Transparency of the Regulatory System
In September 2013, the United States and Mongolia signed the U.S.-Mongolia Agreement on Transparency in Matters Related to International Trade and Investment, or Transparency Agreement (TA). The agreement marked an important step in developing and broadening the economic relationship between the two countries. The TA makes it easier for U.S. and Mongolian firms to do business by guaranteeing transparency in the formation of trade-related laws and regulations, the conduct of fair administrative proceedings, and measures to address bribery and corruption. In addition, it provides for commercial laws and regulations to be published in English, improving transparency and making it easier for foreign investors to operate in the country. Parliament ratified the TA in December 2014, the United States and Mongolia certified that their respective applicable legal requirements and procedures were completed in January 2017, and the TA entered into force on March 20, 2017. Mongolia has five years to implement the TA fully. A copy of the TA is available here: https://ustr.gov/sites/default/files/US-Mongolia%20Transparency%20Agreement-English-Final-As%20Posted.pdf .
Entered into force on January 1, 2017, the Law on Legislation (LL) aligns Mongolia’s legislative processes with its TA obligations. The LL clarifies who has the right to draft legislation, the format of these bills, the respective roles of the GOM and parliament, and the procedures for obtaining and employing public comment on pending legislation. The LL states that law initiators – i.e., members of parliament, the president of Mongolia, or the cabinet of Mongolia – may introduce laws and amendments to existing statutes. To initiate legislation, the initiator must fulfill the following criteria: (1) provide a clear process for both developing, and justifying the need for, the draft legislation; (2) set out methodologies for estimating costs to the government related to the draft law’s implementation; (3) evaluate the impact of the legislation on the public once implemented; and (4) conduct public outreach before submitting legislation to the public. The LL requires that both the Head of the Cabinet Secretariat and the Head of the Parliament Secretariat certify that the law initiator has complied with these requirements before parliament officially accepts legislation for consideration.
To justify draft legislation and account for its costs and impacts, initiators must conduct studies that clearly demonstrate the need for and consequences of a new law. The initiator may reach out to government experts or contract with citizens and such legal entities as professional associations or civil society organizations for data-based information. Initiators must also submit draft legislation to the cabinet and affected ministries for comment and review as a precondition for receiving certification from the Head of the Cabinet Secretariat that the legislation complies with the LL.
The LL requires that law initiators obtain public comment by posting draft legislation and required reports evaluating costs and impacts on parliament’s official website at least thirty days prior to submitting it to parliament (http://forum.parliament.mn/projects?status=Submitted ). These posts must explicitly state the time period for public comment and review. In addition, initiators must solicit comments in writing, organize public meetings and discussions, seek comments through social media, and carry out public surveys. No more than thirty days after the public comment period ends, the initiator must prepare a matrix of all comments, including those used to revise the legislation as well as those not used. This matrix must be posted on parliament’s official web site. After passage of a new law, parliament is responsible for monitoring and evaluating both the implementation and impact of the legislation.
Both the TA and LL do not require the GOM to follow its transparency requirements for budget and related tax legislation. For example, in late 2017, parliament changed the process for issuing mining exploration licenses from an application process to a tender process, which could generate revenue for the budget. Because the GOM defined this change as a fiscal measure, it did not have to submit this legislation to LL requirements, nor did it have to submit for public review changes to the Minerals Law or the Land Use Law required by this budget act. Investors have expressed concern the GOM used this loophole in the LL and TA to pass legislation to escape its notice and comment obligations.
Publicly listed Mongolian companies adhere to International Financial Reporting Standards (IFRS). As with statutory requirements for transparent law making, regulations for accounting, legal, and regulatory procedures also require transparent processes for consistent implementation, and are sometimes (but not always) consistent with international norms and best practices. The business community and legal experts have criticized legal, regulatory, and accounting practices that are non-transparent, vague, or poorly worded in Mongolian and English translations, as well as inconsistently enforced. Domestic and foreign investors claim these domestic practices are largely aimed at extracting revenue for both the government and individuals, and occasionally to injure a company that may be competing against a state-owned or influential private entity. Consequently, some investors have concluded that the Mongolian government does not use transparent laws and regulations to create a level playing field for either foreign or domestic competitors. However, investors have expressed some hope that the TA and the recently passed transparency-based legislation will give them leverage in dealing with GOM regulators.
The General Administrative Law, Article 6, (GAL) brings Mongolia’s regulatory drafting process into line with its TA obligations. Parliament specifies in the text of each statute the specific ministry responsible for administering the law, which includes drafting regulations. The designated ministry creates a ministerial working group that may include representatives of other ministries affected by the statute. Regulatory drafts must be reviewed by the Ministry of Justice and Home Affairs to ensure consistency with other statutes and the constitution of Mongolia. The GAL requires regulations to use scientific or data-driven assessments to assess the costs and impact of proposed rules. The GAL also requires ministries, agencies, and provincial governments to seek public comment by posting draft regulations on their respective websites for at least thirty days and by holding public hearings, following the rules set out in the 2015 Public Hearing Law. The drafting entity must record, report, and respond to the public comment. The Ministry of Justice and Home Affairs must certify that each regulatory drafting process complies with the GAL before the regulations enter into force. After approval, the relevant government agency must monitor and evaluate the implementation and impact of the regulations.
Designated implementing agencies, such as the Mineral Resources and Petroleum Authority, the General Tax Authority, or the General Agency for Specialized Inspections, have statutory responsibility for enforcing regulations. These agencies use administrative remedies to enforce most regulations, including but not limited to seizing contraband, suspending or cancelling use rights and permits, or freezing financial assets. In addition to these administrative remedies, organizations responsible for criminal enforcement, such as the National Police, may enforce regulations using such criminal penalties as imprisonment if the regulatory infraction rises to the level of a crime. The public can contest administrative enforcement acts under the 2002 Law on Procedure for Administrative Cases (LPAC). The LPAC gives disputants the right to a hearing from the Administrative Court of Mongolia. However, the LPAC requires that parties first mediate the dispute with the relevant regulatory authority before seeking judicial remedy. Once the Administrative Court rules, either party can appeal the decision to the Supreme Court of Mongolia.
International Regulatory Considerations
Mongolia is not part of any regional economic block but often seeks to adapt and adopt European standards and norms in areas such as construction materials, food, and environmental regulations; looks to U.S. standards for activity in the petroleum sector; and adopts a combination of Australian and Canadian standards and norms in the mining sector. Mongolia also tends to employ World Organisation for Animal Health standards for its animal health regulations. Finally, Mongolia has a tendency to sync its veterinary, customs, and transport standards to China’s, its primary trade partner.
Mongolia, a member of the WTO, asserts that it will notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations; however, as demonstrated by the failure to notify TBT about changes in the process for using certificates of origin in 2016, Mongolia does not always comply with that commitment.
Mongolia is a signatory to the Trade Facilitation Agreement (TFA) and is working with both the European Union and the United States to comply with its TFA obligations. Lack of capacity has delayed implementation of TFA requisites.
Legal System and Judicial Independence
Mongolia has adopted a hybrid Civil Law-Common Law system of jurisprudence. Trial judges may use prior rulings to adjudicate similar cases but have no obligation to respect legal precedent as such. Mongolian laws, and even their implementing regulations, often lack the specificity needed for consistent interpretation and application. Experienced and dedicated judges do their best to rule in the spirit of the law in routine matters. However, statutory and regulatory vagueness invites corruption within the underfinanced and understaffed judiciary, especially in cases where large sums of money are at stake, or where large foreign corporations are in court against domestic government agencies or well-connected private Mongolian citizens.
Mongolia has a specialized law for contracts but no dedicated law for commercial activities. Contractual disputes are usually adjudicated in Mongolia’s district court system. Disputants may appeal cases to the City Court of Ulaanbaatar and ultimately to the Supreme Court of Mongolia. Mongolia has in place several specialized administrative courts authorized to adjudicate cases brought by citizens against official administrative acts. Disputants may appeal administrative court decisions to higher trial courts. Mongolia has a Constitutional Court, dedicated to ruling on constitutional issues. The General Executive Agency for Court Decisions (GEACD) enforces court decisions.
The Mongolian constitution specifies that non-judicial elements of the GOM “shall not interfere with the discharge of judicial duties” by the judicial branch. The Judicial General Council (JGC), composed of respected jurists, is charged with the constitutional duty of ensuring the impartiality of judges and independence of the judiciary. However, the council lacks official authority to investigate allegations of judicial misconduct or to impose disciplinary measures on judges or other judicial sector personnel. Mongolian law recently required judges to maintain membership in the Mongolian Bar Association (MBA), but some judges actively oppose that requirement with the result that the MBA is no better positioned than the JGC to police the judiciary.
The legislative branch has interfered directly with the judicial branch. In 2016 Mongolia’s Constitutional Court ruled that four provisions of a subsidized residential mortgage program were unconstitutional. Following the program’s suspension, then Parliament Speaker Z. Enkhbold issued a statement that “the parliament will annul the decision of the Constitutional Court and restore the original law with the same provisions as before.” Parliament thereupon voted in special session to dismiss the presiding justice of the court, paving the way for re-adoption of the original legislation and re-establishment of the mortgage subsidy program. Legal experts believe parliament has no authority under Mongolian law to dismiss the presiding justice. Even members of parliament who supported his ouster did so to keep the very popular mortgage program in place and readily admit that the speaker effectively engineered an assault on the court’s independence.
Legal experts believe Mongolia’s substantive law also invites judicial corruption through weak distinctions between the branches of the GOM, which allows unconstitutional overreach. The thinly staffed GEACD is charged with implementing the decisions and verdicts of Mongolia’s civil and criminal courts. GEACD is responsible for operating prisons, garnishing wages, impounding moveable property, and much more. But GEACD personnel do not report to the JGC or directly to the courts, but report to the Ministry of Justice and Home Affairs (an element of the executive branch). The GEACD works closely on a functional level with the Office of the Prosecutor General, an independent agency run by a presidential appointee. However, its funding is provided by parliament. The strong influence of Mongolian prosecutors on Mongolian courts is well documented. Mongolian courts, for example, rarely dismiss charges over the objection of the prosecution or otherwise enter defense verdicts even after trial. As a result of this convoluted chain-of-command, the GEACD can function as a conduit of potentially inappropriate communication from an interested corner of the GOM to the judiciary.
Laws and Regulations on Foreign Direct Investment
2017 saw no major changes in the 2013 Investment Law of Mongolia. The Investment Law frames the general statutory and regulatory environment for all investors in Mongolia. Under the law, foreign investors can access the same investment opportunities as Mongolian citizens and receive the same protections as domestic investors. Investor residence, not nationality, determines whether an investor is foreign or domestic. The law also provides for a more stable tax environment and provides tax and other incentives for investors. Accordingly, most investments by private foreign individuals or firms residing in Mongolia need only be registered with the General Authority State Registration (GASR: http://burtgel.gov.mn/eng/index.php ).
The Investment Law offers tax incentives in the form of transferrable tax stabilization certificates that give qualifying projects favorable tax treatment for up to 27 years. Affected taxes may include the corporate income tax, customs duties, value-added tax, and mineral resource royalties. The law had created a one-stop shop for investors, the Invest Mongolia Agency (IMA), but the government cancelled this program in 2016. The National Development Agency is now responsible for issuing tax stabilization certificates but has not implemented a process for doing so. The remaining IMA support functions are no longer available to foreign investors from the GOM. The NDA has stated it will create a successor agency to the IMA but the government has yet to fund this new agency.
While foreign investors say they appreciate the intent of the Investment Law, they note it does not always deliver the promised national treatment, specifically in two areas. First, foreign nationals and companies may not own real estate; only Mongolian adult citizens can own land. While foreign investors may obtain use rights for the underlying land, these rights expire after a set number of years, with a limited right of renewal. Second, foreign investors object to the regulatory requirement that they invest a minimum of USD 100,000 to establish a venture. Although the Investment Law has no such requirement, GOM regulators have unilaterally imposed it on all foreign investors. In contrast, Mongolian investors are not subject to investment minimums.
Competition and Anti-Trust Laws
Mongolia’s Agency for Fair Competition and Consumer Protection (AFCCP) reviews domestic transactions for competition-related concerns. For a description of the AFCCP and its legal and regulatory powers, see the UNCTAD website (http://unctad.org/en/PublicationsLibrary/ditcclp2012d2_Mongolia_en.pdf ) and the AFCCP website (http://www.afccp.gov.mn/ ).
Expropriation and Compensation
Although Mongolia generally respects property rights, the Mongolian government and parliament may exercise eminent domain in the national interest. Mongolian state entities at all levels are authorized to confiscate or modify land use rights for purposes of economic development, national security, historical preservation, or environmental protection. However, Mongolia’s constitution recognizes private real property rights and derivative rights, and Mongolian law specifically bars the GOM from expropriating such assets without payment of adequate, market-based compensation. Investors express little disagreement with such takings in principle but worry that a lack of clear lines of authority among the central, provincial, and municipal levels of government creates occasions for loss of property rights. For example, the 2006 Minerals Law (amended in 2014) provides no clear division of local, regional, and national jurisdictions for issuances of land use permits and special use rights. Faced with unclear lines of authority and frequent differences in practices and interpretation of rules and regulations by different levels of government, investors can find themselves unable to fully exercise duly conferred property rights. The GOM has acknowledged this but has yet to remedy it.
Many of the cases alleging expropriation involve court expropriations after criminal trials in which the investors were compelled to appear as “civil defendants” but were not allowed to fully participate in the court proceedings. In these cases a GOM official is usually convicted of corruption and sentenced to prison, and the trial court judge then orders the foreign civil defendant to surrender a license or pay a tax penalty or fine for having received an alleged favor from the criminal defendant. In ongoing disputes involving several foreign investors, among them U.S. companies, the courts have taken property or revoked use licenses despite an absence of evidence the property or licenses were derived from corruption.
Investors and the legal community have expressed concerns about an act of parliament they perceive as expropriation. In June 2016, the Mongolian Copper Company, a privately-held entity, bought 49 percent of Mongolian state-owned Erdenet Mining Corporation from the Russian state-owned company Rostec. The non-transparent sale of this mining asset generated public controversy. Parliament subsequently nullified the transaction in February 2017, and ordered seizure of the Mongolian company’s shares. In March 2018, Mongolia’s Constitutional Court upheld this taking but ordered the government to compensate the private company. While investors and legal experts do not dispute parliament’s powers under the constitution and statute to nationalize property, they state that parliament has no authority to undo a business transaction between two non-government or foreign parties. They assert that the court, bending to improper pressure from parliament, delivered a decision inconsistent with Mongolia’s constitution. Consequently, they argue that this taking undermines the sanctity of contracts and may well discourage investment into other projects.
ICSID Convention and New York Convention
Mongolia has ratified the Washington Convention and has joined the International Centre for Settlement of Investment Disputes (ICSID) in 1991. It also signed and ratified the New York Convention in 1994. The government of Mongolia has accepted international arbitration in several disputes.
Investor-State Dispute Settlement
The U.S.-Mongolia Bilateral Investment Treaty (BIT) entered into force in 1997 (http://www.state.gov/e/eb/ifd/bit/117402.htm). Under the BIT, the two countries have agreed to respect international legal standards for state-facilitated property expropriation and compensation matters involving nationals of either country. The BIT effectively provides an extra measure of protection against financial loss for U.S. nationals doing business in Mongolia. In at least one expropriation case, however, the GOM restored a mining license it had unilaterally modified years previously, but declined to compensate for undisputed financial loss as required by the BIT and independently required by the domestic law specifically cited in rendering the modification. Under the BIT, such uncompensated expropriation is appealable through arbitration proceedings. However, the cost of arbitration can make it impractical for aggrieved parties.
The number of investment disputes involving foreigners in Mongolia is unknown. Fearing to jeopardize future opportunities in Mongolia, some U.S. and foreign investors quietly pursue or even abandon potentially sensitive projects, especially those involving a GOM interest. Some investors report that GOM entities have solicited bribes in order to preempt or resolve particular investment disputes with foreign interests.
In disputes involving the GOM, investors report government interference in the dispute resolution process, both administrative and judicial. Foreign investors describe three general categories of disputes that invite such interference. The first comprises disputes between private parties before a GOM administrative tribunal. In these cases, a Mongolian private party may exploit contacts in government, the judiciary, law enforcement, or the prosecutor’s office to coerce a foreign private party to accede to demands. The second category involves disputes between investors and the GOM directly. In these cases, the GOM may claim a sovereign right to intervene in the business venture, often because the GOM itself is operating a competing state-owned enterprise (SOE) or because officials have undisclosed business interests. The third category involves Mongolian tax officials or prosecutors levying highly inflated tax assessments against a foreign entity and demanding immediate payment, sometimes in concert with imposition of exit bans on company executives or even the filing of criminal charges.
Investors have reported local courts recognize and enforce arbitral decisions, but that problems exist with enforcement. The thinly staffed GEACD is charged with implementing the decisions and verdicts of Mongolia’s civil and criminal courts. GEACD employees often live in the jurisdictions in which they work, and are subject to pressure from friends and professional acquaintances. A complicated chain-of-command and opportunities for conflicts of interest can weaken GEACD’s resolve to execute court judgments on behalf of foreign and domestic interests.
International Commercial Arbitration and Foreign Courts
Although investors voice concern that the GOM may choose to ignore international arbitration decisions, the GOM has consistently declared it will honor arbitral awards. In 2016 the GOM and Canadian uranium mining company Khan Resources settled a high-profile expropriation dispute after a Paris arbitration panel awarded USD 104 million to the Canadian company. The parties settled for USD 70 million, which the GOM paid in May 2016.
To improve Mongolia-based international arbitration, parliament passed a new Arbitration Law in January 2017. Based on the United Nations Commission on International Trade Law (UNCITRAL), the Arbitration Law provides a clearer set of rules and protections for Mongolia-based arbitration. The law does not, however, designate any particular organization for use by all disputants, and remains unused by a foreign entity, to our knowledge. Any organization that satisfies specific requirements set out in the law can provide arbitral services. This change breaks the monopoly on domestic arbitration held by the Mongolian National Chamber of Commerce and Industry (MNCCI), which many investors criticized as politicized, unfamiliar with commercial practices, and too self-interested to render fair decisions. Foreign investors say they prefer international arbitration but might consider domestic arbitration if the newly established domestic arbitration tribunals are seen to be fair and effective.
The new law also limits the role of Mongolia’s courts in the arbitration process. Previously, disputants could appeal to Mongolia’s civil courts if the results of “binding arbitration” were not to their liking. The new arbitration law limits parties to a single appeal only to Mongolia’s Court of Civil Appeals (CCA). The CCA can only reject an arbitration judgment for “serious” procedural failings or discrepancies with official public policy initiatives.
As reported in the section on Investor-State Dispute Settlement, local courts will recognize both foreign and domestic arbitral awards and order the General Executive Agency for Court Decisions to enforce them, although collection may be slowed or even sabotaged for the reasons described above.
Foreign investors perceive a bias against them if they pursue legal action against a Mongolian SOE. To our knowledge, no foreign plaintiff has prevailed against an SOE in Mongolia’s courts. Mongolia-based legal experts say foreign investors and exporters are likely to experience preemptory, non-transparent court processes up to outright discrimination by judges. Most investors and legal experts advise using other dispute resolution mechanisms when confronting Mongolian SOEs.
Mongolia’s Bankruptcy Law defines bankruptcy as a civil matter. Mongolian law mandates the registration of mortgages and other debt instruments backed by real estate, structures, immovable collateral (mining and exploration licenses and other use rights); and, after March 2017, movable property (cars, equipment, livestock, receivables, and other items of value). However, even though the law allows for securitizing movable and immovable assets, local law firms hold that the bankruptcy process remains too vague, onerous, and time consuming to make it practical. Mongolia’s constitution and statutes allow contested foreclosure and bankruptcy only through judicial (rather than administrative) proceedings. Local business and legal advisors report that proceedings usually require no less than 18 months, with 36 months not uncommon. Investors and legal advisors state that a lengthy appeals process, perceived corruption, and government interference can create years of delay. Moreover, while in court, creditors face suspended interest payments and limited access to the asset.