Is there an Antidote for Russia's Corruption Problem? by Vlad Frants

Recently, a BusinessWeek article depicted corruption as "Russia's economic stumbling block." Sure, if corruption were decreased then people would be less weary of investing in Russia and a major economic stumbling block would be removed. But how easy can it be to markedly decrease corruption in a place where for so many years judicial enforcement was almost nonexistent, substantive legal remedies available to underpaid and inexperienced judges were ill-defined and Russians were working under tremendous cultural constraints to not follow the law?

Anti-corruption laws don't sound bad and Russia has already made important strides in the right direction by overhauling a problematic tax system, introducing bright-line limitations on local authorities in order to reduce arbitrary bureaucratic actions and creating the Council for Combating Corruption. But perhaps the focus shouldn't be only on decreasing corruption by side line participants. Perhaps there should be a solution from the inside-out.

What if there existed a corporate governance model for Russia that itself led to decreased corruption by molding the right cultural mindset? Bright-line rules, rather than standards, to define proper and improper behavior. Strong legal remedies to compensate for the low probability that the sanctions will be applied. Greater protection of outside shareholders than is common in developed economies. Enforcement, as much as possible, through actions by direct participants in the corporate enterprise (shareholders, directors, managers), rather than indirect participants (judges and regulators).

These are elements of the "self-enforcing" model of corporate law which was introduced by professors Bernard Black and Reinier Kraakman in 1995 for Russia. After creating the model and seeing that it was unable to withstand the socio-economic difficulties and setbacks that Russia faced in the years preceding Russian President Vladimir Putin's tenure, the professors abandoned the model.

In a law review article entitled "Russian Corporate Law: is "Self-Enforcement" Still the Way to Go?, 13 UCLA J. INT'L L. & FOR. AFF. 435 (2008), I reviewed some of the positive changes that President Putin implemented in Russia and argued that we should reconsider a self-enforcing model for Russia.

Perhaps assimiliating the elements of the professors' "self-enforcing" model, coupled with aggressive anti-corruption campaigns, would be the best antidote for Russia's corruption problem.

FCPA Update: Instrumentalities, and separately, Inadvertent Consequences

(I am preparing a post about the recent uproar over flash trading, so please forgive me if this morning I write mini-posts about issues on my radar - thanks!).

First, Law.com ran an interesting article yesterday about how American businesses can navigate the changing role of foreign officials and instrumentalities in light of the current economic crisis (where a foreign official is any person acting in an official capacity over an, inter alia, instrumentality of the government). The crux of the issue: precedent is a poor guide as to what degree of control an official must have over an organization before that organization becomes an "instrumentality." A variety of governments have recently participated in different forms of stimulus and aid to buttress their countries' businesses. The result is a wide variety of degrees and forms of government involvement. Bottomline: good luck American business seeking FCPA compliance. Authors Stephanie Meltzer and Christopher Tierney.

Also of interest: weeks ago I had come across a Fulbright Scholar who had written a research document that received positive feedback at the FCPA Blog. Then I read about him again in the WSJ; and then again last night on the Glom. Those scrutinizing his work are quite interested in his position, and it might be worth checking out. His argument is pretty straight-forward: an effective FCPA removes American investment in foreign markets, but does not achieve a higher ethical standard of business (no bribery). Rather, it allows broader access to that foreign market by foreign business actors to make the same - more? - bribery payments. The author is Andrew Spalding and the paper is available here.

FCPA: Conscious Disregard is Knowledge

This weekend’s news covered a Friday verdict from the Southern District Court of New York that found Frederick Bourke guilty of conspiring under the Foreign Corrupt Practices Act (“FCPA”). Broadly, the FCPA prohibits American businesses from making payments to foreign officials for the purpose of doing business. Despite character witness Former Senator George Mitchell, jurors found Bourke conspired with his business partners to bribe Azerbaijan officials so as to effectuate control of a state-run oil company. Jurors found Bourke had knowledge of the payments, or alternatively, should have known of the payments. The discussion online suggests the due diligence responsibilities of American business under the FCPA is now much broader.

The FCPA applies to actors on behalf of the American business (this includes employees, agents, and shareholders). A successful anti-bribery claim requires the government to prove beyond a reasonable doubt, among other things, that defendant knew that something of value was being offered to a foreign official. This knowledge element need not be actual; it could in fact be acquiesance or conscious disregard. What factual evidence constituted Bourke’s knowledge, or conscious disregard of, in this case? There was the tape: a 1998 conversation between Bourke and an investor discussing possible corporate structures to avoid civil and criminal liability, that included the topic of bribes. This corporate structure later arranged and paid for recipient Azerbaijan officials to fly to NYC for medical treatment. Bourke’s false statements to the FBI in 2002 regarding payments probably didn’t help the matter … There was also testimony: two of Bourke’s business partners – who in fact directly participated in the illegal payments – testified that Bourke knew his investment monies were going to Azerbaijan officials. The fact that both witnesses already plead guilty with prosecutors, or that the timing of some of the dates testified to were inconsistent, did not dissuade jurors of Bourke’s knowledge. If anything, jurors interviewed later said they found Bourke just simply should have known about the illegal payments; “he’s an investor[;] it’s his job to know.”

Sentencing is scheduled for October of this year; appeal is anticipated.

(Photo courtesy of Wikimedia Commons).