Foreign investment in the U.S. real estate market has grown dramatically in recent years. Reports indicate that in 2016 alone, foreign investment surpassed $20 billion, with offshore buyers accounting for 43 percent of the 50 largest U.S. commercial real estate transactions.¹ Advising a U.S. client in a transaction with a foreign counterparty requires familiarity with certain issues and potential complications. In particular, U.S. clients need to be aware of issues relating to (i) the ability to enforce judgments of U.S. courts against foreign counterparties; (ii) so-called “know your customer” diligence requirements as they are applied to foreign counterparties; (iii) foreign capital export controls; (iv) potential Committee of Foreign Investment in the U.S. (CFIUS) review; and (v) registering transactions with the Department of Commerce's Bureau of Economic Analysis.²

Enforcing Judgments Abroad

In a transaction with a domestic counterparty, the ability to enforce a judgment against that counterparty is rarely an issue. With a foreign counterparty, enforcing a U.S. judgment is not a given. As a result, lenders often refuse to consider foreign guarantors unless those guarantors have significant U.S. assets. While a guaranty (or joint venture agreement or other agreement with a foreign counterparty) may be drafted to provide that the foreign counterparty (i) consents to U.S. court jurisdiction, (ii) appoints someone within the court's jurisdiction to accept service of process, and (iii) accepts the preferred choice of law, none of these contractual provisions will matter if a judgment relating to the agreement cannot be enforced against the counterparty's assets. Absent the ability to enforce the judgment abroad, the foreign counterparty is only at risk to the extent of its investment.

In the absence of treaties or conventions, countries are under no obligation to recognize or enforce foreign judgments, though the prevailing trend is toward greater recognition.³ While countries have entered into bilateral treaties⁴ and regional frameworks,⁵ efforts toward a widely adopted global enforcement convention have not been successful.⁶ The United States is not party to any bilateral, regional or global treaty or convention ensuring foreign enforcement of U.S. court judgments,⁷ leaving U.S. counterparties to rely on the laws of foreign jurisdictions for such enforcement. Countries differ greatly in their treatment of U.S. judgments. Some, such as the Netherlands, are highly restrictive, while others, such as Turkey and France, take a more liberal approach to enforcement.⁸

A U.S. party intending to enforce a judgment in a foreign jurisdiction should take certain steps to increase the probability of foreign enforcement, including (i) ensuring that the U.S. court has proper jurisdiction; (ii) making certain the U.S. judgment is final, valid and on the merits; and (iii) avoiding any procedural irregularities (notice, service, opportunity for court hearing, etc.). There are a number of other steps parties can take at the inception of a transaction to pre-empt issues with foreign enforcement. First, the U.S. counterparty can require the foreign counterparty to accept arbitration as the dispute resolution method under the agreement. Arbitral awards are likely to be easier to enforce abroad than judgments. For example, countries party to the New York Arbitration Convention (which has been widely adopted)⁹ agree to enforce arbitral awards in accordance with rules of procedure of the jurisdiction in which the judgment is awarded.¹⁰ Second, U.S. counterparties should consider requiring opinions of counsel qualified to practice in the jurisdiction where the foreign counterparty's assets are located, that a court in that jurisdiction would enforce a U.S. judgment without initiating significant new legal proceedings. While the opinion itself provides more comfort than protection, any assumptions or exceptions in the opinion may be instructive on further steps that may be taken upfront to enhance the likelihood of enforcement. Finally, counsel to the U.S. counterparty can research the laws of the applicable jurisdiction to determine whether and how foreign judgments are enforced.¹¹

“Know Your Customer”

'Know your customer' (KYC) requirements obligate U.S. lenders (and in some cases other transaction parties) to conduct due diligence on potential customers in order to prevent money laundering and to avoid transacting with certain prohibited persons. KYC requirements emanate from a variety of laws, regulations and enforcement agencies: Section 326 of the USA Patriot Act requires every financial institution to form a reasonable belief that it knows the true identity of its customers,¹² the Treasury Department's Financial Crimes Enforcement Network (FinCEN) has codified the requirements regarding lenders' customer identification programs (CIPs),¹³ and the Bank Secrecy Act of 1970 was enacted to prohibit money laundering. The Office of Foreign Assets Control (OFAC) and the Dodd-Frank Wall Street Reform and Consumer Protection Act also give rise to other rules and regulations. In addition, individual institutions often impose internal controls over and above legal requirements, in part to protect against reputational damage. KYC requirements are particularly relevant when dealing with foreign counterparties.