Why the Foreign Business Act is Fundamentally Flawed


The Foreign Business Act (FBA) is flawed because of its extraordinary breadth.  The FBA covers about 50 types of businesses ranging from the production of military armaments and the extraction of natural resources to the simple provision of services and the operation of restaurants.  It covers business activities where there are arguably good policy reasons to restrict foreign ownership to business activities where the rationale for restricting foreign ownership is transparently protectionist and counter-productive.

The same definition of what constitutes an “alien” business applies to every business covered by the FBA irrespective of whether it is a carrier of sensitive military communications or delivering pizzas.  The same factors that determine if a business is employing an illegal nominee shareholding structure to circumvent the FBA applies to both businesses that (arguably) affect national security and those that run Italian restaurants.

The FBA and its predecessor have always defined an “alien” business without any reference to foreign control.  When a business is simply making and delivering pizzas, does anyone really care?  We doubt it.  But when a business is acting in areas that relate to national security, it’s no surprise that there is a tremendous press from some quarters to change the law to make the law actually restrict foreign participation.

This flaw was present at the law’s inception.  Because it was unrealistically restrictive in its breadth, the thin definition of what constitutes an alien business in terms of simple shareholding was required to maintain Thailand’s international competitiveness.   But over time, as other economies in the region have become more open and security concerns more important, the flaws of this law have become more apparent.

On the one hand, it undermines the government’s ability to effectively regulate foreign control and ownership of businesses where many – in a country where the military has always held tremendous power – honestly believe that such regulation is not only appropriate, but also absolutely necessary.  On the other hand, it creates unnecessary red tape and risk to foreigners operating in straightforward commercial activities that make the economy dynamically more competitive, employ, directly and indirectly, millions of Thais, provide all Thais with more choices and improve the quality of life here.

Because the law is ludicrous (and that word is justified for this law), it undermines respect for the rule of law generally in Thailand.  It doesn’t achieve any of its stated policy objectives, and it has been a PR nightmare for investment and business in Thailand. It’s a bad law, and we don’t see it going away in the near future

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Comments

  • Steve Sykes  On December 24, 2010 at 6:04 am

    Any enforcement action against a violator of the Foreign Business Act would be a public record – and not something secretive or hidden.

    As author of the articles on this blog, you have repeatedly commented that violators of the FBA have previously been “caught”.

    I want to make a very simple challenge – and it does not get any easier than this: Find and cite even one single instance – by name of company, or name of violator – of ANY foreign controlled business in Thailand,and that was EVER prosecuted.

    I will eagerly await your citation – because – despite the “urban legends” of past prosecutions, I have never been able to find a single example. And I have been looking for eight years.

    By the way – do you realize that three foreigners can go to any Ministry of Commerce, Department of Commercial Registration Office, and routinely incorporate a Thai Private Co. Ltd.? Nothing prevents this. You simply do it – and the MOC/DOCR does not interfere. Think about that – it surprises a lot of people.

    It is not until an incorporated business begins pursuing an ACTIVITY that is prohibited by the FBA, that a violation of the letter of the law begins to occur.

    At incorporation – which technically occurs when the company registration record document emerges from a printer at the MOC/DOCR – all companies are basically holding companies, carrying out no activity. Such a company does not yet even have tax registration accomplished – so it cannot be pursuing any activity.

    So – any professional services organization that assists a client with incorporating a business in Thailand is – in fact – helping create a perfectly legal business. All the time, every time.

    If a customer later uses a legally incorporated business to pursue an activity prohibited by the FBA – that is really the business owner’s responsibility – not the responsibility of the incorporation services company.

    Taken as a whole, this blog ultimately promotes the following position:

    1. Thailand has a Foreign Business Act (FBA)
    2. The FBA is a bad law.
    3. The FBA is not aggressively enforced.
    4. If foreigners wish to set up and control a business in Thailand, and wish to pursue activities that are in violation of the FBA, they will be breaking the law – and they therefore should not proceed.
    5. Instead, would-be business sponsors should either go somewhere else, or should do whatever is necessary to first get the FBA changed.
    6. To proceed with illegally running a business in Thailand in violation of the FBA places a business person in significant, non-negligible risk of substantial legal problems.
    7. If an irresponsible foreigner does not heed your sincere and wise advice above, and chooses to instead proceed with an illegal start-up, then whatever they do, they should not use a “one stop shop” that pursues a deliberate process, and handles all the various aspects – because doing so significantly increases the likelihood that the lawbreaker will be caught and prosecuted.

    I think that the seven points above accurately reflect your viewpoint. And – you are entitled to your viewpoint.

    Sarcastically (hey – I admit it), I think that your position in regards to point 7, above, begs the question: If someone intends to proceed in violation of the FBA, how SHOULD they proceed to minimize the risk? You seem to imply that they should either “do it themselves”, or should use an ad hoc collection of different services providers, cobbled together, to get all necessary task accomplished.

    Are you on drugs? You can’t be serious.

    My position would be:

    1. Thailand has a Foreign Business Act (FBA)
    2. The FBA is a bad law.
    3. The FBA is not aggressively enforced.
    4. If foreigners wish to set up and control a business in Thailand, and wish to pursue activities that are in violation of the FBA, they will be breaking the law. They need to know that.
    5. Some such individuals – members of the legion of frightened men – should take counsel of their fears, and cancel their plans. Thailand is not for them. “Thar be dragons….”
    5. Some number of poor fools will overcome their terror, and – for whatever reason – decide to push ahead and join the existing population of foreign business owners in Thailand – which now numbers ?????? (how many? 10,000? 50,000? – I really can’t say – but it is a big number).
    6. To proceed with illegally running a business in Thailand in violation of the FBA places a business person in some tiny – negligible – amount of risk of substantial legal problems. In fact, it is virtually impossible to find even a single actual, specific case of ANYONE, EVER having a significant problem with being found in violation of the FBA. (Note; I am not saying that no such cases exist. I am saying that such cases are so rare that – in practical terms – it is impossible to find any record of such cases.
    7. If an irresponsible foreigner does not heed your sincere and wise advice above, and chooses to instead proceed with an illegal start-up, then they probably should use a “one stop shop” that pursues a deliberate process, and handles all the various aspects – because doing so better ensures that the various steps are properly integrated, proceeds more smoothly, more quickly, and is probably less costly.

    I will also freely admit that I am an “interested party” who has a professional stake in this business sector.

    Samuel Johnson once wrote: “Nothing will ever be attempted if all possible objections must first be overcome.”

    ‘Sounds good to me.

    Cheers!
    Steve – The Lone Ranger (RLTW!)

    • Thai Law and Policy  On December 26, 2010 at 5:40 am

      Comments are appreciated, but I think you have fundamentally misunderstood what this blog is about and I hope that doesn’t deter you from reading more. For this reason and because it is early days, I will spend more time responding to your post than would otherwise be case (but please also look at the blog post themselves, because you will find answers there as well to your comments.) This blog is not solely about the Foreign Business Act (that was only the starting place, and we have and will address other laws). This blog site certainly is not about one-stop shops.

      The blog is intended to provide a forum for an honest and non-partisan (to the extent possible) discussion of the connection between policy issues and laws generally. I think it should be apparent that Thai laws, in particular, often have unintended and perverse consequences, which often lead to selective enforcement and corruption. That is one of the major themes of this blog. I thought I might tread on a few toes, but quite frankly my biggest concern was getting dragged into the whole red shirts vs. yellow shirts argument or annoying some authority. I feared having to fend off efforts to drive the discussion in that direction or causing offense to where none is really intended. Your comments – when you compare them to actual blog posts here – really do surprise me.

      But let us go straight to your main challenge: “I want to make a very simple challenge – and it does not get any easier than this: Find and cite even one single instance – by name of company, or name of violator – of ANY foreign controlled business in Thailand,and that was EVER prosecuted.”

      Baker & McKenzie, a major international law firm, issued a newsletter on 25 August 2009 where you will see this: “Thailand’s Ministry of Commerce (MOC) now has an active team which targets and investigates potential Foreign Business Act violations. Their activities have recently culminated in an unprecedented court order against a defendant.”

      Deloitte, a major international accounting firm, also reported a major ramp up in FBA enforcement a few months aback. Have I named a company or violator? No, and for very obvious reasons I am not about it. But do you honestly think Baker and McKenzie and Deloitte would make this up out of whole cloth?

      I am also not about to violate their IP rights by posting their material on my blog site. (You can write to them – at Baker & McKenzie you might try Ben Young at ben_young@bakernet.com and ask him for a copy of their 25 August 2009 newsletter since his name and contact details appear on it.) More important, however, my blogs were intended to demonstrate, and not simply say, that the FBA is a bad policy. Selective enforcement helps demonstrate that point.

      In our own experience, compliance with the FBA does come up in MOC investigations and due diligence exercises, provided those due diligence exercises are performed properly. This is not trivial. These can be deal breakers. If you pause for a moment and think about this, it makes perfect sense: would you buy a company that could be dissolved and where the directors are subject to three years imprisonment?

      In the case of multi-national companies – my real area of experience – I don’t think anyone wants to explain this sort of risk to management back in New York, London or Japan. They want to do it right.

      Now you made an amazing and, I submit, revealing comment: “So-any professional services organization that assists a company a client with incorporating a business in Thailand is – in fact – helping create a perfectly legal business. All the time, every time.”

      And then: “If a customer later uses a legally incorporated business to pursue an activity prohibited by the FBA – that is really the business owner’s responsibility – not the responsibility of the incorporation services company.”

      That’s quite a statement from any professional service provider, but particularly one that offers Thai shareholders so that companies can appear to be in compliance with the FBA. Let me ask the obvious question: if incorporation of a company is the only service provided, what’s the point of offering Thai shareholders in the first place?

      It’s even more amazing from a proponent of bundled services. On the one hand, you say anyone who raises questions about the conflicts of interest and other problems created by bundling services “must be on drugs” (your words), but then go on to say you are not responsible – even when Thai shareholders are provided as part of this bundling of services to create a impression the company complies with the FBA – for any violation of the FBA. I am sure that’s real comforting (NOT) for anyone who uses these services.

      In any event, I intend to post a blog on conflicts of interest generally and the specific dangers and features of conflicts of interest in Thailand. And so I do want to thank you for your contribution: since I am going to use your comments because they do such a great job of illustrating the problem.

      Your summary of my position starting with point no. 5 is wrong. You will not see it in my blog posts. I hope that is all that needs to be said about your “summary” of my posts.

      I do appreciate comments, but I think its fair to ask that they not distort what I posted. Also, this blog site really isn’t about one stop shops, but I will be doing some posts about conflicts of interest that I suspect you won’t like. There is a much bigger picture here (e.g., laws that make no sense, conflicts of interest), and I suspect I may tread on a few more toes. Sorry if I do so, but I think these are issues that need to be discussed honestly and without hype. And if some information about what Thai law really provides get passed along, so much the better.

  • Steve Sykes  On December 28, 2010 at 7:04 am

    OK, staying consistent with your rebuttal above, please edit/complete the three following summary points, to accurately summarize your stance:

    5. Instead, would-be business sponsors should (either go somewhere else, or should do whatever is necessary to first get the FBA changed.) – please replace with a correct phrase.
    6. To proceed with illegally running a business in Thailand in violation of the FBA places a business person in (significant, non-negligible risk of substantial legal problems.) – please replace with your estimation of risk.
    7. If an irresponsible foreigner does not heed your sincere and wise advice above, and chooses to instead proceed with an illegal start-up, then whatever they do, they should …. (please complete as appropriate)

    I will dismiss the purported “evidence” consisting of a non-specific 2009 report by Baker & McKenzie as being so extraordinary as to be de minimis, as concerns typical foreign businessmen seeking to set up in Thailand.

    I will certainly concede that foreign publicly held corporations who must accurately and faithfully report full compliance by overseas subsidiaries with all local laws may be out of luck in Thailand – unless they qualify for a Foreign Business License or Foreign Business Certificate, or operate in one of the business sectors which is not restricted by the FBA.

    In recent history, I do know of one case of legal prosecution of use of Thai nominee shareholders – it was in regards to the sale of Shin Corp to Temasek Holdings, by way of intermediary companies that employed expatriate Thais as shareholders. Once again, that was such an extraordinary action, undertaken as part of a much larger, geo-political contest, that it has no meaningful relevance to typical start-up investors.

    I will state a thesis here: In practice, as actually carried out in Thailand, there is virtually no meaningful government interference in creation of foreign-dominated start-up enterprises by foreign investors. Such start-up businesses are not a threat to Thailand, and are – effectively – welcomed. They create jobs, and they occupy commercial property. Thai regulators reserves actual concern in relation to the FBA to the idea of preventing foreign investors from easily acquiring large, significant Thai corporations.

    I am not specifically able to document that simple assertion – but it basically sticks out in full view. There is no practice of blocking fairly obvious instances of companies being set up under de facto foreign control. But – I believe that there would be immediate and effective blockage of an effort by a foreign MNC to acquire majority shares of a major Thai corporation.

    My best guess is that the FBA – as it now exists – is maintained on the books so as to keep the two scenarios described – 1) Entrepreneurial, foreign controlled start-up; and 2) Foreign MNC acquisition of a large Thai corporation – well-separated. I propose that if the FBA was abolished, it would become much more likely that a foreign MNC might set up a Thai subsidiary company, and then use that entity to slowly absorb the operating units of a large Thai corporation.

    My guess is that there at least 10,000 private companies operating in Thailand that are foreign-controlled, with all actual investment coming from foreigners, but which have majority of shares held by Thais. They are set up under all sorts of “schemes” that have permitted them to avoid FBA challenges, and I will guess that more than 99% of them have never and will never experience any “control” issues in regards to Thai shareholders. Because of Thai tax law, very few of these companies will ever issue dividends – and shareholders will thus never be rewarded on the basis of shareholdings. Thus – the only issues are the issues of maintaining operational and financial control over the company. This is the one meaningful area in which various legal advisers offer different “solutions.” There are probably about a half dozen common approaches here – and – in general – they all work. Thus the 99% “no problems” figure.

    • Thai Law and Policy  On January 3, 2011 at 11:30 am

      Thank you. We will try to keep this brief since we believe that if you (or others) go back and carefully review the blog posts, it will be apparent that most of your “points: are addressed those blog posts. It will also be apparent that you seem to have misunderstood what this blog is fundamentally about. This is not really just about the FBA.

      In any event, on the subject of the FBA you made the following “challenge”: ” I want to make a very simple challenge – and it does not get any easier than this: Find and cite even one single instance – by name of company, or name of violator – of ANY foreign controlled business in Thailand,and that was EVER prosecuted.”

      We provided you with that example, and you don’t dispute it. Instead, you simply dismiss it as “de minimis” That doesn’t strike us as fair or intellectually honest.

      In addition, you misunderstand or misconstrue the discussion about the FBA when you say its all about foreigners getting “caught”. It is not about that at all.

      If you carefully read the posts, you will that we say something very different. We say the main problem is dealing with Ministry of Commerce investigations and, in the case of multinationals, dealing with compliance inquiries from the head office.

      Your summary of our discussion baffles us. We are not arguing that investors should go elsewhere. We’re not telling investors to go anywhere or do anything. We are raising and commenting on what we see as material problems in the Thai legal and regulatory regime. We started with the FBA simply because it provides an easy example of such a problem. There are others.

      You say: “My guess is that there at least 10,000 private companies operating in Thailand that are foreign-controlled, with all actual investment coming from foreigners, but which have majority of shares held by Thais.” We agree, but suspect the number is higher. We have repeatedly said that foreigners can have control without violating the FBA. But we have also said that some structures and practices clearly – and unnecessarily – constitute nominee shareholding. For example, why employ a structure where Thais hold a deed where they essentially admit they are nominees shareholders? This seems like unnecessary risk to us when it is possible, as we have repeatedly said, to establish structures that don’t violate the FBA but do provide foreigners with voting control and economic benefits.

      We plan to move on to other topics now, but we’ll return to the FBA since it clearly is a problem here. Deloitte, PWC, Baker & McKenzie and just about every major professional service provider agree. We simply want to shine some light on some of the more problematic features of this law.

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