3. Legal Regime
Transparency of the Regulatory System
Somalia’s regulatory system is largely nonexistent. The country’s 2012 provisional constitution is currently under review. Many business, taxation, and investment regulations remain from the pre-1991 government and are often ignored or not enforced.
International Regulatory Considerations
Somalia is a member of Inter-Governmental Authority on Development (IGAD) and recently obtained provisional membership in the Common Market for Eastern and Southern Africa (COMESA) with a number of conditions to fulfill before resuming full membership. Somalia is a member of Arab League and Organization of Islamic Cooperation (OIC). Somalia is not a member of the World Trade Organization (WTO).
Legal System and Judicial Independence
The law derives from four sources, including the Italian and British legal systems, customary xeer principles, and Islamic law. The majority of citizens rely primarily on customary dispute resolution (xeer), Sharia courts and local imams, or private mediators to resolve most disputes. The provisional constitution establishes a judiciary system that is independent of the executive and the legislature, however, the necessary laws to operationalize this structure are not in place and the legal system revolves around the executive. Somalia’s legal system is based in Islamic law which includes mechanisms for addressing commercial disputes. However, due to the prolonged absence of a functioning central government and judicial system, businesses and individuals often resort to Somali customary law. This informal system provides a framework for settling disputes, including business disputes, through clan and religious leaders.
Laws and Regulations on Foreign Direct Investment
No laws or regulations related to foreign direct investment are currently in place. The Ministry for Commerce and Industry is working on these laws and there is limited information on regulating foreign direct investment.
Competition and Anti-Trust Laws
Competition and Anti-Trust laws do not exist in Somalia. Local business disputes are informally settled through the intervention of traditional elders.
Expropriation and Compensation
Somalia is still rebuilding from decades of lawlessness and the legal and regulatory environment is still unsophisticated. There are no laws or acts that define how government or authority can expropriate private properties. However, the provisional constitution states, “The state may compulsorily acquire property only if doing so is in the public interest. Any person whose property has been acquired in the name of the public interest has the right to just compensation from the State as agreed by the parties or decided by a court.” Many government-owned properties ended up in private hands illegally after the 1991 collapse of the central government and the current government has now indicated an interest in repossessing these properties.
ICSID Convention and New York Convention
Somalia is not a party to the convention on the settlement of investment disputes between States and Nationals of other States, known as the International Centre for Settlement of Investment Disputes (ICSID), or the New York Convention of 1958.
Investor-State Dispute Settlement
The government has limited capacity to enforce laws or settle disputes domestically. Members returning from the diaspora, though they operate as Somali businesses rather than foreign entities, own many businesses in Somalia. Some of the basic laws that would provide the foundation for investor-state dispute settlement, such as the proposed company law, are yet to be enacted and the government is not a signatory to any internationally binding treaty or investment agreement to arbitrate investment disputes. The government has no bilateral investment treaty or free trade agreement with an investment chapter with United States. There have been no investment disputes involving U.S. persons or other foreign investors for the past 30 years.
International Commercial Arbitration and Foreign Courts
Somalia government is not signatory to any convention and local courts have limited capacity to enforce dispute resolutions arbitrated by them. Domestically, people normally resort to a local council of elders and clan elder, or religious leader to settle disputes. In some instances, people seek out al-Shabaab and other outlawed groups to intervene in dispute resolution locally.
Somalia has no bankruptcy laws.
4. Industrial Policies
There are no formal investment incentives available to foreign investors and the government does not issue grants or jointly finance foreign direct investment projects. There are no laws or acts that support investment incentives or grants to foreign investors. However, informal and ad hoc tax exemptions are used as investment incentives. The Director of Revenue at the Ministry of Finance is legally the authority for granting them, but in practice ministers and often the Prime Minister have offered tax exemptions to foreign investors.
Foreign Trade Zones/Free Ports/Trade Facilitation
There are no laws or policies that designate any area as a free trade zone or area with special tax treatment. Somaliland is in the process of finalizing a free trade zone around the Port of Berbera, funded jointly by the Somaliland government and UAE-based DP World.
Performance and Data Localization Requirements
The Somali government does not mandate local employment. There are no laws inhibiting foreign investors or foreign employees. Currently there are few foreign companies operating in Somalia and those that do that are mostly based within the confines of the secure compound surrounding Mogadishu’s airport. Most of these companies are contracted by either the government or other international organizations to undertake infrastructure and security-related projects. DP World operates in Somaliland and Puntland to implement port expansion projects in those regions.
10. Political and Security Environment
Somalia has a long history of political and clan-based violence that destroyed the basic state institution that supports economic development. Most of Somalia’s infrastructure was destroyed during the 30 years of civil war and violence. While pockets of stability are slowly growing, Somalia remains an insecure environment. Attacks by al-Shabaab, ISIS, regional militias and others can impact individuals and businesses throughout the country. The U.S. State Department advises U.S. citizens against traveling to Somalia.