Aleksieiev V.S.

Oles Honchar Dnipropetrovsk National University (Ukraine)

A FEW STEPS TOWARDS RESOLVING CORRUPTION PROBLEM IN UKRAINE

As Ukraine is moving towards the European Union, resolving corruption problem is becoming more and more urgent. Unfortunately, corruption has roofed itself firmly both in our everyday life (educational establishments, health protection institutions, etc) and in business environment (bribe taking for starting business, getting privileges, kick-backs, etc). Addressing the 13th Yalta European Strategy Annual Meeting President Poroshenko described corruption as Ukraine’s main enemy. Now that Ukraine is facing direct aggression in the east, the need to revive our economy is vital. No doubt, to recover our economy we need a lot of foreign investments. This article deals with some international investment risks and corruption-related problems.

In addition to the typical bribery risks and arrangements discussed above, there is also another group of risks which are not that obvious to understand. It is a rather common scheme in Ukraine and other CIS countries, where companies are advised by a distributor or buyer to use certain sales structures. Although such structures appear to be legitimate on the surface, closer examination of them may lead to the conclusion that significant bribery risks are generated by such sales structures. For instance, a customer from Ukraine agrees to buy certain products from works offshore and suggests that the invoice be paid by its offshore parent or affiliate in Cyprus or Switzerland. Alternatively, the customer performs direct payment to the offshore manufacturer, but requests that the product delivery is made not to the buyer’s office in Ukraine, but to a warehouse in a neighbouring country, e.g., Moldova, Poland or in one of the Baltic States. Product manufacturers have reasonable grounds to pursue such sales structures as they allow companies to minimise logistics expenses and avoid concerns about customs clearance or necessary certification of the product in Ukraine.

However, from an anti-bribery standpoint, such sales structures need to be classified as red flags that require thorough review. This is because such schemes allow distributors or customers to manipulate customs clearance, inflate resale prices or perform other improper actions that allow the minimizing of customs fees and state duties. Such actions often require the making of improper payments to customs officials or other government officials and such payment may be eventually attributed to the product manufacturer. In several recent FCPA enforcement actions, the prosecution successfully argued that in these circumstances the customer or distributor acted for the benefit or on behalf of the product manufacturer, facilitating the import of its products to one of the countries of the CIS. Although under the Ukrainian Anti-Corruption Act the schemes described would not cause a risk unless the product manufacturer explicitly knew that improper payments were made for customs clearance of product certification, the contracts of indirect sales or shipment structures would likely expose the company to the risk of FCPA or UK Bribery Act liability.

The increasing enforcement of international and local anti-corruption statutes against international companies worldwide requires that businesses reconsider the usual ways of doing business. The risk of penalties and other enforcement actions for bribery violations already amounts to the value of benefits gained by the illicit conduct and it could quite possibly be even higher than the benefits received. Thus, it is obviously high time for companies to revise their operations in Ukraine by eliminating improper business arrangements if any exist. Therefore, we recommend that companies implement a three step action plan:

Step 1: Assess Risks and Detect Red Flags. Undertake a careful examination of a company’s specific industry, business practices and market environment which would allow the identification of areas of highest corruption risks. It seems prudent to review obtained regulatory documents and verify that they were obtained in compliance with the law and, if intermediary consultants were used, that their actions would not qualify as a corrupt conduct that may be attributable to the company. For obvious reasons, companies also need to strengthen due diligence review of business partners and establish robust third party vetting procedures that would allow the detection of tainted distributors and agents. Depending on the risks identified, each company also needs to elaborate meaningful procedures that would eliminate or mitigate the risk of corrupt practices or violation of global anti-corruption statute requirement.

Step 2: Implement Procedures and Mitigate Corruption Schemes. Draft or review anti-corruption procedures which should be clear, effective and workable and ensure that their enforcement must be unflinching. None perhaps is more important than a due diligence policy that enables thorough review of partners and agents hired to assist with various business activities. Many anti-bribery experts agree that in the current anti-corruption enforcement environment the use of intermediary agents, consultants and even distributors should be minimised. Where it is impossible to eliminate intermediaries, companies are required to invest significant cost and effort into proper training and control over such intermediaries.

If companies identify corrupt arrangements during the risk assessment, it is essential to work out a separate mitigation plan that eliminates the risk of liability or other adverse effects. It is also necessary to consider the merits of possible local or international reporting of revealed corrupt actions to prosecution authorities.

Step 3: Train Employees and Ensure Top Commitment. This step allows the institution of strong and effective commitment towards the company’s values, policies and procedures. The regular training of personnel and business partners allows the dissemination of ethical business values. In order to be able to spot bribery red flags and schemes, employees should be aware of those risks and understand the possible arrangements and corporate liability. Thus, proper training will ensure a day-to-day anti-bribery effort which will increase the chances of catching improper conduct and eliminating or mitigating risks at an early stage.

Finally, a top level anti-corruption commitment from management is essential to change the business culture in Ukrainian subsidiaries of multinational corporations by promoting compliance and corporate integrity.