Category Archives: Business development

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.”

Advertisements

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.

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.

Early Comments on the FBA Investigation into DTAC

The Bangkok Post reported that the Ministry of  (“MOC”) issued a 35 page report addressing claims that DTAC is an “alien” under the Foreign Business Act (FBA): “Commerce Ministry investigators have made a preliminary finding that some Thai nominees hold shares on behalf of foreigners in the mobile firm DTAC”. (http://www.bangkokpost.com/business/telecom/245480/dtac-probe-finds-nominees)

That report was to be forwarded to the Royal Police, but more about that below. Continuing with the Bangkok Post report: “Mr. Yanyong [of the MOC] said the preliminary investigation had found some Thai shareholders were nominees for foreign groups led by Telenor, a Norwegian state enterprise.”  In other words, this case turns on the so-called “nominee shareholder” prohibition contained in FBA Section 36, as we originally suspected.

The report is not public and it’s early days, but we can make a few observations and comments about this matter.   For example, what the MOC’s “findings” do and do not mean.  And what they suggest about the MOC’s views on what constitutes nominee shareholding under FBA Section 36.

First and foremost, the MOC’s findings, preliminary or otherwise, are not law.  We are a long way off from anything that can remotely be considered law.  Even if this matter gets to the Royal Police, they actually investigate the matter and they decide some of the Thai shareholders are nominees, that finding by the police and anything the police decided is also not law.  The matter must still go to the prosecutors who must then decide if they want to prosecute.  And if they do prosecute and a Thai Court reaches a substantive decision, there are the inevitable appeals.

A comment, reported in the 8 July 2010 edition of the Bangkok Post (http://www.bangkokpost.com/business/telecom/246011/political-appointee-asserts-role), appears to confuse this point:

Sanya Sathirabutr, a political adviser to Alongkorn Ponlaboot, a Democrat MP and acting deputy commerce minister, said yesterday his investigative team had the authority to decide the nationality of the company and hoped to make a decision by Monday.

Not quite.   If it gets that far, that decision will need to be made by a Court.

But even if the MOC’s findings are not law, they are important.  The press reports give us a glimpse into the MOC’s thinking on this matter.  “‘We have no authority to ask for the financial documents. We need to pass on the duty to the Royal Police instead,’ he [an MOC official] said.”  He appears to be referring to alleged loan arrangements with some of the Thai shareholders.

In practice, when making inquiries about possible nominee status, the MOC looks for evidence of the financial ability of Thai shareholders to fund an acquisition of shares with their own money.  A simple review of bank statements is generally conducted at the company registration stage.  The alleged focus on loan agreements in the DTAC case goes beyond this, but it is consistent with our general theory about what, in the MOC’s eyes, distinguishes genuine investors from nominee investors: evidence that the Thai investor had the ability to and did in fact fund an investment with his or her own funds.

From an administrative perspective, you can see why this approach is attractive.  The so-called “nominee” provision found in Section 36 turns on intent: why did this Thai investor buy these shares?  Did he do so as a genuine investor or as a nominee of foreigners?   MOC officials cannot read minds, but they can read financial statements.  Whether that, by itself, is sufficient and how those records should be read is another matter – a matter that also has not yet been decided.

And the there must also be a prosecution.  FBA Section 36 is a penal provision providing for, among other things, imprisonment of up to three years.  From a prosecutor’s perspective, absent an unequivocal admission from the Thai investor (say, a written deed of nominee shareholding signed by the Thai shareholder), how do I, the prosecutor, prove this investor intended to help foreigners circumvent the FBA?  If the Thai shareholder says he is a genuine investor, how do I prove otherwise?

This case, if it proceeds, will need to address these and many other difficult questions.  It will be interesting.

Guaranteed Cheap, Easy & Absolutely Legal Ways to Get Work Permits & Immigration Visas

Just kidding.  The second biggest headache for most foreigners wanting to do business in Thailand is almost certainly work permits and visas.  There are numerous sources on the web that provide or purport to provide the latest work permit and immigration information and services at the lowest possible cost.  This isn’t one of them.

Instead, we’ll explain why we think this is such a major headache for foreigners in Thailand.  In large part we see two main reasons (there are others).

The first reason involves an extraordinarily broad definition of a legal term that provides officials with tremendous unfettered discretion, a recurring theme in Thai law.  Here, the problem lies in the broad definition of the term “work” under Thai work permit law.  The term work is defined as “engaging in work [seems rather circular at this point, but it goes on to provide the definition as] exerting energy or using knowledge whether or not in consideration of wages or any other benefits.”

Read that definition again.  It specifically says you are engaged in “work” even if you are not getting paid.  It’s hard to see what this definition doesn’t cover.

This definition is broad enough to even include attendance at business meetings, making pitches for products and services and short stays of only a few days to render services or inspect factory sites.   If you walk through the business centre of any major Bangkok hotel, most of the foreigners in that business centre are almost certainly engaged in activities that constitute “work” under Thailand’s work permit law.  And we suspect that few, if any, of those foreigners know they are supposed to have work permits, let alone have them.

Will they get arrested?  Unlikely.  We have never seen the authorities randomly raid the business centre of a five star hotel looking for illegal foreign workers.  Could they get arrested?  That’s a very different question.

It’s not just at hotel business centre that you’ll find foreigners violating Thailand’s work permit laws, but also at offices and factories across Thailand.  Thailand’s travel industry wants to increase business tourism by hosting conventions and seminars.  This makes sense: Thailand is a great place for business events and these sorts of events attract ‘quality’ tourists, the holy grail of the TAT.

But the vast percentage of foreign short-term business visitors to Thailand violate Thailand’s work permit laws.  And this is not a trivial offense.  The law, as it is written, says that foreigners violating work permit laws can be imprisoned for as long as five years.

Even if five year prison terms are not the norm (they aren’t), you would think that the combination of (a) a need for and desire to have foreigners visit Thailand for these short term business purposes, (b) the broad definition of the term “work” and (c) the draconian penalties for engaging in work without a work permit would lead to an easy, hassle free process to routinely grant approval to engage in such “work” upon arrival at the immigration counter with a simple visa stamp.  It’s a no brainer.

But you’d be wrong, and the reason lies in second major problem with Thailand’s legal infrastructure.  Immigration authorities simply cannot grant work permits.  A completely different agency in a separate ministry issues work permits: the Alien Occupations Division of the Ministry of Labour.

This means that a “B” class visa does not allow foreigners to engage in short term activities such as meetings and inspections because such activities constitute “work” under Thailand’s work permit law.  It’s almost seems deceptive, doesn’t it?

The law is so counter-intuitive that it creates an environment where you’d be surprised if any foreigners actually comply with the law.  And that creates opportunities for selective enforcement.

But it goes beyond short business visits.  It also helps explain why the process of getting long term visas and work permits can be so complicated.  This is often why foreigners seeking work permits and visas need to run around to different government offices getting different documents and approvals.  There are websites and forums that thrive because they provide foreigners with a place to vent their frustrations about the whole process.

Many foreigners don’t even bother.  They keep their heads down and hope they don’t get caught.  Enforcement in this area is selective and seems to really depend upon whether someone has an interest in having you arrested.  That someone could be a competitor, a disgruntled former employee, a difficult debtor or a jilted lover; the possibilities are endless. The laws in this area create perverse incentives for non-compliance, evasion and corruption.

This is bad in terms of achieving whatever policy objectives Thai work permit and immigration laws are intended to achieve.  (We can imagine some legitimate policy objectives.)  And it leaves many foreigners vulnerable to selective enforcement.  It’s a lose/lose policy.

Why?  We don’t think, as some suggest, it’s a conspiracy against foreigners, although we appreciate why it often seems like one.  Rather, a large part of this problem exists because two different ministries and departments with different bureaucracies that are often controlled by different political parties with competing agendas make and implement the rules and regulations for work permits and immigration.

But what about the BOI’s “one-stop-shop”?  It does streamline the process of getting visas and work permits, but that is not because one agency is handling the process.  Instead, it is more streamlined because officials from two different agencies are present at the same place to process work permits and visas.  And regulations have been promulgated so that, ideally, they work together and don’t try to trip each other up.  It generally works (a pleasant surprise), but it’s only available to some foreigners.  More important, the mere fact that a one-stop shop is needed to solve this problem also serves to demonstrate the fundamental nature of this problem.

Thai ministries and departments are generally fiefdoms unto themselves.  They often compete with each as if they were fierce business rivals.  Often they are fierce business rivals.  We’re not criticizing the BOI’s one stop shop.  Indeed, it’s a wonder that there is a BOI one-stop shop.

But the BOI’s one-stop shop doesn’t solve all of the headaches created by these two fundamental problems with Thailand’s system of regulating foreigner workers and granting visas so that foreigners can be in Thailand when performing such work.  It helps some, but it doesn’t cover everyone, and it doesn’t solve the underlying problem.  If it did, you wouldn’t see advertisements for work permit and immigration service providers, many of them obviously dodgy, virtually every time you do Google search with word “Thailand” or take a stroll along Sukhumvit.

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

What is Illegal Nominee Shareholding under the FBA?

There is no simple and clean answer.  To start, even though news reports, journals and blogs (including this one) use the term “nominee”, that word does not appear anywhere in the Foreign Business Act (FBA), let alone the relevant provision of the FBA, Section 36. FBA Section 36 refers to Thais “aiding and abetting…by holding shares on behalf of foreigners…in order for foreigners to operate a business in violation of the [FBA]…”

The word “nominee” is shorthand for the much more complicated language of Section 36, and it is useful shorthand in many ways because it does help capture parts of this provision of the FBA.  But it is also misleading in some ways because it implies certain concepts (such as trusts) that don’t work well in Thai law (more about that later).

Whenever there is a reference to “aiding and abetting”, you know that intent matters.  Here, you not only need to look at the intent of the shareholders, but also the intent and precise language of the law itself.  This is a criminal provision, and criminal provisions should be and are construed narrowly.  This means you look at the actual language of Section 36, not the “spirit” of Section 36.  You don’t commit crimes by violating the “spirit” of a law (assuming there is such a thing); you commit crimes by intentionally violating the express provisions of a law.

When you look at the history of this law (previously summarized on this blog), its apparent there was no intent for the FBA to provide that a nominee relationship exists simply because foreigners hold shares with greater voting rights or control a company.  The word “alien” is precisely defined so as to exclude any reference to voting rights.  If the FBA was intended to cover voting rights and control, it should have said so expressly.  It didn’t and still doesn’t.

References to voting rights and control are conspicuous by their absence.

Efforts to amend the law so as to include a reference to voting rights have been rejected several times now by several Thai parliaments.  The Ministry of Commerce is on record as saying that a company is not employing a nominee structure simply because foreigners hold shares with superior voting rights or can somehow exercise control over a company.

What matters is whether the Thai shareholders are “genuine investors”.  When the Ministry of Commerce vets company registrations for nominee shareholding, it asks for evidence of the shareholders ability to pay for the shares and, sometimes, evidence that they paid for their shares with their own money.

This makes sense when you look at commercial investments generally.  Individuals make genuine investments all of the time into companies and funds they don’t control.  That doesn’t make the investments any less genuine.  Investors in companies, Thai or otherwise, make all sorts of arrangements about who is responsible for what and who has control over this and that.  A party is not a nominee simply because they lack control over a company.  There are bona fide commercial reasons why parties agree to such arrangements, and a blanket rule saying that certain types of arrangements are illegal per se would do serious damage to the Thai economy.   It would also unreasonably limit the ability of individual Thais to make investments as they see fit.

Changing the FBA to add references to control would constitute a compulsory divestiture or a “taking” from foreign investors.  This would, and did in 2007, raise create major headaches for Thailand.  The EU claimed this sort of change would violate Thailand’s obligations under WTO.  Are they right?  I honestly don’t know.  But what is clear that the efforts to redefine nominee relationships in terms of foreign control were a PR nightmare for investment in Thailand and did absolutely nothing to clarify Section 36 of the FBA.

Looking at control alone is therefore not the answer.  And because a nominee relationship does not arise out of control alone, the mere fact that foreigners hold shares with superior voting rights does not mean that an unlawful shareholding structure is being employed.

So what is an illegal nominee relationship?  In the next post on this subject I will try to give some self-evident examples of a nominee relationship.

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.

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.

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.