Comments made by lawyer Vladimir Alyoshin to the article titled “A firm in gaol”

13 April 2011

Russian companies caught in wrongful acts can be made criminally liable. Such proposal was advanced by Aleksandr Bastrykin the head of Investigative Committee of Russia. He proposed to prosecute fly-by-night companies currently used for laundering of unlawful gains, tax stripping and other fraudulent practices. The interviewed experts are skeptical about the idea: the suggested mechanisms shall not solve the issue. They will rather enable law-enforcement agencies to nightmare honest entrepreneurs.

At the moment the draft bill with comments by Aleksandr Bastrykin is submitted for public consultation. There is no knowing how and when results shall be assessed.

According to civilistics (science on civil law), the main attributes of an entity are statutes, financial statement and round seal. The “chief detective of Russia” does not mean to send files and seals to the pre-trial detention center, put them on the dock and then to send them to gaol. Aleksandr Bastrykin just deems it necessary to penalise non-compliant firms, to divest them of their right to carry out some or any business activity, to revoke their licenses and other permits, and then proceed to compulsory liquidation. All other procedures shall be similar to those imposed by penal law on citizens: restrictive measures may be applied to the “accused” organizations, after sentencing they shall be considered “previously convicted” and be subject to special supervision.

Don't count out a prison cell, a begging bowl may come as well

Currently only individuals are brought to trial. Anyway, an entity, being a “virtual substance” even devoid of “artificial intelligence”, cannot make decisions. Therefore any actions, including criminal ones, are carried out by employees (from a common driver to director or founder). It is they who should (to the extent permitted by applicable law) find themselves in the dock. For instance – for evasion of tax from activity, illegal business practices (including business practice without a license), using of another company’s trade mark, etc.

As to companies, they only can be called to administrative account subject to the current legislation. That is to say, they can be penalized by fines (up to one million roubles and more), prohibition on business activity, etc. The arbitration court may, upon the application of authorized agency, issue a resolution on cancellation of a licence, or liquidation of an entity. However, according to Aleksandr Bastrykin, the existing system used to call entities to administrative account is inefficient, “In the context of prevailing collusive behaviour (concerted actions) aimed at overpricing of separate raw materials and products, as well as at market manipulation, entities are very seldom held administratively liable. The legislation doesn't allow to effectively combat illegal activity of fly-by-night companies which are widely used in criminal schemes aimed at illegal abstraction of assets, and subsequent laundering,” said the Head of Investigative Committee.

The introduced draw bill provides that a legal entity shall be found implicit in a crime committed by an executive of this entity (director, founder, etc.) should the entity derive a benefit from such crime. The latter may include skimming, fraudulent activities, etc., up to murder (for instance, the murder of director of a rival firm). The draw bill contains neither the list of such offences, nor the measure of responsibility to be imposed on organizations. For any offense committed by the director (including fraudulent activities for over 2 thousand roubles) the company can be penalized for up to 5 million roubles, or recovery to 25 percent of income within two years. The court is entitled to apply fine five times as much as profits derived from a crime or damage done to a victim; it also can issue a resolution to liquidate an entity or to prohibit its activity.

Who shall pay for Fuks?

Lawyers are skeptical about the draft law, “The penal sanctions to be imposed on an entity, provided by the draft law are of similar import as/ repeat the norms already stipulated by the current legislation,” stated Viktor Gutov, the partner of the legal company Pen&Paper. “Perhaps, it would be useful to expand the scope of these sanctions, by linking them to specific unlawful activity of citizens anyhow involved in activity of entities.”

Vladimir Alyoshin, the chief consultant on criminal justice of the law firm S&K Vertikal took a philosophical approach of Alexander Bastrykin's idea, “The existing criminal procedure legislation is rooted in other socioeconomic formation –socialism. Any attempts to bring it in line with demands of developing society, made in the last two decades remind one of shamanic rituals to raise the dead.”

In his opinion, the existing public agencies, such as Ministry of the Interior of Russia, internal revenue service, financial monitoring, etc. are quite sufficient to combat fly-by-night companies. “Question arises whether they want to combat these companies,” said Vladimir Alyoshin.

Victor Gutov is convinced that today the law-enforcement system does not manage to suppress using of fly by night companies for criminal purposes, “The current Criminal code of the Russian Federation allows doing that, but it is still problematic to prove “laundering” and fraud. One could easily understand the Investigative Committee which tends to “simplify” the task and to hold partners of such fly-by-night companies liable as well (first of all – financially liable). Even today enterprises are unreasonably pinned the responsibility for choosing their counterparts, even for comprehensive check with respect to their compliance with legislation (despite existing presumption of fairness of participants in civil law relations). Should the draw bill be adopted and enacted as a law, this obligation shall be created in practice, while remaining absolutely inapplicable. As a result, the law enforcers shall get a new, legalized vehicle which shall enable them to nightmare business on such basis,” believes the expert.

According to Inna Vavilova, the managing partner of Prime Advice consulting group, to elaborate the practice of holding entities criminally liable will be a challenging task, “It is difficult to define a set of people actually running the entity, especially a fly-by-night company where executives have no idea of business purpose, let alone who is the real manager of the company.”

Victor Gutov believes that adopting the existing version of law would be a threat for honest entrepreneurs, “It will tighten public control over business and put it under pressure of law-enforcement agencies. In all cases, the minority shareholders will be wrongfully accused: actually, they are not involved in assignment (election) of directors and have no real leverage; however, they will be exposed to all adverse material effect of criminal sanction. Therefore adoption of new penal laws of the RF necessitates simultaneous and adequate modernisation of corporate legislation.

Moreover, according to experts, the proposed law shall prove inefficient in combating fly-by-night companies: “the draft bill does not expressly relate the former conviction of an entity to consequences for organizers, participants, and directors. That is, no prohibition on establishment of a new entity is provided for a founder of organization (i. e., trade enterprise) “ruined” by criminal prosecution.”

On the other hand, adoption of criminal liability will help to stop mass consumer right infringement. For many years, numerous depository institutions (including Sberbank) collected the credit account maintaining fee, etc. from the borrowers. Now the said fee is declared illegal, offenders were penalized by fines, however, banks kept millions roubles illegally collected from citizens. Only a few borrowers filed claims for recovery; many depository institutions are unwilling to return funds automatically and even to forgo illegal profits. Cellular operators, insurance and other companies are in similar situation. Unlike fly-by-night companies they just cannot abandon their entities, so they will be forced to bring them in line with law.

Nevertheless, the experts believe that the lack of professionals in public agencies will make it difficult to apply the law, even with honest attitude to legislation. “Inquest on all economic crimes which was earlier conducted by divisions of the Ministry of the Interior of Russia, is relegated to Investigative Committee of the RF,” said Vladimir Startsev, representative of Directorate for Leningrad region. Police agencies were not very active in these affairs, while we shall “hog the blanket”. Vladimir Startsev confessed that there is shortage of professionals in the agency, “I was offered two best officers to be my direct reports: one of them graduated from the Refrigeration Technical College, another one specialized in woodworking.” "

Pavel Netupsky, 

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