March 31, 2013 on: General

Over the past decade, Mongolia has emerged on the international scene as an exciting economy and a viable investment destination.

The rapid development of its mining sector and economy has forced considerable social changes on its population with sometimes dire consequences. With the presidential election campaigns currently under way, a common electoral platform seems to be the fight against corruption. While this may sound (and probably is in many respects) an empty political promise, there seems to be a real underlying desire for change.

On the surface of it, there are some real and tangible efforts being made to ease the strain of corruption, those include the new Law on Conflict of Interest in 2012, as well as the creation of an Anti Corruption Agency. Furthermore the country recently joined the  Anti-Corruption Plan of the Asian Development Bank, the Organization of Economic Cooperation and Development, and the United Nations Convention Against Corruption.

Yet, despite those admirable intentions, corruption has now become an accepted fact of every-day life, both within the public and private sectors. Evidence of new wealth is ubiquitous in Ulaanbaatar, where high-end restaurants flank rubble-strewn alleyways and brand-new Hummers tie up traffic on crumbling roads. More than half of the city's 1.2 million residents live in the “ger districts” so named after the traditional Mongolian habitat, which have recently become slum-like sprawls of hastily partitioned properties that lack running water and heating. The population of Ulaanbaatar is increasingly exasperated by the visible corruption of their elite while they themselves struggle to survive. 

In a recent Transparency International survey, the two institutions perceived to be the most corrupt are the political parties followed by the parliament and legislature with 84%  of respondents stating that both are extremely corrupt. Possibly more worrying is that 73% thought that levels of corruption hasveincreased dramatically over the past 4 years. 

Is corruption therefore a hinderance to the business environment and ultimately to the development of the country or could it rather be considered a catalyst to a more efficient private sector?

Corruption used to be a catalyst, something used occasionally to speed up processes, permits and authorisations. Today, corruption is becoming a necessary evil for most individuals and businesses, not only to obtain documents faster but increasingly to obtain things that are altogether illegal (permits, houses, contracts etc..).

Some form of corruption, such as political favouritism, collusion of the private sector with the political classes and conflicts of interest are simply unavoidable due to the country’s demographics. With a total population of less than 3 million people, there are barely 60,000 mid-to-high level decision makers nationwide. The government alone employs over half of that group, in such a case, it is simply impossible to maintain a true separation of interest between the public and the private sectors. Conflicts of interest are omnipresent and cannot be eradicated without a considerable increase in the population of the skilled working force. 

A further considerable obstacle to the reduction of corruption is the absolute protection of any information that may be considered private to a company or individual. Public domain is still considered an alien concept in the majority of cases. For instance, it is illegal to obtain any kind of information regarding a new construction project, it is illegal to carry out a basic due diligence check on someone without their approval, it is illegal to check the status or shareholders of a company. It is illegal to verify ownership of a property or other assets. Until this heavy cloak of secrecy is lifted and information is made transparent, those that indulge in corruption will always be able to hide behind the screen of protecting their private information.

Mongolia is essentially governed by 15 large oligarch families who control both the private and public sectors. Such families would usually have both controlling stakes in large conglomerate companies and members of the clan within both major political parties represented in Government and Parliament. 

Up until recently, those families behaved in the fashion of an oligopoly, setting prices, agreeing on non-competition within industries, trading favours and protecting the interests of one another. Yet, a war within the oligopoly seems to have been started last year and a favourite tool of competition has now become the denunciation to the Anti-Corruption Agency of competitors who have gained an advantage through corruption (as all must have at some point).

This trend is most obvious within our own Real Estate sector where it is practically impossible to build a large scale building without using some form of corruption. If found guilty, the land can be returned to the state, heavy penalties applied or the assets themselves can be seized. Recent examples of such in-fighting are the Children’s park of Ulaanbaatar or many of the most recent land seizures around the city.

It may seem like a clean, cheap and efficient way of getting rid of competitors while playing the “shinier-than-thou” card. But it can only truly be played by those that have little to reproach themselves, it may otherwise blow up in revenge denunciations which can cripple an entire industry. This was recently the case when the 4 national airlines declared war to each other with the result that all have suffered considerable damage and all are now under investigation by the Anti Corruption Agency. MIAT, the national airline of Mongolia has recently seen 7 of its top officials placed under arrest for money laundering and embezzlement. 

The MCS company, which was previously referred to as the “Mongolian Corruption System“ company has quickly become the largest conglomerate in Mongolia with interests in practically every industry. Over the past 5 years they have undergone a transformation and became one of the cleanest and most transparent companies in the country. Ever since then they publicly preach against corruption, not because they are pure-of-heart but rather because it functions as an efficient corporate barrier of entry to other companies within their own sectors of influence.

Those are in actual fact positive steps forward, particularly when taking into account Mongolia’s nascent institutions and lack of a strong legal infrastructure to deal with such issues. Yet it is clear that the state still has little capacity to fight institutionalised corruption. There are, for instance, only 16 anti-corruption investigators nationwide, with very few cases actually leading to convictions due to a chronic lack of support from the Government, who has an inherent interest in keeping things relatively quiet. 

Politically, it is rumoured that Ambassadorships and Ministerial posts are up for sale, some for up to 3 Million dollars while the official monthly salary is barely above a thousand USD. Once a post is obtained, often sponsored by a conglomerate, it is the duty of that civil servant to direct any business opportunities to that conglomerate. Such a post also brings considerable advantages in terms of influence, referrals and access to state funds and assets. To remove the incentives of corruption, civil servants must be properly remunerated for their posts and dealt with extremely harshly if found guilty of corruption, something that Singapore has demonstrated works well. 

The most high profile corruption case in Mongolia was that of ex-president Enkhbayar who was arrested and convicted of corruption in 2012. Enkhbayar and his lawyers argue that the current president, Mr. Elbegdorj, who took office in 2009, engineered the corruption case to keep him from running in the parliamentary elections. There is clearly some truth to that statement but few deny that Mr. Enkhbayar was guilty of mass corruption.

It is often said that Mongolia’s high level of political corruption stems from its Soviet heritage. During the Soviet period, the only true form of corruption available was not truly based on monetary gains but rather on the political trade of influence, power and favours. This concept still holds true to this day, with of course the added financial incentive that political posts may bring in a market driven Mongolia. 

Another legacy that the Soviets have left behind is a cumbersome, complicated and often complex bureaucracy. While this heavy administration may make sense in an environment where full employment is required and efficiency isn’t, in today’s Mongolia, it merely helps in furthering corruption. Few citizens are truly aware of their rights and the procedures in place to protect them, fewer still are aware of the laws being constantly enacted. This lack of legal understanding and knowledge is leading to increases of abuse of power by those who formulate those very laws. A true educational effort must be made at all levels. 

Mongolia seems to forget the critical role the civil society can play in the fight against corruption. Today, neither the people forced to pay corruption nor those receiving it have any real incentive to amend their ways. A partial solution to the problem could be to financially reward whistle-blowers along with providing them with legal immunity for their involvement in the act, a technique that India has implemented recently with some level of success. If individuals and businesses are incentivised to expose corruption while being immune to subsequent prosecution, those demanding corruption will become increasingly afraid of being framed by those offering to pay it and will become weary of future transactions.

It seems today that systemic levels of corruption within the higher levels of Mongolia society has led to a sad state of affairs where the few investors still willing to invest in the country are those that could be defined as “cowboy investors”, institutional players looking for short term gains over true added value. If the people of Mongolia are to prosper and the country is to develop a diversified and sustainable economy, it must make radical changes today. It is maybe time that politicians behave as leaders and show the way forward (and maybe follow up on an electoral promise once in a while - such as making a real effort to reduce corruption).

SOURCE OF THIS ARTICLE : M.A.D. Newsletter April

Please note that this article and / or its accompanying media (picture, video, sound files etc…) has not been written, created or taken by M.A.D. Investment Solutions staff. It is not copyrighted to M.A.D. Investment Solutions nor does the company claim any ownership or rights towards the content and its accompanying media. The above article does not in any case represent the views or opinions of M.A.D. Investment Solutions or any of its affiliate individuals or companies. The article above is purely meant as a source of information to readers and does not constitute a legal or biding agreement in any way, shape or form. Ownership of the content and its accompanying media remains with its legal owner or contributor but was sourced from Public Domain sources. If you are the owner of this content or its media and would like it replaced or taken out of our website, please contact us on: info@mad-mongolia.com. For contact and comments directly relating to the above article and or its accompanying media, please refer to the source as stated above.

Did you enjoy this article? Please consider sharing it!

Real Estate Mongolia

M.A.D Investment Solutions Office

Sukhbaatar District, 4th Khoroo
Building no 67, Unit 1&2.
Ulaanbaatar, Mongolia

Tel: +976 11 312 500 (Office)
Tel: +976 95 853 377 (English)
Tel: +976 99 770 439 (Mongolian)
Email : info@mad-mongolia.com

Website design and contents copyright @ M.A.D. Investment Solutions 2009 - 2012 - All rights reserved. Disclaimer