Tougher Criminal Legislation for Combating Unlawful Financial Operations

29.08.2013

Legal Update No. 425, 29 August 2013

Goltsblat BLP advises that, on 28 June 2013, the President signed Federal Law No. 134-FZ, “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”).

The Law came into force on 30 June 2013, which was the date of its official publication. However, certain provisions have different effective dates. This review will highlight the most important developments in the legislation, as well as the potential consequences of their practical application.

The main change is the extended scope of the application of articles Nos. 174 and 174.1 of the Criminal Code, which pertain to money laundering.

The Article read:

The Article now reads:

Article No. 174 of the Criminal Code of the Russian Federation, "Laundering Money or Other Property Acquired by Other Persons through Crime".

Performing financial and other transactions with money or other property knowingly acquired by other persons through crime (other than the crimes specified by articles 193, 194, 198, 199, 199.1 and 199.2 of this Code) in order to give a lawful appearance to possession, use and disposal thereof.

Article No. 174 of the Criminal Code of the Russian Federation, "Laundering Money or Other Property Acquired by Other Persons through Crime".

Performing financial and other transactions with money or other property knowingly acquired by other persons through crime in order to give a lawful appearance to possession, use and disposal thereof.

Note to article 174 of the Russian Criminal Code.

Article 174 and article 174.1 of this Code recognise financial and other transactions with money or other property of a sum exceeding six million roubles as transactions performed in a large amount.

Note to article 174 of the Russian Criminal Code.

Article 174 and article 174.1 of this Code recognise financial and other transactions with money or other property of a sum exceeding one million five hundred thousand roubles or six million roubles as transactions performed in a large or a very large amount, respectively.

Article 174.1 of the Criminal Code of the Russian Federation, "Laundering Money or Other Property Acquired by a Person by Committing a Crime"

Large scale financial and other transactions with money or other property acquired by committing a crime (other than the crimes specified by articles 193, 194, 198, 199, 199.1 and 199.2 of this Code) in order to give a lawful appearance to the possession, use and disposal thereof.

Article 174.1 of the Criminal Code of the Russian Federation, "Laundering Money or Other Property Acquired by a Person by Committing a Crime"

Performing financial and other transactions with money or other property acquired by committing a crime in order to give a lawful appearance to the possession, use and disposal thereof.

The money laundering related articles now not only cover money obtained, but also cover money saved through crime. This is based on how the articles are worded.

In practice, law enforcement authorities will attempt to initiate criminal cases under article 199 of the Russian Criminal Code, "Evasion of Taxes and/or Levies Due from an Organisation" at the same time as those under article 174.1 for performing transactions with cash funds saved through non-payment. It is impossible to differentiate between legal money and money which has been saved through crime as it appears on an organisation's disbursement account. As a result of this, any business operation – even including the purchases of paper clips for office use – may be suspected to be money laundering.

As a result of this, the concept currently envisaged in the Criminal Code under which persons committing tax or customs crimes for the first time may be released from liability, if they repay the sums saved or pay the fines in full, becomes inoperative. This is because the termination of a criminal case instigated for a tax crime does not necessarily entail the termination of a criminal case instigated for money laundering.

Furthermore, the maximum punishment for money laundering (seven years' imprisonment) exceeds the punishment for a tax crime (six years), even though, in this case, laundering is secondary by nature and does not constitute an intended criminal activity by a guilty person.

Overall, these changes will result in significant pressure being brought on businesses by law enforcement authorities and the potential application of article 174.1 of the Russian Criminal Code as a tool for exercising unlawful pressure (“And who so ever does not wish to write a statement of true confession under article 199 of the Russian Criminal Code will face additional charges under article 174.1 of the Russian Criminal Code"). Indeed, an accused entrepreneur will not wish to redress the harm caused to the state – from the state’s perspective, the harm being underpaid taxes into the budget.

Another development is the broader application of the article relating to the non-return of funds from abroad.

The Article read:

The Article now reads:

Article 193 of the Criminal Code of the Russian Federation “Non-Return of Funds in Foreign Currency from Abroad"

Failure by heads of organisations to procure the return of large sums of foreign currency which, under Russian legislation, must be remitted to accounts with an authorised bank in the Russian Federation.

Article 193 of the Russian Criminal Code "Evasion of obligations to repatriate funds in foreign currency or in the currency of the Russian Federation”

Violation of the requirements of the foreign exchange legislation of the Russian Federation under which large amounts of foreign currency or in the currency of the Russian Federation payable to a resident under foreign trade agreements (contracts) for goods transferred or works or services provided to non-residents or for delivered information or intellectual property results, including exclusive rights thereto, are to be duly credited by the non-resident or non-residents to accounts held by the resident with an authorised bank, or with banks outside the Russian Federation, and of the requirements of the foreign exchange legislation of the Russian Federation under which large sums of foreign currency or the currency of the Russian Federation paid to a non-resident or non-residents for goods not imported on to the territory of the Russian Federation (i.e., not received thereon) or for works not performed, services not rendered or information or intellectual property results, including exclusive rights thereto, not delivered are to be duly returned to accounts held by the resident with an authorised bank in the Russian Federation or with banks outside the Russian Federation.

Note to article 193 of the Russian Criminal Code.

The offence specified by this article is recognised as committed in a large amount if the non-returned funds in foreign currency exceed thirty million roubles.

Note to article 193 of the Russian Criminal Code.

The offence specified by this article is recognised as committed in a large or a very large amount if cash funds in foreign currency or in the currency of the Russian Federation which are not credited or returned under a single foreign currency operation or under multiple foreign currency operations performed during one year exceed six million roubles or thirty million roubles, respectively.

As per the current version of the article, any violation of the requirements of foreign exchange legislation triggers criminal liability. Previously, only actually intentionally non-returning money triggered criminal liability.

Until consistent judicial practice is established, there is a risk of being held liable for violating the deadlines for returning funds from abroad – this includes delays caused by business partners.

Furthermore, as per the current version of the article, the criterion for applying such a qualifying parameter as a large amount has been reduced from 30 million roubles to 6 million roubles.

Within the scope of combatting off-shore schemes, legislators have introduced a new set of crimes under which siphoning money to other countries under the pretence of lawful financial operations constitutes a crime.

Article 193.1. of the Criminal Code of the Russian Federation

Performing foreign currency transactions involving the transfer of funds in a foreign currency or in the currency of the Russian Federation to a non-resident or to a non-residents' bank account, accompanied by the submission to a credit organisation, enjoying the powers of a foreign exchange control agent, of transfer-related documents containing deliberately incorrect information about the grounds and the purposes for the transfer.

The article is aimed at combatting a common fund outflow method, i.e. transfers made in the guise of rendering consulting, accounting, legal and/or other services.

Unfortunately, it is currently unclear how to establish the deliberately incorrect nature of information relating to payments made.

For instance, if a foreign consulting firm is engaged, there is a risk that the Russian corporate client will have to bear the burden of proving that the services have actually been rendered. Failing this, the client may be held criminally liable for money siphoning on the basis of an allegedly simulated transaction.

Moreover, legislators have amended the notes to an article on the non-payment of customs charges to make the grounds for attributing liability to individuals the same as those for corporate entities.

The Article read:

The Article now reads:

Note to article 194 of the Criminal Code of the Russian Federation "Evasion of Customs Payments Imposed on Legal Entities and Individuals"

Evasion of customs payments is recognised as being committed in a large amount if the outstanding customs charges due from an individual or a legal entity exceed one million roubles or two million roubles respectively, and in a very large amount if they exceed three million roubles for an individual and ten million roubles for a legal entity.

Note to article 194 of the Criminal Code of the Russian Federation "Evasion of Customs Payments Imposed on Legal Entities and Individuals"

Evasion of customs payments is recognised as being committed in a large amount or a very large amount if the customs charges for goods moved across the customs border of the Customs Union within the Eurasian Economic Community, including as part of the same shipment or a number of shipments, exceed one million roubles or three million roubles respectively.

It should be noted that, even though legislators specify that outstanding charges due for several shipments of goods are to be aggregated in order to determine whether or not there are grounds for criminal prosecution, they do not define the period for which this should be done.

Another new development is that the Criminal Code reinstates liability for smuggling cash funds.

The Article now reads:

Articles 200. 1 of the Russian Criminal Code.

Unlawful movement of cash funds and/or cash instruments across the customs border of the Customs Union within the Eurasian Economic Community committed on a large scale basis.

The liability for this begins once the unlawfully moved cash funds are double the specified amount of cash funds that may be moved without making a written declaration (currently 10,000.00 USD).

The punishment under the article does not mention imprisonment, only large fines that are multiples of the unlawfully moved sums.

In addition to amending the Special Part of the Criminal Procedure Code of the Russian Federation, the legislators have changed the article pertaining to confiscation of property, supplementing it with the possibility of assets being confiscated if they are obtained by committing the crimes outlined by articles 174 and 174.1 of the Russian Criminal Code, i.e. through money laundering.

This innovation is arguable to say the least, since the purpose of laundering is not to acquire property through crime, but to make its possession appear legal. As a result, criminals do not have any new cash funds (property) acquired directly through crime and the possibility of laundered money being confiscated should be based on the crime by which it was obtained.

If, on the other hand, what the legislators meant by this was the confiscation of laundered items, the relevant cash funds might be taken twice. For instance, if a person is found guilty of evading taxes and of laundering the resulting money, the court may order the confiscation of the outstanding taxes payable to the budget as a penalty for this crime. Yet, at the same time, a legal entity that fails to pay a tax must pay it, as required by the tax authority conducting an audit and identifying the non-payment. Therefore, the legal entity may have to pay the same tax twice, which runs counter to the principle established by the Criminal Code of the Russian Federation under which no-one may be prosecuted twice for the same offence.

Generally, the amendments to the Criminal Code of the Russian Federation are of a positive nature and reflect the current economic situation in the country. However, the low technical legal skills displayed by legislators in preparing the changes to the code could offset the positive effect of the changes, lead to the unjustified prosecution of entrepreneurs and increase prosecution-related pressure being put on businesses by law enforcement authorities.

If you have any question or would like more detailed information, please contact:    
                 
Anton Gusev,
Associate, Advocate, Litigation and Dispute Resolution,
Goltsblat BLP
Tel.: +7 (495) 287 44 44,
E-mail: anton.gusev@gblplaw.com

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