Transparency of the Regulatory System

Somalia’s regulatory system is largely nonexistent.  The 2012 provisional constitution has not been finalized, and there is not yet a constitutional court to enforce it.  Many of the current investment laws and regulations predate the 1991 government collapse.  The FGS has revised some of these regulations and has begun to develop modern business and investment legislation to conform to the global business environment, but it has a long way to go.  Somalia has a procurement act that is intended to provide for transparency in public contracts and concessions, but it is not always followed.  In 2020 the FGS passed a petroleum law that provides a regulatory framework for issuing exploration and development licenses.

International Regulatory Considerations

Somalia is a member of the Intergovernmental Authority on Development, as well as the Arab League and the Organization of Islamic Cooperation.  In 2018 Somalia obtained provisional membership in the Common Market for Eastern and Southern Africa, but it has several conditions to fulfill before achieving full membership.  Somalia is not yet a member of the WTO.

Legal System and Judicial Independence

Somalia’s legal system derives from Italian and British law, customary dispute resolution (xeer) principles, and Islamic law.  The provisional constitution establishes a judicial system that is theoretically independent of the executive and the legislature, but in practice the legal system depends on the executive.  There are no courts dedicated to commercial disputes.  A November 2020 USAID-funded report found that the courts lack political independence, are marked by “pervasive graft,” and face competition from a parallel al-Shabaab court system.  There are reports that some citizens choose to bring cases to al-Shabaab courts, finding them less corrupt than government courts.

Laws and Regulations on Foreign Direct Investment

Somalia’s 2015 foreign investment law provides some guidance for foreign investors, but a comprehensive investor and investment bill remains stuck in parliament.  In 2019 the Ministry of Planning opened its investment promotion office, Sominvest, to provide potential investors with guidance on working in Somalia.

Competition and Antitrust Laws

Competition and anti-trust laws do not exist in Somalia.  Local business disputes often are informally settled through the intervention of traditional elders.

Expropriation and Compensation

Somalia is rebuilding from decades of civil war, and its legal and regulatory environment remains undeveloped.  There are no laws that define how the government can expropriate private property.  However, the provisional constitution provides a right to just compensation from the government if property has been compulsorily acquired in the public interest.  After the 1991 government collapse, many state-owned properties ended up in private hands, and the FGS has indicated interest in repossessing these properties.  There is a draft investors protection bill in parliament that will address expropriation, dispute resolution, and the transfer and repatriation of investments.

Dispute Settlement

ICSID Convention and New York Convention

Somalia is not a party to the Convention on the International Centre for Settlement of Investment Disputes or the New York Convention of 1958.

Investor-State Dispute Settlement

The government has limited capacity to enforce laws or settle disputes domestically.  Many businesses in Somalia are owned by members of the diaspora, many of whom operate them as Somali businesses rather than foreign entities.  The FGS still has not passed the investor and investment bill, which could provide a legal framework for investor-state dispute settlement.  Somalia 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 the 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 is not a signatory to any convention on commercial arbitration, and local courts have limited capacity to enforce their own decisions.  Domestically, parties often resort to a local council of elders, clan elders, religious leaders, or al-Shabaab to settle disputes.  Many foreign companies rely on arbitration courts in Djibouti or the United Arab Emirates (UAE).  The Intergovernmental Authority on Development is developing a regional initiative to establish a business dispute and arbitration center in Djibouti.

Bankruptcy Regulations

Somalia has no bankruptcy laws.

The provisional constitution criminalizes several forms of corruption such as abuse of office, embezzlement of funds, and bribery.  The FGS enacted an anti-corruption bill in September 2019 that provides for the formation of an independent anti-corruption commission at both federal and state levels.  Somalia’s procurement laws have provisions to address potential conflicts of interest in awarding government contracts, but enforcement is lax.  Corruption is rampant in all sectors of government, particularly government procurement.  Transparency International ranked Somalia 179 (tied) of 180 countries in its 2020 Corruption Perceptions Index.

For the past several years, the FGS has waged a campaign against public corruption and graft, resulting in several high-profile dismissals and arrests.  For example, in August 2020 a court convicted four senior Ministry of Health officials of embezzling funds intended to address the COVID-19 pandemic.  However, without a robust asset declaration mechanism, an updated penal code, and a functioning criminal justice system, anti-corruption efforts remain ad hoc, and there is little deterrence.

Procurement laws require all government contracts to go through an open tender process unless they meet specified conditions for limited competition.  However, the FGS has not put the relevant procedures in place, and in practice the FGS still awards lucrative contracts based on close relationships and favors.  Moreover, the FGS has not yet established a procurement board as required by law, which further stifles attempts to ensure transparency and accountability in government procurement activities.  An interim procurement board exists, but it meets irregularly.

Resources to Report Corruption

There is no central agency or office for whistleblowers to report corruption, and there is no legal framework to protect whistleblowers.  The FGS has not established an Office of the Ombudsman, as required by the provisional constitution.

Table 3: Sources and Destination of FDI
Data not available.

Table 4: Sources of Portfolio Investment
Data not available.