Golden City Divested After Due Diligence Memo

The film ‘The Big Short’ opens with bankers going “from the country club to the strip club”. For multinational investment opportunities the safest location is not a golden city but legal counsel’s chambers. It neatly encapsulates the need for due diligence in investment opportunities. Since the 2008 crash that the movie explores, investment compliance has become a great deal more complex, with a visible overlap in criminal law that makes it prudent to seek legal advice from experts in criminal and human rights law – as Emerging Towns & Cities Singapore (ETC) has learned to its cost

For multinational investment opportunities, the Golden City scheme in Myanmar serves as a lesson on the range of international law and guidance applicable to any arrangement, particularly when the investment concerns states vulnerable to corruption and associated with international sanctions or other geopolitical risks.The costs of a lack of due diligence can be steep. Understanding the modern connection between criminal law and corporate compliance not only helps to ensure investments do not contribute to human rights violations, but also allows those involved in the opportunities to identify the geese from the golden eggs.

The Singapore Exchange (SGX)-listed company Emerging Towns & Cities Singapore (ETC) has announced the sale of its stake in the Golden City real estate development in Myanmar for S$4 million, which involved a reported loss of S$80.2 million. The company’s announcement on 1 July 2023 to sell its controlling stake follows our legal memo, which explained the compliance mesh that international law and guidance places on companies, sponsors and those who provide the listings on the Singapore Stock Exchange (SGX).

For multinational investment opportunities, the Golden City scheme in Myanmar serves as a lesson on the range of international law and guidance applicable to any arrangement

The overarching question related to the consideration that SGX may need to give to risks of potential legal liability, reputational damage and any consequential cost implications of being connected to Golden City. ETC had obtained some limited consultancy reports, but sought more time after our memo to address the concerns raised. Eventually, the scheme was divested. The memo provides a due diligence outline for all investment and trading platforms and is a warning to ensure consultants are fully cognisant with all legal frameworks, including criminal sanctions and the potential for human rights violations.

Justice For Myanmar spokesperson Yadanar Maung said: “ETC is a longstanding business partner of the Myanmar military that is complicit in the junta’s genocide, war crimes and crimes against humanity. ETC’s divestment was necessary but raises further questions that we urge Singapore authorities to address, including whether SGX will remain exposed to the Golden City project, and the fact that a private Singapore company will continue to bankroll the murderous junta.

“We are heartened that Singapore Exchange Regulation has taken swift action against ETC over its business with the Myanmar military, and to issue sanctions guidance that strengthens the impact of Myanmar sanctions for SGX-listed companies.”

Golden City officially opened Golden City Business Centre in 2017. The development, with a net leasable area of around 150, 000 square feet, involved land use payments over a 70-year term with amounts of up to US$191.1 million to the Myanmar army. States have imposed sanctions against Myanmar in response to its government’s violent suppression of pro-democracy movements, corruption and human rights violations. Sanctions include arms and trade embargoes, asset freezing and prohibitions on travel and investment and yet the investment opportunity was offered through SGX.

States have imposed sanctions against Myanmar in response to its government’s violent suppression of pro-democracy movements, corruption and human rights violations.

Our legal memo was requested when SGX initiated regulatory actions against the developer of the Golden City complex, ETC, after Justice For Myanmar published an investigation into payments to the Myanmar army, implicating funds raised on the SGX.

At the time I was instructed to lead barrister Daye Gang by the Australian Centre for International Justice on behalf of Justice for Myanmar, ETC had already commissioned two independent reviews: one by Nexia TS Advisory into contractual payments and fundraising; and another by Kelvin Chia Partnership into the applicability of sanctions and compliance with “applicable laws”.

However, our legal memorandum found that these reviews may not have addressed a range of international law risks in light of the 2019 UN Independent International Fact-Finding Mission on Myanmar (FFMM) report into the Myanmar military’s economic interests and ongoing atrocity crimes. We also raised the necessary risk assessments for the proposed investment, including the likelihood of breach of sanctions by funds from the project reaching the military junta known as the Tatmadaw – a labelled terrorist organisation.

The memo, drafted in 2021 and running to some 50 pages, answered specific questions as follows:

(a)          Under international law, do ETC’s 2018 and 2020 payments and future planned payments and asset transfers to the QMGO raise any concerns?

(b)          Do ETC’s payments amount to the company being “involved in or connected with… illicit activities” as per Practice Note 2B of the SGX?

(c)          Is there a legal risk for the SGX under international law if they continue to allow ETC’s listing?

(d)          Any other relevant matter arising.

Our instructions were therefore broad and wide-ranging, but did not encompass advice on litigation. In seeking to encompass “any other relevant matter arising”, we considered any international law issues that may arise for SGX within the broader factual matrix, of which ETC’s 2018 and 2020 payments, future planned payments and asset transfers were only one part. The memo is therefore a broad overview of selected international law which we considered relevant to compliance issues.

We considered state and corporate responsibilities, modern slavery reporting, OECD guidelines, investment treaties, sanctions, bribery and corruption risks and a range of other Articles and Conventions, much of which appeared not to have been considered before the listing was sought. We found that although some remedies may be elusive, due diligence failures create risks which should be of concern to corporations, states and state organs. It is not just about rebuffing external pressures, but recognising that the consequential cost implications of being connected to Golden City may be unquantifiable in terms of both human and financial costs. We focussed on the identification of issues that would most assist further investigations, should they become necessary, as well as decision-making on investment risk.

Although some remedies may be elusive, due diligence failures create risks which should be of concern to corporations, states and state organs.

ETC suspended trading on 23 March 2022, asking SGX for an extension of time to find an offer and seek shareholders’ approval for the proposed divestment, specifically citing the memo, which found that international law and guidance places due diligence obligations on the Singapore Exchange (SGX) and possible liability on the Monetary Authority of Singapore and the Singapore government in relation to companies doing business with the Myanmar military.

The memo also found that Singapore has an international legal obligation “to investigate, prevent and cease transactions that amount to wrongful acts”, which is applicable to business transactions with the Myanmar military and its business interests. Legal remedies would be “easily pursued and enforced” against SGX if the Myanmar military’s financial organs are found to be in breach of international laws and/or compliance regulations including international human rights and humanitarian law.

Despite this, ETC’s latest annual report shows a “partial payment” of 2.33 billion kyat (S$1.68 million) to the Myanmar army in 2022. We acted pro bono for Justice for Myanmar, but this was more than an example of effective pressure on Singapore companies to cut ties with the Myanmar military and its associated businesses to undermine the regime’s political legitimacy. It demonstrates the legal minefield that requires expertise on international business and human rights compliance beyond consultancy at the early stages of every investment, including the international criminal law risks. Much of ‘The Big Short’ was taken up with the right time to sell. The law now requires significant reflection before buying in the first place.

Professor Felicity Gerry, Barrister

Libertas Chambers

20 Old Bailey, London, EC4M 7AN, UK

Tel: +44 07956 853737

E: fgerrykc@libertaschambers.com

Professor Felicity Gerry KC is Global Law Experts International Criminal Law Barrister 2023. She is admitted at the International Criminal Court (ICC) and the Kosovo Specialist Chambers (KSC) in The Hague, to the Bar of England & Wales and the Victorian Bar, Australia. She has also had ad hoc admission in Hong Kong and Gibraltar. Felicity is a dedicated and experienced advocate who leads for the defence in serious, complex, and sensitive trials and appeals at every level of court. She specialises in terrorism, modern slavery, financial crime and war crimes (ICL) and has had several career-defining cases.