We spoke with Attorney B.Narantsetseg from the law firm Vindexx LLP, which provides legal advisory services in the field of information technology products and services, about the current state of the legal environment for investment and the challenges arising in practice. She is a lawyer specialized in information technology, taxation, investment, and securities law.
How do you assess the coherence and implementation of laws regulating investment relations?
I would say that the absence of a law that consistently and stably governs this relationship creates significant risks in providing legal advice and conducting professional activities. No one would invest in a country where the legal environment is so risky. When assessing these risks, investors always commission professional lawyers to conduct research and provide conclusions.
For example, Article 21 of the Law on Investment states that “If a foreign legal entity acquires 33 percent or more of the total issued shares of a Mongolian legal entity operating in the mining, banking, finance, media, information, or telecommunications sectors, it must obtain permission.” Any lawyer reading this should be able to understand it clearly.
Special permits for companies operating in telecommunications and information technology are issued by the Communications Regulatory Commission (CRC). However, despite this clarity, authorities often respond by saying, “Since this is an investment matter, we should consult the Ministry of Finance or the Ministry of Economy and Development.” In other words, they are unable to properly interpret and apply existing, clearly written laws or make decisions in accordance with them. In such cases, government agencies pass documents back and forth for five to six months. Meanwhile, the investor may have already established the company and be fully prepared to commence operations, yet the regulatory authority fails to implement the law effectively.
When we provide legal advice, we have reached a point where we say, “This is the law as written in black and white. However, in practice, it may be interpreted differently, so let us confirm it with the authority that issues the permit.”
Mongolia’s Constitution states that democracy, justice, freedom, equality, national unity, and the rule of law are fundamental principles of state activities.
Yes. The reality is that we have entered a stagnant and contradictory state where existing laws are not properly implemented. Such ambiguity leads investors to suspect that authorities may be seeking bribes or unclear benefits. Frequent changes in leadership within ministries responsible for implementing laws also contribute to legal uncertainty.
In 2022, the Law on Permits was adopted to regulate general relations concerning the issuance, renewal, suspension, restoration, and revocation of permits, as well as their registration, monitoring, classification, and listing. This law governs activities that may impact national security, financial stability, public interest, public health, environmental safety, or involve the limited use of natural resources and public property.
However, special permits increase investment costs and restrict business operations to the scope specified in the permit. Therefore, investing in any business is already a highly risky decision for investors.
For instance, special permits for operating monetary lottery activities are issued by the Ministry of Finance. While many companies operate legally under such permits, the ministry has taken no action to protect them from individuals running lottery schemes via Facebook live streams or to distinguish legal operators from illegal ones.
Similarly, when technology companies attempt to place their applications on the Play Store or Apple Store, international platforms often lack confirmation that Mongolia has authorized such activities. Ideally, the government should ensure and verify the implementation of its legislation at the international level. Failure to do so creates significant risks for companies that have already calculated their expenses and invested resources. When companies request regulatory bodies to send official letters or emails to international organizations, they are often told, “This is not within our mandate.” This directly blocks companies from generating revenue. In reality, the state fails to protect companies that have obtained permits while showing reluctance to stop illegal activities by unlicensed entities.
A similar situation exists in virtual asset exchanges. The Financial Regulatory Commission (FRC) imposes high requirements regarding share capital and technological security before granting licenses for virtual asset trading and brokerage services. Yet, individuals can conduct similar activities through Facebook messenger chats, transferring funds through personal bank accounts and collecting brokerage fees. For companies that have spent substantial amounts to obtain licenses, this is clearly unfair. Activities that individuals can conduct freely without licenses eliminate the need for companies to invest heavily in compliance.
When concerns are raised, the Central Bank and the FRC typically respond only with general statements such as, “We are doing our work.” Authorities often speak broadly about improving the business environment and protecting investors. However, it is widely known that companies legally operating under Ministry of Finance licenses may still face inspections, fines, or pressure from municipal authorities or police officers, including demands to remove advertisements.
Within the framework of government policy, the Ministry of Economy and Development has established the Investor Protection Center to protect the legitimate rights and interests of domestic and foreign investors and improve the legal environment. The center is expected to provide legal information through a single window, facilitate information exchange, organize training and seminars, ensure transparency, and help resolve disputes before they reach court.
I have researched this. It remains unclear under which law it operates and how it functions. If it aims to protect others’ rights and interests, it should have its own operational rules and a clear protection mechanism. Under Mongolian law, however, the system for protecting human rights and restoring violated rights is limited to the courts.
In my research, I found no additional substantive mechanisms related to this center. There should be a clearly defined complaint and dispute resolution process for matters that violate the law. Yet, there is no legal procedure clarifying how disputes will be resolved or whether decisions by the center would constitute a pre-trial settlement process. Therefore, its effectiveness is highly questionable.
In reality, investors often do not trust this center, and many do not even trust the courts. First, they believe court proceedings take an excessive amount of time. Second, there is a widespread perception that filing administrative lawsuits against public officials for unlawful acts or omissions is ineffective. Business owners with multiple companies often fear damaging their relationships with the state due to disputes involving one business. They worry that filing lawsuits could negatively affect their other businesses or invite undue pressure.
This is a deeply problematic mindset. The belief that executives, investors, or entrepreneurs must appease public officials and maintain personal relationships with them is entirely unreasonable. Choosing personal connections over reliance on the judicial system seriously undermines the development of the rule of law. Although we advise clients to seek legal remedies through courts and formally determine damages, eight out of 10 executives respond, “Let’s just meet and settle the matter informally.”
Do they manage to resolve the issue informally?
I am not sure. Today, installment payment services are widely used by citizens in Mongolia. However, one domestic technology company operated normally for five years before the FRC conducted an inspection and issued an official violation notice, claiming that the company’s service did not comply with the factoring service requirements applicable to non-bank financial institutions.
The company challenged this decision and filed a complaint with the Administrative Court, pursuing the case all the way to the Supreme Court. In the end, however, they decided to settle the matter by reaching an understanding with the FRC. In reality, the service did not fall under factoring. Nevertheless, the commission continued to insist that it did, eventually forcing the company to obtain the relevant license. This is a real example of authorities demanding requirements that do not exist in law and compelling businesses to comply. I would say such issues occur frequently in the FRC’s practice.
The state should not forget that investors stand behind all these businesses. Ministers often emphasize the importance of foreign investors, but whether domestic or foreign, all investors are still investors and have an equal right to have their interests protected.
Technology companies tend to grow very rapidly within three to five years. However, in such an unstable and unpredictable environment, investors are exposed to extremely high risks. If a business fails, the invested funds effectively become a donation.
The FRC generally refuses to recognize new technological products. For example, despite repeated explanations that raising financing through tokenization of assets that could be used for payment settlements or investment purposes complies with the Law on Virtual Asset Service Provider, such proposals have consistently been rejected. Their standard response is simply, “Under the legislation on the Legal Status of the FRC, we are mandated to protect financial stability. Therefore, we cannot approve your product, as it may negatively affect the development of the over-the-counter market.” Such statements lack proper legal justification.
Under these circumstances, I cannot blame business owners for refusing to bring cases to court. In reality, it is impossible to legislate every new technological product. Yet regulators behave as if every detail must be explicitly written in law, causing Mongolia to fall far behind international practices.
Ultimately, the state itself pressures regulatory bodies, preventing them from making independent decisions.
Could you elaborate on that?
There may be many reasons for this. It cannot be ruled out that conflicts of interest exist, such as officials themselves being involved in similar types of businesses. However, in my view, the primary reason is a lack of courage to make decisions. They are unable to approach innovations that could significantly influence the market with openness. Out of fear that “If I approve this, I might be held administratively liable or even dismissed from my position,” they tend to issue penalties rather than support new products. They avoid making decisions altogether, fearing they will be blamed if problems arise later. I see this as the main reason. In some cases, there are even clear indications that they are protecting the market of competing businesses connected to them.
Another major factor discouraging investors is the instability in the implementation of laws and regulations. Mongolia attempts to regulate modern services—services that are being discussed globally—through very outdated legislation. New types of relationships cannot be resolved using old laws. It should also be noted that the FRC relies on Subsection 6.1.2 of the legislation on the Legal Status of the FRC, which states that the Commission may “approve rules, regulations, and instructions within its authority, monitor their implementation, and establish necessary criteria and other standards to support financial market stability.” Using this provision, they sometimes issue decisions that do not align with the legislation.
Could you give an explanation on why business owners are reluctant to resolve disputes through the courts?
Ultimately, business owners should understand that protecting their rights requires going to court. Besides doubts about whether courts can resolve their issues and fears of losing time, they are also reluctant to sue regulatory bodies and worry that court decisions might not be enforced. Nevertheless, I advise business owners and investors to seek judicial remedies.
For the past five years, I have specialized in providing legal defense services in cybercrime cases. It should be emphasized that the newer the type of legal relationship, the more effort judges in Mongolia make to understand and thoroughly research it. In the cases I handle, judges of all ages demonstrate a genuine willingness to understand specific issues. Although Mongolia does not have specialized courts for such matters, judges perform quite well when resolving disputes requiring specialized knowledge. Additionally, courts have the authority to appoint expert witnesses in matters other than legal interpretation.
The Law on Supporting Information Technology Production was adopted, followed by four to five related regulations. However, announcing such measures without sufficient prior research, often more for public relations purposes, causes significant harm to companies that plan their businesses based on government policies and decisions. The government had previously maintained that tax incentives should not be addressed through non-tax legislation, yet it suddenly adopted this law. Subsequently, several regulations were approved to implement the law, but since no government resolution was issued, it remained unclear how the law would be enforced.
It took three months just to upload three approved regulations into the unified legal information system. When attempting to provide legal advice based on those regulations, it turned out that the government first needed to approve the relevant list. However, authorities then responded by saying, “There is no budget to implement this this year.” This reflects the overall manner in which laws are adopted and implemented in Mongolia. Because laws are enacted without sufficient research, everyone interprets them arbitrarily, and implementation remains unstable.
Instead of directors fearing that suing public officials might negatively affect their businesses, public officials themselves should fear that if they make unlawful decisions, businesses will take them to court and the state may seek compensation from them personally for damages caused by their unlawful actions. I would like to encourage business executives to have confidence in the judicial system and protect their rights through legal means. Going to court can save a business. Additionally, investors should no longer be divided into domestic and foreign categories.
It may not be realistic to pass a law for every issue.
Exactly. We should consider whether it is even possible to adopt laws to regulate every type of relationship. Even when laws are clearly written, we still struggle to understand and apply them properly.
