Investment Treaty with CroatiaSenate Consideration of Treaty Document 106-29
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- Treaty between the Government of the United States of America and the Government of the Republic of Croatia Concerning the Encouragement and Reciprocal Protection of Investment, with Annex and Protocol, signed at Zagreb on July 13, 1996.
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[Senate Treaty Document 106-29] [From the U.S. Government Publishing Office] 106th Congress Treaty Doc. SENATE 2d Session 106-29 _______________________________________________________________________ INVESTMENT TREATY WITH CROATIA __________ MESSAGE from THE PRESIDENT OF THE UNITED STATES TREATY BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF THE REPUBLIC OF CROATIA CONCERNING THE ENCOURAGEMENT AND RECIPROCAL PROTECTION OF INVESTMENT, WITH ANNEX AND PROTOCOL, SIGNED AT ZAGREB ON JULY 13, 1996 May 23, 2000.--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 __________ U.S. GOVERNMENT PRINTING OFFICE 79-118 WASHINGTON : 2000 LETTER OF TRANSMITTAL ---------- The White House, May 23, 2000. 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 Government of the United States of America and the Government of the Republic of Croatia Concerning the Encouragement and Reciprocal Protection of Investment, with Annex and Protocol, signed at Zagreb on July 13, 1996. I transmit also, for the information of the Senate, the report of the Department of State with respect to this Treaty. The bilateral investment treaty (BIT) with Croatia was the fourth such treaty between the United States and a Southeastern European country. The Treaty will protect U.S. investment and assist Croatia in its efforts to develop its economy by creating conditions more favorable for U.S. private investment and thus strengthen the development of its 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 customary international law standards for expropriation. The Treaty includes detailed provisions regarding the computation and payment of prompt, adequate, and effective compensation for expropriation; free transfer of funds related to investments; freedom of investments from specified performance requirements; fair, equitable, and most- favored-nation treatment; and the investor'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 at an early date. William J. Clinton. LETTER OF SUBMITTAL ---------- Department of State, Washington, May 3, 2000. The President: I have the honor to submit to you the Treaty Between the Government of the United States of America and the Government of the Republic of Croatia Concerning the Encouragement and Reciprocal Protection of Investment, with Annex and Protocol, signed at Zagreb on July 13, 1996. 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 Croatia was the fifteenth such treaty signed between the United States and a country of Central or Eastern Europe. The Treaty is based on the view that an open investment policy contributes to economic growth. This Treaty will assist Croatia in its efforts to develop its economy by creating conditions more favorable for U.S. private investment and thereby strengthening the development of its private sector. It is U.S. policy, however, to advise potential treaty partners during BIT negotiations that conclusion of such a treaty does not necessarily result in increases in private U.S. investment flows. To date, 31 BITs are in force for the United States--with Albania, Argentina, Armenia, Bangladesh, Bulgaria, Cameroon, the Republic of the Congo, the Democratic Republic of the Congo (formerly Zaire), the Czech Republic, Ecuador, Egypt, Estonia, Georgia, Grenada, Jamaica, Kazakhstan, Kyrgyzstan, Latvia, Moldova, Mongolia, Morocco, Panama, Poland, Romania, Senegal, Slovakia, Sri Lanka, Trinidad & Tobago, Tunisia, Turkey, and Ukraine. In addition to the Treaty with Croatia, the United States has signed, but not yet brought into force, BITs with Azerbaijan, Bahrain, Belarus, Bolivia, El Salvador, Honduras, Jordan, Lithuania, Mozambique, Nicaragua, Russia, 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. the u.s.-croatia treaty The Treaty with Croatia is based on the 1994 U.S. prototype BIT and satisfies the U.S. principal objectives in bilateral investment treaty negotiations: --All forms of U.S. investment in the territory of Croatia are covered. --Covered investments receive the better of national treatment or most-favored-nation (MFN) treatment both while they are being established and thereafter, subject to certain specified exceptions. --Specified performance requirements may not be imposed upon or enforced against covered investments. --Expropriation is permitted only in accordance with customary international law standards. --Parties are obligated to permit the transfer, in a freely usable currency, of all funds related to a covered investment, subject to exceptions for specified purposes. --Investment disputes with the host government may be brought by investors, or by their covered investments, to binding international arbitration as an alternative to domestic courts. These elements are further described in the following article-by-article analysis of the provisions of the Treaty: Title and Preamble The Title and Preamble state the goals of the Treaty. Foremost is the encouragement and protection of investment. Other goals include economic cooperation on investment issues; the stimulation of economic development; higher living standards; promotion of respect for internationally-recognized worker rights; and maintenance of health, safety, and environmental measures. While the Preamble does not impose binding obligations, its statement of goals may assist in interpreting the Treaty and in defining the scope of Party-to- Party consultations pursuant to Article IX. Article I (Definitions) Article I defines terms used throughout the Treaty. Company, Company of a Party The definition of ``company'' is broad, covering all types of legal entities constituted or organized under applicable law, and includes corporations, trusts, partnerships, sole proprietorships, branches, joint ventures, and associations. The definition explicitly covers not-for-profit entities, as well as entities that are owned or controlled by the state. ``Company of a Party'' is defined as a company constituted or organized under the laws of that Party. National The Treaty defines ``national of a Party'' (hereinafter ``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. Investment, Covered Investment The Treaty's definition of investment is broad, recognizing that investment can take a wide variety of forms. Every kind of investment is specifically incorporated in the definition; moreover, it is explicitly noted that investment may consist or take the form of any of a number of interests, claims, and rights. The Treaty provides that any change in the form of an investment does not affect its character as an investment. The Treaty provides an illustrative list of the forms an investment may take. Establishing a subsidiary is a common way of making an investment. Other forms that an investment might take include equity and debt interests in a company; contractual rights; tangible, intangible, and intellectual property; and rights conferred pursuant to law, such as licenses and permits. Investment as defined by the Treaty generally excludes claims arising solely from trade transactions, such as a sale of goods across a border that does not otherwise involve an investment. The Treaty defines ``covered investment'' as an investment of a national or company of a Party in the territory of the other Party. An investment of a national or company is one that the national or company owns or controls, either directly or indirectly. Indirect ownership or control could be through other, intermediate companies or persons, 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, or by other arrangements. The broad nature of the definitions of ``investment,'' ``company,'' and ``company of a Party'' means that investments can be covered by the Treaty even if ultimate control lies with non-Party nationals. A Party may, however, deny the benefits of the Treaty in the limited circumstances described in Article XIII. State Enterprise, Investment Authorization, Investment Agreement The Treaty defines ``State enterprise'' as a company owned, or controlled through ownership interests, by a Party. Purely regulatory control over a company does not qualify it as a state enterprise. The Treaty defines an ``investment authorization'' as an authorization granted by the foreign investment authority of a Party to a covered investment or a national or company of the other Party. The Treaty defines an ``investment agreement'' as a written agreement between the national authorities of a Party and a covered 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, rulings, closing agreements, and advance pricing agreements. ICSID Convention, Centre, UNCITRAL Arbitration Rules The ``ICSID Convention,'' ``Centre,'' and ``UNCITRAL Arbitration Rules'' are explicitly defined to make the text brief and clear. Territory A definition of ``territory'' was included at the request of Croatia. The Treaty defines ``territory'' as the territory of the United States or Croatia.including the territorial sea established in accordance with international law as reflected in the 1982 United Nations Convention on the Law of the Sea. The definition also applies, in accordance with international law as reflected in that convention, to the seas, subsoil, and seabed adjacent to the territorial sea in which either the United States or Croatia has sovereign rights or jurisdiction. Article II (Treatment of Investment) Article II contains the Treaty's major obligations with respect to the treatment of covered investments. Paragraph 1 generally ensures the better of national or MFN treatment in both the entry and post-entry phases of investment. It thus prohibits, outside of exceptions listed in the Annex, ``screening'' on the basis of nationality during the investment process, as well as nationally-based post- establishment measures. For purposes of the Treaty, ``national treatment'' means treatment no less favorable than that which a Party accords, in like situation, to investments in its territory of its own nationals or companies. For purposes of the Treaty, ``MFN treatment'' means treatment no less favorable than that which a Party accords, in like situations, to investments in its territory of nationals or companies of a third country. The Treaty obliges each Party to provide whichever of national treatment or MFN treatment is the most favorable. This is defined by the Treaty as ``national and MFN treatment.'' Paragraph 1 explicitly states that the national and MFN treatment obligation will extend to state enterprises in their provision of goods and services to covered investments. Paragraph 2 states that each Party may adopt or maintain exceptions to the national and MFN treatment standard with respect to the sectors or matters specified in the Annex. Further restrictive measures are permitted in each sector. (The specific exceptions are discussed in the section entitled ``Annex'' below.) In the Annex, Parties may take exceptions only to the obligation to provide national and MFN treatment; there are no sectoral exceptions to the rest of the Treaty's obligations. Finally, in adopting any exception under this provision, a Party may not require the divestment of a preexisting covered investment. Paragraph 2 also states that a Party is not required to extend to covered investments national and MFN treatment with respect to procedures provided for in multilateral agreements concluded under the auspices of the World Intellectual Property Organization relating to the acquisition or maintenance of intellectual property rights. This provision clarifies that certain procedural preferences granted under intellectual property conventions, such as the Patent Cooperation Treaty, fall outside the BIT. This exception parallels those in the Uruguay Round's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and the North American Free Trade Agreement (NAFTA). Paragraph 3 sets out a minimum standard of treatment based on standards found in customary international law. The obligations to accord ``fair and equitable treatment'' and ``full protection and security'' are explicitly cited, as is each Party's obligation not to impair, through unreasonable and discriminatory means, the management, conduct, operation, and sale or other disposition of covered investments. The general reference to international law also implicitly incorporates other fundamental rules of customary international law regarding the treatment of foreign investment. However, this provision does not incorporate obligations based on other international agreements. Paragraph 4 requires that each Party provide effective means of asserting claims and enforcing rights with respect to covered investments. Paragraph 5 ensures the transparency of each Party's regulations of covered investments. Article III (Expropriation) Article III incorporates into the Treaty customary international law standards for expropriation. Article III also includes detailed provisions regarding the computation and payment of prompt, adequate, and effective compensation. Paragraph 1 describes the obligations of the Parties with respect to expropriation and nationalization of a covered investment. These obligations apply to both direct expropriation and indirect expropriation through measures ``tantamount to expropriation or nationalization'' and thus apply to ``creeping expropriations''--a series of measures thateffectively amounts to an expropriation of a covered investment without taking title. Paragraph 1 further bars all expropriations or nationalizations except those that are for a public purpose; carried out in a non-discriminatory manner; in accordance with due process of law; in accordance with the general principles of treatment provided in Article II(3); and subject to ``prompt, adequate and effective compensation.'' Paragraphs 2, 3, and 4 more fully describe the meaning of ``prompt, adequate and effective compensation.'' The guiding principle is that the investor should be made whole. Article IV (Compensation for Damages Due to War and Similar Events) Paragraph 1 entitles investments covered by the Treaty to national and MFN treatment with respect to any measure relating to losses suffered in a Party's territory owing to war or other armed conflict, civil disturbances, or similar events. Paragraph 2, by contrast, creates an unconditional obligation to pay compensation for such losses when the losses result from requisitioning or from destruction not required by the necessity of the situation. Article V (Subrogation) Article V of the Treaty protects a Party or designated agency's rights and claims under any indemnity, guarantee, or contract of insurance given by that Party (or designated agency) for a covered investment by requiring the other Party to recognize the assignment to the Party or its designated agency of any right or claim of an indemnified national or company. The Party (or designated agency) is entitled to the same treatment with respect to those rights and claims acquired by it through assignment. The Party (or its designated agency) is also entitled to any payments received in pursuance of those rights or claims. Provisions of this type are generally included in separate bilateral OPIC agreements. Croatia requested the addition to the Treaty of an article on subrogation so as to have a mutual agreement in place should Croatia create an agency equivalent to OPIC in the future. The terms of Article V were drafted by the United States, based on its standard OPIC agreements. Article VI (Transfers) Article VI protects investors from certain government exchange controls that limit current and capital account transfers, as well as limits on inward transfers made by screening authorities and, in certain circumstances, limits on returns in kind. In paragraph 1, each Party agrees to ``permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory.'' Paragraph 1 also provides a list of transfers that must be allowed. The list is non-exclusive, and is intended to protect flows to both affiliated and non-affiliated entities. Paragraph 2 provides that each Party must permit transfers to be made in a ``freely usable currency'' at the market rate of exchange prevailing on the date of transfer. ``Freely usable'' is a term used by the International Monetary Fund; at present there are five ``freely usable'' currencies: the U.S. dollar, Japanese yen, German mark, French franc, and British pound sterling. In paragraph 3, each Party agrees to permit returns in kind to be made where such returns have been authorized by an investment authorization or written agreement between a Party and a covered investment or a national or company of the other Party. Paragraph 4 recognizes that, notwithstanding the obligations of paragraphs 1 through 3, a Party may prevent a transfer through the equitable, non-discriminatory, and good faith application of laws relating to bankruptcy, insolvency, or the protection of the rights of creditors; securities; criminal or penal offenses; or ensuring compliance with orders or judgments in adjudicatory proceedings. Article VII (Performance Requirements) Article VII prohibits either Party from mandating or enforcing specified performance requirements as a condition for the establishment, acquisition, expansion, management, conduct, or operation of a covered investment. The list of prohibited requirements is exhaustive and covers domestic content requirements and domestic purchase preferences, the ``balancing'' of imports or sales in relation to exports or foreign exchange earnings, requirements to export products or services, technology transfer requirements,and requirements relating to the conduct of research and development in the host country. Such requirements are major burdens on investors and impair their competitiveness. The last sentence of Article VII makes clear that a Party may, however, impose conditions for the receipt or continued receipt of benefits and incentives. Article VIII (Entry, Sojourn, and Employment of Aliens) Paragraph 1 requires each Party to allow, subject to its laws relating to the entry and sojourn of aliens, the entry into its territory of the other Party's nationals for certain purposes related to a covered investment and involving the commitment of a ``substantial amount of capital.'' This paragraph serves to render nationals of Croatia eligible for treaty-investor visas under U.S. immigration law. It also affords similar treatment for U.S. nationals entering Croatia. The requirement to commit a ``substantial amount of capital'' is intended to prevent abuse of treaty-investor status; it parallels the requirements of U.S. immigration law. In addition, paragraph 1(b) prohibits labor certification requirements and numerical restrictions on the entry of treaty- investors. Paragraph 2 requires that each Party allow covered investments to engage top managerial personnel of their choice, regardless of nationality. This provision does not require that such personnel be granted entry into a Party's territory. Such persons must independently qualify for an appropriate visa for entry into the territory of the other party. Nor does this provision create an exception to U.S. equal employment opportunity laws. Article IX (State-State Consultations) Article IX provides for prompt consultation between the Parties, at either Party's request, on any matter relating to the interpretation or application of the Treaty or to the realization of the Treaty's objectives. A Party may thus request consultations for any matter reasonably related to the encouragement or protection of covered investment, whether or not a Party is alleging a violation of the Treaty. Article X (Settlement of Disputes Between One Party and a National or Company of the Other Party) Article X sets forth several means by which disputes brought against a Party by an investor (specifically, a national or company of the other Party) may be resolved. Article X procedures apply to an ``investment dispute,'' which is any dispute arising out of or relating to an investment authorization, an investment agreement, or an alleged breach of rights conferred, created, or recognized by the Treaty with respect to a covered investment. The Treaty provides that the parties to the dispute should initially seek a resolution through consultation and negotiation. In the event that an investment dispute cannot be settled amicably, paragraph 2 gives an investor an exclusive (with the exception in paragraph 3(b) concerning injunctive relief, explained below) choice among three options to settle the dispute. These three options are: (1) submitting the dispute to the courts or administrative tribunals of the Party that is a party to the dispute; (2) invoking dispute-resolution procedures previously agreed upon by the national or company and the host country government; or (3) invoking the dispute- resolution mechanisms identified in paragraph 3 of Article X. Under paragraph 3(a), the investor can submit an investment dispute to binding arbitration 3 months after the dispute arises, provided that the investor has not submitted the claim to a court or administrative tribunal of the Party or invoked a dispute resolution procedure previously agreed upon. The investor may choose among the International Centre for Settlement of Investment Disputes (ICSID) (Convention Arbitration), the Additional Facility of ICSID (if Convention Arbitration is not available), ad hoc arbitration using the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL), or any other arbitral institution or rules agreed upon by both parties to the dispute. Before or during such arbitral proceedings, however, paragraph 3(b) provides that an investor may seek, without affecting its right to pursue arbitration under this Treaty, interim injunctive relief not involving the payment of damages from local courts or administrative tribunals of the Party that is a party to the dispute for the preservation of its rights and interests. This paragraph does not alter the power ofthe arbitral tribunals to recommend or order interim measures they may deem appropriate. Paragraph 4 constitutes each Party's consent to the submission of investment disputes to binding arbitration in accordance with the choice of the investor. Paragraph 5 provides that any non-ICSID Convention arbitration shall take place in a country that is a party to the United Nations Convention on the Recognition and Enforcement of Arbitral Awards. This provision facilitates enforcement of arbitral awards. In addition, in paragraph 6, each Party commits to enforcing arbitral awards rendered pursuant to this Article. The Treaty also provides that each Party's enforcement of an arbitral award in its territory will be governed by its national law. This additional provision merely confirms that since each Party must fully enforce all arbitral awards as provided in the Treaty, the means of doing so is through each Party's domestic law. The Federal Arbitration Act (9 U.S.C. 1 et seq.) satisfies the requirement for the enforcement of non- ICSID Convention awards in the United States. The Convention on the Settlement of Investment Disputes Act of 1966 (22 U.S.C. 1650-1650a) provides for the enforcement of ICSID Convention awards in the United States. Paragraph 7 ensures that a Party may not assert as a defense, or for any other reason, that the investor involved in the investment dispute has received or will receive reimbursement for the same damages under an insurance or guarantee contract. Paragraph 8 provides that, for the purposes of this article, the nationality of a company in the host country will be determined by ownership or control, rather than by place of incorporation. This provision allows a company that is a covered investment to bring a claim in its own name. Article XI (Settlement of Disputes Between the Parties) Article XI provides for binding arbitration of disputes between the United States and Croatia concerning the interpretation or application of the Treaty that are not resolved through consultations or other diplomatic channels. The article specifies various procedural aspects of such arbitration proceedings, including time periods, selection of arbitrators, and distribution of arbitration costs between the Parties. The article constitutes each Party's prior consent to such arbitration. Article XII (Preservation of Rights) Article XII clarifies that the Treaty does not derogate from any obligation a Party might have to provide better treatment to the covered investment than is specified in the Treaty. Thus, the Treaty establishes a floor for the treatment of covered investments. A covered investment may be entitled to more favorable treatment through domestic legislation, other international legal obligations, or a specific obligation (e.g., to provide a tax holiday) assumed by a Party with respect to that covered investment. Article XIII (Denial of Benefits) Article XIII(a) preserves the right of each Party to deny the benefits of the Treaty to a company owned or controlled by nationals of a non-Party country with which the denying Party does not have normal economic or diplomatic relations, e.g., a country to which it is applying economic sanctions. For example, at this time the United States does not maintain normal economic relations with, among other countries, Cuba and Libya. Article XIII(b) permits each Party to deny the benefits of the Treaty to a company of the other Party if the company is owned or controlled by non-Party nationals and if the company has no substantial business activities in the Party where it is established. Thus, the United States could deny benefits to a company that is a subsidiary of a shell company organized under the laws of Croatia if controlled by nationals of a third country. However, this provision would not generally permit the United States to deny benefits to a company of Croatia that maintains its central administration or principal place of business in the territory of, or has a real and continuous link with, Croatia. Article XIV (Taxation) Article XIV excludes tax matters generally from the coverage of the BIT, on the basis that tax matters should be dealt with in bilateral tax treaties. However, Article XIV does not preclude a national or company from bringing claims under article X that taxation provisions in a investment agreement orauthorization have been violated. In addition, the dispute settlement provisions of Article X and XI apply to tax matters in relation to alleged violations of the BIT's expropriation article. Under paragraph 2, a national or company that asserts in a dispute that a tax matter involves expropriation may submit that dispute to arbitration pursuant to Article X(3) only if (1) the investor has first referred to the competent tax authorities of both Parties the issue of whether the tax matter involves an expropriation, and (2) the tax authorities have not both determined, within 9 months from the time of referral, that the matter does not involve an expropriation. The ``competent tax authority'' of the United States is the Assistant Secretary of the Treasury for Tax Policy, who will make such a determination only after consultation with the Inter-Agency Staff Coordinating Group on Expropriations. Article XV (Measures Not Precluded) The first paragraph of Article XV reserves the right of a Party to take measures for the fulfillment of its international obligations with respect to maintenance or restoration of international peace or security, as well as those measures it regards as necessary for the protection of its own essential security interests. International obligations with respect to maintenance or restoration of peace or 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 interests of the Party involved. Measures to protect a Party's essential security interests are self-judging in nature, although each Party would expect the provisions to be applied by the other in good faith. The second paragraph permits a Party to prescribe special formalities in connection with covered investments, provided that these formalities do not impair the substance of any Treaty rights. Such formalities could include reporting requirements for covered investments or for transfers of funds, or incorporation requirements. Article XVI (Application to Political Subdivisions and State Enterprises of the Parties) Paragraph 1(a) makes clear that the obligations of the Treaty are applicable to all political subdivisions of the Parties, such as provincial, State, and local governments. Paragraph 1(b) recognizes that under the U.S. federal system, States of the United States may, in some instances, treat out-of-State residents and corporations in a different manner than 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 by a State to U.S. out-of-State residents and corporations. Paragraph 2 extends a Party's obligations under the Treaty to its state enterprises in the exercise of any delegated governmental authority. This paragraph is designed to clarify that the exercise of governmental authority by a state enterprise must be consistent with a Party's obligations under the Treaty. Article XVII (Entry Into Force, Duration, and Termination) Paragraph 1 stipulates that the Treaty enters into force 30 days after exchange of instruments of ratification through diplomatic channels. The Treaty remains in force for a period of 10 years and continues in force thereafter unless terminated by either Party as provided in paragraph 2. Paragraph 2 permits a Party to terminate the Treaty at the end of the initial 10 year period, or at any later time, by giving 1 year's written notice through diplomatic channels to the other Party. Paragraph 1 also provides that the Treaty applies to covered investments existing at the time of entry into force as well as to those established or acquired thereafter. The Protocol to the Treaty confirms the Parties' mutual understanding that the provisions of the Treaty do not bind either Party in relation to any act or fact that took place or any situation that ceased to exist before entry into force of the Treaty. This provision thus explicitly states the standard under customary international law that applies in the absence of the Parties' express intent to apply the treaty retroactively. Paragraph 3 provides that, if the Treaty is terminated, all investments that qualified as covered investments on the date of termination (i.e., 1 year after the date of written notice of termination) continue to be protected under the Treaty for 10 years from that date as long as these investments qualify as covered investments. A Party's obligations with respect to the establishment and acquisition of investments would lapse immediately upon the date of termination of the Treaty. Paragraph 4 stipulates that the Annex and Protocol shall form an integral part of the Treaty. Annex U.S. bilateral investment treaties allow for exceptions to national and MFN treatment, where the Parties' domestic regimes do not afford national and MFN treatment, or where treatment in certain sectors or matters is negotiated in and governed by other agreements. Future derogations from the national treatment obligations of the Treaty are generally permitted only in the sectors or matters listed in the Annex, pursuant to Article II(2), and must be made on an MFN basis unless otherwise specified therein. Under a number of statutes, many of which have a long historical background, the U.S. federal government or States may not necessarily treat investments of nationals or companies of Croatia as they do U.S. investments or investments from a third country. Paragraph 1 through 3 of the Annex list the sectors or matters subject to U.S. exceptions. The U.S. exceptions from its national treatment obligation are: atomic energy; customhouse brokers; licenses for broadcast, common carrier, or aeronautical radio stations; COMSAT; subsidies or grants, including government-supported loans, guarantees, and insurance; State and local measures exempt from Article 1102 of the North American Free Trade Agreement pursuant to Article 1108 thereof; and landing of submarine cables. The U.S. exceptions from its national and MFN treatment obligation are: fisheries; air and maritime transport, and related activities. During negotiations, the United States informed Croatia that if Croatia undertook acceptable commitments with respect to all or certain financial services, the United States would consider limiting its exceptions with respect to its national and MFN treatment obligation in financial services. Croatia offered to take no exceptions to the treaty's national or MFN treatment obligations with respect to banking, insurance, securities, and other financial services. Therefore in paragraph 3 of the Annex, the United States has limited its exceptions with respect to banking, insurance, securities, and other financial services to afford treatment no less favorable than that accorded with respect to Canada and Mexico in the North American Free Trade Agreement. Paragraphs 4 of the Annex lists Croatia's exceptions to its national treatment obligation, which are: ownership and operation of broadcast or common carrier radio and television stations; the provision of common carrier telephone and telegraph services; the provision of submarine cable services; and subsidies or grants, including government supported loans; Paragraph 5 of the Annex lists Croatia's exceptions to its national and MFN treatment obligation, which are: fisheries; and air and maritime transport, and related activities (including maritime services). Paragraph 6 of the Annex ensures that national treatment is granted by each Party in all leasing of minerals; concession rights for exploration and exploitation of mineral resources (reflecting the form of mineral leases under Croation law); and pipeline rights-of-way on government lands. In so doing, this provision affects the implementation of the Mineral Lands Leasing Act (MLLA) (30 U.S.C. 181 et seq.) and 10 U.S.C. 7435, regarding Naval Petroleum Reserves, with respect to nationals and companies of Croatia. The Treaty provides for resort to binding international arbitration to resolve disputes, rather than denial of mineral rights or rights to naval petroleum shares to investors of the other Party, as is the current process under the statute. U.S. domestic remedies, would, however, remain available for use in conjunction with the Treaty's provisions. The MLLA and 10 U.S.C. 7435 direct that a foreign investor be denied access to leases for minerals on on-shore federal lands, leases of land within the Naval Petroleum and Oil Shale Reserves, and rights-of-way for oil or gas pipelines across on- shore federal lands, if U.S. investors are denied access to similar or like privileges in the foreign country. Croatia's extension of national treatment in these sectors will fully meet the objectives of the MLLA and 10 U.S.C. 7435. Croatia was informed during negotiations that, were it to include this sector in its list of treatment exemptions, the United States would (consist with the MLLA and 10 U.S.C. 7435) exclude the leasing of minerals or pipeline rights-of-way on Government lands from the national and MFN treatment obligations of this Treaty. The listing of a sector or matter in the Annex does not necessarily signify that domestic laws have entirely reserved it for nationals. And, pursuant to Article II(2), any additional restrictions or limitations that a Party may adopt with respect to listed sectors or matters may not compel the divestiture of existing covered investments. Finally, listing a sector or matter in the Annex exempts a Party only from the obligation to accord national or MFN treatment. Both Parties are obligated to accord to covered investments in all sectors--even those listed in the Annex--all other rights conferred by the Treaty. Protocol As described under Article XVII(1), the Protocol states that the Treaty does not apply retroactively. This clarification was added to the Treaty at the request of Croatia. The other U.S. Government agencies that participated in negotiating the Treaty join me in recommending that it be transmitted to the Senate at an early date. Respectfully submitted, Madeleine Albright.