Special Challenges of Doing Business in Russia

1. GOOD. SMART. BUSINESS. PROFIT.
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2. Special Challenges of Doing
Business in Russia
October 22, 2014

3. Chelsie Chmela
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4. 4
SPEAKING TODAY
Richard Dean
Partner, Baker & McKenzie, Washington, DC
Tom Firestone
Senior Counsel, Baker & McKenzie, London
Jonathan Nelms
Partner, Baker & McKenzie, Washington, DC
Edward Bekeschenko
Partner, Baker & McKenzie, Moscow

5. Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common
terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an
"office" means an office of any such law firm.
© 2014 Baker & McKenzie LLP
Special Challenges of Doing Business in Russia
An Ethisphere webinar, October 22, 2014
Presented by:
Richard Dean, Partner, Baker & McKenzie, Washington, DC
Tom Firestone, Senior Counsel, Baker & McKenzie, London
Jonathan Nelms, Partner, Baker & McKenzie, Washington, DC
Edward Bekeschenko, Partner, Baker & McKenzie, Moscow

6. © 2014 Baker & McKenzie LLP 6
Agenda
‒ Russia today – Angst in the air, gloom on the ground?
‒ U.S. sanctions and their implications for your business
‒ Recent anti-corruption cases
‒ Domestic legal developments
‒ Managing the (increasing) challenges and risks of
working in Russia

7. © 2014 Baker & McKenzie LLP 7
Current situation in Russia
‒ U.S. business community braces for tougher times.
‒ Ambivalence about expanding (or continuing?) in Russia
 But some bargain-hunters remain.
‒ Some companies affected more than others.
‒ Wait and see: Most holding on and complying with the
sanctions, but new expansion and investments in decline.
‒ Representatives of Russian business community emphasize
readiness to continue doing business with the West.
‒ Economic indicators show worsening domestic economic
situation. But support for the government is increasing.
‒ Resolution of conflict/lifting of sanctions does not appear likely
in near term.

8. © 2014 Baker & McKenzie LLP 8
Overview of U.S. Sanctions
‒ March 2014 – U.S. Treasury Department’s Office of Foreign Assets
Control (“OFAC”) imposes first sanctions on Russian and Ukrainian
individuals and entities (“SDNs”) perceived to be behind the unrest
‒ OFAC treats entities 50% or more owned by SDNs to be SDNs
(“Deemed SDNs”)
‒ U.S. Persons are prohibited from dealing directly or indirectly with
SDNs or Deemed SDNs. U.S. Persons include:
 (i) entities organized under U.S. laws and their non-U.S. branches
 (ii) individuals and entities located in the United States
 (iii) U.S. citizens and permanent residents, wherever located or
employed
 Separately incorporated foreign subsidiaries of U.S.
companies are not U.S. Persons under these sanctions

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Overview of U.S. Sanctions (cont’d)
‒ “Sectoral” sanctions prohibit U.S. Persons from certain dealings
with individuals and companies in certain sensitive sectors of the
Russian economy (finance, energy, defense)
 Directive 1 – Transactions in, financing for, and other dealings in
debt over 30 days of certain banks (currently 6 banks)
 Directive 2 – Transactions in, financing for, and other dealings in
debt over 90 days of certain energy-sector players (4 parties)
 Directive 3 – Transactions in, financing for, and other dealings in
debt over 30 days of certain defense-sector players (Rostec only)
 Directive 4 – Providing, exporting, or reexporting U.S. or non-U.S.
goods, most services, or technology to Russia to support deep-
water, Arctic, or shale oil projects (5 parties)

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Overview of new/expanded U.S. export controls
‒ Energy sector controls
 Five companies (same as Dir. 4 above) named to EAR
Entity List
 Requires specific license from BIS to export, reexport, or
transfer any item subject to EAR (including EAR99) if item will
be used by listed company in certain oil and gas exploration
and production
‒ Defense sector controls
 Five companies named to Entity List (similar license rules)
 Additional licensing requirements apply to exports, reexports,
or transfers of certain products to certain military end-
uses/end-users in Russia

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Russian reaction to U.S. sanctions
‒ Russia prohibits imports of agricultural and food products
from EU, U.S., Canada, Australia and Norway, effective for
one year
‒ McDonald’s restaurants closed, ostensibly for sanitary
violations, in Moscow and beyond (Up to 20 reportedly
closed to date; McDonald’s reports over 200 under review)
‒ Anti-money laundering investigation by Russian prosecutors
of Ronald McDonald House (charity arm of McDonald’s)
‒ Jim Beam and Jack Daniels imports blocked
‒ Russia looks East

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Russian reaction to U.S. sanctions (cont’d)
‒ “Rotenberg law”
 Would allow Russian individuals and businesses who suffer
from an “unlawful court act” of a foreign government to
appeal for compensation in Russia, ultimately by seizing
foreign assets, even those covered by immunity such as
diplomatic real estate
‒ Federal Antimonopoly Service (FAS) has stated
publicly that they will not pursue “abuse of dominant
position” cases against companies complying with
U.S. sanctions
 Compare to earlier FAS positions on FCPA compliance

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Russian reaction to U.S. sanctions (cont’d)
Implications for FCPA/other criminal investigations
‒Reduced information sharing between Russian and U.S. law
enforcement?
‒Credibility of Russian law enforcement as factor in DOJ/SEC
decision-making on cases originating in Russia?
‒Pending legislation requiring personal data of Russian
citizens to be stored in Russia – implications for internal
investigations and audits

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Recent FCPA cases involving Russia
Hewlett-Packard
‒September 2014 – Hewlett-Packard’s Russian subsidiary (ZAO
Hewlett-Packard A.O.) pleads guilty to conspiracy and substantive
violations of the anti-bribery and accounting provisions of the FCPA
and will pay fine of $58M
 HP’s Russian subsidiaries made improper payments to government officials
to obtain or retain lucrative public contracts (Office of the Prosecutor General
of the Russian Federation)
 HP Russia created excess profit margins and a slush fund through an
elaborate buy-back deal structure, whereby (1) HP sold the computer
hardware and other products to a Russian channel partner, (2) HP bought
the products back from an intermediary and paid a commission for purported
services, and (3) HP sold the products to the federal prosecutor’s office at
the increased price
 Hewlett-Packard collectively will pay more than $108M to DOJ and SEC for
issues arising out of Mexico and Poland in addition to Russia

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Recent FCPA cases involving Russia (cont’d)
Diebold
‒October 2013: Diebold settles with DOJ and SEC
‒From 2005 to 2008, Diebold’s Russian subsidiary paid approximately
$1.2M in bribes in connection with the sale of ATMs to private banks in
Russia. The bribes were funneled through a distributor in Russia using
phony service contracts to hide and falsely record the payments as
legitimate business expenses
‒Diebold falsified books and records to hide approximately $1.2M of bribes
paid to employees at privately owned banks in Russia
‒Diebold agreed to pay $22.9M in disgorgement and prejudgment interest
and appoint an independent compliance monitor in order to settle the SEC’s
charges
‒Diebold agreed to pay an additional $25.2M fine in the parallel criminal
proceeding initiated by DOJ

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Recent FCPA cases involving Russia (cont’d)
‒ May 2014 – SEC reports investigation of possible
violations of the FCPA by Key Energy Services in Russia
 The Houston-based company’s wholly-owned subsidiary,
Geostream, provides oil and gas drilling, work over and
reservoir engineering services in Russia
 Key Energy also has operations in Mexico, Colombia,
Ecuador, and the Middle East, and a technology
development and control systems business based in
Canada

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Special challenges and risks of working in Russia
‒ Corruption at all levels of government
‒ Hidden/indirect/offshore ownership of companies masking
government ownership, providing cover for tax evasion and
now SDNs
‒ Offshore payment/purchase schemes
‒ Tender manipulation/procurement fraud
‒ Sham intermediaries used for fraud, commercial and official
bribery, tax evasion, tender manipulation, avoidance of
mandatory mark-up rules (pharma industry), and more
‒ Sham service agreements as means of paying bribes

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Legal developments in Russia
‒ Key anti-corruption amendments to Criminal Code and Code
of Administrative offences of the Russian Federation, 2011
including criminalization of foreign bribery and increased
penalties for both domestic and foreign bribery
‒ April 2012 – Accession to OECD Convention on Combating
Bribery of Foreign Public Officials in International Business
Transactions
‒ January 2013 – Article 13.3 of Basic Law on Combatting
Corruption requires companies to establish compliance
programs
‒ Limited enforcement so far, but some indication that
prosecutors and courts will accept compliance as a defense

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Legal developments in Russia (cont’d)
‒ January 2013 – Amendments to Russian Federal Law № 273
“On Combating Corruption”
 Establishes the background check on the legality of the sources of
income of the applicants for the government positions
 Establishes prohibition on buying real estate and holding bank accounts
in foreign nations for government officials, their spouses and children
‒ July 2013 – Resolution No. 24 of the Supreme Court of the
Russian Federation
 Provides local courts with interpretation of the law “On Combating
Corruption,” provides guidelines and best practices when trying
government official charged with bribery

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Legal developments in Russia (cont’d)
‒ Deoffshorization campaign – goals, current status
‒ Introduction of the requirement for government officials to
declare property and other valuable assets owned by
government officials (including assets located abroad)
‒ Consideration of introduction a new law on confiscation, from
government officials and from the members of their families, of
assets received as a result of corruption activities
‒ Russia’s State Duma is considering a bill to protect
whistleblowers who report corruption by state officials to police
or the media
‒ Russian Prime Minister orders annual anti-corruption check-
ups for biggest state-owned banks (Sberbank and VTB Group)

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Domestic (Russian) anti-corruption enforcement
‒ Approx. 200 cases brought under anticorruption laws since 2011
 Typical offenses are bribes to health inspectors, providers of permits
 Largest fine was RUR 60M (then about US$ 2M) for bribes to get
building permits to construct a shopping mall
‒ Does the political situation suggest that there will be more, or
fewer, domestic corruption prosecutions?
 Russian leadership committed to anti-corruption developments but distracted
by foreign policy
 Putin supports bill that would compel Russian citizens to pay taxes on profits
generated/held offshore
 Annual anti-corruption check-up for state owned enterprises
 Government considering leniency for companies that self-report under 19.28

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“Russian Morgan-Stanley” Defense
‒ A legal entity can be held administratively liable for bribes paid
on its behalf only if it failed to take all measures within its
powers to prevent this violation.
‒ One court recently declined to hold a company liable for the
acts of an employee caught offering a bribe to a public official.
 The court came to this conclusion after reviewing the company’s
extensive compliance measures, stating that a public prosecutor’s
position that the company must be held liable despite these
measures is contrary to law.
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Managing corruption and sanctions risks
‒ Overlap between sanctions and compliance due diligence
‒ Most important is to know your counterparties (new and
existing):
 Identity of owners (direct and indirect), officers, other key persons
to identify government officials, SDNs, conflicts of interest
 Qualifications to do business
 Reputation for integrity
 Compliance policies and procedures (required under Russian law)
‒ Screen current customer and supplier databases, and any
new partners, against denied-party lists (SDNs and more)
‒ Conflicts of Law: “Russian Morgan Stanley” vs. Novo Nordisk

24. © 2014 Baker & McKenzie LLP
Due Diligence: balancing Russian and U.S. law
‒ Russian anti-trust regulator (FAS) continues to be hostile to
“refusals to deal” based on compliance measures, claiming that
“dominant” companies may reject partners for corruption
concerns only where there is a criminal conviction
‒ FAS recently held a company liable for refusing to contract with
a reseller suspected in bid-rigging of several public tenders
because there were no “decisions of competent state bodies” to
confirm the suspicion
 The reseller’s background check revealed that technical
specifications for the tenders, which the reseller won at the
maximum price, were prepared by its general director (electronic
documents posted on official public procurement website)24

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Managing corruption and sanctions risks (cont’d)
‒ Contractual protections
 Anti-corruption representation and warranties
 Clear description of service-provider’s duties and deliverables
 Clear indication of timing of services, deliverables, and payment
 Indemnification
 Audit rights
 Termination rights
 Suspension clauses
 Specified legitimate means of payment (wire transfer from local
bank account in counterparty’s name)
 Right to approve subcontractors, assignment, other third-parties
involved into the transaction

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Managing corruption and sanctions risks (cont’d)
‒ Financial controls
 Verify that parties have been cleared through appropriate due
diligence – compliance and sanctions screening – before
entering into accounting system
 Pay only against invoice clearly specifying services rendered in
detail with appropriate supporting documentation
 Empower Finance team to question requests for payment and
supporting documentation
 Limit and track cash usage
 Ensure payments go to bank accounts specified in the
agreement

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Managing corruption and sanctions risks (cont’d)
‒ Compliance training
 Train in-person if possible and in local language
 Train upon onboarding and periodically thereafter
 Focus on practical situations encountered by the business
 Position-specific training that focuses on position-specific risks
(finance, sales, marketing)
 Format – interaction/discussion, not a lecture
 Compliance training should be reinforced at company meetings
and events
 Leadership support essential
 Document training (keep copy of materials, sign-in sheets,
certification of understanding)

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Thank you!
Any questions?

29. © 2014 Baker & McKenzie LLP 29
Follow ongoing developments in global anti-corruption
trends and the Russia sanctions at:
‒ Baker & McKenzie FCPA Newsletter
http://www.bakermckenzie.com/insidethefcpa/
‒ Baker & McKenzie Sanctions Blog
http://www.bakermckenzie.com/sanctionsnews/

30. © 2014 Baker & McKenzie LLP 30
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