Licensing Woes

February 7 (Mongolian Economy) Mongolia’s parliament has quietly passed two key pieces of legislation that has international firms worried they may be left out in the Siberian cold.

The recently passed Law on the Legal Status of Lawyers and Law on Tax Specialised Consultancy place more stringent controls over the services legal and tax advisory professionals can provide in Mongolia. It is another round of controls over participation by foreign investors since Mongolia’s Strategic Entities Foreign Investment Law (SEFIL), passed late May 2012, which suffered from similar debilitations that have put a plug on investment dollars for Mongolia’s booming mining sector. The legislation, which requires government approval for foreign acquisition of a third or more of any companies within the communications, finance and banking, and minerals sectors, has left foreign companies at a standstill out of fear of violating the law—which could have the government barring a company from operating in the country.

In an email, MahoneyLiotta Partner Darin Hoffman wrote that the laws would exclude law and tax advisory firms from providing their services and “are symptomatic of the general shift towards increased regulation over foreign investment and foreign citizens living and working in Mongolia that began with the adoption of the Strategic Entities Foreign Investment Law”...

The legislation puts new limitations on auditing and lawyer firms that require practicing professionals to pass state exams similar to the United States’ bar and CPA exams, said Budragchaa Bayar, a managing partner at domestic law firm Economic Legal Consultancy. As far as anyone can tell, the exams will only be administered in Mongolian language—a language spoken by just some five million in the world—and will add even more red tape to the country’s already Byzantine legal system.

The lawyer law is a “revamping of the legal profession” that “should be big news for worldwide legal professionals”, said Bayar, who was also involved in the drafting of the law.

He said the key difference of the law is all law firms will have to register themselves as limited liability partnerships rather than companies. While LLCs in Mongolia may acquire a single license to operate in Mongolia, LLPs do not, which means licensing will only be granted to individuals. Without licensing, legal professionals will not legally be allowed to call themselves lawyers.

Bayar said the law is effective January 1, 2014, but MahoneyLiotta said it was informed that date had been pushed up to April 15 this year.

The tax advisory law similarly asks tax advisors to pass a state-administered exam for licensing. The law also requires auditing firms such as Ernst & Young to establish a separate organisation for its tax advising services. Any firm that fails to meet these conditions will likely face penalties after June 1, 2013.

For their licensing, lawyers and tax advisors in Mongolia will have to answer to the Mongolian Lawyers Association and the Tinz agency, respectively. However, there is some uncertainty with how the law will be enforced and how government services will be administered.

“We are not sure how long it will take for licensing”, said Mandal Uyanga, chief executive officer of Ernst & Young Mongolia Audit. She added, “This is really a new thing, so we need to communicate with Tinz”.

It’s the lack of clarity in the law regulating lawyers that has law firm MahoneyLiotta, who in Mongolia represents Rio Tinto Groupand the London Stock Exchange, worried how the law will eventually be enforced by government.

According to Mongolia’s central bank data on the balance of payments, foreign investment fell 45 percent from USD 321.5 million in June to USD 176.9 million in November, last year.

Hoffman said that work on almost all public offerings had been halted since the passage of SEFIL, largely due to the uncertainty felt by investors.

“Even though the SEFIL was adopted on 17 May 2012 the foreign investment regulator has still not created the approval process so no large equity offerings like this can be done until the approval process is created (and an approval is obtained)”, Hoffman said.

Bayar, too, worried on the vagueness of the law and how licensing bodies would behave. He has experienced firsthand how Mongolian licensers can “run like a business”.

“In 2005, when I sat in the exam by the [to-be-dissolved licensing agency] Advocates Association, everyone was young. I was the only one with white hair”, he said. “When I got my certificate there was a ceremony to hand out the certificates. Finally I saw several people with gray hairs. I don’t recall seeing them in the exam”.

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