Author Archives: Douglas Mancill

I have worked at Deacons Bangkok since 1998. I am partner in Deacons Bangkok and more information is available at: http://pricesanond.com/the-firms-partners/douglas-mancill.php. As of 4 June 2011, I will be blogging on this site.

Conducting FCPA Compliance Interviews Abroad – Some Quick Observations from Thailand

Foreign Corrupt Practices Act (“FCPA”) investigations typically involve third parties or subsidiaries located outside the US since most FCPA violations arise out of the activities of foreign third parties or foreign subsidiaries. But most guides on how to conduct FCPA investigations and interviews (or run an FCPA compliance program–fodder for the next post) seem to ignore this rather obvious fact. It has not however escaped the attention of the U.S. Department of Justice or the U.S. Securities & Exchange Commission.

Oddly, most guides on compliance investigations and interviews give scant attention to the fact that most of the truly useful interviews will be conducted outside of the US. Many seem to blithely assume that the interviews will occur in a comfortable office in downtown New York, San Francisco, Los Angeles or Singapore. When the foreign component of an investigation or interview is mentioned, there is typically a pro forma reference to language and “cultural issues,” a warning about data protection laws and maybe a travel tip or two about electrical outlets and food hygiene, but little else.

There seems to be a near consensus view that preparation is the key to a successful interview, but little guidance on how to prepare for an interview in a foreign jurisdiction. And this may be justified. A simple suggestion about being sensitive to cultural differences isn’t much help when faced with the reality that every culture is different. Indeed, suggestions about how to interview employees and intermediaries in Asia alone can be downright misleading. Asia is a big place with major cultural, religious, historical and language differences. What works in China could be disastrous in Thailand.

An exhaustive guide on the cultural nuances of compliance interviews in Thailand would require an Encyclopedia Britannica size treatise. The discussion here will be limited to a few major points.

Thailand is not Taiwan, although not everyone seems to know this. Taiwan ranks 29 and scores 63 on Transparency International’s Corruption Perceptions Index 2017 (better than Israel but worse than Chile) while Thailand ranks 97 and scores 37 (the same as Indonesia). The higher the score, the lower the perceived level of public sector perception on a 0 to 100 scale, and there is a big difference between 63 and 97. There is also a big difference between the languages, culture and history of these two countries. This is only one real-world example of Asia’s diversity.

At least one commentator has said that the federal prosecutor approach to compliance interviews is not necessarily the best one and, with apologies to former federal prosecutors, this is particularly true in Thailand. (No idea about Taiwan). Its best to start with an exchange of pleasantries and compliments. This important everywhere, but it is doubly important in Thailand. This may seem like a frustrating waste of time to a US trained lawyer, but many of the tools that are available to compel an interview or press for cooperation are simply not available in Thailand. And a polite manner matters in Thailand. Compliance interviews everywhere often require difficult questions that employees would prefer to avoid answering, and for that you need to develop a rapport with your witness. This is true everywhere, but it is particularly true in Thailand.

There is a flip side to this. Expect to be treated with an extraordinarily high level of politeness and, yes, even flattery. It may or may not be genuine. It may or may not be designed to deflect attention from relevant, and sometimes damning, facts and details. But no matter what the purpose, it is often extraordinarily effective. Even seasoned investigators are often completely oblivious to how this has influenced their own “objective” assessment of a witness.

Grenjai (เกรงใจ) complicates candor in Thailand (I take full ownership of transliteration errors). The term refers to something akin to obligation, but that definition misses its many nuances. And it is pervasive. It’s the deference a junior employee may employ when discussing a senior employee that prevents absolute candor. Thailand is a hierarchal society and expecting a junior employee to be absolutely candid about a senior employee when interviewed by a lawyer who will be returning to New York in a few days is folly. There is much more that can and has been said about this aspect of Thai culture, but there isn’t enough space to do so here. Instead, a few practical points:

1.    Language: A Thai employee of a major multi-national will likely speak some English. She or he might also be able to read and write English near fluently, but often does not understand everything, particularly idioms. And because there is a bias towards agreement and against contention, you may think an employee agrees with your summary of her or his testimony of an issue when the employee does not really understand what you are saying. And lawyers tend to employ idiomatic language more frequently when trying to summarize a complicated subject (“so the big picture here is that…”) before moving to the next.

2.    Document Preparation will be Challenge: Even when the documents are in clear English, this can be a challenge. But when they are in a foreign language that uses script most foreign lawyers have never seen before, it can be particularly challenging. What appears to be a smoking gun (an idiom) in an email because of the timing and participants involved, may actually be a heated (idiom alert) discussion about lunch plans. There are many cheap translators in Thailand, but good legal translators familiar with compliance issues are rare and never cheap. Poor translations can lead to catastrophically expensive mistakes. I have seen them.

3. Staffing the Interview: Generally there should be at least two lawyers present at the interview. In Thailand this is particularly true. At least one of those lawyers should have substantial familiarity with Thai culture and law, in many cases, be able to assist on language issues. And because Thailand does not have a robust or well-defined attorney-client privilege, one of the participants should be from a jurisdiction that does.

4. Taping the Interview: There are good reasons for not taping interviews, but they must be balanced against local considerations. One hard reason is set out in point number 6 below. But there are other “cultural reasons” pertaining to face and societal considerations that don’t exist in other jurisdictions-even in Asia. And don’t be surprised if the witness him or herself is surreptitiously taping the interview.

5.    Work Permits: Thai law has an extremely broad definition of work. It can be found here, but work is defined as “engaging in work by exerting energy or using knowledge whether or not in consideration of wages or other benefits.” And the penalties for working without a work permit can be severe, although they typically involve deportation and a fine. But that is enough to delay and add significant costs to a compliance interview. Work permit arrests are often initiated by someone with an interest in having that arrest occur. As polite as an employee may appear to be, if she or he may lost face or if some embarrassing or some incriminating information has or may come to light, you are much safer having a work permit. For short visits, this typically takes the form of a 15-day urgent work permit, which is relatively easy to procure.

6.    Defamation – Truth is Not a Defense in Thailand: An interview will result in a memorandum summarizing that interview (which will likely include the impressions and views of interviewing counsel), discussion about that interview and follow-up questions that are likely to incorporate factual matters raised during the interview. Be careful about what you say during an interview and what you write following an interview. Truth is not a defense to a criminal defamation claim in Thailand. Thai defamation laws are interpreted broadly and if a statement impugns the integrity of a person or company, that person or company can file a criminal claim directly. Private parties can prosecute claims directly (without review by a public prosecutor), and it is not unusual for private parties to file criminal defamation claims when they don’t like something they have heard or think has been said. Thai companies do and have filed criminal defamation claims against reporters and others that have made claims and statements they don’t like, particularly about sensitive subjects, such as human trafficking and corruption. Your Thai counsel will know this, and she or he will not want to be dragged into a criminal action, particularly if the party asserting the claim is thought to have “dark influence” (อิทธิพลมืด).

7.    There are No Secrets in a Thai Office: This is true, to a varying extent elsewhere, but it is particularly true in Thailand. There really are no secrets in a Thai office. Complicating matters, Thailand is sometimes ranked as the social media capital of the world. Witness should be given an Upjohn warning and specifically admonished to keep the contents of an interview confidential, but don’t simply assume that everything was actually kept confidential. Even if strong measures are taken to segregate interviewed witnesses from other witnesses, don’t be surprised if information leaks back to the office or disseminated to the public at large.  And it should go without saying that witnesses should be interviewed individually and not in groups.

8.    Connections Really Matter in Thailand: Connections matter everywhere, but they really matter in Thailand. It’s not unusual for an employee to have a cousin or uncle holding a senior position in the government. This is not necessarily nefarious, but it could be. The professional technocratic middle class is still relatively small in Thailand and it can be near impossible to find qualified staff whom do not have a relative in a senior government position. This is changing as the Thai economy grows and efforts are made to provide a quality education to larger portion of the Thai population, but it’s a risk now.

9. Employee Cooperation: Thai employees enjoy considerable protections and rights. There is no concept of “at will” employment here. If terminated, Thai employees are typically entitled to mandatory benefits, absent the most egregious of circumstances. This is one of the reasons why extra effort must be put into developing a rapport at the start with employees that will be interviewed. The threat of termination and other disciplinary measures is weak at best here.

10.    Business Practices: Thai parties sometimes engage in practices that are intended to minimize their tax liability or evade regulatory requirements. This type of conduct would often be considered unacceptable in the US. Questionable books and records do not necessarily establish an FCPA violation (but they could), and it is often difficult to know if a party is stone-walling because it fears that disclosure of an FCPA violation (or Thailand’s own anti-corruption laws) or because it doesn’t want others to know about its questionable practices under Thai tax and other laws.

11.    Red Tape Intensive: Thailand does not have a monopoly on red tape, but it seems to have more than its fair share. It has licensing and permitting requirements that you would not find or expect in the US. Many Thai regulations grant broad discretion to Thai officials. There are expectations that junior officials will provide funding for the extravagant life style of their superiors, and the combination of unnecessary regulation and broad discretionary authority gives junior officials the opportunity to provide that funding.

12.    Government Agencies and SOEs: Thailand is not China, but many businesses that would be private enterprises in the U.S. are actually state-owned enterprises (“SOEs”) in Thailand. Fortunately, it is not difficult for local counsel to identify SOEs.

13. Limits to On-Line Research: It is often impossible to conduct on-line research. Information that could be obtained in a short and simple on-line search in the US (e.g., California State Bar membership) is either not available because its considered “confidential” or requires a manual search and the cooperation of officials. Information that could be obtained with 15 minutes of work in the U.S. could take 15 days of work or more in Thailand.

14. Not all Thai Government Agencies the Same: Although Thailand fares poorly on Transparency International’s Corruption Perceptions Index, it would be a mistake to assume that all government agencies suffer from the same transparency problems. Some are much cleaner than Thailand’s rating would suggest. And some are worse. The Thai Securities and Exchange Commission, in my experience, is relatively clean. But for reasons mentioned in point number 6, the notoriously corrupt agencies will not be listed here. For that, you need to hire counsel for privileged advice or perhaps, for a high-level overview, take a look a look here.

15. Sensitivity to Reputation & Face: Many Thais are seriously embarrassed by its reputation for corruption. It’s a loss of face, and face is very important and very complicated in Thailand: it’s not just personal. Some contend that face is a form of social capital in Thai leadership. Thais also have a deserved reputation for patriotism and taking tremendous pride in their country. A visiting lawyer conducting a compliance investigation gains little and risks much by publicly highlighting transparency problems. Those who live here are already very much aware of Thailand’s transparency problems: they live with them on a daily basis. But a foreign compliance lawyer who will soon fly home to Singapore or San Francisco does not. She or he also does not face the very difficult and sometime dangerous repercussions of the full disclosure that is required in compliance investigation. Although this is not an argument for anything less than full disclosure, it is a feature of the social terrain that all compliance investigators must keep in mind.

For more information on compliance and anti-corruption issues in Thailand, feel free to contact the author directly.

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DSI Crackdown on “Nominees” under FBA?

Thailand’s Department of Special Investigation (DSI) says it plans to crackdown on the use by foreigners of proxies or nominees to “operate businesses which are normally off-limits to them [foreigners]” after the agency was given authority to investigate nine more categories of ‘special cases’, reports the 7 January 2012 edition of the Bangkok Post.  As summarized here , Thailand has expansive laws prohibiting foreign ownership of local businesses.

This same article says the DSI will also investigate various recognized trans-national criminal activities, such as human trafficking and computer crimes.  The article says so-called nominee shareholding in violation of the Thailand’s Foreign Business Act  (FBA) will also be subject to a DSI crackdown similar to a crackdown on these other, generally recognized, trans-national crimes.

Perhaps jumbling two issues together, the article quotes the DIS as saying that foreigners violating the FBA are sometimes engaged in such recognized trans-national criminal activities:

The DSI had also heard reports of a group of foreign gangsters extorting protection fees from other foreigners.

Mr Tharit said some of these foreigners had used Thai nominees to set up shell companies and used them as a front to launder money and transfer the laundered money overseas.

If so, why not directly target parties involved in these illegal activities?  Why the focus on alleged nominee shareholding?  And the article does suggest a general crackdown on alleged violations of the FBA – not merely recognized transitional crimes – by listing other, quite ordinary, business activities.

The article mentions that foreigners are involved other businesses that are “off limits” under the FBA and similar laws to foreigners, such as land-trading, mining and newspaper publishing and suggest that such businesses will also be subject to this crackdown.  As described, the crackdown will apply to all violations of the FBA through the use of alleged nominees,

To provide a sense of the breadth of such a crackdown, consider that foreign owned businesses are restricted under the FBA from providing “services” of any kind.  If, as suggested in the article, this “crackdown” extends to all businesses that are “off-limits” to foreigners, it will cover many business activities that are, in international terms, considered perfectly legitimate.

For example, the Department of Business Development (DBD) of the Ministry of Commerce interprets the term “services” very broadly.  The DBD takes the position that a foreign owned Thai company which is engaged in manufacturing (and not otherwise restricted under the FBA) cannot grant a guaranty in favor of its foreign parent company without first obtaining an alien business license because of the FBA’s prohibition on foreign owned companies providing “services”.  Since multinational companies often do need to provide such guaranties as security for loan and credit lines, this interpretation of the FBA has a chilling effect on multinational companies that plan to set up a manufacturing facility in Thailand: it complicates their ability to use those facilities as collateral for credit.

The DBD has also issued guidelines and rulings on what it calls “OEM businesses”.  The DBD’s guidelines state: “[t]he business of ‘manufacturing service’, which is the manufacturing for remuneration (a service fee) according to plans, forms or manufacturing processes from time to time specified by a hirer (in some cases the hirer may also provide raw materials) which is not the manufacturing of goods for sale in general, is considered to be an ‘other [service] businesses’ under Schedule 3 (21) of the FBA …”  In other words, the DBD contends that a manufacturer that engages in “OEM manufacturing” under this rather complicated definition is providing a “service” restricted under the FBA. Will the next maker of an iPhone or iPad want to source components from Thailand if foreign owned manufacturers in Thailand are subject to these restrictions?

And it appears that this could again raise the old battle about what constitutes a “nominee” under Thailand by characterizing legitimate business structures as illegal nominee shareholding arrangements.  The Bangkok Post’s 7 January 2012 article says that:

The law, however, has a loophole in that it does not forbid foreigners from holding a majority on the board of directors or having control over voting rights.

A loophole?  As set out this article in the American Chamber of Commerce’s magazine, T-AB, characterizing these features of the FBA as mere “loopholes” is misleading and dangerous because it suggests that revising this part of the FBA does not constitute a real change of the law – it’s merely eliminating a ‘loophole”.

In fact, changing the FBA to prohibit such practices – which the National Legislative Assembly attempted to do in 2007 – will make Thailand less competitive, chill investment in Thailand, possibly violate Thailand’s WTO obligations and would, in many situations, amount to compulsory divestiture of businesses by foreigners.  As stated at that time in a position paper by the Joint Foreign Chambers of Commerce in Thailand, amending the FBA to eliminate these “loopholes” would: “necessarily criminalize structures that are legal under current law.”

Why is Corruption so Pervasive in Thailand? Could it be the Weather?

A recent article by Reason magazine’s award winning science correspondent, Ronald Baily, describes research that suggests that it could, in fact, be the weather.   He begins:

Greater wealth strongly correlates with property rights, the rule of law, education, the liberation of women, a free press, and social tolerance. The enduring puzzle for political scientists is how the social processes that produce freedom and wealth get started in the first place

Low levels of GDP do correlate with high levels of corruption, although there is a causality problem when arguing that corruption causes poverty or vice versa. But the two are obviously related.  The relationship between low levels of respect for the rule of law and high levels of corruption is almost self-evident; indeed one almost defines the other.  A free press, unencumbered by draconian defamation laws and other restrictions on speech, also challenges corruption. So why is a free press, social tolerance, the rule of law and transparency much stronger in some places than others?

Reason magazine’s article describes research suggesting that differences in the prevalence of disease explains, or at least help explains, this difference.  The article goes on to make a point about the relationship between disease and geography that is of particular relevance to Thailand:

It is well-known that disease prevalence falls the further one gets away from the equator. Hence it is not surprising, Thornhill and Fincher say, that the development of modern democratic institutions began in high-latitude Western Europe and North America.

The entire article should be read, but it is worth highlighting one observation that seems particularly germane to Thailand:

Their central idea is that ethnocentrism and out-group avoidance function as a kind of behavioral immune system. Just as individuals have immune systems that fight pathogens, groups of people evolve with local parasites and develop some resistance to them. People who are not members of one’s group may carry new diseases to which the group has not developed defenses. “Thus,” Thornhill and Fincher write, “xenophobia, as a defensive adaptation against parasites to which there is an absence of local adaptation, is expected to be most pronounced in regions of high parasite stress.”

Thailand’s geography cannot be changed.  Does that mean Thailand is cursed by geography to forever have a high level of corruption and suffer other serious social maladies? No.

Indeed, this theory of political development provides cause for optimism for Thailand.  The article observes:

In any event, as life expectancy across the globe has increased, liberal institutions have spread. The human rights group Freedom House reports that since 1972 the percentage of free countries has risen from 29 percent to 45 percent. During that same time, average global life expectancy has risen from 58 to 70 years.

Thailand has seen even more impressive improvements in life expectancy. The World Health Organization reports that in Bangkok, for example, females have an average life expectancy of 79.7 years while males have an average life expectancy of 75.6 years.  This would have been unimaginable several decades ago.  By other measures as well, Thailand has seen tremendous strides in eradicating or at least reducing debilitating tropical diseases.

Even if this biological theory of political development is true, the tremendous improvements in longevity and overall health Thailand has witnessed over the last several decades will not, in my view, guarantee a reduction in corruption.  It may help explain, in part, why Thailand has a serious corruption problem in the first place, but other changes are needed to eradicate this problem.  I would argue that its not just the change in “attitude” that politicians of all persuasions so often tout as the solution to this problem, but rather a fundamental change to protectionist policies and laws that grant unfettered discretion to officials to act as ‘gate keepers’ to protect Thailand from questionable threats.  There is also a relationship between (a) laws and policies intended to protect entrenched local interests; and (b) corruption. But that is fodder for another post.

A Challenge that Was Inevitable

But I was surprised to see it coming from Thailand.  The motion filed by the ex-TAT Governor, Ms. Juthamas Siriwan, and her daughter, Jittisopa Siriwan (both presumed innoncent), to dismiss a U.S. indictment against them, as reported in this PriceSanond news piece, evidences a reaction to efforts by U.S., and now other countries, to more strictly enforce anti-corruption laws.

As part of an overall effort to enforce anti-corruption laws, U.S. officials are pushing the legal envelope to charge foreign officials who are believed to be recipients of illegal payments in Foreign Corrupt Practices Act (FCPA) cases.  They are using the tools they have, even if somewhat limited, to curb the demand side of international corruption.

In recent years U.S. officials have aggressively pushed the supply side of international corruption on U.S. parties that pay bribes or don’t do enough – in the eyes of U.S. authorities – to curb the payment of illegal payments under the FCPA.  Fines have sky rocketed and people are – as the former head of FCPA enforcement at the Department of Justice (DOJ) said they should – going to jail.  It’s no longer “fun and games”.

Not surprisingly, the U.S. business community has pressed back, complaining that, among other things, the playing field is uneven because their competitors from other countries don’t face anything remotely similar to the FCPA’s tough enforcement regime.   It’s still early days, but other countries are now starting to enforce their anti-corruption laws.  I don’t see that trend reversing itself.

And what about the recipients of illegal payments?  In some cases, bribes are paid to gain an advantage over competitors, but in other cases they are simply paid because they are believed to be necessary to do any business at all (on the facts alleged, this case would not appear to fall within that category).   Not surprisingly, this generates tremendous resentment.  Businesses subject to strong foreign anti-corruption laws ask: why isn’t more being done to prosecute foreign officials that solicit and accept and, in some cases, demand bribes?

It’s a fair complaint and it resonates well not only with the U.S. business community, but with the international business community generally now that foreign anti-corruption laws are starting to show some teeth.  It doesn’t seem fair to punish the payer (supply side) when a foreign official receiving a bribe (demand side) escapes punishment.

Because of limits within the FCPA, it’s essentially impossible to employ that specific law against foreign officials.  So other measures are employed.  U.S. money laundering laws are pushed to their limits, raising the question: could this be a case of bad facts creating bad law?

Other measures are employed:

  • Immigration holds that prevent suspected corrupt foreign officials from entering the U.S.
  • Detaining and searching foreign business people when they pass through U.S. airports.
  • Extraditions from outside of the U.S.
  • A proposed law that would give U.S. companies handicapped by the corrupt practices of their foreign competitors with a civil remedy against those competitors.
  • Rule of law initiatives aimed at strengthening anti-corruption laws in countries where bribes are often paid.

The vast majority of people in countries where bribes are paid suffer the most from corruption.  They are the ones who are most damaged by corruption, although they sometimes don’t appreciate the role corruption plays in impoverishing their society. But that is changing too.  NGOs and more proactive journalists are helping to make the connection between corruption and the harm it causes.  When government officials spend millions, if not billions, on a product or project that doesn’t seem to do anything or is grossly over-priced, it often garners front page news now and questions about which government officials benefitted from the deal.

The pressure on the supply side will continue.  The U.S. may lose a few procedural skirmishes, but the trend to increase pressure on curbing the demand side of corruption will continue.  We may hear cries about ‘neo-colonialism’, but, in the end, those cries will be recognized for what they really are and fall on deaf ears.  Only a very few in countries with corruption problems benefit from corruption; the vast majority are victims.  They pay taxes that are siphoned off to vested interests or sometimes, when safety standards are compromised in an effort to make a profit, they pay with their lives.

It’s still early days – just like it was early days when the DOJ and U.S. SEC started to more aggressively enforce the FCPA in the U.S. in the mid part of the last decade – but we will see more pressure to curb the demand side in the form of enforcement actions and, perhaps, new laws to address gaps in existing laws.  We’ll also see press-back in response to these efforts to curb the demand side of corruption and plenty of skirmishes along the way.

NBTC Notification Restricting “Foreign Domination” – Some Context

It’s hard to see what sort of involvement by a foreigner in Thailand’s telecommunications sector is not up swept into the notification restricting “foreign domination” over Thailand’s telecommunications businesses recently issued by the acting National Broadcasting and Telecommunications Commission (NBTC).  The NBTC’s notification goes far beyond the restrictions found in Thailand’s already expansive Foreign Business Act (FBA).

As reported in this PriceSanond News piece, the acting NBTC recently issued a notification restricting “foreign domination” over telecommunications businesses.  It was published in the Thai Government Gazette on 30 August 2011 and became effective the following day, 31 August.   The notification applies to all current holders of and applications for Type-2 (with network) and Type-3 licenses, meaning that it applies to companies that currently operate a business based on a permission, concession or contract with CAT or TOT. In other words, it applies to current participants in the telecommunications sector. The notification lists the following ten examples of what the NBTC claims is “foreign domination” of a telecommunications business:

1. direct or indirect share holding by foreigners or foreigners’ agents;

2. use of apparent agents (nominees);

3. holding of shares with special voting rights;

4. participating in appointing or having control over the board of directors or senior officers of the licensee;

5. a financial relationship such as having a corporate guarantee or a loan with a lower-than-market interest rate;

6. licensing or franchising;

7. management or procurement contracts;

8. joint investments (by a licensee and foreigners);

9. transactions involving transfer pricing; and

10, any other behavior which provides direct or indirect control to a foreigner over a licensee.

“…any other behavior…”  That catch-all phrase seems about as expansive as you can get.

So Why Issue this Notification Now?

Just a hunch, but the Thailand’s telecommunications sector is lucrative, and the competition has become fierce.  The relationship between Thailand’s second largest telecommunications carrier, DTAC, and its third largest telecommunication, True, has been particularly contentious.  And of course time is running out for this NTBC: new members are supposed to be appointed to the NBTC this Monday.

But first some more background:

In April of this year, DTAC challenged a deal between True and CAT Telecom public limited company (CAT) in Thailand’s Central Administrative Court.  CAT is a state-owned company that runs Thailand’s international telecommunications infrastructure, including its international gateways, satellite, and submarine cable networks connections.  CAT was formed out of a government agency and is often still thought of as a government agency.

At that time, the Bangkok Post reported that Somkiat Tangkitvanich, the vice-chairman of the Thailand Development Research Institute (TDRI), “said the deal amounted to a ‘pseudo-concession’ and should be investigated for compliance with the law.”

About two months later, in mid-June, “True Move…filed a criminal complaint against its bigger rival DTAC for having a foreign state enterprise as a major shareholder, which it claims is a violation of the Foreign Business Act”, reported the Bangkok Post.  The Bangkok Post went onto report: “True Move has no plan to file a complaint against Advanced Info Service even though the mobile market leader also has a complicated shareholding structure, said Athueck Asvanont, vice-chairman of parent True Corporation.”  Interesting.

And filing this criminal complaint, of course, had nothing to do with the complaint which DTAC earlier filed with the Central Administrative Court over what the TDRI’s Somkiat Tangkitvanich said amounted to a “pseudo-concession“.  The Bangkok Post reported in this same article that True’s Athueck “rebutted the claim that the petition represented retaliation against DTAC for filing a case with the Central Administrative Court seeking to scrap the contentious deal between CAT Telecom and True Corporation.”

Several weeks later, the Ministry of Commerce (MOC”) announced that DTAC appeared to be employing an illegal nominee structure in violation of the FBA. This development was summarized on this blog here.

Row Within MOC on FBA Claim Against DTAC

As blogged here and reported in the Bangkok Post, in early July, shortly after the elections but before a new government was formed and appointed new ministers, there was a row within the MOC itself about how to handle the matter.  The Bangkok Post provided this description of the row:

The head of the Business Development Department is challenging his boss’s order for the department to take legal action against DTAC on its nationality, saying the instruction is a “direct political intervention” and “illegitimate”.

The department, a unit under the Commerce Ministry, insisted on submitting its committee’s original findings to the police and ask them to determine whether the law had been broken, and if so, to take further action.

The move openly challenges Commerce Minister Alongkorn Ponlaboot, who had yesterday demanded that Banyong Limprayoonwong, director-general of the ministry’s Business Development Department, press the charge against DTAC. “He [Mr Alongkorn] has no authority or obligation under the Foreign Business Act (FBA) to force me to accuse a company of being foreign-owned,” Mr Banyong said.

“Mr Alongkorn’s decision cannot be regarded as a government policy. It is a direct political intervention,” Mr Banyong said

Shortly afterwards a new government was formed.  The old ministers were replaced with new ones.  And the FBA case appears to have drop off the radar (for now at least).

What about the NBTC and its Notification?

The NBTC which issued the notification restricting “foreign domination” in telecommunications businesses is also about to be replaced with new members. Its members were also appointed before the July elections.  The NBTC’s notification on “foreign domination” of telecommunications businesses was published just one week before new members are supposed to be appointed to the NBTC.  As expained here:

The Thai Senate is scheduled to select members of the National Broadcasting and Telecommunications Commission (NBTC) this Monday, 5 September 2011.  The current acting NBTC recently issued a controversial notification restricting “foreign domination” over telecommunications businesses shortly before the Senate was scheduled to select new members.  The Bangkok Post reports that the selection process has been “punctuated by fierce lobbying”.  If the Senate fails to select members of the NBTC by 11 September, the cabinet then appoints members to the NBTC, reports the Bangkok Post.

“Fierce lobbying” for seats on what would be a rather pedestrian regulatory body elsewhere?  The Senate has the first shot at appointing new members to the NBTC.  But if they are unable to do so by 11 September, the new Thai cabinet is supposed to make the appointments.

What this Means for Thailand: the Larger Picture

Leslie Lopez, a writer for the Straits Times Straits Times in Singapore, recently made the following observations:

Thailand’s manufacturing sector is one of the most robust in the region because of liberal foreign investment rules, and that in turn has made the country a regional hub for industries such as car manufacturing and electronics.

But the services sector is highly regulated in favour of local groups.

Thailand also ranks as one of the last countries in the region to fully deploy advanced wireless technology, largely because of the absence of a regulatory agency with the necessary clout to rein in the powerful state enterprises and push ahead with the licensing of new services.

As a result, the country continues to suffer from a lack of foreign investment in the sector.

***

“The setting up of the NBTC will get the reform process going. That is key,” says investment analyst Thitithep Nophaket, who covers the telco sector for Phatra Securities in Bangkok, referring to the new watchdog body.

Yes; setting up an NBTC that is not beholden to any business interest is important.  Eliminating or at least curbing laws that can be used to take out effective foreign competitors would also help.  Let’s see if it happens.

Will Thailand Ever Ratify ICSID? And Why it Should.

ICSID, the acronym for the International Centre of the Settlement of Investment Disputes, is “an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the Convention) with over one hundred and forty member States.”  It provides a forum and has rules for arbitrating disputes between foreign investors and countries.  It covers disputes similar to the one we saw between Walter Bau and Thailand recently.

Indeed, the bi-lateral investment treaty (BIT) between Germany and Thailand that Walter Bau employed to commence arbitration proceedings against Thailand provides that if “both” countries become parties to the Convention, investment disputes will be arbitrated under ICSID rules rather than the rules set out in Article 10 (3) of that treaty. This provision might as well have said: “if Thailand (finally) becomes a party to the Convention”, since Germany is already a party to the Convention.

At least 147 countries have ratified ICSID.   China is one of them.  Virtually every developed country (except Canada?) and the vast majority of less developed countries have ratified the Convention.  A few countries, such as Namibia and the Russian Federation, have not.  Thailand signed the Convention on 6 December 1985, but has not yet ratified the Convention?   Why?

To be fair, some commentators claim that ICSID and BITs containing investment protection provisions unfairly override the ability of countries, particularly less developed countries, to exercise their regulatory powers.  To be honest, I have never seen ICSID or a BIT prevent a country from legitimately exercising its regulatory powers.

The irony here is that Thailand is already a party to at least 30 treaties that contain some form of arbitral requirement for investment disputes.  They don’t seem to have deterred Thailand from exercising its regulatory powers.  They have created a hodge-podge of inconsistent obligations on the treatment of foreign investors.

Further, even though the Thai government has been reluctant to agree to arbitration of investor disputes, in some matters it is already obliged to arbitrate investment disputes. (The lesson for investors here is simple: look beyond your contract to possible treaty obligations.)  And because arbitration under a BIT is generally subject to ad hoc rules, that arbitration “is subject to the rules of the arbitration law of the country where the tribunal has its seat.”   The Walter Bau matter arose out of Swiss arbitral proceedings.

As Christoph Schreuer observed in The Dynamic Evolution of the ICSID System:

Compared to ad hoc arbitration, the ICSID Convention offers considerable advantages: it offers a system for dispute resolution that contains not only standard clauses for arbitration and rules of procedure but also institutional support for the conduct of proceedings.

Because of these advantages and, quite frankly, the prestige and integrity of ICSID, arbitral proceedings under ICSID also provides a level of perceived legitimacy that ad hoc arbitration lacks.  When a recognized and well-respected international body such as ICSID administers arbitral proceedings, it’s easier for a government to explain why the award must be paid and fend off misinformed domestic complaints about honoring an unfavorable award.

Those advantages did not exist in the Walter Bau matter.  And, because of what occurred in the Walter Bau matter, I suspect it is even less likely now Thailand will ratify the Convention and join ICSID.  There is further irony here since, if Thailand had adopted ICSID, I suspect that it would have been much easier to pay the award in the first place and thereby avoided the domestic controversy we saw when Walter Bau tried to enforce the award.

The Peculiar Local View of Arbitration

When reporting on disputes subject to arbitration, the Thai press typically says or suggests that the arbitration proceedings are, as a matter of common practice, subject to some form of automatic and independent de novo review by a court.  This is particularly true when the local press is reporting about disputes with the Thai government, but you also see this in reporting about commercial disputes between private parties.

The recent case involving the Boeing 737 in Munich was just an example of this practice in the context of a dispute with the Thai government, made more unusual by the extraordinary claim that a Swiss arbitral award could be directly challenged in a U.S. Court.  More recently, in a description of the dispute between DTAC and CAT, the Bangkok Post reported: “If the arbitrator rules in favour of CAT, DTAC can appeal to the Central Administrative Court.”

Is this how arbitration really works?  Not at all, but reading the Thai press you could be excused for thinking otherwise.  This is not the international practice and it is not even supposed to be the practice in Thailand.

The Thai government does seem to be reluctant to agree to arbitration in the first instance, but once it agrees, it should not object to arbitration and should comply with the arbitral award, absent extraordinary circumstances.  This is basic.

Thailand is one of the original signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention, and the New York Convention provides very limited grounds for refusing to enforce an international arbitral award.  Thailand is not alone in agreeing to the New York Convention.

At least 144 other countries are signatories to the New York Convention, including every major trading partner of Thailand.  The domestic legislation that signatories to the New York Convention enact and the policies they following in recognizing and enforcing international arbitral award may vary somewhat, but this idea that arbitral awards are somehow subject to automatic judicial review is very peculiar.

Parties do go to the court, but in the U.S. a motion to vacate an arbitral award may be heard only in the courts of the country where the arbitration occurred or in the courts of any country whose procedural law was specifically invoked in the contract calling for arbitration of contractual disputes.

When parties do go to court following issuance of an arbitral award, this typically only occurs to have the arbitral award recognized and enforced.  And for obvious practical reasons (cost and inconvenience), this generally only occurs when a party fails to comply with an arbitral award.  Even in China:

…if an Intermediate People’s Court intends to turn down an application for enforcing an award of a PRC foreign related arbitration commission or a foreign arbitration award, it must refer the application to the Higher Court for review before making the decision. If the Higher Court is of the same view as the Intermediate People’s Court, it must further refer the application to the Supreme Court at Beijing and no decision should be made until the view of the Supreme Court is sought. This practice assists to alleviate the concern of some foreign parties that awards may not be enforced in China due to local protectionism, especially if the losing party is a state-owned enterprise.

But what about this notion in Thailand that arbitral awards are subject to automatic review by a court?  There were proposals to change Thai law to prohibit arbitration between private parties and governmental agencies, but those proposals were never enacted.  And there is no general provision of law providing for automatic de novo review of arbitral awards by courts, administrative or otherwise.

Could these be a feature of a contract between a private party and the Thai government?  If so, I have never seen such a provision providing for judicial review following arbitration.

In negotiating contracts with government agencies, I have encountered strong resistance to agreeing to any form of arbitration at all.  And in negotiating contracts on behalf of foreign parties with local commercial parties in Thailand, I have sometimes encountered reluctance to  agree to arbitration outside of Thailand. But I have never seen anyone even suggest a clause providing for automatic judicial review of the arbitration.

In the U.S., the courts do not permit a direct appeal of an arbitration award to an appellate court even when the parties have agreed to such a procedure. Johnson v Well Fargo Mortgages, Inc. An agreement for judicial review on the merits of an arbitral award runs contrary to the very purpose of arbitration. It is well established that:

The number-one benefit of arbitration is that it serves as a forum to resolve disputes outside of the judicial system. Arbitration can be fast, quick and easy, whereas lawsuits can drag on for years and years.

So why does this idea that arbitral awards should and commonly are subject to appeal persist in Thailand?

FCPA Compliance Work Just Got Harder in Thailand

Thai laws are not unique in creating perverse incentives that lead to unintended and unwanted consequences.  On 21 July 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. The Dodd-Frank Act primarily introduces major changes in the regulation of the financial services industry, but it also permits “whistleblowers” (click on this link for background on this part of the Frank-Dodd Act) in Foreign Corrupt Practices Act (FCPA) and securities fraud cases to claim a 10% to 30% reward in enforcement actions where the penalties recovered exceed U.S.$1 million.  Was this good policy or not?  I can see arguments on both sides of this issue, but I have major reservations and fear this could be a serious mistake.

We have seen how the Thai Customs Department’s bounty system creates perverse incentives in the enforcement of Thai Customs laws.  Is there something here for U.S. regulators to learn from Thailand?

The bounties from several recent high several high profile FCPA cases would have exceeded 100 million dollars.  As James Tillen, George Clarke, and Kevin Mosley from Miller & Chevalier reported in Corporate Compliance Insights:

If a Siemens whistleblower had been eligible for the 30% reward proposed in the current draft of the legislation, he or she could have received a windfall of $496 million.  In the 2009 case against Kellogg Brown & Root (KBR) and former parent company Halliburton, the DOJ imposed a $402 million fine and the SEC assessed $177 million in disgorgement, for a total of $579 million in penalties.  The windfall for a whistleblower in that case could have totaled $173 million.

By contrast, consider the relatively “meager” incentives the Thai Customs Department offers tipsters.  Consider the results of that incentive system.  Imagine the possibilities here.

In a recent New York Times article, Sean McKessy, chief of the new S.E.C.’s whistle-blower office, said: “The program “will strengthen our ability to carry our mission and it will save us much time and resources in the process.”  Mr. McKessy is quoted in this same article as saying the small agency: “has already received an uptick in quality tips, including lengthy letters laying our elaborate schemes.”  The agency has a new website here with easy to follow instructions on how to submit tips.

If you don’t want to complete the form or if you are concerned about the repercussions of submitting a tip directly, simple Google “FCPA whistleblower” and I am sure you will have no problems finding one of several U.S. firms that will happily help in submitting a tip.  The rewards are great.  I ran this same search several times here in Thailand and each time I found several such firms on the front page of my Google search results.

The United States Chamber of Commerce is not happy about this (please do not confuse AMCHAM Thailand with the U.S. Chamber of Commerce, although I personally sympathize with their concerns on this issue).  According to the New York Times, David Hirschmann, president and chief executive of the Chamber’s Center for Capital Markets Competitiveness says:

In approving this new whistle-blower rule, the S.E.C. has chosen to put trial lawyer profits ahead of effective compliance and corporate governance…This rule will make it harder and slower to detect and stop corporate fraud.

The dig at “trial lawyer profits” is a cheap dig, but he has a point.  It’s early days, but having been involved in several internal FCPA investigations here, having seen how the Thai Customs incentives work in practice and now seeing the early signs of how the whistleblower program is being promoted on the internet, I think its a strong point.  There are other troubling signs.

A whistleblower doesn’t need to report violations internally in order to obtain a reward.  The FCPA Blog comments:

Whistleblowers will run to the SEC whenever there’s a whiff of overseas bribery. They won’t talk about it with their bosses inside the company first. Why should they? That would be like giving away a lottery ticket. And why expose themselves to retaliation? If they go straight to the SEC, they’re immune from corporate discipline. So they’ll go to the feds, taking with them as many internal emails, audit documents, and bank records as they can carry.

I hope I am proven wrong, but my hunch is that this new development will make FCPA compliance work harder, much harder, here in Thailand.  I have seen how things tend to work here and the incredible challenges that foreign companies already face in places such as Thailand.  Stifling the supply side is important, but we really need to see more action curbing the demand side.

Diageo – Victim or Perpetrator?

The Thai press has reported  extensively on the settlement reached between the major multinational alcoholic beverages company, Diageo plc, and the U.S. Securities and Exchange Commission (SEC) after Diageo self-reported violations of the U.S. Foreign Corruption Practices Act (FCPA). Most of the coverage seems to consist of speculation – or perhaps “hints” is the better word – about the identity of the “Thai government official and foreign political official” retained by Diage to provide “lobbying services…in connection with several important tax and customs disputes that were pending between Diageo and the Thai government”.  This is understandable.  The SEC’s Order (in particular, pages 5 and 6) instituting the claim, imposing a cease and desist order and civil penalties provides plenty of hints.  Fingering the ‘bad guy’ makes for simple and exciting press.

But there is another, more fundamental, issue here: why is it that some Thai agencies seem to attract more than their fair share of corruption cases?  “Bribery is particularly concentrated in a few governmental sectors in charge of large financial transactions: the Land Department, Tax and Customs Department, the Transport Department, and the Police Department”, according to the Business Anti-Corruption Portal’s report on Thailand. The Diageo matter involved the Customs Department, and that is not surprising.

The Bangkok Post reports that: “Numerous business surveys have placed the Customs Department at the top of the list of government agencies with serious corruption and transparency problems.”  A large part of the problem at Thai Customs is the incentive system for rewarding tipsters and Customs officials who uncover alleged violations of Thai customs laws.  The Bangkok Post reports:

Previously, officials would get cash rewards of 25% while outsiders would get 30%. However, there were no ceilings. There were cases involving billion-baht shipments where the rewards would be staggering. This led to officials spending too much time trying to find fault with shipments.

Reform in the form of reducing numbers has been the approach, but many question if reducing ‘the take’ rather than changing the underlying policy is really effective. Many also ask why such a system was allowed in the first place; the Bangkok Post reports: “Pornsil Patchrintanakul, the deputy secretary-general of the Board of Trade says the cash rewards should have never existed.”

And why allow any form of pernicious incentive system like this to continue even if the incentives are more modest? Another Bangkok Post article reports: “Even capping the ceiling of each case at 5 million baht might not solve the problem.  For shipments of larger value, officials could simply break them down into smaller cases that meet the 5-million-baht limit.”   The prior Bangkok Post article provides part of the answer about why real reform is so difficult:  “A senior Finance Ministry official said there once was a proposal to abandon the reward system but there was serious opposition from the Customs Department.”

But another, less reported, legal ruling highlights the flaws in Thailand customs law regime: the WTO Ruling and WTO Appellate Body ruling in the Philipp Morris case.  The WTO case concerned the valuation of imported cigarettes, but the fact that the imported products in this particular WTO case were cigarettes should not divert attention to its more important findings.  The rulings by the WTO panel and a WTO Appellate Panel are far more important for what they say about the rule of law in Thailand.

The WTO not only found that Thailand failed to comply with its international obligations in setting values for these imported products for tax purposes, but also that: “Thailand…fail[ed] to publish laws and regulations pertaining to the determination of a VAT for cigarettes and the release of a guarantee imposed in the customs valuation process.”  It is may be hard to garner sympathy for a cigarette producer, but this case was not about protecting the Thai public from cigarettes.  How is any company importing goods into Thailand supposed to do business when its imports are subject to unpublished laws and regulations?

If the subject matter of the dispute, cigarettes, is still a concern, consider this from the WTO: “Philippines challenged the Thai government system under which certain government officials simultaneously served on the board of TTM, a state-owned domestic cigarette manufacturer.”  This wasn’t a public health issue.  It was a trade issue pure and simple.

But even more troubling, according to the WTO’s summary of the case: “[t]he Panel also found that Thailand acted inconsistently …by failing to maintain or institute independent review tribunals or process for the prompt review of guarantee decisions.”  No independent review of decisions made by officials with strong financial incentives to find violations?

This is not about cigarettes or even about the alcoholic beverages that Diageo produces and imports.  It’s about the rule of law.  And the inevitable friction between: (a) legal regimes that permit officials to exercise unfettered discretion when identifying violations pursuant to unclear – or here – unpublished regulations; and (b) and increased enforcement of foreign anti-corruption laws.  Clashes are inevitable.

The U.S.’s FCPA prohibits the payment of bribes to gain a business advantage.  In US vs Kay the fifth circuit held that prohibited payments (illegal bribes) not only include payments to obtain, say, government concessions or contracts, but also include payments made to reduce import duties and reduce taxes if they are made to obtain an unfair business advantage.  But what if they are simply necessary to even do business at all in a particular country?

This feature of the FCPA and other foreign anti-corruption laws puts businesses, particularly foreign businesses, in a very awkward position when they have to deal with less than transparent foreign government agencies.  It often places companies doing business in those jurisdictions with few, if any, legitimate options.  And it is not limited to only the Thai Customs Department.

What might be characterized in the U.S. as payment made to obtain an “unfair” business advantage is often seen as a necessary payment so as even to be able to do business.  It doesn’t provide the business with an unfair business advantage.  It is often simply seen as an unsavory requirement for doing any business at all in some jurisdictions.

This is not a justification for such payments and I am not involved in or familiar enough with Diageo’s situation to say if that is what happened here, but this clearly does happen in practice in Thailand.  More developed countries are more aggressively enforcing their own anti-foreign corruption laws, and this is a positive development.  But the increased enforcement on the supply of the corruption problem must be matched by increased reform on the demand side.

Laws that provide unfettered discretion to officials and provide for little or no independent review on how such discretion is exercised are big part of the problem on the demand side.  As long as local vested interests can use such laws to tilt the playing field in their favor, they will do so.  And in doing so, they undermine local economies, create business environments conducive to corruption and – this is often missed – generate friction with the increasingly robust anti-foreign corruption regimes of more developed economies.  And because these uneven playing fields place foreign companies subject to regulation in countries with robust foreign anti-corruption laws in impossible situations, these same foreign companies will, naturally enough, often press harder for serious enforcement of international conventions and obligations that are designed to level the playing fields.

Aggressive efforts to enforce rights and obligations under the WTO, the UN Convention, the New York Convention and other international treaties and conventions will play an increasingly important role in efforts to level the playing field going forward.   We are now only seeing the early signs of this.

Walter Bau vs. Thailand: A Funny Thing Happened on the way to the Second Circuit

Confirmation of Arbitration Award – 14 March 2010

When Walter Bau sought confirmation of the Swiss arbitral award in the US with the US District Court in New York, Thailand opposed that petition on two grounds: (1) the “arbitrability” of the award (discussed in the prior blog post); and (2) forum non conveniens.  The doctrine of forum non conveniens applies when the forum is oppressive and vexatious – totally inappropriate.  Thailand argued the US was an oppressive and inappropriate forum to address any issues relating to the arbitration award.

“Thailand strongly asserts that the Parties and the disputes lack of contacts with the United States, coupled with the facts that Thailand has no assets in the United States, favors strongly in favor of dismissal”, said the US District Court.  The US District Court seemed to show some sympathy to this argument, saying: “Thailand is correct that a lack of assets is a factor that weighs in favor of dismissal”.

But the US District Court also said that Walter Bau: “disputes that Thailand has no assets in the United States and that any search of assets should be the product of post judgment discovery.”  Citing other reasons as well, the US District Court confirmed the Arbitral Award against Thailand on 14 March 2010.

Boeing 737 Seized in Germany – 12 July 2011

On 12 July 2011 a Boeing 737 is seized in Germany pursuant to a court order Walter Bau’s liquidator obtains to enforced the arbitration award.  Later that week, in Thailand, news of this seizure appears in the press and the Thai government claims the seizure was improper because the jet did not really belong to the Thai government.

When asked why Thailand had not paid the arbitration award in the first place – after all, if it had been paid, there would have been no seizure of the plane – the press describes the Thai government’s response as follows:

The prime minister said a separate legal battle between the German company and the government was underway in New York, and that the Thai side was going to file an appeal with a court in the United States on July 29. Therefore, he said, there should have been no urgent need for German authorities to impound the plane.
“Thailand is ready to follow the final court verdict [the appellate court in the US] even if it means we will have to pay the money. The government will not escape from the responsibility. Besides, we have lots of assets,” he said. http://www.nationmultimedia.com/home/Kasit-seeks-a-meeting-with-German-deputy-FM-over-i-30160380.html

But wait a minute?  Hadn’t Thailand previously argued that United States was the wrong forum for deciding the dispute?

Thailand Files it’s Opening Brief – 28 July 2011

In one short sentence of its 71 page opening brief, Thailand announces it is dropping its challenge on forum non conveniens grounds.  Thailand now has no objection to the US Second Court of Appeals addressing their argument (summarized in the blog post above) that – under US law – the US District Court should conduct a de novo review the “arbitrability” of the dispute.  Thailand also, of course, also acknowledges that: “The New York Convention affords the district court no power to vacate the Final Award [the arbitration award that is supposedly on appeal], and Thailand did not ask the district court to do so.”

But isn’t this curious?  First, Thailand says the US is totally inappropriate, oppressive no less, for deciding any part of this dispute.  But after the airplane seizure in Germany  and questions are raised about why Thailand had not paid the award in the first place, Thailand argues it was not obliged to pay because the matter is still on appeal in the US.  And then, in it’s opening brief, Thailand drops its objection to having the US courts address any part of this dispute.