Economic affairs committee (EAC)of the National Council (NC) said yesterday that dominance of fronting in Phuentsholing was clear when almost all shops in the town remain closed whenever there were festivals in India or the border was sealed during elections.
“Fronting exists in grocery stores, hotels, telephone booths, garment stores, pastry shops, electronic and hardware shops, scrap dealers and micro businesses and even in large industries and construction sector,” a member of the committee, Ugyen Tshering, said.
Documents accessed by a newspaper, he said, showed that the government was aware of fronting in the industrial sector since 2007.
Citing the Ministry of Economic Affairs (MoEA) sources, the committee reported that a total of 205 fronting cases were reported till April this year in four major towns of Phuentsholing, Gelephu, Samdrupjongkhar, and Mongar. Phuentsholing topped the list with 161 cases.
Interaction with officials at the border revealed that there were numerous non-Bhutanese who come to pay taxes, clear goods, and make bank transfer on behalf of licence holders, the committee reported.
The committee said that fronting was a term unique to Bhutan, generally used to describe a business practice where a licensed person leases the business to another person for a fee or commission. “The unregulated and unlicensed person who is the beneficial owner actually controls the business from behind the Bhutanese front.”
The term fronting is defined in Rule 3 of the Rules and Regulations for Establishment and Operation of Industrial and Commercial Ventures in Bhutan 1995 as “leasing of the licence to another party to run the business”.
Most of the MPs suggested that the definition of fronting should be changed so that the meaning is clear. Member from Chhukha, Sangay Dorji, said that definition of fronting involving two Bhutanese and fronting involving Bhutanese nationals and foreigners must be clarified.
The committee reported that the government’s failure to curb fronting had led to illegal business flourishing, especially in border towns. Fronting, it adds, reportedly spread beyond border towns in new sectors, including tourism, hotels, and boulder.
“The proliferation of fronting activities will have dire social, economic and political consequences as the beneficial owners from outside take advantage of business opportunities in Bhutan, evade tax, repatriate profits and render the Bhutanese as lowly paid employees or cheap commission agents,” the committee’s chair Dasho Tashi Wangyal said.
The committee’s recommendations
The committee submitted four main recommendations – to enact effective legal provisions, establish effective institutional frameworks, ensure frequent rotation of public officials, and establish Ngultrum as the legal tender in Bhutan.
It reported that it was only a matter of time before the socioeconomic dimension extends to the political realm and that fronting would undermine national policies, laws and interests. “Lessons from other countries show that political interference by foreign by foreign business entities and domestic politics is the next logical step.”
The committee’s report pointed out weakness of current administrative penalties and the lack of effective legal provision making fronting illegal as the main causes for the spread of fronting.
An amendment proposal seeking criminalisation of fronting as offence to the Penal Code of Bhutan is under discussion in the National Assembly. The committee stated that other legal measures such as imposing hefty monetary penalties or value-based sentencing must be considered before considering it as a felony.
Such an approach, the committee reported, should be included in the Trade and Investment Bill that has been drafted and is being proposed by the Ministry of Economic Affairs (MoEA).
The committee submitted that there should be strict and clear legal provisions to address the fronting issue in a comprehensive manner. “It is equally important to develop comprehensive policies and supportive institutional frameworks to discourage, detect and deter fronting.”
The recommendation calls on the Cabinet to issue clear directives, identify the lead agency to address fronting and outline the roles and responsibilities of all other relevant agencies to support the lead agency.
The committee also calls for establishment of an institutional mechanism for collecting, analysis and sharing of information on suspicious business transactions in coordination with agencies such as MoEA, immigration, banks, and the Royal Monetary Authority (RMA).
“ACC investigations (into fronting cases) revealed that public officials entrusted to uphold laws and implement rules and regulations failed in their duty and were engaged in corrupt practices in collusion with businesses in the border towns thus aiding fronting,” the committee stated.
The committee recommends the Royal Civil Service Commission to facilitate frequent and surprise rotation of public officials in vulnerable positions in trade, immigrations, and customs among other departments.
The committee observed that the existence of certain denominations of Indian currency (INR) in circulation in Bhutan along with free currency convertibility between the two currencies, open borders, free trade regime, growing informal markets, and tax differentials have provided fertile grounds for fronting to flourish.
One of the means to curb fronting, the committee stated, would be to bring the informal, cash-based cross-border market transactions under the formal sector.
Doing this, it suggested, would require the decision to recognise ngultrum as the only legal tender in Bhutan, while holding the one-to-one peg by assuring free convertibility between the two currencies. This means that all transactions in Bhutan must be settled in ngultrum and all balance of payment settlements with India to be routed through the banking channel while any holdings of INR cash must be deposited in the banking system.
This is aimed at enabling greater transparency, disclosure, and monitoring.
The committee recommended the RMA to conduct a thorough study to consider merits and risks of allowing INR to circulate in Bhutan and submit its findings and recommendations to the NC and the government.
The committee recommended also asks the RMA to introduce web-based portal tracking trade flows in coordination with banks and the department of revenue and customs. This, according to the committee, will help check illegal economic activities and gain accurate data and statistics for macro economic planning and management.
The committee’s recommendations will be put to vote for adoption in the House.
Member from Punakha, Lkahi Dolma, said that massage parlours must be scrutinised. She said that illegal business could flourish if unchecked.