Date: Wed, 31 Dec 1997 15:14:44 GMT Server: Apache/1.1.1 Content-type: text/html Content-length: 15562 Last-modified: Fri, 20 Dec 1996 20:57:16 GMT
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On August 11, 1996, Kuwait passed Law No. 25 of 1996 regarding the disclosure of commissions in connection with government contracts (the “Law”), which became effective on August 18, 1996, upon ratification and official publication.
The Law imposes on the contracting party a disclosure requirement regarding commissions or payments in connection with contracts with the government and entities to which the Law applies. It also imposes disclosure obligations on whoever pays or promises to pay and whoever receives a payment or the promise of a payment, and describes the payments covered in the broadest possible language.
The text of the Law contains many ambiguities. It is not yet clear whether the Kuwaiti National Assembly or the various ministries charged with implementing the Law will formally clarify these ambiguities. It is unlikely that the Law will be formally clarified in its scope. This article, therefore, focuses on the scope of the Law.
In Kuwait, unlike the United States, the legislative history of a law is not given any legal weight or persuasive value. On the other hand, the Explanatory Memorandum accompanying the law is regarded as the official commentary on the law and, thus, has legal significance.
A. Legislative History
The first draft of the Law was submitted to the National Assembly on February 18, 1996, and referred to the Assembly’s Legal and Legislative Committee and the Financial and Economic Committee. Both Committees recommended passage of the draft bill with certain amendments.
The Financial and Economic Committee’s report to the National Assembly (Report No. 31, April 22, 1996) regarding its interpretation of the draft law included several significant points, which are summarized below:
- The payments targeted by the draft law are those made “on the occasion” of a contract. This wording seems to limit the disclosure requirements to payments made in connection with a specific contract, as opposed to payments made in connection with general consultancy or agency agreements that do not have payment provisions tied to a specific contract.
- The draft law includes both civil and criminal sanctions. The civil sanctions give the government authority to deduct the equivalent of the payment from the outstanding balance on the contract or to file a claim against the recipient of the payment in the event there are no outstanding payments on the contract. The criminal sanctions specify a penalty and/or imprisonment of up to five years (reduced in the final version of the Law to up to three (3) years).
- These sanctions are directed at non-compliance with the disclosure requirements. Therefore, anyone who complies with the disclosure requirements would not be penalized. However, if the action itself would constitute a violation of any other law, the disclosing party would not be exonerated from liability.
- The draft law applies to all contracts entered into by the Kuwaiti Government or any of its agencies or instrumentalities (the final draft limited the Law’s coverage to contracts of at least KD 100,000).
B. The Explanatory Memorandum
The thrust of the Explanatory Memorandum to the Law is that it is the duty of the Kuwaiti Government and every Kuwaiti national to expose any commissions that are paid, and the beneficiaries thereof, in civil and military transactions entered into by the government or any of its agents or instrumentalities, by requiring full disclosure in order to prevent improper use of influence and to protect public funds.
Although the Explanatory Memorandum repeatedly refers to the disclosure obligations of the “party contracting with the Government,” it does not state anywhere that only such contracting parties have such disclosure obligations.
A. Article 1
Article 1 of the Law specifies to which entities the Law applies. These are:
- | all government agencies, including ministries and departments that form the administrative organs of the government; |
- | the Municipality of Kuwait; |
- | the public authorities and establishments; |
- | government-owned entities or entities in which the government owns at least a 50 percent share of the capital. |
Therefore, the Law effectively applies to transactions entered into by the Kuwaiti government or any of its agencies or instrumentalities (referred to as the “Affected Entity”). The Explanatory Memorandum clarifies that the Law essentially applies to all entities that fall under the supervision of the Kuwaiti Audit Bureau.
B. Article 2
Under Article 2, the Law applies to the following contracts that are at least KD 100,000 (approximately $300,000) in value:
- | all supply and purchase contracts; |
- | all public works contracts, including all kinds of military transactions; |
- | any other contracts of any type whatsoever that are executed by any of the Affected Entities, regardless of the nature or the method of execution of such contracts. |
Article 2 also requires that all contracts entered into with an Affected Entity include a provision that expressly states whether or not the party contracting with the Affected Entity has paid or will pay any commission in cash or in kind, or any benefit of whatever nature, to a disclosed or concealed intermediary.
This is the first type of disclosure obligation that is required by the Law. This obligation appears to apply only to the party contracting with the Affected Entity and not to subcontractors or sub-suppliers of such party. Arguably, however, this provision imposes a duty on the contracting party to pass on this obligation contractually to its subcontractor or sub-suppliers.
If the contracting party stipulates that it has made, or intends to make, such payments, it must satisfy two obligations under the Law:
- First, the contracting party must appoint a certified agent with actual or elected domicile in Kuwait for the purpose of submitting to the jurisdiction of the Kuwaiti courts.
- Second, the contracting party must disclose in the contract the name of any recipient of the payment, such recipient’s official capacity and occupation, his residence or the residence of the party he represents, the exact amount of the commission and its type, the person to whom it was paid and the place of payment.
Prior to the passage of the Law, use of agents or intermediaries was required in public sector commercial transactions. There is also an existing requirement under Kuwaiti Law to have all commercial agents registered as a prerequisite to pre-qualification for governmental, civil and commercial contracts. The information disclosed in this public registration includes the scope of the agency, the products or services covered, its duration, and the commission or compensation paid or to be paid.
The disclosure requirement under Article 2 of the Law is much broader. It covers agents and any other intermediaries, as well as disclosure of concealed intermediaries, the person to whom payment is physically made or to be made, and the place of payment.
As noted, the use of agents and intermediaries has been prohibited in military transactions. Although the new Law requires the disclosure of payments in military transactions of all kinds, this should not be interpreted as implying that such payments are permissible.
C. Article 3
Article 3 imposes additional disclosure requirements that are separate from those imposed by Article 2. Article 3 imposes a disclosure obligation on whoever pays or promises to pay and whoever receives a payment or a promise of payment. Unlike Article 2, Article 3 does not appear to limit this obligation to a party contracting with an Affected Entity.
The payments to be disclosed are described in the broadest possible language. They include any grant, donation, gift or any other payment under any name or description, even if it is a peripheral payment for consultancy services, administrative or any other type of services, where the payment results in a material or moral benefit and is made “on the occasion of” a contract covered by the Law.
The meaning of the phrase “on the occasion of” is unclear and subject to various interpretations. For example, it is not clear if the language covers a payment under a general consultancy agreement providing for a fixed fee that is not tied to a particular contract with an Affected Entity. On the other hand, a payment under a general agency agreement that provides for the payment of a commission with respect to all concluded contracts, including contracts with an Affected Entity, may be covered at the time the payment obligation is triggered.
Article 3 also sets out some practical elements regarding the disclosure requirements under the Law. For one, the disclosure required under Article 3 must be made within thirty (30) days after the date of payment or promise of payment. Practically speaking, in light of the fact that disclosure is to be to the Affected Entity with which the contract is entered into, it is unclear to whom disclosure would be made if the payment or promise of payment is made prior to entering into a contract covered by Article 2 of the Law.
Also, the disclosure must be in the form of a written affidavit detailing the amount of the commission, and the currency, place of payment and method of payment. The affidavit should be submitted to the Affected Entity with which the contract is entered into. The Affected Entity will, in turn, provide a copy to the Kuwait Audit Bureau.
Finally, the disclosure required by Article 3 also applies to existing contracts that have not been fully performed. In this case, the disclosure had to be made in the manner described above within thirty (30) days after the effective date of the Law (that is, by September 17, 1996).
D. Articles 4 and 5
Articles 4 and 5 explain the penalties for a violation of the disclosure requirements of Article 3, either through non-disclosure or through misrepresentation. For non-disclosure (failure to submit the disclosed affidavit on time), the Law imposes a double penalty: a civil penalty equal to the value of the payment, and a criminal penalty equal to the value of the payment. For inaccurate or false disclosure or concealment of a fact relevant to the affidavit of disclosure, the Law imposes a civil penalty in an amount equal to the value of the payment, and a criminal penalty of imprisonment of up to three (3) years and/or a fine in an amount equal to the value of the payment.
Notably, the sanctions that may be imposed for non-disclosure may be less severe than the sanctions imposed for inaccurate or false disclosure.
It is important to remember that full compliance with the Law does not necessarily exonerate the parties involved from liability in the event the payment or the conduct in question constitutes a violation of another Kuwaiti law-for example, a violation of the Public Funds Protection Law or Kuwait Ministry of Defense circulars.
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