Category Archives: Money

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.”

A Challenge that Was Inevitable

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

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

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

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

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

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

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

Other measures are employed:

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

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

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

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

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.

Marked Increase in International Enforcement of Foreign Anti-Corruption Laws

The noose is tightening.  The U.S. has had its Foreign Corrupt Practices Act (FCPA) since the 1970s, but aggressive enforcement is a relatively recent phenomena.  A decade ago there were hardly any active cases, but now there are estimated to be well over 150 cases.  The U.S. used to be an outlier, but now other countries are starting to enforce their own foreign anti-corruption laws, including Germany, Japan and the UK with its new, very strict, anti-corruption law.

Even countries that had ranked low in terms of enforcement (http://www.transparency.org/news_room/in_focus/2011/oecd_progress_2011) are now starting to prosecute foreign anti-corruption cases. The first guilty plea was very recently secured under Canada’s Corruption of Foreign Officials Act. Korea recently indicted two representatives of a logistics company for alleged corrupt activity in China. And now Australia has charged six for allegedly bribing officials in Malaysia, Indonesia and Vietnam to win currency contracts. (http://www.morningstar.co.uk/uk/markets/newsfeeditem.aspx?id=148573656291621)

Perhaps unknown to many, but Note Printing Australia Limited (http://www.polymernotes.org/resources/npasecurency/npa_securency04.pdf) prints bank notes for many countries, including Malaysia, Indonesia, Vietnam and, according to its recent annual report, Thailand. There has been no suggestion that Thai officials were involved in this matter, but this does mean that Australian business persons operating in Thailand can no longer rely on a relaxed anti foreign corruption regime in Australia. The Reserve Bank of Australia issued a press release containing the following:

Over the past several years much has been done to tighten controls and strengthen governance so as to avoid any re-occurrence of the alleged behaviour:

  • Those charged with offences are no longer with the companies;
  • The use of sales agents has ceased;…

“The use of sales agents has ceased.”  The use of sales agents is a common tactic used to circumvent foreign anti-corruption law.

The point of all of this is that foreign corruption laws are no longer a U.S. specific issue.  Other countries are now actively enforcing their foreign anti-corruption laws.  It’s taken awhile, but the playing field is visibly changing and what had been considered “business as usual” is becoming much less acceptable – not only for U.S. companies, but also now for Japanese, Canadian, UK, Korean and Australian companies as well.

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.

Let’s Start with the Foreign Business Act

The Foreign Business Act, B.E. 2542 (FBA), is often the first obstacle a prospective foreign investor in Thailand encounters.  And this makes it an excellent place to begin our discussion of Thai law and policy since the FBA illustrates and embodies so many of the difficulties that foreign investors face in Thailand.

The FBA was enacted in 1999 and prohibits “aliens” – a carefully defined term (more about that and the controversy this has created in subsequent posts) – from owning a wide range of businesses absent certain exceptions or issuance of an “alien business license”, which is difficult to obtain in practice.

The FBA does not cover every business.  I mention this because some seem to believe it covers every business owned by a foreigner, and I want to eliminate that misconception from the outset. The FBA is very broad, applying to about 50 types of businesses (depending upon how a “type” of business is defined) divided into three categories (often called “annexes”), but it’s not so broad as to cover all business activities.  Generally speaking, for example, manufacturing is not restricted under the FBA.  But it’s easy to see how the breadth of the FBA has created the misconception that it applies to any business in Thailand owned by a foreigner.

Complicating matters further, the FBA is also not the only law that restricts foreign ownership and participation in Thai companies.  Even if the FBA does not apply, other Thai laws restricting foreign ownership and participation may apply.  We will look at a few examples of this in future posts, but for now let’s start by taking a broad brush look at the three categories (or annexes) of businesses restricted under the FBA and the rationales for these restrictions.

Annex 1

Annex 1 prohibits alien ownership of nine categories of businesses for “special reasons”, and includes such businesses as newspaper publication, ownership of television stations, forestry, rice farming and trading in land.  The FBA does not permit licenses to be issued to foreigners for ownership of businesses listed in annex 1 under any circumstances.

Annex 2

Annex 2 is divided into three chapters.  In theory, an alien can obtain a license to own a business operating in Annex 2 with approval of the Thai Cabinet.  But in practice getting such approval can be very difficult because of the political nature of the approval required.

Chapter 1 is described as “businesses involving national safety or security” and includes the manufacture, sale and maintenance of firearms, armaments and military vehicles.  Domestic land, water and air transportations “including domestic aviation business” also falls within chapter 1 of Annex 2.  Thailand is not unique in restricting foreign participation in these kinds of businesses.

Chapter 2 is described as ‘businesses affecting arts, culture, traditional customs and folk handicrafts” and includes, among other activities, the creation of Thai wood carvings, manufacture of Thai musical instruments.  I have yet to encounter a foreigner who wanted to set up a business in these areas.

Chapter 3 is described as “businesses affecting natural resources or the environment” and includes, among other activities mining and wood processing to make furniture and utensils. Extractive industries are often the subject of controversy and special protection, and Thailand is no exception.  Because extractive industries tend to attract more than their fair share of transparency problems, investment by foreign companies in these sorts of businesses is problematic even without the FBA.

Annex 3

Annex 3 is described as “businesses in which Thai nationals are not yet ready to compete with aliens.”  Annex 3 is probably the most controversial annex and lists 21 categories of restricted business activities, including, among others, accounting service business,  engineering service business, and “other service business, unless specifically exempted by Ministry of Commerce regulations”.  The Ministry of Commerce (“MOC”) has not specifically exempted any service businesses and the MOC interprets the term “services” very broadly.

For example, the MOC takes the position that a company is engaged in a service business if it leases property.  This means, for instance, that if a manufacturing company (which is not otherwise restricted under the FBA) wants to sub-let part of its facilities to reduce its costs (not uncommon in these financially difficult times), that manufacturing company is engaged in a service activity that requires an alien business license.  Similarly, the MOC takes the position that an alien company needs an alien business license to provide a guarantee.  This means that a foreign owned Thai private limited company that is engaged in manufacturing (and not otherwise restricted under the FBA) cannot grant a guaranty in favor of the foreign parent company without first obtaining an alien business license.  This can create some serious headaches when financing or restructuring the financing of a multinational company:  “Sorry Mr. Lender, the subsidiary that owns our largest factory in Southeast Asia can’t provide a guaranty because…”

What is an ‘Alien Business’?  And Why Definitions Matter

Section 4 of the FBA strictly defines an alien juristic person in terms of ownership of share capital.  Significantly, it does not refer in any sense to voting control of stock or management of a company.  An alien is defined as follows:

“Alien” means:

(1)   a non-Thai natural person;

(2)   a juristic person not incorporated in the country;

(3)   a juristic person incorporated in the country and being of the nature as follows:

(a)   a juristic person of which one-half or more of the capital is held by persons under (1) or (2), or one-half or more of the total capital is invested by persons under (1) or (2); or

(b)   a limited partnership or a registered ordinary partnership of which the managing partner or the manager is a person under (1).

(4)  a juristic person incorporated in the country, of which one-half or more of the capital is held by persons under (1), (2) or (3), or a juristic person of which one-half or more of the capital is invested by persons under (1), (2) or (3).

For the purpose of this definition, a limited company’s shares of which the certificates are issued to bearer shall be considered belonging to aliens unless otherwise provided by ministerial regulations.

This definition is similar to the definition used in the FBA’s predecessor, “NEC 281” (we’ll discuss that when we discuss the history of this law, since you can’t understand the FBA without understanding its history).  This precise definition coupled with the broad scope of both the FBA and its predecessor, NEC 281, and the fact that Thai private limited companies can have shares with different voting rights led to the formation of what are sometimes called “preference share structures” – companies where Thai nationals own a majority of share capital, but foreigners have voting control.   Although officials in prior government publicly stated that such structures were legal provided they did not involve nominee shareholding (fodder for a future post), they have become more controversial and practices surrounding the use of such structures have been more problematic over the last several years.  In the next several posts we’ll walk through the history of the FBA, discuss these issues and explain how they have created a problematic regulatory terrain for foreign investors.