Transparency of the Regulatory System
The Prime Minister chairs an Economic Council, which liaises with the Moldovan business community to discuss government proposals and gather ideas to improve Moldova’s economy, especially in response to the COVID-19 crisis. Laws and regulations are published in the official gazette called Monitorul Oficial, while a database of laws and regulations is available online at http://www.legis.md .
The Foreign Investors Association (FIA) was established in 2004 with the support of the OECD. FIA engages in a dialogue with the government on topics related to the investment climate and produces an annual publication of concerns and recommendations to improve 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.
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 businesspeople about their rights, increase the transparency of business regulations, and help fight corruption. The government has an approved list of business permits and authorizations. Government agencies and inspectors cannot issue any form of documents not included in the list.
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. 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.
Nevertheless, 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 adopted laws to improve the business climate and reduce excessive state controls and regulation, effective implementation is insufficient. This 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.
Moldova committed to implementing 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.
Moldova has a “one stop window” which provides clear and uniform rules for the release of information and standardized documents for business registration.
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 intends 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 seeks to improve the business climate by reducing the opportunity for inspections to be used for political purposes.
International Regulatory Considerations
The EU Association Agreement (AA), including a Deep Comprehensive Free Trade Area (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, intellectual property rights, and others. Under the DCFTA, Moldova will gradually abolish duties and quotas in mutual trade in goods and services. It will also eliminate non-tariff barriers by adopting EU rules on health and safety standards, intellectual property rights, and other fields. The agreement contains a timeframe for implementation, with phase-ins 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 commitments, such as opening to the establishment of foreign service providers, prohibiting local content, trade-balancing, domestic sales requirements (TRIMs), and protection of intellectual property (TRIPS). No major WTO TRIMs inconsistencies have been reported.
As a WTO member, Moldova must notify draft technical regulations to the WTO Committee on Technical Barriers to Trade. In 2016, Moldova ratified the WTO Trade Facilitation Agreement and adopted several measures to conform to WTO requirements.
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 2017, the government changed customs rules to align with the EU Authorized Economic Operator requirements and Approved Exporter conditions.
Moldova’s commercial litigation rules comply with WTO requirements. 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 liberally 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 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 administrative acts issued by the government and other public authorities. Although Moldovan courts are constitutionally independent, their structures have facilitated government and political interference; the courts suffer from inefficiency and low public trust.
The court system consists of lower courts (i.e., trial courts), four courts of appeal, the Supreme Court of Justice, and a separate Constitutional Court.
Moldova has prepared a new justice reform strategy for 2021-2024 approved by its Parliament in November 2020. Although the President has not promulgated the strategy, the Ministry of Justice began implementing some of its provisions.
The new strategy continues the 2016 parliamentary initiative to “optimize” the country’s court system as part of broader justice sector reforms intended to reduce the number of trial courts in Moldova from 40 to 15. Specialized courts such as the Commercial Circumscription Court and Military Court were eliminated. Five trial courts from Chisinau were conceptually merged into one – the Chisinau trial court – although 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 court optimization plan is scheduled to be fully implemented by 2027.
The 2016 reforms created two specialized quasi-independent prosecution offices. The Anticorruption Prosecution Office is responsible for investigating and prosecuting corruption, bribery, 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, and narcotics. In 2017-2019, the Moldovan Prosecution Service continued the implementation of reforms under a law on the prosecution service passed in 2016. The Prosecutor General’s Office (PGO) led the drafting of new regulations for the specialized prosecution offices, regional, district and municipal offices. As of January 1, 2021, the State Tax Service is authorized to investigate economic crimes.
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, prohibitions against 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 Antitrust 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 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, or in international arbitral tribunals.
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 for purposes of public utility if it is not discriminatory and just compensation is provided. 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 the privatization process. 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 complied with the ECHR rulings in these instances.
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. Domestic courts recognize and enforce 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 includes access to international arbitration for 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.
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. AmCham Moldova has established the Chisinau Court of International Commercial Arbitration (CACIC) under its auspices.
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 and subject to New York Convention obligations.
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 at times been discouraged by the slow pace of court enforcement of arbitral awards and the judge’s perceived discretion over the arbitral decision.
In terms of resolving insolvency, the World Bank ranks Moldova 67th out of 190 economies in the 2020 Doing Business Index; it takes creditors on average 2.8 years to recover their credit. This is below the regional average and trails EU members in Central and Eastern Europe. The country has changed its insolvency law to introduce expedited insolvency proceedings, including by granting priority to secured creditors, 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.