Terrence Edwards in Ulaanbaatar -
A US businessman has been convicted of tax evasion in Mongolia, in a controversial case that has worried foreign investors at a time when the country is struggling to woo them back to exploit its natural resources.
Justin Kapla, a US citizen, together with his employees Hilarion Cajucom Jr and Cristobal David of the Phillipines, all of whom used to work for SouthGobi Resources, were sentenced to between five and six years in prison on January 30, after a legal process during which they were banned from leaving Mongolia for two years.
Mongolian judges twice returned the case to the prosecution because the evidence was too weak. Independent Mongolian Metals & Mining Research reported to clients in an email that Ochirbat Chuluunbat, a close advisor to Prime Minister Chimed Saikhanbileg, had called the case an "unacceptable violation of human rights", adding that "tax evasion, if proven by independent audit, is a case against company, not an individual".
Mongolia's mistrust of foreign investors taking over its multi-billion dollar mineral deposits have sometimes led politicians to side against them. Hostile rhetoric and unfavourable legislation on investment contributed to the 71% decline in foreign investment in the year to the end of November in 2014 compared with the same period in 2013.
“The government is trying to encourage investment, but what the tax authorities together with police and courts are doing is another thing,” said a Mongolian legal professional who has experience with tax disputes in Mongolia but could not comment on this case specifically. He did not want to be named out of concern that speaking out against the decision would make him a target of the government.
One concern has been Mongolia's use of travel bans while conducting investigations. Each of the former employees had travel bans that prevented them from leaving the country since May 2012. Kapla registered his case with the UN Human Rights Committee after he was unable to leave Mongolia despite the serious illness of family members abroad.
Before the verdict, Kapla told bne IntelliNews that the Independent Authority Against Corruption had broken protocol by leading a tax audit into the company, when only the tax authority could do this, he claimed. He also said that the case was little changed from the one handed back to the prosecution for lack of evidence, although the sum was far less than the original 230bn tugrik ($118.3mn).
Taking the case into a criminal court is also unusual, said the lawyer. “There's a separate court that does tax dispute,” he said. “This may have been a a tax dispute and the jurisdiction was with the administrative court, but somebody decided to take it through to the criminal court and that's the end result.”
The lawyer said he could recall three other tax cases that were turned into criminal investigations in recent years, including one against Standard Bank employee Chris Bradley and another against Canadian exploration company QGX.
The crackdown on foreigners accused of tax evasion may spoil government efforts to draw investors to Mongolia. This year the country is making 10.1 million additional hectares available for exploration. It is the first time exploration licenses will be issued since a moratorium in 2010.
The government is also making positive strides with the country's largest existing mining assets. It is asking for $4 billion from investors entering a strategic partnership with state-owned miner Erdenes Tavan Tolgoi. Another $4bn is on the way if the government can resolve disagreements with Anglo Australian miner Rio Tinto over the Oyu Tolgoi copper mine.
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