Europe & Central Asia
Azerbaijan risk report
Corruption poses significant compliance risks to businesses operating or planning to invest in Azerbaijan. Political corruption increases business costs and represents the main challenge for foreign companies; patronage is particularly prevalent in the oil industry, which yields the state’s largest revenue. A weak judiciary and insufficient regulatory enforcement allow government officials to act with impunity. The government has a comprehensive anti-corruption legal framework in place: Passive and active bribery, extortion and abuse of office are illegal under the Criminal Code. Nevertheless, the government does not implement anti-corruption provisions effectively. Azerbaijani law puts restrictions on gifts, but companies are likely to encounter demands for facilitation payments or other informal payments.
Judicial system Very high risk
Businesses contend with very high corruption risks when dealing with the judiciary. Courts are inefficient and suffer from corruption; judges routinely accept bribes for favorable verdicts, and the country performs poorly in regards to judicial independence (HRR 2015; GCR 2015-2016). Likewise, the judiciary is inefficient in settling disputes and challenging government regulations (GCR 2015-2016). The judicial process is perceived to be unreliable, and investment disputes may arise when the interests of foreign investors collide with those of well-connected or favored local interests (ICS 2016). Half of all citizens perceive the judiciary to be corrupt (GCB 2013). Azerbaijan is a member of the International Centre for Settlement of Investment Disputes (ICSID) and is a signatory of the New York Convention 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
In one 2015 case, a former judge at the Baku Grave Crimes Court was sentenced to seven years in prison for his involvement in a bribery scheme (NiT 2016).
Police Very high risk
The police sector carries a very high corruption risk. Police corruption and impunity are widespread in Azerbaijan (HRR 2015). Bribery and extortion are common practices, although a local NGO reports that instances of bribe extortions among traffic police decreased during 2015 (HRR 2015). Reportedly, the low wages of police officers contributed to corruption (HRR 2015). Almost half of surveyed households believe the police is corrupt (GCB 2013). In 2014, 48 cases of corruption involving law enforcement employees of the Ministry of Internal Affairs were investigated; 35 employees were dismissed and 28 were demoted (HRR 2015).
In one recent case, journalist Agil Khalil, who had been investigating a case of illegal land clearing by the authorities, had been repeatedly harassed and attacked by the police until eventually being stabbed by two men later identified as officials from the Ministry of National Security (Organized Crime and Corruption Reporting Project, Oct. 2015). In 2015, Azerbaijan formally declared to the European Courts of Human Rights that it will pay compensation of USD 30,000 to Agil Khalil (NiT 2016).
Public services Very high risk
Dealing with public services presents businesses with high corruption risks. More than one-third of businesses expect to give gifts to officials in return for obtaining an operating license (ES 2013). Nonetheless, bribes and irregular payments are not widespread when applying for public utilities (GCR 2015-2016). More generally, corruption is widespread in the public administration, resulting in uneven and inequitable implementation of services (BTI 2016).
Through a government-operated network of mobile and service points (known was ASAN Khidmet), citizens are able to access services in a uniformed and coordinated manner (NiT 2016). The initiative was aimed at limiting petty corruption in routine transactions (NiT 2016). The services have received immense praise from the population (NiT 2016). Starting a business in Azerbaijan is less time-consuming and less costly than the regional average (DB 2016).
Land administration Very high risk
Businesses must contend with a very high corruption risk when dealing with land authorities in Azerbaijan. The property registration system is overloaded by bureaucratic requirements and is reportedly influenced by corruption and inefficiency (ICS 2016). Bribery is common in the processes of sale, registration, and management of land (BTI 2016). Almost half of surveyed companies expect to give gifts to government officials when obtaining construction permits (ES 2013). The government has eased property registration through the creation of the single-window service centers, ASAN (BTI 2016). Registering property is less time-consuming and less costly than the regional average (DB 2016).
The government is not effective in securing property rights (BTI 2016). Corruption in the higher echelons of the government has resulted in violations of the country’s expropriation laws by government officials and oligarchs, who have expropriated private homes and retail spaces for their own purposes (BTI 2016). In the same vein, politically motivated infringements on property rights constitute a problem in Azerbaijan (BTI 2016). The construction sector is also dominated by corruption, with the proxies of the ruling elite – including the presidential family – controlling the construction sphere (NiT 2016). Large infrastructure projects suffer from significant construction delays, overspending and poor quality of work due to kickbacks and money laundering schemes (BTI 2014).
Tax administration Very high risk
The tax administration is one of the most corruption-prone sectors in Azerbaijan, presenting businesses with very high corruption risks (ICS 2016). Bribes and irregular payments are frequently exchanged when meeting with tax officials, and tax inspections are frequently used by the government to intimidate and pressure private companies (GCR 2015-2016; BTI 2016). Paying taxes in Azerbaijan is less costly and less time-consuming than regional averages, requiring seven payments and taking on average 195 hours per year (DB 2016). The government recently eased paying taxes by introducing an electronic system for filing and paying social insurance contributions (DB 2016).
Customs administration Very high risk
The customs administration carries a very high corruption risk and is identified as the institution presenting the greatest obstacle to foreign investors (ICS 2016). Trading across Azerbaijani borders is impacted by corruption and bribery, and irregular payments are widespread when importing and exporting (GETR 2014). Corruption is more rampant in relation to importing than exporting; over one-third of companies expect to give gifts or make an informal payment to get an import license (GETR 2014; ES 2013). The time and costs necessary to comply with required customs procedures are more than twice as high as the OECD average (DB 2016).
In one illustrative case, pervasive corruption within the customs administration forced Nestlé to temporarily suspend all commercial activity within Azerbaijan; the company refused to pay bribes to corrupt customs officials and local distributors (ifood, Mar. 2012). To curb corruption, the State Customs Committee launched a code of conduct aimed at promoting ethical behavior among officials (ENP 2013).
Public procurement Very high risk
Public procurement suffers from rampant corruption and is a very high-risk sector. Bribes and irregular payments are frequently exchanged to obtain public contracts (GCR 2015-2016). In addition, funds are frequently diverted to companies or individuals due to corruption, and favoritism is widespread among procurement officials (GCR 2015-2016).
The Law on Public Procurement requires competitive bidding and imposes strict formal requirements on sole sourcing. Unsuccessful bidders can ask for an official review of the bidding process and can challenge the decision in the courts. Nonetheless, procurement tenders are not transparent at all, and companies guilty of major violations of procurement regulations are not effectively prohibited from participating in future procurement bids (BTI 2016). Companies are recommended to use a specialized public procurement due diligence tool to mitigate corruption risks associated with public procurement in Azerbaijan.
Natural resources Very high risk
Azerbaijan’s oil and gas sector lacks transparency and is considered as the greatest source of corruption in the country (NiT 2015). State revenue in Azerbaijan heavily depends on the extractive industries, with oil and gas making up 74% of government revenue in 2011 (Natural Resource Governance Institute). The opaque distribution of oil revenues has fueled presidential patronage and kickbacks to officials (NiT 2015). The government has not fully adhered to transparency practices of the Extractive Industries Transparency Initiative (EITI). In April 2015, and due to the government’s laxity in including civil society in securing transparency in the extractive industries, the EITI downgraded Azerbaijan from “compliant” to “candidate” status (NiT 2016). Negotiations for the accession to the World Trade Organization have also been intentionally postponed by the government for the sake of protecting the interests of local oligarchs and their corrupt businesses (NiT 2016).
In one high-profile corruption case, it was revealed that Reza Raein, Unaoil Group’s Managing Director, allegedly served as a middleman for bribes between US engineering giant Kellogg Brown & Root (KBR) and officials in Azerbaijan to secure contracts. Leaked documents reveal that Raein had managed to obtain confidential information from Valeh Aleskerov, an official working at Azerbaijan’s state oil company SOCAR and the deputy speaker of Azerbaijan’s parliament, regarding a Caspian gasfield project for the benefit of Unaoil’s clients. Although KBR did not win the USD 90 million offshore gasplant contract, it won a pipeline construction work associated with the project, while another client of Unaoil (Swiss technology firm ABB) also won contracts to provide control and security systems for the project. Raein reportedly made USD 4.5 million from his dealings in Azerbaijan between 1996 and 2005 (The Age, 2016).
In September 2015, Khadija Ismayilova, a journalist reporting on government corruption, was imprisoned, but her colleagues continued her work, revealing the presidential family’s use of two super-yachts belonging to the State Oil Company of Azerbaijan (SOCAR) that cost around USD 12 million per year to operate (NiT 2016).
The government of Azerbaijan has a comprehensive legal anti-corruption framework in place, but enforcement is poor (HRR 2015). The Criminal Code 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 jobs or from engaging in business activities and puts restrictions on gifts: Public officials may not accept gifts worth more than USD 55. The Law on Combating Corruption addresses prevention and detection of corruption offenses among public-sector employees. There is a range of other laws that cover corruption offenses. Officials are subject to financial disclosure laws; nonetheless, reports are not made available to the public, and sanctions for non-compliance were not imposed (HRR 2015). There are no legal measures to protect public or private employees reporting corruption (OECD 2013).
Azerbaijan is a signatory to the Council of Europe Criminal and Civil Law Conventions on Corruption and the United Nations Convention against Corruption.
Freedoms of speech and press are guaranteed by Azerbaijani law, but the government limits media independence and controls most media outlets (FotP 2015). Foreign radio stations are banned from broadcasting in Azerbaijan and are available exclusively via satellite, internet or cable (FotP 2015). Independent and opposition papers struggle financially and are often subject to heavy fines (FotP 2015). Critical print, broadcast, and online media experience regular abuse against journalists, criminal allegations of libel, restrictive regulations and decreasing freedom in online expression (NiT 2016). There are numerous cases of journalists critical of the government being imprisoned on spurious chargers (NiT 2016; Amnesty International UK, May 2016). Public access to government information is provided for by the law but is not possible in practice; media outlets and NGOs filed lawsuits against state entities for failure to provide information, yet they were unsuccessful (HRR 2015; FotP 2015). The country’s media environment is considered “not free” (FotP 2015).
Despite that the law in Azerbaijan provides for freedom of assembly, the government severely restricted these rights in practice (HRR 2015). Civil society organizations (CSOs) faced severe crackdowns during 2014 which also continued throughout 2015 seriously curbing the development of civic engagement (NiT 2016; BTI 2016). CSOs face difficulties registering and operating in Azerbaijan (NiT 2016). Furthermore, civil society activists and their extended families suffer intense harassment and persecution (NiT 2016). CSOs are able to gain influence only through establishing active partnerships and cooperation with the government; similarly, NGOs in Azerbaijan are limited to those which are organized by the government, also known as GONGOs (NiT 2016; BTI 2014).
- World Bank & IFC: Doing Business 2016.
- Freedom House: Nations in Transit – Azerbaijan 2016.
- US Department of State: Investment Statement Climate – Azerbaijan 2016.
- Bertelsmann Foundation: Transformation Index – Azerbaijan 2016.
- World Economic Forum: Global Competitiveness Report 2015-2016.
- Amnesty International: ‘Free Journalists Blackmailed by Azerbaijan’s Government’, 3 May 2016.
- The Age: “Unaoil: Azerbaijan – The Best Dressed Middleman,” 2016.
- Freedom House: Freedom of the Press – 2015.
- Freedom House: Nations in Transit- Azerbaijan 2015.
- US Department of State: Human Rights Practices Report – Azerbaijan 2015.
- Organized Crime and Corruption Reporting Project: ‘Azerbaijan Admits Rights Violations, Must Pay Journalists’, 30 October 2015.
- Contact: ‘Police Officer Arrested in Mingechevir’, 24 August 2015.
- Bertelsmann Foundation: Transformation Index – Azerbaijan 2014.
- World Economic Forum: Global Enabling Trade Report 2014.
- Transparency International: Global Corruption Barometer 2013.
- European Commission: ENP Country Report 2013.
- The World Bank Group: Enterprise Surveys 2013.
- OECD: Third Round of Monitoring – Azerbaijan, September 2013.
- ifood.tv: ‘Corruption forces Nestle out of Azerbaijan’, 15 March 2012.
- Natural Resource Governance Institute: Azerbaijan.