The Free Trade Agreement between the United States, Central America, and the Dominican Republic (CAFTA-DR) entered into force on April 1, 2006, for the United States and Nicaragua. The CAFTA-DR Investment Chapter establishes a secure, predictable legal framework for U.S. investors in Central America and the Dominican Republic. The agreement provides six basic protections: (1) nondiscriminatory treatment relative to domestic investors and investors from third countries; (2) limits on performance requirements; (3) the free transfer of funds related to an investment; (4) protection from expropriation other than in conformity with customary international law; (5) a minimum standard of treatment in conformity with customary international law; and (6) the ability to hire key managerial personnel without regard to nationality. The U.S. Agency for International Development continues to provide support for the implementation of CAFTA-DR. The full text of CAFTA-DR is available at http://www.ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta/final-text.
In addition to CAFTA-DR, Nicaragua's Foreign Investment Law defines the legal framework for foreign investment. The law allows for 100% foreign ownership in most industries (see Right to Private Ownership and Establishment for exceptions). It also establishes the principle of national treatment for investors, guarantees foreign exchange conversion and profit repatriation, clarifies foreigners' access to local financing, and reaffirms respect for private property.
Other major laws governing foreign investment include the Temporary Entry Law, which allows for the duty free import of machinery, equipment, raw materials, and supplies for companies exporting the majority of their production (see Performance Requirements and Incentives); the Export Processing Zone Law (see Foreign Trade Zones / Free Trade Zones); the Tax Equity Law (see Performance Requirements and Incentives); the Banking Law (see Conversion and Transfer Policies and Performance Requirements and Incentives); and a series of intellectual property laws (see Protection of Property Rights). In 2006, the Nicaraguan National Assembly approved a Competition Law, but the law has not yet been fully implemented (see Transparency of the Regulatory System). The National Assembly provides Spanish-language text of these and other Nicaraguan laws, which are available at http://www.asamblea.gob.ni/
PRONicaragua, the Nicaraguan government's investment promotion agency, has collaborated with the American Chamber of Commerce in Nicaragua (http://www.amcham.org.ni/) to create a Guide to Doing Business in Nicaragua, available at http://www.pronicaragua.org/images/stories/brochures/DoingBusiness2010.pdf.
Several factors contribute to a complex policy environment for foreign investors. President Ortega's harsh rhetoric against the United States, capitalism, and free trade has had a negative effect on foreign investor perceptions of risk. Government officials frequently deride "neoliberal" policies and the "tyranny of capitalism" and criticize foreign investors for paying "slave wages." President Ortega has repeatedly suggested that it was a mistake to privatize the telecommunications and energy industries, where a number of foreign firms have invested. He has declared that "imperialist capitalism" has failed. His stated objective is now to implement socialism in Nicaragua, which he further defines as a mixed economy where "not all economic power is for the state." For official copies of speeches in Spanish, see www.presidencia.gob.ni and www.conamornicaragua.org.ni.
In October 2007, during the first year of Daniel Ortega’s second term in office (he previously served as president in the 1980s), Nicaragua signed a 3-year Poverty Reduction and Growth Facility with the International Monetary Fund. As part of the IMF program, the GON agreed to implement free market policies linked to targets on fiscal discipline, poverty spending, and energy regulation. The ECF and subsequent reviews have included commitments to implement free market policies linked to targets on fiscal discipline, spending on poverty, and energy regulation. Adherence to these commitments has allowed the government to maintain macroeconomic stability, including low inflation and a stable exchange rate. The GON has consistently met most of the quantitative targets set out in the agreement. In November 2010, the IMF approved a one-year extension of the arrangement, despite the IMF’s concern regarding the lack of transparency of funds generated by the Bolivarian Alliance for the Americas ( ALBA), which are off-budget and not subject to National Assembly approval (see: Competition from State Owned Enterprises). In October 2011, the IMF approved the seventh review concluding the four year program. The Ortega administration has announced that it will seek a new program with the IMF in 2012.
In the wake of the November 2008 municipal elections marred by allegations of fraud on the part of the ruling Sandinista National Liberation Front (FSLN) and the continued lack of transparency in the budget, the government has lost budget support previously provided by European donors.. In June 2011the Board of the Millennium Challenge Corporation (MCC) terminated MCC's compact assistance to Nicaragua for activities totaling $62 million for road construction and property regularization over concerns that the Nicaraguan Government had not adequately addressed allegations of fraud related to the municipal elections in November 2008.
Immediately upon beginning his term as president in January 2007, President Ortega signed Nicaragua onto the Bolivarian Alliance for the Americas (ALBA) with Cuba, Dominica, Ecuador, Bolivia, and Venezuela. President Ortega has used funds generated by an ALBA oil monetization scheme to increase the participation of his party, the FSLN, in the economy (see Competition from State Owned Enterprises).
On several occasions, the government has used its tax and customs authorities to pressure individuals and companies into accepting noncommercial terms in concessions or contracts (see Dispute Settlement, Transparency of the Regulatory System, and Expropriation and Compensation for examples). High profile rulings by the courts and oversight agencies are unpredictable and widely believed to be politicized. Public opinion surveys indicate that many Nicaraguans believe corruption is endemic to government (see Corruption).
The National Assembly has passed many laws during the last few years intended to improve Nicaragua's business competitiveness. Nonetheless, according to the World Bank's Governance Indicators 2010 study, Nicaragua ranks in the 15th percentile of countries in terms of Government Effectiveness (http://info.worldbank.org/governance/wgi/sc_country.asp). The World Economic Forum's Global Competitive Index for 2011-12 ranked Nicaragua 115th of 142 countries included in the study (http://www.weforum.org/issues/global-competitiveness). In 2012, the Heritage Foundation Index of Economic Freedom put Nicaragua 101st worldwide for economic freedom (http://www.heritage.org/index/).
TI Corruption Index
Heritage Economic Freedom
World Bank Doing Business
MCC Government Effectiveness
MCC Rule of Law
MCC Control of Corruption
MCC Fiscal Policy
MCC Trade Policy
MCC Regulatory Quality
MCC Business Start Up
MCC Land Rights Access
MCC Natural Resource Management
Conversion and Transfer Policies
The Foreign Investment Law (2000/344) and the Banking, Nonbank Intermediary, and Financial Conglomerate Law (2005/561) allow investors to freely convert and transfer funds associated with an investment. Article 10.8 of CAFTA-DR ensures the free transfer of funds related to a covered investment. Local financial institutions freely exchange U.S. dollars and other foreign currencies. Foreigners may open bank accounts, but the process can be cumbersome and time consuming. The Superintendent of Banks and other Financial Institutions (SIBOIF) monitors financial transactions for illicit activity.
The official exchange rate is adjusted daily by the Central Bank according to a crawling peg that devaluates the Córdoba against the U.S. dollar at an annual rate of 5%. The official exchange rate as of December 31, 2011, was 22.98 Córdobas to one U.S. dollar. According the Nicaraguan Central Bank, the accumulated rate of inflation for 2011 was 7.95%. Plans for the introduction of a regional currency for ALBA countries called the sucre have yet to materialize.
Expropriation and Compensation
During the 1980s, the Sandinista government confiscated close to 28,000 real properties. Since 1990, thousands of U.S. citizens have filed claims against the government to have their property returned or receive compensation. As of December 20112, the Nicaraguan Government had settled more than 4,774 U.S. citizen claims, and a total of 419 Embassy-registered U.S. claims remain. Since taking office in January 2007, the administration of President Ortega has resolved 224 claims, including four during the current waiver year.
Since November 2007, the Government of Nicaragua has dismissed 83 of these claims through the retroactive application of Decrees 3 (1979) and 38 (1979), which legalized the confiscation of property belonging to the Somoza family and "close allies." The U.S. Embassy has expressed concern that the government has failed to allow due process in a transparent and objective manner. In addition, the government regards as resolved 21 claims for which it has published notice in the Official Gazette and deposited in escrow indemnification bonds offered as compensation. The U.S. Embassy has asked the government to continue negotiating with these claimants. U.S. citizen claims dismissed through both these mechanisms remain on the list of Embassy-registered claims.
The U.S. Embassy in Nicaragua is working with claimants to ensure that the property rights of U.S. citizens are respected. A U.S. citizen with such a claim may contact ManaguaPropOffice@state.gov.
The CAFTA-DR Investment Chapter prohibits expropriation unless for a public purpose. The government must pay prompt, adequate, and effective compensation.
See Protection of Property Rights for a description of other forms of land security problems affecting investors.
Difficulty in resolving commercial disputes, particularly the enforcement of contracts, remains one of the most serious drawbacks to investment in Nicaragua. The legal system is weak and cumbersome. Members of the judiciary, including those at senior levels, are widely believed to be corrupt or subject to political pressure. A commercial code and bankruptcy law exist, but both are outdated.
Enforcement of court orders is frequently subject to non-judicial considerations. Courts routinely grant injunctions ("amparos") to protect citizen rights by enjoining official investigatory and enforcement actions indefinitely. Foreign investors are often at a disadvantage in disputes against nationals with political or personal connections. Some U.S. companies have been subject to legal procedures that violate international standards of due process and monetary judgments that have no parallel in Nicaragua's legal system. International treaties, such as CAFTA-DR, become domestic legislation once ratified by the National Assembly, and while CAFTA-DR derogated some laws, these laws have been mistakenly applied by some courts to resolve commercial disputes. Misuse of the criminal justice system sometimes results in individuals being charged with crimes arising out of civil disputes, often to pressure the accused into accepting a civil settlement. The World Bank estimates that on average local courts issue a preliminary ruling on contract disputes in 540 days, placing Nicaragua in the more efficient upper half of the 183 countries ranked. Monetary judgments normally are rendered in Nicaraguan currency, but may be denominated in U.S. dollars.
Dispute resolution is even more difficult in the Northern and Southern Atlantic Autonomous Regions (RAAN and RAAS, respectively), where most of the country's fishery, timber, and mineral resources are located. These large regions, which share a Caribbean history and culture, comprise more than one-third of Nicaragua's land mass. The division of authority between the central government and regional authorities is complex and flexible. Local officials may act without effective central government oversight.
The Mediation and Arbitration Law (2005/540) establishes the legal framework for alternative dispute resolution. Nicaragua is a signatory of the New York Convention and the Inter-American Convention on International Commercial Arbitration. The American Chamber of Commerce of Nicaragua and the Nicaraguan Chamber of Commerce jointly operate a Mediation and Arbitration Center. Arbitration clauses should be included in business contracts, but legal experts are uncertain whether local courts would enforce awards resulting from international or local proceedings.
CAFTA-DR establishes an investor-state dispute settlement mechanism. An investor who believes the government has breached a substantive obligation under CAFTA-DR or that the government has breached an investment agreement may request binding international arbitration in a forum defined by the Investment Chapter. Proceedings under this mechanism are generally open to the public and documents are made publicly available.
In 2009 and 2010, California courts dismissed with prejudice three Nicaraguan cases concerning the chemical pesticide dibromochloropropane (DBCP, or Nemagon), citing plaintiff fraud, while a Federal District Court denied recognition of a $97 million Law 364 judgment because the "case did not arise out of proceedings that comported with the international concept of due process." Nicaraguan Law 364, enacted in 2000 and implemented in 2001 in response to lobbying by a group of Nicaraguan and U.S. plaintiffs' attorneys, presumes guilt without due process and in contradiction of known scientific fact and retroactively imposes arbitrary liabilities on foreign companies that manufactured or allegedly used or distributed DBCP in Nicaragua. DBCP was banned in the United States after the Environmental Protection Agency cancelled its certificate for use (with exceptions) in 1979. Law 364 subjects a handful of United States companies to minimum damages that have no parallel in Nicaragua's legal system. In October 2011, Dole Food Company, Inc. announced the signing of a definitive settlement agreement with the Provost & Umphrey Law Firm, L.L.P., which with full implementation will bring to an end all of their lawsuits brought against Dole and Dole entities on behalf of foreign farm workers who claim injuries from alleged exposure more than 30 years ago to the agricultural chemical DBCP.
Performance Requirements and Incentives
Nicaragua's labor code states that 90% of all employees, not including management posts, must be Nicaraguan. The Law on Promotion of National Artistic Expression and Protection of Nicaraguan Artists (1996/215) requires that foreign production companies contribute 5% of total production costs to a national cultural fund. In addition, the law requires that 10% of the technical, creative, and/or artistic staff be locally hired. Under CAFTA-DR, U.S. companies are exempt from these requirements.
The Tax Equity Law (amended 2009/712) allows firms to claim an income tax credit of 1.5% of the free-on-board (FOB) value of exports. The Law of Temporary Admission for Export Promotion (2001/382) exempts businesses from value-added tax (VAT) for the purchase of machinery, equipment, raw materials, and supplies duty if used in export processing. Businesses must export 25% of their production to take advantage of these tax benefits. See Foreign Trade Zones/Free Trade Zones for a description of incentives for investments in free trade zones.
The Fishing and Fish Farming Law (2004/489) exempts gasoline used in fishing and fish farming from taxes. Investors in the sector must register with the Directorate General for Natural Resources in the Ministry of Trade, Industry, and Development and with the Nicaraguan Fishing and Aquaculture Institute (INPESCA). Environmental regulations also apply (see Transparency of the Regulatory System).
The Forestry Conservation and Sustainable Development Law (2003/462) establishes preferential property tax rates and income tax exemptions, in addition to duty and tax exemptions, for inputs and capital goods used in forestry projects. Restrictions on the export of forest resources complicate investment in this industry (see Transparency of the Regulatory System).
The Hydroelectric Promotion Law (amended 2005/531) and the Law to Promote Renewable Resource Electricity Generation (2005/532) provide incentives to invest in electricity generation, including duty free imports of capital goods and income and property tax exemptions. Regulatory concerns limit investment despite these incentives (see Transparency of the Regulatory System). In particular, private investment in hydroelectric dams is banned from the Asturias, Apanás, and Río Viejo Rivers, and the approval of the National Assembly is required for projects larger than 30 megawatts on all other rivers.
The Special Law on Mining Prospecting and Exploitation (2001/387) exempts mining concessionaires from import duties on capital inputs (see Transparency of the Regulatory System for additional information on the mining sector).
The Tourism Incentive Law (amended 2005/575) includes the following basic incentives for investments of $30,000 or more outside Managua and $100,000 or more within Managua: income tax exemption of 80% to 90% for up to 10 years; property tax exemption for up to 10 years; exoneration from import duties on vehicles; and value added tax exemption on the purchase of equipment and construction materials. The General Tourism Law (amended 2010/724) stipulates that hotel owners pay a tax of $0.50 per customer and 2% of the rental rate per room for tourism promotion. It also imposes anti-discrimination, public health, and environmental regulations on tourism-oriented businesses.
The Foreign Retirees and Residents Law (2009/694) provides tax exemptions for imported household goods and scientific or professional equipment, personal vehicles and car rentals, and construction materials to build homes for personal use. Retirees and residents are also exempt from paying a guaranty bond, a requirement for foreigners seeking residency in Nicaragua. A foreign retiree or resident must be at least 45 years old with a monthly income of $600 to $750 to receive these tax exemptions and other incentives.
Those wishing to permanently reside in Nicaragua must request a resident visa from the Office of Immigration in Managua. Investors who live in Nicaragua but fail to obtain a residency permit have encountered immigration problems, including deportation. Investors should consult with Nicaraguan Immigration Authorities to ensure that they have an appropriate visa or resident status while engaging in business. For more information, please see http://nicaragua.usembassy.gov/immigration_laws.html.
Right to Private Ownership and Establishment
In 1992, the Nicaraguan Government began to privatize small state-owned companies that the first Ortega government had nationalized or established in the 1980s. Subsequent privatization programs managed by the World Bank and Inter-American Development Bank sold state-owned telecommunications and electricity generation and distribution companies. Over the past 15 years, Nicaragua has privatized more than 350 state enterprises. In 2011, there was talk of privatizing the public water service, but as of December 2011, no official changes have been made. It has been alleged that members of the current government administration have purchased businesses using state resources.
The government owns and operates the National Sewer and Water Company (ENACAL), National Port Authority (EPN), and National Electricity Transmission Company (ENTRESA). Private sector investment is not permitted in these sectors. In sectors where competition is allowed, the government owns and operates the Nicaraguan Insurance Institute (INISER), Nicaraguan Electricity Company (ENEL), Las Mercedes Industrial Park, Nicaraguan Food Staple Company (ENABAS), and Nicaraguan Petroleum Company (Petronic). Through the Nicaraguan Social Security Institute (INSS), the government owns a pharmaceutical manufacturing company, Laboratorios Ramos.
The government enjoys exclusive rights to manage public social security pension funds (see Efficient Capital Markets and Portfolio Investment). In 2000, Spanish company Union Fenosa purchased the rights to operate both the north and the south electricity distribution companies from ENEL (see Transparency of the Regulatory System). However, operation of the concession has suffered greatly from weak regulatory oversight and the lack of a supportive legal regime. In 2007, the government purchased 16% of Union Fenosa's operations in Nicaragua.
The military pension fund has invested in many sectors, especially retail and construction. These companies compete on equal terms with privately owned businesses.
Protection of Property Rights
Many foreign investors in Nicaragua experience difficulties defending their property rights. The expropriation of 28,000 properties in the 1980s has resulted in a large number of claims and counter claims involving real estate. Property registries suffer from years of poor recordkeeping, making it difficult to establish a title history. Unscrupulous individuals have engaged in protracted confrontations with U.S. investors to wrest control of beachfront properties along the Pacific coast in the Departments of Carazo, Rivas, and Chinandega, as well as prime real estate in the cities of Managua, Granada, and Leon. Judges and municipal authorities have been known to collude with such individuals, and a cottage industry supplies false titles and other documents to those who scheme to steal land.
During 2010 and 2011 there was a significant increase in reports of land invasions. President Ortega has declared on numerous occasions that the government will not act to evict those who have illegally taken possession of private property. Police refuse to intervene in property invasion cases and will not assist in the enforcement of court orders to remove illegal occupants. In addition, Citizen Power Councils (CPCs) affiliated with the ruling FSLN have led some land invasions (see Political Violence). The Embassy is working with several U.S. citizens to press the Nicaraguan government to protect the right to due process for the lawful owners of property in Nicaragua.
Those interested in purchasing property in Nicaragua should seek legal counsel to represent their interests in the transaction. The Embassy maintains a list of attorneys, available at http://nicaragua.usembassy.gov/attorneys_registered_at_embassy_managua.html. The government's investment promotion agency, PRONicaragua, also offers assistance with due diligence (http://www.pronicaragua.org/index.php?lang=en).
The Capital Markets Law (2006/587) provides a legal framework for securitization of movable and real property. The banking system is expanding its loan programs for housing purchases, but there is no secondary market for mortgages. See Efficient Capital Markets and Portfolio Investment for more information on the financial sector.
CAFTA-DR made Nicaraguan standards for the protection and enforcement of IPR consistent with U.S. and emerging international intellectual property standards. To implement the agreement, Nicaragua has strengthened its legal framework to 1) provide state-of-the-art protections for digital products such as software, music, text and videos; 2) afford stronger protection for patents, trademarks, and test data, including an electronic system for the registration and maintenance of trademarks; and 3) deter piracy and counterfeiting. The Nicaraguan Government has not yet implemented an effective system for test data protection and patent linkage for pharmaceutical products, as required by CAFTA-DR. The GON also has yet to implement the electronic system for registering trademarks mentioned above
The legal regime for protection of intellectual property rights (IPR) in Nicaragua is adequate, but enforcement of intellectual property law has been limited. In 2009, the Nicaraguan Government focused on improving interagency cooperation on IPR enforcement against copyright and trademark infringement. The Nicaraguan Government also improved its cooperation with private industry to combat IPR crimes in some areas, such as identifying vendors of pirated goods and offering training to Nicaraguan police officers. In 2011, little progress was made by the Government of Nicaragua in terms of IPR enforcement.
Nicaraguan IPR laws, made available online by the National Assembly (http://www.asamblea.gob.ni/), include:
· Patent, Utility Model, and Industrial Design Law (amended 2007/634)
· Copyright and Related Rights Law (amended 2006/577)
· Satellite Signal Programming Protection Law (amended 2006/578)
· Trademark and Other Distinctive Signs Law (amended 2006/580)
· Plant Variety Protection Law (1999/318)
Nicaragua is a signatory to the following international conventions and agreements on intellectual property:
· Mexico Convention on Literary and Artistic Copyrights (1902)
· Buenos Aires Convention on Literary and Artistic Copyrights (1910)
· Inter-American Copyright Convention (1946)
· Universal Copyright Convention (Geneva 1952 and Paris 1971)
· Bern Convention for the Protection of Literary and Artistic Works (1971)
· Geneva Convention for the Protection of Producers of Phonograms (1971)
· Brussels Satellite Convention (1974)
· International Convention for the Protection of New Plant Varieties (1978)
· Agreement on Trade-Related Aspects of Intellectual Property Rights (1994)
· Paris Convention for the Protection of Industrial Property (1996)
· The World Intellectual Property Organization (WIPO) Copyright Treaty and Performances and Phonograms Treaty (2002)
Transparency of Regulatory System
According to the Governance Matters 2010 report published by the World Bank, Nicaragua is in the 40th percentile among countries worldwide for regulatory quality. Investors regularly complain that regulatory authorities are arbitrary, negligent, or slow to apply existing laws-at times in an apparent effort to favor one competitor over another. Lack of a reliable means to quickly resolve disputes with government administrative authorities or business associates has resulted in some disputes becoming intractable (see Dispute Settlement).
The Law to Simplify Administrative Processes and Services (2009/691) streamlines the procedures for establishing a business. See Chapter 3 of the Country Commercial Guide: Selling U.S. Products and Services, for information on regulatory issues related to establishing an office.
The Competition Promotion Law (2007/601) allowed for the creation of a decentralized institution, PROCOMPETENCIA, to investigate and discipline businesses engaged in anticompetitive business practices, including price fixing, dividing territories, exclusive dealing, and product tying. PROCOMPETENCIA has staff and began to operate in 2010. This law was amended (2008/668), with reforms made to Articles 7, 8 and 50, Articles that deal with, respectively: the selection of members; voting procedures; and the length of the terms of board members. The Digital Signature Law (2010/729) extends legal validity to electronic signatures and digital certificates to facilitate business and government transactions, especially international transactions. The governing body for the accreditation of an electronic signature is the Director General of Technology, which is part of the Ministry of Finance and Public Credit.
The Special Law on Inventory of Select Materials for Infrastructure (2010/730) allows the Ministry of Transportation and Infrastructure to directly negotiate the purchase of materials or land from land owners and to lower the cost of road projects. It also allows the government to declare eminent domain when necessary. Other entities, such as the Ministry of Energy and Mines and the Ministry of Natural Resources and the Environment, may issue permits and licenses for the use of those public domain materials that are related to energy, mines, and natural resources.
The Trust Law (2011/741) provides a legal framework for any individual with ownership over certain property to transfer it to another individual in order for them to use the property.
The Government Procurement Law (amended 2010/737) establishes safeguards to encourage open competition among suppliers bidding on government contracts. The law states that government purchase of goods and services must be openly competed. All government purchases must be planned and approved by procurement committees within each public entity. The 2010 amendments to the law close the many loopholes that existed in the previous version, especially the discretion given to the Controller General's Office to exclude certain purchases from competitive bidding in case of emergency or when in "the public interest." The new amendment eliminates many of the ambiguities that allowed favoritism and unfair competition. The law allows for foreign contractors to bid on projects alongside locally registered companies. While foreign companies do not have to register locally in order to take part in the bidding process, they must present documentation from their home countries in order to prove that they are qualified bidders. If a foreign company wins a bid, it will need to register with the Nicaraguan government. CAFTA-DR also stipulates that foreign companies receive national treatment when bidding on government contracts. The GON spends approximately $300 million annually in contracted projects and purchases.
The General Law for Insurance, Reinsurance, and Bonds (2010/733) provides a legal framework for the regulation of the insurance industry and all related services, such as, but not limited to, foreign insurance companies with branches established in Nicaragua, insurance subsidiaries, reinsurance entities, warranty services, and insurance brokers. The Superintendent of Banks and Financial Institutions is responsible for authorizing, regulating and overseeing all the companies and individuals that are involved in the insurance sector. Any foreign insurance company that wishes to establish branches in Nicaragua must comply with this law and request authorization from the Superintendent before establishing a presence. The Superintendent may only approve such requests from insurance companies that have been established in their country of origin for more than 5 years and when there are bilateral cooperation agreements among Nicaraguan insurance authorities and corresponding authorities from the country of origin. All insurance services rendered in Nicaragua and regulated by this law must comply with antitrust principals. The law prohibits private agreements between two or more companies of this sector that may negatively affect the basis of this principal. Insurance companies, brokers, subsidiaries and all related agencies must render a fee equivalent to a percentage of their commissions to the Superintendent's Office, in virtue of contributing to the annual budget of this government office.
The Consumer Defense Law (1994/182) includes a consumer bill of rights that establishes minimum standards for product safety and quality as well as for truth in marketing. Under this law, the Consumer Defense Directorate of the Ministry of Trade, Development, and Commerce (MIFIC) may investigate business and levy fines. The Ministry of Public Health, Directorate General of Sanitary Regulation, regulates the sale of food and drugs (including cosmetics), while the Ministry of Agriculture and Forestry is responsible for plant and animal health issues (see Chapter 5 of the Country Commercial Guide: Trade Regulations, Customs, and Standards, for further information on food, drug, and consumer product regulation). Government resources to enforce these public health and safety regulations are limited, especially in informal markets.
The Directorate General of Taxation in the Ministry of Finance and Public Credit (MHCP) collects income and value-added taxes, as set forth in the most recent version of the Tax Code (2006/598). MHCP's Directorate General of Customs collects customs duties (see Chapter 5 of the Country Commercial Guide: Trade Regulations, Customs, and Standards for further information on customs procedures). Investors cite arbitrariness in taxation and customs procedures, as well as a lack of delegation of decision-making authority. Tax audits of foreign investors have increased in frequency and duration, to the point where they may hinder normal business operations. Investors also complain that customs authorities wrongly classify goods to boost tariff revenue. The Embassy has received numerous complaints from investors and non-governmental organizations about goods and donations being held up in customs without legal reason.
The Environment and Natural Resources Law (amended 2008/647) authorizes the Directorate General for Environmental Quality in the Ministry of Natural Resources and the Environment (MARENA), to evaluate investment plans and monitor ongoing operations to verify compliance with environmental standards. The Law on Crimes against the Environment and Natural Resources (2005/559) includes additional environmental standards. Some investors complain that MARENA takes political considerations into account in determining whether to issue an environmental permit. Budgetary constraints limit MARENA's ability to enforce environmental standards.
The Law Prohibiting Logging (2006/585) banned the export of timber. However, Presidential Decree 48 (2008) allows the collection of trees felled by Hurricane Felix in the RAAN for export. Lack of infrastructure and regulatory bureaucracy have caused much of the hurricane timber to remain unharvested. The U.S. Embassy has received several reports of scams involving RAAN timber concessions which defrauded U.S. investors of significant sums of money.
The Coastal Law (2009/690) provides a framework for environmental protection, public access rights, commercial activity, and property rights along the shoreline of any body of water in Nicaragua. For coastal property along the Atlantic and Pacific Oceans, the law establishes environmental and public access requirements. It recognizes beachfront property rights within this area, but gives municipalities zoning authority. The waterfront area for public use is defined as the open area between low tide and high tide, plus 50 meters from the average maximum high tide mark to the mainland. On islands of more than two square kilometers with a permanent population, the coastal zone is defined by the historical average of the maximum level of water in winter, or in the case of tides, five meters to the mainland. There is a five-meter setback, measured from the high-water mark, for natural lakes, artificial lakes, rivers, and other bodies of water. The law establishes a Commission for Coastal Zone Development (CDZC) to provide technical assistance and advice to municipalities on coastal development and management, and on concessions for use of public land. Developers have expressed concern that the government implements measurement techniques outside of those stipulated by the law.
In addition to environmental regulation, mining investments are regulated under the Special Law on Mining Prospecting and Exploitation (2001/387), which the Ministry of Energy and Mines (MEM) administers. MEM also retains the authority to grant oil and gas exploration concessions. In 2007, the Supreme Court ruled that several oil exploration concessions had been awarded without proper consultation with the governments of the autonomous regions on the Atlantic coast, even though the concessions were situated outside recognized regional waters. The matter was subsequently resolved through negotiation. Article 74 of this law was amended (2005/525), stating that non-metallic mining concessions must pay: for the right of extraction, for the surface rights of the mining concession; and income taxes. Concession holders cannot be compelled to pay the state for any other services and taxes.
In November 2009, the Committee on Infrastructure and Public Services in the Nicaraguan National Assembly decided to allow MEM to directly issue licenses for study, exploration, and the eventual exploitation of geothermal energy throughout the country (2009/714). These reforms to the Law of Exploration and Exploitation of Geothermal Resource (Law 433) allow MEM to negotiate directly with any investor interested in geothermal exploration without public bidding or licensing process.
The Electricity Sector Law (amended 2004/465), Energy Stability Law (amended 2008/644), and Electricity Distribution and Use Law (2008/661, amended 2010/731) establish the legal framework for the electric power sector. The Ministry of Energy and Mines Law (612/2007) sets policy for the sector and grants licenses and concessions to investors, while the Nicaraguan Energy Institute sets prices and regulates day-to-day operations. Investment in transmission and distribution is limited by law (see Right to Private Ownership and Establishment). Investment in this sector has been constrained by regulatory and political uncertainty and by a complex tariff system that does not provide clear incentives to generators. In 2009, a consortium that included U.S. investors saw its provisional electricity generation permit revoked without regard for due process. The permit was subsequently reinstated. The Renewable Source Electricity Generation Law (2005/532) established tax, financial and economic incentives that contribute to renewable energy development within Nicaragua, exonerating hydroelectric, geothermal, wind, and solar energy investors and producers of many taxes. Through the Sustainable Electrification and Renewable Energy National Program (PNESER), Nicaragua invested $US381 million in its transmission and distribution capabilities between 2006 and 2010 and anticipates continued investments to further reduce electricity loss in 2012 and beyond. In 2011, Nicaragua had the highest loss rate (21%) due to theft and technical problems amongst Central American countries. That loss rate has improved from 26% in 2008.
Under CAFTA-DR, Nicaragua is committed to opening its telecommunications sector to U.S. investors, service providers, and suppliers. In practice, the sector lacks a regulatory framework that would encourage free competition. Enitel, the former state telephone company now owned by a Mexican investor, operates all fixed lines and competes in the mobile phone market. In 2006, the Supreme Court blocked an effort by the Nicaraguan Institute for Telecommunications and Postal Service (TELCOR), which is the telecommunications regulator, to make switching infrastructure owned by Enitel available to other fixed and mobile phone operators. In widely criticized process, TELCOR awarded radio spectrum in September 2009 to a Russian company with ties to senior government officials. The executive branch has proposed legislation that would strengthen TELCOR's regulatory capacity and improve competition among telephone companies. However, some have expressed concern that it would allow the government to introduce political factors in the renewal of broadcast licenses.
Efficient Capital Markets and Portfolio Investment
In the 1990s, the Nicaraguan Government privatized the banks that had been nationalized during the Ortega administration in the 1980s. In 1999-2001, four banks collapsed as the result of fraud and mismanagement on the part of bank officers. Stability returned to the banking system after the government engineered the transfer of assets and liabilities from the failed banks to several healthy banks. However, the government was forced to issue bonds to finance the purchase of distressed assets. These bonds have become unduly politicized and the subject of two rounds of renegotiations.
Through the Heavily Indebted Poor Country Initiative (HIPC), the Multilateral Debt Reduction Initiative, and the World Bank's Commercial Debt Buyback Program, the Nicaraguan Government has been able to significantly reduce external debt from more than $12 billion in 1990 to $3.98 billion (56.3% of GDP) as of September 2011.
Among other services, local financial institutions offer commercial loans, credit lines, factoring, leasing, and bonded warehousing. Lafise, BANPRO and BAC constitute the largest financial institutions in Nicaragua, competing also with five other much smaller banks. Nicaraguan banks remain highly conservative in their lending practices, and the vast majority of their portfolios are centered in Managua and a few select agricultural regions. For most Nicaraguans mired in poverty, the prospect of obtaining a loan from these institutions remains out of reach. The Foreign Investment Law allows foreign investors to access local credit. However, many investors find lower cost financing and more product variety from offshore banks. Short-term government and Central Bank bonds, issued in Córdobas but indexed to the dollar, dominate Nicaragua's infant capital market. U.S. and other foreign banks have acquired a presence in Nicaragua through the purchase of local banks. In 2007, Citigroup acquired Grupo Financiero Uno, a Nicaraguan bank with a large consumer credit portfolio throughout Central America. GE Money owned 100% of the Bank of Central America. In July 2010 Grupo Aval, Colombia's largest financial holding company, purchased BAC-Credomatic for $1.9 billion.
Microfinance institutions are an important source of capital for small businesses in Nicaragua. The nineteen members of the Nicaraguan Association of Microfinance Institution s manage loan portfolios of approximately $250 million. In July 2008, President Ortega called for Nicaraguans to halt payments on their microfinance loans and demand renegotiation of "usurious" interest rates. Later that month, mobs attacked several microfinance institutions in northern Nicaragua, forcing them to close for several weeks in July 2008 and restrict operations throughout 2009. President Ortega reversed his position in January 2009, advising Nicaraguans to repay their loans, but many microfinance institutions report that delinquency rates increased significantly in the interim. As a result of these developments, a violent so-called "nonpayment" movement (known in Nicaragua as “No Pago”) has emerged in Nicaragua as a serious threat to the microfinance sector. Responding to this movement, in February 2010, the National Assembly passed the Moratorium Law (2010/716), which entered into force in April 2010. The Moratorium Law mandates that Nicaraguan microfinance institutions renegotiate loans with debtors who were in arrears as of June 30, 2009, at 16% interest and on generous terms. The law has been sharply criticized by Nicaraguan MFIs, banks, and international creditors, as well as by the International Monetary Fund (IMF) and the Inter-American Development Bank (IDB). In addition, an embezzlement scandal at one of the largest microfinance institutions has illustrated the risk that lax oversight and institutional weaknesses represent for the sector. In June 2011, the National Assembly passed legislation designed to regulate better the microfinance sector, in an attempt to encourage renewed investment. However, the National Assembly has yet to publish the regulations for this law to take into effect.
The banking system has experienced high levels of liquidity. In 2010, bank deposits increased by $636 million, a 25% increase in comparison to the previous year. From January to September 2011, bank deposits have increased by $326 million. The primary cause was an influx of funds from Venezuela through the Bolivarian Alliance of the Americas (ALBA) mechanism, and the adoption of more restrictive lending policies by banks. In August 2010, BANEX -- Nicaragua’s seventh-largest bank -- was liquidated as the result of a questionable lending portfolio and the effects of the so-called No Pago (No Payment) movement on default rates.
As of November 2011, total deposits in the banking system had reached $3.48 billion, of which $2.49 billion was held in foreign currency (U.S. dollars and Euros). Interest rates on savings accounts averaged 1.11% in November 2011 for accounts denominated in Córdobas and 1.00% for accounts denominated in U.S. dollars. The banking system's loan portfolio totaled $2.2 billion as of October 2011. Interest rates on loans denominated in Córdobas averaged 10.22%; loans denominated in U.S. dollars averaged 9.55%.
The Superintendency of Banks and other Financial Institutions Law (amended 2006/576) and the General Law on Banks, Financial Institutions, Nonbank Financial Intermediaries, and Financial Conglomerates (2005/561) establish the legal framework for financial sector regulation. [see above for further information on microfinance institutions] The Superintendency of Banks and other Financial Institutions (SIBOIF) regulates banks, insurance companies, stock markets, and other financial intermediaries. SIBOIF requires that supervised entities provide audited financial statements, prepared according to international accounting standards, on a regular schedule. The Deposit Guarantee System Law (2005/551) established the Financial Institution Deposit Guarantee Fund (FOGADE) to guarantee bank deposits up to $10,000 per depositor, per institution.
CAFTA-DR allows U.S. financial services companies to establish subsidiaries, joint ventures, or bank branches in Nicaragua. The agreement also allows cross-border trade in financial services. Nicaragua has ratified its commitments under the 1997 WTO Financial Services Agreement. These commitments cover most banking services, including the acceptance of deposits, lending, leasing, the issuing of guarantees, and foreign exchange transactions. However, they do not cover the management of assets or securities. Nicaragua allows foreign banks to operate as 100% owned subsidiaries or as branches.
The Nicaraguan Social Security Institute (INSS), a government agency, manages a pension fund for private and public sector employees. INSS is the primary buyer of Nicaraguan sovereign debt; the government has also tapped INSS resources to finance housing projects. The October 2007 Poverty Reduction Growth Facility (PRGF) with the IMF requires the Nicaraguan Government to evaluate shortcomings in the current system and prepare recommendations for reform as needed. The Ortega administration has indicated it would tackle INSS reform in 2012. Private pension funds invest almost exclusively in offshore instruments.
Competition from State Owned Enterprises
President Ortega's stated objective is to implement socialism in Nicaragua, which he further defines as a mixed economy or “21st Century Socialism”, guided by Christian and socialist ideals. In March 2009, Ortega explained, "Our goal to implement a socialist society in Nicaragua is unchanged. We fought for a socialist society from 1979 to 1989 . . . and we continue fighting. But we must take into account that the socialism we sought to implement in the 1980s is not the same as we could and should apply in this new era. We must take into account the new global reality, a new regional reality, so that we can go forward developing the basis of socialism by combining elements of what is known as ‘the mixed economy.' That is, not all economic power for the state, but a mixed economy, including the state and private sector."
To achieve this balance between state and private sector participation in the economy, many feared that Ortega would employ the methods of the 1980s: nationalization and price controls. Instead, he has used funds provided by Venezuela through the Bolivarian Alliance for the Americas (ALBA) to increase the role of the state in the economy.
Through Petronic, the government owns a 45% share in ALBA de Nicaragua (ALBANISA), the company that imports and monetizes Venezuelan petroleum products through the ALBA Energy Agreement. The state-owned Venezuelan Petroleum Company (PDVSA) owns the remaining 55% share of ALBANISA, which sets aside 50% of oil sales for Nicaragua, and has provided over $1.8 billion to the GON through an agreement signed by President Ortega. According to the Nicaraguan Central Bank, Venezuela provided Nicaragua with approximately $533 million under this scheme in 2010, and $344 million during the first six months of 2011. Overall, oil monetization will have provided Nicaragua with about $1.8 billion in funds from 2007 to 2011.
ALBANISA's President is also the Treasurer of the FSLN and vice-president of Petronic, the state oil company. The company is managed privately with no formal government oversight. ALBANISA's core business is the importation and distribution of petroleum products. The company owns storage tanks in several locations and a fleet of tanker trucks and construction equipment. In October 2009, the company acquired filling stations operated by Swiss company Glencore for a reported $50 million. ALBANISA also operates diesel and bunker burning generators with a total installed capacity of 250 MW. Plans to open a refinery, called "Bolivar's Supreme Dream," have yet to materialize.
President Ortega and the FSLN have used ALBANISA to purchase television and radio stations, hotels, cattle ranches, electricity generation plants and pharmaceutical laboratories. ALBANISA, through its subsidiary ALBA Foods of Nicaragua (ALBALINISA), bought the Seminole Hotel and a cattle ranch in February 2009 for a reported $11 million. ALBANISA also operates a factory that makes plastic sacks for bulk foods. In January 2010, ALBANISA purchased a local television station. ALBANISA officials have said they plan to invest in pharmaceuticals (ALBA-MED), coffee (ALBA-CAFE), dairy, agricultural processing, and telecommunications. ALBANISA has also provided capital to the second tier bank, ALBA-CARUNA, which is now the largest “microfinance” institution in Nicaragua. Business owners report that ALBA-CARUNA provides financing only to those vetted by CPCs.
President Ortega and First Lady Rosario Murillo have also utilized these funds to heavily promote the FSLN in election year 2011, by financing populist patronage programs directed at their supporters and through political ads on television, radio and on billboards throughout Nicaragua. President Ortega has even mixed these funds with official GON expenditures, for example using ALBA funds to provide a monthly “Solidarity Bonus” for 145,000 GON civil servants.
Corporate Social Responsibility
Many large businesses have active Corporate Social Responsibility (CSR) programs that include improvements to the workplace environment, business ethics, and community developing projects. The Nicaraguan Union for CSR, which includes 56 companies, is working to create more awareness for CSR in Nicaragua. UNIRSE organizes events and studies best practices throughout the region. Additionally, Sahlman Seafoods of Nicaragua, a subsidiary of the U.S.-based Sahlman Seafoods was recognized with the 2011 Award for Corporate Excellence in the Small and Medium Enterprise category for their CSR programs in Nicaragua. Increasingly, businesses recognize that a CSR programs must go beyond compliance with environmental or labor law, but more work is needed in this area.
President Ortega has designated Citizen Power Councils (CPCs) as the government's preferred civil society partner in implementing its economic and social agenda, including decisions on infrastructure development, local regulatory authority, distribution of subsidized food, access to healthcare, and access to low-income housing. Civic leaders allege that CPC members have been monitoring citizens to differentiate between those who support the FSLN and those who do not, in order to channel benefits to those who do. On several occasions, CPC members have taken physical possession of property either through force or the threat of violence. Municipal officials, court officers, and Nicaraguan National Police have been unwilling to intervene in these cases. Constitutional experts, human rights activists, and nongovernmental organizations have criticized the imposition of CPCs for their unelected role in government and for displacing existing nongovernment organizations.
Before the November 2008 municipal elections and during their aftermath, FSLN and opposition supporters clashed throughout the country, leading to one death and many injuries. FSLN militants and CPC members established checkpoints throughout major cities in an effort to intimidate opposition supporters and discourage them from joining protests; police refused to intervene. Government supporters also violently targeted media and civil society organizations. On one occasion, opposition supporters seriously injured a journalist. These actions paralyzed commercial activity in many parts of the country for several weeks.
Disputes over labor issues, microfinance lending, property rights, and elections turned violent in 2008. Police clashed with drivers and fare collectors during a May 2008 transportation strike. After President Ortega sided with microfinance clients to demand renegotiation of their loans, mobs attacked the offices of several lenders in northern Nicaragua, burning one of them and in another case holding a manager captive for several hours (see Efficient Capital Markets and Portfolio Investment for more on microfinance).
Throughout 2009, FSLN supporters regularly sought to curb opposition or civil society marches critical of the government. This led to clashes between FSLN and opposition supporters throughout Nicaragua, which resulted in injuries and at least one death. As in the previous year, government supporters violently targeted independent media resulting in injuries to reporters and damages to equipment and infrastructure. In October 2009, several hundred FSLN supporters attacked and vandalized the U.S. Embassy using improvised projectile launchers which inflicted damage to the Embassy building. The crowds included government workers and were led by a National Assembly deputy from the governing FSLN party.
There were some cases of political violence surrounding the 2011 national election, including clashes between police and anti-FSLN protestors and violence by both pro-FSLN and anti-FSLN groups. On election day itself there were incidents, including the burning of roughly 10 polling places and other low-level cases of violence. In the two months following the election at least 9 Nicaraguans were killed in circumstances relating to the election, and there have been at least two small armed groups in the RAAN that have publicly stated political agendas.
Corruption, including bribery, raises the costs and risks of doing business. Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines the rule of law.
It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the foreign country and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.
The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies' acts of corruption, including bribery of foreign public officials, by requiring them to uphold their obligations under relevant international conventions. A U. S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.
U.S. Foreign Corrupt Practices Act: In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to foreign public officials for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more detailed information on the FCPA, see the FCPA Lay-Person's Guide at: http://www.justice.gov/criminal/fraud/
Other Instruments: It is U.S. Government policy to promote good governance, including host country implementation and enforcement of anti-corruption laws and policies pursuant to their obligations under international agreements. Since enactment of the FCPA, the United States has been instrumental to the expansion of the international framework to fight corruption. Several significant components of this framework are the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Antibribery Convention), the United Nations Convention against Corruption (UN Convention), the Inter-American Convention against Corruption (OAS Convention), the Council of Europe Criminal and Civil Law Conventions, and a growing list of U.S. free trade agreements. Nicaragua has ratified the United Nations Convention against Corruption (UNCAC) in 2006 and the Inter-American Convention Against Corruption in 1999. Nicaragua has a well-developed legislative framework criminalizing acts of corruption. The Penal Code and Law No. 581 of 2006 cover all relevant aspects of corruption, including bribery, embezzlement, extortion and money laundering.
OECD Antibribery Convention: The OECD Antibribery Convention entered into force in February 1999. As of December 2009, there are 38 parties to the Convention including the United States (see http://www.oecd.org/dataoecd/59/13/40272933.pdf). Major exporters China, India, and Russia are not parties, although the U.S. Government strongly endorses their eventual accession to the Convention. The Convention obligates the Parties to criminalize bribery of foreign public officials in the conduct of international business. The United States meets its international obligations under the OECD Antibribery Convention through the U.S. FCPA. Nicaragua is not party to the OECD Antibribery convention.
UN Convention: The UN Anticorruption Convention entered into force on December 14, 2005, and there are 143 parties to it as of December 2009 (see http://www.unodc.org/unodc/en/treaties/CAC/signatories.html). The UN Convention is the first global comprehensive international anticorruption agreement. The UN Convention requires countries to establish criminal and other offences to cover a wide range of acts of corruption. The UN Convention goes beyond previous anticorruption instruments, covering a broad range of issues ranging from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence to the concealment and laundering of the proceeds of corruption. The Convention contains transnational business bribery provisions that are functionally similar to those in the OECD Antibribery Convention and contains provisions on private sector auditing and books and records requirements. Other provisions address matters such as prevention, international cooperation, and asset recovery. Nicaragua has ratified the UN Anticorruption Convention.
OAS Convention: In 1996, the Member States of the Organization of American States (OAS) adopted the first international anticorruption legal instrument, the Inter-American Convention against Corruption (OAS Convention), which entered into force in March 1997. The OAS Convention, among other things, establishes a set of preventive measures against corruption provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment, and contains a series of provisions to strengthen the cooperation between its States Parties in areas such as mutual legal assistance and technical cooperation. As of December 2009, the OAS Convention has 33 parties (see http://www.oas.org/juridico/english/Sigs/b-58.html) Nicaragua has ratified the OAS Convention Against Corruption.
Council of Europe Criminal Law and Civil Law Conventions: Many European countries are parties to either the Council of Europe (CoE) Criminal Law Convention on Corruption, the Civil Law Convention, or both. The Criminal Law Convention requires criminalization of a wide range of national and transnational conduct, including bribery, money-laundering, and account offenses. It also incorporates provisions on liability of legal persons and witness protection. The Civil Law Convention includes provisions on compensation for damage relating to corrupt acts, whistleblower protection, and validity of contracts, inter alia. The Group of States against Corruption (GRECO) was established in 1999 by the CoE to monitor compliance with these and related anti-corruption standards. Currently, GRECO comprises 46 member States (45 European countries and the United States). As of December 2009, the Criminal Law Convention has 42 parties and the Civil Law Convention has 34 (see www.coe.int/greco.) Nicaragua is not party to the Council of Europe Conventions.
Free Trade Agreements: While it is U.S. Government policy to include anticorruption provisions in free trade agreements (FTAs) that it negotiates with its trading partners, the anticorruption provisions have evolved over time. The most recent FTAs negotiated now require trading partners to criminalize "active bribery" of public officials (offering bribes to any public official must be made a criminal offense, both domestically and trans-nationally) as well as domestic "passive bribery" (solicitation of a bribe by a domestic official). All U.S. FTAs may be found at the U.S. Trade Representative Website: http://www.ustr.gov/trade-agreements/free-trade-agreements. The Free Trade Agreement between the United States, Central America, and the Dominican Republic (CAFTA-DR) entered into force on April 1, 2006, for the United States and Nicaragua.
Nicaragua additionally has free trade agreements with Mexico, Taiwan, Panama, and Chile and is party to CAFTA-DR and CA-Mexico. As of January 2012, Nicaragua is negotiating free trade agreements with Canada, the European Union, ALBA, and CARICOM (Caribbean). Nicaragua has partial trade agreements that include both preferential and non-tariff preferential benefits, as well as economic assistance with Colombia and Venezuela.
Local Laws: U.S. firms should familiarize themselves with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department's U.S. and Foreign Commercial Service can provide assistance with navigating the host country's legal system and obtaining a list of local legal counsel.
Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses seeking to address business-related corruption issues. For example, the U.S. and Foreign Commercial Service can provide services that may assist U.S. companies in conducting their due diligence as part of the company's overarching compliance program when choosing business partners or agents overseas. The U.S. Foreign and Commercial Service can be reached directly through its offices in every major U.S. and foreign city, or through its Website at www.trade.gov/cs.
The Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding on foreign government contracts through the Commerce Department's Advocacy Center and State's Office of Commercial and Business Affairs. Problems, including alleged corruption by foreign governments or competitors, encountered by U.S. companies in seeking such foreign business opportunities can be brought to the attention of appropriate U.S. government officials, including local embassy personnel and through the Department of Commerce Trade Compliance Center "Report A Trade Barrier" Website at tcc.export.gov/Report_a_Barrier/index.asp.
Guidance on the U.S. FCPA: The Department of Justice's (DOJ) FCPA Opinion Procedure enables U.S. firms and individuals to request a statement of the Justice Department's present enforcement intentions under the anti-bribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are available on DOJ's Fraud Section Website at www.justice.gov/criminal/fraud/fcpa. Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information, see the Office of the Chief Counsel for International Counsel, U.S. Department of Commerce, Website, at http://www.ogc.doc.gov/trans_anti_bribery.html. More general information on the FCPA is available at the Websites listed below.
Exporters and investors should be aware that generally all countries prohibit the bribery of their public officials, and prohibit their officials from soliciting bribes under domestic laws. Most countries are required to criminalize such bribery and other acts of corruption by virtue of being parties to various international conventions discussed above.
Public sector corruption, including bribery of public officials, remains a major challenge for U.S. firms operating in Nicaragua. The Penal Code (amended 2007/641) and the Special Law on Bribery and Crimes Against International Trade and Foreign Investment (2006/581) define corruption offenses and establish sanctions. Offering or accepting a bribe is a criminal act punishable by a fine and a minimum three years in prison. Legislation similar to the U.S. Foreign Corrupt Practices Act makes bribery by a Nicaraguan company of a foreign official a criminal act punishable by a minimum five years in prison. The Attorney General and the Controller General share responsibilities for investigating and prosecuting corruption cases. The anticorruption provisions of CAFTA-DR require each participating government to ensure under its domestic law that bribery in matters affecting trade and investment is treated as a criminal offense or subject to comparable penalties.
A 2010 World Bank study, Governance Matters, placed Nicaragua in the bottom quartile of all countries for control of corruption. Transparency International-which has links with local organization "Etica y Transparencia"-ranked Nicaragua 134th of 183 countries in its 2011 Corruption Perceptions Index. In 2008, Global Integrity named Nicaragua to its Grand Corruption Watch List, making it one of 16 countries in the world "at serious risk for high-level corruption."
Local sources and international organizations rank the legal environment in Nicaragua as among the weakest in Latin America. Nicaraguans commonly believe that the judicial system is controlled by political interests and is corrupt. The World Bank's Governance Matters study ranked Nicaragua in the 24th percentile for rule of law in 2010, while the World Economic Forum's Competitive Index Rankings ranked Nicaragua 132nd of 139 countries for judicial independence in 2010-2011.
Influence peddling in the judicial branch puts foreign investors at a sharp disadvantage in any litigation or dispute. Therefore, seeking administrative decisions or legal recourse in the courts is not the preferred method to clarify rights and responsibilities or resolve a dispute. Political connections and nepotism also affect regulatory and procurement decisions. Regulators often maintain business interests within the very sectors they regulate. On occasion, government officials ask investors to cover costs associated with the supervision of a concession or business operation (for example, in the review of an engineering design or a legal contract).
On November 9, 2008, Nicaragua held municipal elections in 146 of the country's 153 municipalities. Unofficial electoral observer groups noted numerous irregularities on election day, including early closures of polling stations and the exclusion of opposition poll watchers from both polling stations and the central tabulation center. Official results released by the Superior Electoral Tribunal (CSE) differed greatly from the results the opposition was able to reconstruct from tabulation sheets provided to each party by local polling stations. The final tally gave the FSLN 105 municipalities, although the opposition asserts that irregularities in at least 40 cities were severe enough to have affected the results.
The Constitutional Court of the Nicaraguan Supreme Court (CSJ) ruled on October 19, 2009, that Articles 147 and 178 of the Nicaraguan Constitution, which prohibit consecutive re-election of the President and other elected officials, are themselves unconstitutional. Two FSLN judges substituted for opposition judges not informed of the hearing in order to establish a quorum. Based on this ruling, President Ortega ran as a candidate for reelection in 2011 in an election that European Union and Organization of American States election observers said was marred by serious irregularities, and independent unaccredited domestic observers claimed was overtly fraudulent.
The elections were not conducted in a transparent and impartial manner, and the electoral process was marred by significant irregularities, as reflected in public statements by international observers and Nicaraguan civil society groups. The 2011 presidential elections mark a setback to democracy in Nicaragua. This erosion of democracy undermines the ability of Nicaraguans to hold their government accountable. The voting results, in which over 100,000 more votes were cast for the National Assembly than for the presidency, cast doubt on the outcomes. Furthermore, as of the end of 2011, the CSE has yet to publish the voting results by voting table, as required by Nicaraguan law. Opposition parties have rejected the results of the election, and one independent domestic election group says that roughly 150,000 votes were manipulated in the election.
In their 2012 report, “Freedom in the World,” Freedom House noted that “Nicaragua suffered a decline in political rights and lost its electoral democracy status due to irregularities in advance of and during the presidential election, which gave Sandinista leader Daniel Ortega another term in office… events in 2011 demonstrated that quasi-authoritarian populism still stands as a threat to the region’s political stability. In the most serious case, Nicaragua suffered a steep decline in political rights due to irregularities in advance of and during the presidential election, which gave Sandinista leader Daniel Ortega another term in office… Nicaragua’s political rights rating declined from 4 to 5 due to shortcomings regarding the constitutionality of Daniel Ortega’s presidential candidacy, reported irregularities and the absence of transparency throughout the electoral process, and the Supreme Electoral Tribunal’s apparent lack of neutrality.”On January 9, 2010, President Ortega issued a decree to extend the terms in office of a number of public officials, despite the claims of legal experts, including the president of the CSJ, that the move was unconstitutional and a violation of separation of powers. CSJ magistrates aligned with the opposition protested the move and were summarily replaced by pro-government judges. This replacement court voted to confirm the 2009 ruling granting Ortega the ability to run for reelection before the opposition judges capitulated and returned to the court. Meanwhile, the president of the National Assembly, a FSLN member, published a new version of the Nicaraguan Constitution that included a clause granting the President the ability to extend the terms in office of public officials. Though changes to the Constitution require the approval of a super-majority in the legislature, this change was made merely by printing a new version of the document itself, which was then backed up by the FSLN-controlled CSJ. These cases illustrate of the tenuous nature of the rule of law in Nicaragua.
In 2009 and 2010, California state courts found that some U.S. plaintiff lawyers have exploited judicial corruption in Nicaragua in order to file false claims and extort money from U.S. companies. They have fomented political unrest, recruited plaintiffs from the poorest areas of Nicaragua, intimidated witnesses, and provided improper benefits to Nicaraguan judges in exchange for favorable rulings for the plaintiffs and to obtain judgments that could be enforced in the United States or other jurisdictions.
During the Bolaños administration, the government successfully prosecuted former President Arnoldo Alemán for embezzlement, fraud, and money laundering. In December 2003, a Nicaraguan court sentenced Alemán to a 20-year jail term, nearly all of which he served under an interpretation of house arrest that allowed him to travel freely throughout the Department of Managua, and later the entire country, and continue to serve as the de facto head of the Liberal Constitutional Party (PLC). In January 2009, the Supreme Court freed Alemán from house arrest and vacated the charges against him.
Some useful resources for individuals and companies regarding combating corruption in global markets include the following:
· Information about the U.S. Foreign Corrupt Practices Act (FCPA), including a "Lay-Person's Guide to the FCPA" is available at the U.S. Department of Justice's Website at: http://www.justice.gov/criminal/fraud/fcpa.
· Information about the OECD Antibribery Convention including links to national implementing legislation and country monitoring reports is available at: http://www.oecd.org/department/0,3355,en_2649_34859_1_1_1_1_1,00.html. See also new Antibribery Recommendation and Good Practice Guidance Annex for companies: http://www.oecd.org/dataoecd/11/40/44176910.pdf
· General information about anticorruption initiatives, such as the OECD Convention and the FCPA, including translations of the statute into several languages, is available at the Department of Commerce Office of the Chief Counsel for International Commerce Website: http://www.ogc.doc.gov/trans_anti_bribery.html.
· Transparency International (TI) publishes an annual Corruption Perceptions Index (CPI). The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2009. TI also publishes an annual Global Corruption Report which provides a systematic evaluation of the state of corruption around the world. It includes an in-depth analysis of a focal theme, a series of country reports that document major corruption related events and developments from all continents and an overview of the latest research findings on anti-corruption diagnostics and tools. See http://www.transparency.org/publications/gcr.
· The World Bank Institute publishes Worldwide Governance Indicators (WGI). These indicators assess six dimensions of governance in 212 countries, including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. See http://info.worldbank.org/governance/wgi/sc_country.asp. The World Bank Business Environment and Enterprise Performance Surveys may also be of interest and are available at: http://go.worldbank.org/RQQXYJ6210.
· The World Economic Forum publishes the Global Enabling Trade Report, which presents the rankings of the Enabling Trade Index, and includes an assessment of the transparency of border administration (focused on bribe payments and corruption) and a separate segment on corruption and the regulatory environment. See http://www.weforum.org/en/initiatives/gcp/GlobalEnablingTradeReport/index.htm.
· Additional country information related to corruption can be found in the U.S. State Department's annual Human Rights Report available at http://www.state.gov/g/drl/rls/hrrpt/.
· Global Integrity, a nonprofit organization, publishes its annual Global Integrity Report, which provides indicators for 92 countries with respect to governance and anti-corruption. The report highlights the strengths and weaknesses of national level anti-corruption systems. The report is available at: http://report.globalintegrity.org/.
Bilateral Investment Agreements
Nicaragua has signed and ratified bilateral investment agreements with Argentina, Chile, Czech Republic, Denmark, Ecuador, El Salvador, Finland, France, Germany, Italy, the Netherlands, South Korea, Spain, Switzerland, Sweden, Taiwan, and the United Kingdom. CAFTA-DR includes an Investment Chapter.
OPIC and Other Investment Insurance Programs
The U.S. Overseas Private Investment Corporation (OPIC) offers financing and insurance against political risk, expropriation, and inconvertibility to U.S. investments in Nicaragua. A 2004 Investment Incentive Agreement between Nicaragua and the United States expanded the range of OPIC programs available to U.S. investors in Nicaragua and streamlined investment application procedures. Nicaragua is a member of the World Bank's Multilateral Investment Guarantee Agency.
In 2010, the Nicaraguan Government estimated Nicaragua's labor force at 2.81 million, of which 2.59 million (92%) are reportedly employed. Of those employed, 32.2% work in agriculture, fisheries, and forestry, 15.9% in manufacturing, and 51.8% in services. Although unemployment is reported to be at only 7.8%, some nongovernment sources estimate informal employment at up to 65-70% of the total work force, and underemployment is common. Unskilled labor is widely available and relatively inexpensive, but in rural areas outward migration has resulted in labor shortages during harvest season. In 2005, he World Bank reported that 46% of Nicaraguans live below the poverty line.
Nicaragua has ratified all eight of the International Labor Organization's core labor conventions. The Nicaraguan Constitution, Labor Code (1996/185 and amendments), General Law on Labor Health and Safety (2007/618), and several other laws establish minimum standards for labor conditions and provide the legal framework for relations between employers and their employees. The Nicaraguan Constitution bans forced labor, slavery, and indentured servitude. The constitution also specifies that a standard work day be no more than 8 hours and a standard work week no more than 48 across six days, The minimum age for employment is fourteen, and teenage workers between ages fourteen and sixteen must have their parents consent in order to be employed, can only work up to 6 hours and are limited to no more than 30 hours per week. The law also prohibits certain dangerous or hazardous work for workers under eighteen. Labor unions complain that the Ministry of Labor lacks adequate staff and resources to fully enforce these provisions.
Business, government, and labor negotiate a statutory minimum wage that the National Assembly must subsequently confirm. Each sector of the economy has a different minimum wage, which must be reviewed every six months. For the past three years, the wage has increased by at least 15% at each review. In 2011 the government negotiated with Labor Unions and COSEP and implemented a 13% increase to the minimum wage during the year – 7% in February, and 6% in August. Minimum wage in Nicaragua is determined by sector. In general, enforcement of the minimum wage takes place only within the formal sector, as opposed to in the largely undocumented informal sector of the economy. While the law mandates premium pay for overtime and prohibits excessive compulsory overtime, the government does not always effectively enforce these requirements.
The labor code sets forth significant benefits that increase business costs. For example, at year-end, employers must pay the equivalent of an extra month's salary. Other benefits include maternity leave, medical care, death and survivor's benefits, pensions, and workers compensation for disability. Upon termination of an employee, the employer must pay a month's salary for each year worked, up to five months salary. Some business groups say that the five-month limit provides workers with an incentive to seek dismissal once they have completed five years with a firm.
Nicaraguan law grants public and private sector workers, except those in the military and police, the right to organize. Workers need not advise the employer or the Ministry of Labor of their intention to do so. In general, workers exercise the right to organize unhindered. However, burdensome and lengthy labor code conciliation procedures sometimes impeded workers’ ability to call strikes. In addition, if a strike continues for 30 days without resolution, Nicaragua’s Ministry of Labor (MITRAB) has authority to suspend the strike and submit the matter to arbitration. The ILO continued to note that this provision limits the right to strike and called for the law to be amended. Labor activists and NGOs alleged that employers routinely violated collective bargaining agreements and labor laws with impunity. Although employers are legally required to reinstate workers fired for union activity, formal reinstatement requires a judicial order which can be difficult to obtain because of a lengthy appeals process. In practice, employers often do not reinstate workers because the law is poorly enforced. Employers may dismiss any employee, including union organizers, by agreeing to pay double the legally mandated severance pay.
The law provides for the right to bargain collectively and for several unions, each with different membership, to coexist at any one enterprise. Employers may sign separate collective bargaining agreements with each union. Independent labor leaders complain that employers often violate collective bargaining agreements and Nicaraguan labor laws. They also complain that employers use company unions to disrupt the organization of independent unions. Sporadic strikes have occurred, especially in the transportation sector. Division among labor unions along political lines complicates the resolution of these strikes and other labor issues.
Burdensome and lengthy labor code conciliation procedures impeded workers' ability to call strikes. During a strike employers cannot hire replacement workers. However, unions alleged that this practice was common. If a strike continues for 30 days without resolution, MITRAB has authority to suspend the strike and submit the matter to arbitration. MITRAB often declares strikes illegal, even when workers follow legal strike procedures.
Foreign-Trade Zones/Free Ports
The Nicaraguan Government reported that as of December 15, 2010, there were 125 companies operating in free trade zones (FTZs) throughout Nicaragua and a total of 49 industrial parks, directly employing approximately 85,000 to 90,000 workers, up from 75,000 workers as of December 2010. Most free zones are located in Managua and approximately 78% belong to the textile and apparel sector.
In addition to export incentives and duty free capital imports granted by the Tax Equity Law and the Law of Temporary Admission for Export Promotion (see Performance Requirements and Incentives), the Free Trade Zones for Industrial Exports Decree (1991/46 and amendments) provides a 10-year income tax exemption for Nicaraguan and foreign investments in FTZs. The National Free Trade Zone Commission of Nicaragua (CNZF) administers the FTZ regime. The CNZF requires a deposit to guarantee that final salaries and other expenses be paid if a company goes out of business.
Foreign Direct Investment Statistic
Foreign Direct Investment (FDI) in Nicaragua is up 45% from 2006. FDI through the first half of 2011 totaled $284 million, a 32% increase compared to the same period in 2010. There are over 125 companies operating in Nicaragua with some relation to a U.S. company, either as wholly or partly-owned subsidiaries, franchisees, or exclusive distributors of U.S. products. The largest are in energy, financial services, textiles/apparel, manufacturing, and fisheries.
PRONicaragua (the government investment promotion agency) continues to target tourism, textiles and apparel, light manufacturing and assembly, agribusiness and forestry, contact centers and business process outsourcing, as well as energy and infrastructure.
Major U.S. Investors in Nicaragua include:
· Cargill (poultry and animal feed)
· Citigroup (banking)
· GE Money (banking)
· PriceSmart (retail)
· Wal-Mart (grocery)