Navigating business corruption risks in Russia

May 2013 | EXPERT BRIEFING | FRAUD & CORRUPTION

financierworldwide.com

Over the past several months, Russia has made a concerted effort to attract foreign business and investors through roadshows, the modernisation of the Moscow stock exchange, new construction in the city’s financial centre, and the passage of new securities and anti-corruption laws and regulations.

Moscow officials are apparently trying to portray Russia as a stable, safe financial environment for companies to raise capital. These new legislative reforms, modernisation efforts, and public declarations by senior Russian officials are undoubtedly positive trends. Russia’s commitment to even-handed enforcement, however, remains to be seen. Moreover, Russian business culture will surely not evolve as quickly as any new Russian reforms are passed. Companies that choose to conduct business in Russia, or list on the Moscow stock exchange, should expect to encounter significant economic and legal challenges. Of particular note are anti-corruption compliance issues, which will remain at the forefront of most economic decisions. As such, new entrants to the Russian business sphere must be prepared to face those challenges with robust compliance programs and third-party due diligence.

The Moscow stock exchange’s initiatives to modernise and attract foreign enterprise have been the centrepiece of Moscow’s efforts to become a global financial centre. In November 2012, Russia created a central securities depository (CSD) as part of the Moscow exchange. The lack of a CSD had been a major roadblock for US investors because the US Securities and Exchange Commission (SEC) requires US investors to place assets with a depository. In February 2013, the Moscow exchange went public with an initial public offering (IPO) that raised almost $500m, the largest IPO on the Moscow exchange since 2007, which provided some measure of confidence in the Russian market. In March 2013, the Moscow exchange debuted Spectra, a new high-speed trading platform. And most recently, the Moscow exchange has started to phase in two-day (T+2) settlement for sovereign debt and several equities, as opposed to the T+0 settlement policy it previously had in place for all transactions. The entire exchange is scheduled to move to T+2 settlement by the end of 2013, which will bring it in line with stock exchanges in the US and most of Europe. Russia also hired Goldman Sachs to improve the country’s image as a stable and secure place to invest and connect Russian officials with major investors.

To complement the Moscow exchange’s modernisation efforts, Russia has passed several regulatory and legislative reforms that are intended to provide some initial stability to a financial market and legal system that historically have been in flux and subject to capricious enforcement. Russia now requires all listed Russian companies to report financial results in accordance with international accounting standards, and financial regulatory authority is slowly being consolidated into a central bank. In addition, in 2010, President Medvedev launched an ambitious anti-corruption campaign called the National Strategy for Counteracting Corruption, which proposed new legislation, including transparency laws covering gifts to public officials, and a new anti-bribery law.

These new anti-bribery laws, which amended the Russian Criminal Code and the Code of Administrative Offenses, outlaw bribery of foreign (i.e., non-Russian) and Russian government officials, as well as commercial bribery. The criminal provisions give Russian authorities jurisdiction over all crimes committed in Russian territory and all Russian citizens around the globe. The administrative provisions create a new four-tier system of fines based on the size of the bribe. The maximum corporate civil penalty for bribery is a fine up to 100 times the amount of the bribe (companies are not subject to criminal sanctions in Russia). The law also applies to intermediaries who convey the bribes, and it contains two statutory defences – one for extortion and one for voluntary reporting violations of the law.

On 1 January 2013, yet another Russian anti-bribery law went into effect. Article 13.3 of Federal Law No. 273 ‘On Combating Corruption’ is perhaps, on paper, the strongest anti-bribery law in the world, surpassing certain requirements of the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act 2010. Article 13.3 requires companies and other organisations that operate in Russia to develop and implement anti-corruption compliance programs that meet a set of minimum standards, including (i) designating anti-corruption compliance personnel and officers; (ii) establishing clear mechanisms for conducting internal investigations and cooperating with the police; (iii) adopting a corporate code of ethics; (iv) regularly training employees on anti-corruption compliance, business ethics, and conflicts of interest; (v) establishing a system to identify, prevent, and resolve conflicts of interest; (vi) preventing the creation and use of false and altered documents; and (vii) conducting regular risk assessments of the company and the company’s business partners. Companies doing business in Russia that do not have compliance programs that meet these requirements – or companies that do business with Russian third parties that lack compliance programs – may now be in violation of Russian law.

Russia’s new anti-bribery laws are a sign that the country’s leaders are aware of the pervasive culture of corruption and uncertainty that has driven away foreign investment and business; it remains to be seen, however, whether law enforcement officials will actually commit to fairly enforcing these laws. For example, an historical survey of FCPA cases brought by the US government that involved admissions of bribery in Russia, including significant enforcement actions against Daimler, Pfizer, Siemens, and Baker Hughes – cases that resulted in the largest FCPA fines ever – reveal that Russian authorities had not even bothered to conduct simultaneous or subsequent investigations or prosecutions of the same activity. Even more disturbing, in 2012, Russia ranked 133 out of 182 countries on Transparency International’s Corruption Perception Index, the lowest ranking of all the BRICs.

Regardless of Russia’s enforcement history, companies doing business in Russia should approach anti-bribery compliance with a serious mindset. Corruption pitfalls can potentially affect any interaction with government officials, directly by company employees or indirectly through third parties. Companies conducting business in Russia must have the proper mechanisms in place to prevent violations from occurring (including due diligence of third parties and employee training), to detect violations if and when they occur, and to respond to or remediate violations quickly and efficiently.

The FCPA, UK Bribery Act, and Article 13.3 all reward (or, in the case of Article 13.3, mandate) robust, risk-based compliance programs. In fact, the FCPA Guide (the Guide), which the DOJ and SEC published in November 2012, expressly states that the US government will give “meaningful” credit – including possible declination of prosecution entirely – to companies that have invested time and thought into creating and enforcing an effective and tailored compliance program. The Guide also includes the following 10 hallmarks of effective compliance programs: (i) a strong commitment from senior management and a clearly articulated policy against corruption; (ii) a current and effective code of conduct; (iii) oversight by a member of senior management with sufficient autonomy and resources to be effective; (iv) risk assessment and internal audit procedures; (v) continuing advice and regular training for company employees and third parties; (vi) enforced disciplinary measures and incentives for good behaviour; (vii) comprehensive, risk-based due diligence on third parties and M&A transactions; (viii) mechanisms for confidentially reporting potential violations; (ix) periodic testing and review of the compliance policy; and (x) pre-acquisition due diligence and post-acquisition integration of compliance policies during M&A deals. Not coincidentally, many of the DOJ- and SEC-recommended ‘hallmarks’ overlap with the requirements of Russia’s new Article 13.3.

In light of the new FCPA Guide and Russia’s recent legislative anti-bribery and financial market reforms, companies that choose to heed Moscow’s siren call must take the time to conduct a thorough, risk-based review of their compliance policies, and, if necessary, augment their policies to bring them in line with both US and Russian standards. Regardless of whether Russian law enforcement officials choose to flex their muscles, the DOJ and SEC are committed to FCPA enforcement in Russia and other high-risk jurisdictions. The compliance program best practices described above provide the most effective roadmap to navigate through these waters and to manage any crises that might arise.

Paul E. Pelletier is a member and Aaron M. Tidman is an associate at Mintz Levin. Mr Pelletier can be contacted on +1 (202) 434 7490 or by email: pepelletier@mintz.com. Mr Tidman can be contacted on +1 (202) 434 7392 or by email: amtidman@mintz.com.

Paul E. Pelletier and Aaron M. Tidman

Mintz Levin