International prosecution against debtors for fraud and insolvency related crimes
The issue of international prosecution for insolvency related crimes is a crucial topic in Russia at present because of the recent reforms in legislation and the peculiarities of the Russian law enforcement system. Moreover, the importance of such a topic is supported by consistent development of international cooperation between the investigating bodies of different countries.
The legislator has recently made necessary amendments to the insolvency regulation in Russia. This is largely because of the permanent growth in corporate insolvencies and personal bankruptcies. For instance, in the first half of 2021, the number of corporate insolvencies increased by 9.2% (up to 4,918 cases), while instances of personal bankruptcies also increased by 2.1 times (up to 88,046 cases).
However, in 2021 only 3% to 4.4% of creditors received recovery of their debts within insolvency/bankruptcy proceedings, while the majority of creditors' claims remained unsatisfied.[1]Thus, the legislator introduced more detailed and complex regulation of criminal liability for crimes connected to insolvency proceedings and toughened the liability.
Due to poor legislation and difficult procedural issues with bankruptcy-related crimes, investigative bodies tended to prosecute for a more general offence of fraud (Article 159 of the Criminal Code of the Russian Federation), rather than specific offences — unlawful actions during bankruptcy proceedings (Article 195 of the Criminal Code of the Russian Federation) and premeditatedbankruptcy (Article 196 of the Criminal Code of the Russian Federation).
For example, there is an official statistic that in 2020 there were 3,028 convictions for fraud on a very large scale (part 4 of Article 159 of the Criminal Code of the Russian Federation). At the same time, in 2020, there were only 24 guilty verdicts for all bankruptcy-related crimes. Thus, the statistics for the international prosecution of the debtors, even if it arose from their bankruptcy, are directly related to their accusations of fraud.[2]
This article contains an overview of the key areas of international prosecution in respect of substantial cases and analysis of alleged problems and perspectives.
General overview of international prosecution instruments
One of the main instruments of the investigative bodies when it comes to international prosecution is the request for legal assistance. This fundamental instrument is broadly used when there is some foreign element in the criminal case, for example, some assets are allocated abroad or the debtor is living in a foreign country. Thus, an investigative body, the general prosecutor's office or the Ministry of Justice issues a request for legal assistance to the relevant authorities of a foreign country.
The request for legal assistance is defined in Section 53 of the Criminal Procedure Code of the Russian Federation, which covers all possible actions during the legal assistance. Another significant regulation of the request for legal assistance comes from international treaties.[3]
Request for procedural actions
The request for procedural actions means that Russian investigative bodies ask relevant foreign authorities to act "on their behalf" while collecting evidence or performing other actions mentioned in the Criminal Procedure Code of the Russian Federation, as if they were their representatives. The reason for this is lack of criminal procedural jurisdiction over foreign territory.
The most common and expressive use of such a request is the request for information on the dissipated assets. The investigative body must reveal in the request information on the debtor, the factual consequences of the criminal case and the provision of the Criminal Code of the Russian Federation under which there is a criminal case. Note that such information is provided for the purposes of enforceability of such a request.
Differences between legal systems also influence the peculiarities of international prosecution. For example, in common law countries, courts only have the authority for an initial approval of a request for legal assistance in terms of gathering evidence by the authorities. That is why requests from Russia to such countries must be prepared in the manner of a court document to convince the judge to allow any procedural actions. The less information that is provided, the lower the chances for success.
This is a widely used weapon by creditors and state authorities to find any assets abroad. Later, this information may be used in the bankruptcy proceedings either to claw back the transactions or to seize it in the criminal case.
On top of this, investigative bodies can also issue a request for the actual seizure of property via Interpol. It is important that Interpol is not the investigative body, but it is a linking body between foreign authorities. Its main aim is to support the investigator to reveal some approximate information. However, the official information may be still discovered only via the direct response of the foreign authorities.
Seizure of property, unlike other procedural actions including impoundment, is available only after there is a guilty verdict from the competent court. However, there is still no certainty in international practice what is the destiny of the confiscated assets. For example, Provision 16 of the "Treaty between the Russian Federation and Japan on mutual legal assistance on criminal cases" signed on 12 May 2009 in Tokyo, leaves the right for the requested party that seized the property to determine the destiny of such property — it may be transferred to the requesting party in full or in part. However, the requested party also has competence to leave the confiscated assets as a benefit of a state budget. The common principle for such decisions is mutuality of such transfers.
Another approach can be tracked in Provision 20 of the "Treaty between the Russian Federation and the Republic of Turkey on mutual legal assistance on criminal cases and extradition" signed on 1 December 2014 in Ankara. There is an obligation on the requested party to transfer the confiscated property in an amount that does not violate local legislation.
Thus, the variety of different approaches to requests for procedural actions and legal systems provide an area where the state, the creditors and the debtor can interpret the applicable legislation based on their needs in order to protect their own interests.
Request for extradition
Another notable instrument in international prosecution is a request for extradition, which is also regulated by special bilateral international treaties and the core treaty — "European Convention on Extradition" signed on 13 December 1957 in Paris.
Extradition means that the state where the debtor is located can transfer, i.e., extradite them, to the requesting state in order to either face criminal prosecution or serve a sentence under the prior jurisdiction.
The key principle in the requests for extradition is the rule of "double criminality." It means that the requesting party must prove that the offence committed by the debtor is a crime in both countries. That is the most frequent reason for Switzerland not to allow extradition for tax crimes, as they are decriminalized if there are no elements of other crimes. A common additional rule for double criminality is the certain threshold of maximum sentences for such a crime in both states. The threshold is a procedural instrument that is intended for the proper use of extradition. Due to the complexity and lengthy periods of international requests for criminal cases, it is simply not worth extraditing a criminal to the requesting state where they will face a minor sentence.
One of the representative cases to illustrate the timeline of such requests is the extradition of Mr. A. Kuznetsov in 2019 for fraud. In 2010 he was declared wanted, and in 2013 he was arrested in France and only extradited for prosecution in 2019 because of a lengthy appeals process. The appeal against the decision to extradite was based on the fact that the prosecution was for a "political cause." What is significant about this case is that the Russian authorities succeeded in confiscating the assets that were bought using the proceeds of the crime for a huge sum in France and Switzerland.
In some cases the time frame can be relatively short, such as in case of Mr. A. Smyshlyaev - Russian distributor of Nokian tires. Nokian tires entered his bankruptcy case in 2018 and coupled it with initiating the criminal case for fraud and premeditated bankruptcy. As a result Mr. A. Smyshlyaev was arrested in 2019 in Italy and extradited in 2021. The dispute in insolvency case is still going in presence of the debtor, so this is a good example of using the criminal case as a simultaneous measure during bankruptcy procedure.
However, the success of the extradition is not at all consistent because of political relationships between different states. In highly publicized case of Dalnyaya Step’, whose beneficiary Mr. W. Brauder was found guilty of organizing premeditatedbankruptcy and tax fraud and was convicted ex parte to a nine-year sentence, no extradition was reached. The reason was the rejection by the UK to extradite Mr. W. Brauder.
Extradition is still a worthy instrument in international prosecution but it needs to be optimized to work properly. In 2021, only 74 defendants were extradited to the Russian Federation, whereas there are almost 10,000 people on Interpol lists declared wanted by the Russian Federation.[4]The transparent statistics depict the lack of engagement between the investigative bodies of different states.
Problems and tendencies of international prosecution
Several problems in international prosecution create several obstacles in the course of proper work of the international judicial system.
Lack of international treaties
This is the most striking reason for the uncertainty of the regulation of international prosecution, including a request for extradition and a request for legal assistance. For example, there is no bilateral treaty between the US and the Russian Federation on extradition.
This leads to numerous situations where debtors find the jurisdiction that doesn't have any treaties with Russia and allocate their assets to it. There is principle, "comitas gentium," that comes from international law and is applicable to international criminal prosecution due to Article 453 of the Criminal Procedure Code of the Russian Federation.
However, as the implementation of such a vague principle does not lead to its practical use, there are still some loopholes for the debtors. Comitas gentium requires mutual recognition and execution of such requests, which makes it difficult for investigative bodies to achieve consistent effectiveness.
Conflicting internal legislations
Another issue to consider is the principle of double criminality. Thus, as in the example with Switzerland and tax crimes, the defendants can actually escape prosecution by hiding in a jurisdiction that has either poor or lenient legislation in this field.
The only possible solution to this problem is harmonization of internal legislation via international organizations. There is already a basis for such a course of actions — Interpol. We suggest that in the nearest future the investigative bodies will force legislative reforms that will prevent the existing loophole.
Collision of requests
Finally, there is a fundamental problem with competing requests for extradition from different states. There is no practical solution yet if there are several requests on different grounds.
Asset dissipation and cross-border insolvency involves many jurisdictions on a regular basis. This leads to the situation where many countries may initiate a criminal case against the controlling persons of the debtor. Grounds for the procedural jurisdiction may differ from the citizenship of the actor or the victim to the protection of the public interest of a certain state and place of action.[5]
In such a collision, all of these states can lawfully request for extradition, but the requested party will face uncertainty, thus violating the rights of several requesting parties, as it cannot extradite the same person to different states.
The situation is even more complicated with the ban on multiple or transit extradition, since it may violate a defendant's rights. The solution of granting the first-dated request is obviously not agile enough. Thus, the doctrinal international system of ranking the grounds for requests may solve the problem in the most effective way.
Conclusion
In this context, initiation of the criminal case in order to collect debt abroad might be a viable instrument. However, it requires a well-thought-out strategy and competence in international criminal prosecution to find substantial evidence and achieve certain interconnections between investigative bodies. Needless to say that it is still complicated with some peculiarities of different legal systems.
We expect further development of bankruptcy related criminal cases due to the recent reform. As the creditors receive more specific instrument, we recommend to keep in mind the criminal case as a simultaneous measure during bankruptcy proceeding. Criminal investigation might give additional evidence for civil proceedings. Furthermore debtor's beneficiaries might initiate settlement negotiations in case of disclosure certain facts by criminal investigation.
Pavel Novikov, Partner
Fedor Bugaytsov, Junior Associate
Baker McKenzie, Russia
[1]Statistical Bulletin of the Federal Bankruptcy Register dated 30 June 2021, https://download.fedresurs.ru/news/%D0%A1%D1%82%D0%B0%D1%82%D0%B8%D1%81%D1%82%D0%B8%D1%87%D0%B5%D1%81%D0%BA%D0%B8%D0%B9%20%D0%B1%D1%8E%D0%BB%D0%BB%D0%B5%D1%82%D0%B5%D0%BD%D1%8C%20%D0%95%D0%A4%D0%A0%D0%A1%D0%91%2030%20%D0%B8%D1%8E%D0%BD%D1%8F%202021.pdf.
[2]Statistical Charter of Criminal Cases, 2021, http://stat.xn----7sbqk8achja.xn--p1ai/stats/ug/t/14/s/17.
[3]Volevodz A.G., "International cooperation in area of criminal justice – history lessons and some problems of reform", International Criminal Law and Justice, https://mgimo.ru/upload/iblock/078/078c292688acf4066472bc7631659847.pdf.
[4]Interview of the head of the Russian department of Interpol, 2021, https://rg.ru/2021/09/29/nachalnik-ncb-interpola-v-etom-godu-v-rf-ekstradirovali-62-prestupnika.html.
[5]M.K. Tatarinov, "Solving collisions of jurisdictions in regard with the crimes in fuel and energy sector," Legal grounds of international cooperation against crime, 2019, https://mgimo.ru/upload/iblock/ad0/01%20%D0%9C%D0%A3%D0%9F%D0%9C%D0%AE%202019%20-%20%D0%A2%D0%B0%D1%82%D0%B0%D1%80%D0%B8%D0%BD%D0%BE%D0%B2.pdf.