Firms trading in Russia warned over “grey practices”

Foreign companies trading in Russia run the risk of fouling foul of opaque trading practices used by local businesses, which may have increased during the financial crisis, warned a leading risk consultancy.

So called “grey practices” are the mechanisms used by local companies to dishonestly maximise profits to the detriment of foreign partners inadvertently caught up in such schemes.

They include tax evasion schemes, one-day companies, and offshore ownership structures designed to generate black cash - unreported income then used to grease the palms of unscrupulous regulators.

These practices represent a significant but often overlooked source of reputational, operational and regulatory risk to foreign companies doing business in Russia, warned Control Risks. While these practices are not endemic, the impact of the global financial crisis has increased Russian companies’ reliance on them, continued the firm.

Charles Hecker, a Russia analyst, at Control Risks, commented: “These practices may not at first sight appear clearly and explicitly illegal, but they can very quickly turn from grey to black. For example, the money these schemes generate and the structures themselves can form part of deliberate and concerted efforts to defraud, facilitate money laundering, pay bribes and conceal conflicts of interest.”

“Grey practices are not necessarily part of corruption, but like corruption, they still expose foreign companies to criminal prosecution. Tighter regulation, in the form of the Foreign Corrupt Practices Act and the OECD Anti-Bribery Convention, and more proactive enforcement is only increasing this exposure.”

Added Control Risks: “An increasing number of Russian companies are embracing higher standards of corporate governance, particularly in those sectors which are more open to foreign capital, such as FMCG and financial services.”

Hecker said: “Russia clearly presents a difficult, though not unique, set of challenges to foreign companies. However, this should not force them to pack up and leave. Many foreign companies are continuing to make a great success of their investments and operations in Russia, particularly those which institute best practice internal compliance policies and seek to understand the nuances of the local operating environment.”