Special Challenges of Doing Business in Russia

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Special Challenges of Doing Business in Russia

October 22, 2014

Chelsie Chmela

Events Manager

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SPEAKING TODAY

Richard DeanPartner, Baker & McKenzie, Washington, DC

Tom FirestoneSenior Counsel, Baker & McKenzie, London

Jonathan NelmsPartner, Baker & McKenzie, Washington, DC

Edward BekeschenkoPartner, Baker & McKenzie, Moscow

Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.© 2014 Baker & McKenzie LLP

Special Challenges of Doing Business in Russia

An Ethisphere webinar, October 22, 2014

Presented by:

Richard Dean, Partner, Baker & McKenzie, Washington, DC

Tom Firestone, Senior Counsel, Baker & McKenzie, London

Jonathan Nelms, Partner, Baker & McKenzie, Washington, DC

Edward Bekeschenko, Partner, Baker & McKenzie, Moscow

© 2014 Baker & McKenzie LLP 6

Agenda

‒ Russia today – Angst in the air, gloom on the ground?

‒ U.S. sanctions and their implications for your business

‒ Recent anti-corruption cases

‒ Domestic legal developments

‒ Managing the (increasing) challenges and risks of working in Russia


Current situation in Russia

‒ U.S. business community braces for tougher times.

‒ Ambivalence about expanding (or continuing?) in Russia But some bargain-hunters remain.

‒ Some companies affected more than others.

‒ Wait and see: Most holding on and complying with the sanctions, but new expansion and investments in decline.

‒ Representatives of Russian business community emphasize readiness to continue doing business with the West.

‒ Economic indicators show worsening domestic economic situation. But support for the government is increasing.

‒ Resolution of conflict/lifting of sanctions does not appear likely in near term.


Overview of U.S. Sanctions

‒ March 2014 – U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) imposes first sanctions on Russian and Ukrainian individuals and entities (“SDNs”) perceived to be behind the unrest

‒ OFAC treats entities 50% or more owned by SDNs to be SDNs (“Deemed SDNs”)

‒ U.S. Persons are prohibited from dealing directly or indirectly with SDNs or Deemed SDNs. U.S. Persons include:

(i) entities organized under U.S. laws and their non-U.S. branches (ii) individuals and entities located in the United States (iii) U.S. citizens and permanent residents, wherever located or employed

Separately incorporated foreign subsidiaries of U.S. companies are not U.S. Persons under these sanctions


Overview of U.S. Sanctions (cont’d)

‒ “Sectoral” sanctions prohibit U.S. Persons from certain dealings with individuals and companies in certain sensitive sectors of the Russian economy (finance, energy, defense) Directive 1 – Transactions in, financing for, and other dealings in debt over

30 days of certain banks (currently 6 banks) Directive 2 – Transactions in, financing for, and other dealings in debt over

90 days of certain energy-sector players (4 parties) Directive 3 – Transactions in, financing for, and other dealings in debt over

30 days of certain defense-sector players (Rostec only) Directive 4 – Providing, exporting, or reexporting U.S. or non-U.S. goods,

most services, or technology to Russia to support deep-water, Arctic, or shale oil projects (5 parties)


Overview of new/expanded U.S. export controls

‒ Energy sector controls Five companies (same as Dir. 4 above) named to EAR

Entity List Requires specific license from BIS to export, reexport, or

transfer any item subject to EAR (including EAR99) if item will be used by listed company in certain oil and gas exploration and production

‒ Defense sector controls Five companies named to Entity List (similar license rules) Additional licensing requirements apply to exports, reexports,

or transfers of certain products to certain military end-uses/end-users in Russia


Russian reaction to U.S. sanctions

‒ Russia prohibits imports of agricultural and food products from EU, U.S., Canada, Australia and Norway, effective for one year

‒ McDonald’s restaurants closed, ostensibly for sanitary violations, in Moscow and beyond (Up to 20 reportedly closed to date; McDonald’s reports over 200 under review)

‒ Anti-money laundering investigation by Russian prosecutors of Ronald McDonald House (charity arm of McDonald’s)

‒ Jim Beam and Jack Daniels imports blocked

‒ Russia looks East


Russian reaction to U.S. sanctions (cont’d)

‒ “Rotenberg law” Would allow Russian individuals and businesses who suffer

from an “unlawful court act” of a foreign government to appeal for compensation in Russia, ultimately by seizing foreign assets, even those covered by immunity such as diplomatic real estate

‒ Federal Antimonopoly Service (FAS) has stated publicly that they will not pursue “abuse of dominant position” cases against companies complying with U.S. sanctions Compare to earlier FAS positions on FCPA compliance


Russian reaction to U.S. sanctions (cont’d)

Implications for FCPA/other criminal investigations‒Reduced information sharing between Russian and U.S. law enforcement?

‒Credibility of Russian law enforcement as factor in DOJ/SEC decision-making on cases originating in Russia?

‒Pending legislation requiring personal data of Russian citizens to be stored in Russia – implications for internal investigations and audits


Recent FCPA cases involving Russia

Hewlett-Packard

‒September 2014 – Hewlett-Packard’s Russian subsidiary (ZAO Hewlett-Packard A.O.) pleads guilty to conspiracy and substantive violations of the anti-bribery and accounting provisions of the FCPA and will pay fine of $58M

HP’s Russian subsidiaries made improper payments to government officials to obtain or retain lucrative public contracts (Office of the Prosecutor General of the Russian Federation)

HP Russia created excess profit margins and a slush fund through an elaborate buy-back deal structure, whereby (1) HP sold the computer hardware and other products to a Russian channel partner, (2) HP bought the products back from an intermediary and paid a commission for purported services, and (3) HP sold the products to the federal prosecutor’s office at the increased price

Hewlett-Packard collectively will pay more than $108M to DOJ and SEC for issues arising out of Mexico and Poland in addition to Russia


Recent FCPA cases involving Russia (cont’d)

Diebold

‒October 2013: Diebold settles with DOJ and SEC‒From 2005 to 2008, Diebold’s Russian subsidiary paid approximately $1.2M in bribes in connection with the sale of ATMs to private banks in Russia. The bribes were funneled through a distributor in Russia using phony service contracts to hide and falsely record the payments as legitimate business expenses

‒Diebold falsified books and records to hide approximately $1.2M of bribes paid to employees at privately owned banks in Russia

‒Diebold agreed to pay $22.9M in disgorgement and prejudgment interest and appoint an independent compliance monitor in order to settle the SEC’s charges

‒Diebold agreed to pay an additional $25.2M fine in the parallel criminal proceeding initiated by DOJ

• .


Recent FCPA cases involving Russia (cont’d)

‒ May 2014 – SEC reports investigation of possible violations of the FCPA by Key Energy Services in Russia The Houston-based company’s wholly-owned subsidiary,

Geostream, provides oil and gas drilling, work over and reservoir engineering services in Russia

Key Energy also has operations in Mexico, Colombia, Ecuador, and the Middle East, and a technology development and control systems business based in Canada


Special challenges and risks of working in Russia

‒ Corruption at all levels of government

‒ Hidden/indirect/offshore ownership of companies masking government ownership, providing cover for tax evasion and now SDNs

‒ Offshore payment/purchase schemes

‒ Tender manipulation/procurement fraud

‒ Sham intermediaries used for fraud, commercial and official bribery, tax evasion, tender manipulation, avoidance of mandatory mark-up rules (pharma industry), and more

‒ Sham service agreements as means of paying bribes


Legal developments in Russia

‒ Key anti-corruption amendments to Criminal Code and Code of Administrative offences of the Russian Federation, 2011 including criminalization of foreign bribery and increased penalties for both domestic and foreign bribery

‒ April 2012 – Accession to OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions

‒ January 2013 – Article 13.3 of Basic Law on Combatting Corruption requires companies to establish compliance programs

‒ Limited enforcement so far, but some indication that prosecutors and courts will accept compliance as a defense


Legal developments in Russia (cont’d)

‒ January 2013 – Amendments to Russian Federal Law № 273 “On Combating Corruption” Establishes the background check on the legality of the sources of

income of the applicants for the government positions Establishes prohibition on buying real estate and holding bank accounts

in foreign nations for government officials, their spouses and children

‒ July 2013 – Resolution No. 24 of the Supreme Court of the Russian Federation Provides local courts with interpretation of the law “On Combating

Corruption,” provides guidelines and best practices when trying government official charged with bribery


Legal developments in Russia (cont’d)

‒ Deoffshorization campaign – goals, current status

‒ Introduction of the requirement for government officials to declare property and other valuable assets owned by government officials (including assets located abroad)

‒ Consideration of introduction a new law on confiscation, from government officials and from the members of their families, of assets received as a result of corruption activities

‒ Russia’s State Duma is considering a bill to protect whistleblowers who report corruption by state officials to police or the media

‒ Russian Prime Minister orders annual anti-corruption check-ups for biggest state-owned banks (Sberbank and VTB Group)


Domestic (Russian) anti-corruption enforcement

‒ Approx. 200 cases brought under anticorruption laws since 2011 Typical offenses are bribes to health inspectors, providers of permits Largest fine was RUR 60M (then about US$ 2M) for bribes to get

building permits to construct a shopping mall

‒ Does the political situation suggest that there will be more, or fewer, domestic corruption prosecutions? Russian leadership committed to anti-corruption developments but distracted

by foreign policy Putin supports bill that would compel Russian citizens to pay taxes on profits

generated/held offshore Annual anti-corruption check-up for state owned enterprises Government considering leniency for companies that self-report under 19.28

© 2014 Baker & McKenzie LLP

“Russian Morgan-Stanley” Defense

‒ A legal entity can be held administratively liable for bribes paid on its behalf only if it failed to take all measures within its powers to prevent this violation.

‒ One court recently declined to hold a company liable for the acts of an employee caught offering a bribe to a public official.

The court came to this conclusion after reviewing the company’s extensive compliance measures, stating that a public prosecutor’s position that the company must be held liable despite these measures is contrary to law.

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Managing corruption and sanctions risks

‒ Overlap between sanctions and compliance due diligence

‒ Most important is to know your counterparties (new and existing): Identity of owners (direct and indirect), officers, other key persons

to identify government officials, SDNs, conflicts of interest Qualifications to do business Reputation for integrity Compliance policies and procedures (required under Russian law)

‒ Screen current customer and supplier databases, and any new partners, against denied-party lists (SDNs and more)

‒ Conflicts of Law: “Russian Morgan Stanley” vs. Novo Nordisk

© 2014 Baker & McKenzie LLP

Due Diligence: balancing Russian and U.S. law

‒ Russian anti-trust regulator (FAS) continues to be hostile to “refusals to deal” based on compliance measures, claiming that “dominant” companies may reject partners for corruption concerns only where there is a criminal conviction

‒ FAS recently held a company liable for refusing to contract with a reseller suspected in bid-rigging of several public tenders because there were no “decisions of competent state bodies” to confirm the suspicion

The reseller’s background check revealed that technical specifications for the tenders, which the reseller won at the maximum price, were prepared by its general director (electronic documents posted on official public procurement website)

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Managing corruption and sanctions risks (cont’d)

‒ Contractual protections Anti-corruption representation and warranties Clear description of service-provider’s duties and deliverables Clear indication of timing of services, deliverables, and payment Indemnification Audit rights Termination rights Suspension clauses Specified legitimate means of payment (wire transfer from local bank account in

counterparty’s name) Right to approve subcontractors, assignment, other third-parties involved into the

transaction



‒ Financial controls Verify that parties have been cleared through appropriate due diligence –

compliance and sanctions screening – before entering into accounting system Pay only against invoice clearly specifying services rendered in detail with

appropriate supporting documentation Empower Finance team to question requests for payment and supporting

documentation Limit and track cash usage Ensure payments go to bank accounts specified in the agreement



‒ Compliance training

Train in-person if possible and in local language Train upon onboarding and periodically thereafter Focus on practical situations encountered by the business Position-specific training that focuses on position-specific risks

(finance, sales, marketing) Format – interaction/discussion, not a lecture Compliance training should be reinforced at company meetings

and events Leadership support essential Document training (keep copy of materials, sign-in sheets,

certification of understanding)


Thank you!

Any questions?


Follow ongoing developments in global anti-corruption trends and the Russia sanctions at:

‒ Baker & McKenzie FCPA Newsletter http://www.bakermckenzie.com/insidethefcpa/

‒ Baker & McKenzie Sanctions Blog http://www.bakermckenzie.com/sanctionsnews/

http://www.bakermckenzie.com/insidethefcpa/

http://www.bakermckenzie.com/sanctionsnews/


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Special Challenges of Doing Business in Russia

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Transcript of Special Challenges of Doing Business in Russia