Keeping Track Of The Money Is Key To Success
- By Mark H. Gay
- Jan. 13 2014 18:13
Talk about core values may sound like a business school ethics class, but for U.S. companies pursuing contracts in Russia, compliance is central to success. The construction industry may be about to put its values to the test.
From 1st January, a new law on state purchases comes into effect that will make procurement less transparent. An electronic system of open tenders will be replaced by paper-based federal contracts. "This will bring us back to the pre-Internet age, to what we had in the 1990s," Igor Artemyev, head of Federal Antimonopoly Service, told Vedomosti. The government will end electronic tenders through the website, zakupki.gov.ru, in favor of what Artemyev called, "envelopes".
"When it comes to core values, and transparency is a key one, we don't act differently in Russia," said David Whitehouse, AECOM Managing Director, Russia, CIS and Turkey. "We acknowledge cultural differences in a country but that does not compromise our core values."
"I disagree with a lot of people that compliance is a major issue. I think it used to be but not today. Our exposure is limited, probably because we are more private sector focused. We can very quickly, on bidding processes, determine whether it is an open, fair tender or not and we will refuse to bid if it is not an open tender. We have to turn down one or two projects a year where, having met the personalities it does not feel right. But compared with other countries I would not say it is a bigger issue."
On Transparency International's scale of perceived corruption, Russia ranked 127 out of 177 countries in 2013. It received the same score (28 out of 100) but moved up from 133 as other CIS countries slipped. On the World Bank's ease of doing business survey, however, Russia saw one of the best improvements, to 92 from 112, out of 189.
Improper business practices immediately increase the risk profile and vulnerability of a foreign business.
Both the recession and legislative changes could harm transparency in government contracts, said Pavel Melnikov, VP, Public affairs & crisis communications, at Grayling. "The pressure has increased. The budget has a deficit and as well as the slowing economic conditions you have not only to invest more in areas like Sochi and elsewhere but the people that were earning or getting their kickbacks are unlikely to restrict their appetites."
For U.S. companies, core values are further stiffened by the need to comply with the Foreign Corrupt Practices Act.
Alex Volcic, Kroll Head of Russia & CIS, says this does not make life harder for U.S. companies than for competitors. "The Americans have been quite good at internationalizing their jurisdiction. The focus on compliance is now something most companies have to follow so our clients on compliance range from Japanese to European. The Department of Justice has been good at paying attention to a whole number of firms that you would not think of as American: BAE Systems and Siemens had settlements with the DOJ.
But compliance is not just about bribes, Volcic stressed. Fraud usually accompanies bribery, "so it is in everybody's interest to make sure that money flows are controlled."
Managing Partner of Goltsblat BLP, Andrey Goltsblat, said compliance was "a matter of your security and a key factor to your success." This made it a bigger issue than leaks or theft. "Improper business practices immediately increase the risk profile and vulnerability of a foreign business operating in Russia."
As well as U.S. laws, companies need to be aware of the Russian Anti-Corruption law. "The Russian law considers a facilitating payment as a corrupt act. It's a common misconception that because FCPA concerns only officials, commercial bribes out of the US won't be prosecuted. There are other US laws apart from the FCPA, which would enforce commercial bribes even in Russia. It's important to know and understand this." Under the Russian Anti-Corruption Law the company can be kept liable and be fined by multiple fine of the amount of bribery committed by its associates in the interest of the company.
Enforcement of the FCPA, passed in 1977, has increased recently, said Goltsblat but the DOJ was willing to resolve cases amicably. "It's very important to be able to demonstrate that the company has undertaken all possible preventive measures to avoid corruption. The law itself does not provide for any consequences of self-disclosure, however, it may help to build collaborative relations with a DOJ officer. At the same time, it's very important to be fully informed of your particular case if there is a FCPA violation and to know what the pros and cons of such self-disclosure are."
Goltsblat said measures should include appointing a person in charge of compliance, along with policies, audits and regular training sessions.
Bribery And Fraud Come As Partners
Alex Volcic, Kroll Head of Russia & CIS
What are the main reasons why companies approach your firm?
There are two sets of reasons. They want us to help mitigate the risk of doing business with people they don't know or in areas with which they are not familiar. This is diligence. Say you are about to do a deal or hire someone and you would like to know more. This is a process that most western firms use and it arrived in Russia in the 1990s. It is a market with different risks than you have in the west but I don't buy that Russia is more corrupt. There are other parts of world that pose similar or higher corruption risks. However, you need to understand the country.
The second reason is if companies have a joint venture or a unit here and something goes wrong. Someone may be stealing information or leaking to the competition or paying bribes to public officials on your behalf. This is mainly an issue for western companies that are subject to very strict corruption legislation. Russian companies approach us about simple corruption or fraud.
What do companies need to do to show that their hands are clean?
I'm not a lawyer but there is both the FCPA and the UK Bribery Act. There are a number of procedures that are deemed to be acceptable to the authorities. There needs to be a risk-based approach: where are my risks, how does money flow out of the company and what is my compliance screening program.
If you are a manufacturing company with a lot of local suppliers you have to screen them. That is a fact of life. If you are a consulting firm without many suppliers you probably don't need it. You need to adopt the approach of, 'what are my risks and what should I do to minimize them'.
What are the main things that U.S. companies worry about in Russia with regards to protecting their technology and intellectual property?
There is the legal question, what is your IP, then there are technical and cyber questions like how do you protect your IP and monitor leaks. This is a mix of technology and good old-fashioned investigation: do I have print logs and need-to-know lists. But this is not a Russian problem. Cyber threat to your IP is a very hot topic and I don't see a Russia specific issue there.
Does the image that Russia is a tough place to do business make companies cautious about doing business here, and what is the reality?
You would me expect me to say this but I don't see how you cannot be here. It is a tough place but the returns are great. There are many sectors where you can do really good business if you put in the right processes, and if you think about the risk and reward equation. Risks are not unmanageable. I don't believe that Russia is worse than other countries with similar growth rates. It has a highly skilled workforce, increasingly educated in a western way, and a great city like Moscow where it is not difficult to get an expat to come.
What types of problems have you solved?
On the reactive side, we deal with a lot of conflict of interest: suspicion that someone in the company has colluded with suppliers or distributors so that decisions were taken to suit personal interests. On the due diligence side, when I started working on this, looking at some of the biographies of people in the 1990s, it was quite adventurous, what we called robber baron capitalism. Now they are increasingly similar to western counterparts, especially when you do work on executives in their 40s and 50s. They may be even better educated than their western counterparts. It makes the job of an analyst
less interesting but it means the economy is maturing.