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SPEAKING TODAY
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
5. 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.
Š 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
6. Š 2014 Baker & McKenzie LLP 6
Agenda
â Russia today â Angst in the air, gloom on the ground?
â U.S. sanctions and their implications for your business
â Recent anti-corruption cases
â Domestic legal developments
â Managing the (increasing) challenges and risks of
working in Russia
7. Š 2014 Baker & McKenzie LLP 7
Current situation in Russia
â U.S. business community braces for tougher times.
â Ambivalence about expanding (or continuing?) in Russia
ď§ But some bargain-hunters remain.
â Some companies affected more than others.
â Wait and see: Most holding on and complying with the
sanctions, but new expansion and investments in decline.
â Representatives of Russian business community emphasize
readiness to continue doing business with the West.
â Economic indicators show worsening domestic economic
situation. But support for the government is increasing.
â Resolution of conflict/lifting of sanctions does not appear likely
in near term.
8. Š 2014 Baker & McKenzie LLP 8
Overview of U.S. Sanctions
â March 2014 â U.S. Treasury Departmentâs Office of Foreign Assets
Control (âOFACâ) imposes first sanctions on Russian and Ukrainian
individuals and entities (âSDNsâ) perceived to be behind the unrest
â OFAC treats entities 50% or more owned by SDNs to be SDNs
(âDeemed SDNsâ)
â U.S. Persons are prohibited from dealing directly or indirectly with
SDNs or Deemed SDNs. U.S. Persons include:
ď§ (i) entities organized under U.S. laws and their non-U.S. branches
ď§ (ii) individuals and entities located in the United States
ď§ (iii) U.S. citizens and permanent residents, wherever located or
employed
ď Separately incorporated foreign subsidiaries of U.S.
companies are not U.S. Persons under these sanctions
9. Š 2014 Baker & McKenzie LLP 9
Overview of U.S. Sanctions (contâd)
â âSectoralâ sanctions prohibit U.S. Persons from certain dealings
with individuals and companies in certain sensitive sectors of the
Russian economy (finance, energy, defense)
ď§ Directive 1 â Transactions in, financing for, and other dealings in
debt over 30 days of certain banks (currently 6 banks)
ď§ Directive 2 â Transactions in, financing for, and other dealings in
debt over 90 days of certain energy-sector players (4 parties)
ď§ Directive 3 â Transactions in, financing for, and other dealings in
debt over 30 days of certain defense-sector players (Rostec only)
ď§ Directive 4 â 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)
10. Š 2014 Baker & McKenzie LLP 10
Overview of new/expanded U.S. export controls
â Energy sector controls
ď§ Five companies (same as Dir. 4 above) named to EAR
Entity List
ď§ 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
â Defense sector controls
ď§ Five companies named to Entity List (similar license rules)
ď§ Additional licensing requirements apply to exports, reexports,
or transfers of certain products to certain military end-
uses/end-users in Russia
11. Š 2014 Baker & McKenzie LLP 11
Russian reaction to U.S. sanctions
â Russia prohibits imports of agricultural and food products
from EU, U.S., Canada, Australia and Norway, effective for
one year
â McDonaldâs restaurants closed, ostensibly for sanitary
violations, in Moscow and beyond (Up to 20 reportedly
closed to date; McDonaldâs reports over 200 under review)
â Anti-money laundering investigation by Russian prosecutors
of Ronald McDonald House (charity arm of McDonaldâs)
â Jim Beam and Jack Daniels imports blocked
â Russia looks East
12. Š 2014 Baker & McKenzie LLP 12
Russian reaction to U.S. sanctions (contâd)
â âRotenberg lawâ
ď§ Would allow Russian individuals and businesses who suffer
from an âunlawful court actâ 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
â Federal Antimonopoly Service (FAS) has stated
publicly that they will not pursue âabuse of dominant
positionâ cases against companies complying with
U.S. sanctions
ď§ Compare to earlier FAS positions on FCPA compliance
13. Š 2014 Baker & McKenzie LLP 13
Russian reaction to U.S. sanctions (contâd)
Implications for FCPA/other criminal investigations
âReduced information sharing between Russian and U.S. law
enforcement?
âCredibility of Russian law enforcement as factor in DOJ/SEC
decision-making on cases originating in Russia?
âPending legislation requiring personal data of Russian
citizens to be stored in Russia â implications for internal
investigations and audits
14. Š 2014 Baker & McKenzie LLP 14
Recent FCPA cases involving Russia
Hewlett-Packard
âSeptember 2014 â Hewlett-Packardâs 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
ď§ HPâs Russian subsidiaries made improper payments to government officials
to obtain or retain lucrative public contracts (Office of the Prosecutor General
of the Russian Federation)
ď§ 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 prosecutorâs office at
the increased price
ď§ Hewlett-Packard collectively will pay more than $108M to DOJ and SEC for
issues arising out of Mexico and Poland in addition to Russia
15. Š 2014 Baker & McKenzie LLP 15
Recent FCPA cases involving Russia (contâd)
Diebold
âOctober 2013: Diebold settles with DOJ and SEC
âFrom 2005 to 2008, Dieboldâs 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
âDiebold falsified books and records to hide approximately $1.2M of bribes
paid to employees at privately owned banks in Russia
âDiebold agreed to pay $22.9M in disgorgement and prejudgment interest
and appoint an independent compliance monitor in order to settle the SECâs
charges
âDiebold agreed to pay an additional $25.2M fine in the parallel criminal
proceeding initiated by DOJ
16. Š 2014 Baker & McKenzie LLP 16
Recent FCPA cases involving Russia (contâd)
â May 2014 â SEC reports investigation of possible
violations of the FCPA by Key Energy Services in Russia
ď§ The Houston-based companyâs wholly-owned subsidiary,
Geostream, provides oil and gas drilling, work over and
reservoir engineering services in Russia
ď§ Key Energy also has operations in Mexico, Colombia,
Ecuador, and the Middle East, and a technology
development and control systems business based in
Canada
17. Š 2014 Baker & McKenzie LLP 17
Special challenges and risks of working in Russia
â Corruption at all levels of government
â Hidden/indirect/offshore ownership of companies masking
government ownership, providing cover for tax evasion and
now SDNs
â Offshore payment/purchase schemes
â Tender manipulation/procurement fraud
â Sham intermediaries used for fraud, commercial and official
bribery, tax evasion, tender manipulation, avoidance of
mandatory mark-up rules (pharma industry), and more
â Sham service agreements as means of paying bribes
18. Š 2014 Baker & McKenzie LLP 18
Legal developments in Russia
â 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
â April 2012 â Accession to OECD Convention on Combating
Bribery of Foreign Public Officials in International Business
Transactions
â January 2013 â Article 13.3 of Basic Law on Combatting
Corruption requires companies to establish compliance
programs
â Limited enforcement so far, but some indication that
prosecutors and courts will accept compliance as a defense
19. Š 2014 Baker & McKenzie LLP 19
Legal developments in Russia (contâd)
â January 2013 â Amendments to Russian Federal Law â 273
âOn Combating Corruptionâ
ď§ Establishes the background check on the legality of the sources of
income of the applicants for the government positions
ď§ Establishes prohibition on buying real estate and holding bank accounts
in foreign nations for government officials, their spouses and children
â July 2013 â Resolution No. 24 of the Supreme Court of the
Russian Federation
ď§ Provides local courts with interpretation of the law âOn Combating
Corruption,â provides guidelines and best practices when trying
government official charged with bribery
20. Š 2014 Baker & McKenzie LLP 20
Legal developments in Russia (contâd)
â Deoffshorization campaign â goals, current status
â Introduction of the requirement for government officials to
declare property and other valuable assets owned by
government officials (including assets located abroad)
â 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
â Russiaâs State Duma is considering a bill to protect
whistleblowers who report corruption by state officials to police
or the media
â Russian Prime Minister orders annual anti-corruption check-
ups for biggest state-owned banks (Sberbank and VTB Group)
21. Š 2014 Baker & McKenzie LLP 21
Domestic (Russian) anti-corruption enforcement
â Approx. 200 cases brought under anticorruption laws since 2011
ď§ Typical offenses are bribes to health inspectors, providers of permits
ď§ Largest fine was RUR 60M (then about US$ 2M) for bribes to get
building permits to construct a shopping mall
â Does the political situation suggest that there will be more, or
fewer, domestic corruption prosecutions?
ď§ Russian leadership committed to anti-corruption developments but distracted
by foreign policy
ď§ Putin supports bill that would compel Russian citizens to pay taxes on profits
generated/held offshore
ď§ Annual anti-corruption check-up for state owned enterprises
ď§ Government considering leniency for companies that self-report under 19.28
22. Š 2014 Baker & McKenzie LLP
âRussian Morgan-Stanleyâ Defense
â 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.
â One court recently declined to hold a company liable for the
acts of an employee caught offering a bribe to a public official.
ď§ The court came to this conclusion after reviewing the companyâs
extensive compliance measures, stating that a public prosecutorâs
position that the company must be held liable despite these
measures is contrary to law.
22
23. Š 2014 Baker & McKenzie LLP 23
Managing corruption and sanctions risks
â Overlap between sanctions and compliance due diligence
â Most important is to know your counterparties (new and
existing):
ď§ Identity of owners (direct and indirect), officers, other key persons
to identify government officials, SDNs, conflicts of interest
ď§ Qualifications to do business
ď§ Reputation for integrity
ď§ Compliance policies and procedures (required under Russian law)
â Screen current customer and supplier databases, and any
new partners, against denied-party lists (SDNs and more)
â Conflicts of Law: âRussian Morgan Stanleyâ vs. Novo Nordisk
24. Š 2014 Baker & McKenzie LLP
Due Diligence: balancing Russian and U.S. law
â Russian anti-trust regulator (FAS) continues to be hostile to
ârefusals to dealâ based on compliance measures, claiming that
âdominantâ companies may reject partners for corruption
concerns only where there is a criminal conviction
â 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 âdecisions of competent state bodiesâ to
confirm the suspicion
ď§ The resellerâs 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)24
25. Š 2014 Baker & McKenzie LLP 25
Managing corruption and sanctions risks (contâd)
â Contractual protections
ď§ Anti-corruption representation and warranties
ď§ Clear description of service-providerâs duties and deliverables
ď§ Clear indication of timing of services, deliverables, and payment
ď§ Indemnification
ď§ Audit rights
ď§ Termination rights
ď§ Suspension clauses
ď§ Specified legitimate means of payment (wire transfer from local
bank account in counterpartyâs name)
ď§ Right to approve subcontractors, assignment, other third-parties
involved into the transaction
26. Š 2014 Baker & McKenzie LLP 26
Managing corruption and sanctions risks (contâd)
â Financial controls
ď§ Verify that parties have been cleared through appropriate due
diligence â compliance and sanctions screening â before
entering into accounting system
ď§ Pay only against invoice clearly specifying services rendered in
detail with appropriate supporting documentation
ď§ Empower Finance team to question requests for payment and
supporting documentation
ď§ Limit and track cash usage
ď§ Ensure payments go to bank accounts specified in the
agreement
27. Š 2014 Baker & McKenzie LLP 27
Managing corruption and sanctions risks (contâd)
â Compliance training
ď§ Train in-person if possible and in local language
ď§ Train upon onboarding and periodically thereafter
ď§ Focus on practical situations encountered by the business
ď§ Position-specific training that focuses on position-specific risks
(finance, sales, marketing)
ď§ Format â interaction/discussion, not a lecture
ď§ Compliance training should be reinforced at company meetings
and events
ď§ Leadership support essential
ď§ Document training (keep copy of materials, sign-in sheets,
certification of understanding)
31. WHY SHOULD YOU APPLY?
⢠Learn your scores â your Ethics QuotientTM
⢠Compare your practices to those of the Worlâs
Most Ethical Companies
⢠Understand the gaps in your program, activities and
practices vs. leading companies
⢠Use this knowledge to guide and shape investments in
program and resources
⢠Engage the entire organization and ecosystem
32. This webcast and all future Ethisphere webcasts are
available complimentary and on demand for BELA
members. BELA members are also offered
complimentary registration to Ethisphereâs Global
Ethics Summit and other Summits around the world.
For more information on BELA contact:
Laara van Loben Sels
Senior Director, Engagement Services
laara.vanlobensels@ethisphere.com
480.397.2663
Business Ethics Leadership
Alliance (BELA)
Jonathan
SDNs + DPs = 153 individuals; 52 entities; 14 covered by SSIL (Sectoral Sanctions); of these: US SDNs = 57 individuals and 36 entities.
#7949288-v3
Sanctions Scope - Recent US and EU sanctions against Russia target several new parties. They include parties based on their industry (e.g., defense, energy, financial) as well as parties based on their involvement in the crisis. http://www.businessinsider.com/new-russia-sanctions-obama-putin-ukraine-2014-9#ixzz3FaENTdmg
On September 12, 2014, the US Treasury Departmentâs Office of Foreign Assets Control (âOFACâ) (i) designated five Russian defense companies as Specially Designated Nationals (âSDNsâ) and (ii) broadened the scope of US âsectoralâ sanctions under Executive Order 13662 to cover the Russian defense sector and additional parties and activities in the Russian energy and financial sectors. WASDMS#7955277-v1
One of the Directives (Directive 4) prohibits the direct or indirect provision, exportation, or reexportation of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and involve any person determined to be subject to Directive 4 or that personâs property or interests in property. The prohibition on the exportation of services includes, for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies. http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/answers2.aspx#sectoral
Jonathan
SDNs to date: 57 individuals +36 entities
SSIL: Contains 14 entities (two oil companies â Rosneft and Gazprom Neft â are covered by both 2 and 4)
SSIL promulgated in July and August
Directive 1 was revised from 90 days to 30 days
Jonathan
BIS = Bureau of Industry and Security
EAR = Export Administration Regulations
âEnergy Sector Controlsâ â Note that the Entity List additions cover oil AND GAS projects; Directive 4 above covers only oil projects
EAR covers (i) US-origin items wherever located, (ii) items exported from the US, (iii) foreign-produced items incorporating >25% US controlled content by value, and (iv) certain foreign products of US technology controlled for national security reason.
EAR licensing restriction applies to any person (US or non-US) engaged in targeted exports/reexports or in-country transfers.
QUESTION â WHAT ARE THE PRODUCTS SUBJECT TO THE SECOND SET OF DEFENSE SECTOR CONTROLS? DISCUSS WITH ALEX.
Ed and Jonathan
http://www.bakermckenzie.com/sanctionsnews/blog.aspx?topic=344&All=null&IsListParentTopic=true
http://www.cnbc.com/id/101899385
http://www.nytimes.com/2014/08/22/world/europe/mcdonalds-a-fast-food-symbol-of-america-falls-in-moscow.html
http://www.washingtonpost.com/world/europe/after-restaurants-shuttered-mcdonalds-charity-now-faces-russian-legal-troubles/2014/10/09/24dbbb08-f60e-4b43-b8b1-7ff3af06f64a_story.html
http://www.nytimes.com/2014/10/09/business/russian-parliament-moves-closer-to-adopting-law-on-compensation-for-sanctions.html?_r=0
McDonaldâs: http://www.ft.com/cms/s/0/40a2f0b0-5789-11e4-8493-00144feab7de.html#axzz3GgwU4Ox8
http://mcdonalds.ru/news/20141008
Ed
\http://www.bakermckenzie.com/sanctionsnews/blog.aspx?topic=344&All=null&IsListParentTopic=true
http://www.cnbc.com/id/101899385
http://www.nytimes.com/2014/08/22/world/europe/mcdonalds-a-fast-food-symbol-of-america-falls-in-moscow.html
http://www.nytimes.com/2014/10/09/business/russian-parliament-moves-closer-to-adopting-law-on-compensation-for-sanctions.html?_r=0
Tom (on DOJ/SEC cooperation with Russian authorities, credibility) and Ed (on personal data)
Members of the State Duma, Russiaâs lower house of parliament, have approved the second reading of amendments that change the effective date of the adopted law obliging companies to store and process Russian citizensâ personal data within the country. RosBusinessConsulting Database October 7, 2014
Tom
See more at: http://www.fcpablog.com/blog/2014/4/16/how-h-p-russia-mimicked-the-mob.html#sthash.e6SEaDLF.3iwBGYam.dpuf
http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370541453075
Tom
See http://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml
Tom
http://www.fcpablog.com/blog/2014/5/7/sec-probes-key-energy-russia-ops.html#sthash.fzdXmYnM.xveEnloQ.dpuf
Jonathan
Tom and Ed
2nd bullet point http://www.fcpablog.com/blog/2012/2/2/russia-signs-oecd-anti-bribery-convention.html#sthash.mKgJurIv.dpuf
3rd bullet http://www.fcpablog.com/blog/2013/3/5/new-russia-law-goes-beyond-fcpa-bribery-act.html#sthash.dEooWWxk.6LXo5giG.dpuf
Ed
1st bullet http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=LAW;n=156929 ; http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=LAW;n=145983;fld=134;dst=100149;rnd=0.14541736752302375
2nd bullet - http://base.consultant.ru/cons/cgi/online.cgi?req=doc;base=LAW;n=155458
Giving money to government official to make him violate his legal or professional duty which are not directed to benefit government official or his family members does not constitute cause of action for bribery. Sec. 23
Ed
As of Oct 15, 2014 the bill aiming at the deoffshorization of the Russian economy is still under consideration; but Putin took the hard line supporting the bill that would compel Russian citizens having even small interest (still under consideration) in the offshore company pay taxes. http://www.vedomosti.ru/finance/news/34735761/ofshor-po-ministerski
http://www.fcpablog.com/blog/2014/9/26/report-russia-considers-new-protection-for-whistleblowers.html#sthash.aXNSaxDH.KCF4dgfp.dpuf
4th bullet http://www.fcpablog.com/blog/2014/9/26/report-russia-considers-new-protection-for-whistleblowers.html#sthash.aXNSaxDH.KCF4dgfp.dpuf
5th bullet http://www.fcpablog.com/blog/2014/5/13/medvedev-orders-annual-anti-corruption-check-up-for-biggest.html#sthash.HBOEewkc.dpuf
Ed
Ed
... successfully represented a multinational pharmaceutical company in administrative proceedings initiated against it by the public prosecutor on charges of corrupt actions brought in by an ex-employee. A peculiar feature of corruption-related civil liability cases in Russia is that the charges are brought by a public prosecutor and are heard by a magistrate judge. The prosecutor's complaint was based on the findings of a criminal case against the ex-employee for attempted bribery of a government official. We argued that the client had undertaken all measures within its control to prevent its employees from engaging in corrupt actions. The court terminated the case without charging the client. The case is a significant victory for the client, and is also notable because it is the first case where the "Morgan-Stanley defense" was successfully pleaded in Russian courts.
Jonathan
WASDMS#7955277-v1
1st bullet point â inquiries may include in the nutshell: whether the parties involved include any of the targeted entities (SDNs, SSIL, Entity List); whether the project falls with the scope of the targeted activities; whether the items to be supplied are subject to sanction (subject to EAR)
2nd bullet - Recognizing when one is doing business directly with a listed SDN is relatively simple process.
When trying to catch whether partner is owned by SDNs, a companyâs anti-corruption and sanctions compliance procedures may overlap. In the sanction context the same concept of due diligence should be employed to make sure partner is not Deemed SDNs. Where a counterparty may have some connection to an SDN, or where the party is particularly valuable to your business, enhanced measures (e.g., completion of a detailed due diligence questionnaire, representations/certifications about ownership) may be appropriate to gain comfort that the business partner is not a Deemed SDN.
More rigorous due diligence required to understand whether a partner is Deemed SDNs (50% or more owned by SDNs)
Screening is not enough anymore as ownership can be obscured through vague network of companies
It can be a difficult task to determine if partner is Deemed SDNs
Jonathan and Ed
Abuse of market dominance is still one of the FASâ favorite regulatory tools, given that there are numerous prohibitions against specific types of conduct thought to constitute dominance abuse, which allow FAS to regulate every aspect of commercial activities of a firm deemed to be dominant.  FAS is eager to use these prohibitions to compel a particular business behavior. Refusals to deal with potential distributors on reputational grounds, such as for the purposes of anti-bribery compliance, continue to be a major problem for multinationals as FAS tends to require convictions rather than âmarket intelligenceâ in order to conclude that a refusal was justified. Refusals to deal based on sanctions are yet to be tested in an antimonopoly proceeding but in their public statements top FAS officials indicate that FAS takes a âwait and seeâ attitude until a refusal to deal based on sanctions will result in a serious disruption of the rejected buyerâs business