Cambodian paper’s demise bad for business

The Cambodia Daily newspaper’s closure on arbitrary and punitive tax evasion charges has significantly raised the volatile country’s regulatory risk profile

Originally published by Asia Times (September 12, 2017)

 

One of Cambodia’s most respected independent newspapers, The Cambodia Daily, closed last week after being handed a US$6.3 million back tax bill with interest that its owners couldn’t pay.

The government’s tax department said the plucky paper, owned by an American citizen, had evaded taxes for years, a charge its owners have denied. While commentators viewed the forced closure as an attack on free speech, the arbitrary nature of the charge has also spooked foreign investors.

“An international business would have to seriously consider the costs of doing business with a government that expropriated an American’s newspaper over an out-of-the-blue and disputed $6 million tax bill,” said Sophal Ear, associate professor of diplomacy at Occidental College in Los Angeles.

The Cambodia Daily was sold last year to a private company owned by the original publisher’s daughter, Deborah Krisher-Steele. It had previously been registered as a non-profit organization.

Prime Minister Hun Sen recently referred to the paper, long a thorn in his ruling Cambodian Peoples Party’s (CPP) side, as “chief thief.” He had declined calls from the paper’s owners to intervene and insisted the sudden move was not politically motivated.

Some observers have argued that the Daily’s management is at fault for not strictly following government rules. Yet even the paper’s critics concede the government used non-transparent and arbitrary means to close it down, without allowances for an independent audit or court appeal.

Cambodia’s tax authority has since filed a lawsuit against the newspaper’s executives, including general manager Douglas Steele, over alleged tax evasion which carries a possible five-year prison sentence. Steele, who has been barred from leaving the country, has likened his situation to “country arrest.”

Cambodia is currently among Southeast Asia’s fastest growing economies, with gross domestic product (GDP) expected to expand 7% this year, the same clip it achieved in 2016. But The Cambodia Daily’s harsh treatment has sent a shiver through many quarters of the foreign business community.

“Anyone can come into the focus of the tax department, or of any other ministry or department, and be accused of tax fraud or any other fraud without the relevant authorities having to prove or explain the case,” said a prominent foreign businessman in Phnom Penh who requested anonymity. “This is obviously very worrisome to many investors.”

Since the United Nations spent billions of dollars in the early 1990s to restore peace and democracy to Cambodia following decades of civil war and genocide, the country has been broadly viewed as a safe place for foreign investment and one of the region’s easiest for doing business.

Investor perceptions were already on the wane before The Cambodian Daily’s forced closure.

Cambodia fell four places in the World Bank’s latest annual ease of doing business report, where it ranked 131 out of 190 surveyed nations.Commerce minister Sun Chanthol had wrongly predicted the country would move up to 21st place after the government introduced new reforms, including various online business registration procedures aimed at improving transparency and accountability.

In May, Phnom Penh hosted the World Economic Forum on East Asia despite widespread calls for a boycott to protest amendments made in February to the political party law that forced opposition leader Sam Rainsy to resign as president of the Cambodia National Rescue Party (CNRP), the country’s largest opposition party.

Kem Sokha, who took over as CNRP president, was arrested at his Phnom Penh home on September 3, the day before The Cambodia Daily closed, and later charged with treason over an alleged plot with the United States to overthrow Hun Sen’s government. He faces up to 30 years in jail if found guilty.

It seems increasingly possible that the CNRP will be dissolved, a move that would mark a virtual end to democracy months before scheduled elections. Miguel Chanco, lead Asean analyst for the Economist Intelligence Unit, said that if the Daily’s closure is seen an isolated incident, then it is “unlikely to significantly affect foreign investment in Cambodia.”

However, “when viewed as a continuation – and, indeed, an escalation – of the CPP’s now two-year crackdown on its political opponents and critical elements of society, the government’s move to shut the paper down is likely to persuade some investors to adopt a wait-and-see approach.” In his view, businesspeople may decide to delay investing in Cambodia “until the dust settles after next year’s election.”

Others are more sanguine. Anthony Galliano, chief executive officer of Cambodian Investment Management, a financial services outfit, said that “across our businesses we have not seen any concern or shift in business sentiment from our customers, and those that were in the process of making a [foreign direct investment] have reaffirmed they will.”

Investor concerns ahead of and after elections are commonplace in Cambodia. Asia Times reported months before June’s commune election, which the CPP won but with diminished returns, that investment could decline in the months on either side of the ballot.

However, many businesspeople and analysts say that the current clampdown is far more severe than the one seen before the 2013 general election or this June’s commune poll, and is doubly worrying due to recent direct targeting of Western interests.

“Right now, Cambodia is a political pressure cooker, making it a volatile and seriously risky investment destination. This isn’t just a matter of ethics; it’s bad business sense to be investing there,” claimed Emma Burnett of Global Witness, a London-based rights group that has investigated Hun Sen’s family’s vast and rich business holdings.

Other pundits argue the recent political crackdown, including The Cambodia Daily’s closure, is unlikely to deter investors from China or other Asian nations. For example, Cambodia and Thailand signed new agreements last week that are expected to boost investment and open new trade routes.

Western investors willing to take the risk could also be stymied if the US or European Union, both vocal against the politicized crackdown underway, take retaliatory actions. A tightening of EU or US export regulations, for instance, “would hurt both the Cambodian labor market and the Chinese investors who export from Cambodia,” said one Phnom Penh-based businessman.

The risk premium for Western businesses has risen considerably by the government’s increasing use of anti-Western rhetoric, including Hun Sen’s allegations that the US is involved in a plot in tandem with the CNRP to overthrow his government.

“Cambodia’s country risk just went up [because of] its anti-American turn, especially given that Cambodia’s top export destination is the US,” said Sophal Ear.

Despite Prime Minister Hun Sen’s positive comments about Donald Trump during the latter’s presidential campaign, the mercurial leader cancelled joint military operations with the US days before Trump’s inauguration in January.

Last month the government shuttered radio stations carrying programs by the US Congress-funded news outlets Voice of America and Radio Free Asia. The US State Department-funded National Democratic Institute was also ordered to cease operations in Cambodia, and its staff expelled.

“Certain Cambodian politicians and government officials are more likely now to distance themselves from publicly engaging with US firms until after the July 2018 general elections, making government advocacy tougher than it normally would be,” the US-Asean Business Council, a business advocacy group, said in an email circular sent to subscribers over the weekend.

“Let’s not forget that Cambodia is a tiny market and is not a must on the international investment agenda,” said one foreign businessperson who requested anonymity. “Cambodia still needs to convince investors that it is safe to invest here.”

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