Recent Developments in Ukrainian Anti-Corruption Legislation: What Business Should Know
Lana SINICHKINA
Partner, Arzinger
Igor SVITLYK
Associate, Arzinger
PROfile
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Last year was marked by the adoption of the On Prevention of Corruption Act of Ukraine (Prevention of Corruption Act, or PCA). This law will come into force on 26 April 2015 and will replace current anti-corruption legislation. PCA establishes a set of limitations and requirements for private companies, and many of these new rules require businesses to take certain actions and adjust their internal processes. In this article we will carry out a brief overview of PCA’s limitations and requirements and provide our recommendation on how to comply.
Covered Persons
The PCA regulates the activities of both public and private officials and ordinary employees. Covered persons may be divided into three groups:
— persons authorized to perform state or local government functions (officials and employees of state bodies, deputies of Parliament, judges, etc.);
— persons that are considered equal to those performing state functions (officials of state enterprises, auditors, experts, etc.);
— officials and, in certain cases, employees of private companies.
Most PCA limitations apply to the first two groups (jointly referred to as public officials), though some may be applied to the third group as well.
Illegal Benefit
The illegal benefit is money, other property, services or any other intangible assets, which are offered, promised, provided or received without legal grounds. The law does not tell us which transaction may be considered as performed without legal grounds. However, in case the transfer of assets to a covered person is not based on legislation or the contract, there is a high risk that these assets will be considered as illegal benefit.
PCA prohibits anyone to offer, promise or provide illegal benefit to any covered person, directly or through third parties. On the other hand, any covered person is prohibited from accepting a promise/offer and receiving illegal benefit. Violation of these restrictions may result in imprisonment or other sanctions with regard to both parties.
Key Issues for Businesses
Provision of Gifts
PCA allows providing gifts to public officials subject to certain limitations. Firstly, such gifts should not be associated with the officials’ activities or adopted decisions. Secondly, the value of the gifts should not exceed the limits established by PCA. To date, such limits are approximately UAH 1,200 for a one-time gift and almost twice as much for cheaper gifts provided within one year. Moreover, the gift should conform to the generally accepted notions of hospitality. In other words, one may invite an official to dinner or present flowers, while giving a bottle of whiskey may fail to pass the hospitality test. Failure to comply may entail a fine for the public official, confiscation of the gift and, if the court decides so, debarment.
One of the novelties under the law is a limitation for a public official to take decisions in favor of a person who has provided a gift to such an official or his/her close person. Such a decision is automatically considered as adopted in conflict of interests and should be cancelled. Any transactions based on such decision may be invalidated.
Therefore, the companies which practice providing gifts to officials should adjust their approach to comply with the above requirements and may consider introducing special registers to track whether the limits are observed, or even abandon such practice in case their company’s activity falls within the official’s authority.
Employment
The Prevention of Corruption Act prohibits to conclude employment agreements (contracts) or any other deals with persons authorized to perform state or local government functions, if (i) such a person had the authority to adopt decisions or exercise control regarding the business activities of a potential employer within one year before the day of the official’s dismissal, and (ii) less than one year has passed between the date of dismissal from office and the date of employment. Failure to comply with this requirement may result in termination of the employment contract.
The companies should consider this requirement and perform thorough pre-employment checks before engaging employees that were likely employed in the public sector.
Corruption Offenders Register
In case a person was brought to liability for a corruption offence, information about that person should be entered into the Unified State Register of Corruption Offenders.
Although this instrument was initially designed to prevent corrupt officials from participating in public procurement, some companies use the register for internal purposes. For example, information from the register is used for pre-employment checks or as grounds for termination of the contract with the employee or the contractor.
Requirements for Private Companies
PCA contains a separate chapter designed to regulate the private sector. Its provisions set a number of rules that apply to any private company as well as specific requirements applicable only to participants in public tenders.
The main requirement among general rules is that businesses will be required to introduce necessary and reasonable measures to prevent corruption. Failure to enforce such measures may result in criminal liability charges and significant fines up to double any income obtained as a result of corrupt activity. PCA does not expand on the scope of measures to be introduced. Thus, until there is an issuance of clarification or specific guidance, it would be reasonable for companies to rely on the experience of those countries where a similar concept has been introduced (e.g. United Kingdom).
Private companies are also required to assess corruption risks and undertake respective actions on a regular basis. One more requirement is that businesses should oblige their employees to refrain from bribery offences, as well as to report any instances of corruption and any conflict of interests. PCA though does not specify how the companies should implement these anti-corruption measures. It may be done either by means of introducing respective provisions into employment contracts or internal labor policies, or in a more widespread and reasonable approach: through the introduction of an anti-corruption policy.
Compared to the general requirements above that apply to any company, new rules for suppliers in public procurement are much stricter. The latter will be obliged to undertake specific anti-corruption measures. If they fail to do so, they will be prohibited from participating in the tender.
The measures include appointment of a person responsible for corruption prevention and adoption of profound compliance policies. These measures may force even companies which have already established high-quality compliance standards to review their policies. Some rules are not clear enough and, therefore, may result in ambiguous interpretations. In such cases it would be reasonable to apply the widest interpretation possible in order to minimize potential risks.
There are other requirements too, such as the introduction of anti-corruption clauses into labor contracts and internal labor policies, as well as obligation to discuss the policy with the company’s employees before its adoption. Again, the law is not specific enough about how the policy should be discussed, either verbally or by electronic means, which gives companies certain leeway.
Latest Trends
It’s no secret that, to date, Ukrainian law-enforcement authorities have not taken any noticeable actions against corruption in both private and public sectors. However, there are some signs that anti-corruption enforcement may soon begin. PCA provides for establishment of the Anti-corruption Agency (ACA), which will monitor compliance with the law. The ACA will be given the right to request respective information and to issue notices against companies that failed to comply with anti-corruption legislation — haven’t introduced necessary and reasonable anti-corruption measures, employed former official that executed control over the company’s activities and so on. If the company does not eliminate violations, the ACA may bring it to administrative liability and impose fines. Subsequently, information on the company’s responsible official may be entered into the Unified State Register of Corruption Offenders, which may result in reputational damages.
Evidently, the Prevention of Corruption Act has some important messages for the private sector. The main one among them is that the rules are getting stricter and compliance control will be strengthened. Thus, it is highly advisable for any business to take these messages seriously in order to avoid accidental liability of the company or its employees.