Prior to taking office, President Medvedev identified the corrosive effect of corruption on civil society in the Russian Federation (RF). Since taking office, President Medvedev has established a National Anti-Corruption Plan outlining numerous objectives for fighting corruption and has moved to advance those objectives.
On January 10, 2009 Federal Law 273-FZ “On Counteracting Corruption” (the Anti-Corruption Law), Federal Law 274-FZ, Federal Law 280-FZ and amendments to a host of other federal laws (collectively, with the Anti-Corruption Law, the Anti-Corruption Legislation) came into force.
Unfortunately, the Anti-Corruption Legislation does not delineate the rules with certainty. However, certain principles can be gleaned from the legislation. Moreover, requirements imposed by home country legislation mean that many non-Russia-based companies operating in Russia already have robust anticorruption compliance programs that should keep them on the right side of the law. Nonetheless, if you are doing business in the RF, it is important to have a strong understanding of the Anti-Corruption Legislation or risk facing the threat of severe civil and criminal penalties.
The Anti-Corruption Legislation
The Anti-Corruption Law is intended to establish the legal and organizational framework for preventing and fighting corruption and minimizing or eliminating the consequences of corruption. The Anti-Corruption Legislation expands upon these basic principles with respect to certain categories of government employees including judges, members of parliament and individuals holding state and municipal offices, as well as amending the Civil, Criminal and Administrative Codes to include various sanctions for violating the laws.
The Anti-Corruption Legislation defines corruption as a detriment to the lawful interests of the state and society arising from:
- An abuse of power or position of authority;
- Giving a bribe;
- Receiving a bribe; or
- Engaging in commercial bribery.
Although it is not expressly stated, the inclusion of the undefined concept of commercial bribery appears to implicitly qualify the first three forms of corruption as involving public servants and governmental officials (hereinafter Public Officials).
An act of corruption is defined as an act (i) for the purpose of receiving a profit in the form of a monetary gain, valuables or other property or services of a proprietary or financial nature (Pecuniary Gain), either for oneself or for third party beneficiaries or (ii) the illegal provision of such Pecuniary Gain, whether by a person for his, her or its own benefit or on behalf of, or for the benefit of, a third person. While the Civil Code permits “simple gifts” of no more than 3,000 rubles (approximately US$90) to be made to Public Officials, it is illegal for any Public Official acting in his or her official capacity to accept any gifts of any value, regardless of the parties’ intent. An exception to this rule is gifts made to a Public Official at an official state function, in situations in which such gifts are accepted by the Public Official on behalf of the state and such gifts are considered state property. Best practices would counsel against giving any gift to a Public Official, and care needs to be taken whenever contracting with a Public Official.
A Public Official is a Russian citizen holding a government service post, either federal or municipal, within the civil, military or law enforcement service sectors, that involves any professional activity involving the execution of the powers of federal state bodies including the constituent regions of the RF as established by the Russian Constitution and other such federal laws. The definition includes government notaries, but excludes private notaries and officials of other countries. A comprehensive list of federal Public Officials can be found in the Register of Public Officials.
Notably, Public Officials also include employees of commercial enterprises if the state owns 50 percent or more of the total share capital of the company.
Ultimate Beneficial Owners
Government involvement is pervasive throughout the commercial sector. Public Officials who act on behalf of the government in a commercial organization in which any shares, interests or assets are owned by any executive body are considered to fall within the realm of a Public Official acting in an official capacity. As such, it is critical, though by no means simple, to penetrate corporate structures to identify their ultimate beneficiaries. The identities of registered owners of limited liability companies are available to the public in the State Registry of Legal Entities and Individual Entrepreneurs on file with the tax authorities. Russia-based joint stock companies pose greater difficulty for accessing information as details of ownership are kept internally on the company register, or by third party registrars, but only the immediate beneficiary, and not the ultimate beneficiary, is required to be listed. With regard to commercial bribery, Public Officials will not qualify as an ultimate beneficiary of such a bribe if their position does not exert any control over a business or the assets of a for-profit or nonprofit entity.
Conflicts of Interest
A conflict of interest exists when the personal interest of a Public Official (either direct or indirect) may affect the proper performance of his or her official duties and when there is or may be a contradiction between the personal interests of an official and the rights and lawful interests of citizens, entities, organizations, society or the state, the result of which the rights and interests of the latter may be violated. The personal interest of an official involves the receipt (directly or indirectly) of a Pecuniary Gain in the course of performing his or her official functions.
Accordingly, current Public Officials and former Public Officials wishing to enter the private sector must:
- Disclose an existing or potential conflict of interest;
- Disclose personal financial information about their and their family’s income, assets and liabilities (the definition of “family” being limited to the official’s spouse and minor children);
- Report any attempt to induce the official to commit a corrupt act;
- Obtain prior approval from a governmental commission for employment in a commercial or not-for-profit organization that is not a state or municipal body or institution in order to perform functions within a sole executive body or as a member of a board of directors or other executive body; and
- Disclose to prospective employers any previous public service during the two-year period following termination of public service.
The Anti-Corruption Legislation increases criminal liability for acts of corruption, introduces administrative fines on Russia-based and non-Russia-based companies engaged in corrupt activities and requires dismissal of Public Officials for violations of the Anti-Corruption Legislation. The penalty for legal entities who commit, or cause to be committed, corrupt acts, on their behalf or for their benefit, is an administrative fine in an amount of up to three times the value of the benefit conferred, but no less than 1 million rubles, along with the seizure of the Pecuniary Gain. Individuals who engage in such conduct may be punished with a fine in an amount of up to 200,000 rubles, an amount equivalent to their income for a period of up to 18 months, corrective labor for a term of one to six months, detention for a term of three to six months, or imprisonment for a term of up to three years.
Mitigating factors may absolve criminal liability for giving bribes. The first mitigating factor is the giving of a bribe under duress (extortion). The second mitigating factor comes into play if the bribe giver voluntarily informs the appropriate authorities of the bribe and agrees to provide testimony in criminal proceedings against the bribe taker.
Foreign Corrupt Practices Act
In addition to the Anti-Corruption Legislation, the Foreign Corrupt Practices Act of 1977 (FCPA) continues to apply to individuals, firms, officers, directors, employees, agents and stockholders acting on behalf of a firm outside US territory with a direct connection to the United States who “corruptly [act] in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value” to “any foreign official . . . to assist . . . in obtaining or retaining business.”
US companies or non-US companies registered on the US stock exchange must be diligent in acquiring Russia-based companies because of potential successor liability for corrupt practices, as well as careful about using intermediaries and third party agents for the distribution of products and watchful of the actions of their joint venture partners in the RF, considering the broad reach of the FCPA. The FCPA, through its books and records and internal controls provisions, extends liability to US parent companies for accounting oversight of their majority owned Russian subsidiaries, as knowledge of improper conduct may be imputed to the parent.