Leadership and Democracy LabWestern Social Science

Legal Risks to Turkey's Textile Industry

Primary Contributor: Thurka Brabaharan

Team Leader: Ernest Tam

3/3/2017

At the Helsinki Summit in 1999, it was confirmed that Turkey has candidacy for full membership of the European Union. Since this open declaration, Turkey has undergone significant revisions in both it’s legislature and structure in order to improve both its fundamental rights and the judiciary. However, following the recent failed coup d’etat attempt in July of 2016, the country’s judiciary and civil sector has been deterred from its path of improvement, due to hostile and extensive targeting by the Turkish government. Since President Erdogan’s orders for mass arrests, Turkey’s global rankings, specifically in relation to the rule of law, have fallen greatly. Of the 113 countries surveyed, Turkey has dropped 8 rankings in the span of one year, down to a dangerously low ranking of 99th place. Although Turkey suffers from a corrupt and unstable government with a transitioning judiciary, the following hurdles can be overcome to demonstrate that Turkey is an adequate candidate for foreign investors.

EXPROPRIATION & COMPENSATION BY THE TURKISH GOVERNMENT

The primary legal risk when investing in textiles, or other major industries in Turkey, is the possibility for expropriation and compensation. Expropriation, the ability of a state to take property from an owner for public subsidy, is specifically restricted to property that will be put to communal use. If expropriation of property takes place, reimbursement is declared to be timely and sufficient. Furthermore, in such a case, the Bilateral Investment Treaty (BIT) guarantees all investors have an equal opportunity to approach Turkey’s local courts or involve an international third-party adjudicator in order to settle any private land disputes. Although the BIT’s guarantee fairness in the case of expropriation, in 2016, only 44% of expropriation cases were met with adequate compensation; below the regional average. Historically, the Turkish government has only expropriated property strictly for communal use or industrial developments. However, following the failed coup d’etat, the Turkish government has aggressively targeted any organizations or businesses believed to be affiliated with the Fethullah Gulen Terrorist Organization (FETO); including banks, businesses and energy outlets. Appearing virtually fearless of alienating foreign investors, Erdogan has relentlessly targeted prominent businesses and large conglomerates in part of the coup investigation. A prime example that no companies are immune to these raids is Boydak Holding, which is one of Turkey’s largest corporations, having its executives targeted and incarcerated in the midst of the crackdown.

AN INEFFICIENT AND CORRUPT JUDICIARY

A significant problem with investment and corporate disputes, although uncommon, is that they are incredibly lengthy, potentially spanning years. In 2016, the World Justice Organization (WJO) recorded that only 32% of cases handled by local Turkish courts are without unreasonable delay, falling well below the regional average. Furthermore, Turkish courts are consistently overstrained, more so after the removal of many judges who were allegedly affiliated with FETO, therefore resulting in delayed decisions and a lack of sufficient time to analyze complex cases. In addition to the overwhelming number of cases and time constraint, the Turkish judiciary has been accused of corruption and unwarranted interference from the government. This is significant to foreign investors, as local courts have failed to meet international standards when dealing with private firms, and have repeatedly showed preferential treatment to Turkish firms. Further to this, the WJO gave Turkey a ranking of 0.53 relative to corruption in the judiciary, the highest score being 1.0. A ranking of 0.53 indicates that there is still a great amount of ambiguity in the fate of trails; as it is likely that decisions will be influenced by external, mainly political, factors.

UPHOLDING THE RULE OF LAW IN TURKEY

 The general definition of the rule of law is the constraint on the arbitrary use of power by submitting it to clearly expressed and established laws. Abiding by the rule of law and regard for the separation of powers in Turkey has been under scrutiny for a long time, however, recent events that have led to political instability, have hindered any possible improvement. Following the failed coup attempt, over 2745 judges have been arrested or removed from their posts; due to alleged ties to FETO. During this purge, hundreds of judges and prosecutors have been removed, re-assigned and substituted into other positions while in the midst of lengthy and complex trials. Furthermore, this extradition of judges has left enormous political pressure over those remaining at their posts, as it is clear that the executive exercises extreme power over the judiciary. In the World Justice Project’s Rule of Law Index, Turkey received a low score of 0.25 out of 1.0 in regards to improper government influence over the judiciary, an incredibly poor score for the region.  This indicates that the judiciary is bound by the executive far more than the rule of law. Ultimately, this can be problematic for foreign investors who may be faced with trials, as the outcome of certain decisions is extremely uncertain and likely to be in favor of the Government of Turkey.

MITIGATION STRATEGIES

 This risk of sudden expropriation and compensation remains relatively low for international investors, as there are currently zero U.S. firms involved in expropriation or nationalization cases with the government of Turkey, nor have U.S. firms been unethically targeted. In order to mitigate this risk, potential investors are advised to avoid any affiliations or business that are deemed to be associated with FETO.

Furthermore, if faced with the rare case of expropriation with the Turkish government or any financial investment dispute, the most favorable option would be to seek an international third-party adjudicator to settle the disagreement, as permitted through the Bilateral Investment Treaties. This avoids the process of utilizing local Turkish courts, increasing the likelihood of a fair trial with due process and therefore alleviating most of the risk of a biased decision and lengthy trial. When ranking discrimination in Turkish courts, the judiciary received a score of 0.42 out of 1.0 from the World Justice Project, indicating that it is probable that foreign investors will face a biased resolution against their favor. The key differentiation in hiring a third-party adjudicator for settlement is that the mediator has no interest or benefit in the outcome, thus, virtually eliminating any partiality. Although third party funding is costlier, as it is likely that a successful plaintiff will have to sacrifice between 20%-50% of their damages award, there is a greater chance of victory with a reduced likelihood of bias and a more efficient litigation process. Within recent years, commercial third party litigation funding has increased swiftly. According to the Organization for Economic Co-operation and Development (OECD), in March 2008, 8 out of 10 of London’s chief law firms were evaluating such cases; indicating that third-party funding was emerging as a conventional practice. Thus, in present day, this is the most feasible and secure option for foreign investors, allowing Turkey to emerge as a viable a candidate financial ventures.