Russia’s political structure is described as “kleptocratic”. A good example of the kleptocracy is the 2014 Sochi Olympics: due to corruption in the government, costs have already skyrocketed from the initially announced US$8.5 billion up to US$35 billion – more than the combined cost of the previous four Winter Olympic Games. According to a study conducted by a human-rights association in 2009 and 2010, the volume of bribes in Russia amount to 50 percent of its gross domestic product.
FCPA violation cases in Russia
Eli Lilly and Company
In 2012, the United States Securities and Exchange Commission charged Eli Lilly and Company for improper payments that its subsidiaries made to foreign government officials to win business in Russia, Brazil, China and Poland. Lilly agreed to pay more than US$29 million to settle the charges.
Eli Lilly and Company’s Russian subsidiary used offshore “marketing agreements” to pay millions of dollars to third parties chosen by government customers or distributors, despite knowing little or nothing about the third parties beyond their offshore address and bank account information. These offshore entities rarely provided any services, and in some instances were used to funnel money to government officials in order to obtain business for the subsidiary. Transactions with offshore or government-affiliated entities did not receive specialised or closer review for possible FCPA violations, paperwork was accepted at face value and little was done to assess whether the terms or circumstances surrounding a transaction suggested the possibility of foreign bribery.
Pfizer HCP Corporation
In 2012, Pfizer HCP Corporation was charged by the United States Department of Justice (DOJ) after employees at Pfizer HCP and Pfizer Inc.'s Russian subsidiary made and authorised payments of cash and other things of value to government officials (including doctors employed by state-owned hospitals) for the purpose of improperly influencing their decisions regarding regulatory and formulary approvals, purchase decisions, prescription decisions, and customs clearance.
Pfizer Russia employees used conference attendance and travel as a corrupt incentive for healthcare providers to prescribe or purchase Pfizer products. Pfizer Russia employees also used purported sales initiatives to make corrupt payments.
Funds for these payments were often generated by Pfizer employees through the use fraudulent invoices created by collusive vendors. The payments were falsely recorded in Pfizer's books and records as travel and entertainment, convention and trade meetings and conferences, distribution freight, clinical grants and trials, gifts, and non-consultant professional services.
Pfizer HCP entered into a two-year deferred prosecution agreement, with a potential one-year extension. Pfizer HCP agreed to pay a fine of US$15 million – 34 percent less than the recommended fine range due to Pfizer's voluntary disclosure, “extensive” cooperation in both this matter and the DOJ's investigation into other misconduct in the industry, and “extraordinary and on-going” remediation.
Russia’s foreign relations with Europe and the United States are plagued by mistrust and mutual accusations. Meanwhile, the government continues supporting its long-time allies – such as Venezuela, Syria and Iran – which also affects the image of Russian businesses.
Another worrying issue of the Russian regime is the speedy and unexpected passing of over a dozen major laws and amendments restricting freedom of public assembly, freedom of speech and freedom of expression (including censorship of the internet). The new laws – all passed within the last year – also target non-government organisations (NGOs) and redefine “treason” to outlaw cooperation with foreign-funded NGOs.
With this political and economic background, there are some major compliance risks businesses should be aware of in Russia.
1. Corruption and bribery as part of the business environment
- Kickbacks, bribes, gifts and courtesies, both in business and in private life, are a norm in Russia. Businesses routinely establish informal relations with tax and customs officials, among others. Managers in private companies are also known to demand favours from suppliers.
- Large foreign companies often face entry barriers in the Russian market. One form of such barrier is the extortion of bribes, paid directly to officials or as voluntary charity contributions. There are examples of this occurring as far back as 2004, when the opening of the first IKEA store in Moscow was postponed by local authorities until the Swedish furniture retailer agreed to donate US$1 million to develop Moscow’s sports infrastructure. Other IKEA stores in Russia also faced delays in opening due to absurd, often last-minute demands. According to the Russian chapter of Transparency International, such cases are very common, although they rarely become publicly known.
- One of the most corrupt sectors of the Russian economy is public procurement. According to a recent government estimate (presumed to be conservative), improper public tenders cause a loss of over US$30 billion in public funds annually. The winner of a tender is likely to be known in advance, and the terms of bidding are often specified so as to bar any possible competitors. Officials have even reportedly resorted to creative tactics, such as replacing Cyrillic letters with similarly-looking Latin letters in requests for tenders to prevent potential bidders from finding them on a bidding website.
2. Government involvement in business
- It is common for politicians or their families to run a business, sometimes owned through a nominee or an offshore company.
- The government holds large stakes in some of the biggest Russian companies, which means these companies often enjoy preferential treatment. In the past few years several private corporations were effectively nationalised. Some experts identify a trend of de-privatisation in Russia.
- Business regulations are complex and hard to comply with, forcing companies to resort to bribery. Obscure regulations are being used against companies to extort payments or shut them down.
3. Inefficient regulations
- Lack of judicial independence is one of the most severe problems of the Russian regime. Most foreign companies doing business in Russia resort to international justice to avoid the Russian judiciary, as the judiciary is perceived to be corrupt after a number of high-profile cases, some politically motivated (including those against oil giant Yukos and a foreign-owned investment fund Hermitage Capital). Barely half of foreign arbitration awards are enforced in Russia.
- Russian anti-corruption regulations are ineffective and are rarely enforced. Despite President Vladimir Putin’s and former president Dmitry Medvedev’s vows to tackle corruption, Russia ranked only 133rd in Transparency International’s Corruption Perception Index – on par with Guyana, Honduras, Iran and Kazakhstan.
- The Russian opposition, who are desperate for justice in their country, regularly turn to governments, courts and NGOs in the United States and Europe, particularly to ensure that United States companies and citizens dealing with Russia are held accountable under the FCPA. The opposition also lobbied for the Magnitsky Act (enacted last December), which denies dozens of Russian officials entry into the United States and freezes their assets.
- Illegal corporate raids involving forced takeover of private companies are frequent in Russia. Governmental officials were reported to ignore or even take part in them. In 2008, the Russian Ministry of Internal Affairs recorded over 3000 claims of illegal corporate raids.
4. Human rights
- Migrant workers in Russia are heavily exploited, working in unsafe conditions and having their wages withheld. Some are trafficked and forcefully held by employers, particularly in the construction and agriculture industries, therefore outsourcing jobs to Russian agencies may be risky and a due diligence procedure is recommended.
Russia is a complicated mix of opportunities and risks. Upon deciding to expand in this country a careful assessment has to be done in order to measure the risks and choose the right local business partners. However, with appropriate due diligence conducted and risk assessment implemented, Russia can become a great business expansion success.
Anticorruption legislation and bodies in Russia include:
- Anti-corruption laws:
i. Федеральный Закон «О противодействии коррупции» – Corruption countermeasures law
ii. Федеральный Закон «Об антикоррупционной экспертизе нормативных правовых актов и проектов нормативных правовых актов» – Anti-corruption expertise of legal acts law
iii. Criminal Code
iv. Национальный план противодействия коррупции – The National Anti-Corruption Plan (issued every two years)
- International conventions:
i. United Nations Convention against Corruption (Russia ratified the Convention in 2006, however, milestone article 20 of the Convention (illicit enrichment) was not ratified)
ii. Council of Europe Criminal Law Convention on Corruption
iii. OECD Anti-Bribery Convention
- Corruption investigation agencies:
i. Anti-Corruption Council
ii. National Anti-Corruption Committee