Corporate Governance
and
Legal and Judicial Reforms
in the Smaller Transition Economies
Case of the Central Asian Economies,
Azerbaijan and Mongolia
Presentation for
Financial Sector Issues in the CIS-7, May 13, 2003
Ms. Shamshad Akhtar
Deputy Director General,
ASIAN DEVELOPMENT BANK
Outline
I.
Introduction
II.
Internal Corporate Governance
III.
Commercial Bank Governance
IV.
Structure and Reforms of the Judicial System
V.
Conclusion
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I.
Introduction
 Key laws affecting corporate governance in STEs
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the Joint Stock Company (JSC) Law
Securities market laws defines the rules of game for listed companies
Commercial banking laws imposes governance standards on banks
Some countries have launched corporate governance codes
 Corporate sector:
 A large large segment of fixed assets and business remain in state sector
 Only 500 companies are listed across the STEs and most of them do not substantially
contribute to market capitalization, nor does the equity market significantly contribute to
corporate finance.
 Large segment of enterprises are insolvent
 Managers lack understanding of modern corporate governance
 Investors are not aware of their rights and weak perception regarding markets have
affected investment flows
 There has been a depletion of legal institutional resources after STEs-independence
(e.g. brain drain of qualified judges to Moscow), leading to inadequate capacity
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II.
Internal Corporate Governance
 A comprehensive review of JSC Laws of STEs was conducted to assess its
adequacy against the five major OECD principles of corporate governance:
1. Shareholder Rights
2. Equal Treatment of Shareholders
3. Creditor Rights
4. Disclosure and Transparency
5. Role and Responsibilities of the Board
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1.
Shareholder Rights
 JSC law provides shareholders:
Reasonable voting rights and allows for one
share one vote, adequate notice of
shareholder meetings, and proxy voting by
mail, although proxies are rarely solicited by
shareholders due to difficulties accessing
share registries

JSC further provides for:

Issuance of golden shares in Kazakhstan and
Mongolia in connection with privatization that can
be used by the state to veto certain shareholder
decisions. Until recently state trustees could veto
shareholder decisions in Uzbekistan

Rights to call a shareholder meeting or add to the
shareholder agenda are well defined, but typically
there is no provision requiring for the periodic reelection of directors or appointment of auditors

Typically a super majority of shareholders is
required to amend the company charter and
approve decisions to transfer assets out of the
company:
Holding of AGMs subject to quorum
requirements of 50% in Tajikistan, and 60% in
Azerbaijan, Kyrgyz Republic and Uzbekistan
Vote on material transfers of assets outside
the company or increases in charter capital
Access to company information such as
audited company accounts, and reports on
operational and financial performance
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•
•
Apart from Uzbekistan and Tajikistan, a
majority is needed to amend the charter
In Uzbekistan, the BOD can approve the sale
of up to 50% of assets and the state can
unilaterally increase shareholder capital if it
holds 25% or more of the shares
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2.
Equal Treatment of Shareholders
 Rights providing for equal treatment of shareholders are a critical requirement for
foreign and minority shareholders, especially in the context of electing directors,
during takeovers, and issuing new shares
To elect directors in most STEs, except for Tajikistan, the JSC provides for cumulative
voting
None of the STEs have adequate provisions in law to protect minority shareholders of
public companies with respect to takeovers or the issuance of new shares
 A closely related issue to minority rights are provisions prohibiting insider trading;
with the exception of the Kyrgyz Republic, none of the STEs clearly prohibit insider
trading, although the Mongolian Securities Law has provisions to develop
measures in this regard
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3.
Creditor Rights
 STEs generally have adopted a legal framework to protect secured creditors -- if a
corporate borrower defaults on his payment obligations, secured creditors should
legally be able to repossess collateral but the legislative framework for registering
collateral and publicizing liens has not been sufficiently developed and/or effectively
implemented:
 Pledge registries are government agencies and suffer from capacity and funding
problems
 Although the STEs provide for non-judicial foreclosure of collateral pursuant to
specific provisions in the pledge agreement, such provisions require public auction
of the pledged property in line with the defined procedures:
 These procedures can be complicated and burdensome,
 may be set aside by the petition of a third party claimant, and
 public auctions may be postponed for up to one year by the debtor.
 When a company cannot meet its financial obligations and creditors can not resolve
their competing claims, bankruptcy proceedings can be initiated. The trigger for
creditors to institute such proceedings varies assessed based on level of defaulted
debt as % of the borrower’s equity or debtors inability to pay debt within a certain
period.
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3.
Creditor Rights - Bankruptcy
 The ability of creditors to initiate bankruptcy proceedings and effective use of such
proceedings often encourages recourse to non-judicial settlement which could be
more cost effective and time efficient
 In STEs, except the Kyrgyz Republic, the debtor is stayed from disposing of its
property after application for bankruptcy, which delays secured creditors’ claims to
foreclose on pledged assets but enables a debtor to continue his operations without
the threat of losing critical assets
 Although some of the STEs, provide for non-judicial resolution of insolvency, judicial
resolution of related issues is still required and debtors may convert the case into a
court administered case
 Bankruptcy legislation in the STEs generally provides for standards provisions such
as the:
 Formation of a creditors’ committee to collectively represent creditors’ claims
 Appointment of an administrator to oversee the bankruptcy process
 Reorganization/rehabilitation option as an alternative to liquidation in appropriate cases
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Creditor Rights – Priority of Claims in
liquidation
3.
 In Azerbaijan, secured creditors appear to retain their priority,
 Tajikistan provides secured creditors with priority as per the current Law on Collateral,
 In Kyrgyz Republic, secured creditors and administrative expenses are paid first. A
special administrator is required to provide the secured property to the secured
creditor’s possession upon his request and can only sell the property with the secured
creditor’s permission,
 In Mongolia, the law substitutes secured creditor’s rights to specific collateral for a
priority claim on the general assets of the debtor and tort claims. Trustee’s salary and
expenses, claims under contracts and transactions concluded in the process of
recapitalizing the debtor are given priority.
 In Kazakhstan, secured creditors have priority after tort claims.
 In Uzbekistan, secured creditors have priority after: (a) payment of wages, personal
injury claims, claims of the state, alimony; and (b) demands on compulsory insurance
and banks credits.
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3.
Creditor Rights - Bankruptcy
 On an overall basis, the bankruptcy legislation is not being effectively implemented
based on because of general lack of understanding of the bankruptcy process as
well as:
 stigma associated with involvement in bankruptcy proceedings and its implications for future
business prospects,
 difficulties for government creditors to be as flexible as private creditors which hampers the
approval of rehabilitation plans by creditors,
 fear by managers of their dismissal by special administrator,
 absence of an effective collateral registration system,
 absence of adequate accounting and asset valuation standards,
 lack of qualified administrators and liquidators,
 the absence of an effective judiciary which is instrumental in the bankruptcy process, and
 judicial reluctance to play too active a role in the closure of liquidation of a company.
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3.
Creditor Rights – Alternative to Liquidation
 STEs provide for rehabilitation of the debtor as an alternative to liquidation
 Rehabilitation is initiated by creditors and is a complicated process that is rarely used in
the STEs,
 Rehabilitation can be abused and may be used to stall liquidation, consequently
proceedings often go into limbo, assets are dissipated, and unclear rules often result in
endless negotiations between parties.
 Most of the STEs allow the debtor to apply to the court to stay bankruptcy
proceedings to examine a sanation option which requires all of the creditors debts to
be fully repaid and continuation of the debtor as a going concern.
 Sanation has not frequently occurred in the STES nor is it likely to be used as it is
highly unlikely that someone would agree to pay all of the debtor’s liabilities when
rehabilitation proceedings provide that debts can be resolved without full payment (only
the amount of payments that would be made in liquidation)
 If such a proceeding is commenced, it is likely to delay a more realistic outcome and
increase the losses being incurred by the debtor or increase the debt. Such
proceedings can also take up to 6 months.
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4.
Disclosure and Transparency
 In order for shareholders and creditors to exercise their rights, they must be able to
obtain information about the company and its financial condition, its shareholders,
board, management and significant transactions
 In STEs, it is extremely difficult for both regulators and shareholders to obtain
information about shareholders:

Apart from Tajikistan, STEs have independent share registries, but information is
difficult to access, and typically only includes information on nominee rather than
beneficial shareholders,

In the Kyrgyz Republic, information in the share register is regarded as a
commercial secret.
 The inability to access information on shareholders creates a wide range of
regulatory problems in the banking sector where financial industrial groups (FIGs)
are evolving, leading to serious problems arising from improper related party
transactions and excessive credit concentrations
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4.
Disclosure and Transparency
 The JSC laws in the STEs typically require the board to disclose information about
the company and its financial condition to shareholders at the annual general
meeting. However, some issues are noteworthy:
 In most STEs there is no requirement, even for listed companies, to make the company charter
and accounts publicly available,
 Apart from Uzbekistan and the Kyrgyz Republic, there do not appear to be any requirements for
public disclosure of the identification and background of board members, although in Kazakhstan
board members must be disclosed to the regulator and the stock exchange,
 Most of the financial information published by companies only has limited value due to accounting
and valuation practices adopted and the lack of requirements to audit accounts or disclose
conflicts of interest on related party transactions,
 In most STEs, local accounting standards are used in preference to IAS and these fail to require
information on issues such as obsolete assets and contingent liabilities, and
 Similarly valuation practices do not reflect international standards and do not provide basis for
making a judgment on company value.
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4.
Disclosure and Transparency
 There are relatively few requirements in the STEs to have company accounts audited
and this problem is compounded by the potential for offers from local auditors to
“improve” a company’s financial statements
 In Kazakhstan, only category A listed companies are required to undergo an independent audit,
 In the Krgyz Republic, laws adopted in July of 2002 support the introduction of international auditing
standards for all JSCs. In the transition period, financial institutions and publicly listed companies
need to be audited annually. It is only by 2004, that all open joint companies will need to be audited
based on international standards,
 In Uzbekistan, independent audits are only required for commercial banks,
 In Tajikistan, there is no requirement for firms other than banks to be audited.
 In part these provision recognize the serious lack of qualified
auditing staff available in the STEs due to:
•
•
•
•
accounting and
The absence of accounting education and training facilities,
Lack of text books in local languages,
Lack of professional bodies to oversight of standards and their implementation, and
Lack of sanctions for failure to comply with standards
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5.
Role and Responsibilities of the Board
 The BOD is the primary mechanism for enforcing standards of good corporate
governance by bearing responsibility for ensuring that management acts on behalf
of shareholders and disclosing information on company performance to
shareholders; Ideally, guidelines should be specified in legislation that provide:
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direction on how board members are appointed and dismissed,
procedures for setting the board agenda,
procedures when conflicts of interest arise,
define the role and responsibilities of the audit committee,
determine how board compensation is calculated, and
specify experience and qualifications.
 Generally, most STEs have a two tier board structure, with one board having
supervisory powers that is elected by the shareholders and a second board that
represents management
 Few STEs have legal requirements governing the independence of board members
 The JSC in Kazakhstan requires half of board members to be independent (not employed nor
affiliated with the company for the past five years), and
 The Kyrgyz Republic provides that board members may not be shareholders. Banking law,
however, since 2003 requires independent directors (more on this in commercial banks corporate
governance section).
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5. Role and Responsibilities of the Board
 The responsibilities of the board vary widely across countries
 Board responsibilities are only vaguely defined in legislation in Kazakhstan and the Kyrgyz
Republic and audit committee responsibilities do not appear to be defined in any legislation,
 In the Kyrgyz Republic, the JSC law imposes broad liability standards on the board and
management but they do not appear to be based on standards of negligence. However, under the
Civil Code, the maximum fine that can be imposed for such violations appears to be about $40.
Shareholders are also provided with atypical powers that undermine the separation of
shareholders and the board of directors, including the right to suspend implementation of board
decisions,
 Mongolia’s JSC law specifies elaborate roles and responsibilities for the BOD, and liabilities of
directors are determined based on duties set forth in a contract between the director and the
company which reflects the company’s rules and procedures,
 In Kazakhstan and Mongolia, the law imposes a general duty of care on company officers and
members of the board and there is a requirement to act in good faith in the interests of the
company, and
 In Tajikistan, the JSC law is silent on the fiduciary responsibilities of the board and its decisions
are not bound by any elaborated standards.
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III.
Commercial Bank Governance
1. Significance and Relevance of Commercial Banks Corporate Governance
2. Provisions for Banks Corporate Governance Standards
3. Ownership Concentration and Lack of Transparency
4. Weak Prudential Regulation
5. Inadequate Risk Management
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1.
Significance and Relevance of Commercial
Bank Governance
 Instituting high standards of corporate governance for banks is crucial
because of
 Banks’ role and functions in liquidity generation, financier of businesses, and protection
of depositor liabilities,
 Banks have small equity that is often highly leveraged,
 Risk of collusion between banks and enterprises or other subsidiaries whose
ownership may be interrelated
 Need to discipline corporate borrowers whose governance failures, attendant losses
and inability to repay borrowers’ monies may spread to the banking system and have
an economy wide and/or global implications.
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1.
Significance and Relevance of Commercial
Bank Governance
 Given the special attributes (discussed above), besides requiring compliance with
internal corporate governance norms to preserve shareholder value, banks require a
different, and more elaborate/complex regime of corporate governance than nonfinancial enterprises
 In particular, an exclusive reliance on addressing the principal-agent problem between
owners and managers is not sufficient for commercial banks as they take excessive
financial risks and there is a dynamic relationship between the banks, the corporate
sector, and the market at large.
 Bank regulation, whose primary concern is to prevent systemic instability, alters the
parameters of the agency relationship by introducing a third party – the regulator, that
serves as an additional external force to ensure that shareholders and managers act to
lend prudently.
 STEs have attempted to upgrade the legal framework for commercial banks, but a
number of factors undermine these efforts and constrain the development of this
sector and these are further discussed in next few slides
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5.
Provision for Banks Corporate Governance
 BIS standards of corporate governance of banks includes, among others:
 Adoption and effective communication of policies that prohibit activities such as
conflicts of interest, lending to employees and other forms of self dealing or preferential
treatment to related parties,
 Setting and enforcing clear lines of responsibility and accountability throughout the
bank,
 Ensuring that board members are qualified for their position, have a clear
understanding of their role in corporate governance and are not subject to undue
influence from management or outside concerns,
 Ensuring that the BOD understands its oversight role and duty of loyalty to the bank
and its shareholders, has the power to question management and provide objective
advice and avoids conflicts of interest,
 Establishing specialized BOD committees to focus on risk management, audits,
compensation and board nominations, and
 Conduct corporate governance in a transparent manner.
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5.
Provisions in Banking Legislation for Corporate
Governance
 Besides JSC Law, banks need to conform to provisions of the commercial banking
law, but among STEs only few countries have taken some important initiatives to
strengthen the corporate governance provisions in law which need to be fine tuned
further. For instance:
In the Kyrgyz Republic, amendments to Law on Banks and Banking in 2003, among
others, require:
• all members of BOD be independent – this requirement is more stringent than the
general norms which require majority (rather than all) members be independent;
Definition of “independent” in the amended law is also not appropriate – as it calls for all
members of BOD to have no relations or business with shareholder but is silent on BOD
relations with the management. Persons representing large shareholders and
CEO/CFO are often a part of the Board in other countries,
• Under Article 14 (1) 4 provisions for licensing, principal shareholders owning more than
5% or more of the shares of the company to seek approval of central banks,
• BOD to continuously conform to certain fitness criteria which disqualifies persons with
conviction, or being a manager of an entity under bankruptcy proceedings, or who has
been deprived of right to be included in management. Besides the need for further
enhancement of this provision, the qualification criteria needs to be extended to
principal shareholders and management of banks so that the shareholders not
conforming to these requirements could be disqualified,
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5.
Provisions in Banking Legislation for Corporate
Governance
• Election of an audit committee by the AGM of shareholders, establishment of a credit
committee of management and has no provision for risk management committee;
Besides need to define more enhanced role for audit committee, there is need to
recognize that an audit committee elected by shareholders may not be as effective for
accountability as a committee of the Board and that Establishment of committees under
the BOD for internal audit and risk management,
• specific fiduciary duties on bank directors and managers,
• requires disclosure of directors and managers’ financial interests, includes requirements
to avoid conflicts of interests by directors and managers, and
• requires non-preferential conditions for bank transactions with related parties
 Azerbaijan, Kazakhstan, Mongolia and Tajikistan impose “fit and proper” qualification
standards on directors (honesty and competence) and restrict transactions with
associated/related persons on more favorable terms.
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Implementation of Corporate Governance Provisions
 In case of payment difficulties of a borrower, bank managers extend maturities, settle
for partial repayments, and roll over credits, rather than to engage in foreclosure of
assets of insolvent enterprises through the court system, as enforcement
procedures of the courts are slow, unreliable, and costly
 To offset high regulatory risks, lenders have adopted a policy of fully securing all the
loans in nearly all corporate transactions and the collateral taken is typically twice
the value of the loan advanced.
 Implementation of corporate governance standards has been weak
 In the Kyrgyz Republic, corporate governance problems in banks have arisen due to shareholder
interference with management
• For example, the shareholders of Maksat Bank instructed management to illegally transfer out
of the bank all of its capital which caused the bank to fail.
• Insan Bank made loans to connected persons at low rates and received the funds back as
deposits on which the bank paid higher interest rates.
 In most of the STEs, bank boards have not become effective governing bodies (e.g. Kazakhstan,
Tajikistan, Mongolia)
• Notwithstanding, the recent success of Agricultural Bank in Mongolia, which opted to enter into
management subcontracting arrangement, could serve as a successful model for the region.
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2.
Ownership Concentration and its Implication for CG
 Apart from Uzbekistan, commercial banks in most STEs are now in private sector
and the legal framework in the STEs limits individual shareholdings of bank shares
 Azerbaijan limits individual shareholder to 12% of equity capital,
 Kazakhstan limits to no more than 22%,
 Kyrgyz Republic limits to 15%, and
 Acquisition of bank shares may require Central Bank (or Monopoly Commission)
approval. For example, Kyrgyz Republic requires persons who seek to acquire 5% or
more of issued shares of a bank to apply in writing to the Central Bank 40 days prior to
acquisition.
 Information on bank ownership structure is not public, however, it is well
known that
 Bank ownership is concentrated,
 Banks are owned by Financial Industrial Groups (FIGs) or banks own other financial,
intermediaries and/or businesses, and
 Interconnected lending is quite prevalent and monitoring not rigorous.
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2.
Ownership Concentration and its Implications
for CG
 Kyrgyz Republic has 19 banks
 About one-third of the deposits held by state owned banks,
 Private banks small and owned by individuals or groups connected with real sector entities (cotton and
mineral extraction etc.). Typically a financial group includes some resource oriented development and
processing companies and at least one commercial bank.
 Even though over 40% of capital of the system is held by foreign shareholders, this has not help
improve corporate governance; these partly or fully foreign owned banks are niche players catering to
their specific sector/business interest.
 Senior managers of the banks are often managers of the business groups.
 Kazakhstan has 41 commercial banks.
 The top three banks (Kazkomertz Bank, Turon-Alem Bank and Norodny Savings Bank) control 60% of
total assets and 70% of total deposits and are affiliated with insurance companies and non-financial
companies including those in the Erel Group, Bodi Group and Petrovis-Capitron Group, creating
complex financial conglomerates.
 Tajikistan has 15 commercial banks
 Of the top four banks, one of which is state owned,the privately owned Agroinvestbank accounts for
70% of banking sector assets with about half of its credit portfolio backed by cotton sales agreements
to its largest single shareholder who is also the largest cotton buyer in Tajikistan.
 Uzbekistan has 38 bank
 Sector is predominated by state; although direct shareholdings of government is reported to be around
50%, indirect shareholdings through enterprises with majority state ownership add an additional 25%.
 There is generally one large holding company covering several enterprises that have equity stakes in
the banks.
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3.
Prudential Regulation
 In 1990s, the STEs were preoccupied with establishing a core banking system
and focus was on bank restructuring and consolidation in wake of emerging
insolvencies resulting from imprudent and reckless lending or because of the
impact on business and banks of the Russian crisis in 1998
 Prudential regulation of the STEs banking sector has been evolving, however,
enforcement is exacerbated by:
 inability of the central bank to effectively regulate and supervise the system: some
central banks have better capacities in this area than others,
 poor reporting by banks,
 inadequate accounting and auditing systems,
 the lack of transparency, and
 lack of capacities to supervise FIGs and related party lending.
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3. Prudential Regulatory Frameworks for STE banks
 The National Bank of the Kyrgyz Republic (NBKR) has been significantly
strengthened in recent years to resolve issues arising from problem banks and a
new law governing bankruptcy of banks is being re-considered.
 Many of issues related to prudential regulation have been strengthened in the recently adopted Law
on Banks and Banking Activity (March 26, 2003) which provides, among others:
• Removal of definitional inconsistencies, including those pertaining to a bank’s capital,
• Strengthening the role and authority of the NBKR in issuance and revocation of licenses and
overall supervision, with clear criteria to determine regulatory actions, and
• Organizational and methodological requirements for risk management, including operational
risk , market risk, interest rate risk and credit risk as well as overall supervision.
 The National Bank of Kazakhstan (NBK) has defined the preconditions for an
effective banking supervisory framework and has established a reputation as an
efficient and unbiased regulator.
 Banking standards are based on the BIS requirements but currently only incorporate 17 of the 30
core principles,
 The number of banks violating prudential norms has been declining, and
 The legal framework has been strengthened to allow the NBK access to information on regulated
entities, obstacles remain to collect information on non-licensed entities as a group.
 Bank of Mongolia (BOM) regulations and reporting requirements are reasonably well
developed, although they do not fully comply with BIS principles.
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4.
Inadequate Risk Management
 Risk management across the commercial banks in STEs is fairly
rudimentary
 Key regulatory concerns are related to credit and liquidity risks. The STEs generally
define individual party exposure and limit lending on preferential terms to “related
persons,” which may be defined to include shareholders, officers and directors of bank
subsidiaries and affiliates (e.g. in Uzbekistan & Kazakhstan), and
 Internal controls continue to be equated to internal audit and there is a lack of a control
environment that entails senior bank management commitment.
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4.
Inadequate Risk Management
 Central banks:
 Are not equipped to assess risks related to the operations of commercial banks,
 Do not proactively review risk and risk management procedures within commercial banks,
 Do not provide regulatory guidance yet on market risk, interest rate risk, operational risk, country
risk or transfer risk assessment and management, and
 Do not monitor effectively connected lending, including indirect violation of credit extension
restrictions.
 Perspective at country level
 NBKR is actively working with commercial banks on how to address specific risks. In 2002, NBKR
took regulatory actions against 7 banks for inadequate risk management,
 NBK has encouraged banks to improve their risk taking and management and has held
management accountable for prudential standards; banks in cases tend to practice risk avoidance
rather than active risk management,
 In Tajikistan and Uzbekistan, reform of internal control and risk management systems has been very
limited,
 In Mongolia, credit analysis is in its infancy, and
 Finally, none of the countries have effective credit information bureau.
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IV.
Structure and Reforms of the Judicial System
1.
Historical Role and Evolving Structure of the Judiciary
2.
Lack of Independence and Capacity
3.
Distorted Incentive Framework
4.
Lack of Transparency
5.
Difficulty in Enforcing Judgments
6.
Judicial Reforms
7.
Alternative Dispute Resolution
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IV.
Structure and Reform of the Judicial System
 A legal regime for shareholder and creditor rights is not effective unless it is
supported by an accountable, effective and independent judicial system to enable:
 The prompt and impartial determination of rights and remedies, and
 Issuance of enforceable orders,
 The legal regime needs to be supported by efficient, ethical and competent
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Judges, prosecutors, arbitrators, bailiffs,
bankruptcy administrators and liquidators
banking and securities regulators,
company and property registries, and
private bar, accountants, auditors, etc.
 Judicial inefficiencies in STEs weaken shareholder and creditor rights and lead to
higher transaction costs that stems from:
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
Historical role and structural problems of the judiciary in STEs which served state interests,
Lack of judicial independence and capacity,
Distorted incentive framework,
Lack of transparency, and
Lack of enforceability of judgments.
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1.
Historical Role and Evolving Structure of
Judiciary
 In the STEs, prior to independence, justice was controlled by the State as reflected in
and the role of the procuracy which investigated and prosecuted crimes and
monitored the judge’s conduct in court, including the legality of any verdict, sentence
or decision.
 STEs adopted either a tripartite court system or a unified court system.
 The tripartite system (adopted by Tajikistan, Uzbekistan and Azerbaijan) has no single
center of authority over different courts that include the:
• Constitutional Court reviews laws and other normative acts to ensure that they
comply with the Constitution,
• Courts of General Jurisdiction over all matters not involving business, and
• Economic Court hears all business related matters.
 The Courts of General Jurisdiction have three levels with the Supreme Courts at the
highest level followed by oblast courts and the raoin courts dispensing justice at lower
level
 Economic Courts include courts at the oblast level and the Higher Economic Court at
the highest level
 Azerbaijan also has an Economic Court for Cases Arising Out of International
Agreements.
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1.
Historical Role and Evolving Structure of
Judiciary
 The unified court system (adopted by Kazakhstan and Mongolia) is centralized and
headed by a Supreme Court with the two lower levels of courts
 In Kazakhstan, a new set of specialized courts has been created at the inter-raion level
which are subordinate to the oblast courts but distinct from the general raoin courts.
These new courts are designed to re-introduce specialized adjudication of commercial
disputes at the lower level of the judicial system for domestic cases involving sums
below a set threshold, not involving foreign parties (approximately less than $25,000)
and having geographic jurisdiction over a number of raions in an effort to reduce the
influence of local authorities in the adjudication of cases.
 A new law on administrative courts was recently adopted to enable the development of
a model Administrative Court in Ulaanbaator City.
 The Kyrgyz Republic recently amended its Constitution to incorporate the Arbitration
Court (Economic Court) into the courts of general jurisdiction and enable, among
others, economic and commercial disputes to be held at the raion level. The country
will continue to have a separate Constitutional Court.
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2.
Lack of Independence and Capacity
 In STEs, judges are appointed by the President, although legislation may provide
Parliament with a role in the nomination and approval process
 In Azerbaijan, Uzbekistan and Tajikistan, tenure is 5 years,
 In Mongolia tenure is 6 years,
 in Kyrgyz, Constitutional Court judges and supreme court judges are appointed for 10
years and lower court judges are appointed for 7 years, and
 In Kazakhstan appointments are permanent, judges’ tenure is limited.
 The STEs vary in terms of the legal framework to remove judges
 In Tajikistan there is no constitutional provision to remove higher court judges; lower
court judges are appointed or dismissed by the President on the proposal of the
Council of Justice,
 In Uzbekistan, the Parliament can terminate the power of Supreme and Higher
Economic Court judges at the President’s request,
 Mongolia has established a Judicial Disciplinary Committee under the General
Chamber of Courts, with broad representation from the legal community) that reviews
ethical breaches and recommends sanctions to the President, and
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2.
Lack of Independence and Capacity
 Qualification requirements for judges have been generally adopted in STEs and
include, among others,
 a law degree,
 minimum age (higher court 35 years old, 25 years old for lower court), and
 ten years professional experience for higher court judges and 5 for lower court judges,
and/or special examinations.
 All of the STEs have judicial training centers which has not appeared to improve
judicial capacity to understand the increasingly complex legal framework.
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3.
Distorted Incentive Framework
 Salaries for judges are very low across STEs
 Tajikistan pays judges below the poverty level ($17 per month), making it difficult to attract and
maintain qualified candidates and deter rent seeking activities,
 In Uzbekistan, lower court judges are paid between $20 and $30 per month and higher court judges
are not paid much more. In some rural areas, judges continue to farm in order to survive.
Constitutional Court judges are paid salaries comparable to high level government officials,
 In the Kyrgyz Republic, as of February 2003, adjustments in salary has raised payments to higher
court judges are paid $450 a month and $190 a month for lower court judges,
 In Kazakhstan, Supreme Court judges receive $500 per month and lower court judges earn less,
and
 In Mongolia, salaries range from $70 per month for regional judges to $76 per month for provincial
judges and $85 per month for a Supreme Court judge. A system of supplements calculated a a
percentage of judge’s income (66% - 78% for the Chief Judge of the Supreme Court) increases the
basic salary. However, these salaries are in line with civil service salaries in general.
 Working conditions in STE courts are poor due to
 Insufficient funding for the court system,
 Courts, especially those at the regional level, lack modern computerized tracking and filing systems
for court cases, copying machines, other equipment, and adequate logistical support, and
 Given these factors and low performance of courts public respect for the institution is low.
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4.
Lack of Transparency
 Difficult to assess how the judiciary functions in the STEs
 Scarcity of data in all of the STEs,
 As is common in civil law systems that do not acknowledge case precedent, court decisions in the
STEs are generally not published and/or when available, information concerning the underlying
rationale for court decisions is not included,
 Judges may not understand prior verdicts and thus treat similar cases differently, and
 Difficult to assess the attitudes of judges and their understanding of their role. Legal professional
may not understand the role of judicial interpretation and discretion in a functioning legal system.
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5.
Difficulty in Enforcing Judgments
 Even where judgments are rendered,:
 they may be difficult to enforce,
 the temptation for losing parties to ignore court decisions is widespread, and
 enforcement mechanisms are inadequate. Only available enforcement officers are judicial
executors and bailiffs and courts and they have only limited powers to ensure that these officers
actually enforce judgments. Bailiff Services may not be fully staffed, funded or trained. Courts often
lack rules to deal with contempt or disobedience of court orders
 Some country perspectives
 In Mongolia, bailiffs are offered incentives for executing decisions based on percentage of value of
the judgment (needs to be closely monitored to ensure it is not abused),
 In Kazakhstan, the Ministry of Justice employs judicial executors to enforce writs of execution
against recalcitrant debtors as well as bailiffs to, among others, serve judicial notices, enforce fines
and assist judicial executors in executing orders. Judicial executors and bailiffs work on an
incentive system – judicial executors receive a portion of the judgment they collect and bailiffs
receive a payment for each notice served,
 In most STEs, there is no system to place a judicial lien on debtor’s property.
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6.
Judicial Reforms
 Some of the STE’s have taken steps to set up independent institutions to support
their judiciaries
 Kazakhstan has moved administrative responsibility for the court system from the Ministry of Justice
to a Judicial Administration System under the Supreme Court,
 Mongolia established a General Council of Courts to oversee the judiciary, including the preparation
of draft budget for submission to Parliament, and
 Tajikistan has moved administration of the judiciary from the Ministry of Justice to the Council of
Justice which is actively involved in the selection of judges.
 In STEs generally most of the investigatory powers previously provided to the
procuracy have been now provided to the judiciary. However, in Tajikistan, the office
of the Procurator General continues to have investigative, supervisory and some
judicial functions.
 In the Kyrgyz Republic recent amendments to the Constitution enable the courts of
appeals/higher courts to render decisions with finality, thus limiting the number of
appeals that can be brought.
 Prior to such decisions, plaintiffs were required to go through a number of appeals. For example, in
trying to foreclose on a secured claim, the the Debt Restructuring Agency went through 37 appeals
and its case was finally rejected by the court concerned.
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7.
Alternative Dispute Resolution
 Alternative Dispute Resolution is emerging as an alternative form of commercial
disputes for claims involving foreign investors.
 Mongolia, Kyrgyz Republic, Kazakhstan and Azerbaijan have developed a legal
framework for arbitration
 The Legal Framework includes the Constitution, Civil Code and the Law on (Foreign
Investments), international treaties and contractual provisions obligating the parties to
use arbitration to resolve disputes. While the Civil Codes refer to arbitration generally,
most STEs have functioning frameworks only for disputes involving foreign investors,
 Kyrgyz Republic, Mongolia and Azerbaijan have adopted specific laws on arbitration,
and
 Azerbaijan, Kazakhstan, Kyrgyz Republic and Mongolia provide for arbitration through
the International Center for Settlement of Investment Disputes or as per the rules of the
United Nations Commission on International Trade (UNCITRAL).
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7.
Alternative Dispute Resolution
 Difficulties in Enforcing Foreign Arbitration Awards
 Although Azerbaijan, Kazakhstan, Kyrgyz Republic and Mongolia are signatories to the
Convention on Recognition and Enforcement of Foreign Arbitral Awards of 10 June
1958, courts in the STEs tend to reject foreign arbitration awards on the grounds that
there are no implementing laws or clear procedures. To date, none of the STEs has
adopted satisfactory procedures for issuance of writs of execution for foreign arbitration
awards,
 In the Kyrgyz Republic, although a new law was adopted to permit domestic and
foreign arbitration of commercial disputes, amendments are needed to the Civil Code
to ensure enforcement of awards, and
 In Uzbekistan, additional problems in enforcing foreign arbitration awards arise based
on currency conversion issues.
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V.
Conclusion
 The STEs are moving in the right direction by introducing legislative frameworks that
include, at least, some provisions that deal with strengthening corporate governance
of firms and banks. Progress has been uneven driven by exclusive concentration of
drafting of laws with ad hoc or incomplete treatment of international standards. As
such
 Gaps and inconsistencies exist in laws. For instance, shareholders rights may be
overdefined and role and responsibilities of BOD under defined,
 Frameworks, including implementing regulations and procedures need to be
streamlined and clarified to promote compliance,
 Greater awareness has yet to occur among stakeholders of the merits of changes,
 Penalties are either low or not enforced, and
 Regulators weak capacities and understanding of the law and regulations has impeded
enforcement.
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V.
Conclusion
 Corporate governance of banks, a crucial element of enforcing higher standards of
corporate governance among borrowers, is very weak and often not defined in the
Law on Banks and Banking.
 Institutional capacity to implement such framework needs to be significantly
developed through higher qualification requirements for judges, on-going training
programs for judges and regulators, and enhanced transparency of the decision
making progress.
 Judicial system, given the high degree of politicization and linkages with vested
interests and weak incentive framework for judges, is unable to enforce rights and
contracts or render timely decisions.
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Recommendations
 It has to be recognized that
 Laws need to be further perfected,
 Ownership structures ought to be transparent and greater effort is required from
regulators to enforce prudential regulations and adopt appropriate risk management,
 Non-government organizations need to be encouraged to effectively monitor
compliance with corporate governance standards,
 Investor education and awareness campaigns need to be launched,
 Independent and reliable credit information bureaus need to be developed and
effectively regulated to monitor credit worthiness of borrowers, and
 Judiciary needs to be fundamentally transformed.
March 22, 2016
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