Global Risk Insights recently had the opportunity to interview Thomas Firestone, a partner at international legal practice Baker McKenzie. Tom is a subject-matter expert on corruption in the former Soviet states of Central Asia, where he often leads corporate investigations into corruption and white-collar crimes. He joined GRI Analyst Jack Anderson to explain how multinational businesses can successfully and profitably operate in Central Asia while avoiding instances of corruption.
Prior to joining Baker McKenzie, Tom worked for the US Department of Justice, where he specialized in matters pertaining to the Foreign Corrupt Practices Act and international law. Tom served as an Assistant US Attorney in New York, prosecuting transnational organized crime. A Russian speaker, he also served as Resident Legal Advisor at the US Embassy in Moscow for 8 years, twice receiving the State Department’s Superior Honor Award for his overseas efforts. Despite Central Asia’s reputation for pervasive and unyielding corruption, Tom explained to GRI that it is possible for businesses to navigate the region’s many intricacies and make profitable investments in various sectors.
The interview transcript has been edited by GRI where necessary for clarity and concision.
On doing business in Central Asia
GRI: How has corruption evolved during the course of your career in Central Asia? Do you see more of it, less of it, and is it becoming more sophisticated?
Firestone: This is a hard question to answer because when we evaluate whether or not there’s more corruption in a country, there’s a debate as to what criteria to use. If a country starts prosecuting more corruption cases, then that creates the appearance of more corruption in the country because all of these facts are coming out and all of these cases of corruption are coming to public light. But at the same time the country is doing more to prosecute corruption and probably making the country more transparent. So it’s hard to evaluate whether or not countries are becoming more or less corrupt, there are not well established, objective criteria for answering that question.
One thing that we rely on, and that pretty much everyone in the anti-corruption community relies on, is Transparency International (TI) rankings. In this regard, pretty much all of the countries that I’ve dealt with – Kazakhstan, Tajikistan, Uzbekistan, and Kyrgyzstan – have all been improving over the last four years in their TI anti-corruption rankings. So I think that’s a positive trend.
Editor’s note: Transparency International’s 2016 Corruption Perceptions Index ranks Kazakhstan in 131st, Kyrgyzstan in 136th, Tajikistan in 151st, Turkmenistan in 154th and Uzbekistan in 156th, with lower-ranked countries being more corrupt. All of their 2016 corruption scores are higher than their 2012 scores.
Also, we’re seeing signs from several of the local governments about taking serious measures in terms of combatting corruption. The government of Uzbekistan recently passed a framework law on anti-corruption. They established an office of a business ombudsman whose role includes protecting businesses against official extortion, which I think is an important step. They also recently cancelled so-called unscheduled regulatory verification, which is basically when regulators come into companies’ offices to do checks, and in many former Soviet countries these are often a pretext for bribe demands. So the [Uzbek] government has reduced the number of so-called unannounced checks as a way to curb abuse of power by government officials. This is something that Russia did several years ago also as a way to protect businesses against corruption. So I think that’s an important step.
Now a lot of these steps in Uzbekistan are still in their early stages, and we have to see how they’re all going to be applied. Similarly, Tajikistan has been making statements about combatting corruption and they recently, as I understand it, arrested ten members of the anti-corruption directorate, the National Anticorruption Agency, on grounds that they were abusing their positions for corrupt ends. So I think that signals an intention to combat this problem.
Editor’s Note: Tajik authorities have now arrested at least 17 officials of the Anticorruption Agency since April, according to EurasiaNet.
In Kazakhstan we’ve seen significant constitutional reforms, more in the direction of a devolution of power away from the President towards the Parliament, which could evolve into an effective system of checks and balances, which is also an important element of combatting corruption.
So I think we’re seeing the governments in the region take initial steps in the right direction. How this will play out over time just remains to be seen. We’ll have to evaluate it. Corruption is not a problem that can be cleaned up overnight. Laws are a first step; they’re an important step, but only a first step. To be effective, laws have to be implemented effectively. So we’ll see how the implementation process works.
In terms of whether or not corruption is getting more or less sophisticated (again, I don’t know if there’s anything specific to the region of Central Asia here), I think globally we can say that corruption is definitely getting more sophisticated. I think this is just a pattern in financial crime generally, because criminals start out typically with the easiest schemes. They start out doing things that are not easily regulated, specifically because they’re not legally regulated. Then the regulators and the enforcement agencies catch up with the criminals. They pass laws, they start to investigate and enforce those laws, and that forces criminals to become more sophisticated.
So I think what we’ve seen, if we talk about the former Soviet Union, since the collapse of the Soviet system in the late 80’s, early 90’s, I think that what we saw early on was a lot of crude criminal activity. Rigged privatizations, street gangsterism [sic], a lot of that has evolved to much more sophisticated levels over the last 25 years throughout the former Soviet Union. So I think corruption is getting more sophisticated, but also anti-corruption efforts are getting more aggressive and those who combat corruption are getting more sophisticated in their attempts to do so. I think we’re seeing more sophistication and effort both on the side of the regulators and on those who would attempt to evade those regulations.
GRI: How are anti-corruption investigations like the ones you conduct, and particularly those conducted by investigators from outside the region as parts of foreign entities, affecting the business environment in the region?
Firestone: Our firm is very committed to helping businesses work in the region. Everybody is appropriately focused on risk, but I don’t think that risk needs to be equated with a prohibition on doing business or a sense that it’s impossible to do business in these countries. We believe firmly that risk can be managed with an appropriate attention to the details, and I think that’s what we try to do, and I think that’s what any good consultant working in this area tries to do, is to help companies to evaluate the risk properly. Not to exaggerate it, as happens sometimes, and not to downplay it, as also happens sometimes, but to get a precise sense of exactly what the risk is. And once you’ve done that, you can structure things to effectively mitigate those risks.
These countries have a bad reputation for the way that they’re portrayed in the media, because of some of the cases that have come out. But that should not be a reason for foreign investors to run away from the region. We think that there’s a lot of opportunity there. As I mentioned, our firm is a founding member of both the US-Kyrgyzstan and US-Tajikistan Business Councils. The other founding members of both those business councils are GE and AGCO, and obviously three such large companies as GE, McKenzie-Baker and AGCO would not have come together to form those councils if we did not think that there were opportunities in the region, and if we did not think that the risks associated with doing business in the region could be managed. We’re actually taking a trade delegation to Kyrgyzstan and Tajikistan this July, and we’ve got great support from the local embassies and the local governments.
I think that the fact that local governments are trying to attract foreign businesses is also encouraging from a risk mitigation perspective. If you go into a foreign country and you’ve got the support of the local government for your project, I think that tends to reduce the risk. A lot of the cases that we see – and this isn’t unique to Central Asia and the former Soviet Union – a lot of times what you see are low level government bureaucrats trying to extort bribes from investors. If the project is one that is supported by the government at a high level and has a high degree of publicity, I think that is less likely to happen. It’s not an absolute guarantee, but I think all other things being equal, it does provide some level of protection to the investors.
I think that good relations with the local government – and I stress, legitimate relations, good relations built through legitimate, ethical means – are supremely important going into any of these countries. At our firm, we’ve seen great outreach lately from the governments of Tajikistan and Kyrgyzstan in helping us to form these business councils, and I take that as an encouraging sign. Risk is important, companies have to focus on it, but they shouldn’t be driven away by it.
A Kazakh oil well in the Caspian Sea.
GRI: What kinds of clients do you work for, and what are you trying to accomplish for them?
Firestone: The specific industries that we deal with really run the gamut. Any companies in any industry can get into corruption problems. Those that are involved more frequently with the government agencies – or more frequently obtaining government licenses – tend to run closer to the line of FCPA issues, because government interactions naturally generate FCPA issues. The pharmaceutical industry obviously has been a big one, because pharmaceutical companies tend to deal with state-owned hospitals, so all of their interactions with doctors at state-owned hospitals become interactions with government officials, which creates risks. But while pharma is one industry we work with, it’s far from being the only one. We have a lot of companies in the oil and gas sector, in telecommunications, information technology and a variety of transportation, logistics and freight forwarding. Any major multinational company has interactions with government officials when it goes to work in high-risk emerging markets, and those interactions create risks that companies look to us to provide advice on.
GRI: Given the state of fraud and corruption in Central Asia, what do you think are some of the top industries that are safest for foreign investors to work in, if they are going to make a direct investment in a Central Asian country?
Firestone: Well, you know there are certain industries that are prominent there. The investment is going to be driven by the opportunity presented by the industry. In Kazakhstan, oil and gas is a very prominent industry; in Uzbekistan, textiles; in Kyrgyzstan, mining is a more important industry. The choice of the investment is going to be driven by the opportunity presented by the industry.
I don’t think that one could say that any industry is safer or riskier than another. I think that it all comes down to the specific transaction and the controls and due diligence that a company does when it goes into the investment, regardless of the industry. You can go into a so-called “safe” industry, but if you’re sloppy, if you don’t do due diligence on your local partner, if you don’t put the right contractual provisions in place, if you employ consultants without keeping an eye on exactly what they’re doing, without visibility into what they’re doing you’re going to create risk for yourself. Conversely, you can go into a riskier industry but by doing thorough due diligence and having attention to all the compliance aspects of any transaction from the outset, you can minimize those risks. So I wouldn’t really look at it from an industry issue, so much as the approach that any particular investor takes when it goes into a particular project.
But I don’t want to say that it’s the same across all industries. Certain industries with a higher level of interaction with government officials create a higher level of risk, and I mentioned pharmaceuticals earlier. There’s a reason so many DOJ FCPA investigations relate to the pharmaceutical industry, because in most countries of the world, health sectors are controlled by the government, which puts all of their activity into the realm of government interaction, so that creates risk. So there are industries that are riskier or less risky depending on the degree of interaction with government officials. But I think that is secondary to the approach companies take to the particular transaction, or the controls that are put in place.
GRI: Are there any countries that you would rank as being more difficult, or a lot easier, to operate in?
Firestone: With regards to the countries of the region, again, I think it depends very much on the approach that the company takes to the transaction. I would rely on – and I only know the clients and matters that I’ve worked on, which is not a full dataset – the TI rankings [because they examine] a much broader range of businesses than I have dealt with in my career. One can look to that as something of an indication of relative degrees of corruption in the various countries. It’s important to note that this is based on perceptions of corruption rather than an objective measurement, so there could be a difference between perceptions of businesses and the reality on the ground, but nevertheless this is the best measure that we have in the anticorruption field.
Looking at that, they rank the various countries of the region. They’re all clustered around the same range in those rankings … so I don’t think that there is a dramatic difference among them according to that, according to the TI rankings. Again, I would stress that I think businesses can operate even in the most high-risk sectors, in the most high-risk markets, effectively, transparently, ethically – if they’re focused on these issues and they put the right controls in place at the beginning of the transaction.
One issue that’s specific within the region relates to currency controls in Uzbekistan. The government in Uzbekistan has very, very strict currency controls which make it extremely difficult to take money outside of the country. This presents special challenges for companies, namely how to get the money out of Uzbekistan in a way that is compliant with local law and the FCPA. The government of Uzbekistan has had a lot of discussion about liberalizing the currency controls there. That hasn’t happened in practice yet, but they seem to be moving in the right direction. I think that’s the sort of area when you see a lot of government regulation obviously more regulation creates more opportunities for inappropriate contacts between business and government. So I think if the government of Uzbekistan liberalizes that, it will be a very positive sign to the international business community, and I know that’s something the business community has been lobbying for, for a long time. Again though, I think this is an issue companies can manage effectively if they’re aware of these restrictions, they are sensitive to local law and they have good advice from local counsel, then this is also a challenge that can be managed. But again, it requires sensitivity to the issue and very good local counsel.
GRI: Do you think it’s become easier or more difficult to conduct your investigations in Central Asian countries?
Firestone: I think it’s, in general, it’s become more difficult for American corporate lawyers to conduct internal corporate investigations in foreign countries. Again, I think that’s part of a broader trend of foreign governments enforcing data privacy rules more strictly, and that can make it more difficult to conduct an investigation. In order to do, say, an analysis of emails, one often has to transfer those emails. If it’s an American law firm doing the investigation, you’re going to want those emails transferred usually to the home office of the American law firm. That raises all sorts of questions about transfer of personal data across borders, which in many countries is prohibited without the consent of the employee. So those rules, as a general pattern, are being enforced more aggressively.
With the trend towards anticorruption over the last 10-15 years, national governments are getting much more interested in prosecuting these cases themselves. I think they are sensitive to the consequences of an American law firm coming in and doing an investigation in their country, and then turning that information over to the US Department of Justice and the SEC because, what you’re talking about there, if it’s a corruption investigation, it’s almost certainly going to involve a local government official. The host government of the country in which you are conducting the investigation is entirely, justifiably concerned about the possibility that information about corruption by its own employees is going to be turned over to the US government, because they don’t know what’s going to happen with it, what political consequences that might have.
So I think in general, governments are getting more focused on foreign lawyers, foreign accountants and foreign consultants coming in and doing corruption investigations in their countries. I think that the stricter enforcement of data privacy laws – and also local national security laws, which prohibit the transfer of state secrets outside of the country, which is sometimes an issue in these investigations – is also becoming more aggressive. It is getting more challenging to do these investigations, and I think (coming back to where we started) that is all the more reason why it’s important to have good local counsel when one does these investigations.
Textile sellers in Uzbekistan
On conducting anticorruption efforts
GRI: Can you walk us through the basics of an anti-corruption investigation in Central Asia?
Firestone: In terms of doing an anti-corruption investigation in Central Asia, I don’t think it’s that different from doing an anti-corruption investigation in any other foreign country. The principles of good anti-corruption investigations are pretty much uniform across countries, in that you have to have a good investigation plan. You have to know what you’re investigating and a good sense of what kind of evidence would confirm or disconfirm the allegations that you’re investigating. You have to have a good sense of who you want to interview and prepare for the interviews very thoroughly. You’ve got to review all the documents in advance of interviews and draw conclusions based on the document review and those interviews.
I think in any investigation it’s extremely important to have good local support, because a lot of investigations involve possible misconduct in a particular country, and a lot of that could relate to government contracts. It could have political aspects to it. There are legal specifics in each country, which have their own laws that may affect the way you do an investigation. These include data privacy laws, employment laws, and labor laws. Sometimes there are mandatory reporting requirements if you discover evidence of a crime. So when we work on these kinds of cases, we typically work very closely with our local offices. We have a very good office in Almaty, which supports all of our investigations in Central Asia, and at the outset of any investigation in Central Asia I’m going to consult with very closely with them about what the local law requirements are, what they know about the background to the allegations.
Those things are pretty much uniform across the board, and I think any investigation has to be done with an eye towards if it is being done for a US company, and if it’s being driven by FCPA concerns. You need one eye on the Department of Justice, the Securities and Exchange Commission, US regulators and their expectations, and another eye on local jurisdictions. I think that when you talk about the specifics of an investigation, it’s important to understand that every country in Central Asia has its own legislation. In a lot of ways, they are similar, but there are a lot of local specifics. So the most important thing is to understand the country that you’re working on and the political, economic and social background to the investigation that you’re doing, and then to understand the local legislation that you’re going to be dealing with as you do the investigation. That’s sort of in a nutshell, what we do in an investigation in any country, including in Central Asia.
GRI: Aside from your office in Almaty, how do you generate good local support? Do you rely on local outside advisors or existing relationships?
Firestone: Those are great questions; usually our local offices are the first port of call. But we do draw on other resources. When we work in foreign countries, and especially in Central Asia, we draw a lot on forensic accountants because a lot of times the devil is in the details, especially financial details and money flows; money coming in, money going out, unexplained cash. And so we want to work with very good outside accounting firms for support on that, and there are some that are quite good in this area.
Sometimes, depending on the nature of the investigation – if it involves alleged corruption at high levels of the government or there’s a political aspect to it – we may reach out to political scientists, experts on local politics. There are experts and think tanks in Washington that I’ve worked with on these issues and that can also be a valuable source of insight.
Another source of support is local embassies. I worked for the US Embassy in Moscow for many years, and a lot of the people I know from the embassy in Moscow have moved on to postings in other various embassies in the former Soviet Union, several of them in Central Asian embassies. So sometimes it’s useful to reach out to them and to understand the issues that you’re dealing with. If you’re dealing with running into a potential violation of local law, one of the issues is how is that local law interpreted? What was driving its passage? What agencies are in charge of enforcing it? How aggressive are they at enforcing it? Is there a political agenda behind it? All of those things are important to understand, and the political scientists whom we work with in the US can help us understand those issues, but also people at the local embassies can help as well.
In addition, our firm is very involved with all of the business councils for Central Asia. We are a member of the US-Kazakhstan Business Council, a board member of the American-Uzbekistan Chamber of Commerce, a founding member of the US-Kyrgyzstan Business Council and a founding member of the US-Tajikistan Business Council. Those are all extremely valuable resources, because through those trade councils we talk to other businesses that are operating in the region. We understand what kinds of problems they are dealing with and how they’ve solved those problems. Sometimes those councils can also provide a valuable forum for discussing issues that companies run into with host governments as well. It’s important that interactions with the host government be conducted legitimately, in an appropriate way. When you’re acting through a business council, the interactions should be beyond reproach. They’re legitimate, they’re approved, and the contacts are made through the appropriate channels. So that’s another resource we draw on when we are working on cases in Central Asia.
Aluminium smelting plant in Tajikistan.
GRI: So what are some good and bad signs that businesses should be looking for to identify reliable partners in Central Asia?
Firestone: That’s a very good question. We always do very thorough due diligence on business partners for our clients. That often requires obtaining good business intelligence from a good investigative outside consulting firm. The things that we look for: Do they have a track record of dealing with foreign international businesses? Do they have a compliance program? When you interview them, do they have sensitivity to these issues? Are they willing to sign anticorruption certifications? Are they willing to provide you with documents upon request? Are they willing to fill out anticorruption questionnaires about their businesses?
If they are open, forthcoming, transparent, sensitive to these issues, that’s a good sign that they’re going to be a reliable local partner. If they are reluctant to provide information, if the ownership structure of the company is opaque, if the company has no track record of doing business, if the services that the company is offering are vague, if the price that the company is demanding for these services appears to be excessive compared to the market rates, those are all very bad signs. Those are red flags with regard to the partner. It doesn’t necessarily mean you can’t work with the partner, but it does mean that you have to investigate that more thoroughly and satisfy yourself that this is somebody you can work with ethically. So those are the typical things that we look for.
I find that in due diligence on local partners you can generate and receive a lot of paper, which I think is important to do. You can get a lot of background reports – also important to do, but I think that interviews with a local partner are far and away the most valuable source of information because when you sit down, when you talk to somebody for an hour or two hours about their business, you can get a feel as to whether this is somebody you can rely on. If the company can afford the resources to do the interviews, that’s something we recommend.
GRI: Are there any particular methods or questions you always recommend asking if you’re going to conduct this kind of an interview on behalf of a client or help them through that process?
Firestone: Well again, it’s very specific to the partner and to the transaction. But we want to know what their history is of working in the industry, what their qualifications are to perform the job that they are being hired to do. How are their rates determined? Do they have a conception of anticorruption compliance? Are they familiar with local laws on anticorruption? Do they train their employees on anticorruption? Are they willing to provide a certification that they will comply with all local laws? Those are the things that we typically ask them. We go through those things in the interview. But then, a lot of times in the interview, the most valuable thing is just to relax a little bit, get them to talk about their business, get them to open up, and when you do that you usually get a sense of whether or not this is somebody you can trust and rely on.
GRI: How do foreign-led investigations compare to those conducted by domestic authorities or local groups?
Firestone: Well, when you’re talking about what we do, we’re operating as a private entity; we’re outside consultants hired by a business. So we obviously have very different powers and abilities when we conduct an investigation than the authorities. Authorities in any country are going to have the means usually to wiretap phone calls, to conduct video surveillance, to subpoena documents, to arrest people and offer them the possibility for reduction in a sentence if they cooperate. All of those powers are available to domestic law enforcement authorities; they’re generally not available to private business conducting an investigation. So we don’t have the panoply of powers that any national enforcement agency would have.
What we do have though, is generally access to employees of the company for whom we’re conducting the investigation. We will hopefully get support from the company’s leadership in encouraging employees to cooperate with the investigation. So if the company has the right kind of compliance programs set up, then employees will be encouraged to disclose wrongdoing to their superiors. They’ll be encouraged to cooperate with investigations. We also typically have access to email correspondence from within the company, and we also typically have access to financial records of the company. So we work through those to try to understand what happened. It’s a different set of powers that what the local enforcement authorities would have, but it’s a different goal that we’re trying to figure out for the company. Does it have an employee who has committed some sort of violation, and if so, what do they need to do to rectify that problem? The job of local law enforcement authorities is to enforce the local law, and, if they need, to incarcerate people for those violations or impose a fine on them. So it’s just we have different goals and different means of accomplishing those goals.
GRI: Has there ever been an example of a time when you’ve been brought in to start an investigation, and then that investigation has led to domestic authorities pursuing a criminal investigation for fraud or corruption?
Firestone: Sure, but I don’t think I’ve had that situation in Central Asia. I have had that happen in other cases where we will do an investigation and discover that the company was the victim of fraud, perhaps by a former employee, or the victim of extortion by a local government official, and we will put that together and take that to the local government for investigation and prosecution. The results at that point vary, depending on the strength of the evidence and the commitment of the local law enforcement to pursue that case. Obviously, when you’re talking about national law enforcement, you’re talking about imprisoning somebody, and the standards of proof are much higher than they are for a company that just wants to fire somebody, because there are no constitutional rights to have any particular job. And if you violate a company’s code of conduct, the company can usually terminate you for that depending on the terms of your employment agreement.
There obviously is a constitutional right in any country not to be imprisoned for a crime you have not committed, or for a crime that can’t be proven beyond a certain evidentiary standard. So they have a much harder time, they have a heavier evidentiary burden than a company does when it’s doing an investigation. Sometimes the national investigations, based on company investigations, are successful. Sometimes they’re not, and it’s really all a question of the strength of the evidence.
This interview was conducted by GRI Analyst Jack Anderson. Editing was completed by Jack Anderson and GRI Commissioning Editor Ian Armstrong.
Global Risk Insights would like to thank Baker McKenzie for their cooperation in making this interview possible.
