Anti-corruption compliance in Russia Overview and Implementation

by Anton Kabakov Hellevig, Klein & Usov

October 27, 2014

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Criminal law

convention on

corruption ratified

Ministry of

Labor guidelines

Amendments to

Administrative Offenses

and Criminal Codes

UN Convention on

Corruption ratified

Criminal law

convention on

corruption ratified

Russian Anti-

Corruption Law

Amendments to

anti-corruption law

Ministry of

Labor guidelines

Amendments to

Administrative

Offenses and

Criminal Codes

National anti-

corruption strategy

and roadmap

2006 2008 2011-2014

• Whistleblowers protection

• Law on lobbying

• Extending application of Russian administrative liability for crimes outside Russia to foreign companies?

• Monitoring the adoption of anti-corruption measures by companies through prosecutors. Checks?

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May apply to wrongdoings committed by Russians

FCPA UK BRIBERY ACT

Applies to • US company or citizen • Any person while in the US • companies listed in the US • Officers, directors, employees,

agents, and shareholders of the above listed entities

• UK companies • Companies carrying out part of

their business in the UK

Examples HQ or subsidiary in the US, listed in the US, etc.

HQ or subsidiary in the UK, rep office or branch, UK sales agent, etc.

CASE STUDIES (May apply to Russian subsidiary misconduct)

Pfizer was prosecuted by the U.S. government for illegal payments made by its subsidiaries to foreign officials in Russia and other countries to obtain regulatory approvals, sales, and a greater number of prescriptions for its products

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CASE STUDIES (May apply to Russian subsidiary misconduct)

Daimler AG paid $185 million to the U.S. government for violation of FCPA by bribing officials in several countries, including Russia

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“Organizations must develop and take anti-corruption measures.”

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Measures Russian anti-corruption law

FCPA UKBA

Appointing responsible officers + + + (Top level commitment)

Introducing standards and procedures + + + (Top level commitment)

Code of ethics and other special policies + + + (Communication)

Preventing conflict of interest + + + (Due diligence)

Preventing false reporting + + + (Risk assessment)

Cooperating with the authorities + + + (Communication)

Whistleblowers protection + + + (Top level commitment)

Continuous improvement Implied + + (Monitoring and review)

Passing compliance tests as a condition for promotion

- - +

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Designation of responsible officers Code of ethics and other special policies Cooperation with authorities Continuous improvement

STANDARDS AND PROCEDURES

Analysis of business processes

Corruption risk assessment

Mapping corruption risks

List of possible violations Establishing preventive

procedures

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Mandatory for all companies

(Article 19 Law on Accounting)

Risk Mapping and Assessment

Subjecting risky transactions to authorization

Checking the Economic Feasibility

Monitoring of Accounting Data

External Audits

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DDs and Vetting Procedures

Reporting conflict of interest

Conflict of interest standards

Preventing Conflicts of Interest

The Supreme Commercial Court upholds that DDs and vetting procedures are preconditions for deductibility of VAT and payments made to suppliers

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Hotline, reporting procedures

Protection of whistleblowers

Investigation procedures

Disciplinary procedures and actions

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Employment Agreements

POAs and Proxies Contracts with Suppliers and Distributors

Standard Anti-Corruption Clauses

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Risks

Penalties for Companies Criminal Charges for Management

From RUB 1 million to several billion

(Article 19.28(1) Code of Administrative Offenses) “The illegal transfer, offer or promise on behalf of or for the benefit of a legal entity of money, securities or other property, the provision of services, or granting of property rights to an official manager in commercial or other company (including foreign official and officials in international organizations) for the commission of actions (inactions) associated with his/her position... "

Failure to implement anti-corruption measures could be interpreted as involvement or support of corrupt practices by company employees (?). Criminal liability for concealing corruption (Article 316 Criminal Code)

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CASE STUDY (1)

(Saratov Regional Court Decision dated 28.05.2013 Case N 7-297/13)

The court ruled as follows: "... imposition of an administrative fine of 1 million rubles with confiscation of funds in the amount of 8,000 rubles ...“ and stated that "... transferring money amounting to 8,000 rubles as a bribe ... the lawyer attempted to obtain funds in enforcement proceedings ..."

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Volgatorg:

The court ruled in favor of "... an administrative penalty in the form of a fine of 1 million rubles ...." and stated that "... The deputy store manager acting on behalf of the company... committed a crime - attempted bribery ... "

(Saratov Regional Court Decision N 7-478/13 of dated 12.09.2013)

CASE STUDY (2)

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Management to compensate penalties imposed on the company?

Risks

• Directors are to act • conscientiously (duty of loyalty) • reasonably (duty to care)

• Compensation of losses in case of violation

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Supreme Commercial Court on the liability of management bodies (Ruling No.62 dated July 30, 2013)

Risks

If a legal entity is brought to administrative liability due to unfair and/or unreasonable behavior of its director (e.g. failure to comply with legal requirement), the losses incurred by the legal entity as a result of such behavior could be recovered from the director. In cases of unfair or unreasonable performance of duties by choice and control over the actions of representatives, contractors, the director will be liable to the company for the losses incurred in such cases

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Establish real procedures

Policies and standards

How can your company protect itself?

“A legal entity is guilty of an administrative offense if it had the opportunity to comply with the rules and regulations the violation of which results in administrative liability, but it did not take all possible measures to comply with them.”

(Article 2.1(2) Code of Administrative Offenses) Take all possible measures to comply with anti-corruption regulations:

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The court ruled: "... An investigation and court proceedings should determined whether the company had an opportunity to prevent corrupt payment by an official on behalf of the company ...”

CASE STUDY (1)

(Ruling N 2360-O of the Constitutional Court of the Russian Federation dated 24.12.2012)

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The court did not impose a fine and stated: “... the facts supporting the offense ... have not been established ... [since] ... sufficient measures were taken by the company... namely ... job description was developed..."

(Supreme Commercial Court ruling N 16234/06 dated March 20, 2007)

CASE STUDY (2)

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ZAO Intrace-Avto:

The court did not impose a fine and stated: “... the Court concluded that the company was not at fault as it had taken all the necessary measures to comply with the law: adopted internal policies ...”

(Decision of Moscow Federal District Court dated July 5, 2004 in Case N KA- A40/5421-04)

CASE STUDY (3)

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RECOMMENDATIONS

Review processes to assess, map and mitigate risks Monitor effectiveness of compliance programs on a regular basis Review current anti-corruption policy and prepare the following

anti-corruption documents: Standard supplemental employment agreement Standard anti-corruption clause for agreements with clients and

suppliers Standard anti-corruption clause for power of attorney Internal control policy and procedures Whistleblowers protection

Introduce IT systems aimed at making processes transparent (automatic recording, clear authorization matrix, reporting)

Staff trainings 24

15.1.2012 25

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Anton Kabakov

Anton.Kabakov@awaragroup.com

+7 (921) 397 1193

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