March 10, 2013

Lobbying threatens prospects for ethical American investment in Myanmar

Photo: The headquarters of the US Chamber of Commerce in Washington, D.C (Ron Cogswell\flickr).

American businesses are keen to invest in Myanmar’s long-moribund economy, but until domestic regulations are significantly strengthened, Western sanctions will remain a vital tool to prevent corruption and human rights abuses in business transactions.

Conference organisers were unprepared for the turnout when the US Chamber of Commerce (USCC) came to downtown Yangon on February 25^th. The headquarters of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI) was filled to capacity with business leaders, journalists and prospectors of all stripes. “We don’t have enough programmes to go around – we’re down to the last few,” said the clearly exasperated UMFCCI staffer behind the press desk. “We just didn’t expect so many people to show up.”

The signing of a memorandum of understanding between American and Myanmar business leaders would have been unthinkable only a short while ago, yet here was UMFCCI president U Win Aung awkwardly shaking hands with Jose Fernandez, the US Assistant Secretary of State for Economic and Business Affairs, amid a hail of camera flashes and applause. For all the talk of progress and cooperation, the carefully scripted rapport between the American commercial establishment and the UMFCCI belies a more complicated reality.

Although the US suspended most financial sanctions against Myanmar in April of last year, the Office of Foreign Assets Control (OFAC)– an agency of the US Treasury Department – maintains a list of Specially Designated Nationals (SDNs), individuals with which US citizens and permanent residents are not allowed to do business. The US has chosen to maintain this blacklist as part of a “careful and calibrated” easing, as Fernandez put it.

Among the names is U Win Aung, who, aside from his position at the UMFCCI, is chairman of the Dagon group, a sprawling conglomerate with close ties to Myanmar’s former military government. Other Western countries, including Australia, Canada, and the European Union, maintain their own lists of targeted sanctions that differ slightly from Washington’s.

The fact that Asian countries never imposed trade sanctions on Myanmar has given Asian companies a huge head start in taking advantage of its economic opportunities, leading American business leaders to complain they have been cut out of the Myanmar gold rush. Despite these concerns, there is an important ethical and business case to be made for maintaining targeted sanctions against the worst ‘cronies’ of the former military regime, even if comprehensive financial sanctions have been suspended. While foreign investment is necessary for economic development to take root, the race to secure a slice of Myanmar’s economic potential risks becoming a race to the bottom.

Weak regulations and monitoring standards in Myanmar make it easy for companies to disregard environmental and ethical principles. A lack of internal capacity to deal with these issues reinforces the need for external mechanisms to help promote minimally acceptable standards.  In an interview with the Associated Press, Fernandez said that the SDN list was valuable due to lingering “concerns about human rights abuses, as well as continued political prisoners, continued military ties to North Korea and corruption.”

Like all of his tycoon counterparts, U Win Aung amassed his fortune  – made mostly in the timber, construction, rubber and energy industries – through connections with Myanmar’s military elites. Despite efforts to improve transparency, it is very difficult to ensure that the old regime’s favoured sons will reform their questionable business practices voluntarily.

Ethical business practices have never been particularly high on the list of priorities for large, military-linked companies in Myanmar. According to an American diplomatic cable dating from December 2007, U Win Aung’s Dagon group was granted “permission to cut teak in protected forests,” and routinely underreported the value of its log exports, smuggling “an estimated $5 million in teak logs to China annually, substantially more than the reported exports of $161,000,” according to the cable.

Fernandez made cautious reference to these concerns in his address to the UMFCCI: “We want US companies to invest here, but we want them to do so in a socially and environmentally responsible manner,” he said. “As a result, we’ve paired our [easing of] sanctions with reporting requirements that [have] never been included in US law for other sanctions. These reporting requirements are to encourage responsible investing, including with regard to promoting transparency.”

Western media analysts noted that the conference itself could be interpreted as being in breach of official sanctions policy, but few in the USCC delegation appeared concerned. While the Obama administration intends to keep targeted sanctions for the time being, the USCC has publically advocated for all remaining sanctions to be dropped. “We’re encouraging reform in the government, we can’t encourage reform in individuals?” said Richard Vuylsteke, the president of the American Chamber of Commerce in Hong Kong, a USCC affiliate, in a December 2012 interview with AP. Maintaining sanctions while deepening links with the nominally civilian government is counterproductive, he claimed, as dropping targeted sanctions would “give these guys [listed business tycoons] an incentive to integrate into the system.”

Just what kind of system these targeted individuals would be integrated into, however, is a big question. Despite reforms, Myanmar remains one of the most corrupt countries on earth, ranking fifth from bottom in Transparency International’s most recent Corruption Perceptions Index. A lack of institutional capacity will prevent the government from addressing the problem of unethical and corrupt business practices, underscoring the need for external compliance mechanisms like the SDN list.

The reporting requirements mentioned by Fernandez apply to any company making new investments of US$500,000 or more in Myanmar. Investors will be required to submit annual reports to the State Department, detailing “information regarding policies and procedures with respect to human rights, workers’ rights, environmental stewardship, land acquisitions, arrangements with security service providers, and, aggregate annual payments exceeding $10,000 to Burmese government entities, including state-owned enterprises,” according to a joint State Department-Treasury statement from July 2012. But the Myanmar government is ill-equipped to enforce such standards, and accurate reporting standards are very difficult for the US government to enforce from afar.

A comprehensive March 2013 report on the rule of law in Myanmar, by Washington, DC–based consulting firm Perseus Strategies, found that President U Thein Sein and his allies are interested in making “genuine reforms; however, many government institutions are quite fragile and the role of the military remains opaque,” leading the authors to claim that “in the near term, reforms are likely to be institutional/legal and, with the exception of greater civil and political rights in large cities, not felt by the vast majority of the population of the country.” Myanmar’s underdeveloped economy is dominated by extractive industries and agricultural production, and listed individuals have significant interests in these sectors. These are precisely the areas in which state oversight is unlikely to extend in the short term.

The desire to shed the regulations that have shackled American business interests in the past are likely to outweigh concerns over human rights issues. Tami Overby, the USCC’s vice-president for Asia, made no mention of existing sanctions in her address. ““I use the term ‘normalisation’ very intentionally,” she said in her opening remarks. “After all, we’re simply moving to a place where we will have the same diplomatic and commercial partnerships as we do with all our other ASEAN partners… [m]aybe we should call this the ‘New Normal’.”

For the USCC, a momentum has started that they clearly wish to see continue. Overby’s address offered an ebullient assessment of Myanmar’s reform process. “It is now time for Myanmar and the United States to take their relationship to the next level. It is important that our efforts here today begin to yield concrete trade and investment achievements,” she said. “We’re still in the early stages, and the reform agenda ahead is massive, but there’s a real sense of momentum, as evidenced by the large turnout here today, which we must sustain.”

The USCC is the single largest lobbying organization in Washington, and has overwhelmingly supported anti-regulation politicians affiliated with the far-right-wing of the Republican party since 1997, when its current president and CEO, Tom J. Donohue, took office. According to its website, the USCC “has one overarching mission—to strengthen the competitiveness of the U.S. economy,” and spends tens millions of dollars on campaign donations and advertising each election cycle.

Although it tries to portray itself as an advocate for small businesses, the USCC derives the vast majority of its funding from major corporations. As a ‘non-profit’ organization, it is not required to disclose its donor base under US law, although a 2010 investigation by the New York Times found a litany of contributions from financial, chemical and energy companies pushing for deregulation in their respective industries.

The USCC’s lobbying goals are not limited to weakening regulations in the United States alone. On the agenda is reform of the Foreign Corrupt Practices Act (FCPA), long the bane of American multinationals operating abroad. Although it has been part of US law since 1977, the US Department of Justice and the Securities and Exchange Commission have pursued FCPA prosecutions with increased zeal over the past decade. At its core, the FCPA prohibits American firms or American-linked entities from bribing foreign officials abroad.  Many contributors to the USCC’s coffers have fallen afoul of FCPA enforcers in recent years – including Chevron, which has extensive interests in Myanmar.

Countries with highly transparent regulatory environments still attract the most foreign investment, but, perversely, there are incentives for multinationals to engage in corrupt practices in countries that are unable or unwilling to crack down on them. A recent study by three US-based academics found that highly corrupt states are more attractive to foreign investors than moderately corrupt ones. In a New York Times op-ed published in late January, Michael S. Pagano, a professor at Villanueva University and one of the study’s authors, explained that “potential investors know who is in charge” in highly corrupt states and plan accordingly. “In moderately corrupt countries,” he elaborates, “it is unclear who is in charge and how to play the game.” The cost of doing business becomes more costly when US authorities intrude, so it is little wonder that reform of the FCPA is high on the USCC’s agenda. Corrupt practices make good business sense if companies are not penalized for engaging in them.

The USCC has criticized the FCPA for its vagueness, claiming it leaves businesses unsure as to whether their practices are in violation of the Act, and gives regulators carte blanche to assume bad faith in their investigations. In response, the US government to release a 130-page ‘resource guide’ to help with compliance efforts. Despite Washington’s attempt at improving clarity, the USCC is pushing for reforms that would substantively water down the FCPA’s deterrent effects.

In a 2010 booklet, the USCC proposed the FCPA be amended by adding a ‘compliance defence’ clause, that would allow American companies to deny liability for corruption if it is committed by local employees or foreign subsidiaries without the company’s direct knowledge. In practice, this would give companies much more scope to deny responsibility.

The USCC claims that companies should not be held accountable for individual employees or subsidiaries paying bribes if they can demonstrate to law enforcement that they have made a good-faith effort to implement suitable anti-corruption mechanisms internally. In practice, however, this will prompt companies to develop impotent and superficial anti-corruption programs – which will provide no incentive for companies to avoid bribing foreign officials if they can claim ignorance.

The USCC has also advocated that companies accused of FCPA violations get a fresh start if they are bought out, absolving the companies that buy them of FCPA-related penalties. This makes a mockery of the notion that companies should do due diligence on potential acquisitions – and, with a bit of creative legal sleight-of-hand, could allow for companies to change their ownership structure in order to pardon themselves.

Despite Fernandez’ claim that “American businesses act as responsible partners in the countries that they invest in,” and that this is “an integral part of US corporate culture,” the USCC’s efforts to undermine anti-corruption legislation tell a different story. Corporate dissatisfaction with the existing rules, coupled with a Myanmar government that is – at best – incapable of enforcing ethical business standards, highlights why targeted sanctions will remain important tools to promote transparency and ethical standards in the short term.

There is evidence to suggest that the American carrot-and-stick approach has prompted some listed companies to change their behaviour. While listed entities have plenty of Asian partners to work with, normalized economic relations with the US serve as an important seal of international legitimacy. The ostensible reform of Max Myanmar Group, one of the most notorious land-grabbers under the old government, serves as a case in point.

Max Myanmar and its CEO, U Zaw Zaw, are still listed by OFAC, and the company has routinely made use of land confiscated by the military from small-hold farmers without compensation across the country. An April 2009 report from Karen Human Rights Group details the company’s seizure of 120 acres of land in Thaton district of Mon State, destroying the livelihoods of farmers who – as the report notes – “will potentially have to apply to work for Max Myanmar in order to support their families.” Another massive land grab in Yangon’s Dagon Seikkan township – involving 16 companies including Max Myanmar – displaced thousands of residents who were offered as little as K 20,000 (US$22.50) per acre for their land, according to a July 2012 report by Eleven Media.

These incidents represent a miniscule proportion of the land seized under the former government. In the first month of the committee’s existence, it received over 500 individual complaints about disputed ownership of some 250,000 acres, according to an Irrawaddy report from March 2013. And despite the formation of a parliamentary committee to look into land tenure issues in June 2012, land grabs remain an ongoing problem.  As if historical claims were not enough, land disputes are turning violent: a late February clash over land tenure issues in Maubin Township, Ayeyarwaddy Division, left one policeman dead and 40 villagers injured.

But there is evidence to suggest that local companies know this cannot continue. In a surprise move last December, Max Myanmar paid 13 farmers in the Ayeyarwaddy Delta US$838,000 for 106 hectares it had seized in 2008 (an incident unrelated to the recent violence in Maubin), and pledged to give similar compensation to victims of the Dagon Seikkan land grab. While this is only a token acknowledgement of wrongdoing, it at least establishes that the company is aware of the need to reform its practices. However, until Max Myanmar proves that it has made a concerted effort to improve its old habits – a process that may take a number of years – it would be premature to remove targeted sanctions entirely, as the state’s ability to act as a watchdog will be weak for the foreseeable future.

Despite U Win Aung’s exhortation that “that total lifting of sanctions can only enable investors to come and invest without any hesitation in our new era of new economic development,” targeted sanctions can help promote responsible business practices. When foreign multinationals are all too eager to take advantage of Myanmar’s corrupt and unregulated business environment, the rationale for preventing them from partnering with corrupt business interests becomes much more important.