RUSSIA: CORPORATE ANTI-CORRUPTION ENFORCEMENT RESEARCH REPORT

IntroductionRussian corporate anti-corruption enforcement has recently become a hot topic for many international companies operating in Russia as well as for Russian corporations with an international footprint.

The increasing interest in this area has been driven by a number of factors.

Firstly, companies now have experience implementing the anti-corruption standards of foreign anti-corruption law, especially the US Foreign Corrupt Practices Act 1977 and the UK Bribery Act 2010.

The active extra-territorial application of these laws has been effective in making companies extremely attentive to observing their requirements.

Both Russian companies and foreign companies operating in Russia have already faced significant liability under these foreign anti-corruption statutes.

Moreover, if a company is being prosecuted1. for corporate bribery in Russia, this alone creates additional risks of liability in foreign jurisdictions.

In Russia, information about corporate bribery prosecutions is for the most part publicly available. Foreign law-enforcement authorities seeking targets for enforcement actions benefit from a certain degree of transparency surrounding Russian anti-corruption cases:

• The General Prosecutor’s Office (GPO) publishes and maintains on its web-site a register of legal entities convicted for bribery.2. This register contains information about legal entities prosecuted for bribery in all Russian regions, as well as the number of the court case and date of court judgment.3.

• Court judgments are in most cases publicly released online.

2013

2014

2015

2016

2017

2018

164 convictions

242 convictions

431 convictions

430 convictions

477 convictions

471 convictions

The judgments contain more detailed information about violations committed, defenses invoked and conclusions drawn by courts.

• Russian prosecutors leading corporate anti-bribery proceedings often announce their successes on their offices’ websites. Local and sometimes even national mass media heavily publicize and amplify such messages.

As a result, companies invest considerable amounts into addressing specific regional and local risks in their compliance programs while doing business in Russia. To be effective, such systems should take into account the regional and national specifics of corruption offences. And one of the most valuable sources of information about these specifics is the practice of Russian courts on corporate bribery matters.

It should be noted that companies prosecuted for corporate bribery offences are not allowed to participate in state tenders for a certain period of time. State procurement has traditionally been a very important part of the Russian economy, and potential debarment from state tenders is a critical concern for many enterprises, as it could put the survival of their business at risk.

Annual growth of prosecutions, as per official statistics

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According to the official statistics of the Supreme Court, the number of prosecutions has steadily increased, starting in 2013, from 164 prosecutions up to 471 prosecutions in 2018. The total amount of fines imposed also grew from 228,020,000 RUB (approx. 7.1 million USD)5. to 691,050,283 RUB (approx. 10.6 million USD).6. We expect these figures to continue to grow in coming years.7.

According to the public register, there were 383 prosecutions for corporate bribery in 2018. These cases are analyzed below.8.

The overview below covers enforcement practice for 2018, since the most recent publicly available complete set of court decisions is from that year. The public register of legal entities prosecuted for bribery in 2019 is already available on

the GPO’s website, but it continues to be supplemented by new cases as these are considered. We have noticed that cases appear in the register after a certain delay, and we therefore expect that the register for 2019 will largely be published in 2020.

The total number of legal entities held liable for illegal remuneration on behalf of a legal entity whereof: the number of cases indicated in the register - 383 (81%), whereof:

Statistics of the Judicial Department at the Supreme Court of the Russian FederationThe GPO register of court cases on illegal remuneration on behalf of a legal entity for 2018

471

Cases the court decisions on which are publicly available9.

Cases with the information on them available only in mass media reports

1. In Russia, there is no criminal liability for legal entities. When a legal entity is held liable for corrupt conduct, it is subjected to administrative liability, such as administrative fines.

2. Register of legal entities held administratively liable for improper remuneration: http://genproc.gov.ru/anticor/register-of-illegal-remuneration/

3. In Russia, it is courts that decide on imposing liability on legal entities for bribery offences.

4. http://genproc.gov.ru/anticor/register–of–illegal–remuneration/

5. At then average exchange rate.6. At then average exchange rate.7. During this period the exchange rate USD/RUB changed from approx. 32 RUB/USD to 65 RUB/USD. Therefore, the dynamics in USD do not seem as impressive as in RUB. We believe that the real growth dynamic can be observed only in RUB, because the sanction for violation of Article 19.28 remained the same throughout the period and did not follow the changes in the exchange rate.

8. Details available for each case vary; therefore, the total sample size varies slightly for each issue considered in this overview.

9. In Russia, magistrate courts decide on administrative anti-corruption enforcement cases as the courts of first instance. There is no unified database for the judgments of this level and one has to search the official web-site of each court (more than 7,500 in total) in order to locate judgments issued by the court. However, for various reasons, not every court of this level has a properly maintained web-site and some of the judgments may be missing.

78.9%

10.9%

10.2%

Cases with no publicly available information

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Unlawful provision, offer or promise made in the name or in the interests of a legal

entity or in the interests of a related legal entity of monies, securities or other property, rendering services of pecuniary nature or provision of property rights to a public official, an official with management functions in a commercial or other organization, a foreign public official or an official of a public international organization (including when upon instructions of the public official, the official with management functions in a commercial or other organization, the foreign public official or the official of a public international organization monies, securities or other property are transferred, offered or promised, services of pecuniary nature rendered or property rights provided to another individual or a legal entity) for any act or omission in connection with his/her duties of office, committed by the public official, the official with management functions in a commercial or other organization, the foreign public official or the official of a public international organization in the interests of this legal entity or a related legal entity”

Overview of relevant legislation and enforcement trendsArticle 19.28 of the Code of Administrative Offenses (“Article 19.28”) provides for very broad grounds for liability of legal entities for bribery offences. It prohibits the mere offer or promise of a bribe by a person acting in the name or in the interests of a legal entity.Citation - Article 19.28 prohibits:10.

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Liability under Article 19.28 could reach 100 times the amount of a bribe.

In a series of cases, Russian courts prosecuted companies under Article 19.28 even when the briber had only a very distant connection with the accused company. We have seen cases where legal entities were found liable for the acts of people with very remote links to the entity itself: company A can be held liable for bribery committed by an employee of company B, if the court considers that this person was acting in the interests (or in the name) of company A, whether by virtue of a contract between these companies or otherwise.

In our opinion, an enhanced internal compliance program can serve as a company’s most promising line of defense.

According to Article 2.1 of the Russian Code of Administrative Offenses (“Administrative Code”), a legal entity can be found guilty of committing an offense only where it had an opportunity to comply with the law but failed to take all possible steps to avoid the violation. In our opinion, in invoking this defense, a company should be prepared to demonstrate that it has in place an effective and robust corporate compliance program, which would prove that the company took all possible measures

to prevent the bribery with which it is being charged.

Article 13.3 of Federal Law No. 273 “On Combatting Corruption” contains a list of measures that all legal entities are required to implement in order to prevent bribery.

These measures may include (but are not limited to):

1) designating departments and structural units and officers who will be responsible for the prevention of bribery and related offenses;

2) cooperating with law enforcement authorities;

3) developing and implementing standards and procedures designed to ensure ethical business conduct;

4) adopting a code of ethics and professional conduct for all employees;

5) means for identifying, preventing and resolving conflicts of interest; and

6) preventing the creation and use of false and altered documents

The Russian Ministry of Labor and Social Protection has prepared and published a series of documents of an advisory nature on anti-corruption matters, including

recommendations on measures for the prevention of corruption by organizations. These advisory documents contain the ministry’s overview of the standards applicable to corporate compliance programs, based on Russian, international and foreign experience, as well as practical recommendations on the introduction of corporate compliance programs.

Unfortunately, very often the courts fail to take note of corporate compliance programs when prosecuting companies under Article 19.28.

While the overall legal framework provides an effective legal environment to prosecute major corporate bribery, recent enforcement efforts have concentrated mostly on petty corruption.

In the absence of major anti-bribery prosecutions, court practice on Article 19.28 is not uniform or settled and is sometimes characterized by unpredictable decisions and questionable analysis.

We have nevertheless been able to identify certain interesting trends, a description of which we set forth below.

10. Unofficial translation from Russian.

5

85.4%

Criminal prosecution

was launched

Criminal prosecution was

not launched

14.6%

Actual bribery

Offer or promise of a bribe

94.4%

5.6%

17.8%

82.2%

Initiation of proceedingsProceedings for the enforcement of Article 19.28 are initiated by the prosecutor’s office, and jurisdiction over the case is usually determined on a territorial basis.

In most cases, prosecutors obtain information about potential offenses from criminal case materials. In other words, Russian prosecutors use their discretion and powers to identify and pursue corporate bribery cases and collect evidence only in approximately 15% of cases.

This is predictable, as Russian prosecutors oversee criminal investigations, and once their investigators make out cases on bribery, fraud or other economic crimes against individuals, they are able to identify violations of Article 19.28 in those case materials without investing much additional effort. Associated criminal prosecutions of individuals are by far the most frequent trigger of Article 19.28 prosecutions, and

Notably, Russian government officials have been officially instructed to report offers of a bribe to a competent prosecutor:

“A government or municipal servant is obliged to notify a representative of the

employer, prosecutor’s office or other state authorities about any instances where he /

companies should be mindful of this, especially when considering whether to report suspected wrongdoing uncovered internally to law enforcement authorities.

However, in some cases there are no grounds to initiate a criminal case, e.g. when there is only an offer or a promise of a bribe (12% of all cases).

she was approached by someone with the intent to convince him / her to commit a corruption offence.”11.

Certain court decisions indicate that government officials who receive bribe offers and report them to prosecutors may be asked to meet once again with the offer or wearing a recording device for

investigation purposes. However, in some cases the only evidence that the offer was made was the testimony of the relevant government official.

No information Available information

Criminal vs. non-criminal cases Criminal proceedings (% out of 82.2%)

Offer vs. actual bribery

12.5%

87.5%

No information Available information

Offer v. actual bribery (% out of 87.5%)

11. Clause 1 Article 9 of the Federal Law dated 25 December 2008 No. 273-FZ “On Combatting Corruption”.

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30.3%

69.7%

No information Available information

Bribes and bribe-takersIn a majority of cases, legal entities are prosecuted for bribes of relatively insignificant amounts. Bribes exceed 1,000,000 RUB (16,000 USD) in less than 6% of the cases reviewed.

2.2%3.4%

19.5%

10.5%

24.7%

39.7%

RUB 500 – RUB 3 000

Between RUB 100 000 and RUB 200 000

Between RUB 3 000 and RUB 100 000

Between RUB 200 000 and RUB 1 000 000

Between RUB 1 000 000 and RUB 2 000 000

Between RUB 2 500 000 and RUB 11 019 049

Bribe amountsBribe amounts (% out of 69.7.%)

This corresponds to the criminal case statistics of the Supreme Court, according to which over 50% of bribery convictions were for minor bribery, i.e. where the amount of the bribe was less than 10,000 RUB (approx. 150 USD).12. Given the overall trend, the percentage of smaller bribes would be likely to increase if we were able to take into account the additional cases

where we did not manage to find any public information.

With these smaller bribes, very often bribe-givers seek to obtain minor and occasional considerations from the bribe-takers, such as permission for operation of an overloaded truck, acceleration of unloading of railcars, or refusal to impose fines for other minor administrative offences.

In 6% of the cases reviewed, bribes were given in non-monetary form, including office equipment, dinner at a restaurant, gasoline, a cake, office supplies, etc.

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12.8%

87.2%

No information Available information

Most common bribe-takers

State procurement

Private bribery

Police

21.3% 14% 14% 8.7%

Governmental bodies

of Russian regions

Leading bribe-takers (% out of 87.2 %)

21.3%

14.9%

12.8%

8.5%

8.5%

Hospitals, medical workers (3% out of all available cases)

Governmental instrumentalities

(2.2 % out of all available cases)

Ministry of Defense (1.8% out of all available cases)

Federal Service for Execution of Punishment

(1.2 % out of all available cases)

Educational and research institutions

(1.2 % out of all available cases)

State procurement - 14% of them:

Most often, companies faced charges for illegal payments to police officers.13.

Among the other most frequent recipients of illegal payments are officials

of various government authorities acting in their capacities as decision-makers in state procurement and recipients of private bribery.

Regional officials and employees of the Federal Bailiff Service and Russian Railways were also frequently identified as recipients of illegal payments.

In 2018, there were no cases involving bribery of foreign officials or other offences committed abroad. In our practice, we have not seen such cases in previous years either.

12. http://www.cdep.ru/index.php?id=15013. The RF Investigative Committee came to this conclusion. See https://www.interfax.ru/russia/641447.

6.6% 6.6%

Federal Bailiff Service

Russian Railways

9

72.1%

27.9%

No information Available information

Industrial split

Industries affectedThe sectoral split reflects the fact that the risks of prosecution for corporate bribery in Russia are more or less equally spread across various industries, with logistics and construction being slightly ahead of others.

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3.1%Agriculture

5.8%Alcohol

16.3%Construction

10.1%Trade

5.4%Healthcare / life science

2.9%Industrial safety

certification

11.2%Logistics / customs

1.1%IT / Telecom

Woodwork industry

5.4%

2.2%Light Industry

2.2%FMCG

0.7%Military

23.6%Services

2.5%Energy / mining

5.8%Heavy Industry

Regional SplitLeading Russian and foreign companies are active in the Russian regions. The infographic below illustrates the risks of being charged under Article 19.28 in different regions.

14. A Federal District is comprised of a group of neighboring regions. There are a total of eight Federal Districts.

Moscow(36 Cases)

Bashkiria and the Saratov Region (17 cases each)

Republic of Komi(14 Cases)

Leader regions in corporate anti-corruption enforcement

Number of regions with no corporate anti-corruption enforcement illegal remuneration cases at all (11.2 % of all regions)

11 Leading Federal District14. in corporate anti-corruption enforcement (24% of the total number of cases)

Privolzhsky Federal District

Federal District with the smallest number of cases (4.7% of the total number of cases)

North Caucasus Federal District

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23.2%

76.8%

No information Available information

Statistics re courts’ approach to establishing guilt

Courts’ approach to establishing guilt (% out of 76.8 %)

No examination of guilt

The company did not take all possible measures to

prevent the wrongdoing

Citation of Art. 2.1

Among the cases where the issue of guilt was addressed by the court, the most common approach was to limit analysis of the guilt issue to a mere citation of Article 2.1 of the Administrative Code (26.9% of 302 available cases). Quite often, the courts also indicate that the company did not take all possible measures to prevent wrongdoing (17% of 302 available cases). These two groups of cases reflect the same approach of the courts, which implies a very formal yet superficial review of cases..

Even where the court seemed to conclude that a defendant company did not take all possible measures, the courts did not list the measures taken by the company and

But did Russian courts think this way in 2018?To date, Russian courts have not developed a unified approach for determining guilt in Article 19.28 cases.

In the majority of cases (57%), the courts do not assess the issue of the company’s fault. This could be explained by the fact that in most of these cases, the companies admitted guilt, which made legal analysis of this issue unnecessary. To some extent, it could also be explained by the overall low quality of judgments issued by Russian magistrate courts.

did not indicate additional measures that could have been taken by the company.

In 40 cases (13.2% of available cases), courts concluded that the offence occurred because the companies failed to take preventive measures and that if the companies had managed to properly take such measures, no offence would have occurred. In one of the cases, a court located in Moscow admitted that the company took anti-corruption measures to prevent the offence, but concluded that they had no value in determining the guilt of the company. In these cases, the courts imposed strict liability on the companies, which is prohibited by Russian administrative legislation.

Available DefensesAs noted above, we believe that the most promising defense available to a company in an Article 19.28 case is a robust corporate compliance program, which should prove the absence of guilt and release the company from liability.

57%

26.9%

17%

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We believe that the statistics on this issue are quite concerning, as the trend we have identified may lead to the establishment of a body of court practice which tends to devalue corporate compliance programs from the standpoint of Russian legislation and law enforcement. This is certainly not what the legislator intended, and some legislative amendments or explanations of the Supreme Court may be required to reverse the trend.

We believe there are several reasons for these developments:

Firstly, it is very likely that most of the companies convicted under Article 19.28 do not have corporate compliance programs and do not advance this argument in court. Instead, they try to argue that the bribe-giver was not authorized to act in the name or on behalf of the company or was acting in his or her own interests, rather than in the interests of the company. Notably, we did not identify even one case among the 302 we reviewed from 2018 in which such arguments led to a company’s avoiding liability or even reducing the penalty imposed.

Secondly, in Russian administrative proceedings, the courts very often tend to agree with prosecutors, unless the prosecutors’ position is obviously unreasonable and unfounded.

The prosecutors, in turn, are driven by the incentives built into their performance evaluation system to improve their statistics on prosecution and collection of fines for the state budget. Moreover (and this especially applies to some regional magistrate courts and prosecutors), sometimes courts and prosecutors lack proper training on the application of Article 19.28 and may therefore apply it arbitrarily.

Thirdly, an administrative judgment issued in favor of the government in the lower courts, in general, has low chances of being overturned by the higher courts, including the Supreme Court.

In light of the above, even the presence of a robust and well-documented compliance program might not allow companies to avoid liability under Article 19.28. In these circumstances, companies should seek to have the court include in its judgment a

detailed description and assessment of the compliance measures taken by the company. The presence of a corporate compliance program that has been established and evaluated by a court should have more evidential weight in other proceedings. For instance, this might be a decisive factor in the decision of foreign law enforcement agencies on whether to investigate a company on the basis of charges in Russia.

Thus, ensuring that the court thoroughly examines the company’s anti-corruption program should be the minimum goal for companies facing charges under Article 19.28 and concerned about negative consequences in other countries.

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Below RUB 300 000

RUB 500 000

Between RUB 520 000 and RUB 700 000

RUB 1 000 000

Between RUB 1 100 000 and RUB 2 000 000

RUB 10 000 000

RUB 20 000 000

1.2%

47.5%

2.1%

42%

1%

2.8%

3.4%

Amount of an administrative fine

14.9%

85.1%

No information Available information

Statistics re fines

FinesAs indicated above, the majority of bribes in Article 19.28 cases are less than 1,000,000 RUB. This limits the fines that could be imposed to a range of 1,000,000 to 20,000,000 RUB.

In most cases, the courts impose minimal fines – in some cases even below the statutory minimum, based on certain mitigating circumstances.

Courts decreased fines below the statutory minimum in 170 cases (52.1% of the total number of 326 cases where this information is available). In most cases, this decrease was formally justified by the difficult financial situation of the legal entity.

However, this seems to be only a formal rationale applied by the court to justify its decision. We observe that very often the courts tend to decrease the fines in cases where companies admitted guilt.

This is likely the result of some sort of compromise between the prosecutor, the court and the company, whereby the company admits guilt and simplifies the resolution of the case for the prosecutor

and the court, while the prosecutor does not object to decreasing the fine below the statutory minimum and the court grants the decrease.

Courts only very rarely agreed to decrease the fine below the statutory minimum if the company did not admit its guilt. According to our calculations, in 2018 this happened only in 73 cases out of 170.

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Commitment of the offence for the first time

Of cases the penalty was decreased below minimum on the following grounds (in some cases the fine was decreased by several grounds)

Statistics re decrease below minimal

81.2%

Difficult financial situation of a legal entity

Due to proportionality and good faith principle

We observed no cases in 2018 where the court agreed to decrease the fine below the statutory minimum based on anti-corruption measures implemented by the company. However, we have seen cases like this in our practice in previous years.

No information on the descent

Available information

18.8%

81.2%

Admission of guilt

No admission of guilt

52.9%

Among 170 cases: Among 81.2 % of cases where the penalty was decreased below minimum

Cases where the penalty was decreased below minimum (52.1% of total number of 326 cases where this information is available)

170

52.1%

47.1%

42.8%

2.2%

2.2%

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ConclusionIn our effort to identify cohesive trends in Russian court practice on prosecution of corporate bribery, one trend of sorts which stands out is a certain deficit of cohesiveness and consistency in the battle with corporate corruption. In our opinion, this is a temporary situation, typical at the introduction of a new legal concept.

Discrepancies in the approaches of legislative regulation and law enforcement practice create their own uncertainty. Amidst many other concerns, this can cause companies to insufficiently prioritize the introduction and enforcement of corporate compliance programs.

We believe that in the current uncertain environment, neglecting the corporate compliance program creates considerable additional risks for companies, both in Russia and abroad.

Experience shows the benefits of a proactive approach, in which companies seek to not simply meet current legal

requirements but to develop and introduce standards exceeding the demands of the law.

We would also note the importance of charting a steady course in developing compliance standards for a company’s brand and reputational value and, as a separate matter, for a company’s potential valuation. Many stock exchanges now require listed companies to disclose information about their compliance programs, and investors are increasingly taking note of this information. This means that developing a world-class compliance program, or at least taking a first step in

that direction, is a worthwhile investment not only in doing the right thing, but also in anticipating trends in local enforcement and – perhaps most importantly – in increasing shareholder value.

We hope that this overview will be useful for companies when they consider making the investment to introduce or improve compliance standards and controls.

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Paul MellingPartner,Moscow+7 495 7872740Paul.Melling@bakermckenzie.com

Contacts

Edward BekeschenkoPartner,Moscow+7 495 7872717Ed.Bekeschenko@bakermckenzie.com

Roman ButenkoAssociate,Moscow+7 495 7872700Roman.Butenko@bakermckenzie.com

Contacts for Russia

Thomas FirestonePartner,Washington, DC+1 202 835 6126Thomas.Firestone@bakermckenzie.com

Lyndon K AllinAssociate,Washington, DC+1 202 835 6167Lyndon.Allin@bakermckenzie.com

Contacts for US

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