Anti-Corruption: Guidance for French companies with activities in Russia

The so-called “Sapin 2” law of 9 December 2016 profoundly modified French corporate compliance by introducing mandatory standards and procedures to combat corruption committed abroad. Improper payments to foreign officials were criminal violations under French law well before this law[1], but enforcement was difficult and rare. The Sapin 2 law changed all of that by introducing new and ambitious procedural obligations as well as a dedicated French agency, the Agence Française Anti-Corruption.

Sapin 2 procedures are mandatory for all companies or groups of companies meeting two cumulative thresholds: 500 or more employees, and gross sales turnover of 100 million euros or more. Smaller enterprises beneath these thresholds, while not under any statutory obligation, are nevertheless well advised to pay heed to Sapin 2 standards, for in essence they represent the “new normal” of French good-practices in the field of anti-corruption. Evidently, even in the absence of statutory obligation, adequate anti-corruption procedures will always help to protect an enterprise and its management from the risk of unwitting entanglement into areas of potential criminal liability. Voluntary introduction of Sapin 2-inspired standards is also likely to facilitate penetration by SMEs into large-scale contracts or projects involving counterparts, contractors or clients themselves fully subject to Sapin 2 obligations. As with other compliance-related statutes, there is a kind of halo effect associated with the Sapin 2 standards, many of which have gradually spread beyond the circle of companies originally targeted by lawmakers.

Amongst the Sapin 2 standards, two are of particular interest for companies with activities in Russia:

• The general “mapping” of corruption risks (“cartographie”)[2]; and,
• Due diligence procedures on third parties[3], now interpreted by the AFA as procedures for the assessment of the ‘integrity’ of third parties (“évaluation de l’intégrité des tiers”)[4].

Both of these standards involve a geographic element, and this is where the “Russia” factor enters into play. Russia is a high-risk environment for corruption, as illustrated by its low CPI ranking by Transparency International over the last two decades. The task therefore is to adequately reflect Russian risk in the design and implementation of anti-corruption procedures, thereby allowing enterprises to conduct Russia-related business while at the same time preventing associated risks.

Corruption risks can arise in a variety of transactions – and not just when one seeks to sell equipment, goods or services to Russian clients. For example, a French enterprise may become exposed to Russian corruption risk when it contracts for projects unrelated with Russia proper, perhaps goods, equipment or services to be installed in a third country, if it transpires that Russian entities or Russian-owned entities are amongst the foreign contracting parties or otherwise participate in the project. Russia-risk is also relevant in mergers& acquisitions when the target entity conducts activities, even minor ones, in Russia. Another potential risk-generating situation is when French persons or entities are recipients of Russian-source funding, whether as debt or equity for corporates, or as promotional payments or sponsorships in the context of sports or cultural events.

As may of course be expected, Russia-related corruption risk is not monolithic. It will depend of the type of Russian entity or person involved, type of project, sector of industry, and even geography. Russia is a federal country, with not less than 85 regional administration units (at present), meaning that there are multiple layers of government and officials that can become involved. Proper assessment of all of this requires granular analysis of a variety of facts and circumstances.

Panorama of past anti-corruption cases in Russia

In order to build a system adequately protecting against Russia-related corruption risk, it helps to know the traps into which other international groups of companies have fallen in the past when conducting Russian activities. The United States, with its 1977 FCPA statute, is a rich source of information, but there are also instances of prosecutions in other countries, including France, Switzerland and Germany. A simplified, non-exhaustive summary of various cases is set out in the Annex to this paper. In the paragraphs that follow we offer a few conclusions that can be drawn from these precedents.

US FCPA cases

Here we draw on publicly reported case materials released by US law enforcement agencies (DOJ and SEC mainly), many of which were helpfully centralized by the Stanford Law School FCPA Clearinghouse.[5]

First, it would appear that the typology of unlawful conduct revealed in Russia-related FCPA cases is not unusual. In other words, there doesn’t seem to be any special Russian idiosyncracy in the manner that cross-border corruption has been organized in the past. The typical situation is when payments were channelled to individuals qualifying as foreign officials under the umbrella of sham contractual arrangements, sometimes through the use of foreign shell companies, and sometimes with simultaneous over-invoicing of the goods, services or equipment charged to the Russian clients or contractors. Russian clients or contracting parties in these precedents were usually government departments or state-owned enterprises. In the majority of cases Russia was not the only country impacted by the unlawful conduct: the same type of conduct took place in other emerging markets where the US or Western enterprise was also present or sought to do business – in turn revealing how the main objective of law enforcement action, quite appropriately, is to eradicate systems of corruption that exist within Western enterprises, regardless of the particular territories or countries where these systems are deployed.

As regards the sectors of industry concerned by past FCPA cases, there does seem to be a specific pattern. By very far, the most problematic industries have been the pharmaceutical and medical equipment sectors. Various explanations can be found for this. The Russian health care sector is still largely state-owned, and therefore involves dealing with categories of professionals and decision-makers (doctors, hospital managers and/or regulators) who will generally qualify as a “foreign official” under applicable law (more on this definition of “foreign official” below). Furthermore, salaries in the Russian health care sector have remained very low in past decades, even by Russian standards, hence increasing the financial incentive on the side of potential recipients.

Other categories of industry affected by FCPA Russia-related enforcement included the IT sector (sales of IT equipment or software) or the automobile sector (sales of vehicles), in the context of large-scale government procurement programs. These are sectors where traditionnally, procurement by Russian buyers has been made abroad, from Western sellers or service providers. As the Russian economy turns more inward, following “import substitution” policies implemented after 2014, it is possible that these sectors will give rise to less opportunities for corrupt behavior by Western enteprises.

Sectors considered in Russia to be “strategic”, which are subject to numerous licensing regimes (for example oil & gas exploration and production, connection to electricity or natural gas utilities, or mining & metals extraction) are evidently at high risk of corruption. It is an apparent paradox therefore that these sectors are not especially present in the track-record of past FCPA enforcement. One explanation might be that in these sectors, anti-corruption prevention has long been a concern and therefore became integrated into the business processes of Western groups of companies before the need for prevention spread to other industry sectors. An alternative, more troubling explanation might be that corruption in these “strategic” sectors is more sophisticated and hence more difficult to detect. There is at least one known FCPA case of unlawful conduct in the strategic commodities sector: it involved procurement of uranium by US purchasers who channelled improper payments to Russian officials to secure procurement of the product through shell companies in the BVI, Seychelles, UK, Cyprus, Latvia and Switzerland. In this particular precedent sanctions were harsh and involved prison terms for Western executives.

One of the more recent illustrations of FCPA enforcement that is of particular interest involves a recruitment program at a European bank, in which relatives of state officials were targeted for recruitment in a systematic way. This case followed on the heels of a similar FCPA case concerning China, in which a US bank had likewise systematically organised and promoted the recruitment of relatives of senior communist party and state officials (very candidly, the program was called “Sons and Daughters”). Such precedents demonstrate that anti-corruption prevention is relevant not only for frontline sales or business development activities, but also in back-office functions like HR management.

French Sapin 2 case

At present the Sapin 2 law has given rise to prosecution of at least one known case involving conduct in Russia: Airbus SE. Specifically, Airbus was found to have channeled improper payments in the context of sales to the Russian Satellites Communications Company (RSCC), a state-owned enterprise. The payments were documented as consultancy services by an intermediary company and destined to RSCC executives. Similar conduct having been found in connection with sales to other countries (Saudi Arabia, China, Korea, Nepal, Taiwan, Colombia), Airbus received an overall fine of about 1 billion euros, and was placed under an independent monitoring regime.

The Airbus case is illustrative, amongst other things, of the sectors of industry currently considered in France to be particularly exposed to corruption risk and therefore designated for particular scrutiny by the Parquet National Financier. The sectors include construction, the extractive industries, transportation, telecommunications, the pharmaceutical sector, energy and military hardware.[6] As pointed out above, the pharmaceutical sector is already amongst those that have been heavily exposed to past FCPA Russia-related enforcement.

Other cases

Other interesting cases of anti-corruption prosecution for conduct in Russia are found in Germany and Switzerland. The judicial record from these cases is less clear cut, however, and prosecution agencies were not always successful in the outcomes achieved. In Germany, a leading bank and several of its executives were prosecuted for assisting a former Russian telecommunications minister in hiding and subsequently selling shares of companies presumed to have belonged to the Russian state. The case ended with a settlement and payment of fines (including by a Danish lawyer who was alleged to have acted as a front for the Russian official). In Switzerland, ABB-Siemens and Gazprom executives were prosecuted for improper payments in the context of the construction of the Yamal natural gas pipeline from Russia to Europe. These prosecutions ended up with a court victory by the executives, however, on the grounds that Gazprom executives did not qualify as “state officials” under then applicable Swiss anti-corruption law (the law has since been amended).

This last Gazprom-related precedent shows how important it is to understand when exactly executives or or decision-makers within foreign organizations will qualify as ‘foreign officials’ under anti-corruption law. There are numerous hybrid public-private type structures in the Russian economy. At present, the Russian state’s ownership stake in high-profile companies like Gazprom or Rosneft is barely over 50%, with the remainder of the equity in hands that may be private and/or foreign (including various Western institutional investors). The corporate status of these companies, whose shares are listed in foreign exchanges, is that of private-law joint-stock companies. It is important therefore to look at the law: the French definition for offenses of corruption and influence-peddling centers on “persons [that are] depositary of public authority, tasked with a public service mission or that have been elected to public office in a foreign State” (“personnes dépositaire de l’autorité publique, chargée d’une mission de service public ou investie d’un mandat électif public dans un Etat étranger”)[7]. The courts have confirmed that such was the case, in the late 1990s, for an Iraqi state oil procurement entity referred to as SOMO (“State Oil Marketing Organisation”), which was, “as its name indicates, a state enteprise affiliated to the oil ministry, and therefore its agents were tasked with a public service mission, in this case the monopoly of iraqi oil sales.”[8] The Airbus case, for its part, involved executives of the RSCC, which holds the legal form of a “federal-level state unitary company” and is wholly owned by the Russian state. Generally, the best approach when dealing with hybrid public-private entities will be to adopt a cautious interpretation and look beyond charter capital ownership structure in order to ascertain whether entities can be viewed as depositaries of public authority or tasked with a public service mission or monopoly.

Russian anti-corruption law

To conclude on the panorama of past precedents, it is interesting to turn to anti-corruption enforcement in Russia proper. Russia has had anti-corruption laws on the books for many years, since 2008 at least, but enforcement has been minimal and usually limited to token prosecutions of minor bribes paid to low-level state employees.[9] In 2019, AO Russian Standard Bank, a large lender owned and controlled by businessman Rustam Tariko, was fined 59 million roubles when one of its employees offered a 5% payment to Crimean court bailiffs to expedite execution of local court judgments (the offer was made on a whatsapp message…). The case involved litigation all the way up to the Russian Supreme Court, with government enforcement action prevailing in the end. At present exchange rate, the fine was approximately 400.000 euros, not a large amount compared to FCPA or Sapin 2 precedents, but in Russia a much larger amount than the usual token fines. This Standard Bank precedent seems relevant as a first example of Russian prosecution of a corporate actor for corrupt conduct, but it is too early to tell whether it signals a wider trend. As regards corrupt behavior by Russian companies outside of Russia, the offense exists on the books, but there are no known reports of prosecutions.

A final comment is about Russian political risk in general. As is often the case in countries where corruption is rife and legal systems dysfunctional, significant unpredictability is associated with the attitude of Russian law enforcement. Instrumentalization of Russian criminal law by one of the sides (usually a Russian party) in the context of commercial business disputes is one of the greatest risks of doing business in Russia, and many such cases have been reported in the last decades. This makes it all the more necessary for French businesses to be wary of entanglement into possible schemes of Russian corruption or influence-peddling: compliance is necessary not only to comply with French anti-corruption law, but also to minimize the risk of possible threats materializing in Russia proper from action or threats emanating from Russian law enforcement. The stars are aligned here; good compliance practices will serve to protect businesses in both France and Russia simultaneously.

Due diligence tools on Russian counterparts

Sapin 2 procedures involve performing due diligence on counterparts and relevant third parties. In addition to outside advice, information can (indeeed should) first be elicited from proposed Russian counterparts themselves, as well as various databases. The paragraphs below are a non-exhaustive list of the types of enquiries that are to be considered.

1. Corporate data. Due diligence on corporate status and ownership of Russian counterparts is an evident first task.[10] This should first involve asking proposed the Russian counterparts for their charter, registration documents and excerpts of shareholder registry. Once received, some of this information can then be independently compared with publicly accessible databases. For all Russian limited liability companies (OOOs), information on the first rung of ownership is maintained by the tax authorities and publicly accessible. For joint-stock companies (AOs), full composition of the first rung of charter capital ownership is rarely publicly reported, and therefore must be asked directly from the counterparts themselves. However, depending on the size and form of company, there may be other mandatory reports that are subject to public reporting and that can be therefore be independently obtained and reviewed. The same applies for the identification of beneficial owners, defined in Russia (as elsewhere) as persons owning, directly or indirectly, 25% or more of legal entities, or otherwise exercising control over them. Russia has not, at present, created a centralized register of beneficial owners, but companies are required to maintain beneficial owner information internally, so enquiries with counterparts on identity of their ultimate beneficial owners must be conducted in all cases.
2. In addition to corporate data, it will be appropriate to request and collect financial information in the form of annual balance sheets and profit-and-loss statements: these are mandatory for all Russian enterprises under Russian law, without exception.
3. A further step will be to clarify what anti-corruption procedures exist within proposed Russian counterparts. Even if implementation is spotty, all Russian enterprises are under the obligation to implement their own anti-corruption procedures, the reference text, in this regard, being Article 13.3 of the federal anti-corruption law (introduced back in 2012). Procedural requirements under Article 13.3 are not unsimilar to Western practices: departments and executives who are responsible for the prevention of corruption must be appointed; codes of conduct and ethics must be developed and implemented; employees must undergo training programs; whistleblowing hotlines and other internal reporting channels must be implemented. Due diligence by French enterprises must therefore involve receiving descriptions of the anti-corruption procedures implemented by their Russian counterparts, as well as inquiries on their actual implementation. As pointed out by the AFA, the absence of anti-corruption programs or procedures within a Russian enterprise must generally be interpreted as a red-flag.[11]
4. In addition to information collected directly from Russian counterparts, independent enquiries can then be made of a number of central databases. As mentioned above the Russian tax office database serves as corporate registry and includes various publicly available data depending on corporate form. Russia also maintains a public register for civil servants in whom “trust has been lost,” which was part of the first 2008 anti-corruption law. This database should always be consulted by French enterprises, especially when dealing with individuals who have been (or still are) government employees. There is also a special registry for legal persons having been found liable for administrative violations under Article 19.28 of the code of administrative violations. The Russian anti-money-laundering agency Rosfinmonitoring, for its part, maintains a list of persons “involved in extremism or terrorism”, which is accessible to various categories of registered users (including Russian advocates).
5. And finally, as is now well understood by all French enterprises with activities in Russia, verifications must also be made to ascertain whether Russian counterparts, their shareholders, employees and/or beneficial owners appear on any of the sanctions lists produced either in the European Union, or by OFAC in the United States. While not directly related to anti-corruption it is necessary to conduct such compliance verifications simultaneously and in parallel.

Belimy Avocats
Paris
1^st December 2021

[1] Corruption of foreign officials was first introduced as an offense by a law of 30 June 2000, as France was implementing the 1997 OECD convention. Additional provisions were then subsequently introduced including by a law of 6 December 2013 following the “Cahuzac” scandal, inter alia creating special financial prosecutor PNF (“Parquet National Financier”).

[2] Article 17.II.3 of the Sapin 2 Law

[3] Article 17.II.4 of the Sapin 2 Law

[4] Paras 201 to 250, AFA Recommendations of 12 January 2021.

[5] Stanford Law School FCPA Clearinghouse, https://fcpa.stanford.edu/

[6] Par. 2.2, Circular of the Ministry of Justice of 2^nd June 2020.

[7] Articles 435-3 and 435-4 of the Criminal Code.

[8] Cass Crim 14 March 2018, 16-82117, in a case involving Total and the Iraqi Oil for Food program.

[9] Notable exceptions to the practices of prosecuting mainly low-level officials were the prosecutions of government ministers Anatoly Serdyukov (charged in 2013, later amnestied) and Alexey Ulyukaev (charged in 2016 and convicted).

[10] AFA Recommendations of 12 January 2021, par. 217, 218.

[11] AFA Recommendations of 12 January 2021, par. 223.