Facing significant international pressure and possible counter-measures from major
trading partners Russia has succeeded within three months what it has
previously been unable to do for several years: on May 28, 2001 the Russian
President signed the law on the ratification of the Council of Europe
Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from
Crime (hereafter the "Strasbourg Convention"), which will enter into force for
Russia on December 1, 2001. On July 20, 2001 the draft Federal Laws "On
Counter-Measures Against the Legalization (Laundering) of Proceeds from Crime"
and "On Amendments and Additions to Legislation of the Russian Federation in
Connection with the Adoption of the Federal Law "On Counter-Measures Against
the Legalization (Laundering) of Proceeds from Crime" received final approval
from Parliament. There remains little doubt that these laws will enter into
force as planned on February 1, 2002.
The present summary proposes to give a short overview of the new legislation (based on the
draft laws). We intend to publish a more detailed study, in particular of the
new laws? significance for Swiss banks and financial intermediaries, in the
course of this autumn.
Definition of Laundering Offences:
The new
legislation amends Article 174 of the Russian Criminal Code, which newly
defines the offence of money laundering as:
"the performance, for large amounts and with the aim of giving a legal appearance to
their possession, use and disposal, of financial and other transactions with
monetary funds and other assets which are known to have been acquired by other
persons through criminal means (with the exception of the offences defined in
articles 193, 194, 198 and 199 of this Code)."
Under the
Criminal Code transactions are for large amounts if their value exceeds 2,000
minimal monthly salaries as defined by legislation (currently the equivalent of
6,500-7,000 USD).
As paradoxically as it may sound, the new article 174 is more restrictive than its
predecessor. The previous definition did not make the offence depend on the
purpose of disguising the criminal origin of the money, i.e. covered any
transactions with and use of criminal money in business. Parliament further
insisted on replacing the words "through illegal means" by "through criminal
means", which signifies that from now on only criminal offences (i.e. offences
defined by the Criminal Code) may be at the origin of money laundering. It
further excluded offences defined by articles 193, 194, 198 and 199 of the
Criminal Code, i.e. failure to repatriate funds in accordance with exchange
control regulations, avoidance of the payment of taxes and customs duties
(smuggling, however, remains a money laundering offense). The definition of
laundering offences remains nevertheless rather broad since the notion of
"crime" includes under Russian law all criminal offences irrespective of their
seriousness (under Swiss law the offence of money laundering is possible only
with respect to "crimes" in the sense of the Swiss Criminal Code, i.e. serious
criminal offences).
The word "knowingly" also restricts the possible application of the article (contrarily
to article 305bis of the Swiss Criminal Code, which is applicable if the
offender knew or ought to have assumed the criminal origin of funds).
Essentially this means that the offence must have been committed intentionally,
negligence not being sufficient. The Russian Criminal Code does therefore not
impose an obligation of due diligence on employees of banks and financial
intermediaries. The definition of the offence seems nevertheless to meet
minimal standards set by the Strasbourg Convention and the Recommendations of
the OECD Financial Action Task Force on Money Laundering (hereafter "FAFT").
A new article 174(1) addresses the case where the author of the crime launders the criminal proceeds
himself. It is broader in its application, but still excludes proceeds from tax
and similar offences.
The offence of money laundering as defined by Articles 174 and 174(1) of the Criminal Code
seems almost completely impossible in connection with tax and exchange control
offences. This includes both tax evasion and tax fraud as defined by Swiss law.
Russian criminal law has indeed not established tax fraud as a separate
criminal offence. Tax offences will therefore give rise to money laundering only
if they involve the commission of other criminal offences (fraud, forgery of
official documents, etc.).
Scope of the Law:
The law applies to the following institutions (hereafter referred to as "financial institutions"):
- credit institutions (banks, etc.);
- professional intermediaries of the securities market (brokers, dealers, stock exchanges, etc.);
- insurance and leasing companies;
- mail, telegraph and other non-credit institutions offering money transmission services;
- pawn-shops.
Mandatory Reporting of Transactions:
Under the new legislation financial institutions will have to report the following
transactions to a special government authority still to be named by the
President of the Russian Federation (designed to become the Russian Financial
Intelligence Unit ? hereafter "Russian FIU" - required pursuant to the
recommendations of the FAFT) if they exceed 600,000 RUR (presently ca. 20,000 USD):
- Cash transactions:
- withdrawal of cash from and payment of cash into a bank account if these operations are not conditioned by the character of the customer?s commercial activity;
- purchase and sale of foreign currency in cash;
- purchase of securities by individuals against payment in cash;
- payment in cash to individuals of bearer cheques issued by non-residents;
- exchange of bank-notes against bank-notes of a different face value;
- payment for equity held in corporations made by individuals in cash.
- transfers from and to the account, receipt and extension of loans,
transactions with securities if one of the parties is an individual or legal
entity registered or domiciled in a country known as illegal producer of
narcotics or a person holding an account in such a country (list of
countries to be drawn by the Government);
- transfers from and to the account, receipt and extension of loans,
transactions with securities if one of the parties is an individual or legal
entity registered or domiciled in a country (territory) which does not
disclose or provide information on financial transactions or a person holding
an account in such a country (list of countries to be drawn by the Government
in cooperation with the Central Bank based on the lists approved by
international anti-money laundering bodies);
- operations with bank accounts (deposits):
- opening a bank deposit to the bearer;
- opening bank deposits in favor of third persons with cash;
- cross-border transfers from and to anonymous accounts;
- payments to or from the account of a legal entity which has been in
existence for less than three months or whose accounts have been dormant since
their opening.
- other transactions with movable property:
- pawning securities, precious metals and stones and other values with a pawn-shop;
- payment of insurance premiums by individuals; payments to individuals
under policies of life and retirement income insurance and other types of
insurance under the terms of which the policy holder builds up a cash capital;
- leasing contracts;
- money transfers by non-credit institutions for the account of clients.
The list of transactions which must be reported automatically has been significantly
shortened by Parliament. The list in the first draft of the law would have
included many transactions of a clearly commercial character (e.g. transactions
with securities where one of the parties is a company registered in an
off-shore jurisdiction).
Reporting of suspicious transactions:
Financial institutions will need to
introduce internal control mechanisms and programs for their implementation,
appoint special officers responsible for compliance with such rules and
implementation of such programs, and take other internal organisational
measures to avert money laundering. The internal compliance rules must include
rules on record-keeping, on confidentiality, requirements for the training of
staff and criteria for identifying suspicious transactions taking into account
the specificity of the institution and the recommendations approved by the
Government or, for banks, by the Central Bank of Russia.
Transactions with the following characteristics must be documented:
- confusing or unusual character of the transaction which has no obvious economic sense or legal purpose;
- the transaction does not fall into the scope of activity of the legal entity as it is defined by its corporate documents;
- identification of a series of operations or transactions which appear to be aimed at eluding the mandatory reporting provided by the law;
- other circumstances which indicate that the transactions pursue the purpose of laundering money.
If based on these internal rules the
officers or employees of the financial institution suspect that a transaction
is conducted with the purpose of laundering money, the institution must report
the suspicious transaction to the Russian FIU. The financial institution has no
obligation to suspend the execution of client instructions nor to block client
funds.
Currently these provisions seem rather
vague and superficial, but they are probably deliberately so. It seems indeed
premature to enact precise and detailed rules before having gathered basic
practical experience. The law thus leaves the Government and regulatory
authorities some time to test future rules before making them mandatory.
Customer Identification and Record-Keeping Requirements:
The law contains an obligation for
financial institutions to identify their customers, i.e. "to establish the
identity of a person carrying out an operation subject to mandatory reporting
with monetary means or other property, or of a person opening an account
(deposit)." The identity must be established "based on the documents
submitted." The following information must be reported and recorded with
respect to those operations for which the law introduces mandatory reporting
requirements (see above):
- the type of operation and the reasons for it;
- the date of the operation and its amount;
- information on the person making the operation (passport references, address), for legal entities tax identification number (TIN), registration number, legal and factual address;
- information necessary to identify the individual or legal entity for whose account and in whose name the operation is made (address, TIN if available);
- information necessary to identify the representative of the individual or legal entity making the operation and acting on the basis of a power of attorney or a legislative or government act (address);
- information on the beneficiary of the operation and his representative (address, TIN if available).
As they are formulated, these customer
identification requirements are likely to be of a formal character. The law
does not contain any direct requirement to establish the true identity of the
person on whose behalf an account is opened or a transaction conducted
("beneficial owner"). At least as concerns legal entities, the requirements are
in our opinion more or less automatically satisfied if the financial
institution obtains the usual account opening documentation or payment
instruction in the form required by existing legislation. The law seems,
however, to leave a certain room for interpretation and implementing
regulations. Customer identification seems a key issue for Russia to focus upon
as it is comparatively easy, inexpensive and common today to structure Russian
companies so as to conceal real ownership structures and equally easy to open
bank accounts in the name of companies incorporated in off-shore jurisdictions.
Many Russian businesses have commercial
reasons for avoiding transparency, and the Russian legal and business environment
makes it often difficult to check ownership structures.
Records on suspicious transactions,
transactions subject to mandatory reporting and customer identification must be
kept during at least five years. Compliance with reporting requirements does
not constitute a breach of banking or commercial secrecy obligations. The law
prohibits the financial institution from informing the client of any measures
taken.
Monitoring financial transactions:
The anti-money laundering law will lead
to the creation of a new authority performing the functions of the Russian FIU.
This authority examines all reported transactions and, if there are sufficient
grounds to assume that a transaction is connected with money laundering,
informs the respective law enforcement authorities. Apart from a faculty to
request information from other government authorities, it will have little or
no powers to conduct its own investigations.
Nothing hinders obviously the law
enforcement authorities from acting on the basis of information received from
other sources in compliance with the Code of Criminal Procedure. The law does
also not abolish reporting requirements provided by tax legislation (opening of
bank accounts by legal entities, bank transfers in excess of 10,000 USD, large
purchases by individuals, etc.). However, the information so reported will be
processed by different government authorities.
Sanctions:
The main flaw of the new legislation
seems the almost total absence of efficient sanctions. It is true that
non-compliance with the law (except the failure to report suspicious
transactions) may lead to the cancellation of the licence of the financial
institution (bank, professional intermediary on securities market), but this
sanction is not likely to be made frequent use of and seems appropriate only in
cases of systematic violation of the law. With respect to other sanctions the
law merely refers to the general provisions of Russian civil, administrative
and criminal law. This basically means that only persons guilty of the
intentional offence of money laundering as defined by articles 174 and 174(1)
discussed above are subject to criminal sanctions. Insufficient due diligence,
e.g. the failure to correctly identify the customer, or the breach of
reporting, customer identification or record-keeping obligations by officers
and employees of financial institutions would not lead to criminal liability.
International co-operation:
It is revelatory that the law does not
contain any provisions on the confiscation of proceeds from criminal offences.
This is not without significance as under the present Criminal Code inherited
from the Soviet Union confiscation is still mainly part of the punishment. In
other words it is not possible to confiscate the proceeds from crime if the
criminal is not identified and convicted by the court. The Criminal Procedure
Code provides for the seizure of proceeds from crime as material evidence («вещественныедоказательства»). Detailed
implementing rules date mainly from Soviet times and seem more adapted to
"traditional" crimes (theft, robbery, etc.), where the proceeds from crime are
found during the search of the criminal?s apartment or in similar
circumstances. The Criminal Procedure Code allows the State to confiscate
criminal proceeds if the criminal himself is convicted. Confiscation without
judgement seems only possible where the owner of seized assets can not be
identified (under the Civil Code assets without legal owners belong to the
State). There possibly
remains Article 169 of the Civil Code, which allows the State to confiscate
proceeds from a transaction which is void because contrary to the basic
principles of law and order or of morality. National law will probably have to
be reviewed in order to render anti-money laundering measures efficient.
On an international level the law provides
for broad co-operation including the spontaneous provision of information to
foreign authorities and the processing of requests from such authorities "in
accordance with international treaties". This may basically be understood as a
general reference to the rules established by the Strasbourg Convention and
other similar treaties (e.g. European Convention on Mutual Assistance in
Criminal Matters of April 20, 1959, which has been ratified by Russia; a treaty
on mutual assistance in criminal matters with the United States has recently
been ratified by Russia). The same applies mutatis mutandis to the enforcement
of decisions by foreign courts ordering the confiscation of criminal proceeds
in Russia. Under Russian law the Strasbourg Convention would be directly
enforceable in Russia in this respect ? at least theoretically. In practice
these provisions will probably take effect only after implementing regulations
will have been issued by the relevant ministries.
Outlook:
The FAFT Progress Report on Non-Cooperative
Countries and Territories published on February 1, 2001 concluded with respect
to Russia that "currently the most critical barrier to improving its money
laundering regime is the lack of comprehensive anti-money laundering law and
implementing regulations which meet international standards. In particular,
Russia lacks: comprehensive customer identification requirements; a suspicious
transaction reporting system; a fully operational FIU with adequate resources;
and effective and timely procedures for providing evidence to assist in foreign
money laundering prosecutions." Clearly the ratification of the Strasbourg
Convention and the enactment of basic anti-money laundering legislation are
only a first step in the implementation of the FAFT recommendations. This first
step may be sufficient to calm the anxiety of foreign regulatory authorities
and the FAFT, but will in our opinion not lead to the immediate and complete
disappearance of Russia from international black lists. Many provisions of the
law (e.g. customer identification, reporting of suspicious transactions) are
likely to be considered not sufficiently concrete, and the international
community, while expressing its satisfaction over the adoption of the law, will
probably wish to follow closely what is done to concretely implement the new
legislation and to facilitate international co-operation before drawing any
definite conclusions.
The new laws are probably not perfect,
but from a pragmatic point of view they provide the basis for building up a
competent national financial intelligence unit and internal compliance
departments in the businesses concerned. This is certainly the prerequisite of
any efficient effort in the fight against money laundering. On the other hand
it seems also obvious that real results may be achieved only in case of the
success of other reforms currently undertaken, in particular the reforms of the
court system, of criminal procedure, of company registration, etc. In the end
measures against money laundering are only an aspect of the fight against crime
and criminal organisations in general.
From a Swiss perspective we welcome the
fact that tax evasion and capital flight can no longer give rise to the offence
of money laundering. This innovation will probably make compliance easier for
Swiss bankers and financial intermediaries working with Russian clients and
Russian money. It should also have certain practical consequences in the field
of mutual assistance in criminal matters between Russia and Switzerland. Hopefully
the dividing line between crime and mere tax avoidance will become clearer and
contribute to the disappearance of the present situation where Russian clients
are sometimes considered a money laundering risk per se. As indicated above, we intend to publish a special analysis
of the consequences of the new legislation for compliance with anti-money
laundering legislation in Switzerland.
The material in this newsletter discusses in a general way certain elements of Russian law. It is not a legal opinion.
The information provided herein reflects our analysis of the legal situation as at the date when the present document was published.
We therefore recommend that our readers seek special advice before making decisions in concrete cases.
