Russia Fights Crime and Corruption

By Michael Gray

Although a strong entrepreneurial spirit continues to flourish among legitimate business people in Russia, organized crime and public corruption are menacing businesses throughout the country. An increasing number of legitimate businesses—in practically every part of the Russian economy—are being blackmailed, forced out of business, or simply taken over by criminals and corrupt government officials.

Slow Legislation

Enacting criminal justice legislation in Russia would establish an effective system of commercial and criminal laws, help to protect businesses from organized crime and corruption, and provide a needed framework for establishing the rule of law in Russia. But it is proving to be a slow and difficult process. Lawmakers apparently cannot agree on the scope of proposed substantive legislation or even whether substantive or procedural reform should be given priority. For example, the draft penal code, after being rejected by the Federation Council (Russia's senate), was passed again by the Duma with sufficient votes to override the Federation Council, only to be vetoed by President Yeltsin, who wants a criminal procedure code further developed first. A separate draft law on organized crime that includes important provisions for combating crime and money laundering was also rejected by the Federation Council in October.

A proposed law on money laundering is also encountering delays because of a lack of consensus among potentially affected government agencies. Revisions to these draft laws, and other important pieces of criminal justice legislation including a draft code on criminal procedure, will now depend on the attitude of the new parliament elected on December 17th.

The current draft penal code outlaws securities fraud and money laundering and forbids "false" and "fraudulent" bankruptcies. The drafters, however, are obviously having difficulty deciding whether certain "harmful activities" should be deterred by civil damages or criminal penalties. "Illegal use of trademarks," for example, is considered a crime under the draft. In the United States this activity is generally addressed by civil prohibition rather than criminal sanction. Similarly, Russian lawmakers branded "negligent destruction of property" as a crime, which in the United States is generally addressed in the civil law context whereby the injured party can sue the person who destroyed the property and recover damages. The Russian draft penal code also proposes criminal sanctions against government officials who obstruct "legitimate entrepreneurship." These actions, however, may be better addressed through disciplinary proceedings within such officials' agencies, or through a civil suit by the aggrieved party.

Drafters could, more clearly, coordinate the creation of criminal prohibitions and civil causes of action. For example, the draft penal code criminalizes false bankruptcies (as in the United States). Yet it has not been clarified how these new criminal provisions and the civil provisions of the Russian bankruptcy law will be squared. Similarly, money laundering provisions in the penal code should be coordinated with those in the proposed law on money laundering. Because of the vague definitions and scope of these crimes, some legitimate business transactions may actually be inhibited out of fear of risking criminal sanctions. It is important to note, however, that a commentary which typically accompanies laws may alleviate many of the problems associated with the lack of clear definition of what constitutes illegal conduct.

Prohibiting Money Laundering

Money laundering is linked to other criminal activity, such as drug smuggling or bank fraud. The Russian MVD (Ministry of Internal Affairs) currently estimates that more than 3,000 criminal groups, using threats and blackmail, have established control over 40,000 businesses, including more than 400 banks, nearly 50 stock exchanges, and almost 1,500 enterprises in the government sector of the economy. The draft Law on Liability for Legalization of Proceeds of Crime, (the proposed law on money laundering), contains many important provisions that not only prohibit money laundering but also attempt to create a structure permitting effective enforcement of the law's prohibitions. However, the law could be improved by clarifying its terms. For example, the draft law prohibits acts designed to conceal the source of funds obtained through "criminal activity," without defining the term, criminal activity. Also, the draft law does not prohibit a person from using funds derived from a criminal act, even if the person is aware of the origin of these funds.

The draft law also requires financial institutions to submit currency reports and record all significant financial transactions in a manner that fully identifies the person or business involved in the transaction. The legislation requires financial institutions to report suspicious financial transactions to governmental authorities within twenty-four hours. Yet terms such as "financial institution" and "financial activities" and "transactions" are not clearly defined. The term "financial institution" appears to be limited to banks, and thus does not include other businesses that receive large sums of money in exchange for goods and services, such as automobile dealers or dealers in precious metals. Nor does it seem to encompass other financial service businesses, such as insurance and credit card companies. (In the United States such companies are required by law to file currency transaction reports.) "Financial institution" may thus include any business whose cash transactions could be used to launder money.

The draft law also requires financial institutions to unilaterally refuse to implement financial transactions if they are either "suspicious" or "economically inexpedient." Yet neither "suspicious" nor "economically inexpedient" is defined by the law. The draft law would thus grant significant discretion to financial institutions to determine which transactions are "suspicious" or "economically inexpedient." It could therefore be disruptive to the financial system, actually promote corruption in the banking industry, and hinder legitimate business activity. It would be preferable to require financial institutions to report all suspicious transactions (with "suspicious" clearly defined by the law) to an appropriate government agency, while employing safeguards to ensure the confidentiality of information reported.

The draft law further requires financial institutions to report to the government any single cash transaction that is more than 200 times greater than the minimum wage and any single noncash transaction that is more than 500 times the minimum wage. Yet the law neither prohibits the structuring of financial transactions to avoid these restrictions, nor requires institutions to report transactions that, if deposited in aggregate amounts within a twenty-four hour period, will reach these same levels. It is important to note that a commentary that typically accompanies the law, may (1) clarify which, if any, structured transactions, are in fact bogus, and thereby must be reported, and (2) clearly define terms such as "suspicious" and "economically inexpedient."

Exercising Due Diligence

Although it is unclear whether the proposed relatively low fines for noncompliance with these regulatory requirements will deter money laundering, Russian banks can prevent these illegal transactions by exercising due diligence. Again, international experience shows that banks should be suspicious of transactions not supported by normal business practices; customers who refuse to provide complete background information; cash or wire transactions that do not fit the profile of a certain type of business; customers who seem more interested in evading reporting requirements than being made aware of them; and unwarranted transactions such as dispersing deposits at branch banks. Banks should also ask for prior bank references, conduct background investigations of all partners in a joint venture, and corroborate all information provided by applicants. Banks should also coordinate their activities with regulators, law enforcement agencies, and business associations.

Effective Enforcement

For any of these nascent efforts to be successful, the political will must exist to enforce them. A critical element is a judiciary with the necessary independence to enforce the laws without fear of retaliation. The judiciary must be free to protect the individual rights and responsibilities that are the cornerstone of a free market. Western governments and business participants can encourage these types of reform.

Russian lawmakers should benefit from abundant U.S. experience in these areas, and consider the following:

• A balance should be struck between criminal laws and civil/regulatory controls that will appropriately sanction different types of prohibited activity.
• Prohibitions need to be clearly defined. If they are vague or too broad, they may well discourage legitimate business activities without necessarily preventing criminal deeds.
• No criminal statute, no matter how comprehensive, can guarantee the creation of a market economy free from fraud and corruption. Although some crimes will be prevented by enacting laws that aim to eliminate the economic incentives of illegal activity, the laws' effectiveness will ultimately depend upon thorough investigation, prosecution, and enforcement.

Michael Gray is director of the U.S. Department of Justice's Criminal Division Program for Anti-Organized Crime Assistance to Central and Eastern Europe and the former Soviet Union. The Department of Justice's Michael Dittoe and John Radsan contributed to this article from Moscow. The opinions expressed in this article are those of the author and do not necessarily reflect the official position of the U.S. Department of Justice.