High Corruption Risks Accompany Winter Games in Russia

The winter Olympics are drawing global attention to the Russian resort town of Sochi that is hosting the games and, less favorably, to the country's longstanding reputation as a haven for bribery and corruption.

The private-public nature of a project the size of hosting an Olympics makes it a potential magnet for bribery and corruption. With an abundance of contract work for domestic and foreign construction firms, support services, and security and hospitality providers, among others, the competitive nature of getting that work can encourage the open palms of public officials and cut-the-line handouts from eager companies. Add thousands of company executives into the mix—sponsors of the games and those trying to cut longer-term deals in the host country—and the risk that someone will see value in sidestepping anti-corruption laws increases.

When the host country has a reputation and history of corruption like the one Russia has, however, the risks are even more elevated. Corruption watchdog Transparency International puts Russia among the most corrupt of the world's developed economies, ranking Russia 127 out of 175 countries on perceived level of public sector corruption. Russia ranks behind such countries as Albania, Columbia, and Niger.

The Winter Olympic Games are doing little to dispel that perception. The price tag for infrastructure needed to host the event has a price tag upwards of $50 billion, the most ever spent to host an Olympic games—summer or winter—and already there are allegations of widespread corruption.

The cost itself isn't the problem says Boris Nemtsov a former deputy prime minister and longtime rival of President Vladimir Putin. “The Winter Olympics in Sochi has become one of the most monstrous scandals in the history of modern Russia,” he wrote in an article that appeared in The Interpreter, a publication of the Institute of Modern Russia, a think tank devoted to fostering democratic and economic development in Russia. “The scale of expenses is unprecedented—more than $50 billion—out of which $25 to $30 billion have been embezzled. The money stolen could have paid for 3,000 high-quality roads, housing for 800,000 people, or thousands of ice palaces and soccer fields all over Russia. None of that has happened. Only those oligarchs and companies close to Putin have enriched themselves.”

Even the appearance of corruption must be disconcerting for Russian officials who, attempting to reform its image, have enacted new laws intended to mirror the United State's Foreign Corrupt Practices Act and crack down on bribery as a way of doing business in Russia. Foreign companies looking to do business there, either short-term for the games or long-term afterwards, however, may be alarmed by the new law's substantial loopholes and fear deals in Russia will tangle them in the FCPA's enforcement net.

Still, some say the country is serious about getting a handle on corruption. “It looks like Russia is trying to crack down on corruption” says Daniel Fetterman, a former federal prosecutor who is now a partner at the law firm Kasowitz, Benson, Torres & Friedman. “Russia is a country where corruption historically has been fairly rampant.  It is beneficial for Russia to show the global economic community that it appears to be serious about combating corruption and bribery.  However, it remains to be seen whether these anti-corruption and anti-bribery regulations will be effective."  

"The Winter Olympics will be a good testing ground since there has been tremendous economic activity surrounding the development and construction of facilities, arenas, and infrastructure, and already there have been numerous publicly reported allegations of corruption for significant amounts of money," he adds. "The question is whether we will see any real, meaningful enforcement of the new anti-corruption regulations.”

New Law, New Loopholes

On the surface, Russia appears to be working to counter its reputation as a haven for corruption. It put a sweeping new anti-corruption law into effect on Jan. 1, 2013, that established a broad definition of what constitutes bribery. Beyond just offerings of cash, securities, and property, the law adds prohibitions for  kickbacks, low- or no-interest loans, home renovations, debt forgiveness, free and discounted vacation packages, loans of cars or other expensive items, and the transfer of intellectual property rights.

In December, nearly a year later, a high-profile prosecution signaled that the law might indeed have some teeth.  A former public official was ordered to pay the equivalent of $29 million—the largest fine ever issued in Russia—for taking a bribe. That same month, Russian officials trumpeted that more than 1,600 Russian lawmakers and other government officials have been indicted for corruption over the past two years, offenses estimated to have cost state coffers as much as $9 billion.

“The Olympics will be a good testing ground ... The question is will we see any real, meaningful enforcement of Russia's new laws.”

—Daniel Fetterman,

Partner,

Kasowitz, Benson, Torres & Friedman

Closer scrutiny of the law and a related Supreme Court resolution, however, reveal some potentially problematic loopholes, says John Carney, a former senior enforcement lawyer with the Department of Justice and SEC who is now a partner at law firm BakerHostetler. He says the Supreme Court's resolution, “unequivocally states that a payment made to a third party who is not a government official, nor a relative of the government official, is not considered a ‘bribe' under Russian law.”

“The exemption for third parties under the Russian anti-corruption framework may create enough room to drive a Mack truck through,” Fetterman says. “By contrast, third parties are a critical focus of the DOJ and SEC under the FCPA, which look to see if payments to third parties in foreign countries essentially are bribes.  The third party exemption under Russian regulations has raised eyebrows and may end up being a significant weakness.”

The third-party exemption also excludes charitable contributions. The FCPA and U.K. Bribery Act, however, specifically prohibit using charitable contributions to influence public officials, and enforcement actions have underscored the importance placed on the prohibition. In December 2012, for example, drug maker Eli Lilly paid $29.4 million to settle FCPA allegations by the SEC that employees used offshore marketing agreements to make payments to third parties chosen by government officials and made donations to charities at the request of government officials.

“Here's the problem, these days you really don't have bags of cash being handed from one party to the next to effect a bribe,” says Peter Spivack, co-leader of the Investigations, white-collar, and fraud practice at the law firm Hogan Lovells. "So much now involves indirect benefits, or third parties that act as conduits. That's one of the avenues that continually bedevil companies.”

Concerns for Foreign Companies

Carney says international companies operating in Russia need to be aware of the distinctions created by the Russia's Supreme Court resolution.  He and a colleague, Yulia Fradkin, an associate at BakerHostetler, recently addressed this in a client memo. “The Russian law carve-outs will do nothing to protect companies making unlawful payments from merciless SEC and DoJ prosecution,” they wrote. “Previous enforcement actions have confirmed that payments made under the thin veneer of charitable donations will be hounded."

RUSSIAN COMPLIANCE DEMANDS

The following, from a client advisory authored by the law firm Morgan, Lewis & Bockius, are some of the legislatively required compliance requirements for Russian companies.

Designating departments and officers who are responsible for the prevention of bribery and related offenses

Cooperating with law enforcement authorities

Developing and implementing standards and procedures designed to ensure ethical business conduct

Adopting a code of ethics and professional conduct for all employees

Preventing and resolving conflicts of interest

Preventing the creation and use of false or altered documents

Russian authorities the right to expropriate property involved in corrupt activities if the parties cannot show evidence of its lawful acquisition.

If a company fails to put the recommended measures in place and an employee (or another person acting on the company's behalf) offers, promises, or gives a bribe, this will be evidence that the company has not done everything possible to prevent corruption. Accordingly, “unlawful remuneration on behalf of a legal entity”, the company could face a substantial administrative fine. Such fines may range from up to three times the amount offered for performing illegal services (but not less than one million rubles) to one hundred times the amount offered (but not less than one hundred million rubles) in the case of a very large amount (i.e., exceeding 20 million rubles, as specified in the current version of the Administrative Violations Code).

Other amendments to the Anti-Corruption Law included a new requirement for government officials and civil servants (i.e., persons included in specific lists maintained under federal laws and the regulations of the Russian Central Bank) to provide information about their personal expenditures, thus facilitating efforts to identify suspicious transactions.

Source: Morgan, Lewis & Bockius.

In effect, Russian officials may request payments which are perfectly legal under Russian law, but will put the business at jeopardy of harsh prosecution in the United States. The FCPA “local law defense,” though a potential shield to liability, “is a very weak and risky one,” Carney and Fradkin wrote. That defense covers payments made to government officials abroad where a defendant can prove that doing so was under the written laws and regulations of that country. The local law defense has been very narrowly construed by U.S. courts. Another problem, specific to Russia is that the Supreme Court resolution that clarified vagaries in the anti-corruption law is, technically, only guidance and not a law or regulation, the standard necessary for the FCPA-provided defense.

“Discount it altogether in planning day-to-day business activities in Russia,” Carney suggests.

Peter Zeidenberg, litigation partner with the law firm DLA Piper's FCPA practice, says that foreign companies should be “worried about the SEC and DoJ before they are concerned about the local Russian authorities. “Although, I think the law probably increases the risk that if there is corruption going on it will be detected,” he adds. “You are in a hornet's nest because you have all kinds of problems, and this is just adding to the list.”

The Russian law, he says, could lead to tips being shared with the United States and United Kingdom, facilitating their own investigations. While Zeidenberg agrees that inconsistencies in the Russian law must be understood by companies doing business there, but he doesn't think that should have a chilling effect.

“If there are good business opportunities in Russia, companies will want to take advantage of that, but must go in with their eyes open and understand it's an environment in which corruption may be apparent,” he says. “They need to be particularly vigilant in making sure everything is done as it should be. They should not allow cash payments, and they should scrutinize expense accounts—but I don't think they should turn down what look like good, legitimate biz opportunities.” 

It's too soon to tell whether the Olympics will be a catalyst for more of those long-term business opportunities, or if the global scrutiny the games have brought will spark real corruption reform. Like Russia, Brazil—hosting the 2014 World Cup and 2016 Summer Olympics—will be under tremendous scrutiny to see if its own new anti-corruption law is up to the task of keeping thousands of related bids and contracts clean.