Transparency of the Regulatory System
Bureaucratic procedures are not always transparent, and red tape often makes processing registrations, ownership, and other procedures unnecessarily long, costly, and burdensome. Discretionary decisions by government officials provide room for abuse and corruption. While the government has adopted a number of laws to improve the business climate and reduce excessive state controls and regulation, effective implementation of these laws is often lacking. The inconsistent application of laws and regulations undermines fair competition and adds uncertainty for less politically-connected businesses, particularly small- and medium-sized businesses as well as new entrants.
The Moldovan government generally publishes significant laws in draft form for public comment. Draft laws are also available on-line on the website of Moldovan Parliament. Business and trade associations provide other opportunities for comment. A significant exception to this norm is a mechanism that allows Parliament to also propose draft laws, as occurred in July 2018, when Parliament proposed and adopted the capitol and tax amnesty law in one day. The working group of the State Commission for Regulation of Entrepreneurial Activity, which was established as a filter to eliminate excessive business regulations, meets to vet draft governmental regulations dealing with entrepreneurship. The working group’s meetings are open to interested businesses and the agenda is published online https://mei.gov.md/ro/agenda . Laws and regulations are published in the official gazette called Monitorul Oficial, while a database of laws and regulations is available online at lex.justice.md . An Economic Council under the Prime Minister offers another platform for discussion of Government-proposed business initiatives.
Moldova made a commitment to implement International Financial Reporting Standards (IFRS) in 2008. Use of IFRS is required by law for all public interest entities (financial entities, investment funds, insurance companies, private pension funds, and publicly listed entities) and national accounting standards (which approximate IFRS in many ways) are used by other firms, although many use IFRS as well due to foreign ownership. Treasury-OTA has an ongoing IFRS training program for the NBM and commercial banks.
The Foreign Investors Association (FIA) was established in 2004 with the support of the OECD. The FIA engages in a dialogue with the government on topics related to the investment climate and produces an annual publication of concerns and recommendations for the improvement of the investment climate. In 2006, the American Chamber of Commerce (AmCham) registered in Moldova, presenting another voice for the business community. In 2011, a group of ten large EU investors founded the European Business Association (EBA). These are the three largest foreign business associations, and they regularly engage in policy discussions with the government.
Since 2008, the National Business Agenda supported by the U.S. Center for International Private Enterprise (CIPE) has organized 30 domestic business associations, putting forth an annual list of priorities in their dialogue with the authorities. These priorities deal with the general business environment and regulatory framework.
Since 2004, the government has been taking steps to reduce excessive government regulation of business activity. The Government approved a 2018-2020 action plan to implement the strategy to reform the business regulatory framework for 2013-2020. The plan aims at further streamlining the regulatory framework and administrative procedures. All regulations and governmental decisions related to business activity have been published in a special business registry, “Register of Regulations on Business Activity,” to raise the awareness of business people about their rights, increase the transparency of business regulations, and help fight corruption.
As part of a USAID-backed program, the Ministry of Economy reviewed the number of permits and authorizations issued to businesses as well as the number of authorities issuing such documents. As a result, government approved a list of business permits and authorizations and banned governmental agencies and inspectors from issuing or requesting any form of documents not included in the list.
In 2012, Parliament passed a law to introduce clear and uniform rules for the release of information and standardized documents through a “one-stop window.”
A law simplifying the system of inspectorates and various inspection bodies was adopted in 2017 to increase efficiency and reduce regulatory burden. Through the reformation of inspection bodies, the government wants to reorganize the state inspection agencies for better planning and monitoring of inspectors’ activity. By reducing the number of inspection agencies and introducing risk-based criteria for inspections, the government hopes to improve the business climate by reducing the opportunity for inspections to be used as a political tool.
The World Bank Cost of Doing Business 2018 survey shows that the time spent by companies dealing with regulatory authorities saw no change in 2017 from the year before. Despite reported improvements, the survey notes that only13 percent of business managers consider that the business climate really improved in 2018. While 66 percent of managers do not see any change, 21 percent believe it has worsened.
In 2016, the government made a decision to merge several agencies – the State Registry, Cadastral Office, the Licensing Chamber, State Registration Chamber and Civil Status Archive – into a Public Service Agency as a one-stop-shop for business registration and licensing.
International Regulatory Considerations
European integration is a fundamental priority for Moldova. The Association Agreement (AA) including a Deep Comprehensive Free Trade Area (DCFTA) significantly strengthens Moldova’s political association and economic integration with the European Union. The AA/DCFTA has binding regulatory provisions committing Moldova to a reform agenda and to approximating domestic legislation to EU standards in a range of areas including corporate law, labor, consumer protection, competition and market surveillance, general product safety, tax, energy, customs duties, public procurement, etc. Under the DCFTA, Moldova will gradually abolish duties and quotas in mutual trade in goods and services, and will eliminate non-tariff barriers by adopting EU rules on health and safety standards, as well as intellectual property rights, among others. The agreement contains a timeframe for implementation, with deadlines up to ten years.
Moldova has been a member of the World Trade Organization (WTO) since 2001 and, as such, is a signatory to the General Agreement on Trade in Services (GATS), the Agreement on Trade Related Investment Measures (TRIMs) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). These agreements contain major investment-related provisions, such as opening to the establishment of foreign service providers, prohibition of local-content, trade-balancing and domestic-sales requirements (TRIMs), and protection of intellectual property of investors (TRIPS). No major WTO TRIMS inconsistencies were reported.
As a WTO member, Moldova has to notify draft technical regulations to the WTO Committee on Technical Barriers to Trade. Also, in 2016 Moldova ratified the WTO Trade Facilitation Agreement and adopted a 2018-2020 Trade Facilitation Action Plan in November 2017. The plan comprises 91 actions, with an estimated budget of over EUR 137.1 million and is implemented by government agencies in cooperation with the private sector under the guidance of the Economic Council under the Prime Minister, which acts as the National Trade Facilitation Committee. While an estimated 80 percent of measures focus on customs performance, the plan also provides for the setup of information points; discussion of relevant drafts with the business community and civil society; strengthening of the capacities of the National Food Safety Agency (ANSA) with integrated management information system for streamlining and standardizing the issuance of permissive documents; management of food safety registries; and supporting automated exchange of data with the European Union and Commonwealth of Independent States. It also involves expanding the capacities of the National Accreditation Center (MOLDAC) in new areas of accreditation, so that it could join the European Cooperation for Accreditation (EA) Multilateral Recognition Arrangement (MLA) and International Laboratory Accreditation Cooperation (ILAC) mutual recognition agreement (MRA). The action plan aims at cutting border-crossing costs for companies engaged in foreign trade.
The government has undertaken incremental steps since 2017 on a draft Customs Code, which would merge existing separate laws on customs procedures and goods crossing national borders and approximate national customs rules to the EU Customs Code. In April 2018, the Ministry of Finance sent the draft Code to the National Anticorruption Center (NAC) for its required review. In May 2018 NAC provided a draft anticorruption report which has not been finalized. In 2017, the government changed customs rules to align with the EU Authorized Economic Operator requirements and Approved Exporter conditions.
Thanks to negotiations linked to Moldova’s WTO accession, modern commercial legislation was adopted in accordance with WTO rules. The main challenges to the business climate remain the lack of effective and equitable implementation of laws and regulations, and arbitrary, non-transparent decisions by government officials to give domestic producers an edge over foreign competitors in certain areas. For example, an environmental tax is applied on bottles and other packaging of imported goods, but not levied on bottles and packaging produced in Moldova. Additionally, the government may cite public security or general social welfare as reasons to intervene in the economy in contravention of its declared respect for market principles. There are reports of problems with customs valuation of goods, specifically that the Customs Service has been applying the maximum possible values to imported goods, even if their actual purchase value was far lower. This has increased customs revenues, but has disadvantaged importers.
Legal System and Judicial Independence
Moldova has a civil law legal system with codified laws that govern different aspects of life, including business, trade, and economy. The country’s legal framework consists of its constitution, organic and ordinary laws passed by the Parliament, and normative acts issued by the government and other public authorities. Although Moldovan courts are constitutionally independent, its structure allows for government and political interference, and also suffers from low efficiency and lack of public trust.
The court system currently consists of lower courts (i.e. trial courts), four courts of appeal, the Supreme Court of Justice, and a separate Constitutional Court.
Moldova is preparing a new justice reform strategy in 2019 after its prior reform strategy expired (after an extension) at the end of 2017; there is no announced timeline for finalization of the new strategy. Parliament passed amendments in 2016 “optimizing” the country’s court system as part of the larger justice sector reforms, which ultimately reduced the number of trial courts in Moldova from 40 to 15. Specialized courts such as the Commercial Circumscription Court and Military Court ceased their activities. Five trial courts from Chisinau were conceptually merged into one — the Chisinau trial court — yet in 2018 the “merged” Chisinau trial court was further reorganized to specialize across five districts (investigative and contravention; criminal; administrative; bankruptcy; and civil, which includes adjudication of commercial disputes). The government’s plan predicts court optimization will be fully implemented by 2027.
In 2016, the government created two specialized quasi-independent prosecution offices. The Anticorruption Prosecution Office is responsible for investigating and prosecuting corruption, bribery and abuse of power by public officials, and money laundering. The Prosecution Office on Combating Organized Crime and Special Cases investigates and prosecutes organized, transnational and particular complex crimes, including tax evasion, smuggling, intellectual property offenses, trafficking in persons, drugs, etc. In 2017, the Moldovan Prosecution Service continued the implementation of reforms under a new law on prosecution service passed in 2016. The Prosecutor General’s Office (PGO) guided and led the drafting of new regulations for the specialized prosecution offices, regional and district offices. The Superior Council of Prosecutors organized competitions to appoint over 90 chief and deputy chief prosecutors in the PGO and all prosecutors’ offices in Moldova.
The government has also reformed the public integrity system in 2016 by creating the National Integrity Authority (NIA) – the successor to the National Integrity Commission. The new agency ultimately is to be staffed with 46 investigators who will check public officials’ financial disclosures, properties and conflicts of interests, and refer to the Anticorruption Prosecutor’s Office appropriate cases for further investigation and prosecution. However, due to the lack of funding and slow administrative planning, the Agency has yet to hire a full complement of investigators or start functioning at full capacity.
Also, in 2016, Parliament passed a new law on disclosure of assets (for NIA review) and conflicts of interest by public officials. This law, long-awaited by Moldovan civil society, broadens and improves the statutory competencies of integrity-checking authorities to oversee public officials’ integrity. Parliament also adopted new statutes in the Criminal Code criminalizing the misuse of international assistance funds. These provisions provide a statutory basis for Moldovan prosecutors to investigate and prosecute corruption or misuse of international donor assistance by Moldovan public officials in public acquisitions, technical assistance programs, and grants.
Laws and Regulations on Foreign Direct Investment
In addition to its international agreements, Moldovan laws affecting FDI include the Civil Code, the Law on Property, the Law on Investment in Entrepreneurship, the Law on Entrepreneurship and Enterprises, the Law on Joint Stock Companies, the Law on Small Business Support, the Law on Financial Institutions, the Law on Franchising, the Tax Code, the Customs Code, the Law on Licensing Certain Activities, and the Law on Insolvency.
The current Law on Investment in Entrepreneurship came into effect in 2004. It was designed to be compatible with European standards in its definitions of types of local and foreign investment. It provides guarantees of investors’ rights, non-application of expropriation or similar actions, and for payment of damages if investors’ rights are violated. The law permits FDI in all sectors of the economy, while certain activities require a business license.
Competition and Anti-Trust Laws
In 2012, Parliament passed a law on competition in line with EU practice and legislation. The National Competition Agency was subsequently renamed the Competition Council. The Competition Council oversees compliance with competition and state-aid provisions and initiates examination of alleged violation of competition laws. The Competition Council may request cessation of action, prescribe behavioral or structural remedies, and apply fines.
Expropriation and Compensation
The Law on Investment in Entrepreneurship states that investments cannot be subject to expropriation or to measures with a similar effect. However, an investment may be expropriated if the expropriation is done for purposes of public utility, is not discriminatory, and is done with just compensation. If a public authority violates an investor’s rights, the investor is entitled to compensation equivalent to the actual damages at the time of occurrence, including any lost profits.
The government has given no indication of intent to discriminate against U.S. investments, companies or representatives by expropriation, or of intent to expropriate property owned by citizens of other countries. No particular sectors are at greater risk of expropriation or similar actions in Moldova.
Since 2001, the government has cancelled several privatizations, citing the failure of investors to meet investment schedules or irregularities committed during privatization. While the government agreed to repay investors in such disputes, investors have had to apply to the European Court of Human Rights (ECHR) to enforce compensation payments. The government has been compliant with the ECHR rulings involving foreign businesses.
In the past, the limit on foreign ownership of agricultural land was reportedly used in lawsuits as an argument against foreign companies.
ICSID Convention and New York Convention
In 2011, Moldova ratified the Convention on the International Center for the Settlement of Investment Disputes (ICSID – Washington Convention). The country also ratified the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. Moldova is also a party to the Geneva European Convention on International Commercial Arbitration of April 21, 1961, and the Paris Agreement relating to the application of the European Convention on International Commercial Arbitration of December 17, 1962.
Investor-State Dispute Settlement
Moldova is signatory to a number of bilateral investment treaties (see chapter 3 above), including the U.S.-Moldovan Treaty Concerning the Encouragement and Reciprocal Protection of Investment, which make binding international arbitration of investment disputes.
Local courts recognize and enforce foreign arbitral awards against the government. There are no known cases when the Moldovan government denied voluntary payment under an arbitral award rendered against it.
The government has had a history of depriving investors, both national and foreign, of their businesses in various forms. Many of them have sued the government at the European Court for Human Rights for violation of the right to fair trial and of the respect for property. In 2018, the International Center for the Settlement of Investment Disputes (ICSID) ruled on a dispute involving a U.S. investor and local government authorities, which in 2011 terminated a farmland lease over a U.S. investor’s alleged failure to fulfill contractual obligations to plant the fields. After Moldovan courts ruled against the U.S. investor’s claims for compensation, in 2016 the investor filed suit with ICSID under the US-Moldova bilateral investment treaty. In 2018, ICSID ruled in favor of the U.S. investor, and the Moldovan Government subsequently paid the U.S. investor USD 1.792 million in compensation for damages.
International Commercial Arbitration and Foreign Courts
Private parties may choose alternative dispute resolution mechanisms instead of going to courts. Moldovan law provides the options of mediation and arbitration. The arbitration legislation is modeled after UNCITRAL rules. There are a number of arbitration bodies available in Moldova, including the arbitration court of the Moldovan Chamber of Commerce and Industry. The American Chamber of Commerce in Moldova (AmCham Moldova) recently established the Chisinau Court of International Commercial Arbitration (CACIC) under its auspices.
Moldova is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Domestic courts recognize and enforce foreign arbitral awards.
Recognition and enforcement of foreign judgments are regulated by a complex framework of documents, including the Code for Civil Procedures, international conventions and bilateral treaties. Therefore, depending on the nationality of the court, Moldovan courts may apply different legal norms in examining the enforcement of foreign judgments. However, as a rule, foreign judgments are enforceable in Moldova on the basis of reciprocity.
Moldova’s court system generally enjoys a low level of public trust and is perceived to be vulnerable to acts of corruption, while court processes lack transparency. The overall expectation in court hearings involving representatives of public authorities, including economic entities, is that final court rulings will be in favor of state representatives. While arbitration is often seen as a preferable option to the courts, the courts must still enforce the arbitral decision. Investors have been discouraged by the occasionally slow pace of court enforcement of arbitral awards and the judge’s excessive discretion over the arbitral decision.
In terms of resolving insolvency, the World Bank ranks Moldova 68th out of 190 economies in the 2019 Doing Business survey. Moldova scores below the regional average and trails EU members in Central and Eastern Europe. According to the survey, it takes creditors on average 2.8 years to recover their credit. The country has changed its insolvency law to grant priority to secured creditors and to ease insolvency proceedings by introducing new restructuring mechanisms, reducing opportunities for appeals, adding moratorium provisions, establishing strict statutory periods in the proceedings, and enhancing the role of insolvency administrators. The law also introduced expedited insolvency proceedings.
The country has two credit bureaus: Biroul de Credit, set up by commercial banks, and Infodebit Credit Report, founded by private shareholders.