Corporate Anti-Corruption Enforcement Trends in Russia

In summary

In recent years, Russia has tried to streamline its corporate anti-corruption enforcement to make it more predictable and to take into account best practices across the globe. Without minimising the scale of the problem that Russia faces in achieving those objectives, this article provides an overview of recent corporate anti-bribery enforcement trends and, taking into account those trends, tries to sum up the most important lessons to be learnt by companies that strive to build compliant businesses in Russia.

Discussion points

• Russian corporate anti-corruption enforcement must be taken into account by companies, especially those with an international footprint and those that actively participate in Russian state tenders
• Small and medium-sized businesses remain under the biggest enforcement exposure, but law-enforcement has made attempts to switch the focus to bigger companies
• Both legislation and enforcement practice enable prosecution of companies for bribery offences committed by parties with extremely remote connections to the accused legal entity
• The nature of the anti-corruption offences detected reinforces the need for proper compliance training of employees
• Corporate compliance programmes gain more weight as a potentially successful defence in anti-corruption enforcement cases

Referenced in this article

• Code of Administrative Offences
• Law on Combating Corruption

In Russia, as in many other countries, companies are subject to liability for their corrupt activity. At first sight, Russian financial penalties for corporate bribery may not appear as significant as, for example, in the case of the potential liability for violations of the US Foreign Corrupt Practices Act or the UK Bribery Act; however, this is not a reason not to prioritise compliance with Russian anti-corruption legislation. There are a number of reasons why this continues to be a hot topic for the majority of international companies operating in Russia.

First, in Russia it is the courts that are empowered to prosecute for corporate bribery. Court judgments are publicly available and can be easily accessed by foreign law enforcement authorities that could consider prosecution in Russia as a trigger for opening their own investigation with a broader scope and potentially much more severe consequences.

Russian mass media and prosecutors contribute to the public circulation of information on anti-corruption enforcement cases; thus, even where judgments are unavailable or difficult to find, there is still likely to be plenty of information in the public domain about those cases.

Second, companies prosecuted for corporate bribery offences are not allowed to participate in state procurement tenders for a certain period. State procurement has traditionally been an important part of the Russian economy, and potential debarment from state tenders is a critical concern for many companies that directly or indirectly have the government as their biggest customer enterprise (eg, life sciences companies).

Third, Russian legislation is well designed to prosecute companies for bribes given on their behalf, in their name or in their interests, even where the company is wholly unaware of the bribe being paid and did nothing to encourage it. As cases like this start to appear, companies are beginning to pay more attention to introducing controls for the choice of and interaction with their counterparties.

Last but not least, although most fines for corporate bribery offences are comparably small, they may be quite significant – even for big companies. The amount of the fine depends on the amount of the bribe and could reach 100 times that amount. So far, the biggest fine imposed on a company in Russia reached 100 million roubles, but we expect that this record will be beaten in the coming years.

Enforcement trends in brief

The overall state of corporate anti-corruption enforcement in Russia has been more or less stable over recent years. No major game changers have appeared in legislation or enforcement practice.

Small and medium-sized businesses remain under the biggest enforcement exposure for a number of reasons:

• they tend to have a less significant compliance culture, less funds to establish compliance controls and an inadequate understanding of how they can benefit from being compliant;
• they operate at the regional or local level, where corruption is somewhat more inherent and can be part of everyday business life; and
• they are put under pressure by their bigger counterparties and have to find ways to survive and be profitable against the backdrop of decreasing income of the population and various crisis situations, such as the covid-19 pandemic.

This does not mean that large Russian companies and multinationals are given a free ride by the enforcement authorities. On the contrary, the enforcement focus has started to move towards a more advanced anti-corruption environment, similar to the environments foreign companies are used to in other jurisdictions.^[1] This is reflected in a number of mutually related trends.

First, Russian law enforcement authorities have become more and more interested in bigger fish instead of commencing numerous low-profile cases. Russian legislation has changed to accommodate this objective. The covid-19 pandemic has only reinforced this trend as the sentencing of higher fines to restore the budget and the abilities of law enforcement to initiate numerous low-profile cases has been affected by the pandemic-related lockdowns and various subsequent restrictions.

Second, Russian courts have started to pay more attention to corporate compliance programmes (and the adequacy thereof, both on paper and in practice) when it comes to the issue of imposing liability for bribery offences.

These trends reflect the growing demand for compliant business practices and for the introduction of strengthened and targeted compliance controls.

In this article, we provide a more detailed overview of the state of corporate anti-corruption enforcement and recent trends and seek to identify lessons to be learned by companies striving to build a compliant business in Russia.

Overview of legislation

The provision prohibiting bribery by companies is contained in article 19.28 of the Code of Administrative Offences (the Administrative Code). It provides very broad grounds for the liability of legal entities for bribery offences. It prohibits the mere offer or promise of a bribe by a person acting in the name or in the interests of a legal entity.

In particular, article 19.28 prohibits the following:

Unlawful provision, offer or promise made in the name or in the interests of a legal entity or in the interests of a related legal entity of monies, securities or other property, rendering services of a pecuniary nature or provision of property rights to a public official, an official with management functions in a commercial or other organization, a foreign public official or an official of a public international organization (including when upon instructions of the public official, the official with management functions in a commercial or other organization, the foreign public official or the official of a public international organization monies, securities or other property are transferred, offered or promised, services of pecuniary nature rendered or property rights provided to another individual or a legal entity) for any act or omission in connection with his/her duties of office, committed by the public official, the official with management functions in a commercial or other organization, the foreign public official or the official of a public international organization in the interests of this legal entity or a related legal entity.

Liability for bribery under article 19.28 can reach 100 times the amount of the bribe (if the bribe exceeds 20 million roubles). As far as we are aware, the largest fine in the history of article 19.28 enforcement was levied by a court of first instance in 2019, which imposed total penalties of 155.9 million roubles, including a fine of 100 million roubles and 55.9 million roubles in confiscated illegal payments. The district court subsequently decreased the fine to 50 million roubles, but even so it remains the record holder.

Other top fines vary from 100 million roubles to 20 million roubles.

Article 19.28 can be applied to offences committed outside Russia, and in 2019 we saw such a case for the first time, that case involving an official from Belarus.

Administrative proceedings under article 19.28 are initiated by the prosecutor’s office, after which the case is transferred to court to decide whether the company will be held liable. The courts of first instance for those cases are the magistrates’ courts. The majority of magistrates still have insufficient experience with cases under this article; many find themselves considering cases under this article for the first time.

While the rulings of the magistrates’ courts may be appealed to a number of higher courts, including the Supreme Court, in our experience, higher courts rarely repeal or change the rulings of magistrates’ courts in this category of cases.

Russian legislators periodically make amendments to article 19.28 and related laws in accordance with developing international best practices in countering corporate corruption. The most relevant among the recent changes are as follows.

• In mid-2018, article 19.28 was supplemented with note 5, which provides a basis for relief from liability in the event of cooperation with law enforcement bodies in detecting and investigating offences, as well as in the event of extortion of illegal payments. The amendments also envisage the possibility of arrest of property or funds of a company to guarantee execution of a court ruling.
• At the end of 2018, amendments were introduced into article 19.28 allowing a company to be prosecuted, even in the absence of the company’s interest in the commission of an offence, if the offence was committed in the interest of a ‘related legal entity’ (this concept is not defined in the law). Furthermore, the recipient of the illegal reward need not be an official but can also be any third party on the instructions of an official.
• At the end of 2019, amendments were made to the Administrative Code allowing the term of an administrative investigation for cases under article 19.28 to be extended by up to 12 months in cases involving a request for legal assistance sent to a foreign state.

In addition, in the summer of 2020, the Supreme Court published an overview of court practice in cases involving article 19.28. In the overview, the Supreme Court confirmed the possibility of prosecuting companies under article 19.28 for the actions of third parties not linked to the company by employment, contractual or other legal relations.

Following the letter of the law, Company A can be found guilty of infringement of article 19.28 of the Administrative Code, even when the illegal reward on its behalf was provided, offered or promised by an employee of Company B, if the court considers that the employee acted in the interests (or on behalf) of Company A, whether by agreement between those companies or on some other basis.

Russian court practice has already seen cases in which courts have prosecuted companies under article 19.28, even when the bribe giver had, in our view, an extremely remote connection with the accused legal entity or the court failed to identify a bribe giver; however, until the publication of the Supreme Court’s overview, there was no official guidance on the criteria or basis for holding a company liable for the actions of such third persons.

As the Supreme Court explained, one of the conditions for bringing such charges against a company is the presence of instructions, knowledge or approval by authorised persons of the company of the commission of the actions. Another essential condition for bringing charges is an ‘economic or other (for instance, reputational) interest’ in the commission of the illegal action.

The below enforcement overview covers legal practice in the past couple of years. Our preliminary review of the cases in the register for 2021 to 2022 confirms the trends outlined below.

Overall state of legal practice in the application of article 19.28

According to statistics published by the Supreme Court, from 2013 to 2017 there was a steady growth in prosecutions under article 19.28, from 164 cases in 2013 to 477 cases in 2017.

There was an insignificant decrease in 2018, and from 2019 to 2020 this decline continued: the number of cases fell to 322 in 2020.

The reasons for this reduction are not entirely clear; a number of factors could have played a role.

First and foremost, an overall change in the focus of law enforcement authorities in anti-corruption cases could have led to this decline. The vast majority of cases under article 19.28 are based on materials collected in the course of criminal prosecutions of individuals; therefore, the number of cases under article 19.28 may be dependent on the level of activity of law enforcement authorities in Criminal Code bribery cases.

According to data from the Judicial Department of the Supreme Court, in 2019 the number of individuals charged in cases of small-scale bribery (cases in which the bribe was less than 10,000 roubles) fell by 31.5 per cent compared with the previous year. At the same time, cases involving illegal payments of less than 10,000 roubles made up more than 39.7 per cent of the total number of cases initiated under article 19.28 in that year. In the following years, around the same figures were recorded.

The decreased interest of law enforcement authorities in prosecuting corruption offences with a bribe below 10,000 roubles is bound to have an effect on the number of cases initiated under article 19.28.

Second, we assume that in 2019 the implementation of note 5 to article 19.28 gathered speed, allowing companies to avoid liability by assisting with the detection and investigation of violations and therefore impacting the figures for 2019 and thereafter.

As far as we know, there is no one publicly available source of information concerning article 19.28 cases that were not brought on the basis of note 5; however, analysing the available information on practice under article 19.28, we see an increase in those cases, which could also partially explain the overall reduction in cases brought under article 19.28.

A decision on the use of note 5 can be taken by the prosecutor when deciding on initiating proceedings under article 19.28; therefore, in most cases, information about those decisions would not come into the public domain and would not be included in the official statistics on article 19.28 enforcement.

In our view, the reduction in the number of cases brought under article 19.28 in 2019 could be the result of an overall improvement in legal practice and a long-awaited refocusing of attention by law enforcement on more significant crimes. The covid-19 pandemic that started in early 2020 contributed to the overall trend by making it difficult for the law enforcement authorities to initiate new cases. This likely explains why the prosecution figures stabilised at around the same level as those in 2019, without any significant growth.

Enforcement highlights and trends

Most prosecutions result from reporting of government officials about an attempt of bribery

The prosecutor’s office has the exclusive right to initiate proceedings under article 19.28.

According to our research, in the majority of cases, article 19.28 violations are detected when officials report offers of bribes and as a result of investigative operations: those two categories make up about 95 per cent of cases for which data on the method of detection is available.

More than half of those cases are instances when investigative steps are taken by law enforcement after receiving information that an illegal reward has been offered or promised. Somewhat rarer are investigations conducted at the initiative of the law enforcement bodies (ie, without receiving information on illegal inducements being offered or promised).

There are also cases where the basis of the accusation was a report or an audio recording made by an official of a person offering an illegal reward, in which case there was no separate law enforcement investigation.

This suggests that most of the article 19.28 offences detected arose owing to companies, or parties acting on their behalf or in their interests, proposing bribes (as opposed to officials requesting bribes).

Even vague proposals to come to an agreement can be interpreted by law enforcement as a violation of article 19.28. This highlights the growing need for complete and timely training and provision of information for employees and others acting on behalf of companies about the risks of liability. Specifically, those persons should be instructed that even a proposal or promise to give an illegal reward can have significant negative consequences for the company.

In the event of extortion of an illegal payment by an official, or upon receiving hints from an official about the possibility of an ‘informal’ resolution of issues, employees should immediately issue an unambiguous refusal to engage in any illegal behaviour and should document the refusal immediately upon closure of the conversation or meeting via internal meeting note or internal report.

Law enforcement tends to focus on bigger bribery cases, but risks of smaller bribery should not be underestimated.

In 2018, in most cases, companies prosecuted under article 19.28 were for relatively small illegal payments. Less than 6 per cent of accusations involved illegal payments of more than 1 million roubles, and around 40 per cent of cases were initiated based on illegal payments of no more than 3,000 roubles.

From 2019 to 2020, the statistics changed significantly. The proportion of cases involving illegal payments of less than 100,000 roubles dropped noticeably from 64.4 per cent to 56.3 per cent of all cases, and the largest increase took place in cases with an illegal payment of more than 2 million roubles. In 2018, there were only six such cases, whereas in 2020 the number more than tripled to 22.

There was a significant increase in the amount of the average illegal payment. In 2018, it was 355,702 roubles, but in 2020 it was more than 733,000 roubles (ie, roughly twice the size). The median bribe grew from 50,012.50 roubles in 2018 to 80,000 roubles in 2019.

Despite this growth in the size of illegal payments under article 19.28, the proportion of cases involving an insignificant illegal payment, as before, remains large. An illegal payment of less than 100,000 roubles was encountered in more than half of all cases in 2020; thus, although law enforcement appears to be shifting its focus to major offences, this should not be seen by companies as a reason to relax controls over smaller expenditures.

Cash bribes are by far most common

In most cases, illegal payments are made in cash, which underscores the need for companies to tighten their relevant controls. In other cases, illegal payments or inducements are made via money transfers, including rapid transfers using a telephone number, the transfer of property or provision of material services.

Bribery through gifts often implies a relatively low monetary value. Recent examples include a bottle of cognac, a crate of paper, a truckload of pit gravel, payment of air tickets to a resort and accommodation in a hotel.

Police officers are the most common bribe-takers, while senior corporate executives are the most frequent bribers

In the period under review, companies most often faced charges for illegal payments offered to police officers. Other frequent recipients of illegal rewards were officials of state institutions and enterprises authorised to take decisions on state procurement, as well as also officials of regional state bodies and the recipients of commercial bribes.

Also among the more common recipients of illegal payments in the period under review were officials of municipal authorities and the Federal Bailiffs’ Service, as well as employees of Russian Railways, although figures for both of these categories have slightly declined over the years.

In 2019, and for the first time, there was a case of bribery of a foreign official: an official of the State Aviation Emergency Rescue Institution of the Ministry of Emergency Situations of Belarus. As far as we know, this was the first such case in the history of article 19.28 enforcement, and we have not identified any other cases of that kind since then.

As far as the participants in corruption on the side of the bribe-giving companies are concerned, cases tended to involve top managers: founders, general directors and financial and executive directors. Other company employees and persons not formally linked to companies by employment or other legal relationships were involved much less frequently.

Companies should pay particular attention to interactions in the course of state procurement

Most frequently, companies face potential liability for illegal rewards designed to ensure a certain decision is taken and for cooperation in obtaining commercial contracts, including as part of state procurement processes.

Companies often give or offer bribes for decisions by officials related to inspections. The aim of those bribes is to avoid or reduce the liability that might result from those inspections.

Other common aims of bribes are to obtain official registration (or licensing or certification), either in an expedited fashion or in violation of legislative requirements, or other official actions linked to the recipient’s position (eg, a bailiff lifting the arrest on a debtor’s account in violation of the legislation on execution proceedings).

There have also been court rulings that describe the aim of illegal payments as ‘for general patronage and connivance’. This phrasing could merely reflect poor legal drafting; however, we recommend that companies draw the attention of their employees to such risks when conducting compliance training.

Specifically, based on this court practice, it is possible to conclude that even an unarticulated or vague aim of corruption on the part of the initiator of an illegal payment is sufficient, in the eyes of the courts, to charge a company under article 19.28.

Corporate compliance programmes remain the most promising ground to avoid or decrease liability under article 19.28

The most promising defence available to companies in article 19.28 cases is a robust corporate compliance programme, which should prove the absence of guilt and release the company from liability.

In accordance with article 19.28, a legal entity can be found guilty of a violation only if it had the possibility to observe the law but did not take all possible measures to avoid the violation. The taking of all possible measures by a company encompasses the introduction of an effective and reliable system of compliance controls and measures to prevent corruption.

In accordance with article 13.3 of Federal Law No. 273-FZ on combating corruption of 25 December 2008, companies are obliged to develop and take measures to prevent corruption. The Ministry of Labour and Social Protection has prepared and published a series of documents of an advisory nature on anti-corruption matters, including recommendations on measures for preventing and countering corruption in companies. Those advisory documents contain the Ministry’s overview of the standards applicable to corporate compliance programmes, based on Russian, international and foreign experience, as well as practical recommendations on the introduction of corporate compliance programmes.

As practice shows, Russian courts are some way from a unified approach in respect of the assessment of guilt of companies when considering cases under article 19.28; however, there have been some positive developments in this area in the court practice of 2018 to 2019, and the most critical improvements were observed in 2020.

In 2020, only around 30 per cent of the cases did not contain any mention of the guilt of the legal entity as a necessary element of corpus delicti, while in previous years these cases represented more than half of all cases.

On the other hand, there has been substantial growth in the number of cases in which courts took note that no measures had been taken to prevent the offence and, when so doing, occasionally referred to article 2.1 of the Administrative Code and article 13.3 of the Law on Combating Corruption. This means that the courts have become increasingly aware of the importance of measures preventing corporate corruption as a basis for discharging liability under article 19.28.

In Russian case law relevant to the application of article 19.28, in 2020 there were still cases with ‘strict liability’ whereby companies were held liable regardless of whether they were guilty. While examining those cases, the courts would usually indicate that the corruption prevention measures taken by the company concerned cannot bear any impact on its guilt. Further, when examining some cases, the courts would confine themselves to a formal indication to the inadequacy of the measures taken, something that, in their opinion, follows from the mere fact of committing the offence (‘the offence would not have been committed had the company taken all possible anti-corruption measures’).

In our view, those cases should also be placed into the category of strict liability instances as, in reality, such cases are examined even without enquiring the issue of whether the company concerned is really guilty, and the company incurs liability ipso facto as a result of the offence committed, regardless of the measures taken by the company to prevent the offence. In 2020, the percentage of cases involving strict liability dropped to less than 4 per cent.

Court judgments under article 19.28 make us believe that most companies prosecuted thereunder do not have corporate compliance programmes. This could be the reason why cases like this are rare. Specifically, companies argued that they took all possible measures to prevent corruption in only 12 cases in 2019, but in 2020 this increased to 17. In 2018, we found only nine such cases.

In some cases, in the absence of argument on the part of the company in respect of its corporate compliance programme, the court may prefer to refrain from assessing this issue on its own initiative; however, strictly speaking, courts should conduct this analysis even where companies keep silent on this issue because guilt is one of the essential elements of an offence under Russian administrative law, which provides for no strict liability.

It is therefore quite difficult to assert that the availability of an effective and well-documented compliance control system can help companies to defend their innocence when indicted under article 19.28 or reduce liability. In the absence of uniform court practice on the matter, the chances of success would depend on the opinion of a particular judge considering the dispute and on credibility of the company’s defence; however, it is increasingly clear that the role and efficiency of the defence will grow with each passing year in proportion to the ongoing trends in that sphere.

Majority of fines remain rather low

The majority of bribes in article 19.28 cases are less than 1 million roubles. This limits the fines that could be imposed to a range of 1 million roubles to 20 million roubles.

Courts often reduce the size of the penalty to below the lower limit envisaged by article 19.28. In most cases, this is because of the dire financial condition of the company charged, as well as, sometimes, in observance of the principle of proportionate punishment. We did not find any cases in the period under review in which the court agreed to reduce the fine to below the lower limit owing to anti-corruption measures taken by a company.

Conclusion

We anticipate that in the foreseeable future, more and more companies (and more and more larger companies) will be targeted by Russian law enforcement agencies, for their own illegal acts or for the illegal acts of their counterparties made in their interests.

Such tendencies in law enforcement practice will further increase the importance of the compliance function. The monitoring and control over activities of counterparties, and processes for the selection of such counterparties, will become increasingly important in the context of potential article 19.28 liability. There will be a growth in the importance of meticulous and timely counterparty due diligence and of training counterparties in anti-corruption compliance standards.

Companies should immediately start taking the appropriate measures. Offences committed now will be the subject of investigation and court proceedings in the years to come and will encounter changing conditions in terms of court practice.

Experience shows that in those situations, it is highly desirable for companies not to simply adhere to the letter of the law but to develop and introduce standards exceeding the statutory requirements.

Notes