Business and its criminal prosecution

Many corporate executives are reluctant to employ new technologies, partially due to concern over an unsubstantiated criminal prosecution. Such was one of the findings of Excessive Criminalization of Economic Activity in Russia. Why that Happens and What Is to Be Done, a report drafted by the Centre for Strategic Research Foundation. When referring to criminalization, the report means occasional entrepreneurial inaccuracies resulting in no considerable damage, being nevertheless qualified by law enforcement authorities as criminal offences.

© RIAN / Alexey Malgavko

The authors of the report state that Russia faces the problem of the criminal law affecting national economy. Their opinion is based on a random analysis of 2016 courts rulings on the most common economic wrongdoings labeled as criminal offences. The authors accentuate three most widespread types of economic violations unreasonably prosecuted under criminal laws.

The first group is violation of the taxation and accounting rules which is qualified as misappropriation. A common case often brought to court is an undue payment of a fine imposed on a company executive personally, from a corporate account. Usually, the offender is the new company director who may not be responsible for the misdeeds of his predecessor. In such a situation, an experienced accountant can give a sensible advice to pay a fine from the new director’s personal income and to later reimburse the expenses with a bonus amounting to the said fine. The judicial practices evidence, nevertheless, that far from all companies employ top professionals in finance. Thus, director of a logistics company in Rovnoye settlement (Saratov Region), for example, was found guilty of misappropriating RUR 1,500 ($ 25) which was the amount of the fine. A common sense would suggest that the executive could not possibly have any intention to make a fortune at the expense of the company since the amount was quite small compared to his monthly salary. Nevertheless, he was found guilty by the court.

The second group is violation of rules and regulations of dealing with values and money. In case a respective record keeping is found inappropriate, that may be qualified as an unlawful appropriation of money or values, even though they may have never been transferred from a company to its employee. Small retail companies trading for cash face the highest risks here, if an employee in charge of the cashflow is too busy and hence a bit late to put the cash into a money box, or to pass a contract to a counterparty. Another source of risks is the relationship between a business owner and a cashier. Is it imaginable that a cash register clerk who hands out receipts – at a carwash, for example – can demand from the business owner to properly record any withdrawals the owner may occasionally make from the company cash box? It makes no difference whether such withdrawals are made for business purposes such as urgent payments to counterparties, or not. It is quite evident that if a cashier is too insistent, he will immediately end up being unemployed. If he is reasonable about the said withdrawals practice, then in case of any conflict with the owner he will be prosecuted for violating cash transactions regulations.

When dealing with cash, “mistakes are eventually hardly avoidable”, the report authors state and refer to another court case when a veterinary physician was regularly paid for treating farm livestock in cash. After that he regularly passed the cash over to the office, but at some moment the cash was passed over with a minor delay, resulting in the physician being found guilty of appropriating RUR 5,500 ($ 95).

The third group is breaching contractual agreements. Even a single failure to comply with them may be qualified as fraud. The cases when agreements are made with the parties (travel agents, for instance) who deliberately intend to default on their obligations, are quite well known. Such fraud is common in dealings between companies, too. Still, it is absolutely clear, that any bona fide agreements may turn out to be unrealizable either by the set deadline or at all. Any economic activity involves mutual risks of the counterparties. Minor problems in meeting contractual obligations may as a rule be settled in a civilized manner. Regretfully, some people are not swift enough to sort them out. Some entrepreneur won a grant for implementing a project which he, due to objective external circumstances, failed to do. He intended to repay the funds he had received, by the specified date, but was unable to do so since before the deadline he was criminally prosecuted for an intentional fraud.

There are thousands of absurd stories like that. They are not results of ill will, but of carelessness, lack of expertise, and inadvertence.

The authors of the report state, that “Such a behavior should by no means be encouraged. Still, applying criminal penalties in such cases is not reasoned either”.

It is noteworthy that criminal prosecution is only applied to a tiny share of the negligent entrepreneurs. According to the research, in the described groups, there are hundreds of thousands of the economic wrongdoings occurring annually, while only about a thousand individuals are prosecuted in each group. That is a lot though, since the result of criminal proceedings are wasted time and nerves, a ruined reputation and an employment ban. As even highly qualified professionals may become victims of the criminal prosecution as well, that causes direct damage to the national economy, the report claims. There are indirect damages too. Some businessmen may shift to the shadow economy since the risks of lawful and unlawful entrepreneurships turn out to be comparable. Some executives, especially directors of public companies, may be reluctant to introduce new technologies, just to be on a safe side.

Whereas most of such breaches through inaccuracy are not worth a bean, law enforcement authorities are quite willing to initiated criminal investigations into them, since suspects usually admit their wrongdoings of being late to pay, or register, or submit whatever, therefore such cases help improve crime-solving rate and the overall police efficiency.

The authors of the report urge to abandon the excessive criminalization practices in economy and come up with two suggestions. First, they propose to set a minimum damage threshold for a wrongdoing to be qualified as embezzlement. Second, investigative agencies, prosecutors and courts should be provided with a clear interpretation of the term willful intent. For that, the researchers find it desirable for the Russian Federation Supreme Court Plenary Meeting to pass a respective judgement.

By Natalia Talskaya

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