Tag Archives: Regulation

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

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

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

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

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

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

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

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

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

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

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

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

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

A Challenge that Was Inevitable

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

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

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

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

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

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

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

Other measures are employed:

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

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

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

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

NBTC Notification Restricting “Foreign Domination” – Some Context

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

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

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

2. use of apparent agents (nominees);

3. holding of shares with special voting rights;

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

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

6. licensing or franchising;

7. management or procurement contracts;

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

9. transactions involving transfer pricing; and

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

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

So Why Issue this Notification Now?

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

But first some more background:

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

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

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

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

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

Row Within MOC on FBA Claim Against DTAC

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

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

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

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

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

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

What about the NBTC and its Notification?

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

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

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

What this Means for Thailand: the Larger Picture

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

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

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

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

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

***

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

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

Will Thailand Ever Ratify ICSID? And Why it Should.

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

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

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

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

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

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

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

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

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

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

The Peculiar Local View of Arbitration

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FCPA Compliance Work Just Got Harder in Thailand

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

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

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

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

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

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

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

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

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

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

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

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

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

Diageo – Victim or Perpetrator?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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.