Potential FCPA Risks Facing Post-War Ukraine

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Sangyoung Yun

While the ongoing war in Ukraine appears to have no end in sight, it is never too early to think about the Foreign Corrupt Practices Act (FCPA) risk landscape in post-war Ukraine, which can come with new and aggravated challenges for FCPA compliance. If every stakeholder is well prepared for potential FCPA risks, not only can Ukraine be saved from compliance-induced delays in its reconstruction efforts, but it can also be set on the right track to become a safe place for investment and development in the long term.

Among many possible scenarios, the following can be a good starting point for discussion:

First, the risks of working with unknown and unproven local partners increase. Though foreign companies have developed longstanding working relationships in the past, large portions of the Ukranian workforce have relocated and may no longer be available to provide services. Many Ukrainian citizens and businesses have been displaced inside and outside the country since Russia invaded in February. Just before that, trusted contractors and vendors were lost through closures and acquisitions during the height of the pandemic, and companies had to scramble to identify and onboard new ones.

COVID-19 — a crisis of a different sort — should also serve as a reminder for Ukraine that new companies will crop up, eyeing to defraud government emergency funds. To avoid this situation, the Government of Ukraine (GoU) should maintain and reinforce its administrative force to keep safeguards in place without gaps. At a minimum, reviving and maintaining the official corporate register, which has been out of service since the war began, can provide a strong tool to verify any new local partner’s legitimacy and associated FCPA risks. 

Second, post-war Ukraine can give rise to more state-owned enterprises (SOEs), and therefore, more foreign officials who could be offered corrupt payments, which the FCPA prohibits. During a crisis, SOEs tend to come to the fore as the nation becomes centralized for resource mobilization and efficiency.

Ukraine, which ranks 122nd out of 180 countries in the Corruption Perceptions Index (CPI), has an excessive number of SOEs that are partly blamed for Ukraine’s corruption problems. Before the current war, Ukraine registered more than 3,000 SOEs; as Ukraine is now up to seizing and nationalizing Russian companies and assets that have been left behind in the country, the list will only continue to grow. The post-war environment is more likely to be in favor of SOEs, as they will be essential in many state-led, large-scale projects, and the GoU will find it easy to provide jobs to displaced or returning civilians through SOEs rather than private companies.

While the oversized roles of SOEs during and after the war seem unavoidable, this shouldn’t mean a death sentence for the nationwide privatization process that President Volodymyr Zelensky had pushed before COVID-19 slowed things down. Foreign partners should watch out for the heightened SOE and PEP risks, while also helping facilitate the privatization process to be back on track for the country’s long-term fight against corruption. 

Lastly, there is an increased risk of committing fraud at an individual level. Even after successfully identifying new local partners and a complete map of state enterprises to not allow any chance of corruption, foreign officials in positions to award contracts and issue licenses can always demand bribes. Apart from extortion or duress, which do not give rise to FCPA liability, the fact that the payment was first proposed by the recipient doesn’t remove the corrupt intent from the giver’s end.

In post-war Ukraine, officials may find themselves in circumstances where the temptation to commit fraud is stronger than before. Donald R. Cressey’s Fraud Triangle theory — opportunity, pressure and rationalization — can help explain the fraud-prone circumstances. As the war-torn country operates on tight resources, potential fraudsters could enjoy weakened or lack of internal controls (Opportunity). They will be under great financial pressure with family members and loved ones in hardship after the war (Pressure). As proud and patriotic government officials who went through the war, they may feel entitled to get their fair share in every possible way (Rationalization). This is why a system of internal controls to safeguard against fraud and corruption should not be overlooked in the government’s post-war planning.

Depending on how the war evolves and ends in Ukraine, we may face a completely new FCPA risk landscape. As compliance professionals, we should pay our dues by continuing to monitor the situation and think ahead about potential compliance risks so that they can be dealt with promptly, putting Ukraine on the fast track to becoming a place for development and investment once again.

Sangyoung Yun is a lead compliance analyst at Deloitte US, where he focuses on FCPA compliance. He is also a Certified Fraud Examiner (CFE) with a background in global due diligence investigations. Yun is a former Rotary Global Scholar in Peace and Security with a master’s degree specialized in conflict management from Johns Hopkins University School of Advanced International Studies. This post represents the opinion of Sangyoung Yun and does not represent or reflect the views of his employer or associations.

SOURCE: ACFE Insights – A Publication of the Association of Certified Fraud Examiners