Category Archives: FBA

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.”

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.

Claims of Political Interference in DTAC FBA Probe

We said it would get interesting.  Over the last two days the press have carried stories about conflicts within the Ministry of Commerce (MOC) over the probe into DTAC for allegedly violating the Foreign Business Act (FBA).  Page one of the business section of today’s Bangkok Post provides a good summary (“http://www.bangkokpost.com/business/telecom/246620/official-defies-instruction-to-file-suit-against-dtac”).  The whole story should be read, but first a few snippets:

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.

The article goes onto to describe the difference between Business Development Department’s report and the report from Mr. Alongkorn’s committee as follows:

Mr Banyong’s panel is less certain about the legal implications and planned to ask the police to investigate further for more evidence.

The original complaint against DTAC was raised by True Move, the country’s third largest mobile operator. It alleged that DTAC is 71.35% held by foreigners and their nominees.

***

A telecom veteran, who asked not to be named, said the legal move by True Move could also spell trouble for mobile leader Advanced Info Service on its shareholding structure.

“Even though True said it would not do the same with AIS, the outcome of the DTAC case will inevitably put pressure on AIS’s shareholding structure, particularly under the administration of the new Pheu Thai-led government,” he said.

We’re not going to delve much further into this politically charged morass here, other than to make the obvious observation that it is morass.  Laws such as the FBA lend themselves to this sort of political controversy in Thailand.  There are views on what constitutes an illegal nominee under FBA Section 36, but much of this is contested terrain – perfect ground for political battles having little to do with sound policy or providing Thailand with a better IT infrastructure.

It is also safe to say that these sorts of controversies do not instill investor confidence in Thailand.  More about that later.

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.

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

Self Evident Illegal Nominee Shareholding under the FBA

Examples do exist.  Imagine a document entitled a “Deed of Nominee Shareholding” executed by the majority Thai shareholders.  The deed says the Thai shareholders are not the “beneficial” owners of the shares but are simply holding them on the behalf of foreign shareholders to “comply with local law restrictions on foreign shareholding.”  The Thai nominee shareholders expressly disclaim any rights they would otherwise have as genuine holders of the shares, including rights to dividends or the right to vote. They will do as told by the foreign shareholders when voting their shares.  If they do receive any dividends from the shares they hold “as nominees”, they will immediately hand them over to the  “real” foreign shareholders.

They don’t sound like genuine investors, do they?  Indeed, the use of the word nominee says it all.  When read in the context of the FBA Section 36’s prohibition on nominee shareholder, these documents often read like a confession statements where the Thai shareholding is admitting a violation of the FBA: “Yes, I admit it, I am holding shares as an illegal nominee.”

Who prepares these documents?   Well a one-stop shop didn’t like one of my prior blogs.  (This is how in large part I intend to respond to those comments since I intended to get around to these issues anyway.)  And to be fair, I haven’t seen one from a one-stop shop.   Instead, the origin is generally a lawyer seated outside of Thailand – invariably Singapore or Hong Kong, but generally the former – who has heard about the FBA, but doesn’t seem to quite get it.

What about email traffic essentially saying the Thai shares are really only held by nominees or something akin to nominees?  Depends upon on what they say, but they typically talk about a payment of a fee to hold the shares, provided the Thai shareholder turns over dividends to the foreign shareholder and votes as instructed to do so.  Again, a problem.

Because these problems are contained in internal company documents and personal files that the Ministry of Commerce (MOC) may never see, we have only seem them develop into problems when someone brings these documents to the attention of the MOC or during a due diligence by a prospective buyer.  With the MOC, the source is typically a disgruntled former employee who has seen and kept a copy of email traffic about shareholding arrangements or the deed of nominee shareholding.   It’s not an everyday occurrence, but it happens and it’s not surprising that it does happen.

How about an ad on the Internet or in the paper that says a local business can provide you with Thai shareholders so that your company will be Thai?  Depends.  It’s not a good start, but it depends upon what the rest of the ad says.  If the rest of the ad explains that you, the foreigner, will not really have a full control over the company, that you are going to have to give it up some of the benefits that come up with real ownership or better yet, that you really won’t own the copmany, that should help.  But it really depends, and we have also seen these create serious problems.  This also should not be surprise.

Why?  To put it bluntly, because they are so public.  This isn’t as clear-cut as the first example or often the second, but it’s not a good start.  And it’s all out there for the world to see.

Best to stay clear of all of these arrangements.  It’s an invitation for trouble that you don’t want to make.

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.

2007: Proposed Amendments to the FBA – What Happened?

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

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

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

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

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

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

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

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

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

But it never happened.

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

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

A Brief History of the Foreign Business Act

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

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

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

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

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

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

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

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


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

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

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