Tag Archives: Southeast Asia

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.

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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.

Walter Bau vs. Thailand: A Funny Thing Happened on the way to the Second Circuit

Confirmation of Arbitration Award – 14 March 2010

When Walter Bau sought confirmation of the Swiss arbitral award in the US with the US District Court in New York, Thailand opposed that petition on two grounds: (1) the “arbitrability” of the award (discussed in the prior blog post); and (2) forum non conveniens.  The doctrine of forum non conveniens applies when the forum is oppressive and vexatious – totally inappropriate.  Thailand argued the US was an oppressive and inappropriate forum to address any issues relating to the arbitration award.

“Thailand strongly asserts that the Parties and the disputes lack of contacts with the United States, coupled with the facts that Thailand has no assets in the United States, favors strongly in favor of dismissal”, said the US District Court.  The US District Court seemed to show some sympathy to this argument, saying: “Thailand is correct that a lack of assets is a factor that weighs in favor of dismissal”.

But the US District Court also said that Walter Bau: “disputes that Thailand has no assets in the United States and that any search of assets should be the product of post judgment discovery.”  Citing other reasons as well, the US District Court confirmed the Arbitral Award against Thailand on 14 March 2010.

Boeing 737 Seized in Germany – 12 July 2011

On 12 July 2011 a Boeing 737 is seized in Germany pursuant to a court order Walter Bau’s liquidator obtains to enforced the arbitration award.  Later that week, in Thailand, news of this seizure appears in the press and the Thai government claims the seizure was improper because the jet did not really belong to the Thai government.

When asked why Thailand had not paid the arbitration award in the first place – after all, if it had been paid, there would have been no seizure of the plane – the press describes the Thai government’s response as follows:

The prime minister said a separate legal battle between the German company and the government was underway in New York, and that the Thai side was going to file an appeal with a court in the United States on July 29. Therefore, he said, there should have been no urgent need for German authorities to impound the plane.
“Thailand is ready to follow the final court verdict [the appellate court in the US] even if it means we will have to pay the money. The government will not escape from the responsibility. Besides, we have lots of assets,” he said. http://www.nationmultimedia.com/home/Kasit-seeks-a-meeting-with-German-deputy-FM-over-i-30160380.html

But wait a minute?  Hadn’t Thailand previously argued that United States was the wrong forum for deciding the dispute?

Thailand Files it’s Opening Brief – 28 July 2011

In one short sentence of its 71 page opening brief, Thailand announces it is dropping its challenge on forum non conveniens grounds.  Thailand now has no objection to the US Second Court of Appeals addressing their argument (summarized in the blog post above) that – under US law – the US District Court should conduct a de novo review the “arbitrability” of the dispute.  Thailand also, of course, also acknowledges that: “The New York Convention affords the district court no power to vacate the Final Award [the arbitration award that is supposedly on appeal], and Thailand did not ask the district court to do so.”

But isn’t this curious?  First, Thailand says the US is totally inappropriate, oppressive no less, for deciding any part of this dispute.  But after the airplane seizure in Germany  and questions are raised about why Thailand had not paid the award in the first place, Thailand argues it was not obliged to pay because the matter is still on appeal in the US.  And then, in it’s opening brief, Thailand drops its objection to having the US courts address any part of this dispute.

Early Comments on the FBA Investigation into DTAC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.