<mark>dubious newly registered company called “Kularb Kaew” (glass rose), where Temasek owns another 49 percent minority share as expected.</mark> <mark>The two major Thai shareholders of Kularb Kaew are two Thai individuals—Mr. Pong Sarasin and Mr. Supadej Phoonpipat. However, their share ownership has created legal controversy, because they are believed not to be genuine Thai partners, but nominees acting on behalf of Temasek. Circumstantial evidence supports this contention. First, both Thai shareholders were allocated in total only 10 percent of the voting shares, rendering effective corporate control in the hands of the foreign partner. Second, both agreed to receive only a fixed 3 percent return on their capital investment, a rate which was lower than the risk-free 1-year government bond. Doubts have also been raised about the ability of the duo to mobilize the billions of Thai baht required to purchase such large equity shares in the company.</mark> <mark>While foreign indirect equity holding through holding companies is not counted towards the statutory foreign equity limit and effective corporate control is not prohibited according to Thai law, equity holding through Thai nominees is subject to criminal penalties for both the foreign investor and the Thai nominees. The Ministry of Commerce launched an investigation into the alleged nominee case. By tracing the financial trail of the funds used for the purchase of the Thai equity share in Kularb Kaew, the investigation concluded that the two Thai individuals were indeed nominees for Temasek. The final court ruling on this case is still pending. It could lead to the imprisonment of the two Thai partners. In addition, the future of many Shin Corp subsidiaries operating in the restricted service sector could be jeopardized—possibly even leading to the revocation of cellular, satellite, broadcasting and air transport licenses.</mark> If an FTA adopts a rule or origin that uses an immediate domestic ownership and control criterion, service suppliers that are ultimately foreign owned and controlled may still benefit. The same issue arises under a cumulated ownership and control criterion at the regional level: service suppliers that are ultimately owned and controlled by persons from outside the region may still benefit. The concept of ownership and control is not well developed in ASEAN countries’ legal and statistical frameworks. As revealed by the case studies, information on the ultimate ownership of companies is typically not published.<sup>15</sup> The same is true for information on the details governing corporate control—such as the composition of the board of directors or the nationality of the director(s) whose signature must accompany all legal contracts binding a company. A related problem is posed by service suppliers whose equity is publicly traded. Share ownership may be diffused across a large number of countries, may change hands frequently, and no single shareholder may exercise control over the company.

Nonetheless, one way to effectively implement an ultimate domestic (or regional) ownership and control criterion is to place the burden of proof on the service providers that seek to benefit from an FTA. For example, under the Treaty of Amity between Thailand and the United States, it is up to companies to prove that they are ultimately owned and controlled by residents of either party. Similarly, the certification system under the Hong Kong-Mailand CEPA puts the onus on companies to prove that they meet the rules of origin of the agreement (see Box 1).<sup>16</sup>

> 15 In Thailand, the Government’s database of registered companies assigns the nationality of a legal entity only by the place of incorporation.  See Arunanondchai and Nikomborirak (2006).

16 Note that an ultimate ownership and control test may also be necessary for a rule of origin that merely requires that non-party service suppliers engage in substantial business operations. As discussed in the text, there may be domestically owned and controlled service suppliers that do not engage in substantial business operations in the domestic territory, but that may wish to exploit the preferences available under an FTA.

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