Know Your Business Partner: Mitigating Corporate Security Risks Through Ukrainian Transparency

Denys Vergeles, Oleksandr Katolik

Researching a business partner may provide a better understanding of a business transaction, unveil hidden risks, bring useful negotiating points and help further planning. In addition, identification of risks may be used to provide a certain kind of protection, reduce costs or future compensation of loss. On top of that, research costs are likely to be less than legal related expenses on dispute resolution. That is why identification of risks facilitates early problem solving, and improves the outcome of potential business transactions, while prudent interpretation of information arms a client in preparation for future dealings.

Issues and expectations

When the need for research is established and the scope of work is determined there are several issues that need to be addressed. Firstly, a researcher is likely to deal with a large volume of information to procure relevant findings. Secondly, a researcher must prove that the sources of information are reliable and trustworthy.

Therefore, in order to match a client’s expectations and provide meaningful information a researcher is expected to navigate through the jungle of information and provide unbiased facts. In addition, those expectations include meaningful interpretation of facts and outlining specific differences if a client is a foreigner or unfamiliar with a specific type of business. Furthermore, a client expects that methods of research are effective and compliant with the law. In addition, information related to evaluation of wealth, hidden property and any wrongdoings of a potential target also requires scrupulous verification.

Methods and sources

Unlike Western jurisdictions, Ukraine enjoys better transparency in terms of provision of public access to numerous registers. For instance, the start of research on a legal entity is likely to begin with online access to the United State Register of Legal Entities, Individual Entrepreneurs and Public Organizations. Unlike Germany, where such access costs money, using free access to a Ukrainian register, a researcher may find information on shareholders, ultimate beneficiary owners, statutory capital, date of registration, contact information and other details. Information on real estate property can be accessed through the State Register of Proprietary Rights to Immovable Property and anyone is entitled to access this register and learn about freehold property, including land and buildings, any long-term lease rights, encumbrances including creditors and enforcement and commercial value. For instance, in Germany, access to real estate ownership is strictly limited to persons who have valid reasons to access such information.     

In addition, pursuant to decision of CMU No.386 of 24 May 2017 at some point the Ukrainian Government will also provide online access to the State Register of Encumbrances to Movable Property, which is currently accessible through a notary. On top of that, a check on a legal entity may also be conducted by accessing the Automated System of Enforcement Proceedings and Unified Register of Debtors. In addition, it may be useful to search the Register of Companies Banned from State Procurement.    

For a legal entity, a researcher may also check the agenda of the Anti-raider Commission, which may provide a valuable insight into potential conflicts regarding a legal entity’s assets and actions that are taken to remedy the situation.         

Some personal information may be found in the following registers: the Unified Register of Persons not Paying Alimony and the Unified State Register of Persons Who have Committed Corruption or Corruption Related Offences. In addition, the Public Register of Domestic Politically Exposed Persons of Ukraine may also be of use when conducting research on a specific person. On top of that, the Unified State Register of Court Decisions may provide insight on offences. Although it does not publish the names of individuals, it may contain notes of positions within a company when someone commits an offence. For instance, a researcher may discover whether a director or an employee of a certain company was in breach of a specific law.

Other than registers, social networks may be used to identify details about a person’s affiliations, lifestyle, personality, hobbies, which will provide clues on finding any hidden assets. As it may be the case, a person may not own any expensive property or any other assets relevant to research. However, someone closely affiliated with him/her may own such luxurious property.      

Besides the national registers, there are also domestic and international providers of information that charge for their services, but may be useful to identify information previously unavailable and to cross reference with other sources of information.         

Furthermore, other type of enquiries may be used such as telephone calls, going to the actual place of research and approaching affiliated persons. In addition, a researcher may find it valuable to check whether a specific person or legal entity is mentioned in any terrorist or sanction lists.    

This is a non-exhaustive list of sources that a researcher may find useful when conducting research, and some sources may be prioritized over others as it depends mostly on the case.

Interpretation of collected information

In the first example, a client ordered the conducting of research on an agricultural business that consisted of several limited liability companies that were established 20 years ago. All the companies were low on liquidity but had significant charter capital. The companies owned numerous pieces of real property and had many connections to a small regional bank. The management of the companies consisted of long-term employees of this regional business group. When the research was done it was discovered that the division of the business into three companies was aimed at shielding the assets by spreading them between companies. It was also found that the bank belonged to the above-mentioned business group and provided additional protection for assets by encumbering property so that no other third party can interfere.  

In the second example, research was conducted on a limited liability company established 10 years ago by foreign legal entities. The company owned a business centre and had a relatively large charter capital. It also had encumbrances on real estate to a foreign creditor and numerous long-term lease agreements with reputable businesses. In this case, a client was considering whether to conclude a long-term lease agreement with a business centre. As it turned out the encumbrances on real estate were used to protect the assets of the business centre. Furthermore, the fact that there were a number of reputable companies, which already established themselves in the business centre, might suggest that the risks related to concluding lease agreement were low.       

In the third example, a client needed more information on a limited liability company established in Kyiv over 10 year ago by foreign companies from reputable jurisdictions. This IT company had less than twenty employees. However, it also entered into long term lease agreements with many business centres located in different Ukrainian cities. As a result, it was revealed that the company had a large number of private contractors who provided services to the above-mentioned company. 

Conclusion

At present it is relatively easy to obtain essential information about Ukrainian business partners. Many registers are free and publicly available. It is likely that even more sources will be available in the future. Investors may take advantage of this transparency to identify the risks inherent in Ukrainian businesses and to mitigate them by interpreting gathered facts themselves or by using local consultants.

Denys Vergeles, counsel at Nobles

Oleksandr Katolik, paralegal at Nobles