Transparency of the Regulatory System
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 resolve disputes with government administrative authorities or business associates quickly results in some disputes becoming intractable. The vast majority of companies in Nicaragua have little accounting and few adhere to internationally accepted accounting standards. The Government of Nicaragua does not have transparent policies to establish clear “rules of the game.” Additional regulatory hindrances can occur in the Autonomous Caribbean Region where regional government and territorial authorities exist in addition to central government and municipal authorities.
Personal connections and affiliation with industry associations and chambers of commerce are useful but the Presidency retains ultimate rule making and regulatory authority, and has used that power in decisions related to the minimum wage and social security, subjects which previously had been areas of collaboration between the Government, private sector, and unions. Though municipal and ministerial authorities may enact decisions relevant to foreign businesses, all actions are subject to de facto approval by the Presidency.
Draft legislation is ostensibly made available for public comment through meetings with associations that will be affected by the proposed regulations, however, in most cases consultations are limited to pro-government groups. Not all information is published on official websites and the legislature is not required by law to give notice. Draft texts may be distributed directly to stakeholders the government deems impacted by the legislation. The ruling Sandinista party has a super majority in the National Assembly, and in practice, the legislative branch has no power to modify legislation proposed by the Executive.
Key regulatory actions are published in La Gaceta, the official journal of government actions in Nicaragua, including official summaries and the full text of all legislation. There are limited oversight or enforcement mechanisms to ensure the government follows administrative processes.
International Regulatory Considerations
All CAFTA-DR provisions are fully incorporated into Nicaragua’s national regulatory system. Nicaragua is a member of the WTO and notifies draft technical regulations to the WTO Committee on Technical Barriers to Trade. Nicaragua is a signatory to the Trade Facilitation Agreement and reported in July 2017 that it had implemented 77 percent of its commitments to date. However, this self-reported figure likely overstates trade facilitation progress, which remains beset with bureaucratic inefficiency and lack of transparency.
Legal System and Judicial Independence
The Nicaraguan judicial system is not independent and is fully controlled by the Presidency. The judicial system is frequently used as a method to pressure and control political enemies. Nicaragua is a civil law country in which legislation is the primary source of law. The legislative process is found in Articles 140 to 143 of the Constitution. Difficulty in resolving commercial disputes, particularly the enforcement of contracts, remains one of the most serious drawbacks to investment in Nicaragua. Members of the judiciary, including those at senior levels, are widely believed to be corrupt. A commercial code and bankruptcy law exist, but both are outdated and rarely used. While regulations and enforcement actions are technically appealable through judicial review, these procedures are not viewed as reliable.
Laws and Regulations on Foreign Direct Investment
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 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 (2000/344) defines the legal framework for foreign investment. The law allows for 100 percent foreign ownership in most industries. (See Limits on Foreign Control and 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.
In June 2017, the Government of Nicaragua passed Law 953 to establish a state-owned mining enterprise (ENIMINAS) operating under the authority of the Ministry of Energy and Mines (MEM). The law requires ENIMINAS participation in the exploitation of mineral resources from national mining reserves, which necessitates that state mining company shall have some level of commercial interest in new mining concessions.
MIFIC maintains an information portal regarding applicable laws and regulations for trade and investment at http://www.tramitesnicaragua.gob.ni . Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal bases justifying the procedures. The site is available only in Spanish.
Competition and Anti-Trust Laws
The Competition Promotion Law (2007/601) established the Institute for the Promotion of Competition (Procompetencia), to investigate and discipline businesses engaged in anticompetitive business practices, including price fixing, dividing territories, exclusive dealing, and product tying. Procompetencia does competent research but has no effective power. In October 2016, Procompetencia opened an investigation into price manipulation by four beef slaughterhouses after a formal complaint was filed by industry and consumer representatives. The investigation is ongoing.
Expropriation and Compensation
Considerable uncertainty remains in securing property rights in Nicaragua. The World Bank reported in June 2017 that 35–40 percent of all property was in some form of dispute. Since June 1, 2018, new property invasions and irregular expropriations have increased substantially as groups affiliated with the ruling Sandinista party have taken advantage of the growing civil unrest to seize property, sometimes violently. Some property seizures appear to be politically motivated, targeting property owners that have spoken against the government. Some U.S. citizens report difficulties exercising property rights due to lack of government action, such as failure by local authorities to remove illegal occupants or long unexplained delays in government authorities’ performing basic duties such as cadastral surveys or issuance of documents needed by property owners. U.S. citizens have also encountered challenges executing and enforcing final court orders, even when orders come from the Supreme Court of Nicaragua. Conflicting land title claims are abundant and judicial appeal in these cases is very challenging. The U.S. Embassy continues to advocate that the government resolve all outstanding property claims and prevent new irregular expropriations, particularly those involving U.S. citizens, and improve its overall investment and business climate. U.S. citizens who wish to report an expropriation or confiscation of their property by government authorities may contact ManaguaPropOffice@state.gov.
ICSID Convention and New York Convention
Nicaragua is a member of the Convention of the Settlement of Investment Disputes between States and Nationals of Other States (ICSID). The Government of Nicaragua signed the 1958 New York Convention on the recognition and enforcement of foreign arbitration awards in 2003. There is no specific domestic legislation providing for enforcement under the 1958 New York Convention or for the enforcement of awards under the ICSID Convention.
Investor-State Dispute Settlement
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 in the Agreement. In December 2017, a group of 24 U.S. investor entities filed a claim against Nicaragua over an alleged expropriation of a hydrocarbon concession. The case is currently pending.
International Commercial Arbitration and Foreign Courts
The Mediation and Arbitration Law (2005/540) establishes the legal framework for alternative dispute resolution. The Nicaraguan Chamber of Commerce and Services founded Nicaragua’s 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.
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 at a disadvantage in disputes against Nicaraguans with political or personal connections. 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.
Dispute resolution is even more difficult in the Northern and Southern Caribbean Autonomous Regions, 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, much of which is controlled by territorial collective systems of both Afro-Caribbean and indigenous populations. The division of authority between the central government and regional authorities is complex and ambiguous. Local officials may act without effective central government oversight, and industry-wide regulations, like those of timber, mining, and fishing, often contradict autonomous recognition of the region.
Although bankruptcy provisions are included in the Civil and Commercial Codes, there is no tradition or culture of bankruptcy in Nicaragua. More often than not, companies simply choose to close their operations and set up a new entity without going through a formal bankruptcy procedure, effectively leaving their creditors unprotected. For their part, creditors typically avoid a judicial procedure fraught with uncertainty and instead attempt to collect as much as they can directly from the debtor, or they simply give up on any potential claims they may have. Nicaragua’s rules on bankruptcy focus on the liquidation of business entities rather than on reorganization. They do not provide for an equitable treatment of creditors, to the detriment of creditors located in foreign jurisdictions.