Fri, Nov 29, 2019

Reshmi Khurana Discusses Importance of Due Diligence in Op-Ed “Investing in Myanmar? Do due diligence”

Risk, as well as opportunity, have always accompanied investors in Myanmar. The recent initiatives by both the United Nations (UN) and the U.S. to ensure that foreign direct investment (FDI) only enriches civilian enterprises and not Myanmar’s powerful military backed entities, makes it imperative for foreign investors keen on operating in Myanmar, to be very sure about the background and military links of their partners. 

In August this year, the UN’s Independent International Fact Finding Mission on Myanmar released a 111 page report outlining how companies affiliated with the Tatmadaw (Myanmar’s armed forces) have supported “extensive and systematic human rights violations against civilians in Kachin, Shan and Rakhine states.”

The UN report urged companies to stop doing business with firms linked to the military, in particular the Myanmar Economic Corporation (MEC) and the Union of Myanmar Economic Holdings Ltd (UMEHL). Primarily owned by the Ministry of Defence, MEC and UMEHL between them control businesses that range widely, from golf resorts and sugar mills to telecommunications, breweries and gemstones. The UN report calls for reducing the economic power of both groups for driving greater corporate transparency in the country.

The UN report has identified close to 60 foreign companies with commercial ties with such Tatmadaw-backed businesses, all of whom, “at a minimum, [are] contributing to supporting the military’s financial capacity.” It calls for immediate, targeted sanctions against MEC, UMEHL and their subsidiaries, and for companies to step-up their due diligence processes to ensure their supply chains are free of involvement with military-owned businesses.

The U.S. Congress is taking a lead in turning such invocations into law. In September, the U.S. House of Representatives passed draft legislation (by 394 to 21 votes) – styled the BURMA Act – that would mandate President Trump to impose sanctions against “military-owned enterprises” in Myanmar. These will include trade, visa and travel restrictions and may extend to individuals and companies with business or family links to such entities. The breadth of those implicated could thus be wide and the definition of what constitutes a “link” potentially open to interpretation.

This draft legislation is being steered towards enactment by Republican party congressman Steve Chabot and Democrat party congressman Eliot Engel. Currently being considered by the Senate Committee on Foreign Relations ahead of reaching the Senate, it enjoys bipartisan support. Its prospects for enactment are therefore high.

This is significant. Given MEC and UMEHL’s wide reach in, and unique importance to, Myanmar’s still emerging economy, they remain attractive for investors seeking to develop a meaningful business presence in the country. Even highly reputable foreign investors have, in the past, embraced the market entry opportunities that MEC and UMEHL offer across sectors ranging from consumer goods to steel manufacturing. 

Asian investors, even those with no U.S. market exposure, should not be tempted to shrug off attempted sanctions of this kind. Developing commercial partnerships with Myanmar entities that the US Government has blacklisted may not directly affect a strictly Asian investment opportunity, but it could limit being appealing to potential partners who do have a care for the reach of US sanctions and financial regulations. 

Dealing with Tatmadaw-related enterprises also risks reputational harm through “naming and shaming.” NGOs like Burma Campaign UK produce “dirty lists” of companies they allege are dealing with military-backed or environmentally damaging companies in Myanmar. Currently 83 companies are on this list.

In August, Belgian satellite communications operator, NewTec, responded to the negative publicity created by its commercial ties to MyTel by withdrawing all investment. MyTel is one of Myanmar’s four telco licenses. A major part of the country’s communications infrastructure, MyTel is a joint venture between Vietnamese and Myanmar military-linked entities.  

It is important to ask whether companies do more harm than good by withdrawing capital and employment opportunities from a country still in the process of slowly liberalizing its economy. The question is complicated because whilst the UN and US seek to create a binary division between civilian Myanmar enterprises and military ones, the reality is less clear cut.

Ever since Myanmar’s independence in 1948, the Tatmadaw has provided the surest path for talent to be recognized and promoted. This channelling of the most able into its ranks stunted the country’s economic and professional development. But its legacy is that many of the country’s most able and well-connected business people have direct or family Tatmadaw connections.

Politically, the fact remains that the NLD and Tatmadaw currently have joint stewardship of Myanmar, uncomfortable working relationship notwithstanding. The Tatmadaw controls 25% of the seats in Parliament and exerts considerable influence on the bureaucracy. The civilian National League for Democracy-led administration needs their cooperation in order to effectively govern, even whilst it may well dream of reducing it. 

Foreign investors must make their own decisions on what level of risk is appropriate in doing deals in Myanmar. But they should do so from an informed position. That begins with undertaking careful scrutiny of their commercial relationships in the country to ensure they are, at the very least, aware of their exposure to the military. 

As companies are held accountable to an ever-growing range of stakeholders – increasingly socially conscious customers and investors, globally influential NGOs and activist groups, and the wider international community – this challenging, yet essential, task of due diligence and risk assessment will only become more important.

This article was first published on The Business Times on Nov 28. 

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