment Treaties with a number of countries. A BIT is often a prerequisite to government financing. These treaties offer you a number of privileges. Perhaps the most significant is the right to resolve legal disputes via international arbitration, rather than having to potentially litigate in the foreign jurisdiction's court system. ICSID in Washington is one prominent arbitration venue, though London and Paris are also well established, and Dubai, Stockholm, Doha and Singapore have also become popular. In order to take advantage of international arbitration, you will need to have a clear arbitration clause in the contract with your foreign partner. Be sure to invoke it immediately if there is a legal dispute. That protects you from a later argument that you have waived your arbitration rights.

The alternative to arbitration is foreign litigation. Not only is this expensive and time-consuming – decades is common in South Asia – but once entangled, a foreign court could ask you to remain in-country until the matter is resolved, stranding you there indefinitely. Opt for arbitration.

Insurance

Your existing insurance coverage is often limited to your activities in the United States and perhaps Canada. If you undertake business abroad, discuss your needs with your broker. Your D&O, CG&L, and umbrella policies must cover your activities in Asia. Riders extending coverage abroad are available.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Michael E. Slipsky
Saad Gul
 
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