Category Archives: Investment

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

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.

To Give and Not Receive?

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

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

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

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

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

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

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

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

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

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

Criminal Defamation as a Business Tool

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

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

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

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

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

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

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

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

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

2007: Proposed Amendments to the FBA – What Happened?

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

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

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

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

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

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

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

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

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

But it never happened.

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

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

14th International Anti-Corruption Conference in Bangkok

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

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

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

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

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

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

A 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.”