Transparency of the Regulatory System
In September 2013, the United States and Mongolia signed the Transparency Agreement. The agreement marked an important step in developing and broadening the economic relationship between the two countries. Upon full implementation, the Transparency Agreement will make it easier for U.S. and Mongolian firms to do business by guaranteeing transparency in the formation of trade-related laws and regulations, the conduct of fair administrative proceedings, and measures to address bribery and corruption. In addition, it provides for commercial laws and regulations to be published in English, improving transparency and making it easier for foreign investors to operate in the country. Parliament ratified the Transparency Agreement in December 2014, the United States and Mongolia certified that their respective applicable legal requirements and procedures were completed in January 2017, and the Transparency Agreement entered into force on March 20, 2017. Mongolia has five years to implement fully the Transparency Agreement. A copy of the Transparency Agreement is here: https://ustr.gov/sites/default/files/US-Mongolia%20Transparency%20Agreement-English-Final-As%20Posted.pdf.
The Law on Legislation aligns Mongolia’s legislative processes with its Transparency Agreement obligations. The law clarifies who has the right to draft legislation, the format of these bills, the respective roles of the Mongolian government and parliament, and the procedures for obtaining and employing public comment on pending legislation. The Law on Legislation states that law initiators – i.e., members of parliament, the president of Mongolia, or the cabinet of Mongolia – must fulfill the following criteria: (1) provide a clear process for both developing and justifying the need for the draft legislation; (2) set out methodologies for estimating costs to the government related to the draft law’s implementation; (3) evaluate the impact of the legislation on the public once implemented; and (4) conduct public outreach before submitting legislation to the public.
The Law on Legislation also requires that law initiators obtain public comment by posting draft legislation and required reports evaluating costs and impacts on parliament’s official website (http://forum.parliament.mn/projects?status=Submitted) at least 30 days prior to submitting it to parliament. These posts must explicitly state the time period for public comment and review. In addition, initiators must solicit comments in writing, organize public meetings and discussions, seek comments through social media, and carry out public surveys. No more than 30 days after the public comment period ends, the initiator must prepare a matrix of all comments, including those used to revise the legislation as well as those not used, which must be posted on parliament’s official web site. After passage of a new law, parliament is responsible for monitoring and evaluating both the implementation and impact of the legislation. Despite these legal requirements, law initiators do not generally follow these rules. Parliament may exempt budget and tax legislation from this law as well.
While General Administrative Law (GAL) Article 6 brings Mongolia’s regulatory drafting process into line with its Transparency Agreement obligations, the Mongolian government is not generally enforcing it. The GAL requires ministries, agencies, and provincial governments to seek public comment by posting draft regulations on their respective websites for at least 30 days and by holding public hearings, following the rules set out in the 2015 Public Hearing Law. The drafting entity must record, report, and respond to the public comment. The Ministry of Justice and Home Affairs must certify that each regulatory drafting process complies with the GAL before the regulations enter into force. After approval, the relevant government agency must monitor and evaluate the implementation and impact of the regulations.
Businesses complain about a high regulatory burden at the local, or aimag/soum, level. They note a lack of knowledge among local inspectors, whom they sometimes accuse of overly frequent inspections intended to raise revenue for local municipalities. Regional tax, health, and safety inspectors in particular have been cited as problematic.
International Regulatory Considerations
Mongolia is not part of any regional economic bloc but often seeks to adapt or adopt European standards and norms in areas such as construction materials, food, and environmental regulations; looks to U.S. standards for activity in the petroleum sector; and adopts a combination of Australian and Canadian standards and norms in the mining sector. Mongolia also tends to employ World Organisation for Animal Health standards for its animal health regulations. Finally, Mongolia has a tendency to synchronize its veterinary, customs, and transport standards with China’s, its primary trade partner.
Mongolia, a member of the WTO, asserts that it will notify the WTO Committee on Technical Barriers to Trade (TBT) of all draft technical regulations; however, as demonstrated by the failure to notify TBT about changes in the process for using certificates of origin in 2016, Mongolia has not always complied with that commitment.
Legal System and Judicial Independence
Investors have complained that judges frequently avoid making controversial decisions in business disputes, preferring to delay judgment for as long as possible – sometimes years. If a decision is made, businesses face similarly long delays in obtaining and executing an enforcement order. In some instances, cases have taken so long that by the time a business had won an enforcement order, the counterparty had already liquidated its assets and closed up. U.S. businesses complain about similarly long delays with respect to inspection agencies, such as the Tax Dispute Settlement Resolution Council (TDSRC) as well as with other inspection agency panels, especially those related to mineral licenses and health matters.
Mongolia adopted a new regulation in April 2019 that effectively simplifies the president’s ability to remove judges and prosecutors, which the president quickly used to remove judges and prosecutors he and the government alleged were corrupt. Transparency International wrote of the legislation, “These legal amendments undermine the separation of powers and systems of checks and balances designed to prevent abuse and ensure respect for the rule of law.” Because no major decisions involving international investors have reached the courts since the adoption of these measures, it is difficult to assess their impact on investors. Investors should focus on whether the government continues to remove judges and prosecutors that show judicial independence as an indicator of whether they can have confidence in an independent judiciary in Mongolia.
Mongolia has adopted a hybrid Civil Law-Common Law system of jurisprudence. Trial judges may use prior rulings to adjudicate similar cases but have no obligation to respect legal precedent as such. Mongolian laws, and even their implementing regulations, often lack the specificity needed for consistent interpretation and application. Experienced and dedicated judges do their best to rule in the spirit of the law in routine matters. However, statutory and regulatory vagueness invites corruption within the underfunded and understaffed judiciary, especially in cases where large sums of money are at stake, or where large foreign citizens or corporations are in court against domestic government agencies or well-connected private Mongolian citizens.
Mongolia has a specialized law for contracts but no dedicated law for commercial activities. Contractual disputes are usually adjudicated in Mongolia’s district court system. Disputants may appeal cases to the City Court of Ulaanbaatar and ultimately to the Supreme Court of Mongolia. Mongolia has in place several specialized administrative courts authorized to adjudicate cases brought by citizens against official administrative acts. Disputants may appeal administrative court decisions to higher trial courts. Mongolia has a Constitutional Court, dedicated to ruling on constitutional issues. The General Executive Agency for Court Decisions (GEACD) enforces court decisions.
The Mongolian constitution specifies that non-judicial elements of the Mongolian government “shall not interfere with the discharge of judicial duties” by the judicial branch. The Judicial General Council, composed of respected jurists, is charged with the constitutional duty of ensuring the impartiality of judges and independence of the judiciary. The Judicial General Council consists of five members, with three members respectively nominated by the first instance courts, appellate courts, and the Supreme Court, one member by the Bar Association of Mongolia, and one member by the Ministry of Justice and Home Affairs, subject to appointment by the president of Mongolia. However, the Council lacks official authority to investigate allegations of judicial misconduct or to impose disciplinary measures on judges or other judicial sector personnel.
Laws and Regulations on Foreign Direct Investment
2018 saw no major changes in the 2013 Investment Law of Mongolia. The Investment Law frames the general statutory and regulatory environment for all investors in Mongolia. Under the law, foreign investors can access the same investment opportunities as Mongolian citizens and receive the same protections as domestic investors. Investor residence, not nationality, determines whether an investor is foreign or domestic. The law also provides for a more stable tax environment and provides tax and other incentives for investors. Accordingly, most investments by private foreign individuals or firms residing in Mongolia need only be registered with the General Authority for Intellectual Property and State Registration (www.burtgel.gov.mn).
The Investment Law offers tax incentives in the form of transferable tax stabilization certificates that give qualifying projects favorable tax treatment for up to 27 years. Affected taxes may include the corporate income tax, customs duties, value-added tax, and mineral resource royalties.
While foreign investors say they appreciate the intent of the Investment Law, they note it does not always deliver the promised national treatment, specifically in two areas. First, foreign nationals and companies may not own real estate; only Mongolian adult citizens can own real estate. While foreign investors may obtain use rights for the underlying land, these rights expire after a set number of years, with a limited right of renewal. Second, foreign investors object to the regulatory requirement that they invest a minimum of $100,000 to establish a venture. Although the Investment Law has no such requirement, Mongolian government regulators have unilaterally imposed it on all foreign investors. In contrast, Mongolian investors are not subject to investment minimums.
Investors have called on the Mongolian government to revise the law to incorporate their concerns.
Competition and Anti-Trust Laws
Mongolia’s Agency for Fair Competition and Consumer Protection (AFCCP) reviews domestic transactions for competition-related concerns. For a description of the AFCCP and its legal and regulatory powers, see the UNCTAD website (http://unctad.org/en/PublicationsLibrary/ditcclp2012d2_Mongolia_en.pdf) and the AFCCP website (http://www.afccp.gov.mn/).
Expropriation and Compensation
Although Mongolia generally respects property rights, the Mongolian government and parliament may exercise eminent domain in the national interest. Mongolian state entities at all levels are authorized to confiscate or modify land use rights for purposes of economic development, national security, historical preservation, or environmental protection. However, Mongolia’s constitution recognizes private real property rights and derivative rights, and Mongolian law specifically bars the government from expropriating such assets without payment of adequate, market-based compensation. Investors express little disagreement with such takings in principle but worry that a lack of clear lines of authority among the central, provincial, and municipal levels of government creates occasions for loss of property rights. For example, the 2006 Minerals Law (amended in 2014) provides no clear division of local, regional, and national jurisdictions for issuances of land use permits and special use rights. Faced with unclear lines of authority and frequent differences in practices and interpretation of rules and regulations by different levels of government, investors can find themselves unable to fully exercise duly conferred property rights.
Many of the cases alleging expropriation involve court expropriations after criminal trials in which the investors were compelled to appear as “civil defendants” but were not allowed to fully participate in the court proceedings. In these cases a government official is sometimes convicted of corruption and sentenced to prison, and the trial court judge then orders the foreign civil defendant to surrender a license or pay a tax penalty or fine for having received an alleged favor from the criminal defendant. In ongoing disputes involving several foreign investors, among them U.S. companies, the courts have taken property or revoked use licenses despite an absence of evidence the property or licenses were illegally obtained.
Investors and the legal community have expressed concerns about an act of parliament they perceive as expropriation. In June 2016, the Mongolian Copper Company, a privately-held entity, bought 49 percent of Mongolian state-owned Erdenet Mining Corporation from the Russian state-owned company Rostec. The non-transparent sale of this mining asset generated public controversy. Parliament nullified the transaction in February 2017, and ordered seizure of the Mongolian company’s shares. In March 2018, Mongolia’s Constitutional Court upheld this taking but ordered the government to compensate the private company. While investors and legal experts do not dispute parliament’s powers under the constitution and statute to nationalize property, they state that parliament has no authority to undo a business transaction between two non-government or foreign parties. They assert that the court, bending to improper pressure from parliament, delivered a decision inconsistent with Mongolia’s constitution. Consequently, they argue that this taking undermines the sanctity of contracts and may well discourage investment into other projects.
ICSID Convention and New York Convention
Mongolia ratified the Washington Convention and joined the International Centre for Settlement of Investment Disputes (ICSID) in 1991. It also signed and ratified the New York Convention in 1994. The government of Mongolia has accepted international arbitration in several disputes.
Investor-State Dispute Settlement
The U.S.-Mongolia Bilateral Investment Treaty (BIT) entered into force in 1997 (http://www.state.gov/e/eb/ifd/bit/117402.htm). Under the BIT, the two countries have agreed to respect international legal standards for state-facilitated property expropriation and compensation matters involving nationals of either country. The BIT effectively provides an extra measure of protection against financial loss for U.S. nationals doing business in Mongolia. In at least one expropriation case, however, the Mongolian government restored a mining license it had unilaterally modified years previously, but declined to compensate for undisputed financial loss as required by the BIT and independently required by the domestic law specifically cited in rendering the modification. Under the BIT, such uncompensated expropriation is appealable through arbitration proceedings. However, the cost of arbitration can make it impractical for aggrieved parties.
In disputes involving the Mongolian government, investors report government interference in the dispute resolution process, both administrative and judicial. Foreign investors describe three general categories of disputes that invite such interference. The first comprises disputes between private parties before a Mongolian government administrative tribunal. In these cases, investors warn a Mongolian private party may exploit contacts in government, the judiciary, law enforcement, or the prosecutor’s office to coerce a foreign private party to accede to demands. The second category involves disputes between investors and the Mongolian government directly. In these cases, the Mongolian government may claim a sovereign right to intervene in the business venture, often because the Mongolian government itself is operating a competing state-owned enterprise (SOE) or because officials have undisclosed business interests. The third category involves Mongolian tax officials or prosecutors levying highly inflated tax assessments against a foreign entity and demanding immediate payment, sometimes in concert with imposition of exit bans on company executives or even the filing of criminal charges.
Investors have reported local courts recognize and enforce arbitral decisions, but that problems exist with enforcement. The thinly staffed GEACD is charged with implementing the decisions and verdicts of Mongolia’s civil and criminal courts. GEACD employees often live in the jurisdictions in which they work, and are subject to pressure from friends and professional acquaintances. A complicated chain-of-command and opportunities for conflicts of interest can weaken GEACD’s resolve to execute court judgments on behalf of foreign and domestic interests.
International Commercial Arbitration and Foreign Courts
The Mongolian government has consistently declared it will honor arbitral awards. The Mongolian government and Canadian uranium mining company Khan Resources settled a high-profile expropriation dispute after a Paris arbitration panel awarded USD104 million to the Canadian company. The parties settled for USD70 million, which the government of Mongolia paid in May 2016.
To improve Mongolia-based international arbitration, parliament passed a new Arbitration Law in January 2017. Based on the United Nations Commission on International Trade Law (UNCITRAL), the Arbitration Law provides a clearer set of rules and protections for Mongolia-based arbitration. The law does not, however, designate any particular organization for use by all disputants, and remains unused by a foreign entity, to our knowledge. Any organization that satisfies specific requirements set out in the law can provide arbitral services. This change breaks the monopoly on domestic arbitration held by the Mongolian National Chamber of Commerce and Industry, which many investors criticized as politicized, unfamiliar with commercial practices, and too self-interested to render fair decisions. Foreign investors say they prefer international arbitration but might consider domestic arbitration if the newly established domestic arbitration tribunals are seen to be fair and effective.
The new law also limits the role of Mongolia’s courts in the arbitration process. Previously, disputants could appeal to Mongolia’s civil courts if the results of “binding arbitration” were not to their liking. The new arbitration law limits parties to a single appeal only to Mongolia’s Court of Civil Appeals. The Court of Civil Appeals can only reject an arbitration judgment for “serious” procedural failings or discrepancies with official public policy initiatives.
Mongolia’s Bankruptcy Law defines bankruptcy as a civil matter. Mongolian law mandates the registration of mortgages and other debt instruments backed by real estate, structures, immovable collateral (mining and exploration licenses and other use rights) and, after March 2017, movable property (cars, equipment, livestock, receivables, and other items of value). Even though the law allows for securitizing movable and immovable assets, however, local law firms hold that the bankruptcy process remains too vague, onerous, and time consuming to make it practical. Mongolia’s constitution and statutes allow contested foreclosure and bankruptcy only through judicial (rather than administrative) proceedings. Local business and legal advisors report that proceedings usually require no less than 18 months, with 36 months not uncommon. Investors and legal advisors state that a lengthy appeals process, perceived corruption, and government interference can create years of delay. Moreover, while in court, creditors face suspended interest payments and limited access to the asset.