Risk factors for General Directors in Russia Alex Stolarsky, Rechtsanwalt, Director Legal, Compliance & Tax, Member of the Board Christopher Schagerl, Director Tea Time Moscow, October 26, 2017
Risk factors for GDs in Russia Personal liability of the General Director Risk Management Typical risks during the life-cycle of the company Temporary solutions for outsourcing the GD 2
Status of GD plays most important role in a company s corporate governance has to act in accordance with business strategy, corporate policies and legal requirements must ensure timely and effective execution of all participant s solutions 3
Civil Liability (1/2) to the Company/Company s participants: GD must act in the interest of the company, reasonable and in good faith. GD bears full financial liability before the company. Obligation to compensate the company for direct actual damages caused by his/her faulty actions (or omissions) for loss of profit Direct actual damages to be understood as an actual reduction in, or deterioration in the condition of the company s available assets, as well as the necessity of the company to incur expenses for procurement (recovery) of the property or for compensation of damages caused to third parties. 4
Civil Liability (2/2) Current court practice demonstrates often rejection of claims against the GD because the plaintiffs fail to prove the combination of (i) Guilty action (or omission) (ii) the LLC s losses and (iii) the cause-end-effect relationship between (i) and (ii) which combination is required for satisfaction of such claim Statute of limitations for presenting claims for compensation of losses: 3 years, but no more than 10 years Not deemed at fault if GD has taken all measures for proper performance of his/her duties, with such care and diligence as are required by the nature of the obligation and conditions of doing business 5
Disciplinary sanctions Labor Code contains comprehensive list of disciplinary sanctions and general rules for the mandatory disciplinary procedure Mainly Art.192, 193 RF Labor Code apply Additional grounds for dismissal for misconduct, namely: Adoption of unjustified decision, which leads to violation of safety of property, its misuse or other damages to the employer Single, gross breach of employment duties 6
Administrative liability GD s as heads of companies bear officer s liability under the Administrative Code ( AC ) AC envisions eight types of sanctions, only two of which may be imposed on the officers: (1) fine and (2) disqualification Under AC, the standard sanction against company officers is a fine up to 50.000 RUB. Disqualification (i.e. the prohibition to work in certain provisions / such as GD) may last from six months up to three years. 7
Criminal liability Sanctions foreseen under the Criminal Code for committing a crime are Fine Deprivation of right to hold certain positions and Imprisonment Individual may be held criminally liable if proven in court that the individual directly or indirectly intended to commit this criminal offence or committed the offence negligently (unintentionally). 8
Delegation of Duties and Responsibility (1/2) Delegation generally possible and normally effective to shift administrative liability from the GD to the delegee Delegation does not relieve the GD from liability in cases where the Criminal Code (or other federal laws) impose liability only on the head of the Company For any administrative or criminal proceeding against foreseen under the Criminal Code for committing a crime are Fine Deprivation of right to hold certain positions and Imprisonment 9
Delegation of Duties and Responsibility (2/2) Individual may be held criminally liable if proven in court that the individual directly or indirectly intended to commit this criminal offence or committed the offence negligently (unintentionally). Administrative or criminal proceeding against an officer of a company other than the GD: Does Job description include the types of actions out of which the violation arose? Advisable to use detailed and clear job descriptions of other officer s positions. 10
Risk Management Risk is an event that, if it occurs, seriously affects the ability of a project to achieve its outcome objectives. Risk management is the process of identifying risk, assessing risk, and taking steps to reduce risk to an acceptable level. 11
Risk Management Risk Identification Risk Monitoring Risk Assessment Risk Mitigation Planning Risk Prioritization 12
Risk dimensions Strategic IT Market Operational Risk Political Legal Financial 13
Risk Management Plan Risk Key client OOO is late paying its invoice. Chief accountant leaves the company. Loss of power for more than 24 hours. A new competitor undercuts the price of our main product. Key bank is loosing license and funds are blocked Probability (1 low - 5 high) Risk (1 low 5 high) Risk Score 5 2 10 3 4 12 1 3 3 2 5 10 1 5 5 14
Risk Management Strategies Strategies Avoid Control/ Accept Transfer Mitigate (change plans) (reduce impact) (budget) (share risk) 15
Risks associated with the organizational and legal form of the Company Conducting of the annual meeting of shareholders Activity in terms of compulsory licensing License compliance Late submission of information about the legal entity in EGRUL Violation of the term: 1. submission of an application for registration with the tax authority at the place of location of a separate subdivision, 2. submission of documents regarding deregistration of the separate subdivision Conducting activity without registration with the tax authority 16
Risks connected with the violation of immigration laws Employment of a foreigner without a work permit (or patent) Employment of a foreigner without permission to employ and use foreign workers Notification of FMS regarding the conclusion/termination of labour and civil law contract of a foreign citizen, HQS Notification of FMS regarding the paid salary to a HQS Violation of the order of documents registration for the right of stay of foreigners in Russia and their departure abroad, if these steps do not contain signs of criminal offence Failure of the inviting party to take material, medical and housing measures to provide an invited foreigner during his stay in the Russian Federation Provision of the inviting party of false information about the purpose of stay in the Russian Federation of a foreign citizen at preparation of entry documents to the RF Non-compliance by the employer with respect to foreign citizens and persons without citizenship with restrictions to perform certain activities 17
Risks connected with the violation of the Labour Code and the law on labour safety 1/2 Admission to work by a person not authorized by the employer (Labour agreement with the person admitted to work is not concluded) Violations of occupational safety requirements Violation of the order of the special assessment of working conditions at the workplace or its failure Admission of an employee to perform the labor duties without: - training and testing of knowledge of occupational safety requirements - mandatory preliminary (at entry) and periodic (during employment) medical checks, mandatory medical checks at the beginning of the working day (shift) - mandatory psychiatric checks or when there are medical contraindications Failure to provide employees with individual protection equipment (overalls, etc.) at work involving harmful and dangerous working conditions, work related to pollution 18
Risks connected with the violation of the Labour Code and the law on labour safety 2/2 Evasion of registration or improper registration of the labour agreement or conclusion of a civil-law agreement Non-payment of salary, delayed payment of salary Delay of employment record book handover to the employee at termination Failure to notify the employment service about the upcoming dismissal of persons in connection with liquidation to reduce the number of employees or staff regime of part-time work (shifts) and (or) incomplete working week on the application of insolvency procedures on the availability of vacancies (positions), the fulfill of quotas for the employment of people with disabilities 19
Risks connected with committing of administrative offences in the area of personal data protection Violation of the procedure for the collection, storage, use, or dissemination of information about citizens (personal data) Failure to notify Roskomsvjaznadzor about beginning/cessation of processing of personal data and/or their cross-border transfer 20
Risks connected with violations in the field of fire safety (excerpt) Violation of the fire safety requirements to: 1. internal fire water supply 2. electricity-generating equipment in buildings, constructions and structures 3. electrical products 4. primary fire extinguishers 5. fire safety requirements on provision of buildings, constructions and structures with primary fire-extinguishing means Violation of the fire safety requirements to: 1. fire escapes 2. fire and emergency exits 3. automatic fire extinguishing systems and fire alarm systems 4. systems of warning people about the fire and evacuation of people in buildings, constructions and structures 5. smoke protection systems in buildings, constructions and structures 21
Risks connected with the import of goods 1/2 Failure to declare according to the set form of goods subject to customs declaration Statement by the declarant (customs agent) at the customs declaration of goods of inaccurate information: 1. on their names, description, country of origin, 2. on their customs value 3. classification code for a unified TNVED of the Customs Union 4. other information, if such information is served or can serve as grounds for exemption from customs duties, taxes or for understating their amount Claim by the declarant (customs agent) at the customs declaration of goods of inaccurate information about goods or submission of invalid documents Presentation of invalid documents when performing customs operations 22
Risks connected with the import of goods 2/2 Failure in the term established by the customs body to provide the documents and data necessary for customs control Terms violation of customs payments Non-completion within the set deadlines of performing customs procedure in respect of which the requirement to complete it is set use of conditionally released products transfer of conditionally released goods for possession or use sale of conditionally released goods or their other ways of disposal in violation of the established prohibitions and/or restrictions on the use and disposal of such goods Use of the goods, which were arrested during the Customs control, without the authorization of the customs authority 23
Risks connected with violations in the areas of finance and taxation 1/2 The observance of cash discipline 1. failure to use cash register equipment, 2. use of cash register equipment, which does not meet the requirements or used in violation of the terms and conditions of registration and use, 3. refusal upon demand of the buyer to give him the receipt, sales receipt or other document to accept cash for goods (work, service) Violation of the terms of tax reporting submission Failure to provide information required for the implementation of tax control Violation of the established mode of submission of tax declarations in electronic form Evasion from paying of taxes and duties (failure to submit declaration or inclusion of false information in the Declaration) Evasion from paying of customs duties levied on the organization 24
Risks connected with violations in the areas of finance and taxation 2/2 Failure of the tax agent to comply with the obligation to withhold tax and (or) to pay taxes Failure to perform the duties of the tax agent Flagrant violation of the rules for booking of income and expenses and tax objects (no primary documents, VAT-invoices, tax and accounting registers, untimely and incorrect reflection of economic operations in accounting and tax accounting) Non-payment or incomplete payment of amounts of tax Violation of the procedure for the submission of statistical information Non-payment of fees within the set up time-limits for negative environmental impacts on the environment 25
Risks connected with a company s property Non-compliance by the owner, lessee, or other user of the established procedure for the State registration of rights to immovable property or deals with it 26
Risks connected with violation of the currency legislation 1/2 Engagement in illegal currency transactions Submission to FTS by the resident of the information on the opening (closing) of an account, change of its details in the bank outside the RF with the violation of deadlines Failure to provide the information to FTS by a resident about the opening (closing) of an account, change its details in a bank outside the RF Failure of the resident timely to get on their bank accounts in banks of foreign currency or currency of the RF due for the transferred goods, works, services, information or results of intellectual activity to nonresidents Failure of the resident within the set up deadline to return to the RF of the monetary funds paid by the non-residents for the imported to the RF goods, works, services, information or results of intellectual activity 27
Risks connected with violation of the currency legislation 2/2 Non-observance of: 1. procedure for the submission of forms and reporting of currency transactions, 2. procedure for the submission of reports on cash flow on accounts in banks outside the RF with supporting bank documents, 3. violation of the order of submission of supporting documents and information in carrying out currency transactions 4. violation of the rules to prepare passports of deals 5. violation of retention time of accounting and reporting documents on currency operations, supporting documents and information in carrying out currency transactions or passports of deals Violation of the terms of submission: forms of accounting and reporting on currency transactions, supporting documents and information at carrying out foreign currency operations on the movement of funds in banks outside the RF 28
Further risk factors (excerpt) Missing Business Partner checks Insufficient material contract review Decision-taking resistance vs. Pressure to act fast Warnings and explanations being ignored Payment re-direction requests Insufficient or incomplete reporting to the HQ Conflict of Interests 29
Characteristics The General Director (GD) shall be appointed at the time when incorporating a company. The GD is the sole executive body in charge of overall management of a company within the powers granted by law and the company charter. The GD is responsible for business results of the legal entity and for the safety of its employees and property. 30
Outsourcing the GD GD Physical person (short term) Management company (long term) 31
Outsourcing the GD Start-up of the company Work permit for foreign GD is needed A new GD is not found, but business should start For period of a dormant company The existing GD cannot fulfil the function due to other circumstances (illness, ) Liquidation of the company Operative Management constantly travelling GD permanently located in Moscow Signatory in the bank Point of contact for stakeholders Eyes and ears of owners 32
Outsourcing the GD Well established contact to authorities Passing approval for payments and contracts of the HQ Fulfilling obligations under local legislation Separation of duties according to international standards Reliable person under clear control is needed The existing GD is not trusted anymore Name of SCHNEIDER GROUP Management Company as a reliable partner is wanted Company structure makes a change of the GD necessary A full-time GD is not reasonable due to business size Local GD also for business with small or medium business or during start-up and liquidation No expenses for visas or work permits Timely flexible service (No Full-time GD necessary) Management Company if the headcount in Russia should be limited 33
Alex Stolarsky Director for Legal, Compliance and Tax Member of the Board StolarskyA@schneider-group.com The exclusive right to the content of this presentation including the rights of translation, reproduction, transmittal, distribution and usage of the presentation and parts of it, in any way, as well as the rights to the company s logo and name SCHNEIDER GROUP, in existing and future publications in printed or electronic form, and the ability to confer rights to a third party belong to SCHNEIDER GROUP. The reproduction, alteration, transmittal or any distribution or usage of this presentation or parts of it, as well as of the company s logo or name SCHNEIDER GROUP in any way, need the written permission of SCHNEIDER GROUP in advance and shall be accompanied with the link to the SCHNEIDER GROUP website and reference to the copyright permission. SCHNEIDER GROUP www.schneider-group.com 34
Christopher Schagerl Director SchagerlC@schneider-group.com The exclusive right to the content of this presentation including the rights of translation, reproduction, transmittal, distribution and usage of the presentation and parts of it, in any way, as well as the rights to the company s logo and name SCHNEIDER GROUP, in existing and future publications in printed or electronic form, and the ability to confer rights to a third party belong to SCHNEIDER GROUP. The reproduction, alteration, transmittal or any distribution or usage of this presentation or parts of it, as well as of the company s logo or name SCHNEIDER GROUP in any way, need the written permission of SCHNEIDER GROUP in advance and shall be accompanied with the link to the SCHNEIDER GROUP website and reference to the copyright permission. SCHNEIDER GROUP www.schneider-group.com 35
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