Russian companies’ failures to adopt effective sanctions policies worsen sanctions’ impact

Subject: Sanctions, Part 2.
Date: Tue, 7 Oct 2014
From: Paul Backer <pauljbacker@gmail.com>

Part 2. Russian companies’ failures to adopt effective sanctions policies worsen sanctions’ impact.

Russian companies failed to address key aspects of sanctions: 1. Large law firm incentives are against giving operationally useful sanctions advice and 2. Nature and enforcement of sanctions differ from traditional law. Transacting with European and American (“Western”) companies became needlessly difficult, expensive, sometimes impossible. Skala Law provides experienced local attorneys in Russia and worldwide to implement effective sanctions policies.

The author: Mr. Backer is a Moscow-based American attorney, with 20 years of sanctions experience, beginning as a U.S. government attorney advising on investment and technology transfer enforcement as to the Former Soviet Union. His email is pbacker@skalalaw.com, contact Skala Law at contact@skalalaw.com or visit at www.skalalaw.com.

There is nothing new about sanctions-related transacting challenges for Russian companies. The July 2014 Skala Law update: “Western companies and financial institutions refuse to offer fair terms or transact with listed [sanctioned] and unlisted Russian companies and individuals. Formally, this is due to sanctions’ increasing severity, unpredictability and compliance costs. In fact, Western companies’ actions owe more to the lack of Russian companies’ viable sanctions policies than to the actual sanctions’ provisions.”

Russian companies suffered avoidable declines in hard currency revenues of HQ companies and foreign subsidiaries, lost access to financial markets, faced difficulties buying equipment and disposables, etc. Why did Russian companies fail to develop viable sanctions policies?

A key factor is Russian companies’ addiction to large US and UK law firms (“Large Firms”) and those firms’ incentives and conflicts of interest. Russian companies pay multiples of the sums paid by Western companies which rely on a mix of Large Firms, in-house and local counsel for legal services. We helped one Russian company cut costs by 45% and improve legal out-comes by switching from a reliance on Large Firms to specialized local and inhouse counsel.

There is a world of criticism of how Large Firms bill and serve corporate clients, but generally clients get the product they pay and pay and pay for. Large Firms aggressively marketed sanctions guidance to Russian clients, delivering both extensive and expensive academic work product, but failed to deliver actionable sanctions policies. Why?

In 2012, top 100 law firms reported total revenues of $75+ billion. Much of that revenue comes from sanctioning governments and companies contracting with these governments. These clients are at the heart of Large Firms’ revenue, because of their large, repeatable and predictable legal billing. The importance of this revenue stream is shown by the “revolving door” between government service and Large Firm partnership.

A great deal of additional Large Firms’ revenue is directly linked to their ability to deliver positive legal outcomes from sanctioning governments for key clients with regulatory, licensing, tax and enforcement matters.

Helping a Russian client with actionable sanctions guidance generates small revenue, while putting the very large directly and indirectly government derived billing at risk. Governments historically have no real objection to being litigated against as to taxes, licensing, etc. but sanctions are very, very different as national security and foreign policy vehicles.

There is no reasonable expectation that Large Firms will jeopardize positive government relationships generating hundreds of millions and billions of dollars of annual revenue by providing actionable sanctions guidance for much smaller Russian clients. Actionable sanctions guidance which the sanctioning governments see as directly detrimental to their foreign policy and security interests.

Setting aside the obvious conflict of interest and whether it violates any reasonable concept of security for a Russian company to seek legal guidance from a Large Firm whose business with the sanctioning governments is ten or twenty or a hundred times larger. It seems highly unlikely that Large Firms are willing to open themselves to scrutiny by sanctioning governments’ enforcement agencies by providing actionable sanctions guidance.

Skala Law does not seek government entities as clients. Skala employs experienced local attorneys for specific task components, compartmentalizing client confidential information reducing vulnerability to government coercion.

The second factor is the Russian companies’ failure to accept the nature and enforcement of sanctions as materially different from traditional law. Russian companies expect Western law and enforcement to be fair and to have due process. That is not the goal of sanctions which are intended to inflict economic damage and do not prioritize fairness or due process.

To oversimplify, laws are either proscriptive or prescriptive. Proscriptive laws impose penalties for wrongful acts, e.g. criminal law. Prescriptive laws establish rules of competition, e.g. securities, licensing and anti-trust law.

Laws are the product of extensive legislative and public participation and provide extensive due process safeguards. Sanctions are emergency measures to protect a state’s foreign policy and security interests and are explicitly intended to injure commercial activity by listed and in unlisted entities. Sanctions are notably short of due process.

To feel the force of law someone usually has to commit an affirmative act. To become subject to a proscriptive Law one must seek a proscribed act. To become subject to a prescriptive Law one must seek to participate in a field of regulated activity. A person is impacted by sanctions solely because of his (its) status. Status such as being a Russian company absent any act.

Sanctions punish a person or entity simply for the fact of being. One is punished for the legally nebulous “fact” of being “close” to a national leader or simply citizenship in a certain state.

Sanctions enforcement agencies are rewarded and evaluated largely on the volume of assets arrested, creating strong incentives to maximize arrested property at all possible junctions.

Russian companies waiting for sanctions to be enforced in the same fair and impartial manner as securities or licensing regulations will have a very long and very expensive wait. Same for those waiting for actionable sanctions assistance from Large Firms. If your company is serious about sanctions compliance, let’s start the conversation.

Next, Part 3. Effective sanctions policies.

Skala Law delivers better legal outcomes faster, usually at 60% less than major law firms worldwide. Skala Law recruits and pays experienced attorneys $60-300/hr for part-time and temporary projects in their home jurisdictions. Visit our site at www.skalalaw.com or write to contact@skalalaw.com. Author’s email is pbacker@skalalaw.com. Follow us on Twitter!

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