Hidden Business Risks in Russia June 16, 2016

Transcription

1 Hidden Business Risks in Russia June 16, 2016 Tom Engelhart & Derek Harris Kreller Background Comprehensive international due diligence and compliance services since jurisdictions represented. 350 in country investigators worldwide. Official representation in Beijing, Caracas, Dubai, London, Mexico City, Moscow, New Delhi, Sao Paulo, Tokyo. 1

2 Historical CPI (Corruption Percentage Index) in Russia Brazil Russia India China CIS (Commonwealth of Independent States) Ukraine Belarus Kazakhstan Armenia Georgia Uzbekistan

3 Russian Anti Corruption Laws Russia s Federal anti corruption law No. 273, article 13.30: Requires companies operating in the country to implement anti corruption, compliance programs. Russia's Federal anti corruption law Responsibility for the prevention of bribery. Adapting procedures to cooperate with authorities (Duma). Creating procedures of ethical business conduct. Implement policies for conflicts of interest. Prevention of false documents. Impact of Sanctions U.S./EU Sanctions Financial Industry Biggest Impact Globally Drop in oil prices Impact on Russian Ruble 3

4 Average Cost Per Barrel in US Dollars Average Cost Per Barrel July Dec Jan. June 2013 July Dec Jan. June 2014 July Dec Jan. June 2015 July Dec Jan. April 2016 Average Cost Per Barrel in Rubles Average Cost Per Barrel in Rubles July Dec Jan. June 2013 July Dec Jan. June 2014 July Dec Jan. June 2015 July Dec Jan. April

5 Ruble Value to a US Dollar 0.04 Russian Ruble Value Russian Ruble Value Average Russian Bribe According to The Moscow Times Moscow police said the average amount of the bribes paid by people arrested in 2015 had doubled over the year to reach 654,000 rubles More of the everyday bribes often range from 1,000 rubles to 15,000 rubles Year Russian Ruble US Dollars ,000 $ ,000 $ ,000 $1, ,000 $3,485 5

6 Average Russian Bribe Cost of a Russian Bribe Rubles US Dollars FCPA Cases Involving Russia since 2008 Department Amount of Fine (US currency) SEC $976,550,000 DOJ $763,353,000 Total $1,739,903,000 Chart is the total fines of the 8 cases stated below 1. Siemens 5. Pfizer 2. Daimler 6. HP 3. Panalpina 7. Bio Rad Laboratories 4. Eli Lilly 8. Vimplecom (CIS) 6

7 Siemens Aktiengelsellshaft Year: 2008 Fine: $450 million DOJ settlement $350 million SEC 4,200 allegedly corrupt payments totaling $1.8 billion over a six year period Also charged with books and records and internal control violations Daimler AG Year: 2010 Fine: Daimler and its subsidiaries paid a total $93.6 million to the DOJ and $91.4 million to the SEC Daimler paid at least $56 million in improper payments over ten years More than 200 transactions in at least 22 countries Daimler earned $1.9 billion in revenue and at least $90 million in illegal profits 7

8 Panalpina Year: 2010 Fine: $11.3 million to the SEC and $71.6 million to the DOJ Panalpina admitted to paying $27 million in bribes to foreign officials Paid bribes to expedite services for a number of companies Eli Lilly Year: 2012 Fine: $29 million to the SEC Improper payments made by its subsidiaries to win business in Russia, Brazil, China, and Poland Russians subsidiary paid millions to induce pharmaceutical distributors and government entities Company recognized the improper payments and still allowed its subsidiary to continue for years 8

9 Pfizer Inc. Year: 2012 Fine: $26.3 million to the SEC and $15 million to the DOJ Wyeth LLC agreed to pay $18.8 million to the SEC Subsidiaries bribed foreign healthcare professionals to increase their business Bribes went on for over a decade Hewlett Packard Year: 2014 Fine: $76.7 million to the DOJ and $31.5 million to the SEC In Russia a subsidiary of HP paid over $2 million to government official to keep a multi million dollar contract with federal prosecutor office Offense took place from No meaningful DD was done on agents or subcontractors even with many red flags 9

10 Bio Rad Laboratories, Inc. Year: 2014 Fine: $14.35 million to the DOJ and $40.7 million to the SEC Bio Rads subsidiaries made improper payments to foreign officials in Russia, Vietnam, and Thailand In Russia Bio Rad SNC paid sales agents commission between percent Commission payments were reviewed and approved by higher level managers Knowingly failed to implement adequate compliance system VimpleCom Year: 2016 Fine: $230.1 million to the DOJ and $167.5 million the SEC and $397.5 million to Dutch prosecutors VimpleComs wholly owned subsidiary Unitel LLC paid more then $114 million in bribes to a Uzbekistan official between Approximately $500,000 in bribes were disguised as charitable donations 10

11 Total Fines in FCPA Cases Involving Russia Since ,000,000,000 Fine 1,800,000,000 1,600,000,000 1,400,000,000 1,200,000,000 1,000,000,000 Fine 800,000, ,000, ,000, ,000,000 0 DOJ SEC Total Developing Risk Scores for Third Party Engagements Types of Third Parties The Right Questionnaires Onboarding portals/screening tools Silent Partners/Shell Companies/Beneficial Ownership Where they Conduct Business (Sanctioned Countries) Lines of Business Risk Government Exposure/Interactions with Govn t. Officials/Political Affiliations Conducting Due Diligence 11

12 Types of Third Parties Agent: Acts on behalf of the company and stands in the shoes of the company. What the agent does, is the same as corporate actor. Sub Agents: Hired by agent pursuant to your contract with agent: large presence in health care industry Joint Venture Partner: Internal relations between your company and potential foreign officials if government partner External relations and control and management of joint venture interactions with foreign officials Consultants: Term is used for a variety of arrangements which can include contacts with foreign government officials Reseller: Company or individual that purchases goods or services with intention of selling them rather than consuming or using them Merger & Acquisitions: Purchasing and or joining with other companies Distributor: Several different types of models Buy and Sell: variations on purchase price, shipping responsibility, and pricing discretion Term is sometimes used for arraignments akin to agents Distributor may be exclusive to your company or may sell competitor products as well Ability to supervise and monitor distributors may depend on importance of your product to distributor Initial Identification of Third Party Who is the third party? Gather as much information about the person or company as possible Professional and educational history Business organization Relationship to the government and government officials (family and personal) How did the third party come to the attention of your company? What is the purpose in hiring the third party? What specific services will the end third party provide? 12

13 The Right Questionnaires Top Ten Inefficiencies in Third Party Questionnaires 1. Company details 2. Elaboration on government exposure 3. Consents 4. Industry licensure and professional associations 5. Use of subcontractors/ consultants/ joint ventures/ intermediaries 6. Full contact details of references provided 7. Specific ownership details 8. Anti corruption compliance 9. Legal, criminal, and regulatory proceedings 10. Level of engagement Due Diligence Questionnaire A written document for third parties and a different form for JV partners With concise and comprehensive questions Personal and family information Business and education history Relationship information Business references Best when done face to face but partial issues can arise: eye to eye contact is valuable Make sure candidates signs form to certify information Make sure questionnaire inquires as to proposed third party s willingness to comply with anti corruption laws (in past and in future) Additional questionnaire for company official proposing third party relationship 13

14 Onboarding tools & Initial Screening Formula Most onboarding tools use a questionnaire which allow you to risk rank your third parties so you know the sufficient level of due diligence that should be taken prior to engagement Risk Factor Risk Criteria Risk Points Country CPI >75 or <75 10 or 5 Internal Sponsorship Transparent/Non Transparent 5 Relationship with Existing or Former Foreign Official Referral from Foreign Official Existing/Direct or Indirect Former/Direct or Indirect Existing/Direct or Indirect Former/Direct or Indirect 15 or or 5 25 or or 10 Prior history or allegations of Corruption or Other Crimes/Misconduct 20 or 10 corruption or other crimes/misconduct Change in Revenues Increase over 10 percent annual 10 Percentage of government business revenues Over 50 percent 5 Any Other Circumstance Unwillingness to sign questionnaire, reps 5 and warranties, audit rights Risk Reduction Training and/or Prior Due Diligence Minus 5 for each Silent Partners/ Shell Companies/Beneficial Ownership Silent Partners: an individual whose involvement in a partnership is limited to providing capital to the business only they are not actively involved in the management of the business Shell Companies: is a corporation without active business operations or significant assets often used as a front for tax evasion Beneficial Ownership: a person who enjoys the benefits of ownership of a property or security even though title is in another name i.e. Panama Papers 14

15 Lines of Business Risk Medical Devices Aerospace/Defense Pharmaceutical Oil & Energy Chemicals Manufacturing Technology Key Components to Risk Ranking Government exposure Interactions with the government Political exposure If there are any current or former government official for the intermediary Where they conduct business Sanction countries 15

16 Conducting Initial Due Diligence Open Source Intelligence Service Low cost and valuable tool Use one of established providers Valuable tool in gathering important information Make sure includes: media sources, public filings, and information on state owned enterprises Dynamic searches: alerts if subsequent information changes search research Use all available Internet search tools it is amazing what you can learn on the Internet Other company employees who may know or have had dealings with the third party Add results of each and analysis to due diligence file Additional Due Diligence Investigation Consider hiring due diligence investigation companies which provide information which you cannot readily obtain Document why you hired company Try and protect attorney client privilege as much as possible Negotiate and understand exactly what steps the investigation company will take Boots on the ground Local familiarity Conduct interviews of local personnel before moving forward Specify exactly what you want done and maintain supervision of process to make sure investigation follows proper steps and covers all bases Ensure review of draft report before it is finalized 16

17 Your Employee s are the Key in Russia Provide Training Interviews Properly Vetting Employees Employees are Key Kreller Group Thomas Engelhart Director, Global Investigations tengelhart@kreller.com x Main Street, Suite 300 Cincinnati, Ohio Derek Harris Global Due Diligence Consultant dharris@kreller.com Main Street, Suite 300 Cincinnati, Ohio