Omassmann doing business in vietnam

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AGENDA • HOW TO ACCESS THE MARKET?

• UNDERSTANDING STATE-OWNED ENTERPRISES

– PVN Insights

– Government Procurement and Bidding

• CORPORATE COMPLIANCE

– How To Deal With Corruption?

– Fight Against IP Theft?

– Competition Law Issues

– Good Compliance Practices: DOS and DON’TS

• IMPEDIMENTS FOR DOING BUSINESS IN VIETNAM

• RECOMMENDATIONS

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HOW TO ACCESS THE MARKET?

• Establishing a corporate vehicle in Vietnam (100% foreign owned or joint venture with Vietnamese partners) or jointly cooperating with Vietnamese partners without establishing any corporate vehicle under business cooperation contracts.

• Forms of Enterprises: LLC, JSC, Partnership and Private Company. For LLC and JSC, liabilities of an owner are limited to the amount of capital he or she undertakes to contribute to the company.

• Vietnam’s WTO Commitments provide foreign ownership restrictions in many service sectors. Market access to “unbound sectors” is subject to discretionary judgment of licensing authorities.

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BASICS OF REGULATORY ENVIRONMENT

• Average licensing procedure period: 30-45 days under the laws. However, this procedure can last for months in practice.

• CIT rate: 25%; VAT: standard rate of 10%. Foreign equipment/services suppliers are subject to withholding tax.

• Land ownership: There is no land ownership in Vietnam. Foreign invested companies have to lease land directly from the state and are granted with LUR certificates.

• Dispute settlement: In principle, foreign arbitration is permitted for contracts between foreign and domestic entities. However, recognition and enforcement of arbitration awards in Vietnam are very arduous.

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UNDERSTANDING STATE-OWNED ENTERPRISES

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UNDERSTANDING STATE-OWNED ENTERPRISES

• Roles of SOEs: Acting as “a pillar of the Communist Party’s control, both as a tool of economic policy and as a way to keep provincial supporters, trade unions and other interest groups happy” (Vietnam – Rising Dragon, Bill Hayton)

• Although equitization (or privatization) process is sped up (e.g. – up to 31 July 2011, Vietnam equitized 3,949 state-owned companies), SOEs still have a bright future ahead.

• Major SOEs such as Vinashin, EVN and Vinacomin are mired in debts and inefficient business activities.

• The management structure of these SOEs is highly bureaucratic, management personnel are generally incompetent and do not act in accordance with international business practice and standards.

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PVN INSIGHTS

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MANAGEMENT STRUCTURE

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Members’ Council

Deputy General Directors

General Director Deputy General Directors

Control Board

General Director Mr. Do

Van Hau

Chairman Mr. Phung Dinh Thuc

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KEY THINGS TO NOTE WHEN DEALING WITH PVN

• PVN is the state-owned oil and gas production monopoly. PVN proclaimed that it earned US$16 billion revenue in 2011. Currently it is considered to be in good financial standing.

• PVN was demanded by the Prime Minister to stop investing in areas out of their core business (e.g. – luxury housing, finance companies) (Government Ordinance No. 94/NQ-CP dated 27 September 2011)

• Based on our experience, PVN does not always act in strict compliance with its contractual obligations.

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GOVERNMENT PROCUREMENT AND BIDDING • Public procurement is one of the sectors most susceptible to corruption.

• The number of competitive tenders in the total value of awarded government procurement contracts declined significantly between 2008 and 2009: In 2008, more than 72% of contracts were awarded through competitive bidding, while in 2009 only 53% of procurement contracts followed a competitive bidding process. This situation has not been much improved recently.

• Officials in charge of equipment purchase contracts can solicit for kickbacks or personal commissions.

• Who benefits from corruption and non-transparency in government procurement in Vietnam: Chinese contractors!

– 90% of power, mining, manufacturing, ferrous and chemical projects of state-owned companies in Vietnam are awarded to Chinese contractors.

– Example: China State Construction Engineering Corp. (CSCEC) keeps winning important contracts although it has a poor track record and has even been blacklisted by the World Bank due to bribery charges.

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HOW TO REACT WITH YOUR HANDS CLEAN? • IN THE SHORT TERM: PERSERVE, DON’T BE FOBBED OFF!

– Forming partnership with subsidiaries or well-connected companies of major state-owned companies (where possible) for bidding.

– Taking advantages of the business associations and foreign diplomatic organizations.

• IN THE LONGER TERM:

- Taking advantage of the negotiations of a free trade agreement between Vietnam and E.U and Trans-Pacific Partnership Agreement between Vietnam and US and other Asian-Pacific countries to require Vietnam to comply with major principles on government procurement and bidding under WTO’s Agreement on Government Procurement.

- Creating more pressure for Vietnam to join WTO Government Procurement Agreement. This should also be a prerequisite for development aid of the US and European countries for Vietnam.!

- Incorporating FCPA anti-bribery principles in the TPP and EU – Vietnam FTA to maintain a level playing field for foreign service/good suppliers.

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Principles of WTO’s Agreement on Government Procurement that Vietnam should follow: • NT treatment: Vietnam is required to accord to products,

services and suppliers of foreign countries treatment “no less favorable” than they give to their domestic products, services and suppliers.

• MFN treatment: Vietnam may not discriminate among goods, services and suppliers of foreign countries.

• Vietnam must ensure that its entities do not treat domestic suppliers on the basis of a greater or lesser degree of foreign affiliation or ownership as well as do not discriminate against domestic suppliers because their good or service is produced in the territory of another Party.

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Principles of WTO’s Agreement on Government Procurement that Vietnam should follow:

• The use of offsets, i.e. – measures to encourage local development or improve the balance-of-payments accounts by means of domestic content, licensing of technology, investment requirements, counter-trade or similar requirements, are explicitly prohibited.

• Vietnam must apply procedures for providing transparency of laws, regulations, procedures, and practices regarding government procurement under the Agreement on Government Procurement. For example, limited tendering procedures are only applicable when the product or service can be supplied only by a particular supplier or for reasons of extreme urgency brought about by events unforeseeable by the entity.

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DEALING WITH CORRUPTION ?

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SCENARIO 1:

A is a salesman of a construction equipment supplier. B is a purchasing manager of a wholly state-owned company in Vietnam. B suggested in a meeting with A that he would approve the purchase of equipments from A’s company if A’s company transferred US$5,000 to his personal bank account. A transferred the requested amount with the approval of his company’s managers.

Q: What happens if this case is investigated by the Vietnamese police and settled in a Vietnamese court?

A: A and managers approving the money transfer can be held criminally liable for the crime of giving bribes. Lightest penalty for the crime of giving bribery is 1 year imprisonment and heaviest penalty is capital punishment. Minimum value for a bribe is VND 2 million (approx. US$100).

People who have knowledge about A’s act but fail to report to the competent authority of Vietnam (e.g. – district police or court) can be held guilty of the crime of failure to denounce criminal offences, and subject to a possible penalty of 6-month to 5-year imprisonment.

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SCENARIO 2:

Same situation, same question as in Scenario (1). The difference is B’s company is a wholly private company. Answer: A and managers approving the money transfer are unlikely to be held criminally liable for the crime of giving bribes because B is not a state official or a manager/employee of a state-owned company. However, depending on specific situation, A, his managers and B can be held guilty of appropriating property through swindling and/or other crimes.

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ELEMENTS OF A BRIBE UNDER VIETNAMESE LAW

• Act: Offering, promising or making a payment

• Payment: Money or anything of value (minimum threshold: VND 2 million (approx. US$ 100)

• Recipient: “People undertaking official duties” such as public servants, government officials, officers, managers of state-owned companies

• Intent: Induce or influence an act/omission or decision

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HOW HAS CORRUPTION BEEN ADDRESSED IN VIETNAM? • Although corruption has moved to the political agenda of Vietnam and an anti-

corruption legal framework has been set up, corruption remains inefficiently addressed in Vietnam.

• The loss of confidence in the system and lack of whistleblowers’ protection have prevented individuals and organizations from reporting corruption incidents.

• Corruption cases:

‾ There are 280 corruption-related cases in average settled in Vietnamese courts with 600 people prosecuted every year from 2007 to 2011.

– Up to date, only a small number of foreign citizens have been prosecuted with corruption-related crimes in Vietnamese courts.

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Worldwide Corruption Perceptions Index (*)

Country/Territory Rank in 2011 (out of 182 countries)

Vietnam 112

Singapore 5

Malaysia 60

Thailand 80

Indonesia 100

Taiwan 32

Hong Kong 12

China 75

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HIGH-PROFILE CORRUPTION CASES Case 1: Huynh Ngoc Sy and Pacific Consultants International

(PCI)

• Huynh Ngoc Sy: Former Deputy Director of Ho Chi Minh Transportation Department and Director of Japan-funded East-West Highway.

• PCI: Consulting contractor of East-West Highway project.

• In 2008, 4 Japanese PCI executives pleaded guilty in a Tokyo court to paying US$820,000 in bribes to Huynh Ngoc Sy.

• Huynh Ngoc Sy was sentenced to 20 years in prison. Japan, the biggest donor country, temporarily suspended hundreds of millions of dollars in ODA to Vietnam in December 2008 and requested Vietnam to combat corruption.

• 3 executives of PCI were convicted to 18 months in prison; PCI was ordered by the Tokyo court to be dissolved and absorbed by Oriental Consultants Co. Ltd.

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Case 2: Securency and Banknote Contract in Vietnam • Australian federal police charged Securency with allegedly bribing

foreign central bank officials and politicians in Vietnam to secure banknote contracts between 1999 and 2005.

• Securency paid to a Ministry of Public Security colonel and middleman, Luong Ngoc Anh, and his company, CFTD, US$20 million in commissions.

• Securency paid for education at England’s Durham University of the former State Bank Governor of Vietnam, Le Duc Thuy . Mr. Thuy , who served as central bank governor from 1999 to 2007, decided to switch Vietnam’s currency from paper to Securency’s polymer material.

• The Reserve Bank of Australia, the company owning 50% of the Securency’s shares, has sought to sell its shares in Securency.

• Mr. Thuy had to retire from central bank governor position.

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Case 3: Vinashin and Vinalines

• Pham Thanh Binh, the former chairman and CEO of Vinashin, the nation’s biggest shipbuilder, was sentenced to 20 years in prison for “intentionally violating State regulations on economic management that caused serious consequences” for US$45 million losses of Vinashin.

• The former Chairman of Vietnam National Shipping Lines (Vinalines), Duong Chi Dung, has been on the run since the police issued a nationwide arrest warrant for him. Mr. Dung was charged with corruption allegations relating to the purchases of a 42-year-old Japanese-built floating dock from Russia (70% of the average world market value of a newly built floating dock) and secondhand cargo vessels at sky-high costs.

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INTELLECTUAL PROPERTY THEFT IN VIETNAM

• Piracy and IPR infringements are still widespread in Vietnam and enforcement remains ineffective.

• Obtaining injunctions from a Vietnamese court against IPR infringements is very difficult in Vietnam. For example, foreign documents accompanied to the injunction request must be legalized prior to submission, which can be very lengthy in practice.

• Criminal penalties of VND 500,000,000 (US$28,000) or a non-custodial reform of up to two years can be imposed against willful infringements of industrial property rights over trademarks or the geographical indications on a commercial scale. However, it is unclear when a copyright/trademark infringement will be considered as a “commercial scale”.

• Vietnamese judges have very limited experience in dealing with IP disputes. To date, very few IP cases have been litigated.

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HOW TO PROTECT YOUR IPRS IN VIETNAM? • Register trademarks, patents and other IP rights as early as

possible. • Follow IPR registrations of the NOIP closely. NOTE: The

NOIP does not sufficiently consider the “bad faith” of the applicant. Many companies in Vietnam are specialized in filing applications that imitate the trademarks of other companies and their applications have been accepted by the NOIP.

• Involve foreign business associations and diplomatic organizations in the fight against IPR infringers.

• Always enter into confidentiality agreements with employees, which must survive upon termination of the labor contracts.

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ONE NOTE ON PRODUCT LIABILITY

• Article 23, Law on Protection of Rights of Consumers 2010: In terms of product liability, the companies trading goods are obligated to compensate for all personal, health and asset injuries, losses, or damages caused to the consumers by their defective products even in case these companies are not aware of or held liable for such defects.

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COMPETITION LAW ISSUES • Mergers and acquisitions of enterprises holding a combined market share of more than 50% of the

relevant market shall be prohibited, except in case after merger or acquisition, the surviving company or newly formed company remains a small – or medium – sized company.

• Vietnamese competition law prohibits a number of restrictive agreements and practices, irrespective of the market share of the involved parties: – Preventing, restraining or disallowing the entrance or business development of competitors – Exclusion agreement – Bid rigging

• Agreements prohibited when the combined market share of participating enterprises makes up 30% or more of the market: – Price Fixing – Market Allocation – Restricting or controlling quantities or volumes – Imposing unfavorable conditions on the others

• Note: There is no clear mechanism or method under Vietnamese law to determine “market share” and the determination is subject to discretionary judgment of competition authority.

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ACTS OF ABUSE OF DOMINANT OR MONOPOLY POSITION • Dominant Position? An enterprise (i) holding market share of 30% or more or (ii) being

capable of restricting competition significantly OR a group of enterprises holding total market share of 50% or more for 2 enterprises, 65% or more for 3 enterprises and 75% or more for 4 enterprises.

They are prohibited from: - Predatory pricing - Unreasonable pricing/minimum price fixing - Imposing restrictions on production/distribution; preventing technological development - Discriminating customers of a kind - Imposing unfavorable conditions on others - Preventing market access

• Monopoly? No other enterprise competing to provide goods or services in the relevant market

A monopolist is prohibited from: - 6 acts of abusing dominant position - Imposing unfavorable conditions on customers - Unilaterally modifying or cancelling contracts without plausible reasons.

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ARE EXCLUSIVITY CLAUSES VIOLATING COMPETITION LAW? • Unfortunately, the answer is likely “yes” in most circumstances. • Articles 8 and 9.1 of the Competition Law collectively provide that “agreements which

prevent, restrain, or disallow other enterprises to participate in the market or to develop business” are strictly prohibited regardless of the market shares of the contractual parties. Article 19 of Decree 116 (2005) defines such agreements as the act of reaching an agreement not to trade with enterprise(s) not participating in the agreements.

• Wait… How about an exclusivity clause in service supply or equipment sale agreements? If it contains any restriction on trading with third parties, there is a clear prima facie case that such exclusivity clause is in breach of Article 9.1 of the Competition Law.

• Consequences? – Administrative sanctions: (i) A fine of 5% of the overall turnover of the preceding

fiscal year; (ii) confistication of all profits gained from the act of violation; and (iii) forcible removal of all violating provisions from the contract in question.

– Worse off? The entire or part of the contract can be deemed invalid under Vietnamese Law because of violation of legal prohibitions (Article 128 of the Civil Code). 29

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GOOD COMPLIANCE PRACTICES: DOS AND DONTS DOS DON’TS

Have your Internal Labor Rules registered with the local Department of Labor, Invalids and Social Affairs

Only submit the Internal Labor Rules to the local DOLISA and not care about registration result. Note: An ILR is only effective from the date of registration

Localize your global compliance rules

Do not care about localization, deem that global compliance rules signed and agreed by employees are enough. Note: Any rule in violation or inconsistency with Vietnamese Law can be deemed invalid and unenforceable.

Organize regular compliance trainings in terms of FCPA and Vietnamese anti-corruption law to employees, set up hot line system for receipt of complaints and allegations from employees

Neglect or do not address the employees’ complaints thoroughly

Maintain “checks and balances” system internally

Maintain ineffective management localization

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HOW ABOUT CHOOSING LEGAL ADVISORS FOR YOUR PROJECTS IN VIETNAM ?

• Article 40.6 of the Law on Lawyers (2006): an obligation of a lawyer practicing organization is to “purchase professional liability insurance for lawyers of its organization in accordance with the law on insurance business”.

• Article 8.2(b) of the Law on Insurance Business No. 24/2000/QH10 (amended in 2010): Professional legal liability insurance is a mandatory insurance.

• However, there is no statutory requirement on minimum value of the professional legal liability insurance. In practice, the majority of law firms in Vietnam have not purchased professional liability insurance for their lawyers.

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HOW ABOUT CHOOSING LEGAL ADVISORS FOR YOUR PROJECT IN VIETNAM ?

WATCH OUT AND FOLLOW ADVICE BELOW STEP BY STEP!

BEFORE YOU SIGN ANY SERVICES AGREEMENT WITH ANY LEGAL ADVISOR/LAW FIRM/CONSULTING FIRM IN VIETNAM PLEASE DO THE FOLLOWING:

COPY PASTE THIS REQUEST IN YOUR EMAIL TO THEM AND WAIT FOR THE REPLY:

“Dear Ms/Mr ….,

Please send us the valid evidence that your company has an international standard and enforceable offshore professional legal liability insurance with dispute resolution offshore Vietnam and not

subject to Vietnamese court or Vietnamese arbitration.

We would be happy to cooperate and retain your services if you can prove that your company is professionally insured to provide legal services to international clients according to international

standards.

Thank you very much

Best regards,”

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IMPEDIMENTS FOR DOING BUSINESS IN VIETNAM

• Complicated licensing procedure, regulatory inefficiencies, and partial judicial system

• Systematic factors such as red tape and corruption remain unaddressed

• Unstable macro-economic environment: high-level inflation and recent catastrophic devaluations of Vietnamese dong

• Poor infrastructure

• Enforcement of IP rights is institutionally weak and largely unable

• Lack of skilled human resources

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RECOMMENDATIONS

• It is your chance now, take it: Invest into the development of the value chain in this fast-emerging market!

• In-depth understanding of Vietnamese law and extensive local expertise

• Careful and thorough investment action plan will lead to great success

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Thank you very much! Questions?

Oliver Massmann: [email protected]

Duane Morris Vietnam LLC Pacific Place

Unit V1307/1308, 13th Floor 83B Ly Thuong Kiet Street Hoan Kiem District, Hanoi

Vietnam Phone: +84 4 3946 2200

Fax: +84 4 3946 1311

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Omassmann doing business in vietnam

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