Monthly Archives: November 2010

Foreign Business Act – Current Status & Risks

There has been no attempt to revise the Foreign Business Act (FBA) since the NLA’s efforts to make the law more restrictive by re-defining the term “alien business” in 2007.  But there has been a marked increase in enforcement.

In August of 2009, a major international law firm announced the first court ruling that a company had been found guilty of operating without a foreign business license in an area restricted under the FBA.  The word “guilty” is used here intentionally, since the FBA has penal provisions providing for up to three years imprisonment, dissolution of a business found to be in violation, disgorgement of shareholding and fines of up to one million Baht.

The Ministry of Commerce (“MOC”) periodically announces that it is surveying business registrations looking for evidence that companies are employing illegal nominee structures.  These surveys concentrate on particular business areas or particular provinces of Thailand, and change from time to time.

But the biggest risk we have seen comes from competitors and disgruntled business partners and employees.  These people have an interest in creating problems and often have access to inside information that the MOC might not otherwise see.   This is a very serious problem if your business is exposed to FBA risk.

What Businesses are Most at Risk?

When the MOC conducts it surveys, it generally focuses on particular industries or particular regions.  But we don’t see many serious problems from such surveys.  Instead, it’s the tips from competitors and former business partners and employees that create the most serious problems.  That, and internet advertising by certain service providers, causes the most grief for foreigners.

The biggest problems seem to occur with businesses formed before the recent efforts to make the FBA more restrictive (when practices were more lax) and structures formed by certain “full” service providers that push the envelope when promoting their services.  The riskiest structures that cause the most grief are invariably established by service providers which claim they can provide any service a new business needs in Thailand from accounting services, brokerage services, human resources, IT services and legal services to anything else a new business needs – including Thai majority shareholders . 

These full stop shops are the legal equivalent of fire traps. 

Nominee shareholding to circumvent the FBA is illegal.  We’ll discuss illegal nominee shareholding in more detail later, but not much discussion is needed to see that any service provider which advertises that it provides Thai nationals (be they lawyers, accountants or anyone else) to ensure the company is Thai majority owned is waiving a red flag right in the face of the MOC. 

The advertisement itself is evidence of an illegal nominee relationship.  We have seen this over and over again, often involving the same “players”.  The MOC is quite capable of searching the internet to identify these service providers and the companies they establish, and they do so.

When you pause for a moment and think about the FBA’s prohibition on illegal nominee shareholding, none of this should come as a surprise.  A service provider that essentially promotes itself over the internet by saying that it can do anything, including provide the majority Thai shareholders, attracts exactly the type of attention a foreign investor in Thailand does not want.  There are other reasons why such service providers are risky (a lack of checks and balances on their work), and we will get around to that in the near future.

Even though the NLA was not able to make the FBA more restrictive, the FBA is still very much alive.  The MOC is taking a more aggressive stance on illegal nominee shareholding, and the MOC now has learned a great deal over the past few years as it has stepped up enforcement efforts.

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Extortion, Bribery or Both? A Thought Experiment

Let’s start our thought experiment by looking at the following four scenarios:

Scenario One: Your business provides a product that is absolutely perfect for the needs of an emerging economy.  It’s reasonably priced and exactly meets the infrastructure needs of that emerging economy.  It’s better than any product offered by your competitors, and it will make the difference for your foreign (U.S., EU, Australian, Japanese) business surviving or at least cost jobs (maybe your own) if you don’t land the contract.  The big problem is this: to a get a contract with this (hypothetical) emerging country you need to pay a bribe.  Maybe it can done by selling through a government minister’s family members – who will set up a consulting firm and package the bribe as consulting fees – but you know what is going on.  If you don’t agree to this sort of arrangement, your product won’t even be considered.  You simply won’t have an opportunity to do business in that country.  The parent company will suffer and need to lay off staff.  What’s the right thing to do?  What are you allowed to do?

Scenario Two: Your local company has been doing business for decades in this emerging economy.   But the jurisdiction where your parent company is located has enacted and is now seriously enforcing legislation under the OECD Convention, an international convention that requires signatory countries to enact legislation similar to the US’s FCPA.  The FCPA, in brief, imposes serious criminal penalties on US companies and persons for bribing foreign officials.  Your product is like the one in Scenario One: absolutely perfect for the local company.  And if you don’t get that contract, you may have to close your local company and lay-off thousands of local employees.  You’ll also lose your job.   Do you pay the bribe?  In terms of issues that matter legally and morally, does your situation really differ from Scenario One?

Scenario Three: As in scenario two, your company has been doing business in this emerging country for decades.  But now the difference between thriving and survival hinges on a regulatory approval.  Without that approval, you cannot survive.  But you won’t get that approval unless a payment is paid.  Maybe it’s a grease payment, but you’re not quite sure (usually you and your lawyers aren’t).  And if no payment is made, you’re out of business and you’ll need to lay off thousands of local employees.  You will also lose your job.  In terms of doing the right thing, does this scenario really differ materially from Scenario Two?  If so, how?

Scenario Four: Your company has been doing business for decades in this emerging economy, but now an official alleges it failed to obtain a required regulatory approval.  You and your lawyers disagree, but your lawyers acknowledge that under local law the official’s have broad discretion on how to interpret that law.  Their current interpretation is “novel”, but might strike an outsider (who doesn’t know how the law had been interpreted for the past, say, 35 years) as plausible. And the officials have made it clear that they will adopt this novel interpretation unless you pay them.  If you don’t make that payment, you’ll be tied up in court proceedings for years, spend  enormous sums on legal fees,  your ability to leave this country will be restricted and you may well end up in jail.  But it can all go away if you pay the official.  If you do make that payment, will you be violating your own country’s version of the FCPA?  Is it wrong to make such a payment?

If you have done business in Thailand for any period of time, you will have likely encountered or know someone who has encountered scenarios very much like the ones described above.   This is a problem, and not just for US companies.  There is a fuzzy line between extortion and bribery, and foreign companies are starting to highlight that what often looks like bribery is, in fact, more akin to extortion.  We’ll hazard a few guesses about how this is likely to affect the anti-corruption regulatory terrain.

On the “supply” side of corruption (that is, the bribe-payers), there has been a dramatic increase in new laws and enforcement activity.  At least 38 countries have adopted the OECD Convention.  Ten years back, the U.S. Department of Justice had, maybe, a couple of open FCPA cases or investigations.  Now there are about 150 open cases.   With this many open cases, you can be confident that the number of non-public investigations is several times that number.  The UK’s Serious Fraud Office (SFO) says that it is going to get tough on foreign corruption, and it appears they are serious (couldn’t resist the pun).  We have not yet met anyone from a Scandinavian country who is comfortable with corruption.  The U.S. Chamber of Commerce wants reform around the edges, but I don’t see the pressure on the supply side of corruption going away.  The US is not about to repeal the FCPA.  Enforcement will become more aggressive and more wide-spread.

What about the demand side?  Well, look at Thailand and make your own judgment.  And then take a look at scenarios above, starting with scenario four.   These sorts of scenarios justifiably outrage most of the foreign business community.   And as the pressure increases on the supply side and foreign companies face increasing pressure to refrain from making bribes, they will get increasingly agitated when local officials compel them to pay bribes:  “You mean our country manager might go to prison if we didn’t pay a bribe?”

So what are foreign governments going to do when companies put this sort question to their legislators and law enforcement officials?   For example, what is the US  Government going to say when a company goes public and says they’re facing extortion in an emerging country and all the US officials want to talk about is the FCPA?  This part of the FCPA debate is starting to get real attention.  It doesn’t have to be as serious as a country manager facing jail unless his employer pays a bribe; it could be serious economic harm and lost jobs in, say, the US if a bribe is not paid.

Local governments will be pressed to get serious about battling corruption.  This is easy; everyone will agree that corruption is bad.  But the track record of getting some emerging countries to seriously challenge local corrupt practices is mixed, at best.  Foreign countries might pass laws that allow their companies to file suits against corrupt foreign competitors, but that was considered and never enacted in the U.S. (and even if it was, would it make a difference?)  Or they could go directly against the foreign officials themselves.

If you look at FCPA enforcement, we submit, you will see the early days of this.  (The Green case doesn’t even hint of extortion, but that didn’t stop the US from pursuing the former Thai official.) There is, and will be increased, pressure to extradite corrupt foreign officials and efforts to nab them when they leave the safety of their own countries.  The US, for example, has a history of permitting bounty hunting.  We’ll hear complaints about ‘neo-colonialism’ and similar cant, but it will fall on deaf ears when the behavior looks more like extortion than corruption.  Why should a foreign country manager face FCPA charges when he faces extortion that will not only affect his company but his own liberty and safety?

Not only in the US, but in other countries as well, the public will be sympathetic to the plight of the foreign country manager, and palatably furious with any foreign official employing extortion against one of their countrymen.  And if the foreign government won’t discipline its own officials, the public (in, say the US or the UK) probably won’t be much bothered if their own government presses hard, employing novel measures, to go against that corrupt foreign official.

To Give and Not Receive?

When a bribe is paid, someone must pay that bribe, and someone must receive that bribe.  One cannot occur without the other.

On 14 September 2009, Gerald Green and his wife, Patricia Green, were convicted in a U.S. Federal Court of bribing the former governor general of the Tourism Authority of Thailand (TAT), Juthamas Siriwan, to get lucrative film festival contracts as well as other TAT contracts.  They were convicted of, among other things, violating the U.S. Foreign Corrupt Practices Act (FCPA) for paying kickbacks to Juthamas Siriwan.  According to the FCPA Blogsite:

the Greens paid approximately $1.8 million in bribes to the former governor through numerous bank accounts in Singapore, the United Kingdom and the Isle of Jersey in the name of the former governor’s daughter and a friend of the former governor. The Greens received contracts that generated more than $13.5 million in revenue to their businesses.

The FBI affidavit filed in support of the initial charges against the Greens provided a detailed list of the payments.  One would think that the FBI would not provide such a detailed list unless they were sure of their evidence and, sure enough, the Greens were convicted after just a few hours (not days) of deliberations.  Sounds like rock solid evidence that bribes were paid, doesn’t it?

Although the FCPA does not apply to a foreign official who receives a bribe (unless they commit an act within the U.S.), the U.S. indicted Juthamas Siriwan on related charges of money laundering and other alleged crimes.  A copy of the indictment can be downloaded here: (http://www.mediafire.com/?jz3mgylictc).  The U.S. government typically doesn’t go after foreign officials, but they did here.

So what is happening in Thailand to the foriegn official who is alleged to have received US$1.8 million in bribes?   Well, there were news reports that she was threatening to file criminal defamation charges (surprise!) against anyone who claims she received bribes.  (We make no such claim.)  So what are the Thai authorities doing?  According to today’s Bangkok Post:

Methee Krongkaew, the person in charge of the subcommittee, said his panel would forward its findings to the main NACC committee if Ms Juthamas failed to show up to defend herself. The main committee would then decide whether to submit the case to the public prosecutor for indictment.

Anything else?  Well she presumably isn’t planning any holidays in the U.S. in the near future.  

She might want to reconsider holiday plans outside of Thailand altogether.  The U.S. has a tradition of aggressively seeking the extradition of federal fugitives, as anyone who has read a paper in Thailand over the past few weeks will know from the Victor Bout case.  But what they may not know is that U.S. authorities also seek extradition of alleged white collar criminals – even when they are foreign nationals – from foreign countries.   And they can be downright tenacious about it, turning up where you would not expect them.

In one case, a foreigner flying to Australia was detained before he officially entered the country, and forced to leave, in the company of several U.S. law enforcement officials, on the next flight to the U.S. (they were obviously trailing him on his flight to Australia).  So a vacation in Australia is probably not a good idea either.  Where else?  Hong Kong? Singapore? No idea.  And we wouldn’t say even if we had one.

Criminal Defamation as a Business Tool

Criminal defamation lawsuits are used generously here in both political and commercial disputes.  In commercial disputes, they are often used to intimidate and silence business rivals and complaining customers.   And foreigners are not immune to such suits.

For example, American investor, Dov Plitman, was charged by a Bangkok luxury condo developer with two counts of criminal defamation after going public in his dispute with that developer.  I don’t know if his complaints are legitimate or not, and even if I had views on that subject, I wouldn’t raise them, mainly because I don’t want to be added as a co-defendant in that criminal defamation action.

The chilling effects on a foreign investor of facing criminal charges in a Thai court are tremendous.  Imagine facing criminal charges for simply airing what you considered to be legitimate business complaints or responding to inquiries about a commercial dispute?  Would you talk to anyone (for example, the press, the consumer protection board) about your complaints if you knew that anything you said could be the subject of criminal charges in a Thai court?

Imagine you believe you are the victim of fraud or self-dealing by a local business partner.  Suppose this business partner is an “influential person”.  Would you raise and pursue such claims even if you were convinced those claims are true?  In Thailand, private parties can file criminal defamation claims, and truth is not necessarily a defense.

Now, pause for a moment, and think about the sort of things that typically get said in any business dispute anywhere in the world.  The discourse can easily get quite heated.

Complicating matters, one of the more common tactics of plaintiffs in such actions is to file suits across the country – often in remote up-country provinces where a newspaper covering the purportedly defamatory comment might have been sold – to cause the maximum amount of inconvenience to a defendant in a criminal defamation lawsuit.  Is it worth pursuing what you believe to be a legitimate claim when the other side might respond with multiple criminal defamation lawsuits across Thailand?

As long as criminal defamation actions can be used by private parties, they will be used. You can’t blame Thai lawyers for this.  But you should ask if the ability to commence criminal defamation proceedings have a legitimate place in the toolbox of any lawyer representing a private party?

And when doing business in Thailand, particularly with an influential person (who may be considered to be an attractive partner precisely because of his influence), you should pause and consider the consequences if things go awry and a dispute arises.  No one enters into a business relationship expecting it to lead to a dispute, but it would be naive to think that a dispute won’t arise.  Business disputes are as much a feature of the Thai business environment as they are of the U.S. business environment.

But one big difference is that you could quickly find yourself facing criminal charges in Thailand for raising the type of claims that are typically raised in any commercial dispute anywhere in the world.

2007: Proposed Amendments to the FBA – What Happened?

Following the 19 September 2006 coup that ousted the government of Thaksin Shinawatra (Thailand’s first non-constitutional change in over 15 years), the military did all of the things that you would expect of coup makers: it canceled upcoming elections, abrogated the Constitution, dissolved Parliament, banned protests and all political activities, suppressed and censored the media, declared martial law, and arrested Cabinet members.  The military also appointed members to a body called the ‘National Legislative Assembly’ (NLA), and the NLA began to consider and enact new ‘legislation’.

For the foreign business community in Thailand, proposed amendments to the Foreign Business Act (FBA) were the most controversial piece of new legislation. These amendments were intended to re-define what constituted an “alien business” under the FBA.  Foreign control would matter even if the company was majority owned by Thais.  From the post on the history on the FBA, you will recall that up until this time, Thai law expressly provided that a Thai majority owned company was not considered an “alien company” – even if it was foreign controlled – unless the Thai shareholders were  “nominees” of foreigners.

To attract investors, previous Thai governments had publicly emphasized this point when trying to explain the FBA to prospective foreign investors.  And in reliance on this very narrow definition of an “alien” in the FBA, 35 years of practice and repeated reassurances by prior Thai governments, foreigners established and controlled tens of thousands of companies, and done so for decades.  But it appeared that all of this was about to change.

The NLA put forward increasingly restrictive proposals.  Foreigners would essentially be forced to divest themselves of businesses they might have established decades ago in Thailand.  The money, time and effort that tens of thousands of foreigners had put into establishing businesses in Thailand – some of them household named businesses that employed thousands – would be subject to forced fire sales to local interests.

This was headline news in the early part of 2007 with front-page articles about pleas by foreign embassies that the NLA please refrain from enacting such legislation.  The EU said such measures would violate Thailand’s obligations under the WTO.

In the heated arguments over these controversial amendments, the then government put forward some rather interesting arguments to justify their proposed amendments to the FBA, such as

  • The new laws would only affect businesses that were already using illegal nominee structures; these businesses were already violating the law, and they therefore had no right to complain.  The response to this was obvious: if these businesses are already using illegal nominee structures, why change the law?
  • Senior officials in the Ministry of Commerce claimed that every “civilized country in the world” had laws restricting foreign ownership similar in breadth to that of Thailand’s FBA, and such laws determined a company’s “nationality” based on voting control.  While there may be some truth to the latter, the former was demonstrably untrue, unless the U.S., Australia and every member of the EU don’t count as civilized countries.  Thailand’s FBA was and is extraordinary in its breadth.

What happened? The foreign business community’s relationship with and confidence in the government was strained.  There was genuine concern – indeed, an expectation – that such changes would be enacted by the NLA before elections were held on 23 December 2007 to replace the appointed NLA with an elected parliament.  But the elections came and went without any change to the FBA.

The foreign business community sighed in relief. But even in the several weeks after those elections while the NLA remained in power before an elected parliament was seated, there was a strong press to make the FBA much more restrictive.

But it never happened.

Although no legislation was enacted, Thailand’s reputation with investors suffered tremendously.  And the foreign business community felt as though they had only gotten through this by the skin of their teeth.

In the next post on the FBA, I will take a look at the current state of the FBA.  Between now and then, perhaps something else.

14th International Anti-Corruption Conference in Bangkok

The 14th International Anti-Corruption Conference was held in Bangkok last week.  I attended a good part of it.   Mr. Voranai Vanijaka of the Bangkok Post had a good article about the conference, which can be found here (http://www.bangkokpost.com/opinion/opinion/206286/an-existential-horror).  He and others observed that “[t]he most popular, and most baffling, statistic last week was the 76.1% of Thais who believe that corruption is OK, as long as the country prospers.”  Agree.  And:

To address this disconcerting find, the prime minister’s spokesperson, Thepthai Senpong, announced that the government will ask the Ministry of Culture to combat such attitudes head-on by building a new culture, creating a new consciousness for the Thai people, one that would not condone corruption

Good sentiment, but “creating a new consciousness” is quite an undertaking, and I have a few other suggestions involving legal reform.  Thai laws are often written in broad terms and grant broad discretion to officials to approve or disapprove registrations and applications.  Often little or no guidance is provided on how such discretion is supposed to be exercised.  I hoped to demonstrate this while looking at some Thai laws in my blogs (always better to show than tell), but this came up just after I started this blog, so please excuse me for jumping ahead a bit.

Thai laws and regulations are also often so over-the-top that they simply invite selective enforcement.  Look at Thailand’s anti-alcohol legislation (discussed in my last post).  While the best of intentions may lie behind this (and, to be quite frank, some of it may just be local businesses wanting to protect their turf from foreign competition), this sort of regulation is just too over-reaching to be practical.

It simply invites rent seeking behavior: “Mr. Official, you have undefined discretion to grant or not grant approval on a matter where you don’t really believe the regulation serves any useful purpose, perhaps I can help show you how you should exercise that discretion…”

I plan to return to the FBA in the next few days and, in the context of discussing that law, I hope to illustrate a few other uh, interesting, aspects of Thai law.  Stay tuned.

A Sunday Afternoon Diversion

It’s Sunday afternoon, the last day of rest before a long week of work, and you’re looking forward to a nice cool glass of beer or, in my case, a nice glass of Penfolds Cabernet Shiraz Bin 8.  But if you are in Thailand, make sure its past 5 p.m., since Thai law prohibits the sale of alcoholic beverages (unless you are buying bulk) between 2 p.m. and 5 p.m.  But if you prefer a local beverage at a local venue, this should not be a problem since it is more than likely that this law is simply ignored.  But if you are a tourist at a good hotel, expect this law to be enforced with vigor.

And expect to pay three to four times more than what you would ordinarily pay for good wine elsewhere.  Thai customs and tariff laws make wine a particularly expensive choice in Thailand.  Notwithstanding a free trade agreement with Australia that  is intended to eventually eliminate duty on Australian wine, it remains very pricey in Thailand while local high octance spirits cost less than US$3.  According to the International Economic Law and Policy Blog, quoting from the Wall Street Journal:

Alcohol companies world-wide are lining up to fight a Thai plan to require graphic warning labels about alcohol on the country’s domestic and imported beer, wine and liquor bottles.

The proposed labels—which would cover 30% of the bottles’ surface area—include unusually explicit warnings about risks associated with alcohol use. One picture shows a shirtless man grasping a woman by the hair and raising his fist to hit her, accompanied by the words, “Alcohol consumption could harm yourself, children and family.”

Another shows a pair of bare feet dangling in the air after an apparent suicide and the words, “Alcohol consumption could alter consciousness and lead to mortality.” Others show diseased livers and a bloody motorbike accident.

The labels “are the most extreme we’ve ever seen,” says Brett Bivans, vice president of the International Center for Alcohol Policies, a Washington-based not-for-profit group funded by alcohol companies.

http://worldtradelaw.typepad.com/ielpblog/2010/09/liquor-labeling.html#comment-6a00d8341c90a753ef0.  And no distinction is made between the local version of white lightening and low alcoholic content beverages such as beer and wine:

Liquor companies also don’t like one of the main messages behind the Thai proposal: that even moderate alcohol consumption is bad. In a June report, Thailand’s Center for Alcohol Studies argued “there is no ‘safe drinking,’ ” only low-risk and high-risk consumption.

Thailand’s Alcoholic Beverages Control Act already imposes substantial restrictions on advertisements for alcoholic beverages.  But you wouldn’t know this looking around Bangkok.  And now these new regulations even though we have seen that Prohibition-like efforts to curtail or even prohibit the sale of alcoholic beverages are having prohibition-like consequences.

A Brief History of the Foreign Business Act

Before there was the FBA, there was the Revolutionary Party’s Announcement of National Council No. 281 (NEC 281), which was issued by Thailand’s then military government on 24 November 1972.  NEC 281 is very similar to the FBA.  NEC 281, like the FBA, divides restricted businesses into three schedules or annexes.  The restrictions imposed by NEC 281 are similar to those imposed by the FBA.  Both Annex C of NEC 281 and Schedule 3 of the FBA are justified on the grounds that “Thais are not yet ready to compete with foreigners” in the areas listed on this schedule.  And the definition of a foreign company used by NEC 281 is virtually identical to the definition used in the FBA.

Both NEC 281 and the FBA precisely define foreign companies in terms of “share capital”.[i] Neither NEC 281 nor the current version of the FBA refer to or even mention voting or beneficial control.  They both provide that a company will be considered an “alien” company if foreigners hold more than 50% of the registered share capital of that company.

Not surprisingly, this precise definition of a foreign company coupled with the expansive scope of NEC 281 led to the formation of what are sometimes called “preference share structures” – companies where Thai nationals own a majority of the share capital, but foreigners have voting control.  These structures became almost routine,  and practices in the formation of these structures became lax as the MOC routinely accepted registration of the companies employing such structures without real question.  Indeed, practices became downright sloppy, something any investor buying a company formed before, say, the year 2001 should seriously investigate during its due diligence.

In 1995 Thailand ratified the World Trade Organization’s General Agreement on Trade in Services (GATS).  In carving out businesses that would not be subject to liberalization under GATS, Thailand’s schedule of such business referred specifically to “registered share capital” – the same language employed by NEC 281 in its definition of an “alien company.”

About four years later, in 1999, the Thai government replaced NEC 281 with the FBA.  When the Thai parliament considered the FBA, a proposal was made to draft this law so that alien companies would be defined in terms of Thai majority voting rights, but that proposal was rejected because of fears it would make Thailand less competitive in an increasingly globalized world. Instead, foreign companies were defined in terms of registered share capital alone.  When the FBA was enacted, the government promised to periodically review and reduce the scope of restricted businesses on Schedule 3.  Eleven years later, not a single business has been removed from Schedule 3.

In the nearly 38 years since NEC 281 was issued, thousands of preference share companies have been formed.  They have been routinely accepted by the MOC for registration without challenge or review.  Indeed, MOC officials publicly acknowledged the legitimacy of such structures.  Foreign companies, including some prominent household name multinationals, relied on these structures when making substantial foreign direct investments into the Thai economy.

Estimates on the number of preference share companies’ range from the thousands to 14,000[ii] to 100,000[iii], but no one really knows the exact number.  Indeed, the debate about the exact number is a red herring, since the more important and indisputable point is that there are many such companies, and that many of them are important contributors to the Thai economy.

There were signs of a change in attitude before the 2006 coup, but the real press for greater restrictions – indeed, proposals for an outright change in the law and re-definition of what constitutes an “alien” – came after the 2006 coup from the militarily appointed National Legislative Assembly.  And this will be the subject of the next post on the FBA.


[i] Compare the definition of an “alien juristic person” in NEC 281, Section 3, with the definition of an alien juristic person in the FBA, Section 4.

[ii] Bangkok Post, “Deal flow dries up on policy uncertainty”, 14 October 2006, quoting an unnamed Western Diplomat: “Under our calculations there are about 14,000 companies…”

[iii] The Nation, “Nominee, or just a passive local partner?”, 11 September 2006: “It is estimated that about 100,000 Thai companies fall into this category.”

Let’s Start with the Foreign Business Act

The Foreign Business Act, B.E. 2542 (FBA), is often the first obstacle a prospective foreign investor in Thailand encounters.  And this makes it an excellent place to begin our discussion of Thai law and policy since the FBA illustrates and embodies so many of the difficulties that foreign investors face in Thailand.

The FBA was enacted in 1999 and prohibits “aliens” – a carefully defined term (more about that and the controversy this has created in subsequent posts) – from owning a wide range of businesses absent certain exceptions or issuance of an “alien business license”, which is difficult to obtain in practice.

The FBA does not cover every business.  I mention this because some seem to believe it covers every business owned by a foreigner, and I want to eliminate that misconception from the outset. The FBA is very broad, applying to about 50 types of businesses (depending upon how a “type” of business is defined) divided into three categories (often called “annexes”), but it’s not so broad as to cover all business activities.  Generally speaking, for example, manufacturing is not restricted under the FBA.  But it’s easy to see how the breadth of the FBA has created the misconception that it applies to any business in Thailand owned by a foreigner.

Complicating matters further, the FBA is also not the only law that restricts foreign ownership and participation in Thai companies.  Even if the FBA does not apply, other Thai laws restricting foreign ownership and participation may apply.  We will look at a few examples of this in future posts, but for now let’s start by taking a broad brush look at the three categories (or annexes) of businesses restricted under the FBA and the rationales for these restrictions.

Annex 1

Annex 1 prohibits alien ownership of nine categories of businesses for “special reasons”, and includes such businesses as newspaper publication, ownership of television stations, forestry, rice farming and trading in land.  The FBA does not permit licenses to be issued to foreigners for ownership of businesses listed in annex 1 under any circumstances.

Annex 2

Annex 2 is divided into three chapters.  In theory, an alien can obtain a license to own a business operating in Annex 2 with approval of the Thai Cabinet.  But in practice getting such approval can be very difficult because of the political nature of the approval required.

Chapter 1 is described as “businesses involving national safety or security” and includes the manufacture, sale and maintenance of firearms, armaments and military vehicles.  Domestic land, water and air transportations “including domestic aviation business” also falls within chapter 1 of Annex 2.  Thailand is not unique in restricting foreign participation in these kinds of businesses.

Chapter 2 is described as ‘businesses affecting arts, culture, traditional customs and folk handicrafts” and includes, among other activities, the creation of Thai wood carvings, manufacture of Thai musical instruments.  I have yet to encounter a foreigner who wanted to set up a business in these areas.

Chapter 3 is described as “businesses affecting natural resources or the environment” and includes, among other activities mining and wood processing to make furniture and utensils. Extractive industries are often the subject of controversy and special protection, and Thailand is no exception.  Because extractive industries tend to attract more than their fair share of transparency problems, investment by foreign companies in these sorts of businesses is problematic even without the FBA.

Annex 3

Annex 3 is described as “businesses in which Thai nationals are not yet ready to compete with aliens.”  Annex 3 is probably the most controversial annex and lists 21 categories of restricted business activities, including, among others, accounting service business,  engineering service business, and “other service business, unless specifically exempted by Ministry of Commerce regulations”.  The Ministry of Commerce (“MOC”) has not specifically exempted any service businesses and the MOC interprets the term “services” very broadly.

For example, the MOC takes the position that a company is engaged in a service business if it leases property.  This means, for instance, that if a manufacturing company (which is not otherwise restricted under the FBA) wants to sub-let part of its facilities to reduce its costs (not uncommon in these financially difficult times), that manufacturing company is engaged in a service activity that requires an alien business license.  Similarly, the MOC takes the position that an alien company needs an alien business license to provide a guarantee.  This means that a foreign owned Thai private limited company that is engaged in manufacturing (and not otherwise restricted under the FBA) cannot grant a guaranty in favor of the foreign parent company without first obtaining an alien business license.  This can create some serious headaches when financing or restructuring the financing of a multinational company:  “Sorry Mr. Lender, the subsidiary that owns our largest factory in Southeast Asia can’t provide a guaranty because…”

What is an ‘Alien Business’?  And Why Definitions Matter

Section 4 of the FBA strictly defines an alien juristic person in terms of ownership of share capital.  Significantly, it does not refer in any sense to voting control of stock or management of a company.  An alien is defined as follows:

“Alien” means:

(1)   a non-Thai natural person;

(2)   a juristic person not incorporated in the country;

(3)   a juristic person incorporated in the country and being of the nature as follows:

(a)   a juristic person of which one-half or more of the capital is held by persons under (1) or (2), or one-half or more of the total capital is invested by persons under (1) or (2); or

(b)   a limited partnership or a registered ordinary partnership of which the managing partner or the manager is a person under (1).

(4)  a juristic person incorporated in the country, of which one-half or more of the capital is held by persons under (1), (2) or (3), or a juristic person of which one-half or more of the capital is invested by persons under (1), (2) or (3).

For the purpose of this definition, a limited company’s shares of which the certificates are issued to bearer shall be considered belonging to aliens unless otherwise provided by ministerial regulations.

This definition is similar to the definition used in the FBA’s predecessor, “NEC 281” (we’ll discuss that when we discuss the history of this law, since you can’t understand the FBA without understanding its history).  This precise definition coupled with the broad scope of both the FBA and its predecessor, NEC 281, and the fact that Thai private limited companies can have shares with different voting rights led to the formation of what are sometimes called “preference share structures” – companies where Thai nationals own a majority of share capital, but foreigners have voting control.   Although officials in prior government publicly stated that such structures were legal provided they did not involve nominee shareholding (fodder for a future post), they have become more controversial and practices surrounding the use of such structures have been more problematic over the last several years.  In the next several posts we’ll walk through the history of the FBA, discuss these issues and explain how they have created a problematic regulatory terrain for foreign investors.

What is this blog about

First day posting. Advice and suggestions are encouraged. I plan to start with the Foreign Business Act (FBA).  Plenty of good and bad material out there on this law and most everyone doing business in Thailand has heard of it, but there is plenty of confusion.  And certainly room for debate.  I intend to start with a brief summary of what the FBA actully says and covers, touch very briefly on what it means, in practical terms, for foreigners wanting to do business in Thailand and then provide a bit of history and background.  The FBA and the controversy surrounding this law cannot be understood without knowing something of its history.

Technical advice is always welcome.  This is all new to me.

Nothing expressed in the blog constitutes legal advice.