Due diligence in Russia has never been simple. Two recent developments make it more complicated. One makes business more transparent. Sort of. The other makes it less transparent. Foreign companies working in Russia will place themselves at peril if they don’t pay close attention to both.
The Public Register of Bribers
The Russian General Prosecutor’s Office created a public “register” of companies that have been convicted since 2014 of violating Article 19.28 of the Code of Administrative Violations (prohibiting improper payments on behalf of, or in the interests of, legal entities). The register, which is available here, identifies, for each case, the name of the company, the court and the date of the court decision. However, it contains no information about the facts of the case, the underlying evidence, or the amount of fine.
The register is designed to help state procurement officials comply with a law that bans companies that have been convicted of bribery from participating in state tenders for two years by making all of this information easily accessible. (Although such information was previously available, collecting it required going to the individual courts.)
While the register is designed for Russian state officials, foreign companies concerned about anti-corruption due diligence would also be well advised to make sure that their local partners are not listed. If so, they should immediately attempt to obtain an explanation from the listed company of the facts and circumstances of the case, conduct public source research to obtain additional information about the matter, and evaluate the risks of continuing to work with the listed company. Failure to take such steps could be interpreted by regulators as turning a blind eye to a (now) open and notorious red flag. Even if the relationship is purely historical, they should confirm that the company has not previously committed any impropriety for their benefit. The register is, after all, available to the DOJ and SEC who will likely use it as a source of investigative leads.
Finally, the register is also useful in that it provides a clear and accessible measure of Russian enforcement trends. For example, the register reveals that in 2018, 280 companies have been prosecuted, in 2017 429 companies were prosecuted and in 2016, 349 companies were prosecuted (disproving the oft-heard claim that Russia does not prosecute corruption cases.) Analysis of the data contained in the register also highlights enforcement trends across industries and regions.
While the register makes available more information about local partners, another law simultaneously makes it harder to know with whom one is working. As a general matter, companies regulated by the Russian Central Bank must publicly disclose information about their beneficial owners, governing bodies and business activities. However, Federal Law 482-FZ, which attracted little notice when it was passed last New Year’s Eve, allows the government to exempt from this requirement the following classes of companies:
- banks and credit companies
- insurance companies and their depositaries,
- non-governmental pension funds and their managing companies
- investment funds
Based on this law, in September-November this year the Russian Government issued a series of decrees allowing insurance companies and their depositaries (Decree No. 1322 dated November 3, 2018),·non-governmental pension funds and their managing companies (Decree No. 1150 dated September 28, 2018) and managing companies of investment funds (Decree No. 1201 dated October 5, 2018) to avoid public disclosure of information about their shareholders and controlling individuals (usually treated in practice as companies and individuals who by virtue of their role in the governing body or their ownership share may exercise control or influence over company decisions) who are subject to foreign sanctions.
On November 23, the Russian Government issued two more decrees (Decrees 1404 and 1405, both dated November 23, 2018) allowing banks to avoid public disclosure of information about their controlling individuals, sole executive bodies and their deputies, board members, chief accountants and their deputies, as well as directors and chief accountants of banks’ branches who are subject to foreign sanctions. Both decrees will take effect on December 5, 2018.
In short, 482-FZ makes it all the more important to conduct thorough due diligence on Russian counter-parties and to obtain from them appropriate anti-corruption certifications as well as certifications that their UBO’s are not subject to any sanctions.
Tom Firestone, pictured above left, is a partner in the Washington, D.C. office of Baker McKenzie and co-chair of the firm’s North America Government Enforcement Practice. He previously served as Resident Legal Adviser at the U.S. Embassy in Moscow. Roman Butenko, above left, is an associate in Baker’s Moscow office and is currently on assignment in the firm’s Washington office working on FCPA issues.