Thursday, June 9, 2011

FCPA Compliance in Russia: Watch Out



In keeping with my Russian heritage, I wanted to dedicate this blog entry to my Russian roots.  Not that anyone in my family was corrupt.

Russia is the new China – economic opportunities abound and companies are rushing to enter into the Russian market. And for good reason. Income in Russia is expected to increase by 60 percent in the next four years Russia has great potential for consumer products, manufacturing, and traditional industries beyond minerals and other heavy industry. Companies are now entering Russia, or acquiring Russian companies.

Like China with its real dangers of corruption, Russia poses significant anti-corruption risks. Transparency International has ranked Russia on the Corruption Perception Index at number 154 out of 178 countries. Compounding the difficulties in Russia is the presence of organized crime. All of this is to underscore the importance of anti-corruption compliance.

There are several significant pitfalls when conducting business in Russia. These are not exhaustive but only a few examples of issues which are likely to come up.

1. Investigating potential government connections of businesses. Companies have a difficult time determining potential government affiliations. For example, in one case, there were 63 affiliated companies with a potential JV partner company. Unraveling the puzzle was difficult but necessary to ensure that a government official or government business does not control the downstream company. Due diligence is more than an art. In Russia it is a painstaking, but critical, process.

2. Government regulatory interactions and inspections. Russian government officials are notorious for demanding bribes. Customs officials and many government operations require bribes in order to provide government functions. Consider for example customs officials who inspect food imports into Russia and require regular bribes in order to permit perishable foods to cross the border. Unreasonable customs delays can increase the risk of spoilage and companies may decide to make corrupt payments to satisfy customs officials..

Government inspections are another risks for corruption. Russia has contradictory rules and regulations, and special decrees issued in the days of the Soviet Union, and now recent Federal laws. The complexities of such regulations and laws enable government officials to seek bribes to avoid delays and penalties.

3. Gifts and gratuities are an essential part of business relationships. Providing gifts or gratuities is part of Russian culture and it is common business practice. In fact, the Russian Civil Code specifically allows simple gifts to government officials. In Russia, small gifts of flowers for women and bottles of alcohol for men are common and can add up to significant payments over the course of a year.

These are just some of the potential risk areas. There are many more significant areas of concern, including sales to government officials, joint ventures and mergers and acquisitions.  Books can be written about these risks, and given the long-winded tradition of Russian literature, books may be required to discuss these potential risks.

Russia is a land of economic opportunity. But it requires careful planning, dedication to a real compliance program and continuous monitoring.

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