ethical corp report summary anti corruption russia
TRANSCRIPT
Anti-corruption, ethics andcompliance in Russia
Practical information from leading companies
Executive SummaryThe full report is available at www.ethicalcorp.com/russia
Ethical Corporation
NOVEMBER 2008
ANTI-CORRUPTION, ETHICS AND COMPLIANCE IN RUSSIA
Contents
Foreword ............................................................................................................................................................4
Acknowledgements ....................................................................................................................................4
Executive Summary ............................................................................................................................................5
Introduction ........................................................................................................................................................7
Chapter 1: Doing business ethically in Russia ..................................................................................................9
1.1 Russian laws and regulations........................................................................................................................91.1.1 Existing anti-corruption legislation ......................................................................................................91.1.2 Impending legislation ..........................................................................................................................91.1.3 A selection of laws and regulations particularly affecting foreign entities ........................................101.1.4 Additional common regulatory issues ................................................................................................111.1.5 Implementation of legislation ............................................................................................................131.1.6 Examples of cases where corruption presents real risks to business ..............................................13
1.2 Russian business norms..............................................................................................................................141.2.1 The cost of corruption in Russia ........................................................................................................141.2.2 Socially common practices ................................................................................................................141.2.3 Industry-specific examples of corrupt practices ................................................................................151.2.4 Corruption risks and threats when doing business in Russia ..........................................................161.2.5 Local expectation and perceptions of foreign multinational companies ..........................................17
1.3 Trends in Russia’s anti-corruption business culture ....................................................................................171.3.1 Background ........................................................................................................................................171.3.2 Corporate practice and tolerance of corruption ................................................................................181.3.3 Long-standing customs......................................................................................................................181.3.4 Ownership transfer and the new oligarchs........................................................................................19
Chapter 2: Russian engagement with international anti-corruption conventions and initiatives ....................20
2.1 Support for international conventions........................................................................................................202.1.1 OECD Convention on Combating Bribery of Foreign Public Officials in InternationalBusiness Transactions ................................................................................................................................202.1.2 United Nations Convention against Corruption ................................................................................202.1.3 World Economic Forum Partnering Against Corruption Initiative (PACI)............................................202.1.4 United Nations Global Compact: Principle 10 ....................................................................................212.1.5 The Council of Europe Criminal Law Convention on Corruption........................................................212.1.6 International Chamber of Commerce (ICC) Rules of Conduct to Combat Extortion and Bribery ......212.1.7 The Kimberley Process Certification Scheme (KPCS) ........................................................................212.1.8 The Extractive Industries Transparency Initiative (EITI) ....................................................................22
2.2 National regulations and global conventions ............................................................................................222.2.1 How national legislation is influenced by the international community ..........................................222.2.2 Industry-supported initiatives ..........................................................................................................222.2.3 Current leadership’s action against corruption ................................................................................222.2.4 Corporate compliance ......................................................................................................................232.2.5 Trends................................................................................................................................................24
2.3 Existing and emerging national and regional anti-corruption frameworks ................................................242.3.1 Government and public initiatives ....................................................................................................242.3.2 Key NGOs ..........................................................................................................................................252.3.3 Regional initiatives............................................................................................................................252.3.4 Private-sector initiatives....................................................................................................................26
Chapter 3: Case studies ..................................................................................................................................28
3.1 Introduction to case studies ......................................................................................................................283.1.1 Host-country-adapted codes of conduct............................................................................................283.1.2 Policy on gifts and client entertainment ..........................................................................................293.1.3 Training issues ..................................................................................................................................293.1.4 Due diligence ....................................................................................................................................293.1.5 Additional ways companies adapt in order to meet the host-country regulatoryand cultural environment ..........................................................................................................................29
3.2 Case studies ..............................................................................................................................................303.2.1 Compliance case study – KPMG ........................................................................................................303.2.2 Corruption case study – Hermitage Fund ........................................................................................343.2.3 Tax Police short case study – Warren’s Sausages ............................................................................373.2.4 Customs short case study ................................................................................................................383.2.5 Regional short case study ................................................................................................................393.2.6 Extortion short case study ................................................................................................................39
Conclusion ........................................................................................................................................................40
Methodology ....................................................................................................................................................42
Appendix 1: Internal ethics and compliance policy information– for select companies operating in Russia ....................................................................................................43
References ........................................................................................................................................................45
ANTI-CORRUPTION, ETHICS AND COMPLIANCE IN RUSSIA
ANTI-CORRUPTION, ETHICS AND COMPLIANCE IN RUSSIA
Foreword
Anti-corruption has resurfaced as a critical issueamong multinational businesses, NGOs and
governments. Corruption by business people andgovernment ocials persists in many emergingmarkets, such as Russia.
Transparency International’s latest CorruptionPerceptions Index ranked Russia in the bottom 20%of countries complying with international compli-ance law. What does this mean for companies? Itpresents real risks to business such as legal fees, time,operational disruptions, stang, and excess taxes.
Increasing trade and foreign direct investmenthave encouraged joint anti-corruption initiatives suchas: the OECD Convention on Combating Bribery ofForeign Public Ocials in International BusinessTransactions; World Economic Forum PartneringAgainst Corruption Initiative; United Nations GlobalCompact: Principle 10; The Council of EuropeCriminal Law Convention on Corruption; and theInternational Chamber of Commerce Rules ofConduct to Combat Extortion and Bribery.
Ethical Corporation
Ethical Corporation has noted an increased interestin Russia by foreign multinational companies. Thesecompanies demand detailed descriptions of currentrisks and effective ethics and compliance strategies.They need to understand the value of global initia-tives in the Russian business environment, and callfor guidance on local anti-corruption laws and norms.
Current legislation affecting foreign companies ischanging. The current leadership is changing nationalregulations in order to conont corruption.
Several Ethical Corporation readers have comeforward with their strategies to mitigate corruptionrisks in Russia. In this report, various leading multi-national companies share their experiences, lessonsand compliance strategies for conducting ethicalbusiness in Russia.
This report aims to help companies comply withlocal and global regulations, and set internal policiesand practices that help combat corruption.
AcknowledgementsEthical Corporation is grateful to Magpie Links Limited for leading this research. We would also like to thankthe following interviewees for providing valuable input: Bill Browder, CEO, Hermitage Fund; Jan Dauman, Chief Executive,CET-InterMatrix; Alexander Kupinsky, Penny Lane Properties; John Lyon, Executive Director – Geographic Development,Dow Corning; Natalia Malashenko, Director, Corporate Communications, UPM-Kymmene; Jim McKinven, Risk ManagementPartner, KPMG Russia; Ruslan Nozdryakov, Corporate Communications Manager, Philips Russia; Elena Panfilova, Founderand Director of Transparency International Russia; Sergey Parkhomenko, Senior Academic Fellow, Russian Higher School ofEconomics and INDEM Foundation; Georgy Satarov, President, INDEM Foundation; Olga Stroeva, PR Director, Century 21;John Warren, Owner, Warren’s Sausages; Vladimir Yuzhakov, Head of the ‘Administrative Reform’ Project at the Centre forStrategic Development; and a Russian lawyer who previously worked for an American multinational company active in Russia.
Executive summary
This report has been compiled to address thecomplexities of corporate ethics and compliance
for multinational businesses that operate in Russia. Itincorporates a special focus on anti-corruption. Thisindustry-diverse country offers many business oppor-tunities to foreign investors, but its complex systemsneed careful analysis when planning market entry.
One of the chief challenges to businesses in Russiaconcerns the level of corruption associated withbusiness activity. Russia’s ranking of 147th out of the180 countries in Transparency International's latestCorruption Perceptions Index is not reassuring.Corruption in Russia affects all types and sizes oforganisations, public and private, local and foreign,and it appears to be on the increase, both in terms ofthe level of corruption and of its cost to companies.The general public does not approve of corruption,but people do not see how it can be eradicated.
A major review of anti-corruption legislation isbeing carried out in accordance with a new Presi-dential Plan. President Medvedev established a specialcommittee in order to implement the legislativereview and to introduce new anti-corruption laws tothe Russian parliament. These are expected to bepassed by January 2009. This initiative has beenwelcomed by the business and public sector; it raisesthe profile of corruption issues and institutes a much-needed review of laws that, to date, have been poorlyenforced. In a society governed strictly by a verticalhierarchy such as Russia, this top-level commitmenthas boosted the public debate on corruption in thecountry.
Another positive indication concerns Russia’sengagement in several of the major international anti-corruption conventions, including the United NationsConvention against Corruption and the Council ofEurope Criminal Law Convention on Corruption,which Russia ratified in 2006. Russia has also madea public commitment to accession to the OECDConvention on Combating Bribery of Foreign PublicOcials in International Business Transactions. Theseglobal initiatives have helped provide the ameworkfor the planned Russian legislation.
As well as committing to international conven-tions, Russia has many national and regionalinitiatives dedicated to fighting corruption. At anational level, many of these initiatives are supportedby a variety of government ministries. It is hoped thatthe new anti-corruption legislation will giveadditional support to these efforts, which should helppromote greater coherence in regulatory implemen-tation in Russia’s regions, where the authorities to
date have had room to interpret such regulations inextremely loose terms. There are also a number ofactive private-sector initiatives, providing informa-tion and support to Russian and foreign-ownedcompanies.
Leading foreign companies active in Russia are alloperating according to codes of conduct that gener-ally have clear policies on compliance issues such asbribery, gis and the use of suppliers and agents.These companies run training programmes on theseissues for employees so that they know how to actwhen they encounter unethical activity.
Ethical Corporation’s research indicates that high-profile Russian companies are following the leadestablished by their foreign counterparts with regardto corporate codes of conduct, ethics and compliance.Increased exposure to a western-style complianceculture has influenced the Russian business environ-ment so that it now presents a very different pictureto that of the 1990s. However, for smaller companies,it is more dicult to avoid bribery and extortion, andin some instances accepting a certain level of corrup-tion may appear to be the only effective way tosustain business operations.
There is also the fact that despite the more positivedevelopments, there are significant cultural differ-ences in Russia concerning anti-corruption whichdate back to Soviet times, and attitudes to what isacceptable or not vary in comparison with otherbusiness cultures. Added to this is the reality thatonce a company has resorted to bribery and othernon-ethical activities, it is much more vulnerable tofurther extortion and blackmail, and in the worst casecan risk losing its entire business along with all itsassets.`
Our research highlights the costs to foreigncompanies of ensuring compliance with local lawsand regulations. The process of obtaining permits andlicences and of ensuring that oces and premisesmeet all the various requirements in areas such asfire and health and safety, can take a great deal of timeand money. In addition, these situations typicallyprovide ocials with opportunities for bribes andfavours. From the company’s perspective, it is essen-tial to have a clear zero-tolerance policy in place, asonce bribes are condoned, then the company cultureis irrevocably compromised.
Our interviews revealed a variety of specificcorruption challenges, and they illustrated the pointthat compliance in itself does not always produce therequired results. Some of the companies profiled didnot manage to combat corruption successfully,
ANTI-CORRUPTION, ETHICS AND COMPLIANCE IN RUSSIA
ANTI-CORRUPTION, ETHICS AND COMPLIANCE IN RUSSIA
despite a commitment to ethical behaviour and to therule of law.
There is no doubt among foreign investors thatthere are many positive aspects of doing business inRussia, which they think compensate for the di-culties of complying with all the regulation affectingbusiness in the country. It should be noted also thatcertain sectors are much more restrictive to foreigninvestors, particularly those named in the StrategicIndustries Bill, which came into force in May 2008.This includes the natural monopolies, such as energyand extraction, where there has been a concertedeffort by the Russian Government in recent years toensure control of these industries under a new gener-ation of oligarchs selected by the state.
Introduction
Corruption as a significant risk to business
According to the World Bank, corruption is the singlegreatest obstacle to economic and social development.The World Bank estimates that corruption costs morethan 5% of the world’s gross domestic product (GDP),nearly $3tn. Companies spend huge sums annually tosecure benefits and advantages for their businessoperations. In certain countries, many governmentocials expect an illegal payment or bribe to enableor speed up a company operation.
There are many reasons why the last 15 years haveseen a steady move against corruption, spearheaded bymany international organisations, including the UN,World Bank and OECD, and supported by governmentsand industry. Corporate governance and responsibilityhave assumed an increasing importance on the corpo-rate agenda, and companies can no longer afford to beseen as engaging in unethical business practices. Theinternational anti-corruption organisations highlight anumber of issues that need to be considered:
Ethical and social issuesCorruption is fundamentally wrong and unfair tosociety as a whole. It is an abuse of the power base ofthe democratic structure of society, debases legitimatestructures and has a particularly strong impact on thepoorer and weaker sectors of society. Corruptionundermines people’s trust in the economic and polit-ical system of a country, and leads to a loss ofintegrity. These outcomes can lead to a lack ofaccountability by a country’s leadership.
Economic and financial issuesCorruption discourages economic growth, detersinvestment, distorts market competitiveness andhampers the development of transparent marketstructures. It can add up to 10% to companies’ costsof doing business, and can generate an additional 25%or more in costs to companies when engaging inpublic procurement.
Legal issuesLegislation such as the US Foreign Corrupt PracticesAct applies to a company’s operations both within andoutside the country where it is registered, so partic-ipating in corrupt activities anywhere in the world isvery high-risk. Furthermore, companies can be heldresponsible for the actions of associates or interme-diaries acting on their behalf. Corrupt activity canresonate throughout the supply chain and result incourt cases and other civil actions.
Reputational issuesCompanies associated with corrupt activity at bestrisk losing status in the business community and, inthe case of prosecution for such activity, can experi-ence long-term and possibly irrevocable damage totheir reputation. The growth of business initiativesand international anti-corruption conventions hasstrengthened the role of business in fighting corrup-tion. As it is oen the companies that are payingbribes to ocials to achieve their business objectives,the alternative is that by insisting on transparencyand compliance they can raise awareness of the issueand help reduce corrupt behaviour.
Also, once employees know that their company isengaging in unethical activities, they are more likelyto condone corrupt activity themselves, and this caninclude unethical behaviour towards their employer.Another risk is that such a company will end upbeing blackmailed, which can be damaging for allparties and can quickly spiral out of control.
Local and environmental issuesEnvironmentally questionable projects are oen thefocus of corrupt activity, providing an opportunity forcompanies to bribe ocials and achieve economicgains, to the detriment of the environment. Fundsthat were intended to develop a local project can endup being diverted to corrupt ocials, which in turnreduces the capital available for locally useful andsustainable projects.
Corruption and related issues in RussiaThere is no doubt that corruption is a major problemfor businesses in Russia.
In July 2008 the Foreign Investment AdvisoryCouncil of Russia (FIAC) released the latest ‘ForeignDirect Investment in Russia’ report, which looks atthe investment climate in Russia. The publication’saim is to build a picture of how foreign investorsperceive Russia in terms of investment opportunities.Fiy chief executives and board members of foreigncompanies operating in Russia were surveyed on arange of issues affecting investment. One of thequestions focussed on companies’ concerns regardinghow the rule of law is enforced in Russia, and wereproduce a graph of the responses to this questionbelow. As can be seen, corruption challenges in Russiaare linked to problems with legislation, lack of trans-parency and other administrative issues. We discussthese issues over the following pages.
ANTI-CORRUPTION, ETHICS AND COMPLIANCE IN RUSSIA
ANTI-CORRUPTION, ETHICS AND COMPLIANCE IN RUSSIA
7090
OthersInsufficientlyindependent
judicial system
Admin.barriers
Insufficientlytransparentlegislation
Anti-corruptionactivity
Source: Foreign Direct Investment in Russia1
Leastconcern
Greatestconcern
Major concerns with doing business in Russia
In September 2008, Transparency Internationalissued its annual Corruption Perceptions Index (CPI).The CPI, first published in 1995, is a ranking of 180countries by their perceived levels of corruption asdetermined by experts and through opinion surveys.Transparency International has an advisory committeeof economists, statisticians and social and politicalscientists that have helped develop the tools used tomeasure levels of corruption. The CPI scores countrieson a scale om 0 (highly corrupt) to 10 (highly clean).In the latest CPI, Russia was in position 147 in theleague table, with a low score of 2.1. This was oneposition down om 2007, when Russia scored 2.3, sothere is no substantial improvement as yet.
Legislation and global initiativesIn Chapter I we provide a detailed summary of devel-opments in Russian legislation that relate to
anti-corruption, and these are situated within globalinitiatives in this field in Chapter 2. At the time ofwriting, the Russian Government is conducting athorough review of its anti-corruption legislation,which is part of a strongly worded commitment omPresident Medvedev that corruption should bestopped. Recent figures quoted by The Committee forthe Fight against Corruption in Russia would suggestthat these measures are timely: of the criminal casesbrought in 2008 against persons convicted of corrup-tion, 757 – or almost a quarter of these – werebrought against individuals working in administra-tion or the law, including inspectors, publicprosecutors, lawyers, judges, and municipal andregional deputies. It is estimated that the illegalincome of corrupt ocials currently exceeds one-third of the national budget of the RussianFederation.
1 www.maksimos.net/?p=451 and http://www.fiac.ru/files/fiac_survey_2008_eng.pdf
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