1. COMPLIANCE: A KEY COMPONENT OF M&A DUE DILIGENCE IN UKRAINE
INVEST IN UKRAINE: REVEALING THE POTENTIAL
Adam M. Mycyk
Chadbourne & Parke LLP, Kyiv, Ukraine
June 11, 2013

2. WHY CARRY OUT DUE DILIGENCE?
Uncover undisclosed liabilities
companies may have liabilities that may not appear in their accounts (e.g., sureties/guarantees)
companies may keep two sets of books
Duty to shareholders
Compliance with laws, e.g., Foreign Corrupt Practices Act (FCPA), UK Bribery Act, anti-money laundering laws, etc.
Issues important to Western investors may not always be of concern in purely domestic transactions – competitive disadvantage?

3. WHY WORRY ABOUT COMPLIANCE? INCREASE IN FCPA ENFORCEMENT!
Siemens agrees to pay $800 million fine to settle FCPA bribery charges (December 2008)
Halliburton to pay $402M for foreign bribes (February 2009)
FCPA sting operation nets 22 executives for FCPA violations (January 2010)
BAE Systems agreed to pay $400 million FCPA fine (March 2010)
Delaware company Innospec, Inc. to pay $40.2M for FCPA violations (March 2010)
Daimler to pay $185M to settle charges of making millions in foreign bribes (April 2010)

4. UKRAINE AND CORRUPTION
2012 Corruption Perception Index published by Transparency International ranks Ukraine 144th out of 174 countries
Recently, President Yanukovych reported that Ukraine suffered budgetary losses of over $2.5 bln in 2012 due to corruption
Ukrainian government has declared a war on bribes and corruption as a state strategic priority
New Ukrainian laws and concepts implemented but enforcement weak
Global movement to combat corruption – close to 40 countries have enacted comprehensive anti-corruption legislation
Enactment of the UK Bribery Act and the aggressive enforcement of the US foreign Corrupt Practices Act (FCPA) have raised additional concerns for businesses operating – or planning to operate – in Ukraine

5. FCPA – TWO PRONGS Anti-bribery provisions
prohibit companies and individuals from making corrupt payments to foreign officials to obtain or retain business
any US citizen or US company or any person if any part of the act took place in the US
“payments” include anything of value, including promises or offers
“foreign official” includes any government employee, political party, candidate and even employees of government owned entities
“obtain or retain business” includes efforts to gain a business advantage such as favorable tax treatment
Books, records and internal controls
applies to companies listed in the US and requires them to
keep accurate records that fairly represent transactions
maintain a system of internal controls to ensure proper management control and reasonable accuracy of books and records

6. UK BRIBERY ACT OFFENSES
Promising, offering or giving, or requesting, agreeing to receive or accepting an advantage (financial or otherwise) in circumstances involving the improper performance of a relevant function
“relevant function or activity” – a public or business activity, which a reasonable person in the UK would expect to be performed in good faith, impartially or in a particular way by virtue of the fact that the person performing it is in a position of trust
“improper performance” – breach of that expectation
Promising, offering or giving an advantage (financial or otherwise) to a foreign public official intending to (1) influence the FPO in his capacity as such, and (2) to obtain/retain business/advantage
Strict liability for companies where an active general or FPO offense is committed anywhere in the world by someone performing services on the company’s behalf intending to obtain/retain business/advantage

7. US FCPA v UK BRIBERY ACT FCPA Bribery Act 2010
Scope of anti-bribery provisions
Applies to offerers/payers of bribes to foreign public officials only
Wider – offerers, payers, requesters and accepters of bribes in public or private sector (domestic or foreign).
Bribery of foreign public officials (FPO)
Briber must intend to “obtain or retain” business.
Affirmative defense if payment is lawful under written laws and regulations of the FPO.
Discrete FPO offense: briber must intend to “obtain or retain business or an advantage in the conduct of business”.
No offense if acceptance is permitted or required by the written law of the FPO.
Corporate liability
No specific corporate offense. A company may be liable for employees’ acts via theory of respondeat superior – i.e. if an employee bribes, the company is liable.
“Adequate procedures” will not provide a defense, but may mitigate sentence.
Corporate offense: automatic liability where an act of bribery has been committed by a person performing services on the corporate’s behalf anywhere in the world.
Defense available if the corporate has in place “adequate procedures” designed to prevent bribery.
Liability of senior officers for corporate’s acts
Senior officer may be liable for a company’s failure to devise and maintain appropriate anticorruption controls in capacity as a “control person”.
A senior officer may be liable for a general bribery offense or FPO offense committed by the company if they “consented or connived” in that offense.
Jurisdictional scope
Applies to anyone if they do anything on US territory in furtherance of bribing a foreign public official.
Otherwise: only to US companies/citizens or “issuers” ( a company with securities registered on a US exchange or reporting to the SEC) in respect of their actions anywhere in the world.
Applies to anyone if they perform any act or omission in the UK forming part of a bribery offense.
Otherwise: UK corporates, British nationals and those ordinarily resident in the UK, in respect of their actions anywhere in the world. Corporate offense applies to all corporates who carry on business or “part of a business” in the UK, irrespective where bribe occurs.

8. US FCPA v UK BRIBERY ACT FCPA Bribery Act 2010
Defense for promotional expenditure/corporate hospitality
Affirmative defense for reasonable and bona fide business expenditures directly related to the promotion, demonstration or explanation of products or services, or explanation of products or services, or the execution or performance of a contract with a foreign government or agency.
No similar defense.
Facilitation payments
Exemption for small payments to foreign officials to expedite or secure the performance of a routine government action.
No similar exemption.
Books and records provisions
Liability for failing accurately and fairly to record transactions in the books and records of an “issuer”.
No equivalent in the Bribery Act, but there are “false accounting” provisions in other legislation.
Penalties
Penalties for individual include:
Up to 5 years’ imprisonment per violation
Fines up to $250,000 or twice the bride
paid/benefit obtained (whichever is greater)
Penalties for companies include:
Fine per violation up to $2m or twice the
bribe paid/benefit sought or obtained
(whichever is greater)
Debarment from US Government contracts
(discretionary)
Up to 10 years’ imprisonment
Unlimited fines
Disqualification for directors
Unlimited fines & possible confiscation
under POCA 2002
Debarment from EU public contracts
(automatic and perpetual)

9. UKRAINIAN RULES ON CORRUPTION
Law of Ukraine on Prevention and Combating Corruption;
Enacted on July 1, 2011;
Extraterritorial Effect;
Catch-all “Public Officials” Notion;
Private Corruption;
Termination of Benefits;
Confiscation of Income/Profit;
Suspension/Termination of Employment.
Liability for Non-reporting Corruption;
Liability for Offer or Promise of a Bribe;
Liability for Hiring Former Officials;
Criminal Liability for Legal Entities (upcoming)
Penalties range USD10K-160K;
Limitation of Activity;
Liquidation of Corporation.

10. BE PREPARED
Completion of a merger or acquisition does not extinguish the legal consequences of FCPA violations
US government can impose successor liability and penalize companies for past violations of the FCPA committed by acquired entities
A company must thus have:
a comprehensive compliance program for its own regular business operations
a complete understanding of the anti-corruption compliance practices and history of any company/entity it seeks to acquire
Due diligence is crucial and should happen well in advance of the decision to proceed with a transaction

11. WHAT TO TYPICALLY LOOK FOR IN DUE DILIGENCE?
Corporate
Ownership
Regulatory – licenses, permits, other approvals
Liabilities – loan agreements, guarantees, long-term contracts
Litigation
Related Party transactions/outside of ordinary course
Contractual matters
Environmental
Taxes
Assets - production assets/real estate and land rights/encumbrances
Labor matters – terms and conditions/payroll/private entrepreneurs
Customer and Supply Issues
Accounting and Records
IP and IT

12. COMPLIANCE DUE DILIGENCE
Begin due diligence early – this takes time and findings may often prevent a deal from proceeding
Involve anti-corruption experts – focus the review/save time/conduct it simultaneously with legal/tax/financial/other DD
Analyze the company’s current anti-corruption compliance program – Compliance officer? Procedures? Training? Audits?
Thorough anti-corruption due diligence review and risk/red flag assessment (counterparty, target and all subsidiaries)
Verify the implementation of a formal compliance program going forward – prior to closing confirm that the existing anti-corruption compliance program meets the standards necessary to eliminate violations following the sale. Important when the target was previously not subject to FCPA or in a country, such as Ukraine, with relaxed corruption enforcement.

13. RED FLAGS TO CONSIDER History of Title to Key Assets
Title to Real Estate and Land
Regulatory Approvals Obtained
Distribution Network Control
Shipment and Customs Clearance
“Tax Optimization Structures”
“Double Accounting
Books”
“Private Entrepreneur Contracts”
“Shadow Salaries”
Close Affiliations with Officials
No Problems with Authorities – BIGGEST RED FLAG!!

14. POST-CLOSING MECHANISMS
What if you can’t determine potential violations prior to closing?
Negotiate specific indemnity provisions for undiscovered violations – not always entirely effective, particularly when individual employees are involved in criminal prosecutions
Seller representations and warranties in SPA that it is not aware of any actions by employees/agents/representatives that could directly/indirectly result in violations of anti-corruption laws
Generally difficult to structure representations and warranties when results of review are inconclusive
Sellers often reluctant to provide these
Negotiate a reasonable “holdback” amount to cover:
Fines, penalties, etc. due to violations that occurred pre-closing
Services of outside counsel, as necessary, to deal with any charges

15. KEY COMPLIANCE PROGRAM COMPONENTS
Routine due diligence of sales agents/distributors/consultants
Contracts/agreements protecting the company against possible FCPA/anti-corruption law violations
Adequate internal accounting controls on payments, invoices, books, records and audits
Regular company-wide training and anti-corruption audits
A reporting mechanism – e.g., a hotline – for employees to report potential violations
Policies/oversight regarding allowable payments (e.g., gifts, etc.)
Policies regarding communications with officials
American Chamber of Commerce in Ukraine has just started a compliance club to share best practices amongst members!

16. Contact Us Adam M. Mycyk International Partner Chadbourne & Parke LLP
25B Sahaydachnoho Street, 3rd Floor
Kyiv 04070, Ukraine
Tel: +380 (44)