Expert opinions, LAW

‘Anti-money laundering’ destruction of small business

Alexei Ilyinhead of financial institutions, ALNANT legal group

It’s been a long time since the federal anti-money laundering law #115-FZ (On Countering Legalization (Laundering) of Proceeds of Crime and Financing of Terrorism) was adopted in August 2001. At first, few noticed it: ordinary people and entrepreneurs didn’t even know it existed. But things changed radically in recent years. Very few households in Russia didn’t hear this law knock on their door, and that’s thanks to the bankers. For some families and companies there was more than a knock …

Initially, the enforcement of this law was very limited: the document was adopted with a view of protecting the rights and legal interests of citizens, society and the state by creating a legal mechanism to counter legalization (laundering) of proceeds of crime and financing of terrorism (article 1).

The law suggested that the ‘crusaders’ fighting these ills in society should have information substantiated by evidence on their hands proving that the proceeds were of criminal nature or were connected with financing of terrorism.

However, in enforcing it, the financial institutions and banks chose another path. ‘Genius’ of the Russian financial market spared themselves. In absence of any liability for abuse, law #115-FZ stared being used as an instrument, a universal tool of reaping one’s economic benefit.

Such actions by banks deal serious and irreparable damage to the country’s business and the national economy in general. Economic activity of many small and medium-sized business entities was paralysed. No matter how absurd this might sound, but it turns out that what the Russian banks do today actually hampers the development of entrepreneurial activity and sometimes even oppose it.

As an example, here’s a situation: a bank gets its hands on federal law 115-FZ as a means of control according to which it can request documents every time a company carries out a ‘suspicious transaction,’ and to suspend payment and cash services. Further on, a bank adds penalties to its banking services agreement and also applies higher rates that allow it to debit the customer’s account for up to 20% of the amount of ‘suspicious transaction’ or of the blocked amount. So, the bank’s economic profit in this case is in the penalty it gets and the ‘free’ loan in the form of the funds blocked. While the documents are being checked and the funds are being cleared, the bank makes use of the customer’s money as it sees fit.

Law #115-FZ and other federal laws do not contain any provisions that allow credit institutions to introduce special increased commission fee as a measure to counter the legalisation of proceeds of crime. Collecting commission for transactions involving monetary funds related to legalization (laundering) of proceeds of crime and financing of terrorism, is not a form of control. Thus, neither the law nor model rules provide for such measure of control as introducing higher rates.

Interpreting it in conjunction with the above provisions of law 115-FZ related to identifying the unusual nature of a transaction speaks to the fact that under the said law, an unusual transaction is just a transaction for which there are grounds for documented registration of information about it. As was already mentioned, such grounds in general or in any specific case are:

  • Intricate or unusual nature of a transaction with no obvious economic reason or evident legal goal;
  • Conflict between the transaction and the company’s mission, as set forth in its statutory documents;
  • Revealing several instances of operations or transactions whose nature gives reason to believe that they are intended to evade mandatory control under law 115-FZ.

Main criteria of transaction’s irregularity are set forth in law 115-FZ and are further specified in the Letter of the Bank of Russia #99-T of July 13, 2005, which are binding for the banks.

Vague wordings used to identify transactions as shady and the method used to calculate a company’s tax burden do not take into account not only business realities but also current tax legislation.

Let’s take a situation.

It is fairly impossible to calculate tax burden for a company registered on January 12, 2018, with just three months of operations. That is because the bulk of the VAT tax amount (which affects the tax burden calculated based on the company’s turnover) will be charged and paid after the tax declaration is submitted at the end of the tax period. In our case, this will be after April 25, 2018. But the banks remain incredibly stubborn in ignoring these circumstances.

We are not even talking about creating stock in trade, purchase of fixed or other assets and other expenditures of a company related to its business development. So, tax burden for such companies will not be in line with the one recommended by the Central Bank of Russia, and this automatically transfers many companies into a risk group.

Lawsuits involving financial institutions make entrepreneurs entail considerable expenses, financial and time. And this allows the bank to take unpunished actions against small and medium-sized businesses. Impunity and absence of strict financial liability allow the banks to use law 115-FZ exclusively for their own interests.

Watching how federal law 115-FZ is being enforced, we can trace a rather disappointing trend. While in 2015-2016 this law was enforced in a rather limited number of cases, in 2017-2018 the banks began requesting documents ‘attesting the legitimacy of transactions carried out’ at the slightest pretext. And in fact, they resolve to suspend clearing and settlements without actually checking or reviewing the documents. With a nod and wink (and often with consent) from the Central Bank, a fine instrument that law 115-FZ represented turned in the hand of the ‘bankers’ into a club that can be arbitrarily used to wheedle money out of entrepreneurs and crush their business.

Countering these actions legally is the only way to bring the bankers down to earth and make their activity legal again.

The courts have more than once expressed their position with regard to the banks’ illegal actions to charge entrepreneurs higher rates. So, to effectively counter the banks’ lawlessness, the companies should send their banks a letter of claim, and if the latter refuse to meet the claim under a pre-action protocol, to file an action.

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