The prior post talked about a colossal plan by Kazakhstan president, Nursultan Nazarbayev, to privatize some 7,000 state-controlled companies that now control over 40% of the nation’s economy.
As I said, Kazakhstan has traditionally welcomed foreign investment. And the proposed privatization would open vast opportunities for more foreign investors.
But will companies that try to comply with the FCPA and similar laws be able to compete for the spoils of one of the biggest privatization programs in history? Let’s take a look.
According to Transparency International, Kazakhstan is currently number 126 on the Corruption Perceptions Index. Kazakh authorities have made little progress in solving the graft problem despite passing various legislation and imprisoning many officials. That environment could deter American companies and other U.S.-listed multinationals from diving into the privatization.
Companies wanting to participate will need to consider potential extra costs (financial and reputational) associated with the compliance risks.
A 2011 study by the New York City Bar’s Committee on International Business Transactions found four ways the FCPA can add costs to international M&A transactions or change M&A behavior:
First, increased transaction costs, including the need for a detailed FCPA-related due diligence.
Second, post-transaction integration costs to ensure that the acquired company will act in an FCPA-compliant manner.
Third, fines and sanctions associated with the risk of an FCPA-related prosecution as well as the costs related to internal investigations.
Fourth, costs associated with the foregone business opportunities because of the FCPA risks.
Of course compliance risks and FCPA cost-benefit analyses don’t always deter American companies or force them out of international M&A opportunities. Kazakhstan’s investment agency, Kaznex Invest, said U.S. companies have already invested over $21 billion in the past decade and played an important role in Kazakhstan’s development.
I’ve been involved in Kazakh matters for more than two decades, including living in the country for over a dozen years. I believe American companies would have invested much more in the country if not for the high levels of corruption. The companies were well aware of the risks of future FCPA investigations and even prosecution for doing business as usual, Kazakh style.
Some American and U.S.-listed multinationals will take advantage of tempting economic opportunities created by the upcoming privatization in Kazakhstan. Others, however, might stay away. They will be willing to miss potential deals because of their fear of FCPA compliance problems, perhaps caused by local intermediaries or employees who don’t understand or acknowledge the risk levels.
While we won’t be able to measure what doesn’t happen, we can assume the FCPA risk will result in less Western FDI for Kazakhstan, perhaps slowing down the country’s growth plans.
Would listing Kazakh companies on the U.S. stock exchanges be a good idea to raise capital for development? In the next post, I’ll look at how that might work.
Alex Nisengolts is a Chicago attorney focusing on cross-border M&A, electronic discovery, and investments and operations in Kazakhstan. He first traveled to Kazakhstan in 1994 as a legal advisor on a USAID-sponsored legal reform project and has been involved in Kazakh matters for the past two decades, for U.S. and Kazakh law firms and as a manager and senior manager for a Big Four international accounting firm. He can be reached here.