The Road to Excess

Joint ventures are an effective vehicle for bribing foreign officials. But with investors starting to notice, so may the authorities.

The turmoil that has swept Asia, has descended upon Russia, and now threatens Latin America raises a question about U.S. joint ventures there. Can these ventures withstand the kind of upheaval that has toppled the Suharto Suharto regime in Indonesia and may threaten ruling cliques in other markets? Like the Suharto clan, they, too, are often U.S. companies’ partners.

For one thing, the backlash against crony capitalism could finally lead other countries to embrace a U.S. law against bribery, which would help U.S. authorities’ efforts to crack down. Whether or not that happens, investors are increasingly wary of the potential instability of corrupt regimes.

Freeport-McMoRan’s experience in Indonesia is perhaps the best example of a U.S. company doing business with such a regime. Less than a year before Indonesia’s former president Suharto resigned in the face of nationwide turmoil, in February 1998, Freeport’s chairman and CEO, James Moffett, capped a three-decade-long relationship with the dictator by forming a joint venture with Suharto’s family. Freeport’s complex deal gave a Suharto-controlled group, PT Nusantara Ampera Bakti, a 4.7 percent stake in Freeport’s famed Grasberg mine, which contains the world’s largest copper and gold reserves and is located on the Indonesian island of Irian Jaya. In return for its stake, the Suharto group paid $315 million, according to documents filed with the Securities and Exchange Commission, $254 million of which Nusantara borrowed from commercial banks. Under the agreement, if Nusantara can’t repay the interest on the loans from dividends it receives as a shareholder, Freeport will make up the difference.

Sure enough, Nusantara’s interest arrears amounted to $7.6 million at the end of last year. That represents 3 percent of the $245 million in net income that Freeport’s publicly traded subsidiary, Freeport-McMoRan Copper & Gold, earned in 1997.

While Freeport declined to comment on the arrangement, it was nothing out of the ordinary. Other prominent companies that entered into joint ventures with Suharto family members on what are — at the very least — favorable financial terms include Merrill Lynch, Lucent, and General Electric.

Granted, these companies’ arrangements with the Suharto family don’t necessarily violate a U.S. law designed to prohibit payments by U.S. companies to foreign officials in return for business, according to experts. The law, known as the Foreign Corrupt Practices Act (FCPA), was passed in 1977, after post-Watergate investigations revealed a slush fund operated by Lockheed for such purposes. Says a corporate attorney specializing in defending bribery allegations, who is currently working on an Indonesian case he would not disclose: “You can do business with the Suhartos all day long, as long as it is legitimate business. The mere fact that they don’t put in an equity contribution doesn’t automatically mean it’s a bribe.”

But what does the partner offer? “If you want to do business in Indonesia, you need to have the logistics running smoothly,” he suggests. “An American company couldn’t walk into the country and understand all the elements required to get up and running in a timely manner. The local partner can do that.”


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