The Ministry of Economic Affairs (MoEA) has asked the public and business communities to stop fronting practices before December 31 this year, as it will become a criminal offence beginning on January 1.
“One individual who had leased the licence to another may either retain and operate the business by himself or herself, or else surrender the licence. Non-operating licences, if found, will be cancelled,” according to the ministry.
Fronting is the act of leasing, subleasing, or permitting another person to use or operate one’s licence.
According to the Section 284G of the Penal Code of Bhutan (Amendment) Act 2021, “A defendant shall be guilty of an offence of fronting if the defendant leases or subleases, hires, or otherwise permits another person to use or operate one’s licence unless otherwise permitted by laws or policies.”
Foreigners, however, are allowed to do business through the Foreign Direct Investment Policy.
Regarding family members operating under the licence, the ministry is in the process of developing Policy Guidelines in collaboration with the office of the attorney general to implement the provisions on fronting. It will be as per the Section GA 2.2 of the Inheritance Act of Bhutan 1980. It intends to exclude those businesses operated by members of a joint family.
Fronting was limited to the trading sector in the past. However, it has proliferated and become more complex, involving big businesses, construction, manufacturing, and in the high growth sectors of tourism and hotels, the ministry stated.
“Fronting activities do not follow the due process that exists in the country, evades taxes, and launders black money,” the ministry stated.
Similarly, new licences are being acquired as an income-earning opportunity by leasing.
Civil servants have been found to be engaging in fronting.
“Fronting issues are further exacerbated with the involvement of foreign nationals from different countries and undermine global best practises of formal foreign investments and such illegal participation lacks transparency, accountability, and such investors mostly fly-by-night operators who are there for short-term gains, and have no regard for our laws and regulations,” the ministry stated.
The ministry conducted two rounds of verification exercises.
In the first round, the regional office of economic affairs (RoEA) and department of trade assessed total of 274 suspected fronting cases: 179 in trading and 95 in services. The authority cancelled 18 licences (17 trading and 1 service) due to non-renewal or expiry of validity; 115 (60 trading and 55 services) were cancelled voluntarily; and 124 (90 trading and 34 services) submitted a statement or letter of undertaking, stating that they are not engaged in fronting.
In the second round, 68 suspected cases (49 national and 19 non-national traders) were assessed by the RoEA and regional immigration office. The authorities found 22 engaging in near fronting businesses; 17 Bhutanese traders and five traders were cardholders.
Eighteen licences were cancelled based on the decision of the joint verification exercise. Five that belonged to Indian cardholders were retained by the RoEA for further observation and assessment.
Fronting enables unauthorised persons to engage in businesses reserved for Bhutanese entrepreneurs, especially in the cottage and small categories.
“This has denied the prospective domestic entrepreneurs the opportunities, spaces, and avenues to venture into business,” the ministry stated.
The ministry cautioned that the continuation and expansion of fronting business practices would lead to full control of the economy by unknown identities and deter the government’s objective to diversify the economy.
Further, fronting has serious national security issues and could lead to the country being listed as facilitating economic crime and a conduit for laundering black money, the ministry stated.
The ministry pointed out that Bhutanese lured by nominal gains obtained through rent-seeking enabled unauthorised persons to take the full benefits of business opportunities.
An open border, free movement of people across the border, import dependence, currency pegs, and free trade agreements are some of the factors that lead to such practices.
Lack of human resource and expertise in carrying out inspections to establish fronting and lack of support from relevant agencies are some of the biggest challenges for the ministry.