Contracts with Provincial Governors Promote Accountability

In an interesting development, the Prime Minister of Mongolia has signed contracts with local governors, and the mayor of Ulaanbaatar, in a move which seems designed to promote accountability and strengthen rule of law in Government.

The contracts set forth the responsibilities of the local governors, and obligations to adhere to the Constitution of Mongolia, and to follow other applicable laws. Additionally, the contracts state clearly that governors are required to fully implement the governmental action program to the benefit of their respective province.

The contracts further provide that local government must be staffed with educated and appropriately skilled personnel, with relevant specializations and expertise. Under the contracts governors are responsible to ensure that provinces maintain and implement budget saving policies and make public services available to more people. Governors will be responsible for enforcing budgeting and discipline, and for enforcing anti-corruption laws.

Governors will be responsible for ensuring that their respective provinces benefit from economic growth, and to ensure equal and well distributed development in areas such as education, culture and general health with a goal to minimize poverty and unemployment.

Under the contract, provincial governors will be subject to punishment for failure to meet the responsibilities as outlined. Governors will be required to submit progress on contractual responsibilities in an annual report to the cabinet.

The take away here is the government’s effort to implement as system of accountability. We are hopeful that the clear guidelines and expectations of the contract will work to increase local government effectiveness. Penalties which the local governors may be subject to for failure to meet expectations are not clear, but the important thing is that each of these governors now knows their performance is being watched. Clear expectations and a little oversight will hopefully go a long way to improve provincial governance.

Accountability and dependability are key factors foreign companies look for when considering a major investment. This applies nationally and at local levels. If provincial governors are able to deliver good results in meeting their responsibilities under the new contracts, foreign investors’ confidence to do business in Mongolia will be greatly improved.

The Parliament passed a new Criminal law and Law on Infringement earlier this year, both were supposed to come into force in 01, September 2016. However, now the Head of the Secretariat of the Government of Mongolia explains that the process of education of relevant government officials, and advertisement to the public for new laws, has not been sufficient. In light of this, it seems the government employee who will be responsible to enforce these laws are not yet ready, further new regulations in connection with implementation of the laws must be implemented as well. There is also a need to restructure the organizations in compliance with the law which may take quite some time to accomplish.

With all of these factors in mind, it is proposed that the implementation date be set back to 07 July 2017. This should allow enough time to address the outstanding issues.

Like all countries, Mongolia has specialized laws regarding immigration and nationality. The Mongolian Constitution indicates that the grounds and procedure for determining Mongolian nationality, or for acquisition or loss of citizenship shall be defined by the law.

The Current Law of Mongolia on Citizenship was enacted in 1995 and it has been updated four times since then. According to the law, Mongolian citizens shall not be allowed to hold citizenship of a foreign nation and maintain their Mongolian nationality. Further, if a foreigner wishes to acquire Mongolian citizenship, he or she is required to give up any prior citizenship.

Under Mongolian Law, there are four ways an individual my become a Mongolian Citizen:

If both of the parents of a child are Mongolian then the child is automatically Mongolian. It doesn’t matter where the child is born.
A child born to one Mongolian parent within the territory of Mongolia is also automatically Mongolian.
A child who is within the territory of Mongolia whose parents are not identified is designated a Mongolian citizen.
Individuals of foreign nationalities may apply for citizenship via the President’s office, or through a Mongolian embassy.
Mongolians who are adopted by foreigners maintain “the right to choose his/her own nationality” according to the Family law of Mongolia.

Interestingly, approximately 16 million Mongolian citizens report having a dual citizenship, with most of them are women and children. Over the last 20 years an estimated 59,000 citizens withdrew their Mongolian citizenship while citizenship was awarded to only 221 individuals (not including new births within Mongolia).

A total of 250 Mongolian children have been adopted by foreign citizens, including family members. There are concerns that the Law should be amended to allow an adopted child to maintain his/her native citizenship until turning 18 years old. Until this change is made, Mongolian law will not be aligned with international convention regarding rights of children.

For this reason, the President, Ts.Elbegdorj has proposed amendment of Law of Mongolia on Citizenship, and has submitted relevant drafts legislation to the Parliament for consideration. It is expected that this change will be officially passed later this year.

In Mongolia, the Law on State Registration of Legal Entities regulates the founding, reorganization, and dissolution of legal entities, as well as amendments to registered information. Per the law the following legal entities, including subsidiaries and representative office must be registered with the state registration authority:

partnerships;
companies;
cooperatives;
NGOs;
State or local government owned enterprises;
government organizations, departments and state funded enterprises (Other than intergovernmental organizations, international organizations, government special funds, committees and national councils);
religious organizations;
media organizations;
public legal entities;
foreign invested legal entities;

After a completed application and required documentation has been submitted to the state registration authority, a decision will be made within 10 business days for foreign invested legal entities as to whether the entity is approved for registration. For domestic entities only two days are required.

If the state registration authority refused to register the legal entity, they will deliver notice in written stating the ground for refusal.

The state registration authority will refuse to register a new entity or any changes to an existing entities’ information if the application documentation is found to not match legal requirements, to be incomplete, or is found to be fraudulent. If an application is refused for any of these reasons, an new application may be made correcting the errors.

Investors should understand that the law specifically prohibits undertaking activities in the name of a entity which has not yet been officially registered.

If any key information of the entities registration is to be amended, the legal entity should inform to the state registration authority within 15 business days after execution of relevant corporate documentation. Failure to do so may incur legal penalty.

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.

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.

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:

Ministry of Environment and Tourism
Ministry of Defense
Ministry of Foreign Affairs
Ministry of Finance
Ministry of Justice and Domestic Affairs
Ministry of Labor and Social Welfare
Ministry of Construction and Urban Development
Ministry of Education, Culture, Science and Sports
Ministry of Road and Development of Transport
Ministry of Mining and Heavy industries
Ministry of Food, Agriculture and Light industry
Ministry of Energy
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.

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.

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.

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.