Term Paper on "Expropriation and Compensation of Foreign Direct Investments in EU and Developing Countries"

Term Paper 25 pages (6406 words) Sources: 1+

[EXCERPT] . . . .

Expropriation and Compensation of Foreign Direct Investments in the EU and Developing Countries

The Modern Case of Expropriation in the European Union and Developing Countries

Expropriation

Direct Expropriation

Indirect Expropriation

Legality of Expropriation

Compensation

Valuation of Assets

Determining Compensation

Future of Expropriation

The world is changing. Modern day investing is going global like never before. As more and more investors head to foreign lands to develop new profit potential, the issue of expropriation is being continuously redefined. Once considered a basic loss of investors to have had their assets seized by a host State, as in the case of nationalization, there are more and more protections which guarantee not only the sovereignty of the host State but also the protection of foreign investment assets that have been acquisitioned. Organizations like the North American Fair Trade ACT (NAFTA) and the International Centre for Settlement of Investment Disputes (ICSID) have been organized and refined to help handle the matter of expropriation and how it should be handled in terms of both State and foreign investor relations. With these new regulations come international foundations for investment law which governs over foreign investments that go beyond domestic containment. In many cases, bilateral investment treaties (BIT) are set up by various nations to help protect their investors abroad and when the stipulations of these treaties are broken, investors and States turn to such regulatory bodies as NAFTA and ICSID to help govern cases of compensation and unlawful expropriation. Cases of direct expropriation, common in more developed nations are handled by the regulatory bodies right along side more controversial cases on indirect expropriation. In order to further combat asset losses, many developed nations such as those found within the European Union, enter into bilateral investment treaties (BIT) with States that are common for their nationals to invest in. These treaties outline the specifics of the assets themselves, along with proper measures to be taken in the event of expropriation. Recent cases testing the legality of expropriation have made significant impacts on how such cases are handled. While many host States who enter into an expropriation debate claim the incident to be nothing more than a domestic affair in order to be handled in domestic courts, new rulings on cases show that any breach of a BIT or other form of international trade agreement leave the case up to international investment decisions under the tribunals of the ICSID. Thus, proving breaches in contract, agreements, and treaties between nations and investors has become a crucial step in protecting the lost assets of foreign investors and acquiring appropriate compensations. Compensation for lost assets remains a heated topic, and can vary depending on the legality of the expropriation itself. Expropriations conducted legally provide that the State is responsible for the repayment of the fair market value of the lost asset. Those conducted illegally can be subject to not only the worth of the fair market value, but also of incident charges and damages as well. Efforts are currently being made to further regulate both compensation and proceedings of expropriations as to continue to secure more protection for both the State's sovereignty as well as the investments of foreign capitol.

Introduction

In today's market, foreign investing is almost as common as domestic investing. In a new modernized global world, foreign investment opportunities have opened up like never before. So many investors have begun the process of taking advantage of foreign born opportunities, and with this wave of new money come the desire to protect it. In previous generations, foreign investment was in many cases risky business. If an investor lost his or her investment within a foreign country based on nationalization or otherwise, little, if not nothing could be done in order to ensure the return of those assets.

However, in recent generations there have been movements to protect both foreign investments as well as the exportation of goods from various countries, leading to an international community who regulates over trades and investments. The North American Fair Trade Act (NAFTA) was established to protect developing nations in North America keep their exported coffee at fair market value, and not be taken advantage of in a way which would have decimated the countries producing most of the world's coffee. Today NAFTA does more than to provide protection from exploitation of coffee prices, but it also stands in to help regulate and arbitrate investment disputes which go far beyond the context of domestic law in the developing countries of the Americas. NAFTA now helps regulate foreign investor safety and security with regulations to help protect investment assets from unlawful seizure, nationalization, or expropriation. Another major regulatory body has also been established to help the international community cover investment disputes, the International Centre for Settlement of Investment Disputes (ICSID). The ICSID also helps regulate the expropriation of investment assets in areas that are both developing and more established, like the countries of the European Union. When domestic laws fail to provide an unbiased case, it is heard by tribunals of the ICSID which govern international investment relations and acquisition laws. These tribunals help establish the legality of an expropriation and how the investment assets should be handled in the form of compensation or damages.

The more foreign investment which comes streaming into various nations across the globe means more cases of expropriation. The regulatory bodies set into place by the international community must handle these disputes and determine the legality of their claims. It is within a modern context that expropriation has become such a regulated international issue, with trade treaties and good foreign relations at stake to nations who choose to expropriate foreign assets illegally without following the guidelines set by such bodies as NAFTA and the ICSID.

Literature Review

Expropriation

The term expropriation refers the idea of a State, or nation, taking back part of r an entire investment asset that is within its country's borders but previously owned by a foreign investor. Expropriation is "the action of the state in taking or modifying the property rights of an individual in the exercise of its sovereignty," (Merriam-Webster 1998). In international investment law, States have the right to confiscate and nationalize property or other assets owned by foreign investors in order to help secure their position and provide for their people. Law expropriation can be conducted under the grounds of a common good for the people, or for reason that the State will benefit economically from the acquisition of the expropriated property, of course after all legal fillings are complete and compensation is given out. This action represents confiscation of private property by the state which takes place beyond the common law. It goes much further than simple leasing or financial disputes between a State and an investor, and relates more to the idea that the State can and should be able to benefit from its own land and resources. Either lawful r unlawful, expropriation of foreign assets is the government's taking over of foreign property; "Investment disputes involve governmental interference with the rights of a foreign investor," (Ripinksy & Williams 2008:6). Yet, expropriation can also refer to cases of nationalization by developing communist and socialist countries. A prime example of this type of largely unlawful expropriation being the collectivization seen in the development of the Soviet Union in the early to mid twentieth century.

The State has the right to determine what it does within its own national boundaries. But as more and more foreign investors are lured into investing with any particular State, it complicates the nature of seizing foreign assets. The investor and the State initially enter into an agreement or contract which spell out provisions for the investment and provide some sense of security on behalf of the investor. In fact, most foreign investment agreements include various provisions which limit a nation from directly or indirectly nationalizing or expropriating the investor's property except for when the nation is utilizing such proceedings to satisfy some public and nondiscriminatory purpose, (SICE ). One important piece of security used by many foreign investors in the Bilateral Investment Treaty (BIT), which is often used by European countries to invest with developing nations. These treaties set standards of security on the behalf of the investor and provide regulations for damages and compensation in the event of a lawful or unlawful expropriation of the investment asset.

Direct Expropriation

There are different forms of expropriation which are grounded on different contextual needs of the State which takes foreign assets from an investor. According to international investment law, "In an international context, a direct expropriation occurs when the host state takes property owned by a foreign investor located in the host state, where there is deprivation of wealth attributable to the state," (SICE: 1). In typical cases of direct expropriation there is a sound need for the State to take back the investment asset. For instance, if the investor owes the State or in someway broke his or her contractual obligations with the State, this can be… READ MORE

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