The Law “On Amendments to Certain Legislative Acts of the Russian Federation Relating to Combating Unlawful Financial Operations” Comes into Force

05.07.2013

Legal Update No. 422, 5 July 2013

Goltsblat BLP advises that, on 28 June 2013, the President signed Federal Law No. 134-FZ of 28 June 2013 “On Amendments to Certain Legislative Acts of the Russian Federation Relating to Combating Unlawful Financial Operations”, the so-called “fly-by-night company law”.

The Law came into force on the date of its official publication, i.e., 30 June 2013, except for certain provisions with other effective dates. Below is an overview of the issues we believe to among the most important.

TAX LEGISLATION

Recovery of tax arrears from subsidiaries/parent companies

The list of cases when tax audits might result in additional taxes being recovered from related /head organisations (subsidiary / shareholder companies) in a court of law has been expanded (sub-clause 2, clause 2, article 45, of the Russian Tax Code):

  • transfer of funds or other property to the head/related organisation after a tax audit has been initiated;
  • proceeds have been transmitted or funds or other property have been transferred to head/related organisations via a combination of related operations or in favour of the taxpayer's related parties.

Arrears will be recovered pro rata the share of proceeds received from sold goods (works, services), the share of funds transferred, the value of other property, subject to the tax authorities having proved a connection between such actions and the tax payment arrears.

New grounds for the tax authorities to request documents, including within the scope a chamber tax audit

The tax authorities will be entitled to demand that a taxpayer provide source and other documents and analytical tax ledgers during a chamber tax audit on the basis of a revised tax return reducing the tax amount or increasing losses, submitted after expiry of two years. Moreover, the tax authorities will be able to request transaction-related documents from the parties thereto or other persons holding relevant documents, including banks, beyond the scope of tax audits, subject to reasonable necessity to do so.

New grounds for the tax authority to suspend operations on a bank account

New grounds for suspension of operations on a bank account have been added: a corporate taxpayer's failure to fulfil its obligation to provide the tax authority in a timely fashion with a receipt confirming receipt of a request for documents, a request for explanations and/or notice of summons to the tax authority's office (received via electronic communication channels).

Possibility for the tax authorities to use the results of investigative activities

The Federal Law “On Investigative Activities” has been amended to allow the tax authorities to use the results of investigative activities in exercising their powers of control and supervision over compliance with the legislation on taxes and levies and their powers relating to ensuring representation of state interests in bankruptcy cases, as well as in exercising their powers in the sphere of state registration of legal entities.

Tax authorities obtain bank account statements relating to individuals and individual entrepreneurs

Among other things, the amendments to a number of legislative acts have provided the tax authorities with an opportunity to request that banks provide them with letters of information relating to bank accounts, bank deposits and/or account, deposit cash balances, statements on operations on bank accounts, deposits of organisations, individual entrepreneurs and unincorporated individuals, as well as statements on e-money balances and e-money remittance, on the basis of a substantiated request. The tax authorities may make such a request, including beyond the scope of tax audits, subject to reasonable necessity. In this event, the tax authorities require the approval of a higher tax authority or Head/Deputy Head of the Federal Tax Service of Russia.

LEGISLATION ON REGISTRATION OF LEGAL ENTITIES

Amendments to the legislation on state registration of legal entities

The given Law amends the legislation relating to state registration of legal entities. The most significant amendments are the following:

  • the law establishes a legal entity's obligation to reimburse other participants in civil turnover for losses caused by failure to provide, delayed provision or provision of unreliable legal entity-related data to the Unified State Register of Legal Entities (the “Companies’ Register”);
  • the law establishes an individual's right to send to the registration authority his/her written objections against an entry being made in his/her respect into the Companies’ Register. In the event of the objections specified above, registration should not be performed in relation to such an individual;
  • the law obliges the registration authority to verify data to be included in the Companies Register.

LEGISLATION ON COMBATING MONEY LAUNDERING

The beneficial owner concept has appeared

The Federal Law “On Combating Money Laundering and Financing of Terrorism” introduces the concept of a “beneficial owner”. The beneficial owner is an individual, who, directly or indirectly (via third parties), ultimately owns (holds a dominant share of at least 25% in the capital) a corporate client or is able to effect control over the client. Clients of organisations conducting operations with cash funds or other property will be obliged to provide such organisations with information about their beneficiaries.

CRIMINAL LEGISLATION

Criminal liability for money laundering

Articles 174 and 174.1 of the Russian Criminal Code are amended to change the sanctions for such crimes and, in a number of cases, make the punishment for laundering money obtained through crime more stringent. In accordance with the new amendments, the laundering-related articles will apply when crimes relating to funds involve evasion of tax, customs payments and non-repatriation of foreign currency funds (the clause relating to exclusion of the crimes provided for in articles 193, 194, 198, 199, 199.1 and 199.2 of the Russian Criminal Code has been deleted).

Financial operations and other operations with funds or other property are recognised as large scale operations if they are for an amount exceeding 1.5 m Roubles and as very large scale operations - if for 6 m Roubles. Previously, an amount exceeding 6 m Roubles used to be a large amount and no very large amount was established.

Stricter criminal liability for non-repatriation of foreign currency earnings

Article 193 of the Russian Criminal Code is amended to envisage stricter punishment for evasion of repatriation of funds in foreign currency or in the currency of the Russian Federation. Large scale non-repatriation now means non-repatriation of more than 6 million Roubles during the year and the maximum sanction in this case will be up to 3 years' imprisonment. In accordance with the amendments, very large scale non-repatriation means non-repatriation of 30 m Roubles and the maximum sanction is up to 5 years' imprisonment.

Previously, a large amount used to be defined as an amount in foreign currency exceeding 30 m Roubles, and a very large amount used not to be determined, and only the head of the company was subject to criminal liability.

Criminal liability for use of false documents or fly-by-night companies in remitting funds to non-residents

The Russian Criminal Code now has a new article, 193.1, which establishes a maximum sanction of 5 years for currency operations relating to remittance of funds in foreign or Russian currency to non-residents' accounts using false documents and a legal entity incorporated for committing one or several crimes. Moreover, if such crimes are committed by a group of persons or for a very large amount, the sanction will be imprisonment for a period of from 5 to 10 years. 6 m Roubles and 30 m Roubles now constitute a large amount and a very large amount, respectively.

This is an innovation in the criminal legislation. Its purpose is quite obvious: to prevent funds from being pulled abroad under fictitious and sham transactions.

A new article “Smuggling of Cash Funds and/or Cash Instruments” has been added to the Russian Criminal Code

New article 200.1 of the Russian Civil Code establishes criminal liability for illegal transfer across the customs border of the Customs Union of cash funds and/or cash instruments, namely, traveller's cheques, notes, banker's cheques and other documentary securities relating to fund payment and not identifying the recipient. An amount equivalent to at least US$ 20 thousand is recognised as a large amount and to US$ 50 thousand or more as a very large amount. At the same time, amounts permitted for transfer without declaring in writing (i.e., the equivalent of US$ 10 thousand) or the declared portion of the amount should be excluded from the calculations.

LEGISLATION ON ADMINISTRATIVE OFFENCES (FOREIGN EXCHANGE REGULATION)

Amendments to the Russian Code of Administrative Offences tightens liability for breach of the foreign exchange legislation

New clause 6.4 of article 15.25 of the Russian Code of Administrative Offences has established a fine for repeat failure to provide information about cash flows on foreign accounts during a year, failure to comply with the procedure for providing supporting documents and information in performing foreign currency operations, breach of rules for transaction passport issue or breach of the prescribed storage periods for reporting and accounting documents relating to foreign currency transaction, supporting documents and information relating to foreign currency operations or transaction passports. Such a fine for officials may amount to up to 40 thousand Roubles and for legal entities — up to 600 thousand Roubles.

CUSTOMS LEGISLATION

New grounds for refusal to apply special simplified procedures to approved economic operators (AEO)

The amendments to Federal Law No. 311-FZ “On Customs Regulation in the Russian Federation” have established that the special simplified procedures (being the key purpose of obtaining the AEO status) will not apply to an AEO if it imports goods dispatched by off-shore companies or pays for imported goods via off-shore zones.

Financial operations with off-shore companies as a new reason for risk management system response

In accordance with the addenda to article 162 of the Federal Law “On Customs Regulation in the Russian Federation”, the risk management system should now also be aimed at preventing breaches relating to financial operations with residents registered in off-shore zones.

CORPORATE AND FINANCIAL MARKET LEGISLATION

Liability of parties controlling the debtor in a bankruptcy case

The provisions regulating secondary liability of parties controlling a debtor have been amended. In particular, the Law determines a number of circumstances under which the debtor is presumed to have been recognised as insolvent (bankrupt) owing to actions and/or omissions by the controlling parties, this actually meaning presumption of guilt of the controlling parties.

Moreover, the given Law expands the scope of secondary liability of parties controlling the debtor. For instance, if the debtor is recognised as insolvent (bankrupt) owing to actions and/or omissions by the controlling parties, such parties, if the debtor's property is not sufficient, will bear secondary liability for all its obligations. Secondary liability previously applied only to financial obligations and/or obligations to make mandatory payments.

Obligation to notify the FSFM of acquisition of 10% or more of the shares (participatory interests) in financial organisations

The Law has introduced the obligation of a person that, directly or indirectly, individually or together with other persons related to it on grounds listed by the given Law, has the right to dispose of 10% or more of the votes attached to the voting shares (participatory interests) in the authorised capital of a qualified securities market player, insurance company, managing company of an investment fund or a microfinance institution (for the purposes hereof - the “Financial Institution”), to notify the relevant Financial Institution and the FSFM to this effect.

If the Financial Institution has not been so notified or it follows from the notice that the individual entitled to dispose, directly or indirectly, of 10% or more of the votes attached to the voting shares (participatory interests) in the Financial Institution is not qualified under the statutory requirements, such an individual will have the right to dispose of not more than 10% of the votes attached to the voting shares (participatory interests). The remaining shares (participatory interests) owned by the individual will not be counted for the purposes of establishing a quorum at a general meeting of shareholders (participants) of the relevant Financial Institution.

The above requirements do not apply to credit institutions operating as qualified securities market players.

Requirements on founders (participants), CEOs, members of management bodies and a number of other employees of financial institutions

In accordance with the given Law, persons with an outstanding conviction for an economic crime or a crime against the state are not entitled, directly or indirectly, individually or together with other persons related to them on the grounds listed by the given Law, to obtain the right to dispose of 10% or more of the votes attached to the voting shares (participatory interests) in the Financial Institution (as defined above).

The Law also introduces additional requirements on CEOs, members of management bodies and a number of other employees of qualified securities market players, insurance companies, managing companies of investment funds, microfinance organisations and non-state pension funds. In particular, the following persons may not act as such:

  • persons who performed the functions of the sole executive body of a financial institution when it committed a breach triggering cancellation (revocation) of the institution's licence;
  • persons, in relation to which the term when they are deemed to be held administratively liable by means of disqualification has not yet expired;
  • persons with an outstanding conviction for an economic crime or a crime against the state.

Additionally, this Law has amended certain legislative acts relating to combating unlawful financial operations, including the Federal Laws “On Organisation of Insurance Business in the Russian Federation”, “On Non-state Pension Funds”, “On Securities Market”, “On Investment Funds”, etc.

For additional information, please contact:

Anton Sitnikov,
Partner, Head of Corporate/M&A Practice
T: +7 (495) 287 44 44,
E: info@gblplaw.com

Evgeny Timofeev,
Goltsblat BLP Partner, Head of Russian/ CIS Tax Practice
T: +7 (495) 287 44 44,
E: info@gblplaw.com

Vladimir Tchikine,
Goltsblat BLP Partner, Customs and International Trade
T: +7 (495) 287 44 44,
E: info@gblplaw.com

Oleg Khokhlov,
Banking and Finance Practice Partner
T: +7 (495) 287 44 44,
E: info@gblplaw.com

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