Formosa’s US$500 Million Settlement Set to Usher in New Era for Environmental Enforcement

Dead fish washed ashore. Polluted water. Fishermen losing their economic livelihood and having their well-being threatened. A Taiwanese company implicated. This is not 2016; the year is 2008, and we are looking at the Thi Vai river in southern Vietnam’s Mekong Delta, with an MSG factory upstream owned by Vedan. This was the first prominent case of environmental regulation being enforced upon a major foreign firm. Comparing Vedan’s case with Formosa’s makes the selective enforcement of regulations quite clear, and this could very well have a negative environmental fallout. Nevertheless, although an unofficial settlement was reached, saving Formosa’s operations in Vietnam for the time being, there are reasons to believe that Formosa will mark a turning point in the prosecution of cases of this caliber moving forward.

The Evolution of Vietnamese Environmental Regulation

When news breaks about pollution scandals in Vietnam, local and national government offices typically pass responsibility back and forth as they try to figure out the right legal approach. In the 2008 case with Vedan, the Vietnamese government largely ignored the environmental damage from spills as the project was bringing in foreign direct investment (FDI). In fact, the government only responded when third parties complained about the increasing corrosion to the hulls of boats docked at a nearby river port. Till then, the local Department of Natural Resources and Environment allegedly chose to overlook the illegal waste or not enforce warnings, despite its annual inspections conducted in conjunction with the national Ministry of Natural Resources and Environment.
 
Similar lapses in government regulations and enforcement are seen in Formosa’s case. The presence of fish-killing chemicals was something that regulators failed to detect due to the application of a broader standard of regulation, and failed to anticipate during the pre-investment assessments of the project. 
 
Facilitating this substantial oversight was a fundamental lack of coordination between local and national government offices. While there was a warning from the Ministry of Planning and Investment regarding Formosa’s “insufficient environmental impact assessment” that had warned of the “possibility for negative effects”, the local Ha Tinh People’s Committee went ahead with the project anyway.
 
Exhibiting a similar degree of mismanagement at the monitoring level, the drawn-out and much disputed resolution of Vedan’s case has, however, not been replicated in the government’s dealing with Formosa. This can be attributed to a number of changes. In 2008, the penal code did not allow for the criminal prosecution against companies such as Vedan. Instead, fines were levied on Vedan of a minimum of just over US$1.5 million for 14 years of illegal waste dumping. In Vedan’s case, the compensation was assessed by the Farmers’ Association, whose numbers itself were disputed for two years as there were other firms in the area that were implicated as well.

Understanding Formosa’s Settlement Agreement

When news of Formosa’s spill reached a tipping point in the Vietnamese media, attempts were first made to shift the blame to a subcontractor currently handling waste disposal. However, since new laws had been put in place, this was no longer a possibility.  With this option off the table, Formosa was exposed to the real possibility of criminal prosecution – a much stricter legal repercussion than was on the line in the case of Vedan. If found guilty of these charges, Formosa would have been liable for a maximum fine of US$900,000 (VND 20 billion) and/or suspension or termination of its operations in Vietnam.
 
Instead of taking the risk of a court battle within the Vietnamese judicial system, Formosa agreed to the following 5 point settlement:

1. A public apology to the Government and the People of Vietnam for causing serious environmental damage.

2. Damage compensation for civilians, career transition support, and maritime environment compensation for a sum of US$500 million (VND 11.5 billion).

3. Agreement to perfect production technology for complete treatment of waste before disposal to not repeat what happened in April.

4. Coordination with Vietnam national and local governments to find a joint solution to prevent pollution and environmental damage to build trust among Vietnamese people and the international community.

5. Compliance to the above; acknowledgment that a repeat offense will be subjected to Vietnamese law.

It is possible that Formosa, like Vedan, serves as a convenient scapegoat as its visibility makes it a target of enforcement. Yet, despite its hefty price tag, the use of a settlement provides Formosa with an expedited solution to an otherwise costly and lengthy legal process, one that took two years for Vedan.
 
Considering the maximum fine under the revised penal code is only US$900,000 (VND 20 billion), the US$500 million fine also might seem absurd. However, given that Formosa has already invested US$10 billion in this project with plans to expand it by US$27 billion, it is fair to assume that this is akin to a fee to continue its Vung Ang investment. Further, the firm has already invested US$45 million into a waste treatment program.
 
Even though the Vietnamese government has decided not to terminate Formosa’s operations at present, official statements claim that this option is still under consideration. This could in part explain the choice to settle with officials rather than seek open confrontation. If all goes according to plan, Formosa could be expected to resume its operation in Q3 2016. According to Nguyen Minh Thuyet, a former Assemblyman, the Formosa case is over for now as the Central Committee convenes. Typically, if the Politburo considers the matter closed, the Central Committee will not contradict this position.
 
Given the suppression of the press and crackdown on protests, it is likely that the government is determined to protect Formosa’s interests in Vietnam. However, according to Dr. Nguyen Van Nam, an HCMC-based lawyer, this agreement only protects Formosa from government closure of its facilities. The firm is still vulnerable as the Vietnam government hasn’t received the power of attorney from the claimants to prevent further litigation. The claimants include the local governments of the three provinces affected, the occupational associations of the area, and the individual civilians themselves. The US$500 million fine is only compensation to the Vietnam government, and in case the disbursement is not considered sufficient by the claimants, they can approach a Taiwanese court, under whose jurisdiction Formosa comes. 

Implications for Investment

Given the growth in environmental awareness and activism thanks to social media, it is likely that Vietnam will see stricter enforcement of existing standards and possibly a more stringent set of regulations in the near to medium term. For investors with existing Vietnam facilities, compliance with current regulations is key, even if it means a costly technological overhaul; otherwise, they risk the shutdown of their facilities. From a reputational standpoint, this is an opportunity to engage with stakeholders, minimize risk, and to distinguish between corporate brands.
 
For new investors, there is a need to be weary of localities that offer lower-than-required environmental standards, as the old “investment at all cost” approach towards FDI is being abandoned. Moving forward, we will see fewer localities that ignore environmental standards. Even for the ones that do waive it currently, investors are now at a much higher risk of regulations being changed, or being fined and/or shutdown in the event of an accident.
 
Another consideration for investors is the need for transparency and self-regulation. This is by and large tied to the organizational and operational issues faced by Vietnamese authorities with regards to FDI auditing. Even if a project receives official approval, investors need to be proactive and stay in touch with the relevant authorities with the proper expertise. In Formosa’s case, the firm followed all proper procedures in their Vung Ang project; however, the Ministry of Industry and Trade was the authority that audited the technical specifications, instead of the Ministry of Science and Technology which is typically the authority.
 
Such incongruence can result in bad PR for the company, but by taking the initiative, investors can distance themselves from the government and minimize blame in the case of scandals. According to Ms. Pham Chi Lan, an economist and former member of the Prime Minister’s Research Committee, local agencies’ lack of auditing capability has led to enforcement failures. Hence, Ms. Lan mentions the need for independent auditing organizations to support the state agencies. In the status quo, due to weak civil society and rule of law, self-regulation would be a better policy in high-risk industries such as manufacturing.
 
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.
 
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