Korea-Belgium investment agreement, a hole for investor lawsuits

Kyunghyang Shimun : 2013-01-25

Korea-Belgium investment agreement, a hole for investor lawsuits

By Kim Ji-hwan

he Ministry of Foreign Affairs and Trade is facing challenges in negotiating revisions of a bilateral investment treaty with Belgium. The U.S.-based private equity fund, Lone Star filed for an investor-state dispute settlement against the South Korean government through a paper company they established in Belgium.

This has triggered the South Korean government to revise an investment agreement with Belgium, so that it would filter out paper companies, but Belgium has not welcomed this proposal. The South Korean government is concerned that this agreement may become a target for speculative funds like Lone Star, which go treaty-shopping for investment treaties most favorable to investors in relation to investor-state dispute settlements.

Lee Si-hyung, Deputy Minister for Trade, announced in a regular briefing on January 23, "We contacted Brussels last month to propose a revision of the Korea-Belgium investment treaty. The Belgian government is not too enthusiastic about our request for a revision, because it has not been long since the revised agreement took effect."

In order to revise the Korea-Belgium investment treaty, Korea must secure consent from Luxembourg as well as Belgium for the two countries are in an economic alliance. However, Belgium and Luxembourg, being major tax havens, can only be reluctant to adding a provision in the bilateral investment treaty filtering out paper companies. After all, paper companies play a big role in attracting foreign funds in both countries.

The problem is that foreign investors such as Lone Star, which have paper companies in Belgium, can continue to take advantage of the Korea-Belgium investment agreement, a weak link among bilateral investment treaties and free trade agreements (FTA).

Lone Star had considered utilizing the Korea-U.S. FTA, but eventually opted for the Korea-Belgium investment agreement, which had no provision against paper companies. According to a lobby report, which Lone Star submitted to the U.S. Senate in February 2006, Lone Star wanted to take advantage of the Korea-U.S. FTA in order to draw a favorable outcome in the tax dispute with the South Korean government.

It has also been reported that Lone Star consulted the U.S. government on utilizing the Korea-U.S. FTA before they filed for an investor-state dispute settlement against the South Korean government based on the Korea-Belgium investment treaty in November 2012.