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11 December 2015 | Lauren O’Neil, Senior Consultant, Asia-Pacific, Control Risks

Navigating weak rule of law in South-east Asia

South-east Asia is a region of immense diversity, and difficult to manage effectively without a nuanced, market-specific, strategy. The opportunities are significant. And so are the challenges. South-east Asia is home to some of the fastest growing middle-class economies, while frontier markets such as Myanmar present numerous opportunities as the country looks to open its doors to global trade for the first time following decades of military rule. Whether investing in, or operating a business in the region, weak rule of law, erratic regulation and poor governance present significant risks. The uncertainty is compounded by weak institutions, pervasive corruption and significant contractual risks.

In a country like Indonesia, for example, investors often avoid seeking legal redress as a first response as a direct result of the archipelago’s persistently weak rule of law and unreliable judiciary. Although Indonesia has introduced a number of successful reforms during the past decade, which have improved some of the country’s legal structures and provided more formal mechanisms to consolidate the rule of law, corruption in the judicial system remains endemic. Numerous cases have arisen in recent years implicating law makers and judges at all levels of the Indonesian legal system. While the fact that those cases have ever even emerged is a testament to the declining atmosphere of impunity within the judiciary, they also underline the extent of the malfeasance.

Businesses also remain vulnerable to regulatory harassment (e.g. expropriation and permit cancellations) as local authorities seek to influence unclear legislation and vague and contradictory national and district level regulations, to their own advantage. Numerous foreign companies in Indonesia have faced extortion efforts by the local authorities who threaten to delay processing or to revoke permits unless illicit payments are made. These instances are, at times, compounded by threats of criminal charges against staff.

In Myanmar weak rule of law is one of many legacy issues inherited from the former military rule. Before Myanmar’s transition to semi-civilian rule in 2010 the military was heavily entrenched in every aspect of Myanmar. Many of Myanmar’s commercial deals were veiled in secrecy with little visibility of how deals were awarded, who the ultimate beneficiaries were and how this intertwined with issues such as human rights abuses associated with ethnic tensions and communal conflict throughout the country. To a lesser extent, it still is.

Myanmar’s judiciary is not independent, it can be unreliable and is easily influenced by vested interests (often linked to the military or military-linked business groups); regulations are commonly applied arbitrarily. Ongoing debate over legal reform is a positive development and, while not perfect, demonstrates forward momentum in the government’s efforts to improve the business environment. However, Myanmar’s rapid post-transition development has, at times, meant its judicial and legislative ambitions have outpaced the government’s capacity to introduce implementing regulations and by-laws, which have been haphazard at best. As such, foreign investors in Myanmar remain vulnerable to the arbitrary interpretation of the country’s laws and how local authorities might apply them.

In both Indonesia and Myanmar we have seen extensive efforts by a number of international organisations and NGOs to improve the operating environment. However, business also has a major role to play. By acting responsibly and taking responsibility for all that they do, business positively reinforces best practice and supports development of the rule of law in that market.

However, adopting best practice in an imperfect market is not easy and can disrupt business operations or even result in lost business. For example, in response to Control Risks’ International business attitudes to corruption 2015/16 survey respondents in Indonesia noted that refusing to pay facilitation payments in Indonesia had resulted in 36 per cent facing major delays, 39 per cent minor delays and 7 per cent of respondents’ operations had ground to a halt.

To effectively mitigate corruption risks (for which Myanmar ranks 156th and Indonesia 107th(1)), businesses operating in the region need to go beyond simply developing an anti-bribery and corruption policy, and also work on its effective implementation on the ground. This often necessitates a set of measures rather than just one solution: it means providing employees with practical guidance on what to do when faced with a corrupt demand, as well as conducting regular localised training and establishing appropriate internal controls (including procedures for managing third parties) combined with clearly articulated messages from senior leadership. For example, one company (operating in both Myanmar and Indonesia), in recognition that it is often a company’s employees who are on the frontline of such demands, issued its employees with ‘zero-tolerance’ cards. Should a bribe be requested the card, in the local language and English, clearly states the individual is not able to provide it.

In Myanmar significant reputational risks persist. In addition to conducting comprehensive due diligence, development of robust mitigation frameworks, including extensive consultation with community, government and non-government stakeholders, and development of environmental and human rights standards that span the company’s entire supply chain, can help to mitigate reputational risks.

Improving rule of law in the region will remain challenging but not impossible. Control Risks’ experience suggests that, there is no one size fits all risk-mitigation strategy. Businesses seeking to improve the rule of law require a fundamental understanding of the market and regulatory environment, effective thought leadership and practical ways to entrench pro-active and meaningful policies (and methods for their practical application e.g. anti-corruption and community engagement programs) into their corporate cultures. In the absence of a strong country-level regulatory framework and reliable judicial system, it is essential for companies to build resilience into their operations, including by conducting effective due diligence and engaging strategically with a broad-range of stakeholders, including government, advocacy groups, industry, NGOs and local communities.

Control Risks is an independent, global risk consultancy specialising in helping organisations manage political, integrity and security risks in complex and hostile environments.

(1) Transparency International’s 2014 Corruption Perceptions Index, ranking 175 countries (with 175th being the worst).