Trump’s SEC pick clears Senate panel, controversies abound

Jay Clayton, President Trump’s pick to head up the Securities and Exchange Commission (SEC), has cleared the Senate Banking Committee, and now heads to the Senate floor for a final vote.

Of particular interest are Mr.Clayton’s comments on FCPA, which he opined in 2011 caused ‘lasting harm’ to US Companies, and his client list while a star lawyer at Sullivan & Cromwell.

As CNN noted, “Clayton’s list of clients at the elite law firm Sullivan & Cromwell reads like a who’s who list of companies accused of the shady practices the SEC nominee wants to stop.

He’s represented Volkswagen, (VLKAF) which pled guilty to criminal charges over cheating on emissions tests; Valean, (VRX) a drug maker accused of being the “Enron” of the pharma world for fraud; and Deutsche Bank, which has been charged in a $10 billion Russian money-laundering scheme.

Clayton’s also advised Goldman Sachs on its controversial government bailout and Bear Stearns on its fire sale to JPMorgan (JPM).”

Other controversies have come to light, including a Reuters report on possible conflicts of interest, that states “he communicated with more than a half dozen of President Donald Trump’s transition representatives, including one whose company has a multi-million-dollar contract with the SEC, according to documents seen by Reuters.”

We await the Senate vote with interest.

Rolls-Royce: Why it never pays to keep quiet

Rolls-Royce has agreed to pay £671m in fines to the authorities in the UK, the US and Brazil. This offer suspends the prosecution and brings to a close a torrid period for the venerable British engineering firm. While there are many lessons to be learned from this debacle, perhaps the easiest and quickest to digest is that lying and obfuscation is not the way to deal with allegations of corruption.

As the FT notes in its report linked below, the investigation into graft and bribery goes back to questionable conduct in the late 1980s in the US, and it was also found that ‘Rolls-Royce’s leadership was aware of questionable conduct since 2010 and decided not to notify the authorities.’

CNS Risk advises companies on how to take action in situations such as these; we assist through investigations that prepare for self-reporting, and work with counsel and other advisors to help companies respond to and cooperate with the relevant authorities. Contact us directly for more information on how we can help.

The FT reports: Rolls-Royce humbled in corruption case

Telia facing $1.4 billion Uzbek corruption settlement

Dutch and US regulators have requested a whopping $1.4 billion in fines from Nordic telecom company Telia. The settlement addresses Telia’s entry into the Uzbek market in 2007. The company has not shied away from accepting blame, and said last September that it would gradually exit its Central Asian markets after probes into local corruption.

In a statement, Telia Chairwoman Marie Ehrling said: “I have said on many occasions in the past that Telia Company’s entry into Uzbekistan was done in an unethical and wrongful way and we are prepared to take full responsibility.”

While that may be the case, the size of the proposed settlement has come as an unpleasant surprise.

“Our initial reaction to the proposal is that the amount is very high,” Ehrling’s statement added.

In February of this year VimpelCom Ltd said it would pay $795 million to resolve U.S. and Dutch probes into a bribery scheme in Uzbekistan.

Why they did it – answers from the fraudsters

Another week, another fascinating look at why fraudsters commit their crimes. In this book, the author relies on first hand testimony – in the form of letters received from the criminals – to tell the story. As Bloomberg reports, Eugene Soltes’ new book, ‘Why They Do It: Inside the Mind of the White-Collar Criminal’ is out on Oct 11.

Having read Soltes’s accounts of these and other white-collar characters, one answer comes into focus above all others to the author’s question of why they did it. They did it because they thought they could get away with it.”

Opening up shell companies

The Economist reports on efforts to make ‘offshore’ less synonymous with corruption and tax evasion.

  “Tracing illicit funds to a shell’s bank account is of little use if you cannot identify the individuals who control it. This worries business people as well as policymakers: a recent survey of corporate leaders in 62 countries by EY, an accounting firm, found strong support for more openness in ownership; legitimate firms want to know whom they are trading with.”

The article concludes that in spite of the attention afforded offshore havens via the blanket coverage of the Panama Papers and others, there is little hope for a full, open register of such entities any time soon, and we’re inclined to agree.

Turkmenistan: Corruption, Risk and Reward

While recent improvements have been made, extreme caution and sound risk management are still advised.

In January 2016, Human Rights Watch, Freedom House and Transparency International released their 2015 reports on human rights, political freedom and corruption, respectively. All three reports bring into focus the pervading situation across Central Asia: the ubiquity of severe human rights violations, a blatant disregard for democratic values, and an ineffective fight against corruption at government and corporate level.

Freedom House named Turkmenistan and Uzbekistan among “the worst of the worst” with regard to political rights and civil liberties, while Transparency International placed Turkmenistan 154th out of 167 on its annual Corruption Perception Index. Human Rights Watch stated Turkmenistan’s “atrocious” record had actually worsened in 2015.

The International Monetary Fund visited Turkmenistan in November last year and immediately lowered its forecast for 2016 GDP growth by 2.9% to 6%. The general message on the state of Turkmenistan’s government and economy is unequivocally negative.

After the collapse of the Soviet Union there was a strong belief that Turkmenistan would quickly undergo a transition to democracy and free market economics but owing to its historical dependency on Russia and other authoritarian regimes with no tradition of democracy, political pluralism or the rule of law, the transition was de facto doomed. As a result, the investment climate for international companies has remained limited and extremely risky.

But we are observing small green shoots of change. In July 2015 the Turkmen President Gurbanguly Berdymukhammedov dismissed several high ranking government officials for various crimes. This March, the President publicly raised serious concerns over the level of graft in the domestic oil and gas industry, a clear response to the exit of Germany’s DEA Deutsche Erdoel AG, citing corruption and bureaucratic delays. In the same month, the World Bank held a practical training session on fiscal policy and macroeconomic management.

We might therefore conclude that Turkmenistan’s leadership has understood that real and lasting change must be carried out: the rule of law, the free economy and anti-corruption measures must be significantly strengthened before the country may make full use of its natural resources, develop its attendant industries, and deliver substantial economic growth.

Currently the main foreign investors in Turkmenistan are its neighbours, politically and geographically – China, Russia, Kazakhstan and Uzbekistan. A wider audience should understand Turkmenistan’s fantastic potential, but while the potential rewards are great, Central Asia’s authoritarian regimes are not an easy sell in the boardrooms of the west.

CNS Risk has a deep understanding of how business is done in the country and specifically how its oil and gas industry functions; while we acknowledge that this is a difficult country for western corporates to operate in, we have the experience and capability on the ground to help steer businesses through this often hostile environment.

For a demonstration of how we can help, please contact our Former Soviet Union (FSU) & Central Asia team directly. The team is led by Gareth Babbs, a skilled navigator of the bureaucracies of the FSU with 20 years of direct experience as MD/CEO of multinational businesses across the regions.

A.H.

References:

HRW: https://www.hrw.org/world-report/2016/country-chapters/turkmenistan.

Freedom House: https://freedomhouse.org/report/freedom-world/freedom-world-2016.

TI: http://www.transparency.org/cpi2015/

Kazakh Privatization: Ensuring Safe Investment

On December 25, 2015, the Kazakh National Economy Ministry published a list of large state-owned organizations to be privatized during 2016 – 2020. These include Temir Zholy, the Kazakh railway company; KAzMunaiGaz, an oil and gas company; Samruk-Energy, a company engaged in the production, transmission, distribution, and sale of electricity; Kazachstan Gharysh Sapary, focusing on development of space activity in Kazakhstan; Kazgeologiya, the national geological exploration company; the Kazakh sovereign wealth fund Samruk-Kazyna; and the Astana international airport.[1] According to the Minister, large-scale privatization is a priority of the Kazakh government in 2016.

Given the global relevance of the Kazakh market, many international corporations are expected to participate in this privatization: last month the country became the 162nd member of the WTO, recent trade and investment deals were signed with the UK,[2] US and China[3], and Kazakhstan has been for several years developing a national FDI strategy.

Privatization, as one of the market reforms, often aims at improving economic efficiency by reducing the role of the state. Yet, the process of privatization, which is the cornerstone for prospective efficiency, has to be carried out with great care.

Corruption, which in the words of Joseph Stiglitz, represents “perhaps the most serious concern with privatization, as it has so often been practiced ….”[4] might greatly impair those involved – both the state and the competing investors.

Corruption continues to represent not only a moral disgust, but also a substantial economic burden on corporations. Furthermore, often neglected are the tremendous legal risks for individuals and their respective corporations.

It is of the utmost importance that all companies that take part in this privatization invest considerable time and resources in corruption prevention measures. To that end, deep-dive legal and risk due diligence must be undertaken, and strategic business intelligence must be collected and studied before making any commitment to the undoubted opportunities presented by Kazakh privatization.

CNS Risk has deep and varied experience of advising international corporates in Kazakhstan. Contact us directly to learn how we can help your company.

A.H.

[1] A complete list of the state-owned companies that will be offered for privatization can be found at: http://economy.gov.kz/upload/Files/Celevie_indikat_real_komp_plana_privatiz_na_2016-2020g_ru.doc.

[2] See e.g. https://www.gov.uk/government/world/kazakhstan.

[3] See e.g. http://thediplomat.com/2015/03/china-kazakhstan-sign-23-billion-in-deals/.

[4] See Stiglitz, J., Globalization and Its Discontents, 58 (2002, Allen Lane the Penguin Press, UK).

The Economist looks at whistleblowing

A very good piece in this week’s Economist, highlighting some of the benefits and pitfalls of whistleblowing, and the often irrational reaction of corporates to such behaviour.

“Ideally, firms would put in place a formal system for hearing and noting complaints—for their own sakes, as well as those of whistleblowers. When people fail to report wrongdoing, the main reason is often not the fear of retaliation but the suspicion that nothing will be done about it. Companies often see whistleblowers as motivated by revenge or greed. But studies consistently show that most are driven to right a wrong. That is why more than 90% of them sound the alarm internally first, rather than running straight to the authorities or newspapers. Given the choice, they would rather warn than accuse.”

Read the whole piece here – The Age of the Whistleblower

CNS RISK/ CIBG/ HBLF/ DLA PIPER – 2nd Integrity Workshop, Oct 13 2015

How prepared are you to react to today’s growing risks?

Oct 13 2015: CIBG, CNS RISK, DLA PIPER and the Hungarian Business Leaders Forum present a second interactive senior executive workshop with prominent CEE business leaders. The workshop will again explore challenges to business integrity and how they can be mitigated.

  • Interaction with peers & experts on managing whistleblowers or allegations of misconduct.
  • Learn how corporate intelligence is employed as a preventative measure and how it should be a third pillar of any due diligence exercise.
  • Consider how cultural differences across companies can render a compliance system useless.

The event is free of charge, but places are strictly limited.

For more details see here: Budapest Integrity Workshop, October 13

Contact CNS Risk for an invite:   Request an Invite

 

The long arm of the SEC – Ford, Germany and Russia

A few weeks ago the SEC joined a long running German investigation into alleged bribery and corruption of Russian customs officials by Ford Germany and DB employees.  Sources suggest that if the allegations are proven to be true, the accumulated penalties could run into several hundred million euros.

The case raises two important issues.

1. Catching up to UK and US prosecutors, the German authorities are now taking firmer interest in the conduct of German registered companies abroad.

2. If a parent company has any exposure whatsoever to FCPA regulations, the SEC’s reach is long and punitive.

Reuters has the background to the story here: SEC joins German Bribery Investigation

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