Regulation of Compliance Matters in Ukraine

The term “compliance” in its current sense emerged in the US business environment over the last 30-40 years and refers to the system of internal regulations and measures implemented by entities to ensure adherence to laws, as well as to specific industry standards, trade customs and regulations. In international business this term also currently 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 a business, whether local, foreign or specific to a company.

In Ukraine, this term has not been widely used, as legislative and practical efforts are focused very narrowly. In particular, the principal statute in the area — the Law on Prevention of Corruption (adopted in 2014 and regularly amended) — is aimed primarily at counteracting corruption and eliminating the impact of conflicts of interest on business and government decisions. However, like 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 adopt the best practices that have been developed, which cover a much broader range of issues.

The main driver for this will be the demands of international and certain foreign legislation (US Foreign Corrupt Practices Act, UK Bribery Act, etc.) because global companies are introducing their worldwide standards into their Ukrainian operations, causing their Ukrainian business partners to adopt the relevant standards. In particular, the best clients of Ukrainian companies — multinational and big foreign companies — demand that their suppliers either adhere to the customer’s compliance policies or that they have their own compliance policies which are satisfactory to the customer.

Ukrainian legislation, although not perfect, 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. Certain specific legislation has been adopted to regulate interaction with healthcare practitioners and that has had a major impact on the pharma industry in Ukraine. Also, as of 1 September 2014, all companies in Ukraine 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 that takes into account both best international practices (which have emerged in response to certain foreign laws) and Ukrainian legislation.

Key Compliance Issues and Protections

Each company operating in Ukraine 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 resolution of 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 and interaction with the authorities). For example, the risks for a transportation company will significantly differ depending on whether 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).

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, thereby exposing it to liability under many foreign laws in addition to Ukrainian laws. In Ukraine, traditionally, the most risky processes 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 for the Ukrainian office 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 review more often than other company employees. To minimize the risks such employees may be required to follow relevant standard operating procedures. Also, the relevant job duties may be allocated among several employees or to the most suitable employee based on their 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 government official responsible, and establishing thresholds and reporting requirements for gifts and payments received or paid by the employee).

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

Conflicts of Interest

A conflict of interest is a relatively new concept in Ukrainian law and is defined in the Law On Prevention of Corruption. Thus, all company employees should be trained on 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 time. Particular attention should be devoted to the procedures for disclosure and the resolution of conflict of interest situations because the privacy and labor laws need to be taken into account when such actions are implemented.

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 as a separate policy (e.g., those that bid in government tenders) should observe some key requirements. First, the anti-corruption program needs to be preliminarily discussed with employees before it can be formally implemented. In addition, it must be accessible to the employees at all times. For Ukraine, this means that a policy in English (or another foreign language) uploaded somewhere on the company’s intranet will not satisfy this requirement.

Ukrainian law does not contain a full list of the issues that must be addressed in its 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 evaluation of the measures envisaged in it

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

9) the procedures for the protection of 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 the contractors of a company, which provides solid legal grounds for protecting multinational businesses from questionable Ukrainian contractors.

Compliance Challenges in Ukraine

The relative novelty 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 companies and their management in their home countries (especially in the US), which in some cases led 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 a lack of loyalty from 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 the recovery of stolen assets, full investigations of violations in Ukraine and millions of dollars to defend the company in the US. Accordingly, managers of international businesses in Ukraine must pay prompt and constant attention to ensure that the business activities of their companies comply strictly with Ukrainian legislation and global best compliance practices.