Sovereign Wealth Funds: Background and Policy Issues for Congress

^Pr^ep^ar^{ed f}^o^r^M^e^m^b^ers^an^d^Com^mⁱ^t^t^ees^of^C^ong^r^e^ss

Sovereign wealth funds (SWFs) are investment funds owned and managed by national
governments. Such funds currently manage between $1.9 and $2.9 trillion and are expected to
grow to over $10 trillion by 2015. This is due to the rapid growth of commodity prices and large
trade surpluses in several emerging market economies. Beginning in 2007, interest in SWFs
increased as Asian and Middle Eastern SWFs, fueled by surging foreign exchange reserves,
invested large sums of capital in U.S. and other Western companies.
Policy makers in the United States have raised two broad policy concerns about SWFs: (1) their
lack of transparency and (2) their possible misuse for political or other non-commercial goals.
Hearings have been held by several congressional committees including the House Financial
Services Committee and the Senate Foreign Relations and Senate Banking Committees.
SWFs pose a complex challenge for policy makers. On one hand, SWFs are long-term investment
vehicles looking beyond quarterly results and therefore serve as stable funding sources during
financial turbulence. On the other hand, however, there are operational concerns stemming from
government control (i.e., lack of transparency and possible non-commercial investment goals).
Without transparency, it is difficult to attain a clear picture of SWF investment activity. A lack of
SWF transparency can also obscure governance and risk-management problems within SWFs.
Many are also concerned that countries will use SWFs to support what one analyst has called
“state capitalism,” using government-controlled assets to secure stakes around the world in
strategic areas such as telecommunications, energy and mineral resources, and financial services,
among other sectors.
In response to these concerns, many analysts and policy makers are evaluating the operations of
existing SWFs and are looking to the international financial institutions such as the International
Monetary Fund, World Bank, and the Organization for Economic Cooperation and Development
to establish guidelines for SWF operations. All of these institutions are currently developing
proposals that will be deliberated during 2008. This report will be updated as events warrant.

Introduc tion ..................................................................................................................................... 1
Backgr ound ..................................................................................................................................... 2
What Are Sovereign Wealth Funds (SWFs)?............................................................................2
What Countries Operate SWFs?...............................................................................................4
The Size of SWFs......................................................................................................................5
Policy Issues for Congress...............................................................................................................7
Transparency and Governance-Related Concerns.....................................................................9
Non-Commercial Investment Motives....................................................................................10
U.S. Taxation of SWFs.............................................................................................................11
Existing legislation on foreign investment..............................................................................12
Banking ........................................................................................................................ ..... 12
Securi ti es ..................................................................................................................... ...... 13
National security...............................................................................................................13
The Global Response to SWFs......................................................................................................13
The Santiago Principles...........................................................................................................15
OECD Standards for Investment in Member Countries..........................................................17
Figure 1. Segments of the Global Capital Market, USD Trillion, 2007..........................................5
Figure 2. Global Reserve Growth and SWFs..................................................................................7
Figure 3. Standard Chartered Ranking of SWFs, by Investment Approach and
Tr ansparency ................................................................................................................................ 9
Table 1. Large Sovereign Wealth Funds..........................................................................................6
Author Contact Information..........................................................................................................17

Sovereign Wealth Funds (SWFs) are investment funds owned and managed by national
governments. Originally created in the 1950s by oil and resource-producing countries to help
stabilize their economies against fluctuating commodity prices, and to provide a source of wealth
for future generations, they have proliferated considerably in recent years. Although their lack of
transparency makes estimating SWF investment levels difficult, it is estimated that they currently ¹
manage between $1.9 and $2.9 trillion. Estimates of their growth over the next several years ²
vary, with the consensus hovering around Morgan Stanley’s projection of $10 trillion by 2015.
Early estimates were higher, but it appears that the global financial crisis has led SWF growth to
slow due to losses by SWFs on the value of their existing portfolios, lower commodity prices, and
the likelihood that some developing countries will tap into their SWF resources for domestic
purposes.
SWFs can be funded through a variety of means, including profits from the sale of commodities
(such as oil) or a current account surplus. SWFs can be established to serve several different
objectives. These may include diversifying national assets, stabilizing the domestic economy
against volatile commodity prices, saving for future generations, getting a better return on
investment than traditional foreign exchange reserves, and promoting political or strategic
interests.
The dramatic recent increase in SWF activity has raised concerns about this relatively
unexamined class of international investors. This report provides background on SWFs, including
what countries operate SWFs and the size of the SWF market, and discusses two broad areas of
concern to Members of Congress and the international financial community:
• governance and transparency-related issues, and
• possible non-commercial investment goals, including the potential use of
government-controlled investment vehicles to attain global strategic and political
goals.
Some U.S. policy makers stress that their concerns about SWFs are not meant to undermine the
U.S. commitment to open investment. They maintain that the United States is one of the most
open economies in the world and note that foreign investment in the United States provides many
benefits, including lower interest rates, increased employment, productivity, and access to capital
for American enterprise. Indeed, for countries such as the United States, which have both a high
national budget deficit and historically low levels of public savings, foreign investment has been ³
crucial.

¹^A^{ll f}ⁱ^g^u^re^{s a}^r^e^{in U.S.}^dolla^rs.
²^Ste^phe^{n J}^e^{n, “}^S^W^F^s^’^G^r^ow^{th T}^e^m^p^e^r^e^d^{: U}^S^{$10 T}^r^illi^on^by²⁰¹^5,^”^M^o^r^gan^St^anle^y^Re^s^e^ar^c^h^G^l^ob^al^{, O}^c^to^be^{r 3}⁰^,
²⁰⁰^8.
³^For^m^o^r^e^inf^o^r^m^a^{tion o}ⁿ^f^o^r^e^ig^{n inv}^e^s^t^m^e^{nt in t}^h^e^U^.^{S. e}^c^o^nom^y^,^s^e^e^C^R^S^R^e^por^{t R}^S²¹⁸⁵^7,^F^o^reign^Direct
^In^vest^m^en^tⁱⁿ^t^h^{e Un}ⁱ^t^ed^St^a^t^{es: A}ⁿ^E^c^on^o^mⁱ^c^Aⁿ^a^l^ysi^s^,^b^y^Ja^m^e^{s K}^.^Jacksoⁿ^.

The rising profile of SWFs is a direct consequence of the massive accumulation of global foreign
reserve assets over the past decade. While reserve accumulation has occurred in many emerging
market economies, it has been especially sharp among oil producers and Asian countries that have
large trade-surpluses with the United States and other developed countries. In these countries,
reserves have swelled to levels far in excess of the amount needed for balance of payments
support, thus presenting an opportunity for foreign exchange reserve managers to maximize
returns.
Foreign exchange reserves are traditionally invested in low-risk assets such as U.S. Treasury bills,
but their recent growth has seen an increasing shift of excess reserves to higher-risk, higher-return
investments. In contrast to traditional foreign exchange reserves, SWFs invest in a much broader
array of assets, including stocks, bonds, fixed assets, commodities, derivatives, and alternative
investments such as real estate and hedge funds. Like private hedge funds and government ⁴
pension funds, SWFs often rely on outside expertise and professional fund managers.
Two key forces drove congressional interest in SWFs during the 110^th Congress: (1) the
introduction of new funds and (2) major acquisitions by existing SWFs following large losses by
Western financial institutions from the U.S. sub-prime mortgage crisis. Many point to the
September 29, 2007, launch of the new China Investment Corporation, Ltd. (CIC), with $200 ⁵
billion of capital as a catalyst of the initial Western interest in SWFs.
While SWFs represent a small percentage of all investment classes globally, their rapid and
projected growth could increase demand for riskier assets, including equities and bonds. Deutsche
Bank estimates that future SWF asset allocation could lead to a gross capital inflow of over $1
trillion into global equity markets and $1.5 trillion into global debt markets over the coming five ⁶
years. Merrill Lynch, using more aggressive assumptions, estimates that $3.1 to $6 trillion is ⁷
likely to be invested in riskier assets by SWFs in the next five years. While SWF investments
peaked during the financial crisis in 2007-8, with many foreign SWFs taking large stakes in
Western financial institutions, it appears that the pace of investments has tailed off.
While the term “Sovereign Wealth Fund” was coined only recently, SWFs have a more than 50-⁸
year history, with the first fund established by Kuwait in 1953. There is no universally agreed
upon definition of SWFs. The U.S. Treasury Department narrowly defines SWFs as “a

⁴^Ste^phe^{n J}^e^{n, “}^E^c^o^nom^ic^s^:^H^o^w^Muc^h^A^s^s^e^ts^C^ould^SW^Fs^Fa^r^m^O^u^t?^”^M^o^r^gan^St^an^le^y^G^l^ob^{al Re}^s^e^ar^c^h^{, J}^a^nua^r^y^10,
²⁰⁰^8.
⁵^Se^e^C^R^S^R^e^por^{t R}^L³⁴³³⁷^,^C^hⁱⁿ^a’^s^S^o^v^e^r^eⁱ^{gn W}^e^alth^Fu^nd^{, by}^Mic^h^a^e^l^{F. Ma}^rtiⁿ^.
⁶^S^t^eff^eⁿ^Kern^,^“S^o^v^erei^gn^W^eal^t^h^F^uⁿ^d^s^-^S^t^at^{e In}^vest^m^eⁿ^t^{s o}ⁿ^t^h^e^Ri^se,^”^D^e^uts^c^he^Bank^Re^s^e^ar^c^h^,^Se^pte^m^be^r^10,
²⁰⁰^7.
⁷^A^l^e^x^P^a^te^{lis, “}^T^he^Ov^e^r^f^l^o^w^ing^Ba^thtub^,^t^h^e^ruⁿⁿⁱ^ng^ta^{p a}ⁿ^{d SW}^Fs,”^M^e^{rrill Ly}^nc^{h Ec}^o^nomic^Aⁿ^a^l^y^s^is^{, O}^c^tobe^r⁶^,
²⁰⁰^7.
⁸^F^o^{r t}^h^{e f}ⁱ^rst^u^s^{e o}^f^t^h^{e t}^e^rm^S^o^verei^gⁿ^W^eal^t^h^F^u^nd^,^{see A}ⁿ^d^r^ew^Ro^zan^o^v^,^“W^h^o^Hol^d^{s t}^h^{e W}^eal^t^h^o^f^Natⁱ^oⁿ^s^,^”^St^ate
^Str^e^e^t^G^l^ob^{al A}^d^vⁱ^s^o^r^s^{, A}^u^g^u^{st 2}⁰⁰⁵^{, a}^t^http^://w^ww^.^ssga^.^c^o^m^/^libra^ry^/^e^sps/
^W^ho_H^ol^ds^_W^e^a^lth_of^_N^a^tio^ns^_A^ndre^w^_R^oz^a^nov^_8.^15.^05RE^V^CCRI¹¹⁴⁵⁹⁹⁵⁵⁷^6.^pdf^.

government investment vehicle which is funded by foreign exchange assets, and which manages
those assets separately from the official reserves of the monetary authorities (the Central Bank ⁹
and reserve-related functions of the Finance Ministry).” The U.S. Treasury Department’s
definition is meant primarily to distinguish SWF investment from official reserves managed by a
country’s central bank. Because the primary goals of official foreign reserves are liquidity and
security, the investment horizon for these for reserves is short.
Some observers provide a more detailed definition of SWFs. Stephen Jen, a currency analyst at
Morgan Stanley, expands on the Treasury definition to provide a broader understanding of SWFs
and how they differ from official foreign reserves and other government-sponsored funds.
According to Jen, there are five key traits of SWFs. They are (1) sovereign government entities
with (2) high foreign currency exposures, (3) no explicit liabilities (such as a national state ¹⁰
pension fund), (4) high-risk tolerances, and (5) long investment horizons.
The IMF divides SWFs into several categories based on their stated goals. In practice, however,
many SWFs combine elements of the following three categories. The three primary types of
SWFs, according to the IMF, are as follows:
(1) Stabilization funds—Volatile international market prices are a primary concern for resource-
and commodity-intensive economies. Some commodities face price fluctuations of an average of

20%-25% per year. To mitigate this volatility, several countries have established funds to sterilize ¹¹

capital inflows and stabilize fiscal revenues. Because stabilization funds serve a more
immediate function than long-term savings funds, they tend to be more conservative in their ¹²
investment decisions, focusing on fixed income rather than equity investments. Examples
include Russia’s Stabilization Fund of the Russian Federation and Kazakhstan’s National Oil
Fund.
(2) Savings funds—Savings funds are intended to share wealth across generations. For countries
rich in natural resources, savings funds convert non-renewable natural resources into a diversified
portfolio of international financial assets to provide for future generations or other long-term
objectives. According to the IMF, while newer oil funds predominantly focus on stabilization
objectives, the recent increase in oil prices has allowed SWFs to emphasize savings objectives.
Because savings funds have longer investment horizons than pure stabilization funds, they invest
in a broader range of assets, including bonds and equities, as well as other forms of alternative
investments, such as real estate, private equity, hedge funds, and commodities. Examples include
the Abu Dhabi Investment Authority, Kuwait Investment Authority, Singapore’s Government
Investment Corporation, and the China Investment Corporation.

⁹^“^R^e^por^{t t}^o^C^o^ng^r^e^s^s^{on I}ⁿ^te^rⁿ^a^tⁱ^ona^{l Ec}^onom^ic^a^{nd Ex}^c^h^aⁿ^g^e^R^a^t^e^Polic^ie^s^,^”^D^e^pa^r^t^m^e^{nt of}^the^T^r^e^a^s^ur^y^,^D^e^c^e^m^b^e^r
²⁰⁰^{7, a}^t^htt^p^://w^w^w^.tre^a^s^.^g^ov^/^o^f^fⁱ^c^e^s^/ⁱ^nte^r^na^ti^ona^l-a^f^f^a^irs^/^e^c^onom^ic^-e^x^c^ha^ng^e^-^r^a^te^s^/^.
¹⁰^Ste^phe^{n J}^e^{n, “}^C^ur^r^e^nc^ie^s^:^T^h^e^D^e^fⁱ^nition^of^a^Sov^e^r^e^ig^{n W}^e^a^{lth Fund}^,”^M^o^r^g^{an Sta}ⁿ^le^y^Re^s^e^ar^c^h^{, O}^c^tobe^r²⁵^,
²⁰⁰^7.
¹¹^Curre^nc^y^ste^r^iliz^a^{tion is a}^f^o^rm^of^m^one^ta^r^y^a^c^{tion in w}^h^ic^h^a^c^o^uⁿ^try^’^{s c}^eⁿ^tra^l^ba^nk^a^tte^m^p^{ts to i}ⁿ^sula^te^itse^l^f^f^r^o^m
^the^f^o^re^ig^{n e}^x^c^h^aⁿ^g^e^m^a^r^k^e^t^{to c}^ounte^r^a^c^t^the^e^f^f^e^c^t^s^of^a^c^h^aⁿ^gⁱ^ng^m^one^ta^r^y^ba^s^e^b^y^s^e^lling^{or buy}^ing^the^dom^e^s^tic
^cu^rren^c^yⁱⁿ^t^h^{e f}^o^rei^gⁿ^exch^an^ge^market^t^o^st^abⁱ^lⁱ^{ze t}^h^{e val}^u^{e o}^f^t^h^{e d}^o^m^estⁱ^c^cu^rren^c^y^.^F^o^{r m}^o^{re i}ⁿ^fo^rm^atⁱ^oⁿ^,^see
^J^a^ng^-Y^ung^L^e^e^,^“^S^te^riliz^ing^Ca^pita^{l Inf}^l^ow^s^,^”^Inte^rna^tiona^l^Mo^ne^t^a^r^y^Fund^{, 1}^99,^a^t^h^ttp:/^/w^w^w^.i^m^f^.^o^rg^/e^x^t^e^r^na^l/pubs^/
^f^t^/ⁱ^ssu^es7^/^issu^e7^.^p^d^f^.
¹²^R^a^c^h^e^l^Zie^m^ba^{, “}^R^e^s^pons^e^s^{to S}^o^v^e^r^e^ig^{n W}^e^a^{lth Fu}^nds^:^A^r^e^‘^D^r^a^c^oniaⁿ^’^Me^a^s^ur^e^s^on^the^W^a^y^?^,”^{RGE M}^onit^o^r^,
^N^o^v^e^m^b^e^r²⁰⁰^7.

(3) Reserve investment corporations—Reserve investment corporations are funds established to
reduce the opportunity cost of holding excess foreign reserves or to pursue investment policies
with higher returns. Reserve investment corporations adapt more aggressive investment
strategies, including taking direct equity stakes. These funds typically seek higher returns than
other SWFs and use leverage (i.e., debt) in their investments. Historically, theses vehicles tend to ¹³
be more secretive than other SWFs that are primarily portfolio investors. Examples of such ¹⁴
funds are Singapore’s Temasek, Qatar’s Investment Authority, and Abu Dhabi’s Mubadala.
Among funds, there are substantial differences in risk-return profiles, investment horizons, asset ¹⁵
allocation, eligible instruments, risk tolerances, and constraints. Because each fund is different
and has varying goals and objectives, it is difficult to generalize about the investment strategies of
SWFs as a class. For example, an oil-exporting economy may initially establish a SWF for
stabilization purposes. However, if the assets under management by the SWF grow to exceed the
levels needed for stabilization, the country may either change the priorities and investment
strategy of the fund or establish a separate fund with a more aggressive investment approach.
Thus, several countries have multiple sovereign wealth funds. For example, the United Arab
Emirates’s primary fund, the Abu Dhabi Investment Authority (ADIA), was established in 1974
to invest surplus cash in assets that provide steady gains and returns over a long time-horizon
using a portfolio investment strategy. In 2002, the United Arab Emirates established Mubadala
Development to pursue direct investment projects targeted at higher returns.
The first SWF was established by Kuwait in 1953 as a means to help stabilize the economy from ¹⁶
fluctuating oil prices. In 1956 the Gilbert Islands (now Kiribati) established the Revenue
Equalization Reserve Fund to manage profits from phosphate mining. Following Kuwait and
Kiribati, the next major SWFs were created in the 1970s in the wake of the oil shock. The most
recent wave began in the 1990s with the Norway Government Pension Fund-Global in 1990 and
continues to this day. In the last five years, funds have been established by China, Iran, Russia,
Qatar, and the United Arab Emirates.
As noted previously, the recent growth of SWFs is a consequence of rapid growth in emerging
market reserves driven by (1) the impact of rising oil prices for Middle Eastern economies and (2)
large trade surpluses, net foreign direct investment flows, and high savings rates among Asian
economies. Reserve accumulation has been especially sharp in the case of China, where there has
been extensive intervention in the foreign exchange markets to limit the yuan’s appreciation ¹⁷
against the dollar.

¹³^Sim^ila^{r e}ⁿ^titie^{s to SW}^{Fs t}^h^a^t^ra^ise^m^aⁿ^y^of^the^sa^m^e^c^onc^e^r^{ns a}^r^e^sta^t^e^-^ba^c^k^e^d^c^o^m^p^aⁿ^ie^{s e}ⁿ^g^a^g^e^{d i}ⁿ^f^o^re^igⁿ
^acq^uⁱ^sitioⁿ^s^{. F}^o^{r ex}^am^p^l^{e, in}²⁰⁰⁵^an^attem^p^{t b}^y^th^{e Ch}ⁱⁿ^{a Nati}^oⁿ^{al Off}^s^h^o^r^{e Oil Co}^o^p^eratioⁿ^{(CNOOC) to}^p^u^rch^a^se
^the^U^.^{S. e}ⁿ^e^r^gy^c^o^m^p^aⁿ^y^U^noc^a^l^r^a^is^e^d^s^ubs^ta^ntia^l^c^ong^r^e^s^sⁱ^ona^{l c}^onc^e^r^ns^aⁿ^{d w}^a^s^e^v^eⁿ^tua^lly^a^b^a^ndone^{d. F}^o^r^m^o^r^e
ⁱⁿ^f^o^rm^atioⁿ^oⁿ^th^{e CNOOC case,}^{see CRS}^Rep^o^r^{t RL}³³⁰⁹³^,^C^hⁱⁿ^a^an^{d t}^h^e^C^N^O^O^C^Bid^for^U^noc^al:^I^s^s^u^e^s^for
^C^ongr^e^s^s^,^by^Dⁱ^c^k^K^.^N^a^{nto e}^t^a^l^.
¹⁴^“^G^loba^{l Fina}^nc^ia^{l S}^t^a^b^ility^Re^po^{rt: Se}^pte^m^be^{r 20}^07,”^Iⁿ^te^rna^tio^na^{l M}^one^tary^F^uⁿ^d^{, Se}^pte^m^be^r²⁰⁰^7.
¹⁵^F^o^{r m}^o^{re i}ⁿ^f^o^rm^atⁱ^oⁿ^on^t^h^{e c}^h^al^l^eⁿ^g^{es o}^f^est^a^b^lⁱ^s^hⁱⁿ^g^{a S}^W^F^,^{see A}ⁿ^d^r^ew^Ro^zan^o^v^,^“S^o^v^erei^gn^W^eal^t^h^F^uⁿ^d^s^:
^De^fⁱ^ning^Lⁱ^a^b^ilitie^s,”^State^S^t^r^e^e^t^G^l^oba^{l A}^d^vⁱ^s^o^r^s^{, Ma}^y²⁰⁰^7.
¹⁶^T^h^e^fⁱ^rs^{t K}^u^w^a^{iti SW}^{F w}^a^s^c^a^{lled the}^K^u^w^a^{it Inv}^e^s^t^m^e^{nt Boa}^r^{d. I}^t^w^a^s^la^te^{r ac}^quire^d^by^a^s^e^pa^ra^te^f^{und, t}^h^e^K^u^w^a^it
^Iⁿ^v^e^s^t^m^e^{nt A}^u^thor^ity^{, w}^h^ic^{h w}^a^s^f^ounde^dⁱⁿ¹⁹⁶⁰^.
¹⁷^C^R^S^R^e^por^{t R}^L³²¹⁶⁵^,^C^hⁱⁿ^a’^s^C^u^r^r^e^nc^y^:^Ec^onom^ic^I^s^s^u^e^s^an^d^O^p^tio^ns^for^U^.^S.^Tr^a^d^e^Polⁱ^c^y^{, by}^W^a^yⁿ^e^M.
⁽^c^onti^nue^d.^..)

^{Analysts estimate that}^{foreign ass}^{ets held by sove}^{reign nations c}^u^r^{rently exc}^{eed $5}^{trillion and are, as the}
^{growing U.S. current accou}^{nt im}^{balance would indicate, increasin}^{g at a significantly more ra}^{pid rate in emerging}
^{market cou}^{ntries with}^{high saving}^{s rates t}^{han in t}^{he indu}^{strialized c}^ountries.
It is difficult to accurately measure the amount of assets under management by SWFs because
many funds do not disclose much information about their operations and assets. The funds
believed to be the largest do not disclose their size, investment strategies, or current holdings.
Estimates for the size of the largest fund, the United Arab Emirates’ ADIA, for example, range
widely between $500 and $900 billion. Reportedly, ADIA has achieved a 20% rate of return for ¹⁸
many years and rarely considers deals less than $100 million.
Official and private sector analysts estimate that there is between $1.9 and $2.9 trillion under
management by SWFs. This is significantly smaller than other investment classes (Figure 1).
Figure 1. Segments of the Global Capital Market, USD Trillion, 2007
^Source:^{Norges Ba}^nk
However, analysts expect that if oil prices remain, and there no immediate correction of current
global imbalances, SWFs will grow rapidly over the next few years. Morgan Stanley estimates
that if foreign reserves continue to increase at a current pace, they could grow to $12 trillion by ¹⁹
2015. Several factors could weaken these growth projections, including a cyclical economic
downturn, a reduction in oil prices, or a weakening of competitiveness in Asian exporting
economies. On the contrary, given the rapid increase in emerging market foreign exchange

^(...c^on^tin^ue^d)
^Mor^rⁱ^s^o^{n a}ⁿ^{d Ma}^r^c^L^a^bon^te^.
¹⁸^He^nny^Se^nde^{r, L}ⁱ^v^e^a^t^A^pollo⁽^M^aⁿ^a^g^e^m^eⁿ^{t): P}^l^aⁿ^to^Ca^{sh In}^{, L}ⁱ^m^{it Sc}^rutiny^,^W^a^{ll Str}^e^e^t^J^ourⁿ^a^l^{, Ju}^l^y¹⁷^,²⁰⁰⁷^.
¹⁹^Ste^phe^{n J}^e^{n, “}^C^ur^r^e^nc^ie^s^:^H^o^w^Bⁱ^g^C^a^{n Sov}^e^r^e^ig^{n W}^e^a^{lth Fun}^d^s^B^e^by²⁰¹⁵^,”^M^o^r^g^aⁿ^Staⁿ^le^y^G^l^oba^{l Re}^s^e^ar^c^h^,
^Ma^y^{3, 200}^7.

reserves, if countries decide to increase transfers from official reserves to SWFs, projected figures
could be substantially higher. SWFs financed by oil and gas exports are estimated to account for
around two thirds of SWFs by amount invested. Asian funds financed by current account ²⁰
surpluses make up the rest. Table 1 provides a list of the largest funds. Figure 2 combines
global foreign reserve growth with recent growth of Asian and oil SWFs.
Table 1. Large Sovereign Wealth Funds
^Current
^Date^Size^{Source o}^f
^{Country Name}^Est.^{($ billions)}^Funds
^{Abu Dha}^{bi Inv}^estment^Aut^{hority and}¹⁹⁷^{6 500-}⁸⁷⁵^Oil
^Corporation^{United Arab}
^{Mubadala Development}^Compan^y²⁰⁰²¹⁰^Oil^Emirates
^{Isithmar 200}³⁴^Oil
^Norway^Governme^{nt Pen}^{sion Fund—Glo}^bal¹⁹⁹⁰³²⁹^Oil
^Governme^{nt of Singapore}^Inves^t^ment¹⁹⁸^{1 100-}³³⁰^Other
^Corporation^Singapore
^{Temasek Holding}¹⁹⁷⁴¹⁰⁸^Other
^Kuwait^{Kuwait Investme}^{nt A}^uthority¹⁹⁶⁰²¹³^Oil
^Russia^Stabilizat^{ion Fund of the Russian}^Federation²⁰⁰^{4 141}^Oil
^China^{China Inv}^estment^Corporation²⁰⁰⁷²⁰⁰^Other
^Qatar^{Qatar In}^vestme^{nt Aut}^hority²⁰⁰⁵⁵⁰^Oil
^Australia^{Future F}^und²⁰⁰⁶⁴⁹^Other
^Algeria^{Revenue Regulation Fu}^nd²⁰⁰⁰⁴³^Oil
^{United Stat}^es^{Alaska Permanent F}^und¹⁹⁷⁶⁴⁰^Oil
^Brunei^{Brunei I}^nvestme^{nt Agen}^cy¹⁹⁸³³⁰^Oil
^Korea^{Korea Investme}^{nt Corporation}²⁰⁰⁵²⁰^Other
^Kazakhstan^{National Oil Fund}²⁰⁰⁰¹⁹^{Oil, Gas}
^Malaysia^{Khazanah Nasional}¹⁹⁹³¹⁸^Other
^Venezuela^{National Development Fund}²⁰⁰⁵¹⁵^Oil
^{Macroeconomic Stabilizati}^{on Fun}^d¹⁹⁹⁸¹^Oil
^Canada^{Alberta Heritage Savings Tr}^{ust F}^und¹⁹⁷⁶¹⁵^Oil
^Chile^{Economic and Social Stabil}^izati^{on Fund}²⁰⁰⁶¹⁰^Other
^{New Zealand}^Superan^nua^{tion Fund}²⁰⁰¹¹⁰^Other
^Iran^{Oil Stabil}^izati^{on Fund}²⁰⁰⁰⁹^Oil
^Source:^Peterson^Institute^{for I}ⁿ^{ternational Economics}

²⁰^Ste^phe^{n J}^e^{n, “}^H^ow^Bⁱ^g^C^oul^d^So^v^e^r^e^ig^{n We}^a^{lth Fun}^d^s^B^e^by²⁰¹⁵^,”^Mo^rgaⁿ^S^t^an^l^ey^P^e^rsp^ectⁱ^ves^{, Ma}^y^{3, 200}^7.

Figure 2. Global Reserve Growth and SWFs
^{(USD Bil}^{lion, roll}^{ing 4}^th^{quarter sums)}
^Source:^RGE^Monitor

The magnitude of financial impact combined with the lack of transparency and possibly political
investment motivations of non-commercial entities has sparked concern among some analysts and
Members of Congress about the rapidly growing wealth of emerging market countries and how
this wealth is being invested in the United States. Hearings on SWFs have been held in several
congressional committees including the Senate Banking Committee, Senate Foreign Relations
Committee, House Financial Services, House Foreign Affairs Committee, and the Joint Economic ²¹
Committee. In addition to hearings, Senator Richard Shelby (AL) has requested a study from ²²
the Government Accountability Office (GAO) to ensure that SWFs are “effectively monitored.

²¹^C^ong^r^e^s^sⁱ^ona^l^he^a^r^ing^s^on^SW^Fs^inc^l^u^d^e^:
^{1. Se}^na^te^C^o^m^m^itte^e^{on Ba}^nk^ing^,^Housiⁿ^g^,^a^{nd Ur}^ba^{n A}^f^f^a^{irs he}^a^r^ing^,^“^S^ov^e^r^eⁱ^gⁿ^W^e^a^{lth Fun}^d^A^c^quisitio^{ns a}ⁿ^d
^O^t^he^r^For^e^ig^{n G}^o^v^e^rⁿ^m^e^{nt I}ⁿ^v^e^s^t^m^e^nts^{in t}^h^e^U^.^S.:^A^s^s^e^ss^ing^the^Ec^onom^ic^a^{nd N}^a^tio^na^{l Se}^c^u^rⁱ^ty^I^m^plic^a^tions^,”
^N^o^v^e^m^b^e^r^14,²⁰^07;
^{2. J}^oⁱⁿ^t^Ec^on^om^ic^C^o^m^m^itte^e^he^ar^ing^,^“^D^{o S}^o^v^e^r^e^ig^{n W}^e^a^{lth Fun}^d^s^Ma^k^e^the^U^.^{S. Ec}^o^nom^y^Str^ong^e^r^or^Pos^e
^N^a^tiona^{l Se}^c^u^rⁱ^ty^Rⁱ^s^k^s?^,”^Fe^br^ua^r^y^{13, 2}⁰⁰⁸^;
^{3. H}^o^us^e^Fi^na^nc^ia^{l Se}^r^v^ic^e^s^Subc^om^m^itte^e^{on D}^o^m^e^s^tic^a^{nd I}ⁿ^te^rⁿ^a^tiona^{l M}^one^ta^r^y^Polic^y^,^T^r^a^d^e^{and T}^e^c^hnol^og^y^,
^a^{nd t}^h^e^Su^bc^om^m^itte^e^{on C}^a^pita^l^Ma^r^k^e^t^s^,^Iⁿ^s^u^r^a^nc^e^,^aⁿ^d^G^o^v^e^rⁿ^m^e^{nt Sp}^ons^or^e^d^Eⁿ^te^r^p^rⁱ^s^e^s^he^a^rⁱⁿ^g^,^“^F^or^eⁱ^gⁿ
^G^o^v^e^rⁿ^m^e^{nt I}ⁿ^v^e^s^t^m^e^{nt in t}^h^e^U^.^{S. Ec}^o^nom^y^a^{nd Fina}^nc^ia^{l Se}^c^t^or^,^”^Ma^r^c^{h 5,}²⁰⁰⁸^;
^{4. Se}^na^te^Ba^nkⁱⁿ^g^Com^m^itte^e^he^a^r^ing^,^“^T^urm^o^{il in U.S.}^Cr^e^d^it^Ma^rk^e^t^{s: Ex}^a^m^ining^the^{U.S. Re}^g^u^la^t^o^ry^Fra^m^e^w^or^k
^f^o^r^A^s^s^e^s^sⁱ^ng^Sov^e^r^eⁱ^g^{n I}ⁿ^v^e^s^t^m^e^nts^,^”^Ma^r^c^h^24,²⁰⁰⁸^;
^{5. H}^o^us^e^For^e^igⁿ^A^f^f^a^ir^s^C^o^m^m^it^te^e^he^a^r^ing^,^“^T^he^Rⁱ^s^e^of^Sov^e^r^eⁱ^g^{n W}^e^a^{lth Fun}^d^s^:^I^m^pa^c^t^s^{on U}^.^S^.^For^e^igⁿ^Polⁱ^c^y
^a^{nd Ec}^o^nom^ic^Iⁿ^te^r^e^s^t^s^,^”^Ma^y^{21, 20}⁰⁸^{; a}ⁿ^d
⁽^c^onti^nue^d.^..)

In his opening remarks at the first congressional SWF hearing, before the Senate Banking
Committee on November 13, 2007, Senator Evan Bayh (IN) neatly summarized the two primary
concerns about SWF activity in the United States and the challenge they present:
^A^lac^k^of^trans^p^aren^c^y^th^{at c}^h^aracterizes^m^a^ny^s^o^v^e^rei^gⁿ^w^ealt^h^f^uⁿ^d^s^uⁿ^d^er^mⁱⁿ^e^s^th^e
^th^eo^r^y^o^f^ef^fⁱ^cieⁿ^t^m^a^r^k^{ets at t}^h^{e h}^ear^{t o}^f^o^u^r^ecoⁿ^o^mⁱ^{c s}^y^ste^m^{. I}ⁿ^ad^d^itioⁿ^,^uⁿ^lⁱ^k^{e p}^r^iv^ate
ⁱⁿ^v^e^sto^r^{s, p}^eⁿ^s^ioⁿ^f^uⁿ^d^{s a}ⁿ^d^m^u^tu^al^f^uⁿ^d^{s, g}^o^v^e^rⁿ^m^eⁿ^t^o^wⁿ^e^d^-^eⁿ^titie^s^m^a^y^h^a^v^eⁱⁿ^ter^e^s^t^s
^that^w^{ill ta}^{ke p}^r^eced^{ence o}^v^er^p^r^o^f^it^m^a^xi^miza^tio^n.^J^u^{st as t}^h^{e United}^{States has}^g^e^opo^litica^l
ⁱⁿ^ter^e^st^{s in}^ad^d^itioⁿ^to^fⁱⁿ^aⁿ^cⁱ^a^{l o}ⁿ^{es, so}^d^o^o^t^h^e^r^co^uⁿ^t^rⁱ^es.^J^u^{st as}^w^e^v^a^lu^e^so^m^e^t^hⁱⁿ^g^s
^m^o^{re t}^h^an^m^oⁿ^e^y^,^s^o^{do th}^ey^.^W^h^y^s^h^ou^ld^w^e^as^s^u^m^e^th^{at ot}^h^e^{r n}^a^tions^{are driv}^en^p^u^r^e^ly^by²³
^fⁱⁿ^aⁿ^c^ia^{l in}^ter^e^sts^w^h^en^w^e^ar^{e n}^o^t?
The political challenges facing U.S. leaders are aptly summarized by Senator Charles Schumer
(NY):
^Rig^h^tⁿ^o^w^,^t^h^{e U.S. f}ⁱⁿ^d^{s itsel}^fⁱⁿ^{a d}ⁱ^f^fⁱ^c^u^{lt p}^o^s^itioⁿ^.^So^m^e^o^f^o^u^r^fⁱⁿ^aⁿ^c^{ial in}^s^tⁱ^t^u^tⁱ^oⁿ^s^h^a^v^e
^m^a^de^mⁱ^s^t^ak^e^s^an^{d n}^{eed capital. So w}^e^’^r^{e s}^h^or^{t of}^{capital bec}^a^u^s^{e of}^t^h^{e credit cru}ⁿ^c^h^,^an^d
ⁱⁿ^t^h^{e l}^ong^{er run}^beca^u^s^{e o}^f^ou^{r o}^wⁿ^h^a^bi^t^s^{. We i}^m^port^m^o^r^e^t^h^aⁿ^w^e^e^x^port^;^w^e^con^s^um^e
^m^o^re^th^aⁿ^w^e^s^a^v^e^{. T}^h^{e bes}^t^c^h^oice^w^{ould be t}^h^at^fⁱⁿ^aⁿ^c^ia^{l i}ⁿ^s^tⁱ^t^u^t^ion^s^cou^l^{d rai}^s^{e capital}
^wⁱ^t^hⁱⁿ^t^h^{e U}^.^S^.^Bu^t^w^e^don’^t^hav^e^t^h^at^c^h^oi^{ce. S}^o^t^h^e^y^rai^s^{e c}^a^pi^t^a^l^f^r^o^m^w^h^{ere i}^t^exⁱ^s^t^s^{, a}ⁿ^d
^so^v^e^r^e^igⁿ^w^e^a^lth^f^uⁿ^d^{s ar}^{e t}^h^e^m^o^{st a}^v^ailab^l^e^f^o^r^m^o^f^ca^p^{ital r}ⁱ^g^h^tⁿ^o^w^.^Or^[^fⁱⁿ^aⁿ^cial
ⁱⁿ^st^itu^tioⁿ^s^]^can^d^r^a^m^atica^l^l^y^s^h^rⁱⁿ^k^{, a}ⁿ^d^w^e^can^lo^se^th^o^u^saⁿ^d^s^an^d^th^o^u^saⁿ^d^{s o}^f^j^o^b^s^{. T}^h^e
^ch^{oice is}^a^sⁱ^m^p^{le on}^e,^an^d^th^e^is^s^u^e^wⁱ^t^h^s^o^v^e^reign^w^ealt^h^fun^d^s^caⁿ^{be de}^fⁱⁿ^e^{d i}ⁿ^a^sⁱⁿ^g^l^e
^s^eⁿ^t^eⁿ^{ce: B}^ecaus^e^t^h^e^y^are^g^o^v^e^rnm^eⁿ^t^-^o^wⁿ^ed^,ⁿ^oⁿ^econ^o^mⁱ^c^f^actors^m^a^y^inf^l^u^eⁿ^{ce th}^eir²⁴
^decisⁱ^on^-m^a^kⁱⁿ^g^aⁿ^{d th}^{e pres}^s^u^{re th}^e^y^pu^{t on}^co^m^p^aⁿ^ies^t^h^a^t^th^e^y^o^w^{n a piece of}^.
Given these concerns, Congressional attention on SWFs has focused on two broad areas, namely
(1) the lack of SWF transparency and (2) the potential use of SWF capital for strategic or political
(i.e., non-commercial) purposes. These concerns as applied to specific SWFs are mapped in
Figure 3. The X axis illustrates fund transparency, or levels of disclosure. The Y axis measures
the active, or strategic, nature of their stated (or perceived) investment philosophy. For example,
the funds of Norway, Alaska, and Alberta, Canada, are conventionally invested in a wide range of
investments and are highly transparent. Malaysia’s SWF and Singapore’s Temasek, while also
highly transparent, pursue a more strategic approach to their investments, targeting various
industries that are of interest to their respective governments. The funds in the upper-left quadrant
are of most concern to Western policy makers. These are the funds that disclose the least
information about their funds and are the most strategic in their investment philosophy. A third
issue that has sparked some congressional interest is how the United States taxes gains on
investments in the United States made by SWFs.

^(...c^on^tin^ue^d)
⁶^.^S^eⁿ^a^t^e^F^o^rei^gⁿ^Rel^a^tⁱ^oⁿ^s^C^o^mmⁱ^t^t^{ee h}^eariⁿ^g,^“S^o^v^erei^gn^W^eal^t^h^F^u^nd^s:^F^o^rei^gⁿ^P^o^lⁱ^c^y^Coⁿ^s^eq^uen^{ces i}ⁿ^an^E^r^a^o^f
^N^e^w^Mone^y^,^”^J^une^11,²⁰⁰⁸^.
²²^Ch^ri^st^op^h^e^r^S^.^R^u^gab^e^r,^“A^g^eⁿ^c^y^In^v^e^stⁱ^g^at^e^s^S^o^verei^gⁿ^F^u^nd^s,^”^A^s^so^ci^at^ed^P^r^ess,^Janu^ary¹¹^,²⁰⁰⁸^.^A^v^ai^l^a^b^l^{e at}
^http:^//w^w^w^.f^or^be^s^.^c^o^m^/^f^e^e^d^s^/^a^p^/²⁰⁰^8/^01/^11/^a^p⁴⁵²²⁹^03.^htm^l^.
²³^Se^na^te^Ba^nk^ing^,^Ho^using^aⁿ^{d Ur}^ba^{n A}^f^f^a^{irs Co}^m^m^itte^e^H^e^a^r^ing^{on F}^o^re^ig^{n G}^o^v^e^rn^m^e^{nt Inv}^e^st^m^e^{nt in t}^h^e^Uni^t^e^d
^Sta^t^e^s^{, N}^o^v^e^m^b^e^r^{14, 20}⁰⁷^.
²⁴^Ma^rⁱ^a^B^a^r^tir^om^{o, “}^C^huc^k^Sc^h^u^m^e^r^{on t}^h^e^Rⁱ^s^e^of^Sov^e^r^e^ig^{n W}^e^a^{lth F}^uⁿ^d^s^,^”^B^u^sⁱ^ne^s^s^W^e^e^k^{, Ma}^r^c^{h 6, 2}⁰⁰⁸^.

Figure 3. Standard Chartered Ranking of SWFs,
by Investment Approach and Transparency
^Source:^{Standard C}^harte^{red and}^{Oxford Analyt}^ica
Given the recent and projected growth of SWFs, many analysts stress the need for increased
transparency of SWF activity. There are no supra-national regulations or disclosure requirements
for the size of SWFs, their investment strategies, or their current holdings. Unlike privately
owned, nationally regulated funds, SWFs are not required to provide information to stock-holders
and stake-holders. “In terms of disclosure on fund performance, investment strategy, or even
basic philosophy, many [SWFs] rank below the most secretive hedge fund,” according to Gary
Kleiman, a senior partner at Kleiman International Consultants, an emerging financial markets ²⁵
consulting group. Of the existing national funds, only Norway’s fund is universally considered
to be transparent and publically accountable.
Minimal SWF transparency masks SWF investment activity and can obscure governance and
risk-management problems within the funds. This can have distressing consequences for policy
makers. First, without insight into SWF activity, it is difficult to assess systemic risks or to
determine whether SWFs are in fact pursuing strategic, non-commercial investment strategies
(see next section). Second, limited disclosure makes it difficult to assess the management and
governance of the funds and therefore difficult to identify mismanagement or corruption by fund
mangers. Conflating this problem, many of these SWFs are established in countries that currently
lack the underpinnings for good SWF governance or SWF oversight. This is of concern to policy
makers, because sizable failures due to poor management, particularly if concentrated within
certain sectors, could affect national or global markets.

²⁵^T^ony^T^a^s^s^e^{ll a}^{nd J}^o^aⁿ^na^C^h^ung^,^“^T^he^$2,5^{00 Q}^u^e^s^tion^,^”^Fi^na^nc^ia^{l Tim}^e^s^{, Ma}^y^{25, 2}⁰⁰⁷^.

Some analysts have tried to empirically measure the lack of SWF transparency. The Peterson
Institute of International Economics (IIE) has tabulated a SWF scorecard, that among other ²⁶
variables, looks at transparency and accountability. For its transparency and accountability
figure, IIE scored several questions, including the following:
• Do regular reports on the investments by the SWF include the size of the fund?
Information on the returns it earns?
• Do reports provide information on the types of investments? Information on the
geographic location of investments? Information on the specific investments, for
example, which instruments, countries, and companies? Information on the
currency composition of investments?
• Is the SWF subjected to a regular audit? Is the audit published? Is the audit
independent?
Consistent with Figure 2 above, the IIE found that the largest funds (i.e., those owned by the
United Arab Emirates, Qatar, Kuwait, and China) scored very low on the transparency and
accountability rankings.
While the ostensible goal of SWF investment is long-term value creation, government control
could mean that a SWF may be motivated by non-commercial considerations in its investment
decisions. Felix Rohatyn, a prominent investment banker and former U.S. official, has noted that
for many funds, political and commercial objectives are closely intertwined. According to Mr. ²⁷
Rohatyn, “they are making investments that they probably think are O.K. but not spectacular.”
However, for these funds, “there has to be a political objective over and above the rate of ²⁸
return.”
Many U.S. policy makers are concerned that countries will use SWFs to support what one analyst
has called “state capitalism,” using government-controlled assets to secure strategic stakes around
the world in areas such as telecommunications, energy resources, and financial services, among ²⁹
other sectors. Recent deals in the energy and finance sector suggest that securing access to
natural resources and developing domestic financial markets appear to be the two primary SWF ³⁰
strategic objectives.

²⁶^Edwⁱ^{n M. T}^r^um^aⁿ^{, “}^S^ov^e^r^eⁱ^gⁿ^W^e^a^{lth Fund}^A^c^quisitio^ns^aⁿ^d^Ot^he^{r Fore}^ig^{n G}^o^v^e^rnm^e^nt^Inv^e^st^m^e^{nts in t}^h^e^Uni^t^e^d
^Sta^t^e^s^{: A}^s^se^s^sⁱ^ng^the^Ec^onom^ic^a^{nd N}^a^ti^ona^l^Se^c^u^r^ity^I^m^plic^a^tions^,”^T^e^s^tⁱ^m^on^y^be^f^o^r^e^the^C^o^m^m^itt^e^e^{on B}^a^nk^ing^,
^Housing^,^aⁿ^{d Ur}^ba^{n A}^f^f^a^{irs Unite}^{d Sta}^t^e^s^Se^na^te^{, N}^o^v^e^m^b^e^r^{14, 2}⁰^{07. T}^e^stim^ony^{is a}^v^a^ila^ble^a^t^http:^//iie^.c^om^/
^pub^lic^a^tio^ns^/^p^a^p^e^r^s^/tr^um^aⁿ¹¹⁰⁷^.p^df^.
²⁷^A^ndr^e^w^R^o^s^s^Sor^k^{in, “}^W^ha^{t Mo}^ne^y^C^a^{n B}^u^y^:^Iⁿ^f^l^ue^nc^e^,^”^The^Ne^{w Yor}^k^Tim^e^s^,^Janu^ar^y²²^,²⁰⁰⁸^,^at
^http:^//w^w^w^.ny^tⁱ^m^e^s^.c^o^m^/²⁰^08/⁰¹^/22/^busⁱⁿ^e^s^s^/^22s^or^kⁱ^n.h^t^m^l^?^d^lbk^.
²⁸^Ibid^.
²⁹^G^e^r^a^{ld Ly}^ons^{, “}^S^ta^te^C^a^pita^lism^:^T^h^e^Rⁱ^s^e^of^Sov^e^r^e^ig^{n W}^e^a^{lth F}^unds^,”^St^an^dar^d^C^h^ar^te^r^e^d^{, O}^c^to^be^{r 15}^{, 2}⁰⁰⁷^.
^Do^cu^m^eⁿ^tⁱ^s^avai^l^a^b^l^{e f}^r^o^m^t^h^{e a}^u^t^h^o^r^.
³⁰^Ri^ch^ard^P^o^rt^es,^“S^o^v^erei^gn^W^eal^t^h^F^u^nd^s,^”^VOXEU^{, O}^c^t^obe^r^17,²⁰⁰^{7, a}^t^htt^p^://w^w^w^.v^oxe^u.org^/in^de^x^.^php?^q=^no^de^/
⁶³⁶^{. Se}^e^a^l^s^o^H^u^w^Va^{n S}^t^eⁿ^is^{, “}^B^aⁿ^k^s^&^Fina^nc^ia^ls^{: S}^o^v^e^r^e^ig^{n W}^e^a^{lth Funds}^—^bui^ldiⁿ^g^s^t^a^k^e^s^{in f}ⁱ^na^nc^ia^ls^,”^M^o^r^gan
^Staⁿ^le^y^Re^s^e^ar^c^h^Eur^ope^,^Se^pte^m^be^r²⁴^{, 2}⁰⁰⁷^.

A report by Citigroup notes that “some sovereign wealth funds invest purely to achieve financial ³¹
returns and portfolio diversification while others have a broader economic or social agenda.”
Such an agenda could be benign; many countries have expressed their interest in using
investments in foreign financial institutions to acquire knowledge and technology to help build
their own domestic financial institutions. On the other hand, many are concerned that countries
may use their SWFs to gain access to other countries’ natural resource industries or other
politically sensitive sectors. Such concern is not limited to Western countries. In January 2006,
one of Singapore’s SWFs, Temasek, purchased from the family of then-Prime Minister Thaksin
Shinawatra a controlling stake in the Thai telecom company Shin Corporation, which included
taking control of space satellites used by the Thai military. This purchase sparked a political crisis
in Thailand, which eventually led to the ousting of Thaksin’s government.
Members have begun raising concerns about U.S. tax policy regarding investments in the United
States by foreign SWFs, specifically a long-standing exemption from U.S. income tax that applies
to certain passive investments made by SWFs and other investments made by foreign sovereigns.
Under Section 892 of the U.S. Internal Revenue code, foreign governments are exempted from
income tax on certain passive investments in the United States. Thus, a foreign government’s
income from investments in the United States in stocks, bonds, and other domestic securities,
financial instruments held in the execution of governmental fiscal or monetary policy, and interest
on deposits in U.S. banks are exempt from US tax. Section 892 also carves an exception for
income derived from a commercial activity by a foreign government, or a foreign-controlled
commercial entity. The gains on passive investment, however, is not considered by the U.S.
Internal Revenue Service (IRS) as a commercial activity.
In March 2008, Senators Max Baucus and Chuck Grassley, chairman and ranking member of the
Senate Committee on Finance requested that the Joint Committee on Taxation (JTC), a
nonpartisan House-Senate committee of the U.S. Congress, undertake a study to “analyze the
history, current rules, and policy underpinnings of the U.S. tax rules applicable to U.S. investment ³²
by foreign governments, including investments made by Sovereign Wealth Funds.” The JTC’s
final report found that treatment as a foreign sovereign imparts limited but significant advantages
to foreign governments over foreign private investors. According to the JTC’s final report,
^In^{practice, s}^o^m^e^o^f^th^e^m^o^s^tⁱ^m^portaⁿ^t^s^t^atutor^y^{U.S. i}ⁿ^co^m^e^tax^adv^aⁿ^t^a^g^es^t^h^{at a}^f^o^reign
^s^o^v^e^reign^inv^e^s^t^{or e}ⁿ^j^o^y^s^o^v^{er a}^f^o^reign^pri^v^{ate i}ⁿ^v^e^s^t^{or are: ex}^e^m^pt^ion^f^r^o^m^U.S^.
^wⁱ^t^h^h^o^l^dⁱⁿ^g^t^a^x^on^al^l^U^.^S^.^s^{ource di}^vⁱ^den^d^s^pai^d^byⁿ^oⁿ^c^ont^rol^l^e^{d cor}^poratⁱ^oⁿ^s^;^e^x^em^p^tⁱ^oⁿ
^f^r^o^m^U.S.^w^ith^h^o^ldⁱⁿ^g^ta^x^oⁿⁱⁿ^ter^e^{st p}^a^id^b^y^{a co}^r^p^o^r^atioⁿ^w^h^er^{e th}^e^f^o^r^e^igⁿ^so^v^e^r^e^igⁿ
^o^wⁿ^s^at^{least 1}⁰^%⁽^s^o^th^e^g^eⁿ^e^r^a^{l “}^p^o^r^tf^o^lioⁱⁿ^ter^e^{st” e}^x^e^m^p^tioⁿ^isⁿ^o^{t a}^v^ailab^l^e)^b^u^t^less
^t^h^{an 50%}^(s^{o t}^h^{e pa}^y^o^{r i}^sⁿ^o^t^“^c^oⁿ^t^r^ol^l^e^{d” b}^y^t^h^e^f^o^rei^gⁿ^s^o^v^e^rei^gⁿ⁾^{of t}^h^{e pa}^y^o^r;^aⁿ^d³³
^ex^e^m^p^tioⁿ^f^r^o^m^{U.S. tax}^oⁿ^c^e^r^t^ain^g^aⁱⁿ^s^f^r^o^m^r^{eal esta}^{te tr}^an^sactioⁿ^s^.

³¹^T^h^e^W^o^{rld Ec}^on^om^ic^Forum^ra^nk^{s the}^Unite^d^Sta^t^e^s^fⁱ^{rst in its}²⁰^{07 c}^o^m^p^e^titiv^eⁿ^e^{ss re}^port.^The^G^l^oba^l
^Compe^titiv^eⁿ^e^{ss Re}^p^o^{rt 2}⁰⁰⁷^-2⁰⁰⁸^{, W}^o^rld^Ec^o^nom^ic^Forum^,^a^t^htt^p^://w^ww^.^g^c^r^.^w^e^f^oru^m^.org^/.
³²^“Bau^cu^s,^G^r^assl^e^y^S^{eek JC}^T^Aⁿ^al^y^sⁱ^s^o^f^U.^S^.^T^a^xatⁱ^oⁿ^o^f^S^o^verei^gⁿ^W^eal^t^h^F^u^nd^s,^{” Un}ⁱ^t^e^d^S^t^at^es^S^eⁿ^a^t^e
^C^o^m^m^itte^e^{on Fina}^nc^e^,^Ma^r^c^{h 1}³^,²⁰⁰⁸^.
³³^J^o^int^C^o^m^m^itte^e^{on T}^a^x^a^{tion, Ec}^onom^ic^a^{nd U}^.^{S. I}ⁿ^c^o^m^e^Ta^x^I^s^s^u^e^s^R^a^is^e^d^by^Sov^e^r^eⁱ^g^{n W}^e^a^{lth Fund}^Iⁿ^v^e^s^t^m^e^nt
^{in t}^h^e^Uⁿ^ite^d^Sta^t^e^s⁽^J^C^X^-^49-⁰⁸⁾^,^J^une^17,²⁰⁰⁸^.

Some analysts propose revising the U.S. tax code to tax SWFs the same as foreign private
investors are. Victor Fleischer, a law professor at the University of Illinois, has proposed that the
baseline tax rate on any SWF investment in the United States could be raised to equal the flat

30% rate on income from passive investment levied on foreign individuals or corporations.

According to Prof. Fleischer, “This approach would raise significant amounts of tax revenue, and
it would give the U.S. a new policy lever to achieve nontax objectives, such as encouraging ³⁴
SWFs to comply with best practices of transparency, disclosure, and accountability.” To date, no
legislation has been introduced that would move to remove the tax exemption granted foreign
SWFs.
Congress has broad powers regulating foreign investment in the United States. While there is no
express constitutional provision permitting the regulation of foreign investment in the United
States, justification for congressional legislation regulating foreign investment includes federal
powers over immigration and naturalisation, the federal power to regulate interstate and foreign ³⁵
commerce, and the power to provide for the national defense. Of course there are already some
restrictions on foreign investment in the United States, but existing legislation is transaction-
specific and not entity-specific. Thus, there is no legislation that specifically regulates sovereign
wealth funds as a unique class of investors. However, certain sectors of the American economy,
such as the financial sector, telecommunications, energy, among others, have statuary limitations
on the types and amounts of investments in which non-American individuals and entities can
participate. In addition, the United States has legislation that allows the president to block any
investment which may impact national security.
The relevant statute regarding investments by sovereign wealth funds in the American banking
sector is the Bank Holding Company Act, which regulates a “bank holding company” – that is,
any company that controls an American bank, meaning any bank chartered by the federal or state
government to do business in the United States. It is important to distinguish between bank
holding companies from foreign banks, which are chartered in their home countries, but do
business in the United States.
The Bank Holding Company Act defines “control” of a bank or bank holding company as
follows: the acquisition of a 25% share or more of any class of voting securities; controlling the
election of a majority of the directors or trustees; or having been determined by the Federal
Reserve to be exercising a controlling interest over the management or policies of the entity. The
law presumes that “any company which owns, controls, or has power to vote less than 5% of any
class of voting securities of a given bank or [bank holding] company does not have control over
that bank or company.”

³⁴^Vic^t^or^Fleⁱ^s^c^he^r^,^“^T^a^x^ing^Sov^e^r^e^ig^{n W}^e^a^{lth Fun}^d^s^,^”^T^h^e^C^ong^l^o^m^e^r^a^te^{, Ma}^r^c^{h 4,}²⁰⁰⁸^{. A}^v^a^ila^ble^at
^http:^//w^w^w^.the^c^ong^lom^e^r^a^te^.or^g^/²⁰⁰^8/^03/^ta^xⁱ^ng^-^s^ov^e^r^eⁱ^g^.^ht^m^l^{. Se}^e^a^l^s^o^Vic^t^or^Fleⁱ^s^c^he^r^,^“^A^T^h^e^o^r^y^o^f^Ta^xⁱ^ng
^Sov^e^re^ig^{n W}^e^a^lth,”^Uⁿ^iv^e^r^sⁱ^t^y^{of Illin}^ois^L^a^w^&^Ec^onom^ic^s^R^e^s^e^arc^h^P^a^pe^{r Se}^rie^s^{, L}^E⁰⁸^-0^30,^a^v^a^ila^ble^a^t
^h^t^t^p^:^/^/^p^a^p^ers.^ssrn^.^co^m^/^so^l³^/^p^ap^ers.^cfm?ab^st^ract^_ⁱ^d⁼¹²³⁴⁴¹⁰^.
³⁵^{. See CRS Rep}^o^{rt RL}³³¹⁰³^,^For^e^{ign I}ⁿ^v^e^s^tm^eⁿ^{t in}^the^Uⁿⁱ^t^e^d^Stat^e^s^:^M^a^jor^Fe^de^r^a^l^Sta^t^ut^or^y^Re^s^t^rⁱ^c^tions^{, by}
^Mⁱ^ch^ael^V.^S^eⁱ^t^zⁱⁿ^ger.

Foreign companies are subject to the Bank Holding Company Act unless: they are organised as a
banking holding company under foreign law and are principally engaged in the banking business
outside the United States; they control less than 5% of the outstanding shares of an class of voting
stock; the Federal Reserve determines that an exemption would “not be substantially at variance
with the purposes of the [Bank Holding Company Act] and would be in the public interest.”
Added as part of the Foreign Corrupt Practices Act of 1977, the Domestic and Foreign Investment
Improved Disclosure Act of 1977 requires that any entity acquiring 5% or more of the equity
securities of a company registered with the Securities Exchange Commission must disclose
certain specified information including their citizenship and residence. According to one legal
expert, “The 5% threshold … explains the levels of investment of sovereign wealth funds, which
have been and will almost certainly continue to be in amounts below the 5% level.
American law also provides statutory authority for the Committee on Foreign Investment in the
United States (CFIUS), a multi-Cabinet member board led by the Secretary of the Treasury, to
review certain foreign investment and determine whether such investment raises a national
security threat to the United States and then make a recommendation to the president whether or ³⁶
not to prohibit the transaction. By law, CFIUS can review “covered transactions,” which
includes any merger, acquisition, or takeover by any foreign person, which could result in foreign
control of any person engaged in interstate commerce in the United States.
The statutory limitation on “mergers, acquisitions, and/or takeovers” appears to lead to the
conclusion that CFIUS is not legally required to review the types of transactions that sovereign
wealth funds have invested in to date. However, if sovereign wealth funds were to begin
assuming ownership stakes of American companies in critical sectors, there may be a larger role
for CFIUS in reviewing their transactions in the future.

At the G7 Finance Ministers meeting in October 2007, ministers discussed SWFs for the first
time, noting that they are “increasingly important participants in the international financial system
and that our economies can benefit from openness to SWF investment flows.” The final G7
communique for the meeting stated that the IMF, World Bank, and the OECD should explore best
practices for SWFs in key areas such as institutional structure, risk management, transparency, ³⁷
and accountability. Secretary of the Treasury Henry Paulson further elaborated on this in his
remarks to the International Monetary and Finance Committee of the IMF:

³⁶^For^m^o^r^e^inf^o^r^m^a^{tion o}ⁿ^C^F^I^U^S,^s^e^e^C^R^S^R^e^por^{t R}^L³³³¹^2,^The^E^x^on-^Fl^or^{io N}^a^ti^on^{al Se}^c^u^rⁱ^ty^Te^s^t^for^F^o^r^e^ign
^In^vest^m^en^t^{, by}^J^a^m^e^s^K^.^J^a^c^k^s^{on; C}^R^S^R^e^por^{t R}^L³³³⁸⁸^,^T^h^{e Co}^m^mⁱ^t^t^{ee o}ⁿ^F^o^rei^gⁿ^In^vest^m^en^tⁱⁿ^t^h^{e Un}ⁱ^t^e^{d S}^t^a^t^es
^(C^F^I^U^S⁾^{, by}^J^a^m^e^s^K^.^J^a^ck^s^{on; a}^{nd E}^d^w^a^r^d^{M. G}^r^a^h^am^a^{nd D}^a^vⁱ^{d M. Ma}^r^c^hic^k^{, U}^.^{S. N}^a^tio^na^{l Se}^c^u^r^ity^a^{nd For}^e^igⁿ
^Dⁱ^r^e^c^t^Iⁿ^v^e^s^t^m^e^{nt, P}^e^te^r^s^oⁿ^Iⁿ^s^tit^ute^f^o^r^Iⁿ^te^rⁿ^a^tⁱ^ona^l^Ec^on^om^ic^s^,^Ma^y^2006.
³⁷^Sta^t^e^m^eⁿ^{t of}^G^-^{7 Fina}^nc^e^Mi^nis^t^e^r^s^a^{nd C}^e^ntr^a^{l B}^a^nk^G^o^v^e^r^nor^s^,^O^c^tobe^r¹⁹^,²⁰^07,^a^t^ht^tp:/^/tr^e^a^s^.g^ov^/pr^e^s^s^/^r^e^le^a^s^e^s^/
^hp6²⁵^.htm^.

^T^h^{e Un}^ited^{States b}^e^liev^e^{s a}^m^u^ltilater^a^{l ap}^p^r^o^ach^to^SW^{Fs th}^at^m^aⁱⁿ^taiⁿ^{s o}^p^eⁿⁱⁿ^v^e^st^m^eⁿ^t
^p^o^{licies is in}^t^h^{e b}^e^{st in}^ter^e^{st o}^f^co^uⁿ^tr^{ies th}^a^t^h^a^v^e^th^e^s^{e f}^uⁿ^d^{s, an}^d^co^uⁿ^t^rⁱ^{es i}ⁿ^w^h^ich^t^h^e^y
ⁱⁿ^v^e^{st. T}^h^{e I}^M^{F i}^s^uⁿ^iq^u^e^l^y^p^o^sitioⁿ^e^d^to^id^en^tⁱ^f^y^b^e^st^p^r^actices^f^o^r^SW^{Fs, b}^uⁱ^l^dⁱⁿ^g^oⁿ^th^e
^ex^is^tⁱ^ng^G^u^idelin^e^s^f^o^{r Forei}^gⁿ^E^x^ch^aⁿ^g^e^R^e^s^e^rv^{e Ma}ⁿ^a^ge^m^e^{nt. B}^e^s^t^practices^w^o^u^l^d
^p^r^o^v^id^e^m^u^ltilater^a^l^g^u^id^aⁿ^{ce to}ⁿ^e^w^f^uⁿ^d^s^oⁿ^h^o^w^to^m^a^k^e^so^uⁿ^d^d^ecisioⁿ^s^oⁿ^h^o^w^to
^str^u^ct^u^r^{e t}^h^e^m^sel^v^es,^m^iti^g^a^te^an^y^p^o^t^en^tial^s^y^ste^m^{ic r}ⁱ^sk^,^aⁿ^d^h^e^lp^d^e^m^oⁿ^s^tr^{ate to}^cr^itics
^th^{at SW}^{Fs ca}ⁿ^b^e^coⁿ^s^tr^u^c^ti^v^e^,^r^e^sp^oⁿ^sib^l^{e p}^a^r^ticip^an^{ts in}^t^h^{e in}^terⁿ^a^tioⁿ^a^l^fⁱⁿ^aⁿ^cⁱ^a^l^sy^st^em^.
^Recipⁱ^en^{t co}^uⁿ^tr^{ies o}^f^SW^{F in}^v^e^st^m^eⁿ^t^also^h^a^v^e^{a r}^e^sp^oⁿ^si^b^ilit^y^to^m^aⁱⁿ^taiⁿ^o^p^eⁿⁿ^e^s^s^to
ⁱⁿ^v^e^s^t^m^eⁿ^t^an^d^s^h^o^u^l^d^w^o^r^k^t^h^roug^h^t^h^e^O^E^C^D^t^o^de^v^e^l^{op bes}^t^practⁱ^ces^f^o^{r i}ⁿ^w^a^rd³⁸
^go^ve^rⁿ^me^nt^-c^oⁿ^t^r^o^l^l^e^dⁱⁿ^ve^s^t^meⁿ^t^.
To address concerns related to the lack of SWF transparency, some have called for an
international body, such as the IMF, to establish guidelines and monitor countries’ compliance
with transparency efforts. Proponents maintain that increased transparency would limit the
potential negative impact of greater SWF investment by allowing financial markets to better
observe SWF activity and exercise any necessary market discipline. Edwin Truman, of the
Peterson Institute for International Economics, argued during November 2007 Senate Banking
Committee hearings on SWFs that
^[t^]h^{e dev}^e^l^o^p^m^eⁿ^t^of^a^s^e^t^of^bes^t^practⁱ^ces^f^o^{r s}^o^v^e^rei^gⁿ^w^eal^t^h^fuⁿ^d^s^,^an^d^sⁱ^mⁱ^l^a^r
^uⁿ^d^ers^t^aⁿ^di^ngs^cov^e^ri^ng^ot^{her cros}^s^-^{border g}^o^v^e^rnm^e^ntⁱⁿ^v^e^s^t^m^eⁿ^t^s^,^off^e^rs^t^h^e^m^o^s^t
^p^r^o^mⁱ^sⁱⁿ^g^w^a^y^toⁱⁿ^crea^{se th}^e^acco^uⁿ^t^ab^ilit^y^o^f^t^h^{ese acti}^v^iti^es,^w^h^ic^h^{are lik}^el^y^toⁱⁿ^crease
ⁱⁿ^relati^v^eⁱ^m^portan^{ce ov}^{er t}^h^eⁿ^e^{xt decade.}^T^h^{e as}^s^o^{ciated increas}^{e in}^traⁿ^s^p^aren^c^y^,^w^h^ich
^{is a}^m^e^aⁿ^{s to}^t^h^{e en}^d^o^f^g^r^ea^{ter acco}^uⁿ^t^ab^ilit^y^,^w^o^u^l^d^h^e^lp^to^red^u^{ce th}^e^m^y^sterie^{s an}^d
^mⁱ^s^uⁿ^d^er^stan^dⁱⁿ^g^{s s}^u^r^r^o^uⁿ^dⁱⁿ^g^t^h^ese^g^o^v^e^rⁿ^m^eⁿ^t^{al acti}^v^ities.^A^t^th^e^sa^m^e^tⁱ^m^{e, t}^h^e³⁹
^en^vⁱ^ro^nm^eⁿ^t^f^o^{r th}^e^m^w^o^u^l^{d becom}^e^m^o^{re s}^t^{able an}^{d predictable.}
During the October 20, 2007 G7 finance ministers meeting, U.S. Treasury Secretary Henry
Paulson hosted an outreach dinner with top SWF managers from around the world to begin the
process of negotiating increased levels of SWF transparency. There appears to be some positive
reception from leading SWFs. According to Dr. Tony Tan, Executive Director of Singapore’s
GIC:
^W^e^believ^e^t^h^{ere i}^s^a^cas^e^f^o^{r fu}^rth^e^{r di}^s^c^los^u^{re on t}^h^{e part o}^f^s^o^v^e^rei^gⁿ^w^ealt^h^fun^d^sⁱⁿ^th^e
ⁱⁿ^teres^t^o^f^tran^s^p^areⁿ^c^y^{. S}^u^c^h^dis^c^los^u^{re can}ⁱⁿ^cl^u^d^{e clarit}^y^oⁿ^th^{e relatio}ⁿ^s^hⁱ^{p bet}^w^een^t^h^e
^fu^nd^{s a}ⁿ^d^t^h^e^r^e^sp^e^c^tⁱ^v^e^go^ve^rⁿ^m^e^nt^s,^t^h^eⁱ^rⁱⁿ^vest^m^eⁿ^t^obj^ec^tⁱ^v^es^aⁿ^d^g^eⁿ^e^ral^s^t^rat^e^gⁱ^e^s^,^and
^th^eirⁱⁿ^terⁿ^{al g}^o^v^e^rⁿ^an^ce^an^d^ris^k^m^aⁿ^a^g^e^m^eⁿ^t^practices^{.... Any}^g^u^idelin^e^s^on^s^o^v^e^reign
^w^ealt^h^f^uⁿ^d^s^s^h^o^u^ld^en^cou^r^a^g^e^th^e^m^to^opera^{te accor}^dⁱⁿ^g^to^com^m^e^{rcial prin}^cⁱ^ples^wⁱ^t^h^a
^loⁿ^g^-^t^er^m^o^r^ien^t^a^tioⁿ^,^f^r^ee^f^r^o^m^p^o^litical^m^o^ti^v^a^tioⁿ^s^{. S}ⁱⁿ^g^a^p^o^r^e^wⁱ^l^l^p^a^r^ticip^{ate i}ⁿ⁴⁰
^f^o^r^m^u^l^atiⁿ^g^a^s^e^{t of}^prin^ciples^an^{d bes}^t^practices^f^o^{r s}^o^v^e^rei^gⁿ^w^eal^th^fuⁿ^d^s^.

³⁸^S^t^at^em^en^t^b^y^H^eⁿ^r^y^M^.^P^a^u^l^son^,^Jr.^S^ecret^ar^y^o^f^t^h^{e U.}^S^.^T^r^easu^r^y^b^e^f^o^{re t}^h^{e In}^t^e^rn^atⁱ^oⁿ^a^l^M^oⁿ^e^t^a^{ry an}^d^Fⁱⁿ^aⁿ^ce
^Com^m^itte^e^,^Inte^rna^tiona^l^Mo^ne^ta^ry^{Fund, O}^c^to^be^{r 2}⁰^,²⁰^07,^a^t^ht^tp^://w^w^w^.i^m^f^.org^/^e^x^t^e^r^na^l/am^/²⁰⁰⁷^/im^f^c^/^s^ta^tem^e^nt/
^eⁿ^g^/^us^a^.^pdf^.
³⁹^Edwⁱ^{n M. T}^r^um^aⁿ^{, “}^S^ov^e^r^eⁱ^gⁿ^W^e^a^{lth Fund}^A^c^quisitio^ns^aⁿ^d^Ot^he^{r Fore}^ig^{n G}^o^v^e^rnm^e^nt^Inv^e^st^m^e^{nts in t}^h^e^Uni^t^e^d
^Sta^t^e^s^{: A}^s^se^s^sⁱ^ng^the^Ec^onom^ic^a^{nd N}^a^ti^ona^l^Se^c^u^r^ity^I^m^plic^a^tions^,”^T^e^s^tⁱ^m^on^y^be^f^o^r^e^the^C^o^m^m^itt^e^e^{on B}^a^nk^ing^,
^H^ous^ing^,^aⁿ^{d U}^r^ba^{n A}^f^f^a^ir^s^Uⁿ^{ited Sta}^t^e^s^Se^na^te^{, N}^o^v^e^m^b^e^r^{14, 2}⁰^07.^Pr^e^p^a^r^e^d^te^s^tim^ony^is^a^v^a^ila^bl^e^a^t
^http:^//baⁿ^kⁱ^ng^.s^eⁿ^a^t^e^.^g^o^v^/^_f^ile^s^/¹¹¹⁴⁰⁷^_T^r^u^m^a^n.pdf^.
⁴⁰^C^ite^{d i}ⁿ^H^u^w^v^a^{n Ste}^eⁿ^is^aⁿ^{d H}^u^be^r^t^y^L^a^m^,^“^S^ov^e^r^eⁱ^gⁿ^W^e^a^{lth Funds}^aⁿ^{d C}^h^ine^s^e^Fi^na^nc^ia^ls^,”^M^o^r^gan^St^an^le^y
^Re^se^arc^h^{, J}^a^nua^r^y^{15, 2}⁰⁰⁸^.

In November 2007, the IMF convened the first of a proposed annual roundtable of sovereign asset
and reserve managers. At the meeting, delegates from 28 countries discussed how best to address ⁴¹
the policy and operational issues faced by managers of growing reserves and sovereign assets.
The IMF’s work agenda on SWFs was approved at a meeting of the IMF Executive Board, which
includes representatives from both sovereign investors and recipients of sovereign wealth, on
March 21, 2008.
In September 2008, following four months of negotiations and several international meetings,
members of the newly formed International Working Group of Sovereign Wealth Funds agreed to ⁴²
a voluntary code of conduct at meetings in Santiago, Chile. Although voluntary guidelines may
likely help policy makers better understand the motives and methods of existing and emerging
SWFs, it is unclear whether the voluntary guidelines will satisfy Western governments, which had
sought more restrictive rules requiring greater SWF transparency. Reportedly, the debate of how
much financial transparency SWFs should provide was one of the more contentious issues in the
working group. While some countries agreed that greater transparency would allay concerns that
SWFs may use their wealth for non-economic reasons and also reassure domestic constituents
that the national wealth is being appropriately invested, many countries insisted that SWFs be ⁴³
allow to maintain a high degree of secrecy regarding their operations.
The chairman of the Australian Fund Board of Guardians, David Murray, chaired a subgroup of
the IWG responsible for drafting the Principles. The group met three times in Oslo, Singapore
and the final meeting in Singapore, where on September 2, 2008, the IWG agreed on a set of
voluntary principles, the Generally Accepted Principles and Practices for Sovereign Wealth Funds
(GAPP or Santiago Principles).
The Santiago Principles are comprised of 24 principles and additional sub-principles in three
broad categories: (1) legal framework, objectives, and macroeconomic linkages; (2) institutional
framework and governance; and (3) investment policies and risk management frameworks (see
box). While country endorsement and adherence to the Santiago Principles is voluntary and must
be ratified by authorities in each national country, by committing to financial objectives and
guidelines for increased transparency and disclosure of investments, the creation of the Santiago
Principles appears to be the beginning of the normalization of SWFs as global institutional
investors.

⁴¹^I^M^{F C}^onv^eⁿ^e^s^Fir^s^{t A}ⁿⁿ^u^a^l^R^o^u^ndta^b^le^of^Sov^e^r^e^ig^{n A}^s^s^e^{t a}^{nd R}^e^s^e^r^v^e^Ma^na^g^e^r^s^{, I}^M^{F pr}^e^s^s^r^e^le^a^s^e^N^o^{. 0}⁷^/2^67,
^N^o^v^e^m^b^e^r^16,²⁰^07.
⁴²^Me^m^b^e^r^c^ountrⁱ^e^s^of^the^SW^{F I}^M^{F w}^o^r^k^ing^g^r^{oup a}^r^e^:^A^u^s^t^r^a^lia^,^A^z^e^r^ba^ija^{n, B}^a^hr^aⁱⁿ^,^B^o^ts^w^a^na^,^C^a^na^da^{, C}^h^ile^,
^Chⁱⁿ^a,^E^q^u^a^t^o^ri^al^G^uⁱⁿ^ea,^Iran,^Ir^el^an^d^,^S^o^ut^h^K^o^rea,^Ku^w^aⁱ^t^,^Lⁱ^b^y^a,^M^e^xi^co^,^New^Z^eal^an^d^,^No^rw^a^y^,^Qat^a^r,^Ru^ssi^a,
^Sⁱⁿ^g^ap^o^r^e,^Tⁱ^m^o^r-L^est^e^,^T^rⁱⁿⁱ^d^{ad & T}^o^b^a^go^,^t^h^{e Uni}^t^e^d^A^r^ab^E^mⁱ^r^at^es,^an^d^t^h^{e U}ⁿⁱ^t^e^{d S}^t^at^es.^Om^an^,^S^a^u^dⁱ^A^r^abⁱ^a^,
^Vⁱ^e^t^na^m^,^the^{OECD, a}ⁿ^{d t}^h^e^W^o^{rld Ba}^nk^,^pa^rtic^ipa^t^e^a^s^pe^rm^aⁿ^eⁿ^{t obse}^r^v^e^{rs. T}^h^e^{IMF he}^l^p^e^d^t^o^f^a^c^ilita^te^a^nd
^c^oordi^na^te^the^w^o^rk^of^the^IW^G^by^prov^iding^a^se^c^r^e^t^a^r^ia^t^f^o^{r the}^I^W^G^.
⁴³^K^r^is^hna^G^u^r^a^{, “}^S^ov^e^r^eⁱ^gⁿ^f^unds^ba^c^k^c^ode^,”^Fin^anc^ia^{l Time}^s^{, Se}^p^t^e^m^be^r^{3, 200}^8.

Generally Accepted Principles and Practices (GAPP) on Sovereign Wealth Funds
“Santiago Principles”
^{A. Legal Framework, Objectives, and Coo}^{rdination with}^Macroec^ono^{mic p}^olicies
^{1. Sound legal framework with a}^{clear delineation of responsibilitie}^{s betwee}^{n the SWF and ot}^{her go}^vernme^{nt bodies.}
^{2, Clearly defined and pu}^{blicly disclosed policy purpose}
^{3. Coordination with domestic fis}^{cal and monetary a}^uthorities
^{4. Clear and p}^{ublically disclosed}^{policies, rules, procedures, or arr}^angements^{regarding a}ⁿ^{SWF’s fu}^{nding, withdrawal,,}
^{and spe}^{nding operations}
^{5. Timely reporting of statistical data}

^{B. Institu}^{tional Framework a}^{nd Governa}^{nce Structu}^re
^6.^{Sound governa}^{nce fra}^mework^{to facilitate accountability and operational independence}
^{7. SWF owner should set t}^{he objectives, appoint mem}^{bers of t}^he^{governing bodies, and exe}^{rcise oversight}
^{8. Governing}^{bodies should have}^{a clear mandate a}^{nd adequate}^aut^horities.
^{9. Indepe}^{ndent op}^{erational mana}^{gement with clearly defined}^resp^onsibilities
^{10. Clearly defined accounta}^{bility framework}
^{11. An}^{nual re}^{port and}^{financial st}^{atements s}^{hould be}^prepa^{red in a}^{ccordance with r}^{ecognized intern}^{ational or national}
^{accounting sta}^ndards.
^{12. Op}^{erations and fi}^{nancial state}^{ments s}^{hould be a}^{udited annually}^{in accordance with}^{recognized international or}
^{national accounting sta}^ndards.
^{13. Clearly defined profes}^{sional and ethical standards}
^{14. Third-party dealings rega}^rding^{SWF management}^{based on eco}^{nomic and financial grou}^nds
^{15. Respecting}^{and complying wit}^{h all applicablehost count}^{ry r}^{ules, laws, and regulations}
^{16. Public disclosure of governa}ⁿ^{ce framework a}^{nd objectives, as}^{well as the man}^{ner in w}^{hich t}^{he S}^{WF’s management}
^{is operationally independent}
^{17. Public disclosure of fina}^{ncial information to demonstrate its ec}^{onomic and financial orientation}

^{C. Investment and Risk Management Framework}
^{18. Clear and consiste}^{nt invest}^m^{ent policy based on so}^und^{portfolio management prin}^ciples
^{19. In}^vestme^{nt decisions should a}^{im to maximize risk adjusted financial retur}^{ns or if invest}^{ment dec}^{isions are subject}
^{to other than}^{economic or finan}^c^{ial considerations, these should b}^e^{clearly set out and}^pu^{blically dis}^closed
^{20. No seeking adva}^{ntages of}^priv^{ileged information or governmen}^{t’s inapprop}^{riate influenc}^e
^{21. E}^{xercising s}^hare^{holder owner}^{ship rights}^{in a ma}^nner^consistent^{with its investme}^{nt policy}
^{22, Trans}^pare^{nt and so}^{und opera}^{tional control and risk manageme}^{nt system}^s
^{23. Accu}^{rate a}^{nd consistent}^repo^{rting of investme}^{nts a}^{nd investm}^{ent pe}^rforman^ce
^{24. Regular review of}^{GAPP implementation}

^Source:^IMF

While the IMF is working to establish guidelines for the management and operations of sovereign
wealth funds, the OECD has an ongoing work program to establish a set of best practices for ⁴⁴
recipients of investments from SWFs. These guidelines would draw on the OECD’s extensive
work on the treatment of foreign investment in OECD economies. OECD work will also draw on
the OECD Guidelines for Corporate Governance of State Owned Enterprises (the SOE ⁴⁵
Guidelines). The Guidelines are applicable to both SWFs and SOEs.
^Mar^tin^A^.^W^e^iss
^An^al^y^s^{t i}ⁿ^In^terⁿ^ation^a^{l T}^r^ade^an^{d Fin}^aⁿ^ce
^mw^ei^s^s^@^c^rs^.l^oc.g^ov^{, 7}^-⁵⁴⁰⁷

⁴⁴^{OECD Inv}^e^stm^e^{nt Ne}^wsle^tte^{r, Oc}^tobe^{r 2}⁰⁰⁷^{, Issue}^{5, a}^t^htt^p^://w^ww^.oe^c^d^.org^/da^t^a^o^e^c^d^/⁰^/57/³⁹⁵³⁴⁴^01.^pdf^.
⁴⁵^T^h^{e OE}^{CD G}^uⁱ^d^elⁱⁿ^{es o}ⁿ^C^o^rporat^{e G}^o^v^e^rn^an^{ce o}^f^S^t^at^e-O^wⁿ^e^d^Eⁿ^t^e^rp^ri^{ses i}^s^avai^l^a^b^l^{e at}^h^t^t^p^:^/^/^www^.^o^ecd^.^o^rg/
^doc^um^eⁿ^t/33^/^0,33⁴³^,e^n_²⁶⁴⁹^_3⁷⁴³⁹^_3⁴⁰⁴⁶⁵⁶^1_^1_^1_^1_³⁷⁴³^9,^00.^htm^l^.