Compliance in Central Europe

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2 Compliance in Central Europe 1.1. Do s & Don ts Appendix General Remarks to the Legal Framework Anticorruption in Poland Differences of the Legal Notion Office Holder Liability of Companies in Case of Compliance Infringements, Austria, Romania Legal Basis of Compliance Charges in Central Europe Creation and Implementation of Compliance and Compliance Trainings Differences in Culture and Mentality / Russia, Ukraine, Hungary Due Diligence - M&A Public Procurement, Supply Agreement M&A - Compliance Clauses Contracts Compliance Clauses State Aid Compliance Pitfalls Language - Ukraine Translation - Turkey Case Turkey: Our basic business culture is Non-Compliance ( Cutting Corners ) Compliance in Italy Article 1 of the Italian Constitution: Italy is a Democratic Republic Founded on Labour Compliance Law No. 231 from Consequences of infringement against the Italian Compliance Law (i.e. Penalties, Shutting Down of Plants, Confiscation, Publication of Verdicts ) Disciplinary Rules Is a Disciplinary Rule sufficiently effective? Conflict of Interest: Compliance Law Labour Protection Law 1.2. Creation and Implementation of a Compliance Management System in a Decentralized Company Organisation - a Practical Approach! - Project Design page 2 of 11

3 Compliance in Central Europe 1.1. Do s & Don ts - A and B, respectively General Remarks to the Legal Framework Companies active in Central Eastern Europe (CEE) have to adapt to a certain extent to local customs if they want to keep up with their compliance standards. First of all the local compliance program will be dominated by the local legal framework of the individual country. But it is much more complicated to bridge differences in culture and mentality throughout CEE in connection with the maintenance of the compliance standard of a company. True and honest endeavours to set up a Compliance Management System (CMS) and to extend the implemented CMS to an affiliate located in the CEE, respectively may fail because of most trivial factors such as the underestimation of simple differences in culture and mentality Anticorruption in Poland The local law will be the first step in order to adapt a CMS to the local challenges: If we talk about anticorruption the limits for invitations and donations will differ from country to country. Sometimes local laws lack any limitations such as in Poland: Polish anticorruption law does not provide a clear rule whether a specific value of a donation will constitute corruption. It is just to the contrary: Polish Law refers to the financial status of the donee whether a certain donation may be considered as an infringement against Polish Anticorruption Laws. Finally the law gives to the judge substantial discretion when deciding whether a donation has to be considered an infringement against Anticorruption Law based on the financial status of the donee. A dinner invitation in the amount of 250 Zloty (about 60 Euro) offered to a civil servant may be considered an infringement against Anticorruption Law if the donee is a simple civil servant within the public administration who earns not more than some hundred Euros per months. If we talk in this example about a donee who might be a high ranked politician the judge might as well say that there is no infringement because the high ranked politician earns much more than the simple employee in public administration page 3 of 11

4 Differences of the legal notion of a civil servant Another very interesting question which is ruled differently in Europe is who has to be considered as carrier of a public office / civil servant in accordance with Anticorruption Laws. Austria as many of the Central Eastern European Countries has extended the notion of the Amtsträger / civil servant to Members of Parliament and any employees of companies owned or influenced by the state (recent change of the 2012 Austrian Anticorruption Law). Poland s notion of the Amtsträger / civil servant goes even beyond that Austrian notion of the Amtsträger / civil servant : Employees of companies who receive public state aid are or to be considered Amtsträger / civil servant as well under Polish Anticorruption Law Liability of companies in Case of Compliance Infringements / Austria, Romania A further very important question of compliance is whether the company as such is liable for compliance infringements of its employees (Corporate Liability): Austria s judges have recently issued numerous rulings against companies in case their employees infringed Compliance Laws. Romania has very recently implemented a change in the law with respect to Corporate Liability referring to certain criminal matters. Today Romanian judges are able to sentence Corporate Liability in case the individual employee of a company has infringed either Compliance Laws or Compliance Standards implemented and published by the individual company Legal Basis of Compliance Changes in Central Europe When we talk about Compliance Standards we have to acknowledge that in Europe we still do not have individual legal frameworks with respect to the creation of Compliance Standards. Compliance Standards are to be considered a deliberate decision of a company to subject itself to certain standards (Compliance Standards). If such Compliance Standards are published by the company on their websites or otherwise they are to be considered as a deliberate obligation of the company to comply with such standards. As mentioned herein before: although Compliance Standards are not measured by legal norms it has to be clearly mentioned, that the infringement against deliberate and published Compliance Standards of 2 Korruptionsstrafrechtsänderungsgesetz (KorrStrÄg 2012); Mag. Klaus Putzer in Compliance Praxis 2012, 29 (Heft 4) CEE/Osteuropa 3 CCBE Compliance and CSR Working Group - Country per Country Overview Table January 2013 ( page 4 of 11

5 companies may be persued, like for example in Romanian Law which in the end leads to a very stringent Corporate Liability Creation and Implementation of Compliance and Compliance Trainings In general European Compliance Experts agree that the content of Compliance in the Central Eastern European states is the same as in WesternEurope. The main tasks of Compliance are anticorruption, unfair competition, export and import law provisions, data protection and IT security. However, many compliance trainings might fail if one does not pay attention to regional differences of mentality and to certain psychological factors Differences in Culture and Mentality / Russia, Ukraine, Hungary When talking about compliance trainings in Russia and Ukraine compliance experts very often point out that individual Russian and Ukrainian employee does still are reserved vis-à-vis the United States of America. US companies and their European affiliates should therefore not fly in a compliance specialist even if such a specialist is fluent in Russian or Ukrainian: The psychological reservation against US doctrine is still very prominent. My local contacts in Russia and Ukraine prefer the local and well experienced consultant. They have had the experience that the effectiveness of training increases tremendously if local well experienced consultants are employed. We have had similar experience in Hungary: Companies with headquarters in Europe find it easier to implement compliance programs in their Hungarian affiliates: other than companies with headquarters in Europe who fly in their US Compliance specialists. Another important task which we mentioned is to pay attention to the cultural and political background of a country: Local consultants are very often most familiar with the current social developments in a country 6. 4 CCBE Compliance and CSR Working Group - Country per Country Overview Table January General Remarks ( 5 CCBE Compliance and CSR Working Group - Country per Country Overview Table January General Remarks ( 6 Mag. Klaus Putzer in Compliance Praxis 2012, 39 CEE/Ukraine page 5 of 11

6 Due Diligence - M&A - (Public) Procurement, Supply Agreements It is very well known that Mergers & Acquisitions are a key source for compliance risks M&A - compliance clauses Many internationally active companies with headquarters in Europe have started to adopt compliance clauses as part of their distribution agreements: If the distribution partners infringe such compliance clauses the individual distribution agreement may be terminated immediately. This practice leads to the right of a distribution partner to do compliance audits on a regular basis. Such compliance audit clauses have to be agreed upon already in the Honeymoon of a contractual relationship, i.e. before controversies arise Honeymoon of a contract In other words: If you are serious with the compliance audit you have to discuss the content of such a compliance audit clause, the background, the purpose of it, the way of execution etc. Has to be understood, agreed and accepted at the very beginning of a contractual relationship. Otherwise you will recognize specifically in the CEE that such clauses will not receive a serious involvement of your business partner. An important recommendation is not only to reduce such a compliance audit clause to writing but also to implement such clauses in advance before anything has happened which might give rise to the suspicion of an infringement. Secondly, you have to understand that CEE business partners often sign contracts without really considering their rights and duties under compliance audit clauses. Your CEE business partners are often simply happy to make business with you. We made the experience that many of our business partners just signed off contracts without really questioning the compliance provisions of such contracts. Another very important recommendation is that if you undertake to do a compliance audit you should not simply rely on local investigation offices. They often have a different approach to a compliance audit and specifically to their measures executing a compliance audit: It would be simple absurd to commit compliance infringements while executing a compliance audit. Another risk when doing a compliance audit is to engage a large international consultance company. Such companies may not be familiar with local specifics. The key recommendation will be to undertake such a compliance audit with a team of international and local specialists. At this point I would like to remind you that a Compliance Due Diligence has to consider state aid compliance as well: Did the company you wish to acquire receive state aid? If so is such state aid to be considered lawful or is page 6 of 11

7 there any danger that the EU Commission might qualify the specific state aid program illegal and the owner of the company might in the end be forced to repay the state aid? Compliance in Italy The reason why I concentrate on compliance in Italy at the end of my remarks to Do s and Don ts in compliance in CEE is, that Italy s compliance law differs considerably from any other compliance regimes within Europe and the Western World. The Italian Compliance Law comprises over more than 100 different elements of criminal law and is moreover closely connected to the labour law of Italy Article 1 of the Italian Constitution: Italy is a Democratic Republic founded on Labour If we talk about compliance in Italy we have to come back to Article 1 of the Italian Constitution which says: Italy is a democratic republic founded on labour. Labour law in Italy dominates almost all different rules of law in Italy. The notion of labour in Italy has to be interpreted in a very broad way: we have to talk about employment, self-employment, corporate activities and any other possible activity to earn income. The referred compliance laws are scattered about in many different laws: You will find specific compliance rules in contract law, social security laws, tax laws and otherwise Compliance Law No. 231 from 2008 The Italian compliance law number 231/2001 is a very stringent law and relates to various labour laws, like the law on safety at work or against exploitation of labour. All infringements against such labour laws lead finally to penalties under the Italian Compliance Law. The sanctions under the Italian Compliance Law reach from monetary fines to plant closures, pledge of chattels as well as real estate, confiscation of goods, publication of verdicts and much more. Italy s Compliance Law judges the effectiveness of corporate compliance whether any infringement against such corporate compliments will lead to effective sanctions Disciplinary proceedings When we are talking about effective sanctions one has to note the very specific situation in Italy with respect to disciplinary rules. According to the Article 7 of the Law (Italy s Labour Law specific Protection Law for Employees/Workers in Italy) any kind of sanction (including any sanction as a page 7 of 11

8 consequence of an infringement of compliance standards or laws within a company) has to be based on certain disciplinary rules to be carried out in advance before any sanction can be pronounced against the individual employee/ worker. These disciplinary rules in Italy are very formal and have nothing to do with the so called call to order which is known in Central Europe as well as with respect to disciplinary rules concerning workers and employees. The Italian Disciplinary Rules require that any facts which may lead to an accusation have to be entirely summarized in writing and forwarded to the respective accused employee/ worker. The accused worker/ employee has the possibility to put forward his statement to the accusation. Only after he had been given such possibility one may pronounce a sanction in case of an infringement against Compliance Laws. Any lack of form with respect to these disciplinary rules lead to the nullity of any pronounced sanction Is the Disciplinary Rule sufficiently effective? One has to mention that any disciplinary rule is only effective if such disciplinary rule contains all kinds of possible infringements including its sanctions. Such disciplinary rule must be published within the individual company or workforce so to enable each individual worker and employee to ascertain whether any of his activities may be considered as an infringement against certain disciplinary rules. Italy s courts are reluctant to adopt a contemporary approach. Instead of accepting that such disciplinary rules become binding if they are part of the IT- or web based system of a company or workforce in Italy they may still have to be published in a certain room to which each individual worker/ employee has access to. If the precondition, the lawful publication of the disciplinary rules has not been fulfilled any further sanction is to be considered null and void Conflict of interest: Compliance Law Labour Protection Law The disciplinary rules are applicable to workers and employees, namely dependent wage earners. The disciplinary rules are not applicable to any self employed persons. Italy s Compliance Law in its Article 6 requires such disciplinary rules to be applied to persons which are not employed but working for a company. This looks rather complicated, specifically in the case self-employed persons have to be integrated in the operational process of a company. Labour Law Disciplinary Rules cannot be applied to the selfemployed persons. On the other hand the Italian Compliance Law requires a functioning system of sanctions to be applied to anyone integrated in the operational processes of a company. 7 7 Mario Prudentino, Partner with Prudentino & Rhein Partnerschaft von Rechtsanwälten - Studio Legale (Hamburg) in Compliance Praxis 2013, 1 - Das Arbeitsrecht als unverzichtbarer Bestandteil der Compliance in Italien (Labour Law as an integrative part of compliance in Italy) page 8 of 11

9 In other words even the very best compliance management system may not release the company from its liability under the Compliance Law if the compliance management system does not contain an effective system of sanctions to be applied to certain employed persons who are integrated in the operational process too. Italy s Compliance Law holds every individual company liable in case of infringements against the Italian Compliance Law. Finally if you are intending to become active as a corporate entity in Italy and if you want to maintain your compliance standards you definitely need to reconsult with a labour law specialist in Italy in order to build up an effective compliance management system within your Italian affiliate Pitfalls Languages / Ukraine A well balanced compliance program will be carried out on the basis of a specific Code of Conduct. Generally, it should not be a problem to export such a code of conduct to any of your affiliates. But this is often easier said than done. Companies who believe it is simply sufficient to publish their Code of Conduct in English Language on the affiliated firm s local website might fail: Ukraine Authorities accept a Code of Conduct only if I. it is published in the local language, II. III. it is printed on paper stamped by different local authorities and if it is signed by all employees of the local affiliates starting with the signature of the CEO and going down to the signature of the most simple worker in the local affiliate Translation / Turkey I have to emphasize that language translations carry the own risk potential: I would like to report about an experience we had in Turkey in connection with an affiliated company. The Code of Conduct clearly stated that any relatives of the members of the management board were excluded from assuming any important and legal function in the company. Later we found out that the Turkish text of the Code of Conduct was missing the language of that certain provision. During a later research we found out that it had been that very same person who had cared for the translation of the Code of Conduct and who had come into this important function in the company based on that missing provision in the Turkish text of the Code of Conduct - and guess what - he was a relative of the business partner. 8 Mag. Klaus Putzer in Compliance Praxis 2012, 39 CEE/Ukraine page 9 of 11

10 Turkey and the slogan Our business culture is Non-Compliance! ( Cutting Corners ) Apart from such obstacles in practice which can be overcome if one pays attention to them one still has to consider that each individual country has its own social mentality. And one cannot easily modify such grown social mentality from one day to the other. I was told by my Turkish colleagues that Turkey s general business culture is dominated by Non-Compliance. In other words: Cutting Corners is a normal day to day business practice in a country, where the public administration does not enjoy the best reputation because of its corruption. I do not want to say that the Turkish example is to be found in any of the Central Eastern European States. It will differ from state to state. You will meet worse examples and much better examples of business mentality than you would expect. However, be prepared that Europe is not to be considered a uniform space and please kindly respect not only local differences in law but also in mentality, culture, language and otherwise. 9 May 2013, Alix Frank Rechtsanwälte GmbH, Dr. Alix Frank-Thomasser (a.frank@alix-frank.co.at) 9 CCBE Compliance and CSR Working Group - Country per Country Overview Table January Turkey ( page 10 of 11

11 Appendix 1.2. Creation and Implementation of a Compliance Management System in a decentralized company organisation - a practical approach! Project Design Design of the CMS PHASE 1 Implementation PHASE 2A Implementation PHASE 2B Research of antitrust and anticorruption law applicable to all affiliates Set up of guiding principles CMS Definition of responsibilities/lead companies and affiliates Discussions with the concerned operational units Design of the CMS- Procedures (information and reporting duties etc.) Selection of Lead Counsels and Sub Lead Counsels Invitation Training face to face workshop Planning and implementation of a pilot project Carrying out of the workshops Definition of extra training (changes, new staff etc.) E-Learning Carry out Documentation Development of a reporting and audit system Attendance of the implementation within the individual operational units Attendance of the daily routine implementation process, ensuring of a current attendance and a periodical reporting Ensuring sustainability Definition of a training concept Definition of the contents Definition of the templates Planning of workshops page 11 of 11