[Senate Treaty Document 104-10]
[From the U.S. Government Publishing Office]
104th Congress 1st SENATE Treaty Doc.
Session
104-10
_______________________________________________________________________
INVESTMENT TREATY WITH MONGOLIA
__________
MESSAGE
from
THE PRESIDENT OF THE UNITED STATES
transmitting
THE TREATY BETWEEN THE UNITED STATES OF AMERICA AND MONGOLIA CONCERNING
THE ENCOURAGEMENT AND RECIPROCAL PROTECTION OF INVESTMENT, WITH ANNEX
AND PROTOCOL, SIGNED AT WASHINGTON ON OCTOBER 6, 1994
June 26, 1995.--Treaty was read the first time and, together with the
accompanying papers, referred to the Committee on Foreign Relations and
ordered to be printed for the use of the Senate
LETTER OF TRANSMITTAL
----------
The White House, June 26, 1995.
To the Senate of the United States:
With a view to receiving the advice and consent of the
Senate to ratification, I transmit herewith the Treaty Between
the United States of America and Mongolia Concerning the
Encouragement and Reciprocal Protection of Investment, with
Annex and Protocol, signed at Washington on October 6, 1994.
Also transmitted for the information of the Senate is the
report of the Department of State with respect to the Treaty,
with Annex and Protocol.
The bilateral investment Treaty (BIT) with Mongolia will
protect U.S. investors and assist Mongolia in its efforts to
develop its economy by creating conditions more favorable for
U.S. private investment and thus strengthening the development
of the private sector.
The Treaty is fully consistent with U.S. policy toward
international and domestic investment. A specific tenet of U.S.
policy, reflected in this Treaty, is that U.S. investment
abroad and foreign investment in the United States should
receive national treatment. Under this Treaty, the Parties also
agree to international law standards for expropriation and
compensation for expropriation; free transfer of funds
associated with investments; freedom of investments from
performance requirements; fair, equitable, and most-favored-
nation treatment; and the investor's or investment's freedom to
choose to resolve disputes with the host government through
international arbitration.
I recommend that the Senate consider this Treaty as soon as
possible, and give its advice and consent to ratification of
the Treaty, with Annex and Protocol, at an early date.
William J. Clinton.
LETTER OF SUBMITTAL
----------
Department of State,
Washington, June 16, 1995.
The President,
The White House.
I have the honor to submit to you the Treaty Between the
United States of America and Mongolia Concerning the
Encouragement and Reciprocal Protection of Investment, with
Annex and Protocol, signed at Washington on October 6, 1994. I
recommend that this Treaty, with Annex and Protocol, be
transmitted to the Senate for its advice and consent to
ratification.
The bilateral investment treaty (BIT) with Mongolia is
based on the view that an open investment policy contributes to
economic growth. This Treaty will assist Mongolia in its
efforts to develop its economy by creating conditions more
favorable for U.S. private investment and thus strengthening
the development of the private sector. It is U.S. policy,
however, to advise potential treaty partners during BIT
negotiations that conclusion of a BIT does not necessarily
result in immediate increases in private U.S. investment flows.
To date, twenty-one BITs are in force for the United
States--with Argentina, Bangladesh, Bulgaria, Cameroon, the
Congo, the Czech Republic, Egypt, Grenada, Kazakhstan,
Kyrgyzstan, Moldova, Morocco, Panama, Poland, Romania, Senegal,
Slovakia, Sri Lanka, Tunisia, Turkey, and Zaire. In addition to
the Treaty with Mongolia, the United States has signed, but not
yet brought into force, BITs with Albania, Armenia, Belarus,
Ecuador, Estonia, Georgia, Haiti, Jamaica, Latvia, Russia,
Trinidad and Tobago, Ukraine, and Uzbekistan.
The Office of the United States Trade Representative and
the Department of State jointly led this BIT negotiation, with
assistance from the Departments of Commerce and Treasury, and
the Overseas Private Investment Corporation.
the u.s.-mongolia treaty
The Treaty with Mongolia is based on the 1992 U.S.
prototype BIT, and achieves all of the prototype's objectives,
which are:
--All forms of U.S. investment in the territory of Mongolia
are covered.
--Investments receive the better of national treatment or
most-favored-nation (MFN) treatment both on
establishment and thereafter, subject to certain
specified exceptions.
--Performance requirements may not be imposed upon or
enforced against investments.
--Exploration can occur only in accordance with international
law standards, that is, for a public purpose; in a
nondiscriminatory manner; in accordance with due
process of law; and upon payment of prompt, adequate,
and effective compensation.
--The unrestricted transfer, in a freely usable currency, of
funds related to an investment is guaranteed.
--Investment disputes with the host government may be brought
by investors, or by their subsidiaries, to binding
international arbitration as an alternative to domestic
courts.
The U.S.-Mongolia Treaty adds to the provisions of the 1992
U.S. prototype text definitions for ``investment agreement''
and ``investment authorization'' as well as a Protocol
clarifying that the national and MFN treatment obligations
specified in Article II, paragraph 1, apply to the
establishment and acquisition, as well as to the expansion,
management, conduct, operation and sale or other disposition of
investments.
The following is an article-by-article analysis of the
provisions of the Treaty:
Preamble
The Preamble states the goals of the Treaty. The Treaty is
premised on the view that an open investment policy leads to
economic growth. These goals include economic cooperation,
increased flow of capital, a stable framework for investment,
development of respect for international-recognized worker
rights, and maximum efficiency in the use of economic
resources. While the Preamble does not impose binding
obligations, its statement of goals may serve to assist in the
interpretation of the Treaty.
Article I (Definitions)
Article I sets out definitions for terms used throughout
the Treaty. As a general matter, they are designed to be broad
and inclusive in nature.
Investment
The Treaty's definition of investment is broad, recognizing
that investment can take a wide variety of forms. It covers
investments that are owned or controlled by nationals or
companies of one of the Treaty partners in the territory of the
other. Investments can be made either directly or indirectly
through one or more subsidiaries, including those of third
countries. Control is not specifically defined in the Treaty.
Ownership of over 50 percent of the voting stock of a company
would normally convey control, but in many cases the
requirement could be satisfied by less than that proportion.
The definition provides a non-exclusive list of assets,
claims and rights that constitute investment. These include
both tangible and intangible property, interests in a company
or its assets, ``a claim to money or a claim to performance
having economic value, and associated with an investment,''
intellectual property rights, and any right conferred by law or
contract (such as government-issued licenses and permits). The
requirement that a ``claim to money'' be associated with an
investment excludes claims arising solely from trade
transactions, such as a transaction involving only a cross-
border sale of goods, from being considered investments covered
by the Treaty.
Under paragraph 2 of Article I, either country may deny the
benefits of the Treaty to investments by companies established
in the other that are owned or controlled by nationals of a
third country if (1) the company is a mere shell, without
substantial business activities in the home country, or (2) the
third country is one with which the denying Party does not
maintain normal economic relations. For example, at this time
the United States does not maintain normal economic relations
with, among other countries, Cuba or Libya.
Paragraph 3 confirms that any alteration in the form in
which an asset is invested or reinvested shall not affect its
character as investment. For example, a change in the corporate
form of an investment will not deprive it of protection under
the Treaty.
Company
The definition of ``company'' is broad in order to cover
virtually any type of legal entity, including any corporation,
company, association, or other entity that is organized under
the laws and regulations of a Party. Coupled with the
definition of investment, this definition also ensures that
companies of a Party that establish investments in the
territory of the other Party have their investments covered by
the Treaty, even if the parent company is ultimately owned by
non-Party nationals, although the other Party may deny the
benefits of the Treaty in the limited circumstances set forth
in Article I, paragraph 2. Likewise, a company of a third
country that is owned or controlled by nationals or companies
of a Party will also be covered. The definition also covers
charitable and non-profit entities, as well as entities that
are owned or controlled by the state.
National
The Treaty defines ``national'' as a natural person who is
a national of a Party under its own laws. Under U.S. law, the
term ``national'' is broader than the term ``citizen''; for
example, a native of American Samoa is a national of the United
States, but not a citizen.
Return
``Return'' is defined as ``an amount derived from or
associated with an investment.'' The Treaty provides a non-
exclusive list of examples, including: profits; dividends;
interest; capital gains; royalty payments; management,
technical assistance or other fees; and returns in kind. The
scope of this definition provides breadth to the Treaty's
transfer provisions in Article IV.
Associated activities
The Treaty recognizes that the operation of an investment
requires protections extending beyond the investment to
numerous related activities. This definition provides an
illustrative list of such investor activities, including
operating a business facility, borrowing money, disposing of
property, issuing stock and purchasing foreign exchange for
imports. These activities are covered by Article II, paragraph
1, which guarantees the better of national or MFN treatment for
investments and associated activities.
Investment authorization
The Treaty defines an ``investment authorization'' as an
authorization granted by the foreign investment authority of a
Party to an investment or a national or company of the other
Party.
Investment agreement
The Treaty defines an ``investment agreement'' as a written
agreement between the national authorities of a Party and an
investment or a national or company of the other Party that (1)
grants rights with respect to natural resources or other assets
controlled by the national authorities and (2) the investment,
national, or company relies upon in establishing or acquiring a
covered investment. This definition thus excludes agreements
with subnational authorities (including U.S. States) as well as
agreements arising from various types of regulatory activities
of the national government, including, in the tax area, closing
agreements, advance pricing agreements, and agreements which
arise out of judicial or administrative rulings, such as
consent decrees.
Article II (Treatment)
Article II contains the Treaty's major obligations with
respect to the treatment of investment.
Paragraph 1 generally ensures the better of MFN or national
treatment in both the entry and post-entry phases of
investment. It thus prohibits both the screening of proposed
foreign investment on the basis of nationality and
discriminatory measures once the investment has been made,
subject to specific exceptions provided for in a separate
Annex. The United States and Mongolia have both reserved
certain exceptions in the Annex to the Treaty, the provisions
of which are discussed in the section entitled ``Annex.''
Paragraph 2 guarantees that investment shall be granted
``fair and equitable'' treatment. It also prohibits Parties
from impairing, through unreasonable or discriminatory means,
the management, operation, maintenance, use, enjoyment,
acquisition, expansion or disposal of investments. This
paragraph sets out a minimum standard of treatment based on
customary international law.
In paragraph 2(c), each Party pledges to respect any
obligations it may have entered into with respect to
investments. Thus, in dispute settlement under Articles VI or
VII, a Party would be foreclosed from arguing, on the basis of
sovereignty, that it may unilaterally ignore its obligations to
such investments.
Paragraph 3 allows, subject to each Party's immigration
laws and regulations, the entry of each Party's nationals into
the territory of the other for purposes linked to investment
and involving the commitment of a ``substantial amount of
capital or other resources.'' This paragraph serves to render
nationals of a BIT partner eligible for treaty-investor visas
under U.S. immigration law and guarantees similar treatment for
U.S. investors.
Paragraph 4 guarantees companies the right to engage top
managerial personnel of their choice, regardless of
nationality.
Under paragraph 5, neither Party may impose performance
requirements such as those conditioning investment on the
export of goods produced or the local purchase of goods or
services. Such requirements are major burdens on investors.
Paragraph 6 provides that each Party must provide effective
means of asserting rights and claims with respect to
investment, investment agreements and any investment
authorizations. Under paragraph 7, each Party must make
publicly available all laws, regulations, administrative
practices and adjudicatory procedures pertaining to or
affecting investments.
Paragraph 8 recognizes that under the U.S. federal system,
States of the United States may, in some instance, treat out-
of-State residents and corporations in a different manner then
they treat in-State residents and corporations. The Treaty
provides that the national treatment commitment, with respect
to the States, means treatment no less favorable than that
provided to U.S. out-of-State residents and corporations.
Paragraph 9 limits the Article's MFN obligation by
providing that it will not apply to advantages accorded by
either Party to third countries by virtue of a Party's
membership in a free trade area or customs union or a future
multilateral agreement under the auspices of the General
Agreement on Tariffs and Trade (GATT). The free trade area
exception in this Treaty is analogous to the exception provided
for with respect to trade in the GATT.
Article III (Expropriation)
Article III incorporates into the Treaty the international
law standards for expropriation and compensation.
Paragraph 1 describes the general rights of investors and
obligations of the Parties with respect to expropriation and
nationalization. These rights also apply to direct or indirect
state measures ``tantamount to expropriation or
nationalization,'' and thus apply to ``creeping
expropriations'' that result in a substantial deprivation of
the benefit of an investment without a taking of the title to
the investment.
Paragraph 1 further bars all expropriations or
nationalizations except those that are for a public purpose;
carried out in a non-discriminatory manner; subject to
``prompt, adequate, and effective compensation''; subject to
due process; and accorded the treatment provided in the
standards of Article II, paragraph 2. (These standards
guarantee fair and equitable treatment and prohibit the
arbitrary and discriminatory impairment of investment in its
broadest sense.)
The second sentence of paragraph 1 clarifies the meaning of
``prompt, adequate, and effective compensation.'' Compensation
must be equivalent to the fair market value of the expropriated
investment immediately before the expropriatory action was
taken or became known (whichever is earlier); be paid without
delay; include interest at a commercially reasonable rate from
the date of expropriation; be fully realizable; be freely
transferable; and be calculated in a freely usable currency on
the basis of the prevailing market rate of exchange.
Paragraph 2 entitles an investor claiming that an
expropriation has occurred to prompt judicial or administrative
review of the claim in the host country, including a
determination of whether the expropriation and any compensation
conform to international law.
Paragraph 3 entitles investors to the better of national or
MFN treatment with respect to losses related to war or civil
disturbances, but, unlike paragraph 1, does not specify an
absolute obligation to pay compensation for such losses.
Article IV (Transfers)
Article IV protects investors from certain government
exchange controls limiting current account and capital account
transfers.
In paragraph 1, the Parties agree to permit ``transfers
related to an investment to be made freely and without delay
into and out of its territory.'' Paragraph 1 also provides a
non-exclusive list of transfers that must be allowed, including
returns (as defined in Article I); payments made in
compensation for expropriation (as defined in Article III);
payments arising out of an investment dispute; payments made
under a contract, including the amortization of principal and
interest payments on a loan; proceeds from the liquidation or
sale of all or part of an investment; and additional
contributions to capital for the maintenance or development of
an investment.
Paragraph 2 provides that transfers are to be made in a
``freely usable currency'' at the prevailing market rate of
exchange on the date of transfer with respect to spot
transactions in the currency to be transferred. ``Freely
usable'' is a standard of the International Monetary Fund; at
present there are five such ``freely usable'' currencies: the
U.S. dollar, Japanese yen, German mark, French franc and
British pound sterling.
Paragraph 3 recognizes that notwithstanding these
guarantees, Parties may maintain certain laws or obligations
that could affect transfers with respect to investments. It
provides that the Parties may require reports of currency
transfers and impose income taxes by such means as a
withholding tax on dividends. It also recognizes that Parties
may protect the rights of creditors and ensure the satisfaction
of judgments in adjudicatory proceedings through their laws,
even if such measures interfere with transfers. Such laws must
be applied in an equitable, nondiscriminatory and good faith
manner.
Paragraph 4 adds to the prototype a provision that the
Parties permit returns in kind be made as specified in an
investment authorization, investment agreement or other written
agreement between the Party and an investment or a national or
company of the other Party.
Article V (State-State consultations)
Article V provides for prompt consultation between the
Parties, at either Party's request, on any matter relating to
the interpretation or application of the Treaty.
Article VI (State-investor dispute resolution)
Article VI sets forth several means by which disputes
between an investor and the host country may be settled.
Article VI procedures apply to an ``investment dispute,'' a
term which covers any dispute arising out of or relating to an
investment authorization, an investment agreement, or to rights
granted by the Treaty with respect to an investment.
When a dispute arises, Article VI, paragraph 2, provides
that the disputants should initially seek to resolve the
dispute by consultation and negotiation, which may include non-
binding third party procedures. Should such consultations fail,
paragraphs 2 and 3 set forth the investor's range of choices of
dispute settlement. Paragraph 2 permits the investor to: (1)
employ one of the several arbitration procedures outlined in
the Treaty; (2) submit the dispute to procedures previously
agreed upon by the investor and the host country government in
an investment agreement or otherwise; or (3) submit the dispute
to the local courts or administrative tribunals of the host
country.
Under paragraph 3, if the investor has not submitted the
dispute under the procedures in paragraph 2 and six months have
elapsed from the date the dispute arose, the investor may
choose among the International Center for the Settlement of
Investment Disputes (ICSID) Convention arbitration, or the
ICSID Additional Facility (if Convention arbitration is not
available), or ad hoc arbitration using the Arbitration Rules
of the United Nations Commission on International Trade Law
(UNCITRAL). Paragraph 3 also recognizes that, by mutual
agreement, the Parties to the dispute may choose another
arbitral institution or set of arbitral rules.
Paragraph 4 contains the consent of the United States and
Mongolia to the submission of investment disputes to binding
arbitration in accordance with the choice of the investor.
Paragraph 5 provides that a non-ICSID arbitration shall
take place in a country that is a party to the United Nations
Convention on the Recognition and Enforcement of Foreign
Arbitral Awards. This requirement expands the ability of
investors to obtain enforcement of their arbitral awards
abroad. In addition, paragraph 6 includes a separate commitment
by each Party to enforce arbitral awards rendered pursuant to
Article VI procedures.
Paragraph 7 provides that in any dispute settlement
procedure, a Party may not invoke as a defense, counterclaim,
set-off or in any other manner the fact that the company or
national has received or will be reimbursed for the same
damages under an insurance or guarantee contract.
Paragraph 8 is included in the Treaty to ensure that ICSID
arbitration will be available for investors making investments
in the form of companies created under the laws of the Party
with which there is a dispute.
Article VII (State-State arbitration)
Article VII provides for binding arbitration of disputes
between the United States and Mongolia that are not resolved
through consultations or other diplomatic channels. The article
constitutes each Party's prior consent to arbitration. It
provides for the selection of arbitrators, establishes time
limits for submissions, and requires the Parties to bear the
costs equally, unless otherwise directed by the Tribunal.
Article VIII (Exclusion from dispute settlement procedures)
Article VIII provides that the provisions of Articles VI
and VII concerning dispute resolution do not apply to disputes
arising under the export credit, guarantee or insurance
programs of the Export-Import Bank of the United States or
under other official credit, guarantee or insurance programs
for which the Parties have agreed to other means of dispute
settlement.
Article IX (Preservation of rights)
Article IX clarifies that the Treaty is meant only to
establish a floor for the treatment of foreign investment. An
investor may be entitled to more favorable treatment through
domestic legislation, other international legal obligations, or
a specific obligation assumed by a Party with respect to that
investor. This provision ensures that the Treaty will not be
interpreted to derogate from any entitlement to such more
favorable treatment.
Article X (Measures not precluded)
Paragraph 1 of Article X reserves the right of a Party to
take measures for the maintenance of public order and the
fulfillment of its obligations with respect to international
peace and security, as well as those measures it regards as
necessary for the protection of its own essential security
interests. These provisions are common in international
investment agreements.
The maintenance of public order would include measures
taken pursuant to a Party's police powers to ensure public
health and safety. International obligations with respect to
peace and security would include, for example, obligations
arising out of Chapter VII of the United Nations Charter.
Measures permitted by the provision on the protection of a
Party's essential security interests would include security-
related actions taken in time of war or national emergency;
actions not arising from a state of war or national emergency
must have a clear and direct relationship to the essential
security interest of the Party involved.
The second paragraph allows a Party to promulgate special
formalities in connection with the establishment of investment,
provided that the formalities do not impair the substance of
any Treaty rights. Such formalities would include, for example,
U.S. reporting requirements for certain inward investment.
Article XI (Tax policies)
Paragraph 1 exhorts both countries to provide fair and
equitable treatment to investors with respect to tax policies.
However, tax matters are generally excluded from the coverage
of the Treaty, based on the assumption that tax matters are
properly covered in bilateral tax treaties.
The Treaty, and particularly the dispute settlement
provisions, do apply to tax matters in three areas, to the
extent they are not subject to the dispute settlement
provisions of a tax treaty, or, if so subject, have been raised
under a tax treaty's dispute settlement procedures and are not
resolved in a reasonable period of time.
Pursuant to paragraph 2, the three areas where the Treaty
could apply to tax matters are expropriation (Article III),
transfers (Article IV) and the observance and enforcement of
terms of an investment agreement or authorization (Article VI
(1) (a) or (b)). These three areas are important for investors,
and two of the three--expropriatory taxation and tax provisions
contained in an investment agreement or authorization--are not
typically addressed in tax treaties.
Article XII (Application to political subdivisions)
Article XII makes clear that the obligations of the Treaty
are applicable to all political subdivisions of the Parties,
such as provincial, State and local governments.
Article XIII (Entry into force, duration and termination)
The Treaty enters into force thirty days after exchange of
instruments of ratification and continues in force for a period
of ten years. From the date of its entry into force, the Treaty
applies to existing and future investments. After the ten-year
term, the Treaty will continue in force unless terminated by
either Party upon one year's notice. If the Treaty is
terminated, all existing investments would continue to be
protected under the Treaty for ten years thereafter.
Annex
U.S. bilateral investment treaties allow for sectoral
exceptions to national and MFN treatment. The U.S. exceptions
are designed to protect governmental regulatory interests and
to accommodate the derogations from national treatment and, in
some cases, MFN treatment in existing federal law.
The U.S. portion of the Annex contains a list of sectors
and matters in which, for various legal and historical reasons,
the federal government or the States may not necessarily treat
investments of nationals or companies of the other Party as
they do U.S. investments or investments from a third country.
The U.S. exceptions from national treatment are: air
transportation; ocean and coastal shipping; banking, insurance,
securities and other financial services; government grants;
government insurance and loan programs; energy and power
production; customhouse brokers; ownership of real property;
ownership and operation of broadcast or common carrier radio
and television stations; ownership of shares in the
Communications Satellite Corporation; the provision of common
carrier telephone and telegraph services; the provision of
submarine cable services; use of land and natural resources;
mining on the public domain; and maritime and maritime-related
services.
Ownership of real property, mining on the public domain,
maritime and maritime-related services, and primary dealership
in U.S. government securities are excluded from MFN as well as
national treatment commitments. The last three sectors are
exempted by the United States from MFN treatment obligations
because of U.S. laws that require reciprocity. Enforcement of
reciprocity provisions could deny both national and MFN
treatment.
The listing of a sector does not necessarily signify that
domestic laws have entirely reserved it for nationals. Future
restrictions or limitations on foreign investment are only
permitted in the sectors listed; must be made on an MFN basis,
unless otherwise specified in the Annex; and must be
appropriately notified. Any additional restrictions or
limitations which a Party may adopt with respect to listed
sectors may not affect existing investments.
Because the U.S. exceptions to national treatment and MFN
treatment are based on existing U.S. law, they are not altered
during negotiations.
Mongolia's exceptions to national treatment are: land
ownership and banking. These exceptions were based on
provisions of investment measures currently in force or under
active consideration by the Government of Mongolia. Mongolia
has not reserved any sectoral exceptions to MFN treatment in
the Annex.
Protocol
In a Protocol to the Treaty, the two sides clarify their
understanding that the obligation to accord the better of
national or most favored nation treatment extends to all phases
of investment--both to establishment and acquisition as well as
to the expansion, management, conduct, operation and sale or
any other disposition of investments.
The other U.S. Government agencies which negotiated the
Treaty join me in recommending that it be transmitted to the
Senate at an early date.
Respectfully submitted,
Strobe Talbott.