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« UK Bribery Act: Pre-trial agreements are a turning point for global enforcement | Main | PTC Part Two: SEC announces first deferred prosecution agreement with individual to resolve FCPA case »
Wednesday
Feb172016

Yes, Kazakhstan is a compliance challenge. But it’s doable

I've talked about the challenges of doing business in Kazakhstan because of its high levels of corruption and rapidly changing legal environment. In this post, I'd like to provide some tips to American companies contemplating potential investments in Kazakhstan or other emerging markets.

Comply with the FCPA
 
At the risk of stating the obvious, American and other companies subject to the FCPA must undertake all the necessary efforts to comply with the law. 

This includes setting the right tone at the top that corruption will not be tolerated, establishing the necessary compliance structure, performing a thorough FCPA-related due diligence on any foreign investments, suppliers and agents, investigating any red flags of potential corruption and making the necessary disclosures to the SEC and the DOJ, and ensuring that all employees, business partners and agents are properly trained concerning their obligations under the FCPA and understand the severe consequences if they fail to comply with it.

The costs of a foregone opportunity are a lot smaller than the potential FCPA-related imprisonment, fines, the risk of debarment from U.S. government or World Bank contracts, and reputational damage. If things have a bad smell, it’s better to walk away.
 
Comply with local law
 
Too many times multinationals go into a developing country and try to act like they own the place. Just because Kazakhstan is an emerging market does not mean that its laws and regulations should not be respected or complied with, no matter how difficult or impractical they may seem to a multinational company.

The laws frequently change and can be vague and sometimes contradictory. Red tape is a major hindrance. But that's the nature of doing business in an emerging market. If the country had already developed and was functioning perfectly, it would no longer be an emerging market and there would be significantly fewer opportunities. You're in Kazakhstan, not in Kansas or Canada. Your company must comply with local law on your home turf, and you should do the same in doing business abroad.

Don't try to game the system

Corrupt foreign officials often see bribery opportunities when a company wants them to ignore or bend the applicable local law. That's the surest way to run afoul of the FCPA. To stay FCPA compliant, sometimes it's necessary to forgo that tempting state procurement opportunity or pay more foreign taxes or customs fees than you would otherwise prefer.

Don't take risky tax deductions or misclassify goods to reduce customs duties. If you're local-law compliant, corrupt officials will have less leverage, and they may have much to lose if you expose their wrongdoings to their superiors or the state prosecutor.

Kazakhstan has its own anti-corruption legislation and numerous local officials have been prosecuted. Last December, a former prime minister was sentenced to 10 years in prison on corruption-related charges, along with a bevy of other, lower level officials. Kazakh officials don't want to go to jail. Act in a risk-averse manner, and you’re more likely to stay safe.

I’ll discuss more emerging-market guidance in the next post.

_____

Alex Nisengolts is a Chicago attorney focusing on cross-border M&A, electronic discovery, and investments and operations in Kazakhstan. He first traveled to Kazakhstan in 1994 as a legal advisor on a USAID-sponsored legal reform project and has been involved in Kazakh matters for the past two decades, for U.S. and Kazakh law firms and as a manager and senior manager for a Big Four international accounting firm. He can be reached here.

Reader Comments (2)

Interesting article.

Is it possible to actually function in Kazakhstan without bribery, in reality? I was just working with a client who runs a resort in Thailand, (he is a lawyer himself as well as a former policeman) and he says it is absolutely impossible to function there without paying bribes. Most of them fall into the category of facilitation payments (hence legal corruption perhaps) so they may be safe under FCPA. But not under the Uk Bribery Act.
February 17, 2016 | Unregistered Commenteralan franklin
Of course it’s possible to do business in Kazakhstan without bribery. Just because corruption levels are high does not mean that corruption is legal under Kazakh law, and hundreds of Kazakh officials have gone to jail because they took bribes. While corrupt officials may offer bribery-related inducements (e.g. a license or a state procurement contract) or extort a company with the threat of sanctions, it’s up to the foreign company to accede to their inducements or demands. Payers of bribes violate not only Kazakh law, but may also violate the FCPA and the UK Bribery Act, if they are subject to it.

Sure, paying bribes may make life easier in the short term. But the company also has to consider the applicable FCPA and UK Bribery Act risks as well as the risk of a bribery-related prosecution in Kazakhstan. Also, paying bribes in one instance may open the company to future extortion as the company will acquire a reputation of being willing to pay bribes. Therefore, it would be more prudent to forego tempting opportunities and fight extortion by corrupt officials by appealing to higher-level authorities, the state prosecutor or the local courts. It may also be worthwhile to consider raising the issue with the country’s investment-promotion authorities or your embassy. That’s why companies contemplating investments and operations in emerging markets need to be properly staffed with lawyers, accountants, and other advisors who can defend the company’s legal position under local law. Obviously, global multinationals are in a better position than small companies to undertake the aforementioned precautions as they have more robust compliance departments and are better suited for doing business in emerging markets.

Although it may seem more onerous at first, compliance with the applicable local law, the FCPA, and the UK Bribery Act is the safest position for the long run. I’ll provide more information in subsequent posts.
February 18, 2016 | Unregistered CommenterAlex Nisengolts
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