OFFSHORE ‘AFFILIATES’ OF YOUR CUSTOMER IN RUSSIA AND CIS – REALLY NECESSARY OR REALLY RISKY?
The insertion of offshore (or ‘onshore offshore’) companies into your supply chain by, or at the request of, your distributor or other buyer is one of the most common ways to get money to the right people, often in ways that put your company at risk of running afoul of applicable anti-corruption, anti-money laundering, or other law. Offshore companies may be owned or controlled by government officials able to influence your business; by individuals affiliated with your customers and looking for kickbacks; or by your own employees looking to embezzle funds.
Even if they are not affiliated directly with such individuals, these companies may be used to make payments out of jurisdictions where fewer disclosures are required about ownership or in locations where bank accounts may be easily opened and closed with no questions asked. These structures are very common in Russia and its neighbors in the former Soviet Union, most of which fare poorly on the usual lists comparing government corruption.
As a member of the finance, legal, or compliance function in your company, you have likely trained your antennae to go up when you hear that a distributor seeks to structure sales through a ‘partner company’ or ‘affiliate’ in Cyprus, Latvia, or Panama, or even, as is increasingly common, in the United Kingdom or the United States. You may strongly question this arrangement or reject it outright.
Where the legitimate commercial purpose or ownership of a company in your supply chain is unclear, you face a host of risks under applicable anti-corruption and anti-money laundering law as well as other criminal, administrative, and tax law.
Apr-Jun 2013 Issue
Baker & McKenzie LLP