3. Legal Regime
Somalia’s limited business laws do not cover outward investment by companies registered in Somalia.
Transparency of the Regulatory System
Somalia’s regulatory system is largely nonexistent. The country’s 2012 provisional constitution is currently under review. Many of the current investment regulations are outdated, having been developed by the central government before 1991. The current FGS has revised some of these regulations and has begun development of modern business and investment legislation to conform to the global business environment. Some new pieces of legislation recently approved and signed into law include: telecommunication, petroleum, company, public finance management, and anti-corruption laws. Several more business-related laws are currently under review.
International Regulatory Considerations
Somalia is a member of Inter-Governmental Authority on Development (IGAD) and in 2018 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 yet a member of the World Trade Organization (WTO).
Legal System and Judicial Independence
Somalia’s legal system derives from four sources, including the Italian and British legal systems, customary dispute resolution (xeer) principles, and Islamic law. The majority of citizens rely primarily on xeer, Sharia courts and local imams, or private mediators to resolve 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. In some instances, Mogadishu residents seek intervention from al-Shabaab’s “courts” to resolve disputes, particularly when one of the disputing parties is from a minority community that lacks confidence in other dispute resolution mechanisms, including Somali customary law.
Laws and Regulations on Foreign Direct Investment
While Somalia’s 2018 Investment Law provides some guidance for foreign investors, there are no laws or regulations related specifically to foreign direct investment. The Ministry for Commerce and Industry is working on the development of FDI laws. In 2019 the Ministry of Planning opened its Investment Promotion Office( ), to provide potential investors with guidance on working in Somalia. Sominvest has already provided guidance and assistance to U.S. companies looking to register business entities in Somalia. ( )
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 undeveloped. There are no laws or acts that define how government or authorities 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. Many businesses in Somalia are owned by members returning from the diaspora, though they operate as Somali businesses rather than foreign entities. Some of the basic laws that would provide the foundation for investor-state dispute settlement, such as the company law, are in the process of being implemented. 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 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 signatory to any convention on commercial arbitration 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. Many foreign companies rely on arbitration courts in Djibouti or United Arab Emirates. The Intergovernmental Authority on Development (IGAD) is working on a regional initiative to establish a business dispute and arbitration center in Djibouti.
Somalia has no bankruptcy laws.
8. Responsible Business Conduct
There are no laws or regulations that encourage corporate social responsibility or define responsible business conducts.
The provisional constitution criminalizes several forms of corruption that include abuse of office, embezzlement of funds, and bribery. The president signed the anti-corruption bill into law in September 2019. The new law will pave the way for the formation of an independent anti-corruption commission on both federal and regional levels. Somalia’s procurement legislation has 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 180 out 180 in its 2019 perceptions of corruption index.
Somalia’s current government has waged a campaign against public corruption and graft, resulting in high profile dismissals and arrests over the past three years. However, without a robust asset declaration mechanism, an updated penal code, and a functioning criminal justice system, including police and prosecutorial services, very few penalties exist for corrupt activities. Legislation on government procurement was passed in 2015 and officially all government contracts must go through an open tender process unless they meet specified conditions for limited competition. However, in practice this has been slow to be implemented and lucrative contracts are still awarded based on close relationships and favors. Moreover, the FGS has not yet established a Procurement and Concessions Board as required in the Procurement Act, which makes it difficult to ensure transparency and accountability in government procurement activities. An interim Procurement Board is in place but meets irregularly.
Resources to Report Corruption
Currently there is no central agency or office where whistleblowers can report corruption. There is no legal framework to protect whistleblowers. The FGS has not established an Office of the Ombudsman, as provided for in the provisional constitution. In December 2018, the Ministry of Justice and Judiciary Affairs signed a Project Initiation Plan (PIP) with UNDP to help the government strengthen its institutions to fight corruption and promote accountability.