Challenge of Compliance in Ukraine

Хотя украинское законодательство и несовершенно, оно строится в принципиальном соответствии с международными конвенциями по борьбе с коррупцией. Вопросам, связанным с соответствием украинских корпораций этим стандартам, и посвящена настоящая статья. Рассматриваются различные аспекты такого соответствия с точки зрения системного подхода. А именно: определение и оценка рисков несоответствия, в частности, конфликта интересов, а также разработка программ борьбы с коррупцией. Подобные риски возрастают в связи с тем, что в украинских корпорациях и в украинских структурах международных корпораций отсутствуют специалисты, имеющие достаточную квалификацию чтобы управлять такими рисками. Недостатки в работе, направленной на установление упомянутого соответствия, приводят к весьма нежелательным последствиям как для самих корпораций, так и для их руководителей, в особенности, в юрисдикциях, в которых имеет место нетерпимость к коррупционным проявлениям, например: в США.

1. Significance of compliance for business in Ukraine

The term compliance has emerged in its current sense in the business environment in the USA within the last 30-40 years and refers to the system of internal regulations and measures implemented by commercial and non-commercial entities to ensure adherence to laws, as well as to specific industry standards, trade customs and regulations. Currently, in international business, this term also covers the system of control an entity uses to ensure that its directors, managers and other employees, as well as contractors and authorized representatives, adhere to all regulations applicable to the business, whether local or foreign.

In Ukraine this term has not been used widely, as legislative and practical efforts are aimed primarily at counteracting corruption and eliminating the impact of conflicts of interest on business and government decisions. However, just as in many other aspects of the Ukrainian economy and business over the last quarter of a century, Ukrainian companies will inevitably follow the path chartered by multinational companies in the area of compliance and will adopt all the best practices that have been developed.

The main driver for this will be Ukrainian legislation, which is currently not perfect but has been drafted along the lines of the most significant international anti-bribery conventions. For example, now any bidder in a government or municipal tender must have an anti-corruption program and a designated company employee responsible for its implementation. Also the best clients of Ukrainian companies — multinational and big foreign companies — demand that their suppliers either adhere to the customer’s compliance policies or have their own compliance policy satisfactory to the customer. In addition, as of 1 September 2014, Ukrainian companies may face criminal liability for corruption offenses committed by their employees (not only by management!). Therefore, to survive and develop, any large or mid-size Ukrainian business must build an effective compliance system.

2. Compliance as a system

Each company must build its own system of compliance depending on its specific features and the issues it encounters in its business. Generally, however, any effective compliance program includes the following elements:

— a compliance policy and compliance officer;

— internal audits;

— evaluation of compliance risks;

— measures preventing violations by third parties authorized to act on behalf of the company;

— communication channels for reporting offenses or possible violations (including whistleblower hotlines);

— measures taken by the management in response to violations or whistleblower reports;

— protection for whistleblowers; internal investigation procedures;

— rules for interaction with law-enforcement authorities authorized to investigate corruption and other violations of the law;

— rules for resolving conflicts of interest.

Additional elements of the compliance system depend on the area of business and the level of corruption risks in the environment (industry, geographic area, the country’s rating in the Corruption Perception Index).  For example, the risks for a transportation company will significantly differ depending on whether or not it performs cross border carriage, and in any case its risks will be different from those faced by a pharmaceutical manufacturing company (and again there will be different risks for domestic and foreign manufacturers).

3. Identification and evaluation of compliance risks

Copying a compliance policy or program from another company is not effective. Instead, each company must identify which of its particular business processes carry high risks of non-compliance and corruption.  Note that in some cases employees act corruptly for their own benefit, but in many cases they will do so trying to obtain or retain business for the company, thus exposing it to liability under many foreign laws, in addition to Ukrainian laws.  In Ukraine the most risky processes traditionally are those related to obtaining or renewing a license or permit (e.g., for construction or renovation), import and export (customs clearance), audit by a government authority, and reimbursement of export VAT.

A risk assessment must be conducted before the compliance program is put in place.  However, it should also be repeated periodically to ensure that the compliance system is up to date and to identify any changes that may be needed to ensure the continued effectiveness of the program.

The assessment should identify the job positions that are most exposed to corruption risks, the methods by which violations may be committed and the circumstances that facilitate such violations. Employees in high-risk positions may be required to undergo the relevant training and reviews more often than other company employees. To minimize the risks such employees may be required to follow relevant SOPs. Furthermore, the relevant job duties may be allocated among several employees or to the most suitable employee based on personality traits and/or skills and experience. Other measures that help to lower the risks should also be used (e.g., electronic declaration forms that do not require personal interaction between the employee and the responsible government official, establishing thresholds and reporting requirements for gifts and payments received or paid by the employee.

The company should always keep the identity of whistleblowers secret and otherwise protect their rights. In particular, retaliation or discrimination against such employees should be prevented or stopped.

4. Conflict of interest

A conflict of interest is a relatively new concept in Ukrainian law.  Thus, all company employees should be trained how to identify and resolve such issues and what harm can be caused to the company if this is not done.

It is better if the conflict of interest policy is communicated to all employees (and to contractors), even if they are not in a “conflict of interest” situation at the moment.  Particular attention should be devoted to the procedures for disclosure and resolution of conflict of interest situations because privacy and labor laws need to be taken into account when such actions are implemented.

5. Anti-corruption programs under Ukrainian law

An anti-corruption program regulates a much narrower set of issues than the compliance policy or the code of ethics. Nevertheless, those companies that must have such a program (e.g., those that bid in government tenders) should observe some key requirements. First, the anti-corruption program requires preliminary discussion with employees before it can be formally implemented.  Also, it must at all times be accessible to employees. For Ukraine this means that a policy in English (or another foreign language) uploaded somewhere on the company intranet will most likely not be viewed as satisfying this requirement.

Ukrainian laws do not contain a full list of the issues that must be addressed in the anti-corruption program. However, the following specific items must be included:

1) the range of persons to whom the program applies;

2) a list and description of the anti-corruption measures, standards and procedures, and the manner of their application, including the corruption risk assessment;

3) the ethics standards for employees;

4) the rights and obligations of the employees and company owners in the anti-corruption field;

5) the rights and obligations of the compliance officer and  subordinates (if any);

6) the procedure for regular reports by the compliance officer to the owners of the company;

7) the procedure for monitoring compliance with the anti-corruption program and evaluating the measures envisaged in it;

8) the terms of confidentiality for employees providing information to the compliance officer about attempted bribery or solicitation of bribes;

9) the procedures for protecting employees who have provided information about corruption or related offenses.

The obligation to comply with the anti-corruption program must be included in the employment agreements of employees.  This requirement may also be present in agreements with contractors of the company, which provides solid legal grounds for protecting multinational businesses from questionable Ukrainian contractors.

6. Compliance challenges in Ukraine

The relative newness of the concept of compliance in the Ukrainian business environment means that there is little awareness and an acute shortage of qualified candidates for the position of compliance officer. As a result, non-compliance risks have been largely ignored, even by foreign managers of Ukrainian divisions of multinational companies.  This has created significant potential (and actual) exposure to enforcement actions against the companies and their management in their home countries (especially in the USA), which has led in some cases to loss of market share and dismissal of the relevant top managers.

In our experience the lack of compliance policies (or of their proper enforcement) in Ukrainian offices has led to the flourishing of costly corporate fraud, low morale and loyalty of staff and significant effort and legal expenses required to clean up the consequences of non-compliant acts. This includes the cost of dismissing the relevant top managers and other employees, expenses related to recovery of stolen assets, full investigation of violations in Ukraine and literally millions of dollars to defend the company in the USA. Accordingly, managers of international businesses in Ukraine must pay prompt and constant attention to ensuring that the business activities of their companies strictly comply with Ukrainian and applicable foreign law.

Автор: Mariana V. Marchuk


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