Compliance with the Company Law is Mongolia is still a relatively rare thing.  Most companies are not publicly listed and are owned by single shareholders so therefore do not feel the need to follow the Company Law.

Under the Company Law of Mongolia there are a number of decisions which must be approved by a shareholder’s meeting held at least once a year, including the appointment of members of a board of directors, approving annual reports, and the reorganization or liquidation of the company, amongst other matters.

While these aspects of the Company Law may not be strictly enforced in Mongolia yet, they nevertheless remain important features of properly maintaining a company.  Compliance is not overly onerous for companies in Mongolia.  A shareholder’s meeting must be held within four months of the end of the company’s fiscal year in order to make the necessary decisions.  While a company may have a different internal fiscal year, in Mongolia it is defined as January 1 through December 31 for the purpose of submitting documents to the tax authority.

A limited liability company may or may not have a board of directors.  If a BOD is defined in the company charter then it must meet as stated in the charter, which may vary from once a quarter to once a year.  The BOD meeting needs to be held before the shareholder’s meeting as the BOD sets the meeting time and place as well as the agenda for the shareholder’s meeting.  A shareholder’s meeting announcement then needs to be sent out to each of the company shareholders, assuming there is more than one.

I have not seen a case where a company has been fined or forced to be liquidated because of non-compliance with the Company Law.  In many cases it comes up with there is a due diligence investigation being done by a potential buyer/investor in the Mongolian company.  Investors, of course, want to see as much of a paper trail as possible to lead them from point A to point B, and the proper shareholder’s resolutions issued as a result of meetings is one way to accomplish this.  Not only does this show the investor the company has been compliant with the Company Law and is therefore in good standing, it also shows the company is striving to be transparent, document its decisions and has nothing to hide.

Slowly companies are beginning to keep better records and increase transparency.  We are two decades out from the very secretive days of the Soviet era and companies are starting to realize that everything cannot be done behind locked doors anymore.  While things still have a ways to go, an increasing number of companies are subsidiaries of companies that are listed in foreign markets, from Hong Kong to London to Toronto.  Of course scrutiny of publicly listed companies is very high, which then trickles down to the Mongolian subsidiary.  There is also increased interest from abroad, and perhaps now more than ever there is a large amount of international interest in investing in Mongolia, especially in already existing Mongolian companies.

While most may think corporate compliance need only be practiced by publicly traded companies, limited liability companies would do well to be more open.  As the world market becomes increasingly globalized customers and partners are going to want to work with those they know operate transparent, fair and legal businesses.  Having a partner who is loath to disclose any information automatically raises alarm bells in this era of corporate transparency and disclosure.  Currently there are a number of NGOs and other organizations focusing on corporate governance and transparency, including projects by USAID.  You can find a podcast on these topics here.   The podcast can also be found on both the Mongolia Business Blog website as well as iTunes.

ULAANBAATAR, MONGOLIA – New Mongolian currency law takes effect on August 9, 2009.  Starting on this date, all Mongolian businesses and agencies must do business in tugrugs (often referred as tugriks), the Mongolian official currency, and not in foreign denominated or foreign currency based rates.

The Government of Mongolia passed the law in July 2009 to better control the currency fluctuations as a response to the sudden devaluation of the tugrug in March 2009.  Mongolian government is taking the currency measures seriously and have passed severe penalties for the offense.  It is well advised for companies to follow the government’s new law.

Sudden Drop in Tugrug’s Exchange Rate

As the saying goes, any port in a storm will do. As the economic downturn seemed to hit its peak around at the end of 2008 and during the first few months of 2009 the Mongolian tugrug grew increasingly weak against foreign currency. While the exchange rate had been hovering around 1170 tugrugs to the US dollar for several years, it suddenly spiked to over 1700 tugrugs per dollar in March. As a result individuals and businesses began to conduct more and more business in US dollars, British pounds or other convertible currencies.

Mongolian Government’s Response to the Currency Devaluation and Fluctuation

The Government of Mongolia felt the need to get a handle on the situation, passing a Currency Law in late July 2009 in order to do this. The newly-passed Currency Law mandates that all prices, all settlements and all advertisements within the territory of Mongolia must be set in tugrug, prohibiting the use of foreign currency for domestic transactions.

US Dollar Was the Unofficial “Official” Currency in Mongolia

It is a fairly common practice, especially amongst foreign-invested companies, to advertise or charge in dollars as many of the goods sold in Mongolia are imported, most likely bought and paid for with dollars. Politicians felt this was undermining the tugrug, and thus the Currency Law was passed. Ironically, the Mongolian Immigration Office, the Foreign Investment and Foreign Trade Agency and the Mongolian Tax Authority all charge various services or fees in US dollars, at least until this law was passed.

Violators Beware

The penalties are quite high for those who continue using foreign currency for settlement in Mongolia. The first offense is confiscation of the income, the second offense is a fine ranging from ten times to one hundred times the minimum wage, and the third offense can result in the confiscation of any special licenses a company may hold.

Based on these consequences, it is clear that the Government is taking the violation of this law seriously. If you or your company currently lists prices and makes settlement within the territory of Mongolia in currencies other than tugrug it is definitely time to begin the switch to tugrugs.

NOTE: The correct way to spell Mongolian currency is tugrug, not tugrik as often spelled.