Deep due diligence needed in high-risk Myanmar

March 10, 2016

Myanmar is undergoing a remarkable transition, with one of the world’s most reviled military juntas allowing a democratic government to be formed in the country. This reform process culminated in November 2015 in a landmark general election, putting an end to several decades of military rule that had caused the country to lag behind the rest of the world.

The first signs that change could be possible were seen in 2011, when Myanmar’s military government began to introduce gradual political, economic and foreign policy reforms. The release of nearly 2000 political prisoners and the return of the National League for Democracy (NLD) to the country’s political process led to an easing of international pressure and a thawing in relations with the United States.

NLD President and national icon Aung San Suu Kyi is the daughter of independence hero Aung San and one of the most beloved figures in Myanmar (or Burma, as many in the West still call it). Suu Kyi was released from house arrest in November 2010, after spending 15 of the 21 years since 1989 as a political prisoner.

In 2011, a nominally civilian government composed of former generals took office, paving the way for the international community to withdraw many of the sanctions against the country. Some crucial restrictions have continued, though, including that United States companies remain barred from doing business with approximately 200 ‘specially designated nationals’ who have been deemed to have close ties with the former junta. However, many United States sanctions were lifted as reward for President Thein Sein’s 2011 decision to allow Suu Kyi to contest the 2012 by-elections, in which the NLD won 43 out of the 44 contested seats.

Since then, there has been some major investment in Myanmar by various United States–owned entities. This has included investments by the Singapore subsidiary of ConocoPhillips in an offshore gas concession, can producer Ball Corporation in a can-manufacturing plant for Coca-Cola, ACO Investment Group in solar energy, and General Electric in power and healthcare. In addition, fast-food companies KFC and Pizza Hut have opened restaurants in the capital city of Yangon.

Thet Aung Min Latt, a political and business consultant at Myanmar-based consultancy firm Diamond Intelligence, believes that the easing of United States sanctions over recent years has everything do with the country’s political reforms. The United States is closely monitoring these reforms and there is great anticipation that sanctions may be further eased to coincide with the NLD taking office in March this year.

In December 2015, just one month after the country’s elections, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a six-month general licence that authorised certain trade-related transactions supporting exports to Myanmar that had previously been prohibited by sanctions. General Licence No. 20 allows companies to conduct most transactions involving blocked parties, but only when those prohibited parties are incidental and not directly involved with the export of goods, technology or non-financial services to or from Myanmar.

Constitutional guarantees

Myanmar’s existing constitution, drawn up by the junta, guarantees the military one-quarter of all seats in the country’s parliament, control of three security ministries, and a constitutional veto. Aung San Suu Kyi is constitutionally barred from taking up the Office of the President as she was married to a foreigner and her children have foreign citizenship. And even though her NLD party took the 70 percent of seats needed to make constitutional changes, the party has surprised many since the elections by continuing to work with the junta rather than push it away, with Suu Kyi making public statements to the effect that the NLD should forget the past and try to work closely with the junta for the betterment of the lives of ordinary Myanmar citizens.

Diamond Intelligence consultant Thet is of the opinion that the NLD is probably afraid to do anything that might encourage the junta to return the country to the horrors of 1991, when the NLD won elections with a similar majority only for the junta to assume power and place Suu Kyi under house arrest for almost two decades.

Rumours persist that Thura Shwe Mann, a former general and ‘number three’ in the junta who has since been purged, may form an alliance with the NLD and could be a possible proxy president for Suu Kyi. In a recent statement on the matter, Suu Kyi declared that she would make all of the important decisions and lead ‘above the president’, but that the president would be someone amenable to the party.

While the military junta remains in power, it is perhaps too early to speculate on the extent to which issues such as corruption, bribery and crony capitalism can be affected by the change in government. According to various watchdogs, corruption and patronage still run deep in Myanmar and much remains controlled by the armed forces and their allies. Suu Kyi has even gone on record saying that the NLD will plan to largely continue the economic policies of the military-backed administration, and will not try to shut out businesses linked to the former ruling generals.

Local English-language newspaper Eleven recently highlighted several cases of corruption, crony capitalism and power control by the military junta, which is trying to force through a number of changes in their final months in power.

In January 2016, several government bodies were noted to be involved in quickly privatising state-owned land plots, buildings and factories by selling and renting them – activities that have in the past proven rife with corruption.

Healthcare professionals have voiced their concerns and launched campaigns against the August 2015 appointment of military officers from the Ministry of Defence to positions in the Ministry of Health. The media had previously been informed by the Ministry that such transfers would be suspended, but Eleven noted several instances in 2015 where the military junta attempted to militarise the healthcare sector. This rightly generated severe criticism from all sides as military involvement in the healthcare sector would raise serious concerns for foreign pharmaceutical and medical equipment companies wishing to do business in Myanmar.

The government of President Thein Sein enacted Myanmar’s anti-corruption law in 2013. This was followed by the appointed of the Anti-Corruption Commission in February 2014 by parliament. According to NLD Member of Parliament Myat Nyana Soe, approximately 80 percent of complaints relating to corruption remain unanswered, with the Anti-Corruption Commission sitting on many complaints and a number of files yet to be reviewed by the government. In addition, Myat Nyana Soe argues that the anti-corruption law is flawed as the payment of a bribe by a business is neither punishable nor illegal. As only government officials tend to be found guilty, businesses are happy to offer high bribes in order to win contracts in Myanmar.

The Myanmar Centre for Responsible Business recently greatly criticised both the NLD and the OFAC financially-sanctioned Htoo Group of Companies after the NLD accepted complimentary hotel facilities at Htoo Group’s Shwe Sann Ein Hotel for member of parliament training.

The Shwe Sann Ein Hotel incident perhaps reinforces the idea that it would be naïve to expect too much too soon when the NLD assumes power in March. While it continues to walk hand in hand with the military junta it is unlikely that the NLD will be willing to make constitutional changes and implement strict laws to reduce corruption and capitalism in the government sector. This means that, even with the recent political reforms and positive outlook by companies in the United States, it will likely be a while before business and politics in Myanmar are run in a fully transparent and democratic manner.

Foreign companies wanting to invest or do business with counterparts in Myanmar need to proceed with due caution and conduct sufficient due diligence. More rigorous due diligence must be imposed that focuses on a company’s beneficial ownership as well as its business conduct, financial status and reputation.

Companies facing demands for greater transparency may require a complete overhaul of their due diligence processes. As a result, it may prove to be more cost effective to instruct a specialist due diligence firm, especially when dealing with a high number of third parties.

 

 

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