The recent outrage in international media directed at Mongolia, sparked by the imprisonment of former SouthGobi Sands (SGS) employees for tax evasion, is proving just how fragile Mongolia’s business reputation is.
After Mongolia jailed U.S. citizen Justin Kapla and Philippine nationals Hilarion Cajucom Jr. and Cristobal David on January 30, international media giants such as Bloomberg, Fortune, and the Global Post delivered heavy blows against the sentencing of the defendants, one after another, telling Mongolia to stop jailing foreign investors if it wants investment.
In contrast to the spotlight foreign media gave to this issue, the local media has been dismally quiet, with minimal coverage of the affair in daily newspapers and popular news websites. It seems like the story made headlines everywhere but the place it will impact the most.
The Business Council of Mongolia and the U.S. Embassy in Ulaanbaatar released statements expressing their disapproval of the court’s decision to jail the former SGS employees for up to nearly six years in prison.
“According to practices in many other countries, as well as clearly defined articles in Mongolian taxation laws, tax disputes can be and usually are solved through civil proceedings. The Business Council of Mongolia regrets that this case has been considered a criminal case against above legislation, and that the defendants received very harsh sentences ranging from five years and six months to five years and 10 months of imprisonment in the correctional facilities under strict regimens in Mongolia,” said the Business Council of Mongolia.
“Several embassy officials attended the trial, including Ambassador Piper Campbell, and noted that there were interpretation problems during the trial. Because of these problems, the defendants stated during the trial that they could not understand the interpretation, nor could they express themselves clearly. Mr. Kapla’s case has lasted nearly three years and the repeated delays and exit ban have caused him enormous hardship,” said the U.S. Embassy in Ulaanbaatar in their statement made shortly after the trial.
Family and friends of the imprisoned businessmen have set up Facebook pages to garner support and push the U.S. government and other international human rights organizations to help free them.
The Business Council also noted that the imprisonment will hinder Mongolia’s goal to attract foreign investors and fight Mongolia’s shrinking economic growth.
“One of the fundamentals of a good investment climate is certainty, and the court’s verdict has left investors with many questions about transparency, governance, and the rule of law, not only for companies but also for individuals. We, as a country, should not underestimate how damaging this verdict is for the Mongolian investment outlook,” the council said.
It is difficult to quantify Mongolia’s lost monetary and business opportunity as a result of all of this bad press, but it might already be having an effect on U.S. aid to Mongolia through the Millennium Development Corporation. Jackson Cox, chairman of the American Chamber of Commerce in Ulaanbaatar, has called on the U.S. government to cease discussions of future aid until American citizen Justin Kapla is freed.
Sources in the government remain confident that U.S. aid will not stop, because Cox does not have any real power over aid to Mongolia, but when stories like this go viral in international media, it nevertheless hurts Mongolia’s reputation.
So far, the international media have only voiced the concerns of foreign investors on the issue, as the opposing side, the Mongolian government, has determinedly dodged questions about the case.
As a native Mongolian, I’m appalled at how badly the government is handling the situation without a single formal comment being made on the issue.
Surely the consequences of incompetent handling of cases such as these will become a burden for the people of Mongolia, whose businesses will suffer from the negative image the government projects to foreign businessmen.
To avoid putting themselves on slippery ground again, the nation’s decision makers should focus on improving the transparency of the justice system, which was highly criticized in the SGS tax evasion case, and impose fines in cases of tax evasion instead of imprisonment.
There are many who maintain that Mongolia shouldn’t back down and it should send a message to businesses within its borders that they have to play by its rules. But if Mongolian courts lack the courage or means to defend their verdicts in the international arena, all its messages about integrity will be misinterpreted as ego and behind-the-scenes plots.
Mongolia really cannot afford to send mixed messages to foreign investors and lenders with foreign investment down more than 80 percent in the last three years and the MNT exchange rate falling by over 30 percent. GDP growth slowed down to a little over seven percent last year, down from 17.5 percent in 2011, and the inflation rate is still in the double digits.
High-ranking state officials talk of gaining investor trust, which is all well and good, but the reality is that investors are more distrustful of Mongolia than ever. Minerals and natural resources have exposed Mongolia as a potential hub for businesses, but the spotlight is also revealing some gaping deficiencies that need to be addressed immediately, such as a lack of access to justice, and political instability.
Prime Minister Saikhanbileg’s government might be working to earn foreign investor trust, as was the previous “reform” government, but it seems like it has neglected to gain the trust of its own people.