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The Bottom Line

Almost Fool-Proof Method to Protect Your Russian Investment
By Elena Platonova, Director of Avenir

As a finance director who has acted in the financial field since the mid 1990s I often hear horror stories from clients or business colleague investors who lose their investments due to dishonest partners. Of course this happens in any country, and not just between westerns and Russians.

What steps can an investor take to secure an investment with a local partner, in a cost-effective manner? How can a secure, tamper- proof system be put in place that at the same time would permit a partner to implement and run a business, while simultaneously safe-guarding against potential temptations to cut corners, take unwarranted distributions or improperly divert funds?

But first a few stores of real problems. First, the House that wasnt built. Recently a residential real-estate developer from the West created a local company with a local director. The money that was transferred to the locally established bank account of the local company was not used to pay invoices for purposes of construction as per the original intentions of the parties. Then there is the GhostArbiter. In this example, a local director of European nationality had fictitious staff on the books, and also had overpaid staff, in order to re-route money back to himself. In addition to that, fictitious receipts were generated waith companies in order to embezzle funds. Finally, Oh what a mess! The Director of a Fortune 500 American company with the name Truck Maker OOO (not the real name) registered a company with the name Truck Maker ZAO. The company register accepts slight changes like this. He issued invoices for over $1 million in the name of the newly formed company, which named his friend as the only shareholder. The Director was fired and pursued in the criminal and civil courts. He was not found guilty.

In the above scenarios, if outsourcing had been used these types of issues may have been avoided. So I recommend the following for small and medium concerns:

Secured Bank Account Transactions with 2 Keys; its all about encryption!

With the sophistication of online banking these days, it is now possible and safe to conduct all banking transactions with a 2 key system whereby the on-the-ground local business partner would have one key and the less active investor would have the second key, from Moscow or from wherever. The bank account could be set up so that the local General Director has the right to transfer his/her own funds under say $5,000 (or whatever limit is set). This system relies on sophisticated encryption technology and is fairly fool proof; most banks guarantee against external fraud.

Outsource an Independent Accounting Firm

In order to ensure that all transactions are done legally, transparently and within the guidelines of the business, an independent outsourced firm can be appointed to act as a watchdog to ensure that all monies are spent in accordance with both parties interests. Like (1) above, the second key for the bank account could also be given to the outsourced accounting firm instead of to the local Managing Director. According to most service agreements, the outsourced accounting firm would provide reporting as frequently as possible. By relying on an independent outsourced firm, the risk is transferred from an individual to an independent firm. Thus the lions share of fraud risk is transferred to the bank, hence removing bank risk (which is usually not a concern especially if it is a Western one). Depending on the arrangement, the outsourced accounting firm is able to issue either monthly or weekly management reports to a head office or to the non-active partner. Moreover, the non-active partner can check in real-time any and all transactions if there are any questionable activities or transactions spotted.

Outsourced Payroll and Human Resources Administration

One of the easiest ways that business partners cheat one another is through payroll tricks. If payroll and HR administration issues are outsourced to an independent firm, it is much more challenging for one partner to cheat the other. One other advantage to outsourcing payroll is that the employees are less likely to know about their co-workers salaries since this information is stored with an independent third party.

Independent Audits

On a historical basis, it is also possible to look back and independently determine if the active partner in a business relationship has been operating in accordance with the intended goals of the partners. However, if the company does not have a policy of transparency, audited information might be of limited use.

Managing Director Services

It is possible to appoint for a fee a Managing Director which can be a lawyer inside a law firm (our sister company Hellevig, Klein & Usov offers this service) or in certain cases a company can be appointed as Managing Director. The types of responsibilities can be specifically laid out by contract. In this regard the risk is shifted from an individual to a firm.

If the above steps are followed, it is much easier to safeguard an investment in Russia, or for that matter in any country. Other arguments for outsourcing, and especially for regular audits, is that when it comes time to sell the business either to a partner or to a third party investor, clean audited accounts can be shown to help understand the business and its value. Finally, for those companies which are committed to spending their time on things like sales and growing their investment, it is sometimes advantageous to outsource as much as possible so as to be able to focus on the core business. The savings in space (especially in view of Moscows sky-high real estate prices) for accounting/HR staff will also partially or fully offset the costs of outsourcing.

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