Going Global
Attention to compliance steps taken by Ukraine is growing around the world. The subsequent laws cross borders, ensuring their global reach. Along with facilitation of domestic laws and regulations, business is challenged to secure its reputational risks and avoid sanctions. As international investigations gain momentum, Ukraine is coming under the spotlight of foreign regulatory authorities. Ario Dehghani, counsel and recent newcomer to Redcliffe Partners, anticipates that Ukraine will “go global”, and very soon corporate leaders will generate “big ticket” tasks for the compliance practice of law.
UJBL.: What is the role of compliance in risk management? Could you share your views on the situation globally and in Ukraine?
Ario Dehghani: Companies face risks at many different levels and from all kind of sources and, naturally, have to proactively manage them.
According to the Top Business Risks Report 2016 by Allianz — fraud, corruption and changes in legislation are among the top disruptive impacts for businesses in the U.S., other Western European economies, China, Russia, and Ukraine. All of the above are closely linked to compliance. Other possible impacts for non-compliance are sizable fines, confiscation of property, withdrawal of licenses, freezing of assets, and loss of reputation or brand value. Individual legal liabilities of top-management and other employees might include fines, suspension from certain positions and activities, and imprisonment.
A well-established and robust compliance system, based on a regular conducted risk assessment is by far one of the most efficient instruments for mitigating these kinds of risks.
Designing such a system is, in fact, a lot more challenging than it might seem. It is especially the case for multinational companies and Ukrainian companies doing business abroad. Doing business with the UK or the U.S., for example, can lead to further compliance obligations than Ukrainian companies might have here in Ukraine, including being subject to foreign law regimes like the UK Bribery Act (UKBA) and the Foreign Corrupt Practices Act (FCPA).
An effective compliance system is, unfortunately, still no guarantee that a business is immune from violations due to the fact that individual employees can still violate their obligations. Nevertheless, with a compliance system in place violations can be discovered more quickly and managed more effectively due to a structured, documented process. A compliance system is an effective shield from potential investigations and court proceedings initiated by government authorities. In many jurisdictions around the world, including the U.S., UK, Germany, France, Brazil, Russia, and Ukraine, companies, which have a compliance structure are released from liability or face minimum liability, when dealing with a compliance issue. The same liability release or reduction applies to top management (directors, managing board members, supervisory board members), who otherwise can be held responsible for the lack of a compliance structure.
UJBL.: Could you be more specific about the difference between compliance regimes across jurisdictions? What does this mean for legal counsels?
A. D.: The above-mentioned possible risks are present for companies everywhere in the world.
Nevertheless, every country has its own legal risks, based on its respective business environment and national laws.
Some countries, like the U.S. or the UK, are “feared” for their very strict criminal law, which penalizes the bribery of government officials or other private individuals.
Other countries and the EU are known for their very strict antitrust or anti-cartel law and their huge fines in connection with violations in this regard.
These days, most car manufacturers worldwide seem to be alert to the strict environmental laws and the powerful authorities enforcing these laws in the U.S., especially in California.
Some countries, for example Switzerland, are known for their very strict data protection law, including the huge risks for every employee sending an email which can be sent via a server abroad.
In Ukraine compliance risks can include antitrust, intellectual property, tax, employment, data protection, environmental protection, product liability and product safety. But the most pressing compliance issues in Ukraine relate to bribery, corruption and money-laundering. Ukraine, compared to other countries, is seen to be a high risk country for corruption, especially in connection with government officials. Companies doing business in Ukraine need to include that in their risk assessment and to address that within their compliance structure.
Based on the above, legal counsels advising clients in more than one country need to understand the different realities of legal risks within the different legal and business environments, as well as how to approach these risks in the best possible way to be compliant.
We often meet legal in-house counsels who are responsible for a specific region comprising 10 or more countries. In my experience, managing possible legal risks for more than three countries is a huge challenge and responsibility. Doing the same job in several completely different legislative frameworks is a very sophisticated assignment. That even applies to countries within the EU. Managing compliance issues for several or all EU countries requires non-stop monitoring of differing legal risks based on the differing respective national laws of EU-countries, which can — in a certain scope — implement the same EU regulations differently into their national law.
That is the primary reason why in many cases legal counsels depend on and make use of additional support from outside counsels to be able to handle their responsibility appropriately. Moreover, with regard to one’s own existing liability risks for in-house counsels, additional expertise from outside might be helpful and supportive to mitigate these risks.
UJBL.: The worldwide trend to introduce the function of compliance officer is also relevant for Ukraine. What usually remains unseen by internal officers and is revealed by an outside counsel?
A. D.: Since joining Redcliffe I have met with a lot of CEOs, CFOs and in-house lawyers of companies residing or doing business in Ukraine. All of them agree that compliance is obviously gaining momentum within the business environment of Ukraine. You can say it is a hot topic in Ukraine too.
However, there is one common misperception which I hear way too often. Many businesses here think that provided they have one policy for anti-bribery issues and an in-house compliance officer on their staff, they have compliance risks covered for years to come. Well, according to my experience and the cases I have advised on worldwide, they are far from covered.
It is also not enough to only have written policies without good training of employees. Outside counsels — provided they have a significant track record of experience — can have a more systematic and efficient approach of how to raise the awareness of the employees with regard to compliance and how to establish a successful compliance culture within the respective business environment.
An outside counsel can also asses the existing compliance risks from a more objective point of view. An on-going risk assessment, especially in such an emerging legal environment as Ukraine, is essential for every successful compliance system.
Outside counsels — provided they have a significant track record of experience — can introduce new ideas of how to approach a respective risk or compliance issue in a more effective way and with a learned best practice approach.
Furthermore, in-house counsels in companies residing outside the U.S. often need support to get appropriate knowledge of foreign law regimes, like the FCPA or the UKBA.
Another challenge for in-house counsels is that they need to run a compliance system with a very small budget and on top of this they need to state to the management and themselves over and over again that the reduced “one-policy compliance system” is enough to control the possible risks. An outside counsel is per se more independent and is more free to deal with unpleasant and tough issues in a more direct and objective way.
An outside counsel can also support in communicating with authorities. In my almost eight years of specialized compliance experience I had a few cases when the communication via an outside counsel helped to resolve issues with authorities faster and more smoothly.
Outside counsels as third parties can also conduct independent internal compliance investigations. In some countries authorities even explicitly ask for an investigation to be conducted by an outside counsel in order to guarantee a certain level of objectiveness and independence.
UJBL.: When there is a gap in compliance, investigations and serious consequences follow. What are the trends in international investigations?
A. D.: A gap in compliance can indeed lead to serious consequences, both causing liability risks for the company, its management and the acting individual employee. Employees, in particular the top management, and the company are exposed to possible civil damage compensation claims. Penalty fines for FCPA violations can lead to payments of over a billion USD, as some FCPA cases like Siemens demonstrated in the past. The reputational loss, the costs of “cleaning up” and adjusting the former compliance system need to be added as well. Moreover, board members and other senior management employees can be exposed to huge financial and personal liability risks in case of a compliance violation based on a gap of compliance structure within the company they run.
International cross border investigations and penalties based on compliance issues increase worldwide, not only in the U.S. In the last five years the number of compliance investigations and penalty decisions grew immensely in all European countries. When I started working in the field of compliance around eight years ago, companies didn’t see any necessity to put much effort or money into their compliance systems. In most companies one legal counsel was responsible for both legal issues and compliance issues. There was no special compliance officer. Compliance was a kind of “on the side” job. After several “bad” court decisions within Europe, some top managers and compliance officers were forced to pay huge penalties, lost their jobs and some of them even went to jail. After that point the budgets for compliance systems grew and companies and managers realized the need for good and robust compliance systems to protect themselves and the company against huge compliance liability risks.
The government authorities, on the other hand, gained a growing momentum of carrying out investigations with regard to possible compliance violations. They also view this as an opportunity to get increased income for the state budget. In Ukraine the probability of enforcement and exposure related to incompliance liability risks is rising day-by-day, due to fundamental reforms within the judicial system and in the Prosecutor-General’s Office. Ukraine needs to show international lenders and investors more than simply the good will to fight corruption. One or two public prosecutions for corrupt practices will not suffice. Ukraine needs to prove within the coming years — also to the international lenders — that its legal enforcement system is functioning effectively and that also smaller, non-political cases are being enforced in an effective and strictly regulated way. The fight against corruption has just begun.
Based on this, our advice for companies doing business in Ukraine is to adjust their compliance approach in line with the FCPA and the UKBA liability risks, but also in line with the growing stricter law-enforcement in Ukraine expected to come into place within the next few years.
UJBL.: What are the consequences of non-compliance with the UK Bribery Act and U.S. Foreign Corrupt Practices Act? How can penalties be minimized via compliance mechanism?
A. D.: According to the UKBA the criminal penalties, which can also be enforced in Ukraine, can include (i) for individuals: imprisonment of up to 10 years and an unlimited penalty fine; and (ii) for companies: unlimited penalty fines and being excluded from public contracting.
FCPA criminal penalties, which can also be enforced in Ukraine, include (i) for companies the payment of up to USD 2,000,000 or double the benefit received from the payment; and (ii) for individuals (officers, directors, stockholders, employees, and agents) the payment of up to USD 100,000 or double the benefit received and/or imprisonment of up to five years.
According to the FCPA the civil penalties can include civil claims or civil actions for injunctive relief, including claims under the False Claims Act against any firm or any officer, director, employee, or agent of a firm, or stockholders acting on behalf of the firm.
Besides, according to both law regimes, shareholder and derivative civil actions are possible, claiming loss and other damages to the corporation and the acting individual.
An existing compliance system itself can avoid or at least reduce the fines to a minimum. There were several cases when all the charges against an incompliant company were dropped due to the fact of having an appropriate and up-to-date compliance system.
UJBL.: What industries demonstrate interest in introducing compliance programs? How well do they understand the benefits of compliance?
A. D.: In general, large companies across industry sectors are more interested in establishing a compliance system because their risks of exposure to possible compliance issues, for example including kickback schemes or possible bribery of government officials, are higher. Subsidiaries of big internationals operating in Ukraine are also interested in having a good compliance system based on their international high standards.
With regard to the particular compliance field of bribery and corruption, some industry sectors are more affected than others. For example, businesses which depend on approvals or licenses issued by government officials, face higher risks of bribery and, therefore compliance issues at such companies need to be addressed in a more sophisticated and more structured way.
Based on my experience, companies from industry sectors like military, pharma, oil and gas, chemicals, automotive and electricity are more often exposed to possible bribery issues as compared to other industry sectors.
Broadly speaking, businesses start investing in compliance for one of the two reasons: they are either scared by potential liabilities or need to attract external financing. Whatever the motives are, compliance typically starts with a thorough risk assessment. The sooner the companies and the top management are briefed about the potential risks, the better they understand the advantages of a good and robust compliance system.
UJBL.: What is the most challenging case from your professional experience?
A. D.: Two examples come to my mind.
The first case was a big company we undertook an investigation for, and where a board member was allegedly involved in a fraud scheme that sales personnel used towards customers for decades. Our investigation revealed that one board member knew or at least was informed about the fraud scheme and did not do anything to inform other board members or the supervisory board.
The second case involved an investigation which some other law firm had already been doing for over a year. At one point the client was asked by the U.S. authorities to hire our team to assess the already undertaken investigation from an FCPA point of view and to finalize the investigation. It was more than challenging to work together with the previously involved law firm which conducted the investigation so far and to get all relevant information from them. It took longer to ensure appropriate running cooperation on that case.
UJBL.: Do you expect global investigations covering Ukraine in the near future?
A. D.: Yes. Ukraine has huge industry sectors, running billion dollar businesses, which still depend on the goodwill of government officials. Therefore, huge businesses and companies are in the focus of foreign and national compliance authorities for possible bribery actions. Also, the well-known Ukrainian practice of giving a government official a “speed up fee” or a “small attention” is not helping either. Ukraine’s current ranking in the Transparency Corruption Index is making Ukraine more and more interesting for globally run investigations.
We know that the DOJ and the SEC are continuously increasing their staff and sector team members for investigations abroad. We also know that Russia and other CIS countries are getting more and more into the focus of the U.S. and UK authorities. Every CIS country where big international companies are investing are interesting for investigators.
Not only are the U.S. authorities monitoring the Ukrainian market for possible investigations. The UK authorities, like the Serious Fraud Office (SFO), are interested in investigating businesses run in Ukraine and having potential violations of the UKBA. The director of the SFO, David Green, stated in 2014 that the SFO has frozen several assets of former government officials of Ukraine worth several millions based on a bribery allegation. The SFO is closely monitoring and assessing activities on the Ukrainian market.
UJBL.: You have joined Redcliffe Partners to launch the compliance practice. What type of requests do you observe on the Ukrainian market?
A. D.: Most of the requests are related to potential risks for companies residing in Ukraine and those doing business here. Our mandates also include the establishment of a compliance system from scratch, the audit of existing compliance systems, delivering in-house training, in particular with regard to the FCPA and the UKBA. We also had inquiries requesting compliance due diligence of business partners and other third parties.
Redcliffe Partners Key facts:
• Year of establishment
2015 (2008 — 2015 Clifford Chance Kyiv)
• Number of lawyers/partners
10/4
• Core practice areas
Antitrust
Banking and Finance
Capital Markets
Compliance
Corporate and M&A
Debt Restructuring and Insolvency
EU law
International Arbitration
Litigation
Real Estate
