Navigating Risks in Emerging Market the Crisis May Be a Catalyst for IT Market

ETHICS & COMPLIANCE

Lessons From the Frontline of Ethics and Compliance "A pig in a poke": Navigating Risks in Emerging Market The Crisis May be a Catalyst for IT Market

A Word From Executive Director of AmCham Dear AmCham members and friends,

Operation of businesses in a legal way is not a new phenomenon in Azerbaijan. Companies respecting to themselves, their Issue 26 shareholders and community they function have been demonstrating this play since independence. It has been mostly observed by all international companies and some local ones. Credits In recent years, thanks to changes in legislation of Azerbaijan, practice and way of doing business by local (Azerbaijani) companies have also changed. AmCham Executive Director: Modern day business management in Azerbaijan calls for Natavan Mammadova compliance and ethical business. As the leading business association, AmCham has been actively promoting compliance in all spheres of business operations. This is a Editor: must towards transparency and effective management, as well as, ethical position of Aykhan Nasibli businesses in global market. It is also important to note that, AmCham has established a separate working group named “Legal and Compliance” which is expected to be transformed into operating committee. Moreover, AmCham presented a number of Articles contributed by: recommendations in this context through its biannual publication - White Paper, which Bakhtiyar Aslanbayli was published in 2016. The members of the relevant working group regularly come Alena Edisherova together for discussing current status and implementation process of recommendations Clare Farley delivered in the White Paper, as well as invite certain government officials to the meeting for exchanging opinions on different matters. Elnur Eyvazov Herein, AmCham Azerbaijan’s quarterly business magazine, IMPACT, puts an emphasis Farid Isayev for ethics and compliance subject within the 26th edition. We have observed that there Orkhan Rajabov & Gunel Farajova is a progress on this field. International companies are willing to share their experience. Mekhriban Taghiyeva Thanks to lessons learned, there is a willingness towards compliance related practices Ruslan Bayramov in local companies as well. We are sure that in short period of time, Azerbaijani Vurgun Hajiyev business community will be ready to have solid ethical and compliant way of business management. In this case, members of AmCham Azerbaijan will be able to share best Emil Garayev practices and experiences.

Advertisers: I wish the best of success in your businesses and have a nice summer! Azerfon Mosaik Best regards, Natavan Mammadova Turkish Airlines BP Coca Cola Editor’s Comment Deloitte Dear friend, Capital Legal Services Ekvita Welcome to the 26th edition of IMPACT Azerbaijan magazine, ATL devoted to Ethics & Compliance. ITECA The business community of Azerbaijan is growing. This growth has been reflected not only in delivery of added value goods and Publisher: services, but also on managing businesses in ethical manner. Obviously, the latter carries a big weight, including to be compli- American Chamber of Commerce ant for the legislation, international norms and behaviors, as well in Azerbaijan as stakeholders in large. Bearing in mind importance of this subject, IMPACT Azerbaijan Tel: (+994 12) 497 13 33 magazine puts an emphasis for this subject. Within this edition you will be able to benefit Fax: (+994 12) 497 10 91 from the experience of diverse companies on application of compliance related matters, as well as relevant other topics thanks to the vision and experience of the leading Am- www.amchamaz.org Cham members. It would be also relevant to indicate that there are further steps ahead of us in ethics and Advertising opportunities: compliance related matters. Existence of willingness to work on create a good basis for Please contact the Editor at further proliferation. [email protected] Herein, it is my pleasure to appreciate one more time for interviewed people, authors of articles, as well as companies who see deep value to advertise their business in IMPACT, including Azerfon, Mosaik Printing, Turkish Airlines, BP, Coca Cola, Deloitte, Capital Le- The articles in IMPACT Azerbaijan gal Services, Ekvita and ATL. express the opinions of the authors and do not necessarily reflect the Keep reading and enjoying. position of the American Chamber of Commerce in Azerbaijan Best wishes, Aykhan Nasibli contents

IN FOCUS 23 6 Transparency and Awareness Five Tips on How to Build a High- of Employees Matter Trust Culture and Organization

Mekhriban Taghiyeva Bakhtiyar Aslanbayli Head of Legal Affairs and Compliance, Carlsberg Azerbaijan Vice President for Communications, External Affairs, 25 Strategy & Region, BP Azerbaijan-Georgia-Turkey Essential Elements of a Successful Compliance Program 8 “A pig in a poke” Navigating risks in emerging market Ruslan Bayramov Legal Manager, Ekvita Alena Edisherova Senior Manager, Deloitte & Touche member contribution 27 12 The Crisis May be a Catalyst Lessons From the Frontline of for IT Market Ethics and Compliance

Vurgun Hajiyev Clare Farley Chief Technical Officer, “ATL Tech” Regional Ethics & Compliance Manager, BP Azerbaijan-Georgia-Turkey (AGT) Region 28 Global “De-Risking” Practice 14 in Financial Markets and its Growing Importance Impact on Azerbaijan of Business Ethics and Compliance in Azerbaijan and the CIS Region Emil Garayev Tax & Legal Director, Deloitte & Touche Elnur Eyvazov AMCHAM AZERBAIJAN Senior Legal Advisor, Capital Legal Services 31 16 About Us Compliance Function as a Pillar of Modern Corporation

32 Farid Isayev Business Events Director, Head of KPMG’s Law Practice in Azerbaijan 20 Ethical Business Practices in Supply Chains 34 Committee Highlights 41 AmCham Legal Update

Orkhan Rajabov, Manager, Ernst & Young Azerbaijan 48 Members’ News Gunel Farajova, Senior consultant, Ernst & Young Azerbaijan 52 M2M Discount Program

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Conference on “Economic Reforms: the Achieved Results and Recommendations”

Conference on “Economic reforms: the achieved results and imli and President of the American Chamber of Commerce in recommendations” Azerbaijan Mr. Nuran Kerimov spoke about the main direc- On May 30, conference on “Economic reforms: Achieved re- tions of economic reforms and challenges ahead. sults and recommendations” co-organized by the Center for It was mentioned that the dialogue and cooperation between Economic Reforms Analysis and Communication and the American Chamber of Commerce in Azerbaijan (AmCham) has been organized. The event was sponsored by Azerbai- jan Coca-Cola Bottlers, Deloitte Azerbaijan, EY Azerbaijan, KPMG Azerbaijan, PASHA Bank and PwC Azerbaijan. Opening the conference, First Deputy Prime Minister Mr. Yagub Eyyubov, Executive Director of the Center for Eco- nomic Reforms Analysis and Communication Mr. Vusal Gas-

the government and the private sector create favorable conditions for strengthening the role of private sector in ensuring sustained economic growth. In particular, it was noted that the “Strategic road maps for the national economy and main economic sectors” intend reforms in Azerbaijan that are thoroughly thought-out under the leadership of President H.E. Ilham Aliyev and target not only short-term but also medium

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Azerbaijan Mr. Timothy Tarrant, Managing Director of SAP Azerbaijan Mr. Rufat Hajialibayov, CEO of Azerbaijan Coca- Cola Bottlers Mr. Erdinc Guzel and Deputy Director of Vey- seloglu Mr. Ilgar Nuri also delivered speeches and expressed their opinions on discussed issues. In particular, it was mentioned that the ongoing economic reforms serve the interests of the private sector. In this regard, a gradual reduction in the number of procedures required for business activity, digital and on-line service options offered by various governmental bodies increase the investment attractiveness of the country. Representatives of international organizations and private sector also noted their satisfaction for being in constant dialogue with the government during the process of continuous improvement of the business environment, and gave the recommendations on attracting foreign direct investments, as and long-term goals. well as strengthening stability in the country. Chairman of the Central Bank Mr. Elman Rustamov, Chair- man of the Financial Market Supervisory Authority Mr. Rufat Aslanli, Chairman of the State Customs Committee Mr. Aydin Aliyev, Chairman of the State Committee on Property Issues Mr. Karam Hasanov, First Deputy Minister of Taxes Mr. Sahir Mammadkhanov and Deputy Minister of Economy Mr. Sahil Babayev delivered speeches and presentations at this event.

At the end of the conference, it was stressed that the main purpose of this type of events is raising awareness of the economic reforms, as well as ensuring close participation of private sector in the process of reforms and generally contributing to further increase in inclusiveness and effectiveness of the reforms. Together with AmCham and other partner organizations, the Center for Economic Reforms Analysis and The officials highlighted that macroeconomic stability and the Communication will continue discussions of the results of the stability of manat, in particular, were ensured, inflation was reforms with large segments of society pursuant to the statu- lowered to a manageable level, economic growth in non-oil tory requirements. sector and export was increased as a result of ongoing economic reforms carried out by President H.E. Ilham Aliyev. It was also noted that the current favorable business environment serves as a basis for expanding the activities of local and foreign businessmen and attracting investments to the country. Tax, customs, fiscal and monetary policy reforms carried out in Azerbaijan have increased entrepreneurs’ satisfaction and created greater opportunities for transparency, accountability, and efficiency. Subsequently, representatives of international organizations and private sector participating at this conference – IFC representative in Azerbaijan Ms. Aliya Azimova, Head of Baku Office of the European Bank for Reconstruction and Develop- ment (EBRD) Ms. Ivane Duarte, Country Director of FINCA

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Five Tips on How to Build a High- Trust Culture and Organization Bakhtiyar Aslanbayli Vice President for Communications, External Affairs, Strategy & Region, BP Azerbaijan-Georgia-Turkey

• Trust Me, Show Me, Prove to Me – there was once a time when business leaders could just tell the public to “trust me to do the right thing” and they would. With increased regulation and pressures from investors, companies are now asked to show and to prove to the We operate in a globalized economy with a diverse work- public that they have ethical values which are embed- force and where the public is more alert to ethical issues. This ded throughout their organization. In Azerbaijan, we set means that the landscape in which businesses operate, is all out the impact of our business on the environment and the more complex. Doing business ethically is very important society and economies in which we operate through our to us. We believe that acting with integrity builds trust. It is an Annual Sustainability Report. Be open and transparent important part of how we do business in BP and across the about your company’s achievements as good operator, a Azerbaijan-Georgia-Turkey Region. Making the right ethical good corporate citizen and a great place to work. decisions builds long term success and value. • Make Integrity a Habit – leaders who strive to do the Based on our experience, we believe there are five top tips right thing under all circumstances know that being trust- we could offer to our peers for building a high-trust culture worthy takes effort, awareness and hard work. Anyone and organization: wanting to build a high-trust culture and organization • Values Made Easy – companies need a set of values or must start by looking in the mirror. Personal character principles which reflect the way they do business or how is foundational for interpersonal trust. Organizations in they aspire to carry out their business. Set out clearly which leaders have integrity stand a much better chance and simply what is acceptable, desirable and responsible of building trust from the top down and bottom up. behavior, above and beyond compliance with laws and Our guest`s biography regulations. Explain the why, the what and the how of Mr. Bakhtiyar Aslanbayli is BP’s Vice President for your company’s values and behaviors. Communications, External Affairs, Strategy and Region covering • Be Clear about What You Stand for – in BP we have Azerbaijan, Georgia and Turkey. He is also overseeing regional a 25 page Code which is simple, easy to understand ethics and compliance as well as tax and customs teams. and most importantly, is not just a set of rules. It is a Prior to this role, Mr. Aslanbayli served as BP’s regional director must-read, must-follow guide to doing the right thing in for tax and customs for Azerbaijan, Georgia and Turkey. He business. Make your company’s code accessible to all joined BP from PricewaterhouseCoopers in 2002 as a Tax employees so they know how to do the right thing, and Advisor. have the courage to do the right thing, no matter what the In addition to professional activities, Mr. Aslanbayli also teaches consequences may be. international affairs and energy geopolitics at Baku State • Lead by Example – personal integrity matters. No mat- University, ADA University and Baku Higher Oil School. He was ter how competent, charismatic, or powerful a leader a guest lecturer at Harvard Black Sea Security Program in 2014 may be, he/she is either trustworthy or not; a business is and 2015, as well as a frequent speaker at various international and local conferences. He is the author of one book and more only as trustworthy as its leaders. In BP, tone at the top is than 50 academic articles and commentaries. critical. We provide our leaders with Responsible Leader- Mr. Aslanbayli holds MSc in International Affairs from Baku ship and Advancing Speak Up training to support them in State University. He also completed his PhD studies at the role modeling ethical behaviors and listening to and han- Azerbaijan National Academy of Sciences. dling concerns appropriately. Provide your leaders with He is member of Board of Directors of American Chamber of an ethical tool-kit so that they can live your company’s Commerce in Azerbaijan (AmCham). values and lead by example.

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“A pig in a poke” Navigating risks in emerging market

Alena Edisherova making investments or engaging third parties and should con- Senior Manager, sider performing ongoing due diligence of existing business Deloitte & Touche relationships and third parties. • Challenges with choosing local business partners, agents • Relevant risk management and controls Compliance and Integrity-related Risks As companies continue to expand their activities in Azerbaijan In 2016, the Transparency International’s Corruption Percep- – to produce products, deliver services, and sell to custom- tion Index ranks 176 countries based on perceived levels of ers in this emerging market – many executives are concerned public-sector corruption such as bribery of public officials and over compliance and integrity-related risks, which they be- the effectiveness of government anticorruption efforts1. While lieve are growing. Companies should be highly confident that the highest-ranked countries are overwhelmingly developed they have effective processes in place to identify and manage countries, most of the major emerging markets are ranked these risks when making investments or engaging third par- below 70th (e.g. most of the CIS region countries are ranked ties. below 100th with the score not more than 30). Countries that Many companies are investing through mergers and acquisi- score less than 50 out of 100 “are perceived to have a serious tions (M&A) as well as by locating company-owned facilities corruption problem”. in those markets (“Greenfield investment”). In addition to expanding their footprint directly, many companies are increas- DOJ’s FCPA Unit is working “more closely and ingly engaging third parties located in emerging markets — much more frequently with foreign counter- such as vendors and a variety of other third parties including parts.” service providers, sales agents, distributors, channel partners, and intermediaries. Fraud Section Chief Andrew Weissmann, February 2016 The benefits of expanding into emerging markets can be significant: to lower costs, tap a wider pool of skilled labor, im- In 2016 the 53 enforcement actions under the U.S. Foreign prove the ability to respond quickly to changes in demand, Corrupt Practices Act (FCPA) were brought by the Depart- and gain access to new customers. Yet, the compliance and ment of Justice (DOJ) and the Securities and Exchange Com- integrity-related risks can also be significant. Before invest- mission (SEC), what trails only the 74 in 2010 (a year skewed ing or engaging third parties, companies should consider by the infamous, yet numerous arrests) for the most enforce- implementing processes to manage risks such as corruption, ment actions in the 39-year history of the statute2. money laundering, terrorist financing, connections to orga- Another source of concern may be the whistleblower provi- nized crime, criminal activity, and violations of economic and sion of the Dodd-Frank legislation. Under the legislation, a tradesanctions. whistleblower who voluntarily provides the Securities and Given the potential for compliance risks in emerging markets, companies should carefully conduct due diligence before 1. https://www.transparency.org/news/feature/corruption_perceptions_index_2016#regional 2. http://www.gibsondunn.com/publications/documents/2016-Year-End-FCPA-Update.pdf TIDEWATER INC. NOVEMBER 4, 2010 The SEC charged New Orleans-based shipping company eign government officials in Azerbaijan in 2001, 2003 and Tidewater Inc. with violating the FCPA for paying bribes 2005 in order to influence acts and decisions by Azeri tax to foreign government officials in Azerbaijan disguised as officials to resolve local audits in favor of a Tidewater sub- payments for legitimate services. The SEC further alleges sidiary. that from January 2002 through March 2007, Tidewater, Without admitting or denying the SEC’s allegations, Tide- through a subsidiary, reimbursed approximately $1.6 mln to water has consented to a court order permanently enjoining its customs broker in Nigeria used to make improper pay- it from future violations of these statutory provisions; and ments to local Nigerian customs officials. ordering it to pay $7.2 mln in disgorgement plus prejudg- The SEC alleges that Tidewater, directly or through its sub- ment interest of $881 thousand and a $217 thousand civil sidiaries and agents, paid $160 thousand in bribes to for- penalty.

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Exchange Commission with original information about a vio- mended that adequate due diligence is a standard practice at lation of federal securities law that leads to a successful en- the companies. It is common that companies almost always forcement action is entitled to receive 10 percent to 30 per- conduct due diligence before making M&A transactions or cent of the penalties assessed1. Greenfield investments in emerging markets. However, due Given the reputational and financial risks involved in investing diligence into specific risks is rarely extensive. One explana- in emerging markets, it is expected that boards of directors tion for this may be the business pressure to quickly complete and senior management should be actively involved in over- a M&A transaction or open a new company operation. seeing activities to manage compliance and integrity-related The company should conduct an extremely or very extensive risks, including: assessment of potential commercial bribery and bribery of • bribery of government officials; government officials issues during due diligence when con- • commercial bribery or kickbacks; sidering foreign investments. Yet, it is common that compa- • violations of economic and trade sanctions; nies that do probe into these and other issues often identify • money laundering and terrorist financing; cause for concern. According to 2012 Deloitte compliance • potential criminal activities. Survey 46 percent of companies that had considered poten- While the FCPA prohibits bribery of foreign government of- tial M&A transactions in emerging markets, reported that po- ficials, other countries also have antibribery laws that apply tential deals had been halted due to compliance and integrity- to commercial bribery. For example, the 2010 UK Bribery related findings during due diligence. Act (“the UK Bribery Act”), which took effect on July 1, 2011, prohibits offering, requesting, or receiving bribes involving commercial organizations. The UK Bribery Act prohibits Local Business Partners commercial bribery that occurs anywhere in the world, Companies find that employing third parties can help increase provided the organization is incorporated or formed in their flexibility to run operations around the clock by taking the UK or carries on business in the UK. advantage of time zone differences and to quickly scale up operations when demand rises. Third parties can also help a company gain access to a wider pool of skilled professionals On February 18, 2016, Dutch telecom compa- including professionals with an understanding of the local ny and ADR-issuer VimpelCom and its Uzbek market, which can be important when conducting research subsidiary, Unitel, entered into a $795 mln res- and development for new products and when selling products or services to local customers. olution arising from allegations that the com- Although the activities of third parties are not under compa- panies made more than $110 mln in improper nies direct control, unethical behavior by one of companies payments to an Uzbek government official to third parties can result in legal enforcement actions under the FCPA and other anti-bribery statues, as well as garner nega- facilitate market entry and secure preferential tive media coverage resulting in reputational damage. treatment in the country. It is critical that the company conducts an initial risk assess- th ment before engaging a third party to determine if compliance DOJ marks the 6 largest monetary settlement in the and integrity-related due diligence is needed and, if so, what history of the FCPA. level of scrutiny is appropriate. The initial risk assessment may include the following: However, the quality of a company compliance program is an • independently review of public records to verify owner- important consideration in defending against an alleged viola- ship, to identify government associations, and to discov- tion of the UK Bribery Act. According to guidance provided by er any unfavorable information; the UK Ministry of Justice, “It is a full defense for an organiza- • use of local professionals, firms, and government agen- tion to prove that despite a particular case of bribery it never- cies to check business references and conduct inquiries theless had adequate procedures in place to prevent persons regarding business practices and reputation; associated with it from bribing2. Thus, in addition to potentially • request the representatives to disclose information such reducing the likelihood that corrupt behavior will take place, as beneficial owners, proof of incorporation, prior ad- it appears that companies that implement effective compli- verse information, or government connections; ance programs may also have an improved defense if they • conduct site visits; are cited for an instance of bribery that occurs despite their • screen against lists of politically exposed persons best efforts. (“PEPS”) and international sanctions/watch lists (such as by OFAC). The company should also conduct ongoing due diligence Proper Integrity Due Diligence of existing third parties, e.g. annually or every two or three In managing the above discussed risks, it is highly recom- years. The fact that many companies do not closely assess these key risks may be due to the scale and complexity of 1. https://www.sec.gov/rules/final/2011/34-64545.pdf 2. The Bribery Act 2010: Guidance about commercial organizations preventing bribery, UK Ministry the task. Despite the challenges, however, failing to inves- of Justice, http://www.justice.gov.uk/downloads/legislation/bribery-act-2010-guidance.pdf

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tigate these issues when engaging a third party in emerging A rigorous, risk-based approach can help to minimize the markets leaves a company vulnerable to significant legal and potential for compliance and integrity-related issues among reputational risks. companies third parties. In the event such issues do arise, There is a number of challenges in companies’ efforts to iden- companies that have employed a sound, risk-based ap- tify and manage compliance and integrity-related risks among proach will be better positioned to demonstrate that issues third parties. Leading the list of challenges that companies have occurred despite the existence of a robust compliance face could be to adequately verify information provided by and integrity-related risk program, thus, mitigate the adverse business partners and third parties. Some third parties may implications of the incompliance. submit incorrect information, either accidentally or in some cases intentionally by maintaining an inaccurate set of financial records for public consumption. Analyzing and confirming the information provided by a third party can be time consum- ing, and can be difficult given the large number of third parties that many major companies work with. The active involvement of senior executives is often critical to secure the resources needed for an effective program as well as to set the “tone from the top” by communicating the importance to the company of ethical behavior among both employees and third parties. Conclusion and Recommendations With an increasing focus on the ethical behavior of companies — and their third parties — by enforcement agencies, investors, and the general public it is extremely important to Author`s biography address compliance and integrity risks while doing business Ms. Alena Edisherova is Senior Manager for Fraud Inves- abroad. Working to ensure ethical behavior can be particular- tigation at Financial Advisory of Deloitte & Touche LLC. Ms. ly difficult for multinational companies when it comes to their Edisherova carries more than 6 years of cross-disciplinary experience, having led a number of fraud investigations, cor- third parties in emerging markets such as vendors, business porate intelligence and fraud risk management assignments partners, licensees, contractors, and service providers. Com- for clients in various business sectors, including construction, panies often face significant legal and reputational risks if one telecommunications, steel and coal mining, and more. She of their third parties engages in corrupt activities. also has experience of financial sector regulatory reviews, Companies should consider assessing the compliance and and has conducted numerous FCPA investigations, compli- integrity-related risks presented by all third parties they oper- ance reviews and due diligence assessments for International ate with on a local market, both new third parties and existing investors across the CIS. Furthermore, she has been involved third parties. More in-depth due diligence investigations for in developing recommendations to improve anti-corruption companies on the emerging markets should analyze public and anti-fraud controls. Ms. Alena Edisherova carries Mas- record information, search media coverage, and conduct inter’s Degree in Economics – Financial Management, Plekha- terviews to help determine if there is evidence of ethical con- nov Russian University of Economics; ACCA, Member of the cerns such as conflicts of interest, a record of bankruptcy or Association of Chartered Certified Accountants (ACCA), UK; solvency issues, counterfeiting, use of child labor, product CFE, Member of the Association of Certified Fraud Examiners safety problems, links to organized crime, money laundering, (ACFE), UK; Russian Certified Auditor, Ministry of Finance of or bribery. the Russian Federation.

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Lessons From the Frontline of Ethics and Compliance

Clare Farley Regional Ethics & Compliance Manager, BP Azerbaijan-Georgia-Turkey (AGT) Region

a significant role in creating trust in the minds of BP’s stakeholders. We take care of business to international standards and this means that we expect ethics and compliance to be done to international standards.

Describe a typical day in the life of a Regional Ethics & Compliance Manager? There is no such thing as a typical day in the life of a Re- As BP’s Regional Ethics & Compliance Manager, Clare leads gional Ethics & Compliance Manager. Before I was appointed a team of 12 professionals covering investigation, risk man- to this role, my predecessor summed up what each day would agement and advisory/program activities across the Azer- be like with one word “intense”. I now understand what he baijan-Georgia-Turkey Region. Clare reveals what she has meant. This role is definitely fast paced and no two days are learnt about maintaining, and constantly improving an ethics the same. Often the course of my day is determined by what and compliance program at one of the Region’s leading oil call has come in through BP’s OpenTalk Helpline or what is- and gas companies. sue is being raised by BP employees or from external sources across the Azerbaijan-Georgia-Turkey Region. What are the special challenges of an ethics and compli- My day usually begins early. I start reviewing emails, our in- ance-based role within one of the largest oil & gas com- ternal press review and various ethics and compliance blogs panies in the Region? before breakfast. I believe that it is important to be current and BP has been in Azerbaijan for 25 years since 1992, and it re- up to speed on regional matters and global ethics and compli- mains an ongoing challenge to embed ethics and compliance ance issues. At work, I would then spend time meeting with standards which were new for this market. Having trust is my various team members in Investigations, Risk Manage- precious and fragile. Helping the Azerbaijan-Georgia-Turkey ment and Advisory & Programs, reviewing a series of investi- (AGT) business to be trusted by our stakeholders is impor- gation and assurance reports generated by my staff, together tant, and the AGT Regional Ethics & Compliance Team plays with Regional ethics policies, training programs and various metrics to check our business is on track. Of course, there are multiple meetings and emails each day. Much of our business is by face to face discussion, so moving between meetings where you are dealing with different issues and different stakeholders is the norm. I like to catch up later in the day on emails when there is a bit of quiet time.

What projects are your Ethics & Compliance Team working on these days? In Investigations, we are working on developing local guidance for decision makers to ensure they make consistent, well informed decisions to enforce and uphold our Code. My Risk Management team are working closely with our procurement organization to build an ethics and compliance capability

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caseload to BP’s whistleblowing helpline across Europe, Af- rica, Middle East, Russia & the Caspian. I had finally found “my career home” in Ethics & Compliance at BP.

How did your background—personal and professional— prepare you for your roles? I believe a successful ethics & compliance officer must be able to communicate across the organization, whether in the boardroom or out on a rig/platform or at a terminal. You have to be willing to listen, but know when to pause and when to speak. I have undertaken a lot of pro bono legal work during my career as a lawyer prior to BP, and have come to realize that active listening is critical. I have also been fortunate to work with some very talented people who have acted as my assessment into BP’s sourcing process. We want to work mentors and been willing to share their knowledge and expe- with suppliers who contribute to sustainable development, are rience with me, particularly around impacting and influencing. economically, environmentally, socially and ethically responsible and strive to achieve excellence in assurance of sup- If you weren’t working at BP, what would your dream ca- ply, service and innovation. And last month, we launched an reer be? updated Regional Gifts & Entertainments Procedure which is I would have loved to have been a Formula One driver. I come clearer, simpler and risk-based, to help our employees make from a family of fast-jet pilots so I like controlled speed! the right decisions and obtain the correct approvals for gifts and entertainments. Ethics & Compliance has never been Our guest`s biography busier! Ms. Clare Farley is the Regional Ethics & Compliance Manager of BP’s Azerbaijan-Georgia-Turkey Region. She What skill sets are required to communicate ethics & leads a team of 12 professionals covering investigation, risk compliance messages to such a large and diverse work- management and advisory/program activities. Clare joined BP force, and how do you keep staff engaged on a consis- in 2007 in Group Ethics & Compliance (E&C) as an Open Talk Case Manager, managing a caseload to BP’s whistleblowing tent basis? helpline across Europe, Africa, Middle East, Russia & the We use a variety of tools to communicate our ethics & compli- Caspian. Between 2010 and 2015, Clare was in the Group ance messages. The most important aspect of what we try to E&C Regional Team providing business facing support to do is to keep it short and focused. Employees can become Downstream and Upstream operations and various business/ overwhelmed by lengthy presentations (death by Power functions in the Other Business & Corporate portfolio in Point) or long newsletters. It is important to realize that you BP. She was responsible for developing and maintaining a may only have employees’ attention for a short period of time. sustainable program to build a positive ethics & compliance We have started to use micro-learning (also known as burst culture and in particular, overseeing the implementation of learning) in the AGT Region. We often use short 2 minute hu- controls to prevent bribery, corruption and fraud. In 2015, morous videos or animations to get our employees’ attention Clare was appointed to the role of Group E&C Risk, Program and frame the issue. When you don’t have long, you need to & Training Manager, where she was instrumental in redefining make it count. the Group E&C Remit and Group E&C Training Strategy, leading the assessment of the BP Group E&C Program, What initially influenced you to enter the field of ethics and developing a business unit level ethics and compliance and compliance? assessment process. I started out as a labor lawyer in London, specializing in la- Before joining BP, Clare practiced law in the United Kingdom bor disputes and discrimination cases, advising individuals, as Solicitor specializing in employment/labor relations. Clare companies and public sector organizations for several years has an LLB Law (Hons.) from the University of Bristol UK and before joining BP. In 2007, I was looking for a change but an MA in Medical Ethics & Law from King’s College London still wanted the challenge of case management and using UK. She is registered with the UK Solicitors Regulation Authority. my investigation skills. I joined BP in 2007 in Group Ethics Clare is married and currently on assignment to the Azerbaijan- & Compliance as an Open Talk Case Manager, managing a Georgia-Turkey Region based in Baku, Azerbaijan.

13 in focus

Growing Importance of Business Ethics and Compliance in Azerbaijan and the CIS Region

Elnur Eyvazov of banking, capital markets and financial system and invest- Senior Legal Advisor, ment climate of the country. Consequently, there is a growing Capital Legal Services importance of business ethics and compliance in Azerbaijan and some other CIS countries. Azerbaijani companies especially those which are gradually gaining access to international markets, need to develop a business ethics culture as they have to comply with business ethics standards and legal requirements in various interna- Azerbaijan and many countries in the CIS region have gone tional markets. This will add one more guarantee of their suc- through the various turbulent moments in the process of busi- cess, as many investors, international and modern Azerbaijan ness ethics, corporate governance and compliance standard consumers became more and more sophisticated regarding formation and their subsequent implementations. Unfortu- company reputations. Adherence of Azerbaijani companies nately, in this part of the world there is a tendency that busi- to the best ethics and compliance standards will portray them ness ethics and compliance are not of significant importance from a positive spotlight in the long-run. for many organizations. Furthermore, there is a prevalent A company’s reputation might be damaged so seriously that view that business ethics culture is mostly appropriate in the a company can be driven out of the market by non-adherence West due to the well-functioning legal system and corporate to ethics and compliance standards in the long-run. For ex- ethical values. However, recent banking and financial crises ample, every force majeure event in Baku such a small eco- revealed the flows and deficiencies in the business ethics and nomic downturn or heavy snowfall, reveals that for example, corporate compliance standards even in the Western world. Bank A does not provide reliable service to customers under Finally, another approach is that business ethics can be well such extraordinary circumstances. As a result of its inability to established and implemented in countries with strong reli- provide adequate service to its customers, Bank A’s reputa- gious values. For example, countries with Islamic legal sys- tion suffers and every such event results in a corresponding tem strongly adhere to the principles of ethics and morality increase of customers for their competitor, Bank B. when it comes to various aspects of business activities, fi- Secondly, a company violating ethical principles cannot have nance and transactions. a good governance system. As a result, there might be a lot The main reasons of the growing importance of ethical com- of conflict of interest cases where the managements or em- pliance in the business environment are, on one hand, the ployees of the company act in their best interests or interest increasingly high cost of poor decisions, which has to be paid of the third parties instead of acting in the best interest of the not only by decision makers, but more often than not by so- company overall. Thus, there is a growing importance of busi- ciety at large; on the other hand, because legislation simply ness ethics and compliance in Azerbaijan and the CIS region cannot envision and regulate every aspect of social interac- in order to avoid such unwanted moments. tion. Some undesirable conduct is always left outside of the Thirdly, reputation is very important for potential direct and in- legal framework and must therefore be regulated in an organization or company by norms of ethics, i.e., a code of conduct. The creation and introduction of business ethics codes and compliance standards in Azerbaijan is timely. By all means, it should be done. We have to recognize that this is rather difficult and in some cases simply impossible to fully comply with all ethical norms in theCIS countries. Azerbaijan, likewise some CIS countries, has gone through significant positive transformation by improving its legislative process, judi- cial reforms and fight against corruption. There are a lot of ongoing projects, such as the improvement and reformation

14 Issue 26 in focus

pany. Objectivity and fairness in dealings with others in the work environment are very important concerns. Violation of these principles in the work place leads to conflict of interests or collision of personal and business interests. There are several types of conflict of interests. The most frequent types of these conflicts are the possibility to derive personal gain from relationships with partners, abuse of personal relations in order to influence a decision-making process, working for a competing firm; close personal and family relations with suppliers firms, relations with competitors, etc. Codes are very important for our country, because in many local companies people have no understanding of complexity of ethical dilemmas and possess a very vague notion of their responsibilities or the subtleties of building relations with management, colleagues, suppliers and others. A code is more than a list of rules. Provisions of codes ensure clear understanding of ethical norms, as applied in various situations, direct investors both local and international. For example, the where laws fail to provide unambiguous answers. population of Azerbaijan does not trust banks with their sav- I personally believe that Azerbaijani companies should de- ings, because people remember the epidemic of bankrupt- sign and adapt their own codes of conduct. Global experience cies in the banking sector recently. There are only a few local shows that the very existence of such a document, combined banks that are making efforts to gain credibility. with ethics training programs, ethical behavior reward, incen- Fourthly, violation of ethical norms sooner or later leads to an tive program, and demonstrated management commitment to accident, usually resulting in a toughening of the state regula- principles of business ethics, can prevent many ethical violation. For instance, the recent event in the banking and finan- tions and adhere to good compliance standards. cial sectors both in the western countries and Azerbaijan resulted in a toughening of the state regulation of these sectors. Our guest`s biography A lack of good business ethics and compliance standards Mr. Elnur Eyvazov is a Professor of Business Law and might cause significant obstacles for the company to attract Business Ethics at ADA University Business School. He is also and retain good and trustworthy professionals. Professionals a Director of the Office of Diversity and Equal Opportunities seek to avoid companies with a bad reputation. at ADA University. At the same time, Mr. Eyvazov is a Senior Sixthly, good business ethics helps to increase profits. Ac- Legal Advisor with Capital Legal Services. Professor Elnur cording to estimates based on business and marketing strat- Eyvazov is an expert in business law, investments, business egy research, it is five times cheaper to keep old customers ethics, and finance. than to make new ones. For example, one of the largest Mr. Eyvazov has international professional experience. While Russian telecommunication companies Rosstelecom takes in Oxford, Mr. Eyvazov had his Vocational Scheme Program reasonable efforts to maintain its existing client base. This with Clifford Chance LL.P in London in January 2009. Mr. company notifies its customers in advance of all technical Eyvazov worked as a Legal Adviser for New World Frontiers, problems or preventive measures and indicates a concrete Co., Ltd. in Azerbaijan and he advised the company on issues time when technical issues will be fixed. of civil law, contract law, financial law, banking law, and At last, but not least, in some developing countries, where customs law. He worked in the Legal Department of BP as the state, for a variety of reasons, is not able to provide the a legal advisor where he provided advice, prepared memos, majority of population with a decent standard of living, the reviewed contracts and documentation in connection with the task of instilling and implementing good business ethical BP’s exploration and production/upstream and midstream values and compliance standards must be largely borne by projects in Azerbaijan as well as oil, gas, and energy law business in their own interests. Acting as socially responsible related matters. Professor Eyvazov practiced law and finance corporations, i.e., by creating competitive and well-paid jobs, as a summer associate at JP Morgan & Co, Investment Bank, supporting social programs, giving up super-profits by setting Legal and Compliance in New York. reasonable prices, refraining from polluting the environment, He received LL.B degree from the Law Faculty of Baku State business can, to a certain degree, help ease social tension. University and master degree in International Commercial Dealing with Conflict of Interests Law from the Law Faculty of Cambridge University on a Cambridge. Mr. Eyvazov is also a graduate of Law faculty The ability of an individual to find a common language with of Oxford University where he got MJuris/M.Phil degree in other stakeholders whether colleagues, customers, consul- financial, banking and corporate finance law. Mr. Eyvazov tants, suppliers, advertisement specialists, shareholders, also attended Columbia University School of Law on a governmental officials defines the reputation of that person, Fulbright Fellowship where he obtained MCL degree in Law and, what is more important, can affect the image of a com- and Finance.

15 in focus

Compliance Function as a Pillar of Modern Corporation

programs emphasizing both functions can reduce the inci- Farid Isayev dence of abuse. Director, Head of KPMG’s Law Practice in Azerbaijan Internal Audit’s objective is essentially assurance. The Inter- nal Audit function is designed to monitor and evaluate the company’s internal control environment as to its adequacy, efficiency and effectiveness. Compliance’s objective is predominantly operational. The Compliance function is thereto reasonably ensure that the Conduct and culture have been moving up on the regulatory company is complying with all applicable laws, rules and agenda and should be a prominent feature for the Board and regulations, as well as internal codes of conduct, policies and senior managers at firms across the industry. procedures. Multiple instances of misconduct in retail and wholesale mar- The report of Basel Committee on Banking Supervision spe- kets have left the industry vulnerable to a series of commer- cifically states that the compliance function and the audit cial and regulatory pressures. The industry will need to reca- function should be separate, to ensure that the activities of librate the way that it sets the tone and sets the culture and the compliance function are subject to independent review. the way it measures and rewards people for the way that they The said report also stipulates that compliance risk should deliver against the strategic objectives. be included in the risk assessment methodology of the in- When it comes to conduct and culture, the industry is dealing ternal audit function, and an audit program that covers the with a combination of commercial and regulatory pressures. adequacy and effectiveness of the bank’s compliance func- The commercial pressures include the need to rebuild reputation should be established, including testing of controls com- tion and trust; to establish commercial benefits from taking a mensurate with the perceived level of risk. more customer-centric approach; to respond to growing com- To ensure an effective coordination of activities between petition from challenger banks; and to avoid or minimize the these two functions, it is essential that the two functions le- financial costs of misconduct (criminal actions, fines, reme- verage a common language of risk and control. A common diation and civil actions). methodology for compliance and internal audit leads to an To address this, an integrated approach is being taken by agreement about the definition of risk types and risk thresh- some organizations in implementing a regulatory compliance olds. Additionally, organizations should manage compliance framework through a compliance officer. This involves devel- and internal audit using a common technology solution. The oping and establishing a compliance methodology, policies, use of different technology solutions puts the organization at procedures and a training program. The benefits include: risk of inconsistencies and inefficiencies, and ultimately high- • corporate oversight and guidance for compliance activi- er costs. ties; The two functions may share common grounds, yet argu- • improved efficiencies and effectiveness; ably, it is the reporting where the two diverge. Traditionally, • increased employee awareness of regulatory compli- internal audit function (whether single-person internal audi- ance requirements and issues, and tor or audit committee) enjoyed greater independence in its • the minimization or mitigation of legal, reputational, or operation- and rightly so. To put internal audit function under financial risks. the command of body(ies) or officers, whose work is scruti- Whilst the compliance function plays a second line of defence nized, would defeat the whole purpose of internal audit re- role within corporate governance, it also has a place in the view. Hence, internal audit typically reports to the Supervisory first line of defence for its own activities with ownership, re- Board or directly to shareholder(s). sponsibility and accountability for directly assessing, control- Compliance, by contrast, has not had the privilege of enjoy- ling and mitigating risks. ing greater access to corporations’ supervisory authorities or shareholders, primarily due to the nature of their function. As Compliance vs Internal Audit a matter of common practice, compliance function has long The first thing to be clear about is that they are fundamen- been viewed as part of business processes, as opposed to tally just titles. Compliance and Internal Audit have risen in reviewer of those processes, hence was accountable to ex- prominence in the past few years, both representing critical ecutive body. Another contributing factor was the subjection control components of an organization’s structure. Effective of compliance function to internal audit review, which ensured

16 Issue 26 in focus

the principle of checks and balances. However, calls for The European Securities and Markets Authority (ESMA) in greater independence for compliance function are becoming its guidelines recommends similar, in nature, obligations for more widespread and this can be highlighted as one of the compliance function, albeit designed for investment firms. initiatives for improving corporate governance at companies. However, ESMA’s guidelines put greater emphasis on compliance function’s independence. Thus, guidelines stipulate that Compliance Function Responsibilities investment firms should ensure that the compliance function Compliance function responsibilities vary a great deal, de- holds a position in the organizational structure that ensures pending on the industry and nature of corporation. Yet there that the compliance officer and other compliance staff act in- are numerous directives, guidelines or recommendations, dependently when performing their tasks2. The compliance which outline the core of suggested compliance functions for officer should be appointed and replaced by senior manage- businesses. The Basel Committeeon Banking Supervision, mentor by the supervisory function. Equally important is for though for banks, recommends the following core responsi- investment firms to ensure that the compliance function per- bility areas: forms its tasks and responsibilities on a permanent basis. In- • Advice: The compliance function should advise senior vestment firms should therefore establish adequate arrange- management on compliance laws, rules and standards, ments for ensuring the responsibilities of the compliance including keeping them informed on developments in the officer are fulfilled when the compliance officer is absent, and area. adequate arrangements to ensure that the responsibilities of • Guidance and education: The compliance function the compliance function are performed on an ongoing basis3. should assist senior management in educating staff on These arrangements should be in writing. compliance issues, and acting as a contact point within the bank for compliance queries from staff members. Chief Compliance Officer • Identification, measurement and assessment of compli- Chief Compliance Officers (CCOs) play an important and cru- ance risk: The compliance function should, on a pro- cial role in fostering integrity in their respective organizations. active basis, identify, document andassess the compli- They are responsible for making sure that their firms comply ance risks associated with the bank’s business activities, with the rules that apply to their operations. As part of that ef- including the development of new products and business fort, CCOs typically work with senior corporate leadership to practices, the proposed establishment of new types of instill a culture of compliance, nurture an environment where business or customer relationships, or material changes employees understand the value of honesty and integrity, and in the nature of such relationships. encourage everyone to take compliance issues seriously. • Monitoring, testing and reporting: The compliance func- Quite often CCO is responsible for compliance and ethics. tion should monitor and test compliance by performing- This role is also tasked to build a strong organizational ethics sufficient and representative compliance testing. and compliance program, which is a high priority in any orga- • Statutory responsibilities and liaison: The compliance nization, especially in listed ones. function may have specific statutory responsibilities (e.g. Reputational Risk Management is becoming more and more fulfilling the role of anti-money laundering officer). important. Every compliance or ethics issue may lead to a • Compliance program: The responsibilities of the compli- scandal or a problem with the company’s reputation that may ance function should be carried out under a compliance weaken its brand value. In addition, supervisors, regulators, program that sets out its planned activities (e.g. review internal and external auditors try to ensure that CCO has built of specific policies and procedures, compliance risk as- a good ethics and compliance program, and that he has the sessment, compliance testing)1. necessary qualifications and experience. International Finance Corporation (IFC) in its Advanced Methodology for Financial Institutions breaks downs CCO’s qualifications into 2 groups: personal and professional qualifications. Personal qualifications include: (i) integrity, understanding of duties of loyalty and care, (ii) communication skills and (iii) honesty and ethical behaviour. Professional qualifications, essentially, require good understanding of laws and regulations governing the particular industry; regulations governing companies (and, if the bank is publicly listed, regulations and laws covering public entities) and AML requirements. Nowadays, the need for senior leadership to support CCOs is not just good practice, but also a business necessity. Indeed, a recent U.S. Securities and Exchange Commission (SEC) enforcement case demonstrates that the Commission takes

1. The Report of Basel Committeeon “Banking Supervision on Compliance and thecompliance func- 2. Guidelines on certain aspects of the MiFID compliance function requirements, guideline 7 tion inbanks”, article 7 3. Guidelines on certain aspects of the MiFID compliance function requirements, guideline 6

17 in focus

seriously the importance of firms supporting the work of their all compliance controls are set out in one document; CCOs. In the particular case, the firm’s CEO was found not 6. Most respondents (76%) with a separate and indepen- to have provided the CCO with sufficient guidance, staff, and dent compliance function have this function in all its sub- financial resources, despite the CCO’s pleas for help which sidiaries. In 24% of cases, Legal Department performs a contributed substantially to firm’s compliance failures4. compliance function; 7. The average number of employees in the compliance function is 4.5 times higher in the companies that have been under SEC/DOJ investigation for violating Foreign Corrupt Practices Act than in the companies that have not5.

Global Trends There have been numerous surveys conducted in this sphere. One such recent survey, objective of which was to analyse Compliance Function in Azerbaijan the structure and the area of responsibility of compliance Compliance function is not yet widespread in the corporate functions in large international companies, identified the fol- business culture of Azerbaijan. For two major reasons: (i) it lowing findings: is not yet mandatory by law, (ii) corporations are generally 1. The most common areas of compliance are anti-corrup- lenient towards establishing more advanced corporate gover- tion compliance and compliance with ethical standards nance standards, unless benefits are immediate and tangible. (100%), followed by compliance in safety, health and en- Arguably, financial sector is the frontrunner of acknowledging vironment (91%), antimonopoly compliance (85%), hu- the importance of compliance function and integration of it man rights compliance in the workplace (67%), compli- into its organizational structure. This is, principally, dictated ance in personal and confidential data protection (61%), by regulatory demands to establish internal audit committees compliance with trade sanctions (45%) and compliance or risk management committees6 in certain industries. in marketing products sector (9%); Recent legislative changes aim to promote the idea of having 2. 76% of the respondents stated that they conduct a com- internal audit committee at companies in Azerbaijan, linking pliance risk assessment; whereas 24% of the respon- them to certain thresholds regarding the size and significance dents cited that compliance risks are not singled out in a of company, with compliance function still appearing as a separate risk group and are assessed irregularly; distant idea. Yet global corporate governance trends require 3. According to almost half of the respondents (46%), the faster and voluntary action. Heads of compliance functions report directly to CEO or President. In 27% of cases, they report to either Vice- 5. KPMG’s Global Compliance Survey 2016 president or CFO. In another 27% of cases, the compli- 6. “Corporate governance standards at banks” of the Central Bank of the Republic of Azerbaijan ance function reports to a Head of Department (a third Author’s biography level of subordination); Mr. Farid Isayev is director at KPMG in Azerbaijan, heading 4. 55% of the respondents stated that the compliance func- law practice. His previous work experience includes: tion reports to a supervisory body (the Audit Committee, commodity trader- Glencore Xtrata (London), banking and Compliance Committee, etc.), in 15% of cases - to ex- insurance sector in Azerbaijan and another Big4 firm prior to ecutive bodies (collegial or individual), in 30% of cases joining KPMG. - to both supervisory and executive bodies; Farid’s specialization areas include financial sector, M&As, 5. The majority of the respondents (91%) indicated that PPPs, state privatizations, corporate governance and compliance controls for different business processes are international contracts. set out in different documents, and only in 9% of cases Farid is also acting vice-president at German-Azerbaijani Foreign Chamber of Commerce and head of AmCham’s Travel, Hospitality and Tourism Committee. 4. http://www.sec.gov/litigation/admin/2015/ia-4126.pdf

18 Issue 26

in focus

Ethical Business Practices in Supply Chains

Orkhan Rajabov Gunel Farajova Manager, Senior consultant, Ernst & Young Azerbaijan Ernst & Young Azerbaijan

The Concept of Business Ethics age their families and friends from using products of those companies (Gov.UK., 2013). The concept of business ethics is quite subjective and each As we already mentioned, the concept of ethics and com- company specifies ethical norms in accordance with its be- pliance covers all the aspects of business, including supply liefs, and the assessment of the company’s ethical behavior chains. In next paragraphs of this article, we will attempt to can be based on the products it manufactures, markets and explain business ethics in supply chains context, as supply industry in which it operates and other criteria. chains are one of the important directions of operations to be The term business ethics evolved in the second half of the considered for sustainable and successful business. 20th century in the USA and afterwards was spread to Europe and other countries. The term initially had three areas of the development: ethics-in-business – applying socially accepted We cannot close our eyes to the problems the ethical norms to the companies, improvement of academic world faces. At Unilever we believe that busi- field, and implementation of ethics in businesses, including ness must be part of the solution. But to be so, Corporate Social Responsibility. Moreover, Sustainable Development Goals spearheaded business needs to change. by the UN in 2015 are also based on the ethical values of Unilever CEO, Paul Polman the businesses. For example, Goal 1 – End poverty – can be achieved only if companies understand that everyone has equal rights to economic, financial and all other types of re- Ethics in Supply Chains Nowadays globalization covers every aspect of our lives, es- sources, and try to incorporate projects and innovations that pecially when the talk is about business operations. A com- will provide poor inclusiveness into their strategies (Globeth- pany can produce goods that are assembled in one country, ics, 2015). materials are extracted in another country and the final prod- It could be argued that, the concept of business ethics is just ucts are sold in third countries. another word for sustainability, as the basis of sustainable Therefore, for companies, it is a crucial moment to investigate development it encourages companies to behave ethically to- the entire value chain of their operations to be sure that their wards the environment and the society. For instance, corrupt- business is ethical on all fronts. Because, as a result of raising ed organizations damage not only their reputation, but also the importance of sustainability issues such as human rights, the community in which they operate and economic develop- depleting natural resources, fair remuneration, etc. there is ment of their country of origin. Consequently, companies that growing attention and demand from stakeholders from or- act in irresponsible and unethical way towards the environ- ganizations not only to behave ethically, but also to ensure ment and natural resources put under risk the prosperity of ethical behavior in their supply chains with regard to environ- future generations. Ethical behavior is not only important to mental, social and economic aspects. According to the online the external stakeholders, but also brings advantages to in- survey conducted in 2015, 61% of the Millennials believe that ternal stakeholders by increasing value, reputation and profit “responsible sourcing is gaining more and more visibility in of companies, as it is a rigorous tool for risk management to the USA” (Harbert, 2016). anticipate the financial and reputational losses. Ensuring environmentally friendly practices in supply chains Nowadays, consumers pay more attention not only to the can benefit not only the planet, but also financial indicators of quality of products, but also to the values of companies and companies. For example, choosing suppliers that are located their attitude toward global and local problems. In 2013, De- near to each other or opting for energy efficient transportation partment for Business, Innovation and Skills in the UK, con- alternatives will lead to reduced carbon footprint and trans- ducted a survey asking people about their attitude toward portation costs. companies that pay to their employees less than the minimum Ethics in supply chains will lead to increase in revenue wage defined by the government. Survey results showed that, by 5-20% and in brand value by 15-30%, decrease in sup- 80% of the participants would not use the products and ser- ply chain costs by 9-16% and carbon emissions by 13- vices of such companies and 79% said they would discour- 22% (World Economic Forum, 2015).

20 Issue 26 in focus

Companies worldwide have already been taking some mea- Coalition (EICC) Code of Conduct, Business Social Compli- sures to ensure ethics in their supply chains. For instance, ance Initiative (BSCI) Code of Conduct, the Forest Steward- “John West Tuna” has developed a special application that ship Council, the Marine Stewardship Council, the Leather helps buyers to track the origins of fish in the can (John West, Working Group etc. to ensure ethical operations in supply 2015). Another way to decrease environmental impact of sup- chains of businesses. ply chains is to reduce usage of materials for packaging. For Marks and Spencer ensures that its suppliers pay enough to instance, Walmart was able to save $3.4 billion by reducing employees through the process that includes fair payments packaging materials only by 5% (Wallmart, 2015). to suppliers and implementation of “ethical model factory As supply chains become increasingly complex and global- program” (Beyond Supply Chains, 2015). Brussels garment ized, they are attracting more and more scrutiny from stake- company Mayerline is also concerned about fair wages in its holders, especially from consumers, regulators and business supply chain and in 2013 was able to facilitate the signing of partners. Due to frequently happening human right issues the first Collective Bargaining Agreement in Turkish knitwear such as human trafficking in developing and underdeveloped industry between its suppliers and the Textile, Knitting and countries where big multinationals operate to reduce opera- Clothing Workers’ Union of Turkey, which lead to increased tional costs, an awareness of the human rights risks is con- wages, reduced working hours and provided additional social stantly growing and ‘hard’ and ‘soft’ laws, standards emerge benefits to the workers (Fairwear, 2015). in this area. All these change the way how stakeholders are monitoring and managing their supply chain risks and costs/ losses that might occur due to these risks. Most of the companies, especially multinationals, have codes of conduct that can be based on governmental regulations or international standards. The most popular international guidelines are the UN Global Compact, which consists of 10 core principles such as human rights and anti-corruption, and International Organization for Standardization that has different sets of standards and policies for various industries and aspects. There are also international certifications, such as Partnering Against Corruption Initiative (PACI) of the World Economic Fo- rum, SA8000 of Social Accountability International and Ethi- cal Trading Initiative that have developed several standards on labor practices. Specific certifications are also available in different industries such as Electronic Industry Citizenship What can unethical practices in supply chains lead to? Lumber Liquidators Rana Plaza The largest hardwood-flooring retailer in North America – Collapse of Rana Plaza in Bangladesh, which was hous- Lumber Liquidators – had annual net sales of almost $1 ing to different garment factories, drew attention not only billion and its share prices were being sold at a price more as the biggest tragedy in the country that resulted in more than $51. The company could have continued its prosper- than 800 dead workers, but also due to the revealed cases ous existence if only it had payed enough attention to its of human rights abuses. There were no basic health and suppliers. safety norms, persecution of labor unions, the workers had In 2015, the media revealed that that laminate flooring that minimum wages and had to work additional hours for free came from Chinese suppliers had 20 times more carcino- under the threat of getting reduced salary. gen in its composition than allowed by the law. It was re- Though the responsibility of the tragedy falls on Bangla- ported that extra amount of this substance in flooring could deshi government’s and Rana Plaza owners’ shoulders, have resulted in 6-30 more cases of cancer in every 100 the Western garment companies, such as Benetton, thousand people. Mango and Primark, that utilized factories in this building As a result, Lumber Liquidators’ sales fell by 13.7%, share also bear responsibility for not properly investigating HSE price became less than $13, loss was calculated to be practices of their supplier. Ignorance of ethical compliance $19.8 million and the CEO of the company gave up his in the supply chain lead to exploitation of workers, forced responsibilities. Moreover, the company had to pay $13.1 labor and hundreds of dead people and broken families million fine as it was discovered that its Chinese suppli- (Gomes, 2013). ers had imported wood from Russian forests that are home to Siberian tigers and Amur leopards, which are under the threat of extinction (Harbert, 2016).

21 in focus

However, despite all these standards, there are still cases Therefore, the companies operating in Azerbaijan should also with the abuse of human rights, even in the supply chains take into account ethical behavior of their suppliers in order to of big multinationals dedicated to sustainability such as Col- avoid fines, minimize reputational risks and improve financial gate, Nestle, Unilever etc. According to the report issued by position. Furthermore, if companies want to be competitive in Amnesty International in 2016, these companies have cases the international market, they should regularly assess opera- of exploitation of workers in their supply chains of palm oil, tions of their suppliers in order to become ethical and conse- non-sustainable production that results deforestation and quently attract international consumers and investors. destructution of habitation of rare species (Amnesty Interna- tional, 2016). Conclusion Though there are different standards and guidelines on com- New generation, Millennials, is more concerned about sus- pliance with business ethics in supply chains, they are not tainability practices than any other generation before, as un- binding and not compulasory. However, alongside with hard ethical and irresponsible consumption of natural sources, and law to be adopted, new technologies can also be helpful in increasing amount of human rights issues around the world ensuring sustainability practices in the supply chains. In May make people consider the value chain of the products along- 2017, Microsoft Corp. and the Office of the UN High Commis- side with the quality. Price or brand name is no longer the sioner for Human Rights announced a partnership, the aim of crucial factors influencing purchasing decision of consumers, which will be to develop and implement new technology that and sustainability and ethics are the present and the future will enable UN human rights employees to better forecast, in- of trade and market development that will ensure ethical and vestigate and respond to urgent human rights issues all over compliant economic environment. the world. Rights View is one of the examples of such technology, which is a dashboard that will accumulate external and internal data from countries and types of violations in real References Beyond Supply Chains. Empowering Responsible Value Chains. (2015). World Economic time mode (Microsoft, 2017). Forum. Though there are many developed standards that cover eth- De George, R. T. (n.d.). A History of Business Ethics. Doing Great Things Together. (2015). Retrieved from ics in the supply chain, they are voluntary and businesses can https://www.fairwear.org/living-wage-portal/#!/content/https://www.fairwear.org/living-wage- decide whether to implement them or not. Moreover, it may portal/doing-great-things-together/ Employers Underpaying Workers Risk Losing 80% of Their Business. (2013). Retrieved be hard for a company to choose the best standard that suites from its operations taking into account their high variety. https://www.gov.uk/government/news/employers-underpaying-workers-risk-losing-80-of- their-business In order to guarantee sustainable practices, governments Ethics and Sustainable Development Goals SDGs 2015-2030. (2015). Retrieved from should also put certain requirements on ethics in supply http://www.globethics.net/documents/4289936/18297332/GE_Ethics_SDGs_150825. pdf/55dbaa9c-9906-43be-83f4-313cd7e449ae chains of companies operating in their countries. For in- Gomes, W. (2013). Reason and responsibility: the Rana Plaza Coppalse. stance, according to the UK Modern Slavery Act of 2015, “a Harbert, T. (2016). Ethics and the Supply Chain. Import and Export Operations. (2014). The State Statistical Committee of the Republic of slavery and human rights statement for a financial year” must Azerbaijan. Retrieved from contain information about company’s undertaken actions to http://www.stat.gov.az/xeber/index.php?id=2373 Modern Slavery Act. (2015). Retrieved from ensure absence of human trafficking and slavery in its supply http://www.legislation.gov.uk/ukpga/2015/30/section/54/enacted chain (Modern Slavery Act, 2015). Technology for Human Rights: UN Human Rights Office Announces Landmark Partnership with Microsoft (2017). Microsoft News Center. Retrieved from According to the State Statistical Committee of the Repub- https://news.microsoft.com/2017/05/16/technology-for-human- lic of Azerbaijan, in 2014 the country imported products from rights/#bui7hBcZkZRDaQlp.97 Webb, J. (2016). Amnesty International Slams Colgate, Nestle and Unilever for Palm Oil 137 countries that demonstrates that the supply chain of local Supply Chain Abuses. Retrieved from companies is not limited to the local suppliers. https://www.forbes.com/sites/jwebb/2016/11/30/amnesty-international-slams-colgate-nestle- and-unilever-for-palm-oil-supply-chain-abuses/#112f173c4ea3 Authors` biography Mr. Orkhan Rajabov leads Cleantech and Sustainability Ser- vices in Azerbaijan and specializes in sustainability reporting assurance and advisory. Orkhan holds a Bachelor degree in Accounting and Audit and an MBA in Finance from Azerbaijan State Economic University as well as MSc in Finance from Durham University. Orkhan specializes in sustainability strategic advisory and sustainability reporting assurance and advisory. He is taking an active part in forming the professional sustainability community in Azerbaijan. Ms. Gunel Farajova is a senior consultant at Cleantech and Sustainability services in EY Azerbaijan. She holds Bachelor and Master degree with distinction in European Studies from Azerbaijan University of Languages, and MBA from Univer- sity of Durham. Gunel specializes in waste management / Ex- tended Producer Responsibility and sustainability reporting assurance and advisory.

22 Issue 26 in focus

Transparency and Awareness of Employees Matter

Mekhriban Taghiyeva jobs or from engaging in business activities and puts restric- Head of Legal Affairs and Compliance, tions on gifts: Public officials may not accept gifts worth more Carlsberg Azerbaijan than AZN 55. The Law on Combating Corruption addresses prevention and detection of corruption offenses among public-sector employees. Officials are subject to financial disclo- sure laws; nonetheless, reports are not available to the public, and sanctions for non-compliance not imposed. There are no legal measures to protect public or private employees report- Corruption and bribery are among the most pressing prob- ing corruption. Azerbaijan is a signatory to the Council of Eu- lems of modern society. Fight with it is not only the task of rope Criminal and Civil Law Conventions on Corruption and authorities, but also of business and each citizen, therefore the United Nations Convention against Corruption. big international companies already contribute to this process The Law on Public Procurement requires competitive bidding in Azerbaijan. For example, one of leaders of non-oil sector of and imposes strict formal requirements on sole sourcing. Un- economy Carlsberg Azerbaijan not only demonstrates com- successful bidders can ask for an official review of the bidding pliance with all applicable laws and regulations on bribery and process and can challenge the decision in the courts. corruption, including, but not limited to, the U.S. Foreign Cor- In most international companies, including ours, it is strictly rupt Practices Act (FCPA), the UK Bribery Act 2010 (UKBA), prohibited to provide even modest gifts, hospitality or certain and Anticorruption Law of AR (№508, 2004), but also imple- other things of value to government officials and private indi- ments its own policies and rules. viduals that are legal and directly related to the promotion or We’ve discussed this issue, which is very burning for the demonstration of the company’s services or the performance business in Azerbaijan, with the Carlsberg Azerbaijan’s Head of a particular contract with a government or state-owned or of Legal Affairs and Compliance Ms.Mekhriban Taghiyeva: state-operated entity. I would like to start off by saying of the world-famous Rus- Due to the existing problems in stopping the cases of giving, sian classic Lev Tolstoy: “All happy families are alike; each taking or mediating bribery, international companies, which unhappy family is unhappy in its own way.” Likewise, any business relationships, whether in the public or private sector, are correct only in one way known to mankind - through transparency. However, there are many practices of violating or avoiding rules and regulations, both legislative and ethical ones. The latter is the starting point, giving the way for corruption and bribery. It is not a secret that the cases of corruption in one way or another are observed practically throughout the world, however, much to my regret, the post-Soviet area is very strongly affected by it. Everyone knows that, offering, promising and authorizing the giving of money, or anything else of value, to a government official in order to secure an improper advantage is strictly prohibited. However, often, in practice, we are confronted with different pictures. Even the mere act of offering is prohibited, regardless of whether or not the item of value is actually accept by the intended recipient. Although government has been taking number of steps in order to tackle with corruption and bribery, the situation is still not satisfactory. The Criminal Code of AR criminalizes active and passive bribery, attempted corruption, extortion, bribery of foreign officials, money laundering, trading in influence and abuse of office. The Code prohibits public officials from holding additional

23 are represented in dozens of countries of the world with different levels of corruption and bribery, have to take their own measures to fight these problems or create an internal business environment excluding the possibility of corruption in order to save the profitability of business and maintain their representation in these markets. For this, first of all, full transparency and correctness of conducting business and strict adherence to legislative norms are necessary. On the other hand, it is extremely important to have internal statutory documents, policies, regulations, etc., strictly prohibiting the involvement of the company as a whole, or its individual employees in any agreement intending acts of corruption and bribery. Also, awareness of employees is extremely important. To this end, companies organize trainings, sessions on a regular basis. The practice of mutual control is also very effective. Thus, the availability of an anonymous hotline, provided by a global outsourcer contractor, giving an opportunity to inform in case of notification about the offenses against which no measures are taken, is an extremely successful practice and justifies itself by the example of a number of transnational companies. Internal and external audits are another means to recognize such violations. Our company with representative offices in Western and Eastern Europe, and also Asia, in different markets with ab- solutely different culture and tradition of doing business and office work, certainly may face cases of bribe request. How- ever, our position on this issue is unambiguous: we do not take bribes under any circumstances, and we are not in any way connected with acts of corruption. We, Carlsberg Azer- baijan, part of the Carlsberg Group, have become a tax partner of the Ministry of Taxes of the Republic of Azerbaijan due to full openness and transparency of doing business, we are constantly working with our employees to create a mindset that does not allow involvement in corruptive procedures. Companies, which currently function in less compliant environment, unfortunately, will face the situation, when short term benefits, that they gain thanks to ignoring or evading law, deprive them from building a stable business in a long term perspective, so using above mentioned practices can be an excellent contribution to the development of society as a whole, because fostering a culture of transparent implementation of operations in our employees, we affect a certain part of our society, which undoubtedly plays a role in building a fair civil society.

Author’s biography Ms. Mekhriban Taghiyeva is Head of Legal department at Carlsberg Azerbaijan as of 2015. Before joining to Carlsberg Azerbaijan, she has been Managing Director of “Apriori” Law firm (2011-2015), Director of Legal Department at “Dia Holding” and held other positions in different companies. Ms. Taghiyeva carries degree on Faculty of Law from the Baku State University and Russian Philology from Azerbaijan University of Slavonic Languages. in focus

Essential Elements of a Successful Compliance Program

Ruslan Bayramov (2010). Also ISO 37001:2016 standards on Anti-Bribery Man- Legal Manager, agement Systems, which was drafted in close interaction with Ekvita UK Bribery Act of 2010 is fundamentally based on these five main elements that establish successful compliance program. 1. Leadership Commitment An effective compliance program must be fully endorsed by company leadership that has clear vision on compliance Introduction strategy and can oversee company’s compliance program. In April 2012 U.S. Department of Justice (‘DoJ’) prosecuted Company leadership must demonstrate commitment and in- Morgan Stanley’s former Managing Director Garth Peterson fluence with respect to company’s compliance objectives and in charge of company’s real estate group in Shanghai, China. should provide strong, explicit and visible support for com- He pleaded guilty1 for engaging in a conspiracy to sell an pany’s compliance activities. In companies where there’s a ownership interest in a Shanghai building owned by Morgan governing body, such as, Board of Directors (or Supervisory Stanley to a local government official who had provided as- Board), the compliance program should be overseen and en- sistance to Peterson in securing business for Morgan Stan- forced by the governing body. But in cases where company ley in China. During the conspiracy, Peterson repeatedly and does not have a separate governing body, these activities falsely told Morgan Stanley that the corporation buying the should be carried out by top management (e.g. Director, or ownership interest in the building was owned by the Shang- Executive Board). hai government when, in fact, it was owned by Peterson and, inter alia, the local government official. By lying and providing false information to Morgan Stanley, Peterson was side 2. Risk Assessment stepping the company’s internal standards and controls that Companies should undertake regular risk assessments that were created and intended to prevent FCPA violations. The cover country risks, sector risks, business opportunity risks, DoJ declined to take any actions against Morgan Stanley and business partnership risks, and transactions risks. Risk as- concluded that it had done all that it could by having already sessments are designed to identify the risks that reasonably existing, effective, and continuously improving compliance can tackle company in terms of compliance and allow compa- program. The case of Morgan Stanley ratified the importance nies to analyze, assess and prioritize them prior to engaging of a compliance program once more and that companies can in operations. Risk assessment can also evaluate the suit- shield themselves from enforcement action by establishing a ability and effectiveness of existing controls to mitigate the proper compliance program. So what are the essential ele- assessed compliance risks. ments of a successful compliance program that can shield companies from prosecution? What is enough when it comes 3. Standards and Controls to compliance? In compliance with the best practice companies should adopt proportionate standards and controls to prevent and detect The Five Essential Elements based upon prohibited conduct. These documents should at least include: the Best Practice Code of Conduct that expresses company’s ethical princi- As described in this article there are five fundamental pillars of effective compliance program, which are established by 7 elements of Effective Compliance and Ethics Program under Guidelines Manual (2016) of U.S. Sentencing Commission2, 12 good practices for companies by OECD’s Good Prac- tice Guidance on Internal Controls, Ethics, and Compliance3 (2010), and 6 Adequate Procedures under UK Bribery Act4

1. https://www.justice.gov/opa/pr/former-morgan-stanley-managing-director-pleads-guilty-role- evading-internal-controls-required 2. http://www.ussc.gov/sites/default/files/pdf/guidelines-manual/2016/GLMFull.pdf 3. https://www.oecd.org/daf/anti-bribery/44884389.pdf 4. http://www.legislation.gov.uk/ukpga/2010/23/pdfs/ukpga_20100023_en.pdf

25 in focus

ples, standards and controls, including Anti-Bribery Compli- ance Policy, and necessary procedures to ensure that those policies are implemented, followed and enforced. 4. Training Another important pillar for an effective compliance program is training of employees on laws and regulations, as well as internal policies on prohibited conduct. The effectiveness of such trainings is measured by answering to: 1) Who conducts these trainings? 2) How the trainings are conducted? 3) How often these trainings are conducted? Employees should be trained by a qualified trainer live (in-person) in order to receive immediate feedbacks from employees. Companies should also plan intervals to organize trainings. 5. Oversight The last essential element of the compliance program is Authors` biography monitoring. Once companies establish their standards and Mr. Ruslan Bayramov is Legal Manager at Ekvita. As Com- controls and communicate them to their employees, they still pliance Consultant within BP’s Enterprise Development Pro- gram implemented by Ekvita, he has sucessfully consulted need to oversee the compliance program in order to ensure local companies about establishment of compliance program. that it properly works. It includes monitoring to detect non- Ruslan also acts as legal expert within projects of Establish- compliance facts by establishing whistleblowing procedures, ment of Asset Management System in Azerbaijan Railways, and internal audits that are conducted at planned intervals to funded by the World Bank, and Support for the development provide information whether the compliance program is ef- of the system responsible for control of food safety in Azerbai- fectively implemented and maintained. jan, funded by the EU Commission. In the end, the five elements as described in this article are Ruslan received his bachelor degree in Law from Qafqaz Uni- minimum requirements of successful compliance program versity in 2008 and has more than 7 years of experience in and companies should take additional measures to ensure commercial law. He had worked for several holding compa- continuous improvement their compliance program. nies prior to joining Ekvita.

26 Issue 26 member contribution

The Crisis May be a Catalyst for IT Market Vurgun Hajiyev Chief Technical Officer, “ATL Tech”

a financer, plan properly job needs, involve talented people, be closer to sales and be ready for “business improvement”.

What do the innovations and solutions you suggested as a technological company serve for? Although “ATL Tech” is a young company, it possesses strong enough and fundamental potential. Our method of Nowadays world economy and national economic systems business aproach is totally different thanks to our professional are sensitive to global processes. Integration of national team and modern point of view. Complex projects that we economies into the united world economy manifests itself not conducted successfully and our support to startups comprise only in the inter-company relations, but also in establishment principal source of our development line. The first solution of single industrial platform upon involvement of regularly we appilied at our company was reduction of costs through updated integrated mechanization and automation solutions business optimation. The second important point is balanced for all countries. prioritization of projects and proper planning of all kinds of The principal point in globalization is transfer of industrial resources. economy into the information based economy. At this point the fourth biggest sector of the economy – information To what extent does the crisis condition affect your technologies come to the forefront. Innovations of this field business? and the acquired skills are able to change industrial and We shouldn’t be afraid of grave effects of the crisis. All crises economic fields along with the lifestyle and social life of will come to end soon or later. The crisis may be a catalyst population. for IT market. If we look back on, we can experience that a number of innovations have been produced, which we use at What is the role of information technologies in compe- present. So it is urgent to be open to new startup projects and titiveness of the companies in a crisis conditon? new ideas. In consideration of such conditions of the market, The companies operating in the IT sector scrutinize once more our company offers a number of significant products and the technical innovations, market strategies, their current and services. We are mainly aimed at helping the entrepreneurs future projects in the economic crisis conditions. The main and businessmen to increase efficiency of busienss activity purpose of IT directors at critical period of the company is not and reduce costs. In this regard, from the current examples only to take measures to reduce costs, but also to suggest in our portfolio, I can mention the virtual call center which is strategies and opinions that combine competitiveness and abundant with unique functions we have prepared on cloud productivity after the economic conditions change. The platform, local software that is strong enough to compete with suggestions shall cover mainly innovative solutions, business its global competitors in the management of Human Resource automation and optimation of business processes. and the solutions we have presented for business optimation. What is more, software orders coming from the international To which points do you pay attention in your activity in a markets subject to the requirements of other changing time crisis condition? has already turned to be a priority for us now. Our main power is our awareness, operativeness and analysis Our guest’s biography skills. We focus our technological thinking skills to business Mr. Vurgun Hajiyev is Chief Technical Officer at "ATL Tech". and this increases our sensitivity to results, processes and He carries more than 17 years of ICT business management market reactions during decision-making and management. experience in systems engineering. Mr. Hajiyev holds PhD I think that, the points I mentioned shall be topical and from Azerbaijan National Academy Sciences Institute of interesting for all managers and CIOs: I mean to consider Cybernetics, on Modeling Telecommunication and Networks. alternative solutions, specify priorities, analyze risks, think like He also lectures at Cisco Academy.

27 member contribution

Global “De-Risking” Practice in Financial Markets and its Impact on Azerbaijan

Emil Garayev • Instead of reducing the risk in the global financial sector, Tax & Legal Director it actually contributes to increased vulnerability by push- Deloitte &Touche ing high-risk clients towards smaller financial institutions that may lack adequate AML/CFT capacity • It creates a reputational harm to financial institutions as the banks terminating the correspondent banking as well as money transfer relations are seen as cutting off crucial funds to vulnerable populations According to the Oxford Dictionary “de-risk” is defined as In fact, having effective KYC procedures in place and on- taking steps to make [something] less risky or less likely to going monitoring of counterparties remain the most effective involve a financial loss1. In the context of financial services, way of maintaining strong AML/CFT controls environment. “De-Risking” refers to financial institutions exiting relation- In October 2014, the FATF raised the issue of de-risking at its ships with and closing the accounts of “high risk” counterpar- triannual Plenary Session held in Paris. In the media state- ties. Such a practice, to greater extent, is linked to anti-money ment, it said: laundering (AML) and counter-terrorist financing (CFT), but “De-risking should never be an excuse for a bank to avoid not only. De-risking is a complex issue that goes far beyond implementing a risk-based approach, in line with the FATF than that. Leading financial institutions are especially reluc- standards. The FATF Recommendations only require finan- tant to do business with clients that generate low volumes, but cial institutions to terminate customer relationships, on a pose a higher AML/CFT risk. The situation especially aggra- case-by-case basis, where the money laundering and ter- vated after 2008-2009 financial crisis because of increased rorist financing risks cannot be mitigated. This is fully in line scrutiny on flow of money tied to drug dealers, terror suspects with AML/CFT objectives. What is not in line with the FATF and tax evaders through the banking system. Data from the standards is the wholesale cutting loose of entire classes of Association of Certified Anti-Money Laundering Specialists (ACAMS) shows that in 2012 there was a 131 times surge in fines and monetary settlements paid by banks for AML/CFT and sanctions violations as compared to 2011 - from $26.6 million to $3.5 billion. The World Bank Group’s survey conducted at the request of the G20 in 2015 revealed that the effects of de-risking is unevenly distributed, with some regions being more affected than others. According to the survey, the drivers of the decline in foreign correspondent banking relations can be divided into two groups: the first group includes causes that are more business-related explaining the decision to terminate foreign correspondent banking relations in purely economic terms, and the second group includes causes that are more regulatory and risk related2. De-risking creates problems for the entire financial services industry, some of which are outlined below: • It threatens progress that has been achieved by many international organizations on financial inclusion

1. https://en.oxforddictionaries.com/definition/de-risk 2. http://www.worldbank.org/en/topic/financialmarketintegrity/brief/de-risking-in-the-financial- sector

28 Issue 26 member contribution

A lesson to take –domestic financial institutions urgently need to review and adjust client on-boarding processes and documentation to capture all necessary KYC information, while correctly explaining to the client how that information is used and what purpose it serves. 3. Building proper risk management framework which is based on three lines of defence: i. Business management ii. Independent Control Functions (e.g. compliance departments) iii. Internal audit 4. Continue to invest resources in compliance departments in charge of AML/CFT tasks and also use adequate technological solutions for customer profiling, filtering of transactions, etc. 5. Establishing strong internal audit practice - the third line of defence with subject matter AML/CFT knowledge. Such an internal practice is vital in identifying control gaps and working with respective divisions to remediate them. customer, without taking into account, seriously and compre- No matter how hard they try, domestic banks cannot entirely hensively, their level of risk or risk mitigation measures for in- rule out the risk of the loss of correspondent banking rela- dividual customers within a particular sector. The risk-based tions to be terminated. The government’s role is of no small approach should be the cornerstone of an effective AML/CFT importance, which will be discussed in the next article. To be system, and is essential to properly managing risks.”3 continued. Many Azerbaijani financial institutions are also among those that lost correspondent banking relations with leading western banks during the last five to seven years. Factors driving this tendency include cost/benefit considerations and concerns of western counterparties regarding AML/CFT risks, poor level of communication, lack of investments in building effective AML/CFT framework, inadequate risk appetite of domestic banks. So how should our financial institutions manage the expectations of big market players? One does not need to dig deep to find the answer to this – in first instance it is all about complying with international standards and leading market practices: 1. The Risk-Based Approach (RBA) – this golden rule pre- sumes that financial institutions are expected to identify, assess and understand the money laundering and terrorism financing risks to which they are exposed and take AML/CFT measures commensurate to those risks in order to mitigate Our guest’s biography them effectively. The RBA applies to the way banks allocate Mr. Emil Garayev is Tax & Legal Director at Deloitte &Touche their AML/CFT resources, organise their internal controls and LLC. He carries ten years of experience in advising local and implement policies and procedures to identify and prevent multinational companies on direct, indirect and individual money laundering and terrorism financing risks. tax compliance. Mr. Garayev specialized in provision of tax th 2. Beneficial ownership – In the Report On 4 assessment assistance to clients in the Financial Services Industry and visit of Azerbaijan dated 10 December 2014, MONEYVAL Public sector. He successfully led full-scale implementation criticized local financial institutions for doing business with le- of FATCA requirements for number of leading Azerbaijan gal entities beneficial ownership of which is not fully identified. financial institutions, as well as high number of audit and FATF Recommendation No. 10 requires financial institutions tax due diligence projects and performed a large number to identify the beneficial owner and take reasonable mea- of tax reviews covering corporate income tax, withholding sures to verify the identity of the beneficial owner, such that taxes, payroll taxes, income tax and social contributions. the financial institution is satisfied that it knows who the ben- Emil is specialized in AML and other statutory regulatory eficial owner is. For legal entities and arrangements this ex- compliance. At the same time, he has authored series of tax ercise must also include financial institutions understanding and compliance related articles. Mr. Garayev successfully the ownership and control structure of its potential customer. completed a half year secondment in International Tax team

3. http://www.fatf-gafi.org/documents/news/rba-and-de-risking.html in Deloitte UK-London

AmCham Azerbaijan

The American Chamber of Commerce in Azerbaijan is a About Us private, non-profit business association supporting and promoting the interests of business in Azerbaijan.

Established in 1996, AmCham is composed of over 260 members and asso ciates active in every sector of the Azer baijani economy. We represent 80% of all foreign investment, as well as a significant portion of local investment which allows us to promote American, Azerbaijani and multinational corporations. This includes leading companies in Energy, Banking, ICT, Legislative/ Financial Consulting, Professional Ser vices, Education, Real Estate Develop- ment, Health, Transportation, Travel and Production fields.

An active and positive influence in Azerbaijan, we conduct our mission with integrity and respect for the country, observing all local laws and insisting on the highest ethical standards in all relationships and transactions. Membership To apply Why join? There are two types of affiliation with To apply for affiliation with AmCham, AmCham: Member and Associate. a candidate must submit a written Key member benefit – Member status includes voting application in the form adopted by best networking opportunities in privileges and eligibility for Board and the Board of Directors. Membership Azerbaijan! committee chairmanships in addition applications are available at the to the privileges granted to Associates. AmCham office or on our website at As a member of AmCham, your company For affiliation as a Member, a candidate www.amchamaz.org. The application has access to a vast network of business must be a legal entity, registered and form should be completed and sent to information and contacts in Azerbaijan and doing business in Azerbaijan and be our office with the company registration in the US government, as well as valuable in good standing in the community, as certificate issued by the Ministry of information on US businesses across determined by the Board of Directors. Justice of Azerbaijan. Europe through ECACC (European A legal entity, branch or representative A candidate meeting the objective and Council of American Chambers of office of a legal entity is eligible to subjective requirements for affiliation Commerce) and US Chamber of be affiliated with AmCham as an with AmCham is accepted as either a Commerce. Associate, subject to the Board of Member or Associate upon receiving Directors’ determination of good an affirmative majority vote of the Additional Member Benefits include: standing in the community. Board of Directors and paying the first Associates are eligible to participate in year’s fee for the candidate’s category • Annual Employee Salary Survey various activities; receive our regular of affiliation. • Quarterly Inflation Survey publications, including the Membership To maintain affiliation with AmCham, • AmCham Membership Directory Directory, Annual National Employee Members and Associates must • AmCham Resource Library Salary Survey and Quarterly Inflation continue to meet our eligibility Survey. Associates, however, are not requirements, be in good standing in For more detailed information please entitled to vote or serve on our Board the community, and be current with all visit our website www.amchamaz.org of Directors. financial obligations to AmCham.

31 AmCham Azerbaijan

CEO of PASHA Bank, as AmCham Vice-President. After that, with recognition of importance of labor and social issues for Business Events all the members, Mr. Kerimov introduced the keynote guest Mr. Salim Muslumov. The Minister expressed gratitude to all AmCham members Monthly Members Luncheon and guests. He noted that it is a great beginning and he feels proud of AmCham; and Mr. Muslumov is confident 26 April that relations between Chamber and the Ministry should get intensified. Mr. Muslumov highly appreciated the active participation of the Chamber in the process of economic development in Azerbaijan, emphasized that the Ministry attaches great importance to the cooperation with AmCham and strengthening of social-economic dialogue with the private sector in relevant business areas: “Successful reforms carried out by the President of Azerbaijan Mr. Ilham Aliyev for minimization of the effects of serious difficulties arising from political, social and economic cataclysms on a global scale on Azerbaijan and ensuring sustainable development of national economy, at the same time further strengthening measures to support entrepreneurship. Fortunately, in return, the role of the private sector in the economy has increased and more

This luncheon was organized in partnership with Kapital Bank, which featured speech of the honorable guest - Mr. Salim Muslumov, Minister of Labor and Social Protection of Population of the Republic of Azerbaijan. Mrs. Natavan Mammadova, AmCham Azerbaijan Executive Director, welcomed guests and congratulated all participants with the National Entrepreneurs’ Day celebrated on April 25th in Azerbaijan, which was proclaimed in accordance with the Order of President Ilham Aliyev and wished all participants new achievements and prosperity. Afterwards, representatives of “UPS-AZ” LLC and Universe Azerbaijan delivered company presentations. Mr. Nuran than 40% new jobs in private sector have been created in the Kerimov, President of AmCham Azerbaijan, welcomed the first quarter of the current year”. Mr. Muslumov stated that the audience and shared the appointment of Mr. Taleh Kazimov, labor market is one of the areas mostly affected by the global economic crisis. Minister expressed his concern regarding the gender disparity where the number of boys is significantly great than girls and a challenge to provide the employment opportunity for all the boys coming back from military service. He also stressed out part of Strategic Road Map for Labor Market, which is target to create 450.000 new jobs in next 10 years. Mr. Muslumov also noted that the relevant people at the Ministry have familiarized themselves with the White Paper published by AmCham and aware of all gaps in Labor market and legislation which concern the businesses. He thanked AmCham members for raising the issues and assured that all proposals will be considered and included in legislation concerning social security, labor cost and improvement of labor legislation. He informed the audience that the Ministry is discussing problems highlighted in White Paper regarding the work hours, offshore workers, social security and termination

32 Issue 26 AmCham Azerbaijan

of employment with protected employee’s and requested participants to share their proposals and thoughts. The Minister also briefed on the work carried out within the framework of the self-employment program by the Ministry according to the Order of the President of Azerbaijan Mr. Ilham Aliyev dated April 7, 2016. Mr. Salim Muslumov emphasizing the social and economic importance of this issue; thus, nearly 400 new family farms have already been created in the country at the expense of the assets given within the program and the process is on-going. Also Minister said that the Ministry proposed to institute CSR Presidential Award for private sector which will have several nominations and asked AmCham for further cooperation. Furthermore, the Minister gave detailed information about the reform measures in pension system, the changes made to Law of the Republic of Azerbaijan “On labor pensions”, their essence and goals, the work done in the field of social partnership, the activities of the Tripartite Commission for Social and Economic Affairs, etc. Then Minister tasked Mr. Idris Isayev to establish Working Group of AmCham HR specialists which will directly work with the Ministry to build up all issues in labor legislation. Hotel Baku delivered information on portfolio and the activity Speech of the Minister was followed by extensive Q&A directions. session covering issues including application of the new Afterwards, Mr. Movlan Pashayev, Country Managing Partner unemployment insurance system, increasing the knowledge of PwC Azerbaijan introduced Ms. Olga Grygier, PwC leader and skill levels of the workforce, elimination of illegal in Central and Eastern Europe who delivered the speech employment, the social responsibility of business structures, about the global economic situation in Europe and Azerbaijan. etc. Mr. Nuran Kerimov, President of AmCham Azerbaijan, welcomed the audience and introduced the keynote guest Mr. Azad Rahimov. The Minister welcomed and expressed 29 March gratitude to all AmCham members and guests. Then he shared information about the upcoming sport events in Azerbaijan: the 4th Islamic Solidarity Games (May 12-22) and 2017 Formula 1 Azerbaijan Grand Prix (June 23-25). He emphasized that the 4th Islamic Solidarity Games will feature the participation of more than 5,000 athletes in 20 sports disciplines, and 16 sporting arenas are ready for hosting the competitions. The Minister stressed upon that the Athletes Village, which meets all the international standards, is also ready to receive athletes. “I am convinced that we will witness a grand sporting event,” Mr. Rahimov said. “Azerbaijan, as a country that has held a number of significant international sporting events, such as the 1st European Games and Formula 1 at the highest level, will also demonstrate the top level of professionalism during hosting the 4th Islamic Solidarity Games”– stated the Minister. Mr. Rahimov noted that with over 50 participating countries from across four continents, this is a fantastic opportunity AmCham Azerbaijan organized monthly members` luncheon, for the people of Azerbaijan to become a part of a major supported by PwC Azerbaijan featuring participation and international sporting event. Finally, he mentioned that speech by Mr. Azad Rahimov, Minister of Youth and Sports of Azerbaijan will host the European Trampoline Championships the Republic of Azerbaijan. in 2018 as decided by the Executive Committee of the Ms. Natavan Mammadova, AmCham Azerbaijan Executive European Union of Gymnastics. Director, welcomed guests and updated all about the last and At the end, Mr. Rahimov thanked to AmCham members and upcoming events, also announced new Tax & Customs as guests and stated his willingness for the further cooperation well as Travel, Hospitality & Tourism committees’ chairmen. with the Chamber. Afterwards, representatives of Paramed and Winter Park

33 AmCham Azerbaijan

Committee Highlights Legal & Compliance WG Meeting creates additional and unreasonable burden for employers. Company representatives shared their experience about protected employees, which commit serious violation and deliberately abuse rights, with some real negative examples they faced. Mr. Mehti claimed that this problem can be solved by limiting behaviors of protected employees – employment agreements should be terminable if they act with gross violations. Mr. Abulfat Maharramov referred to the Ruling of Constitutional Court on Protection of Labor Rights of Certain Category Citizens and mentioned that according to this Ruling it is not illegal to keep certain employees under protection. The Chairman said that he agrees with the attitude of Constitutional Court – it is important to protect certain circle of employees, but it is also vital to limit their behaviors in order to prevent the cases of abuse. A participant noted that this problem makes troubles for foreign investors and business owners, too, so they do hesitate to enter market in Azerbaijan sometimes, because of the difficulties like this. AmCham Legal and Compliance Working Group hosted Furthermore, migration issue was also discussed at the meeting on May 2. Mr. Ilgar Mehti, Chairman of Legal and meeting. It was noted that there is a contradiction between Compliance Working Group outlined the context of the legislative acts regarding employment agreement of foreign meeting and its agenda. HR Committee representatives employees, as Migration Code requires them to conclude an also joined the meeting in order to discuss the current status employment agreement in Azerbaijan, while Labor Code lets and implementation of the AmCham White Paper 2016 them work here on the grounds of employment agreement recommendations. Mr. Ilgar Mehti introduced Mr. Yalchin concluded in their country. And problems in electron system Muslumov, Advisor to the Minister of Labor and Social related to temporary residence permit were also mentioned Protection of Population of the Republic of Azerbaijan and – a participant informed that a temporary residence permit, Mr. Abulfat Maharramov, Deputy Director at the Department which is usually issued in 20 workdays, is required to register of Labor Policy of the Ministry. an employment agreement electronically and because of this, The first issue raised by the Chairman was about the vacation its authorization takes a while. The Chairman suggested to entitlements of employees working offshore in oil and gas insert work permit data instead, to overcome the problem. industry, which was already mentioned in White Paper 2016. At the end of the meeting Mr. Ilgar Mehti thanked Vacation issues often go into trouble as employees want to representatives of the Ministry and other participants for a spend it in their working time, while employers mostly tend to productive meeting. grant it in rest time, which lasts for 14 or 28 days for offshore workers. Mr. Abulfat Maharramov approached to the problem in a way that is already defined in Labor Code. He mentioned CSR Committee Meeting On May 23, AmCham CSR Committee hosted its regular that, regardless of the working regime and industry that meeting. Committee Chair, Ms. Aynura Piriyeva introduced employees work in, and without being discriminated, all Ms. Konul Babayeva Mejnun, Marketing Leading Specialist/ employees should be entitled with an annual leave. Both PR at AccessBank, who delivered presentation on “CSR the Chairman and a participant in the meeting noted that activity of AccessBank”. It included financial education, green it is acceptable to work without a vacation for offshore office, caring mother, etc. Later, Mr. Natig Hajiyev, President workers in international oil and gas industry and there are of ADA University Foundation made an announcement about big examples like UK and US, which apply it. In response to Day of Citizenship and Social Responsibility (26 May), to this, the deputy director said that, Azerbaijan ratified Holidays be held at ADA University, which will demonstrate student with Pay Convention of International Labor Organization social responsibility and innovation projects, as well as and according to this act, it is not acceptable to discriminate announcement of winners. employees according to the industry or field they work in – so, Furthermore, Ms. Piriyeva introduced Ms. Sona Abbasova, vacation leave should be provided to offshore workers, too. It Corporate Communications Director at PASHA Bank, who would breach rights of employees not to do so. delivered presentation on “How to plan CSR Strategy, The second problem raised at the meeting was about example of PASHA Bank”. Ms. Abbasova informed about termination of employment agreement with protected the vision and mission, sustainability priorities and positions employees. The Chairman and some participants from of PASHA Bank. Afterwards, she told that PASHA Bank is auditorium claimed that article 79 of Labor Code sometimes

34 Issue 26 AmCham Azerbaijan

delivered presentation on “Work Life Balance”. Furthermore, Ms. Mehriban Nazarova from the Ministry of Education made a presentation about SABAH project and Career Development Fair, which is held with support of AmCham. The Career Development Fair will give opportunities for the companies to meet senior students from 45 faculties and to offer non-paid and paid internship positions, job vacancies, etc. The committee meeting was concluded by Ms. Fidan Farzaliyeva, who gave information about AmCham Luncheon featuring Mr. Salim Muslumov speech about potential changes in labor legislation. Based on the suggestion from Ms. Farzaliyeva during the Luncheon the Minister tasked Mr. Idris Isayev, Deputy Minister of Labor to establish Working committed to achieving sustainable growth by shifting from Group of AmCham HR specialists which will directly work with a classical CSR approach to a CSE (Corporate Stakeholder the Ministry in support of solving the issues in labor legislation Engagement) model. area. The next presentation was delivered by Ms. Kamala Ismayilova, Project Manager at WoWoman – Women empowerment platform – on WoWoman as an example of Social Entrepreneurship. Ms. Ismayilova told about WoWoman’s mission and how to empower the women around the world to dream, dare, connect and grow. HR Committee Meeting • On May 26, AmCham HR Committee hosted its regular meeting. The HR Committee Chair Ms. Leyla Novruzova outlined the context of the meeting and its agenda. Then Ms. Novruzova gave the floor to Mr. Jamal Shahverdiyev, Managing Director of CBSolutions, who delivered presentation on “Coaching for developing talents”. He talked about goals and methodology, benefits for the company and how coaching works, and showed examples of projects. The next presentation was delivered by Mr. THT Committee Meeting • On May 25, 2017 AmCham THT Committee hosted Mikhail Zelenov from SAP Azerbaijan and it was about its regular meeting. Mr. Tom Butcher, Head of Venue Delivery Modern Platform for Today’s HR Demands: importance of and Facility Management of Paddock area of F1 Grand Prix of HR transformation process, cloud based platform “Success Azerbaijan welcomed everybody and briefly made induction Factors” and showed two interesting videos. Finally, Ms. about the venue. Mr. Farid Isayev, Chairman of the THT Novruzova introduced Ms. Gemma Slater, assignee spouse, Committee, opened the meeting and gave the floor to the who delivered presentation on Accompanying Spouses guest speaker for the event - Mr. Rauf Pashayev, Deputy Head on International Assignments: sharing personal study & of Tourism Department, Ministry of Culture and Tourism of the experiences. Republic of Azerbaijan. He gave information about tourism statistics during last years, brief information about decree of • On April 28 AmCham HR Committee hosted its the President of the Republic of Azerbaijan H.E. Ilham Aliyev regular meeting. The Committee Chair Ms. Leyla Novruzova of September 1, 2016 on Additional Tourism Development outlined the context of the meeting and its agenda. Measures in Azerbaijan, about tourism council and lack of Then Ms. Novruzova gave the floor to Mr. Husein Aliyev, specialists in different spheres especially in aviation. Then Counsellor to the Minister of Education and Mr. Teymur he noted about Road Map on tourism, importance and Taghiyev, Research Consultant and Project Lead, who directions of this document. Also, Mr. Pashayev talked about delivered presentation on “2017 Graduate Recruitment construction of sun and beach in our seashore regions, three Survey”. They informed about the purpose of the survey and types of markets and difficulties in tourism business. planned approaches, which aims to build bridge between the Later, Ms. Jamilya Talibzadeh made an announcement: Ministry of Education, students and business society. The National Tourism Promotion Bureau offers a unique The next presentation was made by Ms. Chinara Aliyeva from chance to enter tourism market of Russia and CIS countries. WoWoman. She presented “HR Academy” which is one of the An online B2B platform will introduce your product to more initiatives of the organization, as well as about other projects, than 500 tour operators in Russia and CIS countries. Travel plans and vision. Later, Ms. Leyla Novruzova introduced Mr. agencies, hotels and airlines based in Azerbaijan will have Rashad Baghirov from PSG Management Systems, who an opportunity to hold a webinar during which they will teach

35 AmCham Azerbaijan

to ensure more effective use of Azerbaijani section of the Caspian Sea for improving tourism industry. Also Mr. Isayev told about non-oil exporters’ conference in Yevlakh, which President Aliyev has chaired. President said that we must see tourism as an export sector. We’ll earn billions of currency from development of tourism. He noted that according to the calculations of Davos World Economic Forum, the country where tourism is quickly developing is Azerbaijan. “Therefore, new hotels should be built in Baku. This will be an effective business”. Chairman noted about shopping festival in Baku which brought profit in many ways to Azerbaijan. Joint ICT and BFI Committees’ Meeting On June 8, 2017 the Joint Meeting of Information and Communication Technologies (ICT) and Banking, Finance hundreds of potential partners how to sell their products. and Insurance (BFI) Committees took place. Moreover, the information about your company and product AmCham BFI Committee Deputy Chairman Mr. Teymur will be emailed to 100 thousand addresses. Akhundov and ICT Committee Chairperson Ms. Kamilla Then, Mr.Turab Teymurov from BCC informed that on May 30, Shahbazov opened the meeting and introduced the Meeting memorandum of understanding of cooperation between Baku guest speaker – Mr. Josep Curto, Data Scientist, Entrepreneur City Circuit Operations Company (BCC) and the Alliance for and Professor at IE Business School and Universitat Oberta Advancement of Tourism and Cuisine (AATC), as part of the de Catalunya. He delivered a presentation on “Disruption in “Positive Impact of the Formula 1 Azerbaijan Grand Prix on the banking industry through Big Data Analytics.” Professor Tourism Development” project, will be signed. It states that Curto spoke about how companies in the banking sector each participating company will offer special discounts to around the world make use of decision trees, random forests, 2017 Formula 1 Azerbaijan Grand Prix ticketholders via the clustering, text analytics, data lakes, neural networks, link signing of a bilateral contract with AATC. The main purpose analysis and survival analysis to reshape them. of this project is to help the private sector develop further by creating effective financial opportunities for local businesses, including small and medium-sized enterprises. The discount ICT Committee Meeting On April 25, AmCham ICT Committee hosted its regular campaign will start on June 1st and will last until July 15th, meeting. Committee Deputy Chair, Ms. Kamilla Shahbazov, 2017. BCC will provide participating companies with special outlined the context of the meeting. Then she passed the floor discount stickers to be placed at their entrances. The meeting to Mr. Agharahim Poladov, Marketing Manager in STEP IT was followed by a quick tour around Paddock Area led by Mr Academy. He presented about “Commitment to Azerbaijan, Tom Butcher, where guests were informed about the insights plans and strategy to grow high demanded IT specialists”, how a F1 event is organised. which covered information about strategy, courses junior academy and summer camp of STEP IT Academy. • On April 28, AmCham THT Committee hosted its Later, Ms. Shahbazov delivered results of last AmCham Board regular meeting. Chairman Mr. Farid Isayev, introduced newly elections and introduced Ms. Shebnem Mammadova, Head appointed Deputy Chairman – Mr. Husseyn Atakishiyev and of department for e-governance Development in the Ministry announced the agenda of the meeting. of Transport, Communications and High Technology. She Then, Mr. Isayev gave the floor to guest speakers – representatives of National Bureau of Tourism Promotion: Director Mr. Fuad Nagiyev, marketing specialists Ms.Jamilya Talibzadeh and Mr.Kanan Gasimov. They delivered presentation on future plans and activities of the “National Bureau of Tourism Promotion”. Also Ms. Talibzadeh and Mr. Gasimov answered to members’ questions and encouraged members to submit proposals in tourism sphere. Committee members provided proposals about tourism phone applications, tourism channel in hotels, updates on social life in town, training for customer services, problems with taxi drivers, regulation taxi service in the airport, develop tourism in regions, children tourism, etc. Mr.Farid Isayev briefed members about an executive order signed by HE Ilham Aliyev approving an action plan on development of beach tourism for 2017-2020. The order aims

36 Issue 26 AmCham Azerbaijan

presented about ministry activity directions, aims and mission, and improvements in Doing Business report and asked all functions of Department for e-governance development, members to share their proposals about the law projects. government cloud, High Technologies Park, e-Government He touched upon the topic of the draft law “On amendments in Azerbaijan, Strategic ROAD MAP on Telecommunications to the Labor Code of the Republic of Azerbaijan” which has and high technologies, etc. passed the first reading in Milli Majlis. As stated in the draft At the end, Shahbazov gave information about plans of ICT law, employment contract will remain in two types: fixed-term conference in October and asked members to share their and termless. Previously, fixed-term employment contracts ideas and feedback. Also, she talked about future Trade could be signed for maximum 5 years, while according to the Mission in the USA. draft law this limitation will be removed and duration of this type of contracts will be defined based on mutual agreement HMI Committee Meeting of the parties. • On May 24, AmCham HMI Committee hosted its In accordance with the proposed amendments, guarantees regular meeting. The HMI Committee Chair Ms. Lala Bilandarli upon termination of employment contract will be changed. invited Ms. Sevinj Hudaverdiyeva and Mr. Azer Huseynli, who Terminating an employment contract due to cutback of delivered the presentation on activities of Azecolab electrical personnel, employer will have to consider the experience of service and performance inspection of medical equipment. an employee. If an employee has less than 1 year experience, Ms. Hudaverdiyeva gave information about the company, the notification regarding the termination of employment agreement should be sent to employee at least 2 weeks in advance, employees having an experience between 1 and 5 years should be notified 4 weeks in advance, employees having an experience between 5 and 10 years should be notified 6 weeks in advance, while employees having experience more than 10 years should be notified about the termination of the employment agreement at least nine weeks in advance. In line with the draft law, in cases of termination of employment contract due to liquidation of enterprise and cutback of personnel, employer will pay dismissal benefit adequate to work experience of employee: Experience to 1 year — in amount of the average monthly salary; from 1 to 5 years — at least in amount of 1.4 times services provided and their clients. Then Mr. Huseynli talked of the average monthly salary; from 5 to 10 years — at least about equipment calibration and testing related services, in amount of 1.7 times of the average monthly salary; more risk-based biomedical equipment management program and than 10 years — at least in amount of 2 times of the average showed video about sudden cardiac arrest. monthly salary. Mr.Isayev also noted about working groups that were • On April 19, AmCham Healthcare & Medical created between Government and business community as a Insurance Committee hosted its regular meeting. The HMI possibility to amend or comment to the laws before they are Committee Chairperson, Ms. Lala Bilandarli, invited Mr. adopted. He informed that international practice of more than Nabil Seyidov, PhD, Head of Health Policy and Reforms dozen states were researched before the current draft and Department, Center of Public Health and Reforms, Ministry added that most of the world countries have social payments of Health. He presented on “Public Health in Azerbaijan” burden split equally between entrepreneur and employees. topic and gave information about the Center of Public But today in Azerbaijan more than 60% of registered Health and Reformation (creation, main purposes, strategic employees earn less than 300 manats which is economically and methodical documents, training and communication unrealistic. Consequently, to cure this situation new formulas methods). Then Mr. Nabiyev shared social projects organized were implemented in new drafts. by Center of Public Health and Reformation (more at www. During the meeting a problem about termination of employment isim.az). agreement with protected employees was raised. The Chairman and some participants from auditorium claimed that Tax & Customs Committee Meeting article 79 of Labor Code sometimes creates additional and • AmCham Tax and Customs Committee meeting unreasonable burden for employers. Mr. Abulfat Maharramov hosted its regular meeting on June 1. Ms. Arzu Hajiyeva, referred to the Ruling of Constitutional Court on Protection Chairman of the committee introduced guest speakers Mr. of Labor Rights of Certain Category Citizens and mentioned Idris Isayev, Deputy Minister and Mr. Abulfat Maharramov, that according to this Ruling it is not illegal to keep certain Deputy Director at the Department of Labour Policy of the employees under protection. Ministry. Mr. Idris Isayev gave information about new changes in • On April 13, AmCham Tax and Customs Committee legislation on labour, social insurance, Azerbaijan’s position was organized. Mr. Nuran Kerimov, President of AmCham,

37 AmCham Azerbaijan

adjustment issues in bilateral treaties. Another question was on application of deemed profitability of 20% under 4th and 5th TP methods that could be rejected by tax authorities of other states as deemed profitability is not determined based on comparability analysis which is the core principle of TP. Mr. Fatizada said that for very specific cases where the deemed profitability could be applied, Ministry of Taxes would follow TP regulations as envisaged with respect to deemed profitability. However, Mr. Fatizada emphasized that the purposes of the taxpayers and the tax office is to conduct TP study and determine comparable transaction to complete TP study based on comparability analysis and referring to deemed profitability only in very extreme cases where no comparable transaction could be located. Next, the question was about order 55 and conditional introduced new Committee Chairs, Ms. Arzu Hajiyeva and profitableness of 20% and issues of it implementation. Mr. Deputy Chairman Mr. Jeyhun Mammadov. Guest speakers Zaur Fatizada clarified that using this provision is the last were Mr. Zaur Fatizada, General Director of the Department resort if none of methods could be implemented which is for International Cooperation and Tax Monitoring in Financial nearly impossible. As a follow up, the use of TP databases Institutions and Mr. Ulvi Yusifov, Director of International and whether taxpayer should use the same base that used Cooperation Department within Department for International MoT to avoid misunderstanding in TP was asked. Mr. Cooperation and Tax Monitoring in Financial Institutions of the Fatizada stated that in this case taxpayer will use the same Ministry of Taxes. Mr.Zaur Fatizada made a short statement database as MoT and added that the Ministry will use desk on behalf of Minister of Taxes and thanked the committee audits for checking TP. for invitation. Meanwhile he noted the importance of the A question on databases for transactions where local party is new tax trends and expressed his believe in future for open being tested was raised. Specifically, the question concerned discussions and possible amendments to the transfer pricing the possibility to look into the neighboring markets for testing legislation. local party of the transactions. Mr. Zaur Fatizada responded The meeting was rich with questions-answers. The first that neighboring markets should not be used as comparable raised issue was about collision in the tax code between for the purposes of testing local party pf the transactions. He transfer pricing articles and market price notion. Furthermore, also emphasized that at this point no public information is threshold of the transfer pricing documentation was raised, as available at the local market and the MoT will keep taxpayers 500.000 limit on transactions, whether it is a price written on updated on any changes with this fact. contract between parties or not. Mr. Fatizada replied that the During the meeting Mr. Nuran Kerimov asked about future Ministry probably will take the position to consider the limit for plans and training of Transfer Pricing. Mr. Fatizada gave threshold, as the transfer price detected by the parties rather information about certain training which were conducted than the contract price. internally and almost 50 tax officers are taking part in that Then, the question related to collision between articles training program, meanwhile MoT is about to start TP twinning 1.2 and article 7.5 in transfer pricing guidelines, whereas with the EU and started cooperation with developed countries 500.000 threshold could be violated by tax authorities and that have improved TP legislation. implemented on transactions less than that fix amount. In Next issue was about black list of offshore countries and this regard our guest replied as if no collision exist between its confirmation, to what MoT replied that this list is under those articles and its 7.2 article only considers the possibility discussion in the government. of implementing transfer pricing methods in field audit due to Also, comparison of transactions between unrelated parties taxpayers’ fraudulent transactions. and the use of external/internal transactions were asked. Mr. Furthermore, question regarding the transfer pricing methods Ulvi Yusifov replied that in that case parties should look for 4 and 5 and the issues of filling the TP reference as asked. internal comparable, and if not found for external between Mr. Fatizada replied that certain lines in reference could be independent sides. skipped related to prices if method number 5 was selected Another question was about service providence from and also clarified that decision number 55 (20%) mentioned headquarters to its affiliate and whether TP will be used in in the guidelines is not applied to the groups global turnover. this case, to what Mr. Fatizada replied that cost allocation in Later, the question was raised regarding the sequence of frames of services would be the topic of TP studies. methods implementation in Azerbaijan and other countries. The last question was about PSA agreements and application If there is different preference of methods in other states, of TP to subcontractors. Mr. Fatizada replied that those PSA would that be acknowledged by tax authorities or they would that are exempted by law will not be a subject of TP. be asked to use Cup Method. In this regard Ministry officials Ms. Arzu Hajiyeva thanked everybody for productive replied that national law prevails and taxpayers should discussion and expressed gratitude to Mr. Zaur Fatizada and prove his choice of different method, without infringing post Mr. Ulvi Yusifov for accepting invitation.

38 Issue 26 AmCham Azerbaijan

Events and Seminars

Career Development Fair, 2017 The Career Development Fair was held on June 9 with the joint organization of the SABAH Group and AmCham in Azer- baijan with participation of over 31 companies. The purpose of the fair is to direct the attention of existing employers in the current academic year to graduates of the SABAH Groups, as well as to create an opportunity for direct meetings and familiarity of graduates with representatives of companies. Ms. Leyla Novruzova, Human resources Vice President in BP Azerbaijan and AmCham Human Resources Committee Chair opened the Fair by welcoming everybody, expressed gratitude to companies for participation and wished good luck

sional training. Mr.Gurbanov talked about determining professional improvement directions of first alumnus of SABAH Groups and implemented works in order to support students in this way. The Deputy Minister expressed his confidence that the SABAH Group graduates of the university will play an important role in the development of our country and wished them good luck. The students participating in the job fair and studying in 38 specialties had the opportunity to get acquainted with internship programs and vacancies, as well as to provide their CVs directly to companies. It should be noted that the SABAH groups was created on initiative of the Ministry of Education in 2014-2015 academic year in 34 specialties and in 7 higher educational institutions; and it is one of the leading projects that provide students with more attractive opportunities for study and development. Currently, operating in 11 higher educational institutions, the SABAH Groups cover 46 specialties and more than 2300 stu- to students. The Executive Director of AmCham in Azerbaijan dents. The number of the first graduates of SABAH Groups in Ms. Natavan Mammadova thanked to Mr. Firudin Gurbanov, 2016-2017 academic year is 722 people. Deputy Minister of Education of the Republic of Azerbaijan for highly effective cooperation between the Ministry of Edu- cation and AmCham. Noting the importance of the permanent partnership between the education system and private sector, that is, employers, she expressed confidence that SABAH Groups will make a huge contribution to the country labor market. Finally, Ms. Mammadova thanked to all the companies who took part in the Career Development Fair and wished success to the students expressing the hope that a large number of students will be provided with work in the leading companies of the country as a result of the fair. Then Deputy Minister of Education Mr. Firudin Gurbanov made a speech, saying that this fair creates various opportunities for students and graduates of SABAH Groups project created for implementation of the “National Strategy for the development of education in the Republic of Azerbaijan” and about the role of the project in providing personnel profes-

39 AmCham Azerbaijan

and Public Administration and as the President of Preparing Global Leaders Forum a leadership training program for rising leaders from over 100 countries. CSR Implementing Partners Night On April 5, Amcham Azerbaijan organized the first ever in Azerbaijan CSR Implementing Partners Night, where business circles and non-profit organizations came together. One of the main purposes of the event was to create platform for businesses and non-profits to discuss opportunities

HR Specialist Program April Session On April 21, AmCham Members’ HR teams participated at HR Specialist Program session delivered by Halima Gamar- linskaya, Nar Mobile. The subject of the session was Work- Life Balance, for improving healthy balance between personal and professional life. Halima Gamarlinskaya has experience of 17 years of working with mental health and psychological problems as a psy- chiatrist, as well as a consulting physician in government and private clinics. She carries more than 10 years of experience in conducting training in different companies and recognized as a leading expert in the field “Stress management” in Azer- baijan. for implementation of various CSR related projects and be “partners-in-mission” in a time of crises – budget cut. Another goal of this event was discussion of various joint projects to Seminar on “Creative Thinking in Turbulent synergy efforts for the future development of the country. Economic Times” by Dr. Sam Potolicchio Natavan Mammadova, Executive Director of AmCham Azer- baijan, noted that this event is a great platform for businesses On April 18, AmCham Azerbaijan members had a chance to attend the Seminar on “Creative Thinking in Turbulent Eco- nomic Times”, by Dr. Sam Potolicchio. The event was held under the initiative of AmCham CSR Committee. Dr. Sam Potolicchio is Director of Global and Custom Educa- tion at the McCourt School of Public Policy at Georgetown University. Potolicchio was named one of “America’s Best Professors” by the Princeton Review, the only one in his field, and the Future Leader of American Higher Education by the Association of Colleges and Universities. He also serves as the Department Chairman and Distinguished Professor in Po- litical and Social Communications at the School of Public Pol- icy at the Russian Presidential Academy of National Economy

to come together with implementing partners and civil societ- ies and discuss new opportunities, create outstanding projects for sustainable development of our society. Later, Ms. Aynura Piriyeva, Chairperson of AmCham CSR Committee, briefed about CSR Committee and its activities, as well as introduced Ms. Ayten Eynalova from “Birgə və Sağlam” Association. Moreover, Mr. Orkhan Rajabov, Deputy Chairman of CSR Committee, delivered background information on CSR Excellence Award in 2014 and 2015, projects and jury members.

40 Issue 26 AmCham Azerbaijan

AmCham Legal Update

Tax and customs AZN 30,000 performed by VAT registered taxpayers Amendments to Tax Code of Azerbaijan Republic and taxpayers within the trade or public catering indus- We would also like to note that according to the recent try, whose taxable transactions during one month of any amendments to the Tax Code, if during the filed tax audit it is consecutive twelve month period exceed AZN 200,000, revealed that either delivery note or e-delivery note or e-VAT and settlements of any other taxpayers within a calendar invoice evidencing the purchase of goods in the taxpayer’s month in excess of AZN 15,000; possession does not exist, the purchaser will be subjected to • Payment of salaries and other payments defined by the the following financial sanctions: legislation and paid to employees by employers, except • 10% of goods purchased: one violation in a calendar year; those engaged in retail trade, public catering and the • 20% of goods purchased: two violations in a calendar year; service industry, whose taxable transactions during one • 40% of goods purchased: there and more times in a calen- month of any consecutive twelve month period are up to dar year. AZN 200,000; pensions, scholarships, financial aid, bonuses (including one-time bonuses), compensation and Amendments to the Tax Code of Azerbaijan Republic: benefits; The Law on amendments to the Tax Code has been approved • Utilization/expenditure of funds received under public On 17 May 2017, The Azerbaijani Parliament approved the procurement contracts; Law on amendments to the Tax Code of the Republic of Azer- • Leasing/Loan providers for receiving cash payments; baijan. New amendments cover several significant issues. • Insurers and reinsurers for receiving and payment of in- Introduction of “public legal entities” notion to the Tax surance premiums and claims respectively; Code • Recipients of cash payment of service fees and other With the recent amendment definition of “public legal entities” payments made to government agencies, state-owned has been added to the Tax Code. Moreover, public legal enti- legal entities or legal entities, in which the state owns ties are not allowed to be simplified taxpayers. controlling interest, public legal entities and those funded Clarified financial sanctions for violation of the law “On by the State Budget; Cashless Payments” • Recipients of cash in respect of payment of landline The new law threw light on certain unclear aspects of imple- phone services and utility costs; mentation of the law “On Cashless Payments”, in particular • To payers and recipients for cash payment and repay- range of responsible parties. So the following taxpayers will ment of interest-free cash funds (except where such be subject to a financial sanction of up to 40% of the transac- funds are provided by non-taxpayers) and other mon- tion value for violating the cashless payment regulations: etary allocations; • For settlements within a calendar month in excess of • For cash receipt of tuition and tourism agent fees;

41 AmCham Azerbaijan

More goods for excise tax: • Rights and obligations as well as liability of the parties to • Fur and leather products are also included in the list of the contract; goods subject to excise tax. • Parties, date and the number of a contract confirming the proprietary rights of an insolvent bank with respect to The amendments of The Rule on “Accounting for income non-performing (toxic) assets. and expenses for taxation purposes in the field of public Based on a mutual consent of the parties to the contract, the catering” and the Rule on “Accounting for income and value of non-performing (toxic) assets is defined by an inde- expenses for taxation purposes in the field of retail trade” pendent evaluator (evaluators). The Rule on “Accounting for income and expenses for taxation purposes in the field of public catering” and the Rule on Approval of the Rules of “Electronic delivery note appli- “Accounting for income and expenses for taxation purposes cation, registration and use” in the field of retail trade” (together “Rules”) have been ap- On 14 March 2017, Cabinet of Ministers approved the Rules proved by the Decree of the President of the Republic of Azer- of application of e-delivery note, its registry and use. baijan dated 19 April 2017. According to the Rules, e-delivery note is an electronic docu- According to the Rules, taxpayers in public catering and retail ment, issued by a person supplying goods, rendering servic- trade are imposed the following obligations: es or performing works to sole traders and legal entities at the • Accurate bookkeeping of income and expenses in a time of delivery of goods (services, works). timely manner in accordance with the Tax Code; A taxpayer prepares, confirms and issues e-delivery note • Depending on the applicable accounting method under via accessing to the Internet Tax Department with enhanced to the Tax Code, recording income and expenses in peri- electronic signature. ods when they obtained and incurred, respectively; If VAT taxpayers do not amend transaction within 5 days from • Maintaining bookkeeping in a manner allowing to track the date of issuance of e-delivery note, based on the provided commencement, progress and completion of all transac- e-delivery note an electronic VAT invoice will automatically be tions. prepared and submitted by the software on behalf of these Additionally, the Rules contain the following requirements re- taxpayers. lating to public catering and retail trade: VAT registered persons and persons engaged in trade and • Documentation of goods received; (or) catering whose taxable supplies exceeds AZN 200,000 in • Documentation of transactions related to sale of goods any 12 consecutive months should issue e-delivery notes to and, in public catering, transactions related to consump- the buyer of goods (services, work) as of 1 April 2017, while tion of goods for production; all other taxpayers as of 1 January 2018. • Methods for income and expense recognition; • Methods of accounting of closing inventory balance. Double taxation between Azerbaijan and Israel has been eliminated Transfer of non-performing (toxic) assets The law on approval of “Convention between the Republic of Decree of the President of the Republic of Azerbaijan dated Azerbaijan and the State of Israel for the Avoidance of Double 03 May 2017 approved the Rules on “Transfer of non-per- Taxation and Prevention of the Fiscal Evasion with respect to forming (toxic) assets of insolvent banks as a part of their Taxes on Income” and its Protocol have been signed by the resolution and recovery measures” (“Rules”) in accordance President Mr. Ilham Aliyev. with Article 164.1.36 of the Tax Code of the Republic of Azer- According to the law, double taxation has been abolished be- baijan. According to the Rules, transfer of non-performing tween Azerbaijan and Israel. (toxic) assets of insolvent bank as a part of its resolution and recovery measures involves alienation of both, property rights Amendment to the Tax Code has been adopted over non-performing (toxic) assets and rights to pledge the President of the Republic of Azerbaijan Mr. Ilham Aliyev has collateral with respect to non-performing (toxic) assets. Pur- signed an order on enforcement of the law “On amendments suant to the Rules, assets classified as non-standard assets to the Tax Code of the Republic of Azerbaijan”. in accordance with the normative acts of Financial Markets In accordance with the amendments, managers of investment Supervision Chamber as well as collateral on such assets funds have been added into the list of persons who do not are defined as non-performing (toxic) assets. Prior to transfer have the right to be simplified taxpayer. of non-performing (toxic) assets, the bank must receive the opinion of Financial Markets Supervision Chamber on recog- Amendments to the Regulation on the Ministry of Taxes nition of such assets as non-performing (toxic) assets. Such President Mr. Ilham Aliyev has signed a decree “On approval opinion must be issued within 20 calendar days. Transfer of of amendments to the Regulation on the Ministry of Taxes of non-performing (toxic) assets of insolvent banks as a part of the Republic of Azerbaijan”. their resolution and recovery measures must be conducted In accordance with the amendment, payment of calculated in compliance with civil contracts, reflecting at least the fol- taxes and rates, imposed financial sanctions and administra- lowing: tive penalties shall be provided only in cashless form. • Parties, subject and amount of a contract;

42 Issue 26 AmCham Azerbaijan

Economic, Financial, Banking the changes, financial markets supervision authority controls The Action Plan on Improvement of Business in Azerbai- the activities of the temporary administrators. jan has been approved Moreover, according to amendments the courts appoint the President Mr. Ilham Aliyev has signed the order “On approval Fund (defined as a legal entity established in accordance with of Action Plan on Icreasing Expediency of Business Environ- the Law “On Insurance of Deposits”) as a liquidator of a bank ment in Azerbaijan and improving the position of the state in subject to mandatory liquidation. international rankings”. Based on contract, the Fund may assign the liquidator func- A number of issues have been highlighted in the Action Plan, tions to legal entities or individuals. including: The Amendment provides for the rules on: • Effective governance and macroeconomic indicators; • Action plan on resolution of the bank which lost the ability • Foreign trade and trade tariffs; to pay; • Efficiency of commodity market and competition; • Transfer of the assets and liabilities of the bank which • Technologies and innovations; lost the ability to pay to the bank- acceptor; • Tax and accountability. • Sale of the bank which lost the ability to pay and its join- Under the order, coordination of activities and solution of ing to the healthy bank; other related matters were assigned to the Commission on • The establishment of the bridge bank and implementa- Increasing Expediency of the Business Environment in the tion of its sale; Republic of Azerbaijan established by the order of the Presi- • Participation of the government in restoration of the sol- dent dated July 13, 2016 and to the Cabinet of Ministers of vency of banks important for the system; the Republic of Azerbaijan . • Voluntary restructuring of the bank`s liabilities; • Mandatory liquidation of the bank; Amendments to the Law on Food Stuffs has been ad- • Control over the activities of a liquidator by the financial opted markets supervision authority. The president Mr. Ilham Aliyev has signed the law “On amendments to the Law on Food Stuffs”. The law on the Central Bank has been amended In line with the amendments, the relevant executive bodies The law “On amendments to the law on the Central Bank of and agencies having authority to evaluate the accredited the Republic of Azerbaijan” has been signed by the President compliance of food stuffs will certificate these products in ac- Mr. Ilham Aliyev. cordance with proper standards, technical regulations and In line with the amendments, the following articles on “Tar- requirements defined in other normative legal act. geted lending to credit institutions” have been eliminated: The accreditation of the bodies evaluating compliance will be 49-1.1. The Central Bank may extend targeted loans to banks implemented based on the law of the Republic of Azerbaijan built on the state guarantee in order to fund socio-economic “On accreditation in the field of compliance evaluation”. projects, as well as provide financial support for the real sector of the economy. The Management Board of the Central The order on accelerating establishment of free econom- Bank shall determine types, rules and provisions of such ic zones has been signed loans. President of the Republic of Azerbaijan Mr. Ilham Aliyev has 49-1.2. In the event of the necessity to cover debt commit- signed the order “On accelerating the work on establishment ment on the targeted loan through the state guarantee and of free economic zones” on May 31, 2017. in the event of full or partial coverage of this commitment On the basis of the order the working group containing a through debt securities issued by the state at the consent of number of state officials has been created under heading of the Central Bank, the Central Bank shall acquire the secu- deputy chairman of Milli Majlis, Mr. Valeh Alasgarov. rities in question at the primary market in compliance with The working group will expertise the draft law on establish- terms of issuance. ment of free economic zones, and will prepare the final ver- sion of the document which provides protection of interests of License for currency exchange activity both the state and investors. The group will prepare sugges- On 25 April 2017, the Parliament of the Republic of Azer- tions for contracts which will be signed with foreign investor baijan adopted draft amendments to the Law “On Currency (developer) companies. Regulation” allowing individuals and legal entities to carry out currency exchange activity. According to the Amendments, Amendments to the Law on Banks local banks, local branches of the foreign banks, national Amendment to the Law “On Banks” dated 07 April 2017 pro- postal operators, resident legal entities and individuals and vides for the new definitions such as fund, bridge bank, banks branches of the non-resident legal entities are entitled to con- important for the system, investor, a healthy active, resolution, duct currency exchange services based on the license. The bankrupt bank etc. The Amendments introduce provisions on currency exchange can be conducted only in cash and based appointment of a temporary administrator to the bank, which on the clients request. The state duty for obtaining of a li- lost the ability to pay, and on the scope of authority of the tem- cense for currency exchange activity is defined as AZN 500. porary administrator in the bank’s management. According to

43 AmCham Azerbaijan

Civil Procedure having an experience between 5 and 10 years should be noti- Amounts of new state duties have been defined fied 6 weeks in advance, while employees having experience President Mr. Ilham Aliyev has signed the law “On amend- more than 10 years should be notified about the termination ments to the Law on State Duties” adopted by Milli Majlis. of the employment agreement at least nine weeks in advance. In accordance with the law, state duty in amount of 20 (twen- In line with the draft law, in cases of termination of employ- ty) manats has been set for certification on compliance of ment contract due to liquidation of enterprise and cutback of goods (service and work), process, management system and personnel, employer will pay dismissal benefit adequate to staff in line with the requirements which have been defined in work experience of employee: standards, technical regulations and legal acts. • Experience to 1 year — in amount of the average month- Moreover, state duty in amount of 20 (twenty) manats shall ly salary; be paid for getting certificate on accreditation of the agency • From 1 to 5 years — at least in amount of 1.4 times of the which evaluates compliance. average monthly salary; • From 5 to 10 years — at least in amount of 1.7 times of Amendments on Intellectual Property Legislation the average monthly salary; Draft law “On amendments to the Law on Copyright and Re- • More than 10 years — at least in amount of 2 times of the lated Rights” has passed from the first reading in Milli Majlis. average monthly salary. In accordance with the amendments, it is proposed to add two new clauses to the following articles as below: Amendments to the Law on Accounting: • “Article 6. Works which are object of copyright According to the amendments, the preparation of financial • 3. Advertisement is an object of copyright within the statements by public entities stipulates that all public enti- terms provided in this law.” ties, except for those described below, prepare their financial • “Article 32. Subjects of Related Rights statements in accordance with International Financial Report- • 3-1. Creator and producer of advertisement are the sub- ing Standards. jects of the related rights within the terms provided in this Health care institutions, children’s homes, care-giving institu- law.” tions, open and closed-type special training and educational institutions, preschool institutions, general education schools, Conditions on term of employment contracts are subject first vocational schools, secondary educational institutions, to change higher educational institutions, special education institutions Draft law “On amendments to the Labor Code of the Republic and family education institutions established by the state and of Azerbaijan” has passed from first reading in Milli Majlis. municipalities prepare their financial statements in the follow- As stated in the draft law, employment contract will be signed ing order according to this Law: in two types: fixed-term and termless. - if the right for entrepreneurial activity is envisaged in the Previously, fixed-term employment contracts could be signed charters, financial statements for Commercial Organizations for maximum 5 years, while according to the draft law this lim- are prepared in accordance with the National Accounting itation will be removed and duration of this type of contracts Standards or International Financial Reporting Standards de- will be defined based on mutual agreement of the parties. pending on their choice; In accordance with the proposed amendments, guarantees - if the right for entrepreneurial activity is not envisaged in upon termination of employment contract will be changed. the charters, financial statements for the government-funded Terminating an employment contract due to cutback of per- organizations are prepared in accordance with the National sonnel, employer will have to consider the experience of an Accounting Standards. employee. If an employee has less than 1 year experience, The new amendments also state that upon completion of re- the notification regarding the termination of employment port period the public entities should submit annual financial agreement should be sent to employee at least 2 weeks in statements no later than 30 April of the next year and con- advance, employees having an experience between 1 and solidated financial statements - no later than 30 June of the 5 years should be notified 4 weeks in advance, employees next year.

New to AmCham Regular Members

44 Issue 26 AmCham Azerbaijan

The public entities preparing consolidated financial state- Amendments to the law on State Duties ments as well as the public entities, whose financial state- According to the amendments, state duties for the obtainment ments are envisaged to be published by their charters and the of licenses for indicated in the table below activities were in- public entities established by appropriate bodies of executive creased effective 9 March 2017: powers and those which receive subsidy, subvention, grant or Transfer Pricing Regulations have been approved The Minis- funds for implementation of certain powers should put annual try of Taxes approved Transfer Pricing Regulations, effective financial statements or consolidated financial statements to- as of 08 February 2017. Transfer pricing is only applied for gether with audit opinion on their official website or publish in the purposes of corporate/personal income tax and to so- print newspaper. In this case their subsidiaries do not publish called controlled transactions exceeding AZN 500,000 per their financial statements. controlled party. The following transactions are controlled: Amendments to “Regulations on the form and rules of • a resident and non-resident in related party relationship; conducting unified register of inspections in the field of • a permanent establishment of a nonresident or any rep- entrepreneurship” resentative office, branch office or other unit of such non- On 16 March 2017 President of the Republic of Azerbaijan resident in other countries; signed a Decree approving the Amendments to “Regula- • a resident and (or) a permanent establishment of a non- tions on the form and rules of conducting unified register of resident and persons established (registered) in a coun- inspections in the field of entrepreneurship”. According to try with a favorable tax regime. the amendments, any state authorities, public legal entities, For the purposes of comparability analysis, both internal com- as well as state-owned legal entities, which hold a dominant parables (internal data of the party to the controlled transac- position in the sphere of provision of the respective services tion) and external comparables (external data of the indepen- and are empowered to conduct inspection in the field of en- dent parties) may be used. In doing the comparability analysis trepreneurship, must ensure registration of all types of on- (a process of selection of the uncontrolled transaction compa- site inspections within the timeframe and order defined in rable to the controlled transaction) the following criteria must the Regulations. On-site inspections may only be conducted be taken into account: upon registration with the Registry. The inspections conduct- • Type, origin, quality and other indicators of the goods ed without proper registration will not be legally valid. (works, services); • Contractual terms, including quantity of the goods (work, Amendments to “Regulations on the form and rules of services), delivery and payment terms; conducting unified register of inspections in the field of • Functions performed by the parties to the transaction; entrepreneurship” • Tangible and intangible goods and rights in the posses- On 16 March 2017, President of the Republic of Azerbai- sion of the taxpayer; jan signed a Decree approving the Amendments to “Regu- • Economic conditions- geographical location of the mar- lations on the form and rules of conducting unified register kets, existence of similar goods (work, services) in the of inspections in the field of entrepreneurship”. According to market; the amendments, any state authorities, public legal entities, • Marketing strategy, etc. as well as state-owned legal entities, which hold a dominant Where the transaction involves transfer of intangibles, addi- position in the sphere of provision of the respective services tional comparability factors must be considered. and are empowered to conduct inspection in the field of en- The Regulations provide 3 transactional transfer pricing trepreneurship, must ensure registration of all types of on- methods and 2 profit methods: site inspections within the timeframe and order defined in • Comparable uncontrolled price method (“CUP”); the Regulations. On-site inspections may only be conducted • Resale price method (“RSM”); upon registration with the Registry. The inspections conduct- • Cost plus method (“CoPM”) ed without proper registration will not be legally valid. • Comparable profit method (“CPM”); • Profit split method (“PSM”);

Associate Member

45 AmCham Azerbaijan

The Regulations prescribe, to the extent it is possible, strict quested by entrepreneurs being below 150 kWh to construc- priority of application of CUP method. Other methods may tions. The decree aims to improve business environment, only be applied if the transfer price cannot be determined by make Azerbaijani market more attractive to foreign investors direct application of CUP or no comparable uncontrolled price and increase quality of provided services. According to the is found. If no comparable transaction is found during applica- presented rules, entrepreneurs will be able to file an application of CPM, this method may be applied based on a “20% tion regarding their need in energy supply to their planned to deemed profit method”. If the audited controlled transaction be constructed or already existing buildings to ASAN Com- involves supply of goods (work, services) and if the actual munal Centres (the “Centres”). The process of electric energy price charged: supply will consist of following three steps: • is below the transfer price or lower limit of the arm’s 1) Entrepreneurs application to the Centres for the prepara- length range, taxes shall be computed based on the tion of technical terms, project cost estimate documents by transfer price; or the Centres; 2) Payment of project cost estimate documents • exceeds the transfer price or lower limit of the arm’s fee, carrying out construction and installation works length range, taxes shall be computed based on actual and physical connection to energy supply chain; 3) Electric price. If the audited controlled transaction involves pur- power supply to construction. The process described above chase of goods (work, services) the value of which was should not take longer than 24 days.

claimed as tax deductible, and if the actual price charged Draft law on amendments to the Civil Code • is below the transfer price or upper limit of the arm’s The Draft Law dated April 25, 2017, retrieved from the offi- length range, taxes shall be computed based on actual cial website of the Parliament of Azerbaijan, makes following price; or amendments to the Civil Code of Azerbaijan: • exceeds the transfer price or upper limit of the arm’s 1) Prohibits purchase of shares of the main company by sub- length range, taxes shall be computed based on the sidiary and dependent organisation; transfer price. 2) Adds the right to make amendments to agenda of a general The actual price charged in a controlled transaction is re- meeting and requires to add more topics for discussion to the spected if such price equals the transfer price or falls within agenda of this meeting to the rights of participants of the gen- the arm’s length range. eral meetings of Limited Liability Companies (“LLC”), as well The transfer price is the average price, being the sum of all as the right to terminate the authorities of the chosen board of prices charged in selected comparable uncontrolled transac- directors (supervisory board) and/or inspection commission; tions divided by the number of such uncontrolled transactions. 3) Adds more details in the procedures that Supervisory A TP documentation filing requirement is introduced for trans- Board of LLC should follow; actions per controlled party exceeding AZN 500,000 per 4) Adds the clause describing requirements towards audit annum. The TP documentation must be filed by the end of committee of LLC; March 31 following the tax/reporting year. Failure to do so is 5) Adds the list of information that needs to be covered in the subject to a financial sanction of AZN 500. Where the value annual reports and balance sheet of Open Joint Stock Com- of the transactions per controlled party does not exceed AZN panies (“OJSC”); 500,000 and no filing requirement is applicable therefore, the 6) Includes the procedure of transfer of shares in OJSC: de- taxpayer is still required to follow the Regulations in comput- cision on alienation or purchase of 50% or more shares of ing his/her tax liability. OJSC or in other Company, respectively, can be adopted In determining transfer prices, the following databases may by two thirds majority decision during the general meeting be used: of shareholders. The proposal on purchase of 50% or more • International or local exchange quotations; of shares in OJSC should be officially presented to each of • Foreign trade statistics of the customs authorities; shareholders; • Reports placed in reliable sources; 6) Gives the priority in sale and issuance of additional shares • Databases of specialized agencies to which the tax office to owners of simple (ordinary) or other voting shares in Closed is subscribed, etc. Joint Stock Companies (“CJSC”); An advance pricing agreement mechanism is also intro- 7) Broadens the rights of shareholders in Joint Stock Compa- duced. At the taxpayer’s request, the tax office may inform nies (“JSC”) by adding the right to: the taxpayer on the recommended transfer pricing method to a) bring members of executive and supervisory board to liabil- apply for a particular transaction. The taxpayer is required to ity for damaged caused to JSC by their negligence; submit his/her request at least 3 months prior to carrying out b) participate in the process of sale of shares of JSC; the transaction. c) apply to court or other competent authority with request of The Regulations also set out provisions on TP dispute reso- reimbursement of damage caused to JSC or shareholders as lution, and avoidance of double taxation, as well as provide a result of deals made; relevant examples of each of the transfer pricing methods. d) familiarize themselves with deals to be signed. 8) Requires the execution of payment of dividends within 30 Decree on “Simplification of electric power supply to days after the decision regarding payments of such; construction objects” 9) Adds the clause describing requirements towards the audit Decree establishes rules on supplying electric energy re- committee of JSC.

46 Issue 26 AmCham Azerbaijan

On 25 April 2017, the Parliament of the Republic of Azer- • To integrate the electronic information system of the Min- baijan adopted draft amendments to the Law “On Currency istry of Labour and Social Protection of Population of the Regulation” allowing individuals and legal entities to carry out Republic of Azerbaijan for registration of employment currency exchange activity. According to the Amendments, agreements with the aforementioned Registry; local banks, local branches of the foreign banks, national • To install real-time surveillance cameras at the construc- postal operators, resident legal entities and individuals and tion sites at the expense of individuals or legal entities branches of the non-resident legal entities are entitled to con- conducting the construction for the purpose of identify- duct currency exchange services based on the license. The ing the persons involved in execution of work (services) currency exchange can be conducted only in cash and based under employment agreements which are not registered; on the clients request. The state duty for obtaining of a li- • To establish Labour Relations Monitoring Center within cense for currency exchange activity is defined as AZN 500. the State Agency for Public Service and Social Innova- tions under the President of the Republic of Azerbaijan Amendments to the law on Telecommunication for the purposes of coordination of monitoring and con- According to the amendments, both an operator and a pro- trol activities with respect to prevention of informal em- vider of Internet telecommunication services must register ployment in the construction sector. with the Ministry of Transport, Communications and High Labour Relations Monitoring Center will perform the following Technologies (hereinafter referred to as the “Ministry”) within functions: 15 days after commencement of services provision. In case • Carrying out the electronic Registry; of changes in registered information, operator and provider • Observation of cameras installed at the construction should inform the Ministry within 10 days upon these changes sites; took place. • Establishing and management of the analytical detection The amendments provide that operator / provider should re- system carrying out identification of workers; spond to inquiries from law enforcement agencies, ministries • Conducting comparative analysis of materials and re- and courts within 3 working days. ports of the Ministry of Taxes, Ministry of Labour and So- cial Protection of Population on measures implemented Export and Import of Products/Goods to prevent informal employment; The law on state registration of real estate has been • Allocation of mobile teams to monitor the construction amended sites; The law “On amendments to the law of the Republic of Azer- • Sending documents to the relevant public authorities for baijan on state registration of real estate” has been adopted. the purpose of documentation of the facts revealed and The relevant executive body has been authorized to deter- implementation of measures on administrative liability mine accellerated rule and term of application for registration or criminal prosecution of the parties in breach of laws. of real estate. Amendments to the “List of permitted inspections con- In accordance with the amendments, based on request of ap- ducted in cases of threatening human life and health, plicant, extract of registration may be presented to applicant national security and economic interests” signed on 28 in hard copy or placed in E-Government portal upon approval April 2017 by the President of the Republic of Azerbaijan, by E-Signature to obtain it in online regime. included the monitoring of cases informal employment to the respective list of inspections. Such monitoring will be Import rates have been reduced for some products conducted by the State Agency for Public Service and The Cabinet of Ministers of the Republic of Azerbaijan (“Cab- Social Innovations under the President of the Republic Min”) has adopted a decision on amendments to the “Deci- of Azerbaijan. sion on rates of customs duties for export-import transactions”. The decision has come into force on May 23, 2017. Amendments to the Law on Labour Pensions According to the decision, import rates of customs duties for Amendments eliminate the concept of “basic part of the la- all types of saplings have been reduced from 15% to 0%. bour pension” and the 12 year work experience required for Moreover, import rates for tobacco seeds have been defined the appointment of pension. It also increases the retirement as 0%. age for women and men to 65 years. Due to elimination of “base part of pension” concept, amendments introduce the MISCELLANEOUS concept of “minimum pension”, which is equal to 110 AZN. Prevention of informal labour relations in the construc- According to the amendments, the length of work experience tion sector required for retirement for members of all professions have On 28 April 2017, the President of the Republic of Azerbaijan been increased, with the exception of police and military per- signed the Decree “On Measures to Strengthen the Super- sonnel. Another change covers the transfer to the individual vision over Prevention of Informal Employment in the Con- account of a citizen of a bigger part of the paid contributions struction Sector”. The Decree provides for provisions on the for compulsory state social insurance. Ninety percent of the following issues: contributions paid by a citizen on compulsory state social in- • To establish an electronic registry of residential buildings surance will now be reflected in his/her account. under construction as well as individuals and legal entities engaged in construction of such buildings;

47 AmCham Azerbaijan

Projects AmCham Azerbaijan, Index of Prices The sample of representative goods and services for which prices are collected each period is held constant and the set of weights is fixed to reflect the importance in the typical The new edition of Consumer Price Index (CPI) covers the household budget of the particular good or service. It is 1st quarter of 2017 (January – March, 2017). The Consumer possible that, following the trial period. First ‘basket’ was Price Index (CPI) is designed to measure the change in the represented by AmCham Azerbaijan in 2006. In 2012 the average level of prices paid for consumer goods and services weights were adjusted and ‘basket’ was reviewed. by private households. AmCham members will find it useful in The entire report is available on AmCham web-page. setting pay increases, product prices, etc. The CPI can also be used to determine the value of a sum of money from the past at today’s level. Over the last year (the base is 100 at 31 March 2016) the AAIP rose by 13.68 percent for Azerbaijani consumers and 14.26 for Expatriate consumers. In the 1st quarter of 2017 the AAIP rose by 2.62 percent for Azerbaijani consumers and 2.85 for Expatriate consumers. The largest upward effect on the AAIP rate came from Fruits & Vegetables and Fuel where Index of Prices rose by 9.25 and 9.75 percent, respectively. In average, over the 1st quarter of 2017 Indexes rose by 13.53 percent. The survey is conducted collecting the prices of a fixed representative group or ‘basket’ of goods and services every quarter. These prices are then compared to the prices of the same goods and services from the previous quarter and the price change calculated. The prices of these goods and services are then combined into a single index measuring the overall level of prices. Different ‘weights’ are attributed to the various goods and services to reflect the average expenditure by households. Members’ News Global Chief Dentons opens in Georgia Executive Officer of Dentons, a member of AmCham in Azerbaijan, has entered Dentons. the Georgian market with the opening of its new office in The highly ranked Tbilisi. The Firm’s expansion into Georgia will solidify Dentons’ team of 11 professionals, including two partners, brings market leadership in Central and Eastern Europe (CEE) and capabilities in Litigation and Dispute Resolution, Corporate, the Commonwealth of Independent States (CIS). Banking and Finance, Intellectual Property, Energy, “Our new Tbilisi office will further enhance Dentons’ position Government, and Infrastructure and PPP. The team joins as the preeminent law firm in CEE, CIS and Central Asia,” Dentons from DLA Piper. Otar Kipshidze will lead Dentons’ said Tomasz Dabrowski, Chief Executive Officer of Dentons Tbilisi office as Managing Partner and will also head the Europe. “With a legacy dating back more than 25 years, not Litigation and Dispute Resolution practice in Georgia. He only were we among the first international law firms in the brings extensive experience in litigation, energy, banking and region, but we have also established a solid track record on finance and corporate law. Partner Avto Svanidze will lead many of the most important deals and litigations in these the local Corporate practice. He advises on M&A, real estate, emerging markets.” financing, restructuring and infrastructure privatization, and “In line with our polycentric strategy, Dentons is now the only has represented clients in many of the largest transactions global law firm to offer clients on-the- ground legal knowledge on the Georgian market. Senior Counsel Ted Jonas advises in Georgia, Kazakhstan, Azerbaijan, Russia, Turkey and clients on international business transactions, energy and Ukraine. We are in the unique position to serve our clients’ legal infrastructure projects, government relations, and dispute needs right across this energy-rich region,” said Elliott Portnoy, resolution. He is dual qualified in the US and Georgia.

48 Issue 26 AmCham Azerbaijan

Nar provided great gifts to its loyal customers while celebrating 10-year anniversary

Nar, celebrating its 10th year, began its commercial activity in 2007, under the brand name of ‘Nar Mobile’ and in short period of time has become a significant player in Azerbaijani telecommunication field. In 2015, with a great respect for Azerbaijani heritage and traditions, the mobile operator rebranded to Nar – the change that resembles the cohesion of the rich cultural heritage of Azerbaijan with the modern life. Nar is a truly national symbol for something exceptionally valuable that everyone can enjoy from. It has dropped the “mobile” from the brand name to reflect the variety of offered services – Nar offers today in addition to mobile services also fixed internet and digital TV. Nar believes there is a large group of customers in Azerbaijan To celebrate the 10th anniversary and continue making its that is being underserved – this group wants to receive customers happy, Nar presented 200 minutes of on-net calls communications services with best value for the money and and 1 GB data traffic for all the subscribers that joined Nar all Nar offers serve just one goal – to make telecommunication family 10 years ago. and entertainment services affordable to everyone. Nar will As a part of anniversary celebrations Nar launched a new continue introducing simple offers with best pricing to address ‘Bring Your Friend’ campaign – customers who will bring their variety of different needs – either you need mobile voice or friends to Nar family will get money on their balance. In this data, or fast fiber optic internet at home, or high quality TV, or campaign, those who brought new subscribers to Nar will get all of those in one package – you can get it from Nar with the free balance for 5 months every time when their friends top best value for money. up their account. Student projects reflect ADA University values

ADA University marked its annual Day of Citizenship and Social Responsibility under the title United by Values! During the graduation ceremony, ADA University awarded the best student teams for promoting the sense of community and social responsibility. Named after a famous historic figure, philanthropist Haji Zeynalabdin Tagiyev, the award was presented to the top three projects that has reflect ADA values of collaboration, commitment to public service, civic engagement and caring for others. Among 17 student team projects in 2017, three of them were selected by jury members composed of faculty, deans and vice-rector. These projects covered attempts to create the tradition of sign language in the country to raising awareness about danger of second hand smoking, student teams worked with perseverance to advance the causes they picked and gathered support for them. Among the Tagiyev award winners, the 3rd place to “Walking – increasing access to jobs, 2nd place to Run2Help project – Poison” project – promoting side effects of active and passive promoting healthy lifestyle, and the 1st place to Mango project smoking, the 2nd place to Gestuno project – creating tradition – mobile & easy access in selection of food. of sign language in Azerbaijan, and the 1st place to ADAMUN As Ambassador and Rector Hafiz Pashayev stated during the project – increasing knowledge among Azerbaijani youth May 26 Ceremony, "if you keep your values at the core of about the work of international organization. everything you do, then people will believe you, unite around Furthermore, for the first time at ADA University, newly you and make you and your goals stronger. This is what will launched Innovations award encourages submission of make you a “leader” not by authority, but by the ability to project for promoting innovative ideas. Within this competition, inspire the best in others. People will follow you, because they Innovation award were following: 3rd place to Jobleron project want to, not because they have to."

49 AmCham Azerbaijan

“BCD Travel Azerbaijan - Global Travel” celebrates its 18th birthday!

“BCD Travel Azerbaijan - Global Travel” - celebrates a significant date of 18 years from the day of its foundation! “18 year-time period is a serious term, which characterizes us as a reliable and stable partner. Yes, we are already of age, serious, confident, but at the same time, we are set apart for our constant growth and development. This year we have established important goals in improving our services and we hope that our customers will appreciate our efforts”, said the Company’s director Kenan Roustamov. The Global Travel was founded on May 31, 1999. And from the very beginning, it has set the goal of developing services in the field of business travel arrangements. It happened just as it would. A few years later, in 2005, Global Travel became the exclusive partner of the global BCD Travel network. “BCD Travel” is one of the leading global companies in the field of travel management, represented in 102 countries over the world. At present, the “Global Travel” has its own corporate style, company proudly represents Azerbaijan at world tourism good material and technical infrastructure, as well as exhibitions such as MICE South Europe in Italy, EIBTM World competent and friendly staff, who are proficient in many in Spain, ATM Dubai in the United Arab Emirates, IMEX 2017 foreign languages and who have extensive experience in the in Germany, Azerbaijan Meetings Planners Workshop in tourism business and certificates of IATA/UFTAA courses and Russia. IATA airlines. “We hope that the relations established during the above- By sincere and respectful service, the “Global Travel” mentioned events will help us not only to achieve success offers real Azerbaijani hospitality, which aims to create an in business, but also to develop the tourism industry in the unforgettable impression of a trip to surprise and delight country, given the fact that Azerbaijan has become a popular each customer. We, by providing a relaxed and comfortable destination for both leisure and business meetings and journey focus on developing a wide range of services that will conferences”, emphasized Ayten Humbatova, Manager on meet the requirements of people traveling on business trips. the MICE. I would like to share one more achievement of the company “Global Travel” keep pace with time and we have been faithful on the 18th year of its activity - in early 2016, Global Travel to our mission for 18 years - to help customers and achieve became an official partner of BCD Meetings & Events great results. We are one big family. Thanks to all who have in Azerbaijan, which is a global network in the sphere of been and are with us all these years. I wish you prosperity, organizing business events and conferences. development and conquest of new horizons. Let every day be Now for over a year being a partner of BCD M&E, our better than the previous one!”, said Kenan Rustamov.

New Appointment

Jalal Hajibayov, Senior manager, GRA Deloitte & Touche

Jalal was one the first employees of Deloitte Azerbaijan and of the first members of Enterprise Risk Management advisory team in Deloitte Moscow. Jalal rejoined Deloitte Azerbaijan after 15 years. Prior rejoining Deloitte, Jalal managed the projects in the fields of SOX compliance, Corporate governance assessment and Business transformation. He has 15+ years of experience in Risk management, Internal control and Internal audit, gained in large international companies and consulting firms. Jalal advised companies in the sector of oil & gas, telecom, mining, utilities and banking. Jalal believes and leads healthy life style. He is a triathlon athlete.

50 Issue 26 AmCham Azerbaijan

AmCham Calendar of Events 15 March – 15 June

28 April - THT Committee Meeting

28 April - HR Committee Meeting

2 May - Legal and Compliance Working Group Meeting

23 May - CSR Committee Meeting

24 May - HMI Committee Meeting

25 May - THT Committee Meeting

29 March - AmCham Members` Luncheon

5 April - CSR Implementing Partners Night

13 April - T&C Committee Meeting

18 April - Seminar on "Creative Thinking in Turbulent Economic Times" 26 May - HR Committee Meeting

30 May - Conference on "Economic Reforms: the Achieved Results and Recommendations"

1 June - T & C Committee Meeting

8 June - Joint ICT & BFI Committees' Meeting

9 June - Career Development Fair 2017

19 April - HMI Committee Meeting

21 April - HR Specialist Program 2017, Session 2

25 April - ICT Committee Meeting

26 April - AmCham Members’ Luncheon

51 AmCham Azerbaijan

52 Issue 26