6/13/2016
Hidden Business Risks in Russia June 16, 2016 Tom Engelhart & Derek Harris
www.kreller.com
1.800.444.6361
Kreller Background • Comprehensive international due diligence and compliance services since 1988.
• 200 jurisdictions represented.
• 350 in‐country investigators worldwide.
• Official representation in Beijing, Caracas, Dubai, London, Mexico City, Moscow, New Delhi, Sao Paulo, Tokyo.
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Historical CPI (Corruption Percentage Index) in Russia Brazil
Russia
India
China
2010
69
154
87
78
2011
73
143
95
75
2012
69
133
94
80
2013
72
127
94
80
2014
69
136
85
100
2015
76
119
76
83
CIS (Commonwealth of Independent States)
Ukraine
Belarus
Kazakh‐
stan
Armenia
Georgia
Uzbe‐
kistan
2012
144
123
133
105
51
170
2013
144
123
140
94
55
168
2014
142
119
126
94
50
166
2015
130
107
123
95
48
153
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Russian Anti‐Corruption Laws
Russia’s Federal anti‐corruption law No. 273, article 13.30: Requires companies operating in the country to implement anti‐corruption, compliance programs. Russia's Federal anti‐corruption law
• Responsibility for the prevention of bribery. • Adapting procedures to cooperate with authorities (Duma). • Creating procedures of ethical business conduct. • Implement policies for conflicts of interest. • Prevention of false documents. Impact of Sanctions • U.S./EU Sanctions
• Financial Industry – Biggest Impact Globally
• Drop in oil prices • Impact on Russian Ruble
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Average Cost Per Barrel in US Dollars
120
100
80
60
Average Cost Per Barrel
40
20
0
July‐ Dec.
2012
Jan.‐June
2013
July‐ Dec.
2013
Jan.‐ June
2014
July‐ Dec.
2014
Jan.‐ June
2015
July‐ Dec.
2015
Jan.‐ April
2016
Average Cost Per Barrel in Rubles
3.5
3
2.5
2
Average Cost Per Barrel in Rubles
1.5
1
0.5
0
July‐ Dec.
2012
Jan.‐ June July‐ Dec.
2013
2013
Jan.‐ June July‐ Dec.
2014
2014
Jan.‐ June July‐ Dec. Jan.‐ April
2015
2015
2016
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Ruble Value to a US Dollar
Russian Ruble Value
0.04
0.035
0.03
0.025
0.02
Russian Ruble Value
0.015
0.01
0.005
0
2010
2011
2012
2013
2014
2015
Average Russian Bribe
• According to The Moscow Times Moscow police said the average amount of the bribes paid by people arrested in 2015 had doubled over the year to reach 654,000 rubles
• More of the everyday bribes often range from 1,000 rubles to 15,000 rubles
Year
2008
2009
2010
2015
Russian Ruble
₽9,000
₽23,000
₽61,000
₽208,000
US Dollars
$405
$736
$1,952
$3,485
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Average Russian Bribe
Cost of a Russian Bribe
250000
200000
150000
Rubles
US Dollars
100000
50000
0
2008
2009
2010
2015
FCPA Cases Involving Russia since 2008
Department Amount of Fine (US currency) SEC
$976,550,000
DOJ
$763,353,000
Total
$1,739,903,000
Chart is the total fines of the 8 cases stated below
1. Siemens
5. Pfizer
2. Daimler
6. HP
3. Panalpina
7. Bio‐Rad Laboratories
4. Eli Lilly
8. Vimplecom (CIS) 6
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Siemens Aktiengelsellshaft
• Year: 2008
• Fine: $450 million DOJ settlement $350 million SEC
• 4,200 allegedly corrupt payments totaling $1.8 billion over a six year period
• Also charged with books and records and internal control violations
Daimler AG
• Year: 2010
• Fine: Daimler and its subsidiaries paid a total $93.6 million to the DOJ and $91.4 million to the SEC • Daimler paid at least $56 million in improper payments over ten years
• More than 200 transactions in at least 22 countries
• Daimler earned $1.9 billion in revenue and at least $90 million in illegal profits
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Panalpina
• Year: 2010
• Fine: $11.3 million to the SEC and $71.6 million to the DOJ
• Panalpina admitted to paying $27 million in bribes to foreign officials • Paid bribes to expedite services for a number of companies Eli Lilly
• Year: 2012
• Fine: $29 million to the SEC
• Improper payments made by its subsidiaries to win business in Russia, Brazil, China, and Poland
• Russians subsidiary paid millions to induce pharmaceutical distributors and government entities • Company recognized the improper payments and still allowed its subsidiary to continue for years
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Pfizer Inc.
• Year: 2012
• Fine: $26.3 million to the SEC and $15 million to the DOJ • Wyeth LLC agreed to pay $18.8 million to the SEC
• Subsidiaries bribed foreign healthcare professionals to increase their business • Bribes went on for over a decade
Hewlett Packard
• Year: 2014
• Fine: $76.7 million to the DOJ and $31.5 million to the SEC
• In Russia a subsidiary of HP paid over $2 million to government official to keep a multi‐million dollar contract with federal prosecutor office
• Offense took place from 2000‐ 2007
• No meaningful DD was done on agents or subcontractors even with many red flags
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Bio‐ Rad Laboratories, Inc.
• Year: 2014 • Fine: $14.35 million to the DOJ and $40.7 million to the SEC • Bio‐Rads subsidiaries made improper payments to foreign officials in Russia, Vietnam, and Thailand
• In Russia Bio‐Rad SNC paid sales agents commission between 15‐30 percent
• Commission payments were reviewed and approved by higher level managers
• Knowingly failed to implement adequate compliance system VimpleCom
• Year: 2016
• Fine: $230.1 million to the DOJ and $167.5 million the SEC and $397.5 million to Dutch prosecutors
• VimpleComs wholly owned subsidiary Unitel LLC paid more then $114 million in bribes to a Uzbekistan official between 2006‐ 2012
• Approximately $500,000 in bribes were disguised as charitable donations
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Total Fines in FCPA Cases Involving Russia Since 2008
Fine
2,000,000,000
1,800,000,000
1,600,000,000
1,400,000,000
1,200,000,000
1,000,000,000
Fine
800,000,000
600,000,000
400,000,000
200,000,000
0
DOJ
SEC
Total
Developing Risk Scores for Third Party Engagements
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Types of Third Parties The Right Questionnaires Onboarding portals/screening tools Silent Partners/Shell Companies/Beneficial Ownership Where they Conduct Business (Sanctioned Countries) Lines of Business‐Risk
Government Exposure/Interactions with Govn’t. Officials/Political Affiliations • Conducting Due Diligence
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Types of Third Parties
• Agent: Acts on behalf of the company and stands in the shoes of the company. What the agent does, is the same as corporate actor.
• Sub‐ Agents: Hired by agent pursuant to your contract with agent: large presence in health care industry
• Joint Venture Partner:
‐ Internal relations between your company and potential “foreign officials” if government partner
‐ External relations and “control and management” of joint venture interactions with foreign officials
• Consultants: Term is used for a variety of arrangements which can include contacts with foreign government officials • Reseller: Company or individual that purchases goods or services with intention of selling them rather than consuming or using them
• Merger & Acquisitions: Purchasing and or joining with other companies • Distributor: Several different types of models
‐ Buy and Sell: variations on purchase price, shipping responsibility, and pricing discretion ‐ Term is sometimes used for arraignments akin to agents
‐ Distributor may be exclusive to your company or may sell competitor products as well ‐ Ability to supervise and monitor distributors may depend on importance of your product to distributor
Initial Identification of Third Party
• Who is the third party?
‐ Gather as much information about the person or company as possible
‐ Professional and educational history
‐ Business organization
‐ Relationship to the government and government officials (family and personal) • How did the third party come to the attention of your company?
• What is the purpose in hiring the third party?
• What specific services will the end third party provide?
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The Right Questionnaires
Top Ten Inefficiencies in Third‐ Party Questionnaires 1.
2.
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4.
5.
6.
7.
8.
9.
10.
Company details
Elaboration on government exposure
Consents
Industry licensure and professional associations
Use of subcontractors/ consultants/ joint ventures/ intermediaries Full contact details of references provided
Specific ownership details Anti‐ corruption compliance
Legal, criminal, and regulatory proceedings
Level of engagement Due Diligence Questionnaire
• A written document for third parties and a different form for JV partners • With concise and comprehensive questions
• Personal and family information • Business and education history • Relationship information
• Business references
• Best when done face‐to‐face but partial issues can arise: eye‐to‐eye contact is valuable • Make sure candidates signs form to certify information
• Make sure questionnaire inquires as to proposed third party’s willingness to comply with anti‐corruption laws (in past and in future)
• Additional questionnaire for company official proposing third party relationship 13
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Onboarding tools & Initial Screening Formula Most onboarding tools use a questionnaire which allow you to risk rank your third parties so you know the sufficient level of due diligence that should be taken prior to engagement
Risk Factor
Risk Criteria
Risk Points
Country CPI
>75 or <75
10 or 5
Internal Sponsorship
Transparent/Non‐Transparent
5
Relationship with Existing or Former Foreign Official
Existing/Direct or Indirect
Former/Direct or Indirect
15 or 10
10 or 5
Referral from Foreign Official
Existing/Direct or Indirect
Former/Direct or Indirect
25 or 20
15 or 10
Prior history or allegations of Corruption or Other Crimes/Misconduct
corruption or other crimes/misconduct
20 or 10
Change in Revenues
Increase over 10 percent annual
10
Percentage of government business revenues
Over 50 percent
5
Any Other Circumstance
Unwillingness to sign questionnaire, reps 5
and warranties, audit rights
Risk Reduction
Training and/or Prior Due Diligence
Minus 5 for each
Silent Partners/ Shell Companies/Beneficial Ownership
• Silent Partners: an individual whose involvement in a partnership is limited to providing capital to the business only they are not actively involved in the management of the business • Shell Companies: is a corporation without active business operations or significant assets often used as a front for tax evasion • Beneficial Ownership: a person who enjoys the benefits of ownership of a property or security even though title is in another name i.e. Panama Papers 14
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Lines of Business‐Risk
• Medical Devices
• Aerospace/Defense
• Pharmaceutical
• Oil & Energy
• Chemicals
• Manufacturing
• Technology Key Components to Risk Ranking
• Government exposure ‐ Interactions with the government
‐ Political exposure ‐ If there are any current or former government official for the intermediary • Where they conduct business ‐ Sanction countries 15
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Conducting Initial Due Diligence • Open Source Intelligence Service
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Low‐cost and valuable tool
Use one of established providers
Valuable tool in gathering important information
Make sure includes: media sources, public filings, and information on state‐owned enterprises
‐ Dynamic searches: alerts if subsequent information changes search research • Use all available Internet search tools‐ it is amazing what you can learn on the Internet • Other company employees who may know or have had dealings with the third party
• Add results of each and analysis to due diligence file Additional Due Diligence Investigation • Consider hiring due diligence investigation companies which provide information which you cannot readily obtain • Document why you hired company
• Try and protect attorney‐client privilege as much as possible • Negotiate and understand exactly what steps the investigation company will take
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Boots on the ground
Local familiarity Conduct interviews of local personnel before moving forward
Specify exactly what you want done and maintain supervision of process to make sure investigation follows proper steps and covers all bases ‐ Ensure review of draft report before it is finalized
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Your Employee’s are the Key in Russia • Provide Training
• Interviews
• Properly Vetting Employees
• Employees are Key
Kreller Group
Thomas Engelhart
Director, Global Investigations
[email protected] 800.444.6361 x104
www.kreller.com
817 Main Street, Suite 300
Cincinnati, Ohio 45202
Derek Harris
Global Due Diligence Consultant
[email protected] 513.723.8919
www.kreller.com
817 Main Street, Suite 300
Cincinnati, Ohio 45202
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