Transparency of the Regulatory System
Costa Rican laws, regulations, and practices are generally transparent and foster competition in a manner consistent with international norms, except in the sectors controlled by a state monopoly, where competition is explicitly excluded. Publicly-traded companies adhere to International Accounting Standards Board standards under the supervision of SUGEVAL, the stock and bond market regulator.
Rule-making and regulatory authority is housed in any number of agencies specialized by function (telecom, financial, health, environmental) or location (municipalities, port authorities). Tax, labor, health, and safety laws, though highly bureaucratic, are not seen as unfairly interfering with foreign investment. It is common to have Professional Associations that play a regulatory role. For example, the Coffee Institute of Costa Rica (ICAFE), a private sector organization, promotes standardization of production models among national producers, roasters and exporters, as well as setting minimum market prices.
Costa Rica is a member of UNCTAD’s international network of transparent investment procedures (http://www.businessfacilitation.org ). Within that context, the Ministry of Economy compiled the various procedures needed to do business in Costa Rica: https://tramitescr.meic.go.cr/ . Accounting, legal, and regulatory procedures are transparent and consistent with international norms. The Costa Rican College of Public Accountants (Colegio de Contadores Publicos de Costa Rica -CCPA) is responsible for setting accounting standards for non-regulated companies in Costa Rica and adopted full International Financial Reporting Standards. For more, see the international federation of accountants IFAC: https://www.ifac.org/about-ifac/membership/country/costa-rica .
Regulations must go through a public hearing process when being drafted. Draft bills and regulations are made available for public comment through public consultation processes that will vary in their details according to the public entity and procedure in question, generally giving interested parties sufficient time to respond. The standard period for public comment on technical regulations is 10 days. As appropriate, this process is underpinned by scientific or data-driven assessments.
Regulations and laws, both proposed and final, for all branches of government are published digitally in the government registry “La Gaceta”: https://www.imprentanacional.go.cr/gaceta/ . The Costa Rican American Chamber of Commerce (AmCham – http://amcham.co.cr ) and other business chambers closely monitor these processes and often coordinate responses as needed.
The government has mechanisms to ensure laws and regulations are followed. The Comptroller General’s Office conducts operational as well as financial audits and as such provides the primary oversight and enforcement mechanism within the Costa Rican government to ensure that government bodies follow administrative processes. Each government body’s internal audit office and, in many cases, the customer-service comptroller (Contraloria de Servicios) provide additional support.
There are several independent avenues for appealing regulatory decisions, and these are frequently pursued by persons or organizations opposed to a public sector contract or regulatory decision. The avenues include the Comptroller General (Contraloria General de la Republica), the Ombudsman (Defensor de los Habitantes), the public services regulatory agency (ARESEP), and the constitutional review chamber of the Supreme Court. The State Litigator’s office (Procuraduria General) is frequently a participant in its role as the government’s attorney.
The review and enforcement mechanisms described above have kept the regulatory system relatively transparent and free of abuse, but have also rendered the system for public sector contract approval exceptionally slow and litigious. There have been several cases in which these review bodies have overturned already-executed contracts, thereby interjecting uncertainty into the process. Bureaucratic procedures are frequently long, involved and can be discouraging to new investors.
A similarly transparent process applies to proposed laws. The Legislative Assembly generally provides sufficient opportunity for supporters and opponents of a law to understand and comment upon proposals. To become law, a proposal must be approved by the Assembly by two plenary votes. The signature of ten legislators (out of 57) is sufficient after the first vote to send the bill to the Supreme Court for constitutional review within one month, although the court may take longer.
Costa Rica is transparent in reporting its public finances and debt obligations, including explicit and contingent liabilities. The Ministry of Finance provides monthly updates on public debt, generally on the 20th of the month, with the debt categorized as Central Government, Central Government and Non-Financial Sector, and Central Bank of Costa Rica: https://www.hacienda.go.cr/contenido/12519-informacion-de-la-deuda-publica
The following chart covers contingent debt as of December 31, 2019: https://www.hacienda.go.cr/docs/5e27072cb4e07_12.19%20Resumen%20deuda%20contingente.xlsx
The General Controller’s Office produced the following report on unregistered debt, summing to 1.27 percent of GDP: https://cgrfiles.cgr.go.cr/publico/docs_cgr/2019/SIGYD_D_2019015487.pdf
International Regulatory Considerations
While Costa Rica does consult with its neighbors on some regulations through participation in the Central American Integration System SICA (http://www.sica.int/sica/sica_breve.aspx ), Costa Rica’s lawmakers and regulatory bodies habitually refer to sample regulations or legislation from OECD members and others. Costa Rica’s commitment to the OECD accession process accentuated this traditional use of best-practices and model legislation. Costa Rica regularly notifies all draft technical regulations to the WTO Committee on Technical Barriers in Trade (TBT).
Legal System and Judicial Independence
Costa Rica uses the civil law system. The fundamental law is the country’s political constitution of 1949, which grants the unicameral legislature a particularly strong role. Jurisprudence or case law does not constitute legal precedent but can be persuasive if used in legal proceedings. For example, the Chambers of the Supreme Court regularly cite their own precedents. The civil and commercial codes govern commercial transactions. The courts are independent, and their authority is respected. The roles of public prosecutor and government attorney are distinct: the Chief Prosecuting Attorney or Attorney General (Fiscal General) operates a semi-autonomous department within the judicial branch while the government attorney or State Litigator (Procuraduria General) works within the Ministry of Justice and Peace in the Executive branch. Judgments and awards of foreign courts and arbitration panels may be accepted and enforced in Costa Rica through the exequatur process. The Constitution specifically prohibits discriminatory treatment of foreign nationals.
The Costa Rican Judicial System is comprised of the civil, administrative, and criminal court structure. The judicial system generally upholds contracts, but caution should be exercised when making investments in sectors reserved or protected by the Constitution or by laws for public operation. Furthermore, independent government agencies, including municipal governments, which grant construction permits, can issue permits or requirements that may contradict the decisions of other independent agencies, causing significant project delays.
Costa Rica’s commercial code details all business requirements necessary to operate in Costa Rica. The laws of public administration and public finance contain most requirements for contracting with the state.
The legal process to resolve cases involving squatting on land can be especially cumbersome. Land registries are at times incomplete or even contradictory. Buyers should retain experienced legal counsel to help them determine the necessary due diligence regarding the purchase of property.
Laws and Regulations on Foreign Direct Investment
Costa Rican websites are useful to help navigate laws, rules and procedures including that of the investment promotion agency CINDE, http://www.cinde.org/en (“essential info”), the export promotion authority PROCOMER, http://www.procomer.com/ (incentive packages), and the Health Ministry, https://www.ministeriodesalud.go.cr/ (product registration and import/export). In addition, the State Litigator’s office (www.pgr.go.cr – the “SCIJ” tab) compiles relevant laws.
Competition and Anti-Trust Laws
Several public institutions are responsible for consumer protection as it relates to monopolistic and anti-competitive practices. The “Commission for the Promotion of Competition” (COPROCOM), an autonomous agency housed in the Ministry of Economy, Industry and Commerce, is charged with investigating and correcting anti-competitive behavior across the economy. SUTEL, the Telecommunications Superintendence, shares that responsibility with COPROCOM in the Telecommunications sector. Both agencies are charged with defense of competition, deregulation of economic activity, and consumer protection. COPROCOM has traditionally been underfunded and weak but under a law passed in 2019 gained greater regulatory independence and sufficient operating budget.
Expropriation and Compensation
The three principal expropriating government agencies in recent years have been the Ministry of Public Works – MOPT (highway rights-of-way), the state-owned Costa Rican Electrical Institute – ICE (energy infrastructure), and the Ministry of Environment and Energy – MINAE (National Parks and protected areas). Expropriations generally conform to Costa Rica’s laws and treaty obligations, but there are allegations of expropriations of private land without prompt or adequate compensation.
Article 45 of Costa Rica’s Constitution stipulates that private property can be expropriated without proof that it is done for public interest. The 1995 Law 7495 on expropriations further stipulates that expropriations require full and prior payment. The law makes no distinction between foreigners and nationals. Provisions include: (a) return of the property to the original owner if it is not used for the intended purpose within ten years or, if the owner was compensated, right of first refusal to repurchase the property back at its current value; (b) detailed provisions for determination of a fair price and appeal of that determination on the part of the former owner; (c) provision that upon full deposit of the calculated amount the government may take possession of land despite the former owner’s dispute of the price; and (d) provisions providing for both local and international arbitration in the event of a dispute. The expropriations law was amended in 1998, 2006, and 2015 to clarify and expedite some procedures, including those necessary to expropriate land for the construction of new roads. (For full detail go to https://PGRweb.go.cr/SCIJ – when reviewing the articles of the law go to the most recent version of each article.)
There is no discernible bias against U.S. investments, companies, or representatives during the expropriations process. Costa Rican public institutions follow the law as outlined above and generally act in a way acceptable to the affected landowners. However, when landowners and government differ significantly in their appraisal of the expropriated lands’ value, the resultant judicial processes generally take years to resolve. In addition, landowners have, on occasion, been prevented from developing land which has not yet been formally expropriated for parks or protected areas; the courts will eventually order the government to proceed with the expropriations but the process can be long.
ICSID Convention and New York Convention
In 1993, Costa Rica became a member state to the convention on International Center for Settlement of Investment Disputes (ICSID Convention). Costa Rica paid the awards resulting from unfavorable ICSID rulings, most recently in 2012 regarding private property belonging to a German national within National Park boundaries.
Costa Rica is a signatory of the convention on the Recognition and Enforcement of Arbitral Awards (1958 New York Convention). Consequently, within the Costa Rican legal hierarchy the Convention ranks higher than local laws although still subordinate to the Constitution. Costa Rican courts recognize and enforce foreign arbitral awards. Judgments of foreign courts are recognized and enforceable under the local courts and the Supreme Court.
Investor-State Dispute Settlement
Disputes between investors and the government grounded in the government’s alleged actions or failure to act – termed investment disputes ‒ may be resolved administratively or through the legal system.
Under Chapter 10 of the CAFTA-DR agreement, Costa Rica legally obligated itself to answer investor arbitration claims submitted under ICSID or UNCITRAL, and accept the arbitration verdict. To date there have been two claims by U.S. citizen investors under the provisions of CAFTA-DR. Extensive documentation for both cases is filed on the Foreign Trade Ministry (COMEX) website: http://www.comex.go.cr/tratados/cafta-dr/ , under “documentos relevantes”. No local court denies or fails to enforce foreign arbitral awards issued against the government.
In some coastal areas of Costa Rica, there is a history of invasion and occupation of private property by squatters who are often organized and sometimes violent. It is not uncommon for squatters to return to the parcels of land from which they were evicted, requiring expensive and potentially dangerous vigilance over the land. Nevertheless, in recent years the Supreme Court has refused title to squatters on land already titled, thus removing some incentive for persistent squatters.
International Commercial Arbitration and Foreign Courts
The right to solve disputes through arbitration is guaranteed in the Costa Rican Constitution. For years, the practical application was regulated by the Civil Procedural Code, which made it ineffective with no arbitration cases until 1998, the year the local arbitration law #7727 was enacted. A 2011 law on International Commercial Arbitration (Law 8937), drafted from the UNCITRAL model law (version 2006), brought Costa Rica to a dual arbitration system, with two valid laws, one law for local arbitration and one for international arbitration. Under the local act, arbitration has to be conducted in Spanish and only attorneys admitted to the local Bar Association may be named as arbitrators. All cases brought before an arbitration panel, under the rules of local arbitration centers, will normally be resolved within two months of the closing arguments hearing. Parties can withdraw their case or reach an out-of-court settlement before the arbitral tribunal delivers an award. If the award meets the review criteria, the losing party has the option to request that the Costa Rican Supreme Court examine the award, but only on procedural matters and never on the merits. Under the local Law for International Arbitration, proceedings may be held in English and foreign attorneys are authorized to serve as arbitrators. The following arbitration centers are in operation in Costa Rica:
- Centro de Conciliacion y Arbitraje. Costa Rican Chamber of Commerce (CCA)
- Centro de Resolución de Controversias. Costa Rican Association of Engineers and Architects
- Centro Internacional de Conciliacion y Arbitraje (CICA). Costa Rican American Chamber of Commerce (AMCHAM)
- Centro de Arbitraje y Mediacion/Centro Iberoamericano de Arbitraje (CAM). Costa Rican Bar Association.
Beyond such arbitration options, law #7727 also facilitates courts’ enforcement of conciliation agreements reached under the law. Some universities and municipalities operate “Casas de Justicia” (Justice Houses) open to the public and offering mediation and conciliation at no cost. Law #8937 empowered local arbitration centers, beginning with that pertaining to the Engineers and Architects’ Association, to implement Dispute Board regulations, as a method to address construction disputes.
Outcomes in local courts do not appear to favor state-owned enterprises (SOEs) any more or less than other actors. SOEs can sign arbitral agreements, but must follow strict public laws to obtain the permissions necessary and follow correct procedures, otherwise the agreement could be voided. Once SOEs find themselves in arbitration, they are subject to the same standards and treatment as any other actor.
U.S. companies cite the unpredictability of outcomes as a source of rising judicial insecurity in Costa Rica. The legal system is significantly backlogged, and civil suits may take several years from start to finish. Some U.S. firms and citizens satisfactorily resolved their cases through the courts, while others see proceedings drawn out over a decade without a final resolution. A new civil procedural code implemented in October 2018 (Law #9342) was designed to accelerate judicial processes by emphasizing oral argument over the traditional written submissions, but processes are still slow. Commercial arbitration has consequently become an increasingly common dispute resolution mechanism.
The Costa Rican bankruptcy law, addressed in both the commercial code and the civil procedures code, is similar to corresponding U.S. law, according to local experts. Title V of the civil procedures code outlines creditors’ rights and the processes available to register outstanding credits, administer the liquidation of the bankrupt company’s assets, and pay creditors according to their preferential status. The Costa Rican system also allows for successive alternatives to full bankruptcy: “convenio preventivo” or arrangement with creditors; “administracion por intervencion” or administration through judicial intervention; “reorganizacion con intervencion judicial” or reorganization through judicial intervention; and finally bankruptcy. As in the United States, penal law will also apply to criminal malfeasance in some bankruptcy cases. In the World Bank’s “resolving insolvency” ranking within the 2019 “Doing Business” report, Costa Rica ranked #13 of 190 (http://www.doingbusiness.org/rankings ).