Anti-corruption legislation in the Ukraine

September 2011 | TALKINGPOINT | FRAUD & CORRUPTION

financierworldwide.com

FW moderates a discussion covering anti-corruption legislation in the Ukraine between Jared Grubb at Clifford Chance LLC, Andrei Stepanov at Deloitte, and Svitlana Kheda at Sayenko Kharenko.

FW: Ukraine’s ‘Prevention of and Counteraction against Corrupt Practices’ legislation came into force on 1 July 2011. Can you briefly explain how the Act expands the overall scope of the country’s previous legislation in this area?

Stepanov: The Act expands the list of public sector positions affected by anti-corruption legislation. In addition to state officials, the list includes officers of government-owned companies; law enforcement officers and tax inspectors; non-government organisation officers where such organisations are financed from the state budget, persons engaged in provision of ‘public services’ including auditors, notaries, valuation experts; state officials of other states; and officials of international organisations. One important aspect is the inclusion of officers of legal entities and private individuals into the listing of affected categories, if the public servants listed above receive from them ‘unlawful gains’. The Act also contains provisions on declaring income and expenses by public servants, limitations on gifts and hospitality, limitations on business and entrepreneurial activities by public servants, limitations on employment of relatives, and stipulates criminal liability for corrupt practices. In summary, the Act is a positive new development in strengthening the anti-corruption legislation in Ukraine.

Kheda: After six months of having no special anti-corruption law in Ukraine the Act and the Law ‘On Amending Certain Acts Regulating Liability for Corruption Offences’ (the New Liability Law) were enacted, both of which became effective on 1 July 2011. The laws are more consistent and clear, as compared to the previous legislation, and generally seem to conform to international best practices. The Act introduces important restrictions, including on receiving gifts/donations by certain individuals subject to liability for corruption offences (liable individuals). The New Liability Law establishes new corruption related crimes and offences. The laws apply not only to the governmental officials and public servants, but also to a variety of people, and will directly affect the corporate sector. As of 1 January 2012, officials and some other liable individuals are required to annually declare their earnings and expenses.

Grubb: The first law against corruption in Ukraine was adopted in 1995 which effectively served as the only anticorruption Act for more than 15 years. The new legislation has obviously improved the previous anti-corruption legislation which often lacked clarity and consistency. In terms of expansion of the scope of the previous legislation, the new law not only applies to Ukrainian governmental officials, but also to foreign governmental officials, officials of legal entities and ‘providers of public services’, such as auditors, notaries, experts, evaluators, judges of arbitral tribunals, and other persons who provide public services. The law also introduced mandatory declaration of a civil servant’s and his family’s earnings and expenses, as well as providing for the creation of a special governmental registry in which all offenders of the anti-corruption regime will be registered. The idea behind the creation of the registry is that an individual will not be entitled to be appointed as a governmental official if there is a negative record on that individual in the registry.

FW: To what extent does the Act strengthen regulation surrounding gifts and hospitality? In your opinion, how will this affect the way companies operate and the methods they use to win and retain business?

Kheda: Ukrainian law distinguishes between a simple gift and a bribe, but there are still no apparent de facto procedures for gift giving to officials. The Act bans officials and some other liable individuals from receiving gifts or donations from companies and individuals for decisions and acts in favour of the gift giver, and from subordinates of such persons. These persons, however, may accept personal gifts consistent with the generally recognised ideas of hospitality. The Act establishes a value threshold – currently being $60 to $120 – for gifts, which is a new experience for Ukraine. Regulation of presenting gifts applies also to hospitality, so each case of hospitality should be thoroughly evaluated.

Grubb: First, while public officials are allowed to accept gifts in limited circumstances, the value of those gifts must be below a certain established amount. Second, in any event, all gifts presented to civil servants are considered to be owned by the state and must be transferred by the official to the state. Failure to comply with this requirement will be viewed as an attempt to steal the property from the state, with the relevant consequences.

Stepanov: The Act has introduced provisions containing an exhaustive list of cases where the gift cannot be accepted by the subject. The Act prohibits receipt of gifts by public servants and donations valuing in excess of UAH400 or £30 for one gift, or double that amount for the cumulative value of all gifts obtained from a single source during one year. In addition, clearer guidance has been given with respect to the legal status of gifts or donations.

FW: The Act contains specific provisions relating to state officials and their ability to engage in business activities. Could you provide some insight into why lawmakers believed it was necessary to include such provisions? Do they go far enough to reduce corruption going forward?

Grubb: Many members of parliament are involved in commercial activities in addition to their legislative duties. Whenever this situation arises there is the risk that decisions will be made for reasons which are beneficial to a person’s personal interest as opposed to the interest of the country. The rules set forth in the new law seem to be strict, but as is often the case in Ukraine whether or not this will achieve its intended purpose will depend primarily on how the laws are enforced.

Stepanov: The Act prohibits performance of ‘other paid or entrepreneurial activities’ by state officials, with certain exemptions such as tuition, research, medical practice, instruction and sports refereeing. The Act also prohibits state officials from holding executive or supervisory positions in businesses and organisations. This is an important stipulation which, if vigorously enforced, will help with much-talked about separation of public service and business. The rationale behind such a provision is to prevent an individual misusing their status as a state official for personal benefit.

Kheda: Under the Act, individuals authorised to perform state functions or local government functions are prohibited from engaging in other paid or entrepreneurial activities apart from teaching, scientific and creative work, and some other activities, and become members of governing bodies of profitable companies – except when representing the state interests in the governing bodies of such companies. The rationale for this ban is that, ideally, state and municipal officials have to perform their duties impartially, for the benefit of society. This can be jeopardised if the business interest is involved.

FW: What new sanctions and penalties for non-compliance have been introduced under the Act?

Stepanov: The Act amending the Code of Administrative Offences, Criminal Code and Code of Criminal Procedure has become effective together with the Act ‘On Prevention of and Counteraction against Corrupt Practices’, expanding the existing limits of liability for corrupt actions. In addition, the Act itself has introduced the procedure for dismissing from the workplace individuals liable for corrupt actions and adding their name to a state register of persons liable for corrupt actions. The Act stipulates criminal liability for public servants convicted of corrupt practices. It also prescribes compensation of losses to victims of corruption, and confiscation of assets gained through corrupt activities. Details of persons convicted of corruption will be entered into the state register of persons who have performed corrupt practices.

Kheda: The Act establishes criminal, administrative, civil and disciplinary liability for corruption offences. Information on persons liable for corruption will be listed in the Unified Register of Individuals Liable for Committing Corruption Offences. The New Liability Law introduces many new corruption related crimes and offences, including unlawful enrichment, and violation of the ban for receiving gifts or donations. The law distinguishes between receiving, offering, or giving a bribe; commercial bribery; bribery of persons rendering public services; and provoking bribery or commercial bribery. Depending on the degree of a particular crime, bribery is punishable by a fine or imprisonment and, as the case may be, deprivation of the right to hold certain office or engage in certain activities for up to three years, and confiscation of property.

Grubb: In addition to the already existing sanctions and penalties, which include incarceration, restrictions on freedom and corrective labour, under the new Act new sanctions include an increased amount of fines and an increase in the duration of incarceration periods from eight to 10 years. Moreover, restrictions on the right to hold certain positions or conduct certain activities for a period of up to three years and seizure of property can now be applied to officials of legal entities.

FW: How does the new legislation compare with regulation elsewhere, such as the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act?

Grubb: The new legislation is aimed at fighting domestic endemic corruption, whereas the US FCPA and UK Bribery Act go beyond their own country and apply to companies doing business outside of their official domiciles.

Kheda: As opposed to the FCPA and the UK Bribery Act 2010, the Act does not have extraterritorial application. It also does not deal with bribery which is regulated by respective provisions of the Criminal Code. It does not impose liability for the third party payments. The Act does not provide for company liability, and charges for corruption offences can only be brought against company officers and employees. No ‘facilitating payment’ exception or ‘adequate procedures’ defence, or any other exceptions and defences available under the FCPA and the UK Bribery Act 2010, are envisaged in the New Law. Even though the New Liability Law increases fines and penalties for violating the Ukrainian anti-corruption and anti-bribery legislation, these fines and penalties are still insignificant, the maximum fine being less than $4000.

Stepanov: The new Act can be viewed as an important step forward in bringing Ukraine’s anti-corruption legislation in conformity with European equivalents. It contains many new provisions similar to those in the UK Bribery Act and the US FCPA.

FW: What challenges does Ukraine face in implementing the new legislation? Is there a significant possibility that the original objectives of the Act will not be achieved in practice?

Grubb: The main challenge for the Ukrainian government is to be impartial and consistent when it comes to enforcing the new law. While fighting corruption has often been quoted among the major goals of various Ukrainian politicians, little progress has been made on this issue so far. One of the shortcomings of the new law is the introduction of some wide and unclear definitions into the Act, such as ‘unlawful benefit’ and ‘conflict of interests’ – not only does this make it more difficult for people to ensure that they are complying with the Act, there is a risk that it will frustrate the fair and impartial application of the Act.

Kheda: Despite official declarations that combating corruption and bribery is the primary task for Ukraine, enforcement of the anti-corruption and anti-bribery legislation has been inconsistent, opaque and subjective. Considering that the new legislation introduces a number of new notions into Ukrainian law and that many existing legal acts governing this area have to be brought in compliance with the new laws, enforcement of the new anti-corruption legal framework remains an issue and success of its application will largely depend on interpretation of the new laws by the Ukrainian enforcement agencies and courts, which is too early to predict at this stage.

FW: In light of the new Act, what is your advice to companies with operations in Ukraine? What steps should they take to ensure compliance with the new law and avoid penalties?

Stepanov: We would advise companies operating in Ukraine to become familiar with the new legislation and to build the new requirements and limitations contained in the Act into their day-to-day business practices, paying particular attention to interactions with the state. A thorough compliance review of business practices and processes may be required, with internal policies and procedures amended or enforced as the outcome. What may have looked like a harmless Christmas gift under the previous legislation is in fact a prohibited ‘unlawful gain’ resulting in criminal prosecution of the company’s officers by the new Act.

Kheda: The Act expands the groups of persons subject to liability for corruption. Now charges can be brought against CEOs, managers, and administrative personnel of any company. For instance, there is a possibility that even doctors issuing prescriptions to preferential categories of patients can be prosecuted under the Act. Therefore, companies operating in Ukraine, especially those regulated by the FCPA and the UK Bribery Act 2010, should adopt compliance programs and policies, or amend the existing ones in accordance with the Act, carefully evaluate each case of gift giving/providing hospitality, as well as pay closer attention to their business partners. The global compliance programs and policies are not per se enforceable in Ukraine. For them to work, it is necessary to introduce in the Ukrainian subsidiaries local programs and policies based on the new anti-corruption legislation and incorporating, where possible, relevant provisions of the global compliance programs and policies.

Grubb: Companies need to make sure that they are acquainted with the new legislation and that they do not exceed the limits set on ‘hospitality expenses’ as stated in the new law. Further we recommend the implementation of strict internal policies and rules, and that companies take their compliance with these rules seriously. The company’s culture of compliance needs to come from the top of the organisation and needs to match words with deeds when it comes to implementation and monitoring.

Jared Grubb is the managing partner of the Kyiv office of Clifford Chance. He specialises in cross-border finance including real estate finance, project finance, debt restructuring, syndicated lending and acquisition finance. Mr Grubb has significant experience in advising clients on issues relating to anti-money laundering legislation and white collar fraud. He recently participated as an expert speaker in the Conference on Legal Compliance with the New UK Bribery Act and Other Anti-Corruption Laws. Mr Grubb can be contacted on +38 (044) 390 2236 or by email: jared.grubb@cliffordchance.com.

Andrei Stepanov a partner at Deloitte. He is in charge of consulting Services in Ukraine, Belarus and Georgia. During his 13 year career, Mr Stepanov has worked on an extensive range of financial institutions advisory, risk management and internal controls projects. These include projects on processes, implementation and improvement, IT systems specification, implementation and post-implementation review. He is a Fellow Member of the Association of Chartered Certified Accountants, United Kingdom, and is involved in its professional activities in Ukraine. Mr Stepanov can be contacted on +38 (044) 490 9000 or by email: astepanov@deloitte.com.ua.

Svitlana Kheda is counsel at Sayenko Kharenko. She has 14 years experience practicing law and is in charge of the firm’s anti-corruption practice. Ms Kheda’s experience includes developing and teaching an anti-corruption course for senior government officials. She is a published author of over 40 publications in many countries and is a frequent speaker at local and international venues. Ms Kheda can be contacted on +380 44 499 6000 or by email: skheda@sk.ua.

THE PANELLISTS

Jared Grubb

Clifford Chance LLC

Andrei Stepanov

Deloitte

Svitlana Kheda

Sayenko Kharenko