Enforcement of a Foreign Judgment in Mongolia



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We have recently handled a litigation case involving enforcement of a foreign judgment in Mongolia. While, Mongolia has no specific detailed law dedicated to addressing issues in connection with enforcement of foreign court decisions, there are provisions set forth in Article 194.1 of the Civil Proceeding Law stating, “Procedures for the enforcement of Mongolian and foreign Courts decisions are determined by the legislation of Mongolia, the international treaties Mongolia has concluded with a foreign country or to which is a party.” Chapter 11 of the Law on Enforcement of Court Decisions also confirms enforcement of a foreign court judgment is regulated by the laws and regulations of Mongolia, by a treaty entered with the foreign country and by international treaties to which Mongolia is party.

 In Mongolia, both foreign and domestic persons are entitled to request enforcement of a foreign court decisions in the territory of Mongolia. The Court Decision Enforcement Agency is entitled to enforce court decision of foreign courts and international arbitration if so specified in the international treaty.

 In international civil procedure matters, Mongolia has ratified the 1954 Hague Convention on Civil Procedure. Furthermore, Mongolia has concluded a Bilateral Treaty to Mutually Provide Legal Aid in Civil and Family Cases with several countries, including Peoples Republic of China, Russia, France, Bulgarian, Poland, Ukraine, Hungary, India and both North and South Korea. Unfortunately, Mongolia has not signed a treaty with some of the larger developed countries, including the United States of America, United Kingdom, Japan, Australia and German, with respect to mutual recognition of court judgments.

 In order to be enforced in Mongolia, a foreign court decision must first be confirmed and accepted by the court that made the decision to compel enforcement in Mongolia. Further, the foreign court decision must be officially translated into Mongolian and delivered to the court along with relevant evidences in accordance with the proper regulation under the Bilateral treaty between the countries or international treaty.

If any of the following situations would occur pursuant to the enforcement of a foreign court judgment here in Mongolia, a foreign court decision will not be enforced in Mongolia:

  • if  damage to the independence and national security of Mongolia may occur;
  • if it contradicts commonly accepted norms;
  • if there is a valid court decision made by Mongolian courts on the case in question;
  • if the court decision is related to litigation that belongs to the special jurisdiction of Mongolian courts;
  • if the court decision is not yet validated; or
  • statute of limitation for enforcing a foreign court judgment has lapsed.

All of that said, as a practical matter, Mongolian courts rarely enforce foreign court judgments, though it is possible. Foreign court decisions related to family issue, specially divorce, and the child custody and maintenance have increasingly been enforced over the past two decades.

Mongolia’s Economy is Global: Trades with 136 countries



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The National Statistics Office of Mongolia has recently released a report detailing Mongolia’s vital trade statistics. The report indicates that Mongolia has traded, either exported to or imported from, 136 separate countries over the first seven months of 2016. The total turnover from trade during this period is over 4 billion USD.

Exports are said to comprise USD 2.54 billion during the period while imports are at 1.83 billion. The total turnover from trade appears to have decreased by 12% (USD 647.4 million), compared to the same period last year. That amounts to a 17% (376.2 million) reduction in imports and 9.6% (271.2 million) reduction in exports.

Overall, the balance of trade surplus at this point in 2016 stands at USD 709 million, and increase of USD 105 million over 2015.

We are looking for the trend in decreased overall trade to be reversed as Oyu Tolgoi’s underground gold and copper mining operation ramps up.

New Parliament Approves Government



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The election of Parliament was held on June 29, 2016, and 76 members of Parliament took the oath of office on July 05. One of the Parliament’s first acts was to approve the law on the Structure of the Government, which occurred July 21, and became effective immediately. The law does not present a drastic change in the structure of Government or the Ministries. The government now includes 13 ministries with 16 Ministers.

The List of Government ministries is as follows:

  1. Ministry of Environment and Tourism
  2. Ministry of Defense
  3. Ministry of Foreign Affairs
  4. Ministry of Finance
  5. Ministry of Justice and Domestic Affairs
  6. Ministry of Labor and Social Welfare
  7. Ministry of Construction and Urban Development
  8. Ministry of Education, Culture, Science and Sports
  9. Ministry of Road and Development of Transport
  10. Ministry of Mining and Heavy industries
  11. Ministry of Food, Agriculture and Light industry
  12. Ministry of Energy
  13. Ministry of Health

The basic continuity of the government is a positive sign. If there had been major changes, a period of uncertainty would have followed while the new ministries are established, and personnel are appointed, while other ministries may have been shut down entirely. The fact that this has not been the case contributes to a trend of stability which can only be beneficial for foreign investments in the country.

Ever Wanted to Buy Land in Mongolia?



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If there is anything Mongolia has plenty of it is land! As of January of this year, Mongolia has revised regulations for land auctions. The auction regulations cover land ownership, possession or usage, all terms of art under Mongolia law indicating a certain allocation of property rights.

Under Mongolian law, only the Mongolian state or Mongolian individuals are able to formally own land and hold all rights of use and disposal. Mongolian individuals and companies may also have rights to “possess” land, which is a kind of more limited right to land within the context of an agreement with the state. Foreigners generally may hold rights to “use” land.

The law prescribes certain conditions in which a land auction is required. When required, an auction may be initiated  via an invitation to bid published at least 30 days prior to the date the auction is to be held. Interested persons much be registered before the auction is held. Before the recent update to the regulations the invitation to bid was required to be published via a public media format. The updates now also allow publication to be posted to the website of the organizer. The updates also allow for a completely online auction format.

The starting price of the auction is in most cases set by the local Governor, and participating parties are required to pay 10 percent of the initial auction price as a deposit. The deposit is returned in full within 5 days after the auction, to all but the winning participant.

Other highlights of the updated regulation include a new mechanism for dispute resolution. In previous regulations, the Supervisor of the Auction Commission would make a decision on disputes which arose during the auction or in connection with the process, and the only way to challenge the decision was before court. The new regulation only requires a preliminary decision on the issue from the local Governor, after which a suit may be filed at court.

Mongolia Construction Sector: Status and Outlook



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These are difficult times for the construction and real estate sectors in Mongolia. This is demonstrated by the recent trend in which newly build apartments are not being sold. Apartment prices are so high that ordinary citizens are often unable to afford the price for an apartment. At the same time, construction companies are relying on high interest loans to fund continued development projects. On top of that, many construction projects lack coordination and city planning and end up without access to basic needs such as parking areas, playgrounds and parks, or access to schools.

The situation has been described as a bubble, driven from the economic boost the country had received from the mining sector. As a result of the bubble, it is often impossible to obtain a clear and accurate valuation of a property, including land and any structures. This results in inflated property purchases by construction companies without any reasonable ability to obtain a return on the investment. Construction companies which cannot repay loans risk the seizures of properties and buildings by banks seeking to collect. If this happens, the properties are sold at a 40% discount off market price.

 Typically in Mongolia, a construction company plays the role of a Real Estate company. Construction companies not only build buildings, but become responsible for sales and continued maintenance of the property. A better system may be for Construction companies to focus on building a building in compliance with all environmental and safety regulations, and then sell directly to a property development company, which has responsibility for such things as funding, community planning, and long term maintenance.

 It is clear some kind of reform is needed in the sector. Experts have proposed three main solutions. Firstly, the system for property zoning should be improved. There should be government designated zones for residential spaces, industrial areas, and green areas. Secondly, steps should be taken to limit high interest loans for property development, and valuations should be moved to a lower more market based rate, property taxes should be imposed. Finally, an electronic database should be established containing all information in connection with any given property. This would provide the public with convenient access to property information, which will allow for more informed purchases.

Holding a Perfected Pledge in Mongolia just got 100% Better!



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As part of the firm’s project finance practice, we do a lot of work with securities, and particularly pledges of movable and immovable property. When advising clients, we often receive pushback and incredulity when we explain Article 54.2 of the Law on Enforcement of Court Decisions which states, “A pledgee shall be responsible for other creditors’ payments.” Clients rightly ask, “what is the value of holding the pledge if after receiving the pledged assets you have to give it all away to other creditors of the pledgor?”

However, a plain reading of Article 54.2 led to the inevitable conclusion that the law was specifically making pledgees a first priority security interest in collateral responsible for payments owed by the pledgor to other creditors, even where the pledgee has not done or agreed to anything whereby it would otherwise assume any of those obligations.

Article 54.2 provided legal justification for Mongolia’s Court Decision Enforcement Agency, which is responsible for the enforcement of valid court decisions, to demand a pledgee take action to recover funds due to other creditors of a pledgor, even by going so far as to require redistribution of proceeds earned via the sale of the collateral and in some cases the pledgee’s own assets! All of this required no additional court decision or ruling against the pledgee. Naturally, once we convince a client of the meaning and implications of the law, the typical reaction would be, “Well, that’s just not fair!”

Luckily, the Mongolian Constitutional Court agrees. The court recently concluded that Article 54.2 resulted in outcomes in violation of Article 16.3 of the Constitution of Mongolia. Article 16.3 protects, “The right to fair acquisition, possession and inheritance of movable and immovable property.” The court ruled that due to violations of that provision of the constitution, enforcement of Article 54.2 shall be stopped.

This is great news for investors and foreign investment in Mongolia. In a country were major mining and infrastructure projects are financed via complex securities transactions with international banks taking pledges over local real estate and other assets, the legal regime provided for by Article 54.2 increased the risk of these international banks and made acquiring funding even more difficult that it would normally be. We consider this a step in the right direction for Mongolia and foreign investment in the country.

Purchasing a Mongolian Company: Measure Twice Cut Once



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 A client approached us recently with a request to perform due diligence into a Mongolian company recently purchased by the client. The client, a foreign company, said they had some problems with their old local agent (not a lawyer) and wanted a local lawyer to verify the legal status and ownership of the company, as well as a property owned by the company.

 Our Mongolian lawyers perform due diligence on local and foreign companies on a regular basis. We proceeded to work through the due diligence checklist, confirming the company’s status with the various local government agencies, and confirming ownership of the property. We found that the current foreign shareholder of the company had formerly been a minority shareholder with a Mongolian national being the majority shareholder of the company. The foreign shareholder had purchased the Mongolian nationals shares earlier in the year. Nothing surprising here.

 When our lawyers took a look at the property held by the company we were surprised. The company held Land Possession Rights” (LPR), which by law may only be held by a Mongolian national, or a company with Mongolian ownership. As a company invested by a foreign national the client’s company was not allowed to hold LPR. By law it could only hold Land Use Rights (LUR). For both LPR and LUR the ultimate owner of the land is the state. The property rights held by LUR holder are more limited than those accorded to a holder of LPR.

 We informed the client of the situation, and speculated that the LPR were purchased by the company at an earlier time before the foreign shareholder had purchased the shares of the Mongolian national. Subsequently, the relevant government bureaus were not informed of the share transfer or the change in the status of the company.

 We advised the client to report the situation to the local government as quickly as possible. Legal penalties in such a situation are not clear, and it is typically far better to be open and honest about such compliance issues, rather than continue to cover up an illegal situation.

 All of this may have been avoided if a Mongolian Attorney would have been consulted first.

Parliament Looks to Offshore Accounts



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Certain members of Parliament are planning a proposal for a new Law on Offshore Accounts. This comes in the wake of disclosures in the Panama Papers of names and offshore account details of several Mongolian nationals, including high-level government officials.

Following those revelations, the Standing Committee of Parliament initiated a formal request to the IAAC (Independent Authority Against Corruption), a Mongolian agency tasked with identification and elimination of corruption. The Standing Committee assigned the agency to perform a thorough review to determine of the accuracy of the Panama Papers information, and to verify information reported within the income declarations of senior pubic officials which were revealed to maintain offshore bank accounts.

The next step will be a new Law on Offshore Accounts which as envisioned would demand politicians and government officials to accurately and self-report their foreign bank account and real estate holdings in addition to those belonging to family members. Officials would also be required to identify and explain the sources of their income.

As the law is targeting Mongolian governmental officials, impact on foreign companies and foreign citizens in Mongolia should be minimal. In any case, the additional transparency among government officials will be a welcome and important step toward reducing corruption.

2016 Update to VAT



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The new Value-Added Tax Law came into effect on 1 January 2016.

The new VAT law revised key terminology and broadened the types of activities which are subject to VAT. The VAT Law increased the threshold for the requirement to register as a VAT payer from 10 million MNT to 50 million MNT in an effort to support small and medium sized enterprises. Voluntary registration as a VAT payer remains possible if the income of the entity reaches 10 million MNT.

The Law also introduces a system of incentivizing taxpayers with the possibility of recovering up to 20 percent of taxes paid if certain conditions are met. It further attempts to improve the system and procedure for collating, processing and reporting data relating to the payment of VAT by creating a consolidated registration system.

The VAT rate of 10 percent remains the same, however, there have been some changes in the types of goods, work and services that are exempted from value-added tax and those that are subject to zero (“0”) percent VAT.

New General Administrative Law to be Implemented



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Drafting of The General Administrative Law was started in 2008 but for various reasons the parliament of Mongolia did not adopt the law until June 19, 2015. The law will come into effect starting from July 1, 2016. In the past the Administrative Procedural Law has been the sole authority regarding general administrative issues, and administrative procedural issues. The law is intended to govern the relations of individuals or legal entities with public authorities in their performance of executive powers. A revised version of the Administrative Procedural Law was also adopted and will become effective on the same day.

The newly adopted General Administrative Law improves the law in the following areas:

  • The former law listed the agencies and agents whose decisions will be regarded as “Administrative”. This system was not very efficient as the administrative structure in Mongolia changes frequently, the new law removes such lists;
  • The new law clarifies the scope of application of the law and specifies where it does not apply;
  • The new law defines the rights and obligations of parties clearly more clearly;
  • The new law enables government agents or agencies to seek professional expert assistance from each another in a written form. This will improve the communications between governmental agencies;
  • The new law introduces a new procedure called “Hearing” which requires the governmental agents and agencies to conduct a hearing to introduce the concept and purpose of a new decision they are intending to adopt and the hear opinion from the affected population. This procedure is mandatory, with some exceptions, however government agencies will though not required to modify their proposed plans to reflect the input received at the hearings;
  • The forms of administrative actions are classified as “Administrative Acts”, “Administrative Contracts” and “Administrative Decisions Setting Norms and Standards”. The adoption of either of these different forms requires unique procedures. The law outlines these procedures to reduce ambiguity and confusion. For instance, the former law only regulated procedural issues such as what steps should be taken to annul the wrong decision at the court. The new law governs the process of drafting, introducing and passing the decisions before it reaches the court;
  • According to the new law, if an administrative action has become void, the authority that is responsible for wrongful decision shall be punished. The possible punishments include a warning, a decrease of salary for responsible individuals, dismissal, and dismissal with a prohibition on return to public service for 1-10 years.

Some are concerned that with the implementation of the new General Administrative Law, the public service will become more bureaucratic. Let us remain optimistic that after successful implementation, administrative obstructions will be reduced and implementation of effective Administrative actions will be made easier.