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Foreign Powers Investigating Ukrainians
Author: Sergiy Grebenyuk, Orest Stasiuk
Source: The Ukrainian Journal of Business Law, 3 March 2020
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Ukraine does not seem to be short of anti-corruption cases. However, local law-enforcement authorities are not the only player in Ukrainian anti-corruption enforcement. Every now and then foreign authorities start prosecuting Ukraine-related corruption cases. In recent years cases with a Ukrainian nexus have been spotted in Europe, America and even Asia.

US Foreign Corrupt Practices Act

The FCPA is well known to readers interested in business and compliance, and there is lots of overview material available, so we won’t spend much time discussing it. However, we cannot omit it in an article with such a headline.

In simple terms, the FCPA is the US law penalizing companies with a US nexus for bribing foreign officials all over the world. Thus, it is applicable in cases when such bribery takes place in Ukraine.

There are a few cases involving Ukrainian nexus that have invoked the US FCPA: Teva Pharmaceuticals, ADM, IBM, Affinia Group, Analogic Corporation. It is no wonder as the US, armed with FCPA regulations and acting through Securities and Exchange Commission and Department of Justice, is known as a major player in prosecuting cases abroad.

As an example of FCPA enforcement, in 2013 Archer Daniels Midland (ADM) and its Ukrainian unit pleaded guilty to violating the FCPA. According to the plea agreement between 2002 and 2008 about USD 22 million were paid to third parties to be further provided as bribes for Ukrainian tax officials to secure value-added tax refunds. Different mechanisms were created to provide the payments, including artificially inflating contracts or faking them. For instance, according to DOJ files, one of the instruments invoked was overpaying the third-party vendor for commodities. Another included purchasing unnecessary insurance policies so as to generate extra funds. Following the FCPA investigation, the company paid a total of USD 54.3 million to the US government.

US prosecutors going after Ukrainian individuals

Another, less known part of US enforcement, are attempts of US prosecutors to hold liable foreign-based individuals under the FCPA in the event of alleged bribery with a US nexus.

Because of complicated political and jurisdictional elements in the case of Ukrainian businessman Dmytro Firtash we won’t discuss it in detail, though this is an example of such an attempt by US prosecutors.

Another example of such an attempt is the case of EDAPS, a consortium focused on security & identity products.

In 2014 two Ukrainian owners of EDAPS faced charges of corruption in the USA. The US prosecutor alleged that Ukrainians obtained benefit for their business via alleged bribing of an employee of the ICAO (International Civil Aviation Organization — a UN agency, dealing with, inter alia, standardizing identity documents).

The case was pushed back as the defense invoked a jurisdiction aspect, as the defendants were not US citizens and the ICAO was not of American origin. The prosecution pursued allegations that donations made by the US government to the ICAO could be viewed as an appropriate US nexus. The approach of the prosecutors was heavily criticized by the judge, who dismissed the charges and stressed that there had been no US nexus and the defendants were foreigners.

Kazakhstan and Croatia — bribery in Ukrainian arms trading

America may remain the best known global enforcement power, but it’s not the sole country pursuing corruption-related charges against Ukrainians.

In the middle of December 2012 devastating headlines hit the Kazakh press: a Kazakh military aircraft crashed, taking the lives of 27 individuals on board, including several state officials. A rapid investigation uncovered reasons for the crash, including equipment failure.

Before long two Ukrainian officials were arrested in Kazakh airport — head of a department at Ukrspetsexport (Ukrainian state-owned entity specializing in the sale of Ukrainian weapons) and his deputy. Ukrspetsexport was the contractor who repaired the Kazakh aircraft before the crash.

Kazakhstan was on the rush to punish those linked to the tragedy — two Ukrainian officials were sentenced in a couple of months (July 2013) with a jail term of 6.5 years. The verdicts revealed the allegations, that between 2011 and 2013 Ukrainian officials had given circa USD 1.5 million in bribes to Kazakh authorities to obtain fruitful contracts for repairs of Kazakh aircraft, including a USD 500,000 bribe for the contract, which presumably preceded the crash. From the Kazakh side, one of the officials was sentenced to 11 years in prison for taking the bribe.

Later in 2014 a similar investigation was launched in Croatia. Although Ukrainians did not face any charges, the indictments within the case revealed that employees of Ukrspetsexport had allegedly bribed an official of the Croatian Defense Ministry to obtain a contract on aircraft repair worth EUR 17.6 million. According to the files of the Croatian case the jets were never duly repaired and some of them were taken out of service.

World Bank debarment

When it comes to alternative types of enforcement, it is worth noticing the debarment system of development banks.

Debarment is an administrative sanction, imposed by the World Bank on companies or individuals engaged in adverse practices (i.e. corruption, fraud, coercion, collusion or obstruction) regarding the projects financed by the World Bank. Application of debarment means that an individual or a company will not be able to work in the World Bank’s financed projects.

To be practical, we provided an example of the World Bank enforcement regarding Ukrainian companies.

In 2016 the World Bank released information regarding debarments in the case of Incom (Information Computer Systems) — 22.5 years of debarment for Incom, 6 and 7 years of debarment for other companies involved, and debarments for officials of the above entities. According to the information disclosed the World Bank Integrity Vice Presidency (INT) revealed that Incom had paid bribes and had engaged in collusive and corrupt behavior in relation to the awarding of three IT contracts worth approximately USD 43 million.

It is notable that this was one of the largest debarments in the history of World Bank enforcement. A major part of the harsh punishment was attributed not only to underlying collusive and corrupt behavior, but to the fact of multiple attempts made to obstruct the World Bank’s investigation.

Switzerland — money laundering case brought for trial

Another trend we noticed in recent years is that foreign prosecutors institute investigations having focused on money laundering of alleged proceeds of corruption upon receipt of information about a crime   allegedly committed in Ukraine.

An example of a Swiss investigation on money laundering, which originated from Ukraine, is a case related to tenders of the state-owned company Enerhoatom.

The case includes a couple of episodes, one of which concerns the alleged use of influence of Ukrainian official to ensure that a Czech company won Ukrainian public procurements on the buying of equipment for Enerhoatom. It is alleged that in return the Czech company transferred 15-20% of the value of tender prices to an offshore company controlled by a Ukrainian official.

While the criminal cases opened in the Czech Republic and Austria focused on their citizens involved in the alleged schemes, Switzerland opened a case against the Ukrainian official on money laundering charges, since the accounts of the offshore company were located in Swiss banks.

In December 2019, Swiss prosecutors transferred the case to a court, accusing the Ukrainian official of laundering EUR 2.8 million.

Bribe in Ukraine — trial in the US

Last, but not least, should we expect new cases and more enforcement? Recent legislative proposals in the US suggest that we should.

In 2019 the Foreign Extortion Prevention Act (FEPA) was submitted to the US Congress. The changes suggest criminalizing the bribery of foreign officials, requiring no nexus of an official to the USA. If adopted, foreign officials would be liable for extortion, request, receipt or consent to receive a bribe for abuse of office with punishment by a fine or imprisonment for up to two years.

Experts discuss that one of the goals of the FEPA is to protect US businesses from extortion of bribes abroad. If the new law is adopted, a bribe may well become a headache not only for companies, but also for officials. And this makes sense, since for US law-enforcement there will be only one venue of identification of a possible violation, namely the report of the company in question.

Although the FEPA initiative raises a wide range of questions regarding its implementation (i.e. how to identify a violation; how to collect evidence in another jurisdiction; how to ensure adequate rights for defense; how such “universal jurisdiction” will comply with human rights standards) and its approval is currently pending, it clearly shows the overall tendency for extending jurisdictions and creating new venues for more enforcement overseas.

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