Non-Governmental Organizations and Charities in The Light of Anti-Corruption Compliance
Alexander Bondar, senior associate, Legal Alliance Company
The topic of Anti-Corruption compliance in Ukraine seems to have changed its status from “being a popular topic for headlines and speeches of government officials” into “must-do activity” for business entities.
The Law of Ukraine On Prevention of Corruption dated October 14, 2014 (hereinafter – the Law) has introduced a significant number of changes in this sphere, inter alia, for example, the necessity of establishment of the National Agency for Prevention of Corruption, the establishment of the obligation for some legal entities to have an Anti-Corruption Program (Policy) and an Authorized Person (Compliance Officer) on staff who would be responsible for the Anti-Corruption Program implementation, determination of some new limits concerning gifts to government officials etc.
Article 61 of the Law, in particular, is very interesting from the perspective of establishing general obligations for a legal entity with regard to corruption prevention. Under Part 1 of this Article legal entities shall ensure the elaboration and arrangement of necessary and justified measures to prevent the corruption in the activity of the legal entity. The managers (directors) and founders (company members) of the legal entity are responsible for a regular evaluation of corruption risks in the activity of such legal entity. They shall ensure the implementation of the Anti-Corruption measures in order to detect and eliminate the corruption risks. It shall be noted that independent experts may be engaged in such Anti-Corruption review.
So, basically, the Law establishes the grounds for the Anti-Corruption Due Diligence Review. At the same time, the Law neither expressly specifies the procedure for carrying out such reviews nor identifies specific areas of activity or contracting parties which shall be reviewed.
The U.S. Foreign Corrupt Practices Act (FCPA) along with other relating documents (A Resource Guide to the U.S. Foreign Corrupt Practices Act) shed more light on this sphere.
Since it was enacted in 1977, FCPA has been amended several times and currently it generally applies to:
- Companies (and their directors, officers, employees, shareholders and agents) which have certain class of securities listed on a national securities exchange in the US or which are required to file respective periodic reports with the Securities and Exchange Commission (SEC);
- Individuals who are citizens, nationals, or residents of the US and any corporations, partnerships, associations, joint-stock companies, business trusts, unincorporated organizations, or sole proprietorships (and their directors, officers, employees, shareholders and agents) that are organized under the laws of the US or that have its principal place of business in the United States;
- Other individuals or legal entities (foreign nationals and foreign legal entities) acting while in the territory of the US.
It is worth mentioning that the three groups specified above fall into the category “read between the lines” which means that the ultimate list of companies and individuals that may be subject to liability under FCPA may be longer depending on the territory of conducting certain activity, the way of funds transfer, agents status etc.
Thus, the area of coverage by FCPA is very broad and it extends to different kinds of activities, including charitable donations to non-governmental organizations and charities.
Charitable contributions became wide-spread activity in Ukraine, especially among pharmaceutical companies. Of course, there is nothing bad in such donations or grants and in business promotion in this way as long as it is not the way to funnel bribes or conduct any other corruption activity, and when such activity is well-documented and is in line with the company’s internal policies. It is obvious that the designated use of such contributions and statutory activities of the respective non-governmental organizations and charities shall coincide.
The cooperation of the pharmaceutical companies with such organizations may bear significant risks from the criminal and material (penalties) perspective as well as the risks to the image and reputation of the companies provided it is performed without:
- identifying the necessary data about such contracting parties, their management and beneficiaries;
- tracking the designated use of the charitable funds;
- checking information about possible relations of the contracting party to the government bodies (government officials) and its involvement into the allegations of fraud, bribery and/or corruption;
The Resource Guide to the U.S. Foreign Corrupt Practices Act identifies five key questions to consider prior to making charitable payments:
- What is the purpose of the payment?
- Is the payment consistent with the company’s internal guidelines on charitable giving?
- Is the payment at the request of a government official?
- Is a government official associated with the charity and, if so, can the government official make decisions regarding your business?
- Is the payment conditioned upon receiving business or other benefits?
Basically, the answers to all of those questions are designated to find out whether there is any relation between government officials and the corresponding charity, and whether the donated funds may be misused for any corrupt purposes.
Consequently, in order to comply with FCPA, the companies shall not only be guided by integrity and righteousness but they shall ensure that their contracting parties adhere to the same principles and standards. Thus, the reputation of non-governmental organizations and charities is crucial for making the decision on providing such denotations.
That being said, the preliminary proper due diligence is very important for charitable giving. It shall be taken into account that the formal review in this case may not be considered to be sufficient. Apart from the analysis of the requested documents of the contracting party, the review of the relevant databases, registers shall be conducted and the Media search shall be carried out regarding the presence of any signs/ allegations of fraud, bribery, corruption and/or other illegal activities, as well as relationship with public (government) authorities.
During such Media review the companies shall deliberately consider the history of activities of non-governmental organizations and charities in question on the market which may serve as some kind of indicator of their reputation.
So, as it has been already mentioned, the legislation does not contain any clear guidelines for the Due Diligence Review. However, based on our significant experience in this sphere, the following possible stages of such procedure may be identified:
Stage I. Collection of the necessary documents/information of the potential contracting party;
Stage II. Legal analysis of the documents/information provided by the contracting party;
Stage III. Media search of the relevant information on the contracting party, check of the available information in the open registers and databases;
Stage IV. Preparation of conclusions on the results of the due diligence review.
Upon completion of the review, the authorized representatives (Compliance committee) make the decision regarding the possibility of further cooperation with the contracting party (potential contracting party).
The mere establishment of the anticorruption compliance programs and policies, inclusion of the anticorruption provisions to the agreements and conduct of the relevant anticorruption seminars may be regarded as a non-sufficient instrument of the anti-corruption compliance policy of the company.
Taking into account the enhanced interest of the controlling authorities to the pharmaceutical industry and to the sphere of corruption violations, the companies should perform some practical activities aimed at the identification of the necessary information about the contracting party (potential contracting party) despite of their legal status.
Therefore, the regular Due Diligence Review of the contracting parties is vital for the activity of the companies. The comprehensive and regular Due Diligence Review of the contracting parties may serve as a demonstration of a genuine commitment of the company to uncovering and preventing corruption violations, intention to build transparent and open relations with contracting parties etc. as well as may help to avoid some serious risks and undesirable consequences in the future.