The government has approached the German Embassy in Kathmandu to help resolve a payment dispute with Muehlbauer ID Services GmbH, the company handling Nepal’s e-passport system. The government owes the company Rs300 million but has withheld payment amid a corruption investigation.

The latest diplomatic move comes months after German Ambassador Udo Volz waited nearly three hours at the Prime Minister’s Office while seeking a meeting to discuss the investigation into German companies involved in the passport contract. The prime minister’s advisers reportedly reprimanded him.

The dispute has intensified as Muehlbauer has warned that it may suspend services if the government fails to clear its dues. On Monday, Foreign Secretary Amrit Bahadur Rai told company representatives that the government was committed to making the payment but could not release the funds because the Commission for the Investigation of Abuse of Authority and the Office of the Attorney General had not responded to the government’s request for a way out. A corruption case against the German company remains sub judice.

“We sought legal remedies from the CIAA and the Office of the Attorney General. They advised us not to make payments or allow Muehlbauer to open the letters of credit until the case is settled. So we reached out to the German Embassy in Kathmandu to resolve the payment dispute,” said Rai during a virtual meeting involving senior officials from the Foreign Ministry and the Department of Passports and representatives of Muehlbauer, according to an official who attended the meeting. 

Rai said the German Embassy had responded positively to the government’s approach but did not elaborate on how it could help resolve the dispute.

“We will try our best to resolve this issue soon, but at present, due to the prevailing laws, we cannot release the money to Muehlbauer. We are ready to fulfil our obligations,” Rai said.

Rai said the government could not decide on the payment while the case was before the court. He added that the issue went beyond the company’s dues and had implications for bilateral relations between Nepal and Germany. 

The impasse has its roots in a controversial government decision to investigate the procurement of the new e-passport system. In June, CIAA Chief Commissioner Prem Kumar Rai and senior commission officials were summoned to the PMO, where advisers to Prime Minister Balendra Shah pressed them to expedite the investigation. 

The incident raised concerns among legal experts about possible government interference in the anti-corruption body. The German ambassador’s failed attempt to meet officials at the Prime Minister’s Office added to the diplomatic tensions. 

On June 23, the CIAA filed a corruption case against 18 people, including a former director general of the Department of Passports, government officials and local representatives of the two German contractors, Muehlbauer and Veridos GmbH.

The accused were subsequently released from custody by the Special Court. The Supreme Court has also issued a verdict in favour of the German companies, but the Special Court has yet to deliver its final verdict in the corruption case. Passport officials have remained reluctant to approve the payment while the proceedings are unresolved.

Two Foreign Ministry officials told the Post that the Department of Passports had sought clearance from the CIAA and the Attorney General’s Office but had received no response as of Friday. Department spokesperson Dipak Banjade said the pending court case and the lack of responses from the two institutions had complicated the payment process.

Muehlbauer had already set September 30 and October 7 as deadlines before issuing its latest ultimatum for the payment. In a letter to the department, it said its local employees remained unpaid and that continuing operations without payment was becoming unsustainable.

“The supplier has performed. The purchaser has not,” the company said in a letter, arguing that the failure to pay an earned and certified milestone constituted a breach of contract. It has reserved its rights under the contract’s dispute-resolution provisions and the 1986 bilateral investment treaty between Nepal and Germany, raising the possibility that the dispute could extend beyond the immediate payment demand.

Muehlbauer employees supporting the passport department have submitted a memorandum to Director General Dipak BK, warning of a strike over unpaid salaries. Internet service provider Subisu has also threatened to suspend its services citing unpaid bills.

Any suspension by Muehlbauer could disrupt passport issuance nationwide. The company manages pre-enrolment, biometric enrolment, data management, and delivery systems that are essential to processing passport applications. Veridos, which prints and supplies passport booklets, relies on these systems to process applicants’ information.

Under the contract, the department must pay the supplier within 30 days of receiving the letter of commissioning. The first payment milestone is worth around Rs300 million, with 85 percent payable in foreign currency and the remaining 15 percent in Nepali currency.

The contract allows interest on delayed payments at 2 percent on amounts payable in foreign currency and 10 percent on amounts payable in Nepali currency, subject to a cap of 10 percent of the total contract amount. Rai said the government was prepared to discuss the interest claim if the company submitted an invoice.

Officials are also discussing whether to release the local-currency portion of the first milestone, Rs45 million, as an initial payment.