Working with local partners has been a winning strategy for many MNCs interested in the Russian market. However, with increased concerns about FCPA and UK Bribery Act enforcement, MNCs are more than ever seeking to ensure their Russian partners are not engaging in any corrupt practices.
In theory, MNCs can protect themselves by conducting extensive due diligence on any potential partners, including compliance clauses in their contracts with their partners, and carefully monitoring for any suspicious activity.
In practice, however, “Some companies are so eager to enter the market, they rush into partnerships believing everything their Russian counterparts tell them. They allow themselves to be seduced by local partners,” says Tim Stanley, formerly with Control Risks and KPMG and now Frontier Strategy Group expert advisor and independent consultant with extensive experience in conducting integrity and operational due diligence for companies investing in Russia and throughout the CIS.
“There is often a huge gap between how foreign companies expect their local partners to work, and how their Russian counterparts actually operate on the ground. The gap may not become obvious for a while, especially if foreign company representatives only occasionally meet with their Russian partners,” points out Tim Stanley.
He adds that Russian firms may sometimes not share the details of how they get things done with their foreign partners, because they believe all that matters to the foreign company is good financial results. “Communicating to your partners the importance of ensuring compliance in all their actions is key,” says Mr. Stanley. “And doing so not just once, but on a continuous basis.”
Mr. Stanley offers a few other tips for foreign companies working with local partners in Russia:
When evaluating potential partners: know who runs the company, and who actually owns it
Who legally owns the company and who runs it can differ greatly in Russia, and MNCs should see any inconsistencies in the ownership and management structures of potential partners as a red flag. Some Russian companies have immensely complicated ownership structures, sometimes for legitimate reasons but often created with the purpose of tax evasion and other illegal practices. The real owners may present operational, reputational and political risks significantly different from those which an unwitting investor or business partner may be aware of when negotiating with local management.
Reputational due diligence is extremely effective in Russia
Often in Russia, word of mouth can give you a better perspective on a potential partner than a review of their financials. Get a second or third opinion on a potential partner, learn about their reputation and the experiences other companies – especially Western ones – have had working with them. If the company has a local track record of legal disputes, or a reputation for using aggressive business tactics or for cutting corners, then chances are, you will hear about it.
Due diligence does not end with a signed contract
Over time a company’s profile will change as business activities adapt and develop. A company’s compliance profile – and thus potential vulnerability – will change in step with the changing nature of the company, with some risks becoming more prevalent and others diminishing. A clean bill of health during the pre-transaction due diligence is a necessary, but not sufficient condition for compliance purposes, and foreign investors need to invest in promoting a culture of integrity and compliance in their dealings with local companies. This can be achieved by embedding compliance throughout the company’s operational activities, and through regular communication and training.