Arrested developments in Mongolia

By bne IntelliNews May 19, 2014

Terrence Edwards in Ulaanbaatar -


Mongolia's vast natural resources have enticed foreign investors to what is still very much a frontier market. Politicians' re-writing of investment rules has been one major risk for intrepid investors, but another more worrying hazard is emerging: arrest and travel bans.

Since the 1990 Democratic Revolution in Mongolia, the country has established itself as a beacon of democracy that outshines the authoritarian neighbours of Russia and China that it is sandwiched between. However, the Mongolian authorities' increasingly liberal use of travel bans on expats is starting to concern many investors and long-time residents of the country.

Take the case of Justin Kapla, a veteran in Mongolia's mining industry with a Mongolian family. Kapla had held the post of president at SouthGobi Sands, the license holder for the Ovoot Tolgoi coal mine in the Gobi desert, for just six months when prosecutors raided his offices on May 8, 2012, investigating illegal dealings with a former head bureaucrat at the Mineral Resources Authority, who was charged and later convicted of corruption. Kapla was banned from leaving the country, though this ban was lifted about a month later, on June 20. However, he received a second travel ban after investigators decided that after looking at SouthGobi's books the company was suspected of evading taxes and laundering billions of dollars

Kapla denies the accusations, citing as proof internal audits as well as external audits from the "Big Four" accountants PricewaterhouseCoopers and Deloitte. He also questions the methodology of the investigators. "All they've done is shown sums of findings in reports," he says. "They've never presented us with materials that show how they've come up with those numbers."

Kapla didn't actually learn about his second travel ban until a colleague, SouthGobi's legal advisor Sarah Armstrong, was stopped at the airport in October 2012 when flying home to Australia. Armstrong was allowed to return home in time for Christmas that year, but she left behind three colleagues from SouthGobi who are still subject to travel bans but have yet been formally charged of any crime.

Then there's a banking consultant for Standard Bank, Chris Bradley, who received a travel ban from November to December last year for what many regarded as only tenuous links to fraudulent documents submitted by Just Group to take out a loan from the bank. Just Group defaulted on its debt following its 2013 implosion, which brought down with it Mongolia's fourth largest bank at the time, Khadgalamj Bank.

While Bloomberg has reported that there are about 50 expats prohibited from leaving Mongolia because of alleged connections to open investigations, Kapla reckons there's tens more. Says Allyson Algeo, a spokesperson for the US Embassy in Ulaanbaatar: "We continue to raise our serious concerns regarding [Kapla's] case with Mongolian authorities and to urge them to resolve any outstanding issues through a fair and transparent process, conducted in an expeditious manner."

The reason for this worrying trend is manifold, say observers. Mongolia's police are gung-ho about rooting out graft due to the strong anti-corruption stance taken by Mongolian President Tsakhia Elbegdorj since he was elected in 2009. Some expats attribute their problems to political motives, as many of the alleged crimes occurred during the notoriously corrupt government of former prime minister Sukhbaatar Batbold, who led the Mongolian People's Party from 2009 to 2012. Many corruption cases that involve foreign companies are related to officials who were in power during that time, as was the case for SouthGobi. There is also a fair bit of mistrust among some Mongolians toward foreign investors due to the widening wealth disparity that occurred during Mongolia's mining boom, as well a general perception that foreigners are plundering Mongolia's natural resources.

Then there are suspicions that the travel bans are being used as leverage in contract disputes. "We are concerned by reports that the Mongolian exit visa system is being misused to pressure foreign investors to settle civil and investment disputes,” says Algeoa of the US embassy. “Such concerns could have a chilling effect on international investors considering whether Mongolia is a viable destination for foreign direct investment.”

Shaky foundations

Certainly, in many cases bne has looked into the evidence doesn't warrant such drastic action as the imposition of travel bans, lending weight to the idea that other considerations are at play here.

Nearly two years after Kapla was first prohibited from leaving Mongolia, a judge on May 12 rejected the case against SouthGobi for tax evasion, arguing it was too weak to proceed, according to a statement from the company accompnaying its first-quarter results for the year.

From the start, claims Kapla, the authorities have been bending the law to reach a specific goal — proving some kind of wrongdoing by SouthGobi's management. "Basically, all tax cases must originate from the Mongolian Tax Authority's audits," says Kapla. "In this case, it doesn't."

The figures don't add up either. SouthGobi was accused of selling twice as much coal as it reported in 2012, according to Kapla's legal defence, when it reported a loss to shareholders. They also claimed it laundered over $4.5bn during the year, or over a third of Mongolia's 2012 GDP.

But there is still the possibility of civil action, and the travel bans for Kapla and two of his former co-workers remain in place. Meanwhile, Kapla worries about the health of his father-in-law back home and whether or not he'll ever be able to see his grandfather again. "My grandfather is going to be 102. At 102, there aren't many birthdays on the horizon for him," he says.

Australian Didi Anandakalika says she too has faced the situation of Mongolian authorities rushing to judgment against foreign residents after groundless accusations have been made. Having lived in Mongolia for 21 years – enough time to see the wild deer that once roamed the streets of Mongolia's capital pushed out by luxury Hummers and BMWs – Anandkalika has been denied an exit visa since the beginning of this year due to accusations that she embezzled funds from the orphanage to which she has dedicated her life. She denies the charges made against her by colleagues, saying she suspects the intent is a land grab against the orphanage. “I was surprised how many things I can be accused of” without any evidence from the accusers, says Anandakalika. “People can make all kinds of complaints. You have to prove yourself innocent,” she says, noting how little was required to make such a serious claim against her

Mongolian authorities' actions also appear to be in violation of the International Covenant on Civil and Political Rights, which Mongolia signed in 1968 and ratified six years later. It states: "Everyone shall be free to leave any country, including his own," unless there are "exceptional circumstances".

Mongolia's justice minister has publicly acknowledged the circumstances surrounding the stranded foreign residents in an interview with a local Bloomberg television affiliate in Mongolia, adding that there are also many Mongolians under such restrictions. On May 13, it emerged that a former Mongolian bureaucrat involved with the petroleum sector had died in custody without him ever being charged.

Temuujin told Bloomberg his ministry is looking into the issue of travel bans, and the matter would likely be discussed during the fall session of parliament, later this year.


According to one investor from Australia who regularly travels to Mongolia, some of his peers refuse even to make the trip on the chance that they too will be prohibited from leaving. Thus this increasing use of travel bans is inevitably taking its toll on foreign investment  – something the Mongolian government is bending over backwards to attract again after inflows began drying up two years ago following some high-profile cases of foreign investors being discriminated against.

SouthGobi played a prominent role in that process. In 2012, the government blocked a proposed acquisition by state-owned Aluminum Corporation of China, or Chalco, to purchase a majority interest in SouthGobi Resources, the parent company of Kapla's organisation. The deal went sour largely because Mongolia remains wary of China exerting political or economic power over its smaller neighbour after centuries of warring between them.

Mongolian politicians responded to the Chalco bid by rushing though the notorious Strategic Entities Foreign Investment Law (SEFIL), which drastically limited the size of interest in Mongolia's mines, among other strategic assets, that foreign private and state-owned entities could buy without seeking government approval. Foreign investment in 2013 was nearly half as much as the prior year, and Mongolia has not come close to the jaw-dropping 17.5% economic growth it achieved in 2011.

Mongolia has since repealed that controversial investment law, and the authorities are now being given a second chance with SouthGobi to show it is open to foreign investment, with Turquoise Hill Resources confirming it is again considering bids for its 56% share in the miner. One person familiar with the company suggests the starting price will value the whole company at around $235m, which would make it the largest deal since SEFIL was passed two years prior.

But while the government's moves to repeal unfriendly laws and create an environment more conducive to foreign investment are welcome steps, none of it will do much good if investors are too afraid to visit their investments.


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