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East Asia & The Pacific

Laos risk report

Updated:

Corruption is a high risk for companies operating in Laos and deters foreign investment. Political patronage pervades all business sectors, and a culture of corruption has been perpetuated by senior LPRP (Lao People's Revolutionary Party) **leaders and by foreign investors willing to buy political support and pay off officials. Petty bribery is another dimension of corruption in Laos; companies are likely to encounter this when trading across borders, paying taxes or acquiring public services. The judiciary is weak and inefficient, thus impeding the proper enforcement of anti-corruption laws. The Law Against Corruption criminalizes abuse of power, embezzlement, passive bribery and fraud in the public sector, but officials are rarely prosecuted.

Judicial system Moderate risk

There is a moderate risk of corruption in the judicial system. Bribery is widespread both in civil and in commercial cases (BTI 2016). An additional problem is political interference: The judicial system is formally independent but is in practice subject to the ruling LPRP party (BTI 2016). Political connections can thus be decisive (BTI 2016).

Overall, Laos's legal system does not meet the needs of a modern market economy, especially regarding contract laws (ICS 2016). Legally, contractual rights are provided for; however, in practice companies must contend with political interference and patronage. Enforcing a contract takes in average 443 days, but enforcement is weak and contracts can be voided if they interfere with public interests or are disadvantageous to one party (DB 2016; ICS 2016). Even though there are commercial courts in place, legal administrators lack training and knowledge (ICS 2016). Businesses should seek counsel from reputable law firms for advice on contracts (ICS 2016). Achieving justice against arbitrary government decisions is not always an efficient process (GCR 2015-2016). Similarly, settling disputes can be challenging for businesses (GCR 2015-2016). Given the low capacity of the judicial system, arbitration outside Laos can prove to be more efficient.

Laos is not a member state of the International Centre for the Settlement of Investment Disputes (ICSID Convention). It signed the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) but has not yet been asked to enforce a foreign arbitral award (ICS 2015).

Police Low risk

There are few reports available on the level of corruption in the police force. Overall, businesses are generally confident in the police to enforce law and order (GCR 2015-2016). Nevertheless, the police have broad powers, which it at times abuses by extracting bribes from citizens (HRR 2015). Furthermore, the police do not serve as a recourse against corruption as it does not actively follow up on complaints against corrupt officials (BTI 2016).

Public services Very high risk

Companies face a high risk of encountering corruption when acquiring permits, licenses or other public services. When it comes to public utilities, undocumented extra payments are sometimes exchanged, and bribes to approve or expedite applications are also commonly accepted (GCR 2015-2016; ICS 2016). Wages of government officials are very low, which can entice some to engage in corruption (HRR 2015). Moreover, the public service is highly politicized, and the recruitment of administrative personnel is tainted by nepotism, cronyism and political patronage (BTI 2016). Consequently, even if civil servants are adequately competent they are ultimately unlikely to take decisions that would go against political imperatives (BTI 2016).

Complying with government regulations can be challenging as they are often vague and even conflicting (ICS 2016). Moreover, the realities of doing business often fail to correspond with existing legislation and regulations because of weak implementation and enforcement of the law (ICS 2016). Obtaining the many necessary documents outside Vientiane can be challenging for foreign investors (ICS 2016). Starting a business takes approximately 73 days (the average is 26 in East Asia and the Pacific) (DB 2016).

Land administration High risk

Corruption is a problem in the land administration: Even though land and property rights are theoretically protected, a weak judiciary and corrupt officials frequently undermine them (BTI 2016). False and disputed claims can, in theory, be resolved through arbitration, but in practice, most settlements are reached through the payment of bribes to relevant officials (BTI 2016).

In 2013, land grabs by Vietnamese companies bankrolled by companies such as Deutsche Bank and the International Finance Corporation (the World Bank's private lending arm) came to light (The Guardian, May 2013). More than 3.7 million hectares of land have been handed over to companies since 2000; these deals were made possible by corruption in the land administration and among politicians and led to evictions without compensation, food insecurity, and illegal logging so that the country's forest coverage has decreased by 50% since 1960 (Global Witness, May 2013; July 2014). After the reports came to light, Deutsche Bank divested from the named Vietnamese firms (VOA, Dec. 2013).

Tax administration Very high risk

The tax administration in Laos presents companies with a high corruption risk. Bribes and other irregular payments are often exchanged in relation to annual tax payments (GCR 2015-2016). Similarly, around one in four companies expect to give gifts in meetings with tax officials (ES 2012). Lao tax officials are renowned for their lavish salaries (compared to other civil servants); their positions are commonly obtained through connections (Radio Free Asia, Jan. 2016). The tax collection system is problematic investigation mechanisms of state audit organizations are inadequate (Radio Free Asia, Jan. 2015). Paying taxes is more time consuming than in other parts of East Asia and the Pacific: On average, a business spends 362 hours to prepare, file and pay taxes (DB 2016).

Customs administration Very high risk

Companies should note a high risk of corruption in the customs sector. Irregular payments when importing and exporting are commonplace (GCR 2015-2016). The lack of transparency and efficiency at the border is problematic: It is difficult to predict the time needed to complete all import procedures and the clearance process is deemed inefficient by investors (GETR 2014). Import licenses are often acquired with the help of gifts to officials (ES 2012).

Public procurement Very high risk

Bribery and patronage are high risks for firms operating in the public procurement sector in Laos. Government contracts are commonly awarded to private companies with close ties to high-ranking party members (BTI 2016). Additionally, undocumented extra payments in connection with awarding public contracts frequently occur (GCR 2015-2016).

In 2015, auditors uncovered 25 so-called “ghost” projects in the Oudomxay Province: State budgets were repeatedly allocated to private firms to build roads in northern Laos to support the country’s 10th National Sport Games (RFA, Jan. 2016). The roads were never built; nonetheless, the contracting firms allegedly cashed in payments (RFA, Jan. 2016). Authorities reportedly detained the former minister of finance, the former governor of Oudoumxay Province, and several other officials who allegedly remain under investigation (HRR 2015).

Companies are strongly recommended to use a specialized due diligence tool on public procurement to mitigate corruption risks associated with public procurement in Laos.

Natural resources Very high risk

Corruption is a high risk for companies operating in the natural resource sector in Laos. The industries lack accountability and transparency, and the Government Inspection Authority reports huge revenue losses due to illegal logging and overall mismanagement (Shanghai Daily, July 2014). Correspondingly, companies are likely to encounter corrupt officials and secrecy around the allocation and management of land and resources (Global Witness, July 2014).

Legislation

Laos has many laws against corruption in place, but they lack enforcement. The Law Against Corruption criminalizes public sector abuse of power, embezzlement, passive bribery and fraud. In 2015, the Law on Anti-Money Laundering and Combatting the Financing of Terrorism took effect, requiring companies to provide information on and act against money laundering and the financing of terrorism; companies must now perform due diligence on customers before entering into a business relationship (Global Compliance News, Aug. 2015).

Only a few officials of lower positions have been prosecuted under the existing anti-corruption law (BTI 2016). Senior members of the ruling party who perpetuate and encourage the prevailing culture of corruption are not targeted (BTI 2016). At present, no appointed or elected officials are under any legal obligation to disclose their assets or income (HRR 2015).

Laos has ratified the UN Convention on Anti-Corruption but has not signed the NoneOECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Civil society

Most news outlets are government owned and thus restricted (FotP 2015). Censorship and self-censorship are pervasive (FotP 2015). Even though government-regulated media frequently point to corruption, it does so without mentioning names (BTI 2016). Some private media outlets exist, but they report mostly on general issues, not on politically contentious topics (FotP 2015). As online increased, the government passed a restrictive cybercrime law that vaguely prohibits publishing negative information about the government and demands all social media users to register with their full name (FotP 2015). The press is considered "not free" (FotP 2015).

The legal right to assembly and association are restricted, and participation in organizations that engage in demonstrations or public protests is prohibited (FitW 2015; HRR 2015). Some human rights groups operate in the country, but the government limits their ability to effectively investigate rights violations (HRR 2015).

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