Overshadowed by an ever-changing sanctions regime, opaque structures, and deep-rooted bribery and corruption issues, operating in Russia can be a source of risk and compliance headaches. But Russia is a land full of natural resources and opportunities are available for those who can navigate the uncertainties.

Our team has deep experience handling these issues. Here we take a look at the current environment, particularly in light of sanctions, and explore the three biggest challenges compliance officers encounter when considering major investments, private wealth prospects, or evaluating joint venture partners.

A Difficult Place to Do Business

On the global stage, relations between Russia and the West have leaned toward hostile, underscored by complex geopolitical tensions. Ukraine’s crisis in 2014 resulted in the West imposing significant financial sanctions, limiting foreign investment and reducing Russia’s presence in global markets. The breadth of sanctions imposed on Russia by the US and EU makes doing business there particularly difficult, especially as sanction regimes evolve rapidly.

COVID-19 is also of immediate concern, having hit Russia’s economy hard. The country is heading toward a recession and is seeing negative growth in most sectors. The decline follows a previous decade of little to no growth and a stagnant economy that does little to attract foreign investment. Despite placing at 28/190 on the World Bank’s ease of doing business rankings in 2020 (jumping from 62/189 in 2015), the absence of the rule of law remains a significant impediment to conducting business in Russia. The Putin administration has taken further control over businesses and relations with outside interests and private businesses are prey to degraded and politicized law enforcement. Business disputes can quickly become criminalized and the recent case of Michael Calvey is a case in point. Calvey, one of Russia’s most prominent investors, was placed under house arrest on suspicion of fraud, suspected of embezzling billions of rubles. Calvey claims that the case is being used against him in a corporate dispute over the control of a Russian Bank.

Data security adds another layer of complexity with significant monitoring from law enforcement and security agencies, backed by the government. When it comes to information, the first thing that may come to mind is Russia’s facility with information warfare and influence operations. But beyond that, most media sources should be looked at with appropriate skepticism for credibility; most do not have the freedom to report true facts, especially on entities with state ties.

Looking further ahead, we expect President Putin will remain in power for at least the next two years, making it likely that there will be continued interference with global politics. Russia will be inclined to remain on high alert to avoid anything like the social unrest recently seen in Belarus. And with ongoing sanctions, relations between Russia and the West will continue to be strained. A change in administration in the US may result in changes to sanctions, and compliance teams should be prepared for Russia to continue to be a complex place to do business.

Navigating the Top Three Compliance Challenges

With these factors in mind, compliance teams can take a comprehensive approach to risk and compliance in Russia.

Sanctions

The impact of doing business with a Russian sanctioned entity should not be underestimated. In the US, it can result in legal repercussions, major fines, and a negative impact on an organization’s reputation. But complex business structures and opaque markets can mean it’s not always immediately obvious that you are doing business with a sanctioned entity or individual. In this recent case, companies linked to two Russian oligarchs were able to evade US sanctions and buy high-value art by exploiting a loophole whereby US banking regulations do not apply to high-value art transactions. Getting to the bottom of beneficial ownership is vital to avoid being thrown off guard and perpetual monitoring of your Russian partners means that you are able to stay on top of changing sanctions.

Bribery & Corruption

Bribery and corruption are intrinsic to business life in Russia and can have a significant impact on potential investors. Corruption filters through all walks of life, from the highest level at the Kremlin and courts through to petty corruption on the streets and local government. Despite having a Federal Anti-Corruption Law in place, a lack of enforcement renders legislation largely powerless, except when enforcement is politically expedient.

Conflicting local practices and growing international ABAC legislation make this difficult terrain for compliance teams. Alexion Pharmaceuticals discovered this first hand, paying $21.4 million to resolve FCPA offenses in 2020 relating to payments to doctors at government hotels. Another recent case is the $11.7 million Juniper Networks settlement, relating to sales practices in Russia where employees secretly agreed to increase discounts without passing on those discounts. There are no two ways about it; robust due diligence is a must in this environment.

PEPs

Russia’s oligarchs continue to control a vast amount of wealth, including many of the country’s major entities. Their influence is far reaching and their ties with the Kremlin run deep. Russian elites and oligarchs are masterful at working around sanctions — and convoluted ownership structures mean that knowing who you are doing business with is not always straightforward. Detailed vetting of prospective partners, businesses, and employees is necessary to identify politically exposed persons (PEPs) and avoid running afoul of regulations, including the FCPA. An example of this can be seen in the 2019 settlement paid by Deutsche Bank related to the hiring of public officials in Russia and China.

Conquering Risk and Compliance Issues in Russia

Linda Huang, IntegrityRisk’s Global Head of Research Operations, notes that due diligence on Russian entities can pose extraordinary challenges. “The reliance of many large Russian businesses on obscure intermediaries that can siphon funds offshore demands special records research competencies and, often, multiple language skills,” she says. “Middleman arrangements that can divert funds offshore or mask sanctions evasion schemes,” says Linda, “require a deep understanding of investigative research tools that best mitigate client risks.”

IntegrityRisk CEO Jim McWeeney echoes Linda’s observations about the hurdles to enterprises operating in Russia. “Navigating the complex web of hidden, informal relationships that characterize the Russian business scene,” he warns, “can pose difficult challenges for the uninitiated.”

IntegrityRisk has extensive experience supporting businesses navigating the complexities of risk and compliance in Russia. Our sanctions screening goes beyond the database and watch-list checks to provide analysis and context, verifying that the watchlists used are credible sources. Our enhanced due diligence utilizes Russian language research as part of our open source research and link analysis. We support this research with local source inquiries and investigations to determine the actual status, connections, and reputation of Russian individuals and corporations.

Reach out today to speak to our experts and get the help you need to overcome potential Russian compliance issues.