Compliance: Risks of "outstaffing" in Ukraine

The compliance obligation of management does not end at the German border. Rather, board members and managing directors must ensure not only compliance with domestic law, but also that foreign and internationally applicable regulations are observed within the scope of which the company falls. The compliance scandals of the recent past and, in particular, the "Siemens/Neubürger" ruling of the LG München I have shown that foreign matters in particular can drastically increase the liability risks for companies and thus for the management. In almost all cases of non-compliance, it was employees at the level of foreign subsidiaries and sub-subsidiaries who violated applicable law. The consequences are regularly considerable direct or indirect damage to the parent company not directly involved and loss of reputation of the Group as a whole.

Against the background of political tensions and the difficult economic environment in Ukraine, numerous foreign companies based there have significantly reduced the number of local employees in their local branches in recent years. In many cases, so-called "outstaffing" solutions are used, in which the employees are no longer employed by a group subsidiary but by a specialized third-party provider.

However, this practice entails considerable compliance risks. Due to the special features of Ukrainian labor law, the competent authorities could consider the respective outstaffing model to be a violation of the law and sanction it in individual cases. Outstaffing providers, for example, must always be registered in a special list of the Ukrainian employment agency. In practice, however, this is currently not possible as there is still no corresponding implementing regulation in place.

In this context, it should also be noted that in 2017, the Prosecutor General's Office of Ukraine launched official investigations into two outstaffing providers for tax evasion and money laundering. The service providers concerned, "Promotion Outsourcing" and "Promotion Staff", employ staff for a large number of the largest Ukrainian companies as well as for branches of various international corporations. According to the investigating authority, the two outstaffing providers applied a hiring model that deprived the state budget of one billion UAH, the equivalent of approximately 32 million EUR. In June 2018, a court order allowed the authority to search the offices of companies and confiscate documents and, if necessary, seize them.

Companies whose subsidiaries or branches in the Ukraine rely on outstaffing solutions should urgently check whether the chosen structure does not violate Ukrainian law in view of the associated compliance risks. Furthermore, the respective service providers should also be subjected to an audit. A timely internal or external compliance audit to determine the risks arising from the outstaffing is strongly recommended.

Barbara Mayer
Victoria Melnychenko, Integrites, Kiev

1:1. This is how we work together. You decide upon a competent partner; he/she will then remain your point of contact. > more