Overview

  • Throughout 2016, Russian prosecutors initiated numerous bribery investigations against legal entities. Most cases resulted in the imposition of a fine. These investigations focused on small-scale bribery of Russian companies. Only very few companies could be exempted from liability because they had taken sufficient compliance measures.
  • Outside of bribery investigations, Russian prosecutors actively performed inspections of Russian companies. The purpose of these inspections was to verify the implementation of mandatory anti-corruption measures (appointment of a compliance officer, adoption of a compliance code, cooperation with law enforcement authorities etc.). Court orders have been issued against companies that failed to implement these measures.
  • The U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) completed several enforcement actions for violations of the Foreign Corrupt Practices Act (FCPA) relating to Russia. Most published cases occurred in the Russian healthcare sector. In contrast to Russian investigations, these actions targeted large-scale bribery and resulted in significant fines.
  • Russian law enforcement authorities can now prosecute for bribery committed by foreign legal entities outside of Russia, provided that (i) such bribery is directed against the interests of the Russian Federation and (ii) the legal entity was not held liable in a foreign state. It is currently unclear which cases these new extraterritorial competences will apply to.
  • Russian legal entities are now obliged by law to identity their beneficial owners and disclose them to the Russian authorities. This may simplify the know-your-customer (KYC) due diligence of Russian business partners which – due to a widespread reluctance to disclose beneficial owners – currently often fails.

 

Russian enforcement actions

Bribery investigations

According to information disclosed by the general prosecutor’s office, 380 bribery investigations against legal entities were initiated in the first three quarters of 2016 alone (based on Article 19.28 of the Administrative Offences Code, i.e. unlawful remuneration on behalf of a legal entity).

Most cases – almost all dealing with illegal payments to civil servants or employees of other companies – resulted in the imposition of a fine. Depending on the bribe sum, the law provides for fines of up to RUB 100m (approx. USD 1.7m) or more. In most cases, however, only the minimum fine of RUB 1m was imposed. That means that Russian bribery investigations against legal entities currently focus on small-scale bribery.

Court practice also shows that the bribery investigations target almost exclusively Russian companies with Russian beneficiaries; no case against a foreign company and only three cases against Russian subsidiaries of foreign companies (German and Dutch) were published.

No exemption from liability

Legal entities can be held liable under Article 19.28 of the Administrative Offences Code (unlawful remuneration on behalf of a legal entity) if the prosecutor can prove that they have not taken all measures necessary to prevent such bribery being committed by their employees or agents.

Since its introduction in 2013, these measures arguably include the raft of measures listed in Article 13.3 of the Anti-Corruption Law (appointment of a compliance officer, adoption of a compliance code, cooperation with law enforcement authorities etc.).

Following the current court practice, however, only one of the legal entities prosecuted had implemented the necessary measures and was exempted from liability. This decision gives no guidance on the proper implementation of anti-corruption measures in order to be exempted from liability. That only one company succeeded confirms, however, that the prosecutors and courts seem to have fairly strict requirements as to the sufficiency of a company’s compliance management system.

Inspections of companies

Outside of bribery investigations, the prosecutors have been actively performing inspections of Russian legal entities to check whether they have actually adopted the anti-corruption measures of Article 13.3 of the Anti-Corruption Law.

Russian law actually does not specify sanctions for non-compliance with the requirements of Article 13.3 of the Anti-Corruption Law. Therefore, the prosecutors filed civil law claims “in the interest of an indefinite number of persons” which were processed by the courts. These claims resulted in numerous court orders obliging companies to implement anti-corruption measures within a certain time period (usually one month).

Practice shows that Russian subsidiaries of foreign companies are also frequently subject to such checks.

SEC/DOJ enforcement actions (FCPA)

Teva Pharmaceutical Industries Ltd. (Israel)

The world’s largest generic drug manufacturer agreed to pay the SEC and the DOJ more than USD 519m to settle charges of paying bribes to government officials in Russia, Ukraine and Mexico.

In Russia, Teva employees paid bribes to a high-ranking government official to use his authority to increase sales of Teva’s multiple sclerosis drug, Copaxone, in annual drug purchase auctions held by the Russian Ministry of Health. For this purpose, Teva Russia entered into a distribution agreement with a Russian company controlled by the government official. The government official ensured that the distribution company won state tenders for the supply of Copaxone to the Russian government in 2011 and 2012. Teva earned more than USD 200m in profits from the sale of Copaxone, and the government official earned approx. USD 65m through inflated profit margins granted to the distribution company.

The charges were based on Teva senior executives authorising these illegal payments while knowingly or recklessly ignoring red flags indicating bribery and having inadequate internal accounting controls.

AstraZeneca PLC (UK)

The global biopharmaceutical company agreed to pay the SEC more than USD 5m to settle charges that its wholly owned subsidiaries in China and Russia made improper payments to foreign officials.

From 2005 to 2010, employees of the Russian subsidiary provided improper incentives to government-employed health care providers (HCP) in connection with sales of AstraZeneca pharmaceutical products. The Russian employees maintained charts tracking the names of HCPs, the regions in which they practised, their level of influence in making purchasing decisions for the respective entities in which they worked and the manner in which they could be motivated to purchase AstraZeneca products through gifts, conference support and other means.

AstraZeneca failed to devise and maintain a sufficient system of internal accounting controls, and lacked an effective anti-corruption compliance programme.

BK Medical ApS (Denmark)

The subsidiary of medical device manufacturer Analogic Corporation (U.S.) agreed to pay the SEC and the DOJ nearly USD 15m to settle charges that from 2001 to 2011 it engaged in hundreds of sham transactions with distributors that funnelled about USD 20m to third parties, including doctors employed by Russian state-owned entities.

As part of the scheme, the distributor requested that BK Medical issue invoices that falsely inflated the sales price of the equipment. The distributor then overpaid BK Medical the inflated amount and BK Medical transferred the excess funds to third parties as instructed by the distributor.

BK Medical was charged with “turning a blind eye to suspicious payments” and failure to keep accurate books and records and maintain adequate internal accounting controls.

Nordion Inc. (Canada)

The global health science company agreed to pay the SEC a USD 375,000 penalty to settle charges that one its employees schemed to bribe Russian government officials and obtain drug approvals.

From 2014 to 2011, the employee arranged improper payments from Nordion to a third party agent so that a portion of the funds could be used to bribe Russian officials to approve the distribution of a liver cancer treatment called TeraSphere. The employee provided false documentation to Nordion to conceal the scheme, and received USD 100,000 in kickbacks from the third party agent.

The SEC charged the company with lacking sufficient internal controls and basic FCPA due diligence to prevent its employee from conducting the scheme.

Legislative developments

Extraterritorial jurisdiction

Since March 2016, Russian law enforcement authorities may prosecute foreign legal entities for bribery offences committed outside of Russia too. Such extraterritorial prosecution requires additional justification – the offence must be directed against the interests of the Russian Federation (new Article 1.8(3) of the Administrative Offences Code).

The Strategy of National Security of the Russian Federation (approved by Presidential Decree No. 683 dated 31 December 2015) defines the national interests only vaguely as the “aggregate of internal and external needs of the Russian state to ensure security and sustained development of its identity, society and nation”. Based on this vague definition, theoretically any foreign bribery offence involving a Russian element may be subject to administrative proceedings in Russia.

However, the risk of ungrounded investigations is limited to a certain extent by the express prohibition of double jeopardy – Russian jurisdiction arises only if the foreign entity has not been held liable in a foreign state.

Disclosure of beneficial owners

Amendments to the Federal Law No. 115-FZ “On Combatting Money Laundering […]” which have been effective since December 2016 upped the pressure on Russian legal entities to identify their beneficial owners.

Each legal entity must now take feasible action – even in difficult circumstances – to identify their beneficial owners and, upon request, disclose such information to the Russian Federal Financial Monitoring Service or the tax authorities. Shareholders and persons otherwise controlling a legal entity are obliged to provide the required information to the legal entity. The beneficial owner data must be verified once a year and kept for at least five years. Failure to collect, disclose or provide relevant information may result in administrative fines for legal entities and their officers.

These amendments may simplify the know-your-customer (KYC) due diligence which currently often fails in practice due to a general reluctance of potential Russian business partners to disclose their beneficial owners.

Closing loopholes in criminal liability

In July 2016, legislative changes aimed at closing loopholes in criminal liability for bribery have been introduced by the Federal Law No. 324-FZ "On Introducing Amendments to the Criminal Code […]".

In particular, criminal liability for bribery is extended to cases where the bribe is not transferred to the bribe-taker but to a third party (individual or legal entity) indicated by the bribe-taker. Further, a new Article 204.1 has been introduced to the Criminal Code; this provision now prohibits mediation in bribery – i.e. the direct transfer of bribes upon instructions by the bribe-giver or bribe-taker – in commercial and other organisations. Earlier, such mediation in bribery had been punishable only in cases of bribery of civil servants/state officials (according to Article 291.1 of the Criminal Code).