On the Ropes: Enforcement Risk Roundtable—Anti-Corruption and International Risk Perspectives from Recent Developments in Poland

In this edition of Ropes & Gray’s podcast series On the Ropes: Enforcement Risk Roundtable, litigation and enforcement partner Amanda Raad and associate Kyle Zipf team up with Roman Iwański from B2RLaw to discuss the effect that Poland’s latest judicial reforms have on the legal landscape for conducting business in the country from an anti-corruption and international risk standpoint.

Transcript:

Kyle Zipf: Welcome to our latest installment of On the Ropes: Enforcement Risk Roundtable, a Ropes & Gray podcast series focused on global anti-corruption and international risk. I’m Kyle Zipf, a litigation & enforcement associate based in New York. I’m joined today by Amanda Raad, a co-chair of the firm’s global anti-corruption and international risk practice and our R&G Insights Lab, an innovative, full service legal consulting group—and the industry’s first-ever analytics and behavioral science offering. We are here today to have a discussion about the current anti-corruption landscape in Poland with Roman Iwański, who leads the commercial law practice at B2RLaw in Poland. To start off, Amanda, could you give us a little bit of background on what we’ll be discussing today?

Amanda Raad: Happy to dive in. Poland is a critical country in any discussion of Central and Eastern Europe. It’s one of the biggest economic success stories of Europe, with 28 years of unbroken growth, until just this past year when the COVID pandemic broke out.  That includes the financial crisis in 2008-2009, when it was the only economy in the entire European Union to avoid a recession during that time. In recent years, Poland has become somewhat of a hub for the CEE region with a number of global companies setting up their regional headquarters in Warsaw. So, a lot of this economic success has been attributed to a relatively stable and reliable legal system, which allows for a predictable business market and environment. Now, some of this stability has recently come into question due to a rise in populism and certain controversies regarding judicial reforms and the rule of law in Poland. And in our conversation today, we’re going to try to unpack some of the modern pressures that a business faces from an anti-corruption and international risk standpoint arising out of some of those recent political events.

Kyle Zipf: Great. So Amanda, you mentioned some recent controversies about judicial reforms—why don’t we start a bit with that?

Roman Iwański: Sure, I can jump in here. I think we can all agree that any anti-corruption efforts require a judiciary that enjoys independence from government officials. In 2015, the Law and Justice Party that came to power in Poland based on a campaign stating the need for social and governmental reforms. Some of the most controversial reforms pertained to the judiciary. The controversial reforms have resulted in a vehement conflict between the current government on the one hand, and the European Commission along with the vast majority of legal practitioners in Poland on the other hand. One of the reasons for the reform was to allegedly increase the efficiency of the judicial system in Poland. Recent data that just came up this last week proves that in fact the result is quite the opposite. Proceedings in Poland on average are nearly twice as long over the span of the last five years. In order to give an example of the efforts made by the current ruling government in order to purge the judiciary, the PiS party tried to lower the age of the retirement for both Supreme Court justices and ordinary court justices, but at the same time, allowed the Polish President (who’s also from the ruling government) to grant five-year extensions to those of his liking. The European Court of Justice ruled this illegal in 2019 and resulted in the Polish government backtracking on this new law.

Another reform was that judges could be investigated and sanctioned for their court rulings, for criticizing the reform itself or even for submitting questions to the European Court of Justice based on EU law. The disciplinary hearing and procedures for the judges would be conducted by other judges specifically selected by the parliament in a new Disciplinary Chamber of the Supreme Court. The European Commission criticized this reform as an attack on judicial independence and brought legal action against Poland in October 2019. The European Court of Justice granted interim measures that resulted in the suspension of the Disciplinary Chamber of the Supreme Court, however, both the judges appointed by the ruling government and the government itself are currently ignoring these interim measures. As a result, just the week prior to this one, the European Commission lodged yet another set of proceedings with the European Court of Justice also seeking further interim measures aimed at preventing the aggravation of serious and irreparable harm inflicted to judicial independence.

Yet another reform included allowing parliament to make political appointments to the National Council of the Judiciary, the KRS, which is the public body responsible for appointing judges. These infringements have also caused the EU to trigger Article 7 of the Treaty of the European Union proceedings against Poland for undermining the rule of law. In sum, the changes that have been imposed by the ruling government in Poland are an attempt to try to exert political control over the judiciary and other institutional bodies, thus undermining the principles of democracy and the rule of law, both key to EU membership.

Amanda Raad: Thanks, Roman. This is all very interesting from an anti-corruption and international risk perspective. The EU’s concerns with these policy changes seem to be that these reforms may be breaking down the barriers for corruption. What this means for the investor is that companies conducting business in Poland, and their employees, might be more incentivized to simply align with the ruling party for potential business benefits. Without the proper controls within a business, such as regular anti-corruption training for employees or oversight of employee expenses, this can easily lead to potential corruption-related misconduct in a large organization. More importantly, given that these risks are country-wide, it means that these same potential risks may exist for business partners, which of course means you really need to focus on robust due diligence procedures when you’re engaging with any business partners as well.

Kyle Zipf: Right. So these reforms can actually have a material impact on the day-to-day operation costs of running a business in Poland. Taking a step back, though, has this really changed the process from what a business should have been doing in the first place? That is, Poland has, for many years before any of these recent reforms, had laws in place against bribery and influence peddling, so companies have always been barred from exerting influence over a public institution or a public official.

Amanda Raad: That’s a good question. And it’s certainly true that global businesses should always develop and maintain robust internal procedures and controls, but I think the key point here is not that these things are illegal but that the recent political developments may have made it more likely for corporations to face these risks. And with the higher risk, companies really need to dedicate more resources for identifying these potential problems and combatting them.

Roman Iwański: I agree. The more the judiciary gets politicized, the higher the risk that corruption starts to gain greater footing in Poland once again. Government officials or political appointees, knowing that they may count on backing from politically appointed prosecutors or judges, may be more willing to demand favors from representatives of the foreign investors. Importantly, in addition to judicial reforms, the current government has increased the role of state companies in key industry sectors such as banking, insurance, petrochemicals and energy. This means that there is also much more potential exposure to the government and government-related entities for companies doing business in Poland now, further adding to this risk.

Kyle Zipf: That all makes sense. Looking to the future, Roman, how do you see these disputes regarding judicial reforms between the EU and the government panning out?

Roman Iwański: A positive scenario foresees the EU institution effectively cracking down on these undemocratic reforms, thus forcing the current government to adjust course. Maybe political change in Poland down the road will lead to an abandonment of these illiberal reforms. A much less-favorable scenario sees the Polish government’s conflict with the EU escalating, the ruling party ignoring European Court of Justice rulings and taking over even greater control over the judiciary. Though support for EU membership remains relatively high in Poland—hence a Polexit similar to Brexit—is hopefully not a threat for now, but Poland may fade away to the fringe of the EU, similarly as in the case with Hungary, thus hampering further development and putting legal stability at risk. In either case, it is advisable that investors follow these developments closely. The risk may seem immaterial for some for now, but without an independent judiciary in Poland, investors’ rights may be in jeopardy when the need to seek protection before Polish courts sometime down the road.

Amanda Raad: Yes, I definitely agree that investors and companies operating in Poland should definitely be paying attention and taking the appropriate compliance measures in their businesses. Really regardless of the outcome, it’s clearly a time of considerable change in the Polish political and government structure. And we typically see, in any country, increased instances of bribery and corruption during politically instable and turbulent times. Not only can this pose risks within Poland, but it can be doubly problematic for companies and investors in the U.S. and the UK, where laws such as the FCPA and UK Bribery Act target precisely this kind of conduct.

Kyle Zipf: So to recap, for those doing business in Poland now, it appears exceedingly important in today’s political landscape to implement strong anti-corruption and other compliance policies within the organization and all of its subsidiaries. And for those looking to acquire an entity based in Poland or with operations in the country, a detailed due diligence process considering any and all potential interactions with government entities appears to be warranted.

Amanda Raad: Yes, and companies should always be organizationally prepared for potential regulatory, including criminal proceedings, in light of the current political climate.

Roman Iwański: Completely agree. One last addition from me as a litigator is that companies entering into contracts governed by Polish law should potentially look more favorably at incorporating arbitration clauses instead of relying on Polish states courts determining their disputes down the road. This obviously stands especially true when one is to deal with Polish state-owned entities.

Kyle Zipf: All great points. Roman, Amanda, that was a wonderful discussion—thank you both for joining me and sharing your insights. And thank you to our listeners. If you have any feedback or suggestions for jurisdictions or specific topics you would like us to cover, please contact us at express@ropesgray.com or feel free to reach out to any of us directly. You can also subscribe to this series wherever you regularly listen to your podcasts, including on Apple and Spotify. Thanks again for listening.