Global Investigations Review - The law and practice of international investigations

Securities & Related Investigations

Last verified on Tuesday 15th November 2016

Russia

Murat N Akuyev, Yulia Solomakhina and Victoria Karpova
Cleary Gottlieb Steen & Hamilton LLP

    Regulatory environment

  1. 1.What are your country’s primary securities or related law enforcement authorities? 
  2. The Central Bank of Russia (CBR) is the primary regulatory, supervisory and enforcement authority in the field of financial products and securities in Russia. In this regard, it is the successor to the Federal Service for Financial Markets (FSFM), which was ‘merged’ into the CBR as the Russian ‘mega-regulator’ of financial markets in 2013.

    The CBR has powers to investigate and impose various enforcement measures for violations of Russian securities laws, including for insider trading and market manipulation. However, the CBR does not have the authority of criminal prosecution. Where the relevant events may give rise to criminal liability, the CBR’s investigation can trigger criminal proceedings against the responsible individual (but not companies themselves) through intra-governmental interaction (see question 4).

    The Public Prosecutor’s Office, separate from the CBR, has broad authority to supervise, in the public interest, compliance by companies and their management with Russian laws, including laws governing securities and financial markets. In this regard, the Public Prosecutor’s Office generally has the powers, first, to carry out inquiries to verify compliance where it becomes aware of alleged violations, second, to supervise criminal investigation and, third, to lead criminal prosecution. The limits of its inquiry powers are not well defined, though in practice the Public Prosecutor’s Office tends not to substitute the CBR. In the past, the Public Prosecutor’s Office policed relatively minor breaches of domestic securities laws (eg, non-disclosure of information), and we are not aware of publicly reported incidents where the Public Prosecutor’s Office would have played a pivotal role in a high-profile securities case. When a violation of securities laws is of such a degree that criminal proceedings ensue (eg, insider trading of a material scope, see questions 37–38), the Public Prosecutor’s Office leads on the prosecution side, as in any other criminal case in Russia.

     By law, stock exchanges established in Russia are obliged to set up controls for their trading platforms to help prevent and detect insider trading and market manipulation. This gate-keeping function is supported by the CBR’s punitive measures for failure to operate appropriate controls. In line with this requirement, Moscow Exchange – Russia’s major exchange for equities, debt, derivatives and currency trading – has set up criteria of suspicious transactions, and must investigate such transactions on a daily basis and report the same to the CBR. According to its CEO, Moscow Exchange reports approximately 200 suspicious trades per month in the form of prompt information on non-standard trades and follow-up detailed reports. The reporting by Moscow Exchange has been a major background source for the CBR’s investigations into market abuse allegations.

    Brokers trading on the exchange who have suspicions about a client’s trade being a market abuse must report it to the CBR under a perjury of punitive measures, in a similar gate-keeping way as set for Moscow Exchange. 

  3. 2.What are the principal violations or legal issues that the securities or related law enforcement authorities investigate?
  4. Russian law provides for administrative liability for, among other things, the following types of violations on securities and financial markets:

    • improper securities issuances (ie, violations by the issuer during a securities issuance);
    • trades by professional securities market participants in unregistered securities;
    • non-disclosure or improper disclosure of information;
    • insider trading and market manipulation; and
    • broadly, non-compliance with various specific Russian statutory and regulatory requirements for activities of professional securities market participants.


    Certain of the above violations, including insider trading and market manipulation, can be criminal offences in Russia if their impact is material (see questions 37–38). (This assumes that a securities investigation is an investigation into allegations of insider trading and market manipulation (in short, ‘market abuse’)).

    Based on the CBR’s information, cases dealing with the above violations other than insider trading and market manipulation dominate the CBR’s caseload. The number of cases in which the CBR has established insider trading or market manipulation is relatively small – roughly five dozen in the past six years. It is worth noting that the Russian regulation against insider trading and market manipulation was enhanced only six years ago when these concepts were reformed to align better with the US and European practices and a more strict liability regime was created. Enforcement against market abuse is still in its infancy.

  5. 3.If there is more than one authority involved in a securities or related investigation, how is jurisdiction allocated? What is the interplay between the securities regulator and the public prosecutor?
  6. As a matter of law, both the CBR and the Public Prosecutor’s Office can take action in response to alleged violations of securities and related laws and there is some overlap of jurisdictions (particularly in terms of pursuing administrative liability). Still, in practice, the primary function of supervision of activities on financial markets, including policing market abuse, rests with the CBR. The CBR does not per se lead criminal prosecution of securities law violations.

  7. 4.Do the securities or related law enforcement authorities have investigatory powers? Can they bring administrative, civil or criminal proceedings? 
  8. The CBR’s powers to investigate suspected market abuse are set forth, among others, in Federal Law No. 224-FZ on counteraction to unlawful use of insider information and market manipulation and on amendments to certain legislative acts of the Russian Federation of 27 July 2010, as amended (the Insider Trading Law) and build on the authority to request documents and information (including trading records) from a wide range of persons not limited to the suspect. The CBR does not have typical investigative powers such as forensic search, wiretapping or mail searches. The CBR can seek the assistance of the Ministry of the Interior for such type of measures to the extent needed for the CBR’s administrative proceedings. The procedure for such cooperation is to be determined in a joint regulatory act of the CBR and the Ministry of the Interior, which has not been adopted to date. As a practical matter, ‘aggressive’ investigations of market abuse are not common for the CBR. See also question 9.

    The CBR can initiate administrative proceedings and impose administrative liability for market abuse and take other enforcement measures (see question 37–38). The CBR does not make a decision on the institution of criminal proceedings; the power to do so lies within the jurisdiction of criminal law enforcement authorities (eg, the Investigative Committee of the Russian Federation). Still, the CBR can transfer its investigation materials to the latter if the CBR believes that the revealed violations may constitute a criminal offence.

    See also questions 47–48.

  9. 5.Are regulatory or criminal securities and related investigations public? Under what circumstances? 
  10. On the CBR’s part, the fact of its ongoing investigation, as well as any investigation-related information the CBR receives, is confidential. As a rule, the CBR issues a press release on the results of the investigation if the CBR found a violation and imposed punitive measures or, at the least, issued an order to abstain from similar future behaviour. The press release usually also mentions whether or not the CBR has transferred materials of its review to criminal law enforcement authorities. As part of this step, the CBR may also disclose the circumstances of the wrongdoing that led to its findings and the choice of punitive measures.

    As a practical matter, CBR officials may give press comments regarding high-profile instances of alleged violations. In the past, there were numerous instances when the FSFM officials disclosed the start of their inquiry into allegations of market abuse. Recently, such public statements at the start of or during the review have become exceptional, but might still appear in politically charged or high-profile cases. The latter is also true for statements of Moscow Exchange.

    On its part, the target of the investigation bears the duty to keep the CBR’s investigation confidential, which restricts the target’s public comments pending the one. However, disclosure obligations may still be applicable under Russian law or relevant foreign law with respect to internal investigations that may run in parallel to the CBR one and should be assessed by counsel in particular circumstances.

    The CBR must keep all its investigations or administrative proceedings that did not reveal any violation confidential, except in cases of informational exchange with a foreign securities regulator (where the relevant materials can be shared, see question 13).

  11. 6.Are regulatory or criminal securities and related investigations targeted at the company or the individuals involved, or both?
  12. The CBR’s investigations primarily target the company. Although the involved employees may also face measures for the same violations (and for that reason be reviewed by the CBR in parallel), the CBR’s investigation very much centres on the company in practical terms.
    If there are grounds to initiate a criminal case following the CBR proceedings, such criminal case is targeted solely at the responsible individual. Russian law does not provide for the criminal liability of legal entities.

    Investigation procedure

  13. 7.How do the securities and related law enforcement authorities typically begin an investigation?
  14. The following can cause the CBR’s investigation into an alleged market abuse to start:

    • reports from a stock exchange with details of non-standard trades or data from the electronic monitoring system of trades used by the CBR;
    • references from other governmental bodies;
    • reports from a shareholder of the issuer or any securities investor; and
    • information from practically any source, including mass media, which points to an alleged market abuse.

    (Although the CBR may also investigate allegations as part of its periodic review of a professional market participant’s compliance with securities laws, we assume scenario of a one-off inquiry into specific concerns of a market abuse.)

    The CBR’s investigation can be carried out onsite or as a desk review at the CBR (ie, without any onsite visit to the target). The form of a desk site review prevails in the CBR’s investigations of market abuses.

    In principle, in case of a desk review based solely on third-party evidence, the target might not even know about the ongoing investigation – the regulations do not explicitly oblige the CBR to notify the target of a desk review in advance. In practice, the target is likely to find out after having received a document production order from the CBR.

    In the case of an onsite investigation, it should begin with a prior notice to the target, which is required to be made at least three business days in advance of the actual site visit by the CBR. The notice is usually accompanied by a list of documents requested from the target that the latter should make available to the CBR representatives upon arrival. We are not aware of publicly reported incidents when a market abuse investigation started by way of a dawn raid (see question 9).

  15. 8.What level of suspicion of wrongdoing is required for the securities or related law enforcement authorities to begin an investigation?
  16. Russian law does not specify the suspicion threshold for the CBR to initiate an investigation. Broadly, an investigation should be in respect of facts which give basis to believe that there are indicia of manipulation of prices for publicly placed and/or publicly traded securities. Ultimately, it lies within the CBR’s discretion. We are not aware of reported cases where a target of the investigation would successfully base its objections on the suspicion threshold. 

  17. 9.May the securities or related law enforcement authorities conduct dawn raids? Does this depend on the nature and seriousness of the allegations?
  18. The CBR’s investigations tend to take the form of a documentary review based, among other things, on its document production requests and information exchange with other securities regulators. Forensic searches or other ‘aggressive’ measures are not a typical feature of the CBR’s securities investigations.

    This is quite distinct from the practice of the Federal Antimonopoly Service of Russia, which tends to rely on dawn raids as an important tool for collecting evidence of cartels. As a matter of law, there exists a normative basis for the CBR’s dawn raids in the same way as for FAS’s dawn raids, and in July 2015 the Constitutional Court of Russia upheld as constitutional FAS’s dawn raids (ie, forensic inspections on a short notice prior to a formal start of administrative proceedings for the purpose of verifying indicia of a violation, coupled with wide powers of document collection).

    A full panoply of criminal investigation powers, including forensic visits and dawn raids, becomes available to authorities where a criminal case for market abuse is initiated against the responsible individual. See also questions 4 and 12.

  19. 10.Must the findings of a company internal review be reported to the securities or related law enforcement authorities? When and under what circumstances?
  20. There is no duty of self-reporting to the CBR (as the securities market regulator), even where an internal review has revealed a potential wrongdoing. At the same time, such duty to disclose may arise if the CBR rightfully requests such type of documents during its investigation. Furthermore, the CBR’s 'commissioners' appointed to major financial institutions in Russia (currently, there are approximately 150 of them, including in Russian subsidiaries of large foreign banks) have wide authority to review internal control documents and attend management meetings of such institutions.

    The immediate measure for non-disclosure is a relatively modest monetary fine. The CBR may also seek the assistance of other law enforcement bodies to compel their production.

    The concept of adverse inferences in case of non-production is not formally developed in the CBR’s practice, but the CBR can be expected to interpret evidence more loosely to ‘reconstruct’ the factual circumstances if the target has withheld significant information under its sole control.

  21. 11.Are whistleblowers a frequent source of information for securities and related investigations? 
  22. No systemic work with, or remuneration programme for, whistleblowers (akin to eg, the US practices) exists in Russia. The CBR can start an investigation based on a whistleblower’s information.

  23. 12.Describe the typical phases of a securities or related investigation in your country.
  24. Typically, the CBR’s administrative proceedings would include the following steps:

    • Step 1 – issuance by the CBR’s authorised official of an instruction to conduct an inquiry to verify what the CBR considers to be indicia of market abuse, upon reference from a dedicated division of the CBR;
    • Step 2 – evidence collection by the CBR’s dedicated division from any person who the CBR believes possesses the relevant information, including by way of information exchange with foreign regulators or seeking expert opinions;
    • Step 3 – issuance of an act on the results of the inquiry; if the gravity of potential violations justifies immediate action by the CBR such as suspension of the target’s operations, an interim act may be prepared; and
    • Step 4 – issuance of a formal decision of the CBR on whether a violation occurred and its appropriate qualification (eg, as an administrative offence), and adoption of enforcement measures or further enforcement steps (eg, transfer of the investigation materials to criminal law enforcement authorities).

    The timer for the CBR’s investigation starts from the formal issuance of the instruction to conduct an inquiry, rather than its delivery to the target. Under the CBR rules on the inquiry procedure adopted on 13 September 2015 (the CBR Inquiry Procedure), which should apply to all kinds of inquiries other than insider trading and market manipulation (see below), the maximum term of the CBR’s inquiry (ie, Steps 2 and 3 above) is generally limited to three months, subject to possible extension for up to one month and to rules on suspension, for instance, where the target fails to cooperate or where a delay is due to information exchange with foreign regulators. In accordance with the CBR rules on the inquiry procedure in relation to the insider trading and market manipulation adopted on 10 August 2015 (the CBR Insider Trading Inquiry Procedure), the maximum term of the CBR’s inquiry in relation to the insider trading and market manipulation is generally limited to eight months, subject to possible extension for up to two months and to rules on suspension and reopening due to new facts. In regard to the latter – which is a new rule for the CBR, it appears that the CBR may be willing to use this normative possibility to reopen investigations against companies based on (and using potentially wider evidence from) individual criminal convictions in the same factual circumstances.

  25. 13.What are the mechanisms by which a securities or related law enforcement authority may cooperate and coordinate with authorities outside your jurisdiction?
  26. Russian law gives the CBR powers to engage in informational exchange and cooperation with its counterparts abroad, including in the context of securities investigations. The CBR can share information with foreign financial market regulators, including confidential information and bank secrecy (such as beneficiaries, parties and details of specific trades) but excluding information constituting state secrecy, pursuant to:

    • a multilateral memorandum of understanding concerning consultation and cooperation and the exchange of information of the IOSCO;
    • an international treaty of the Russian Federation; or
    • a bilateral agreement between the CBR and a foreign regulator.

    The above information exchange is conditional on the relevant foreign law ensuring a comparable level of data protection to that existing in Russian law and the foreign regulator’s commitment not to share the received information with third parties, including any law enforcement authorities, without the CBR’s prior consent, except for disclosure under a court order in a criminal case.

    On its part, the CBR must keep the information that it has received from foreign regulators confidential and generally should not disclose it to third parties without the foreign regulator’s consent, except on the basis of a court order in a criminal case.

  27. 14.Will a securities or related law enforcement authority take into account findings by a law enforcement authority outside your jurisdiction in the course of its investigation?
  28. The regulator may take into account findings by a foreign regulator, but they have no binding cross-border nature. The foreign regulator’s information has infrequently been a trigger for the CBR’s own inquiry into Russian market participants.

    Document production

  29. 15.What can the securities and related law enforcement authorities require to be produced as part of an investigation? Do the powers of a regulator differ from those of the public prosecutor?
  30. The Insider Trading Law empowers the CBR to require the production of ‘documents which are necessary for the conduct of an investigation [into compliance with the Insider Trading Law]’, and empowers the CBR to require such documents, information and clarification from ‘any person in respect of whom there are grounds [for the CBR] to believe that such person is in possession of the necessary information’. Broadly, such powers explicitly extend to information statutorily protected by various types of secrecy, including commercial (trade) secrecy, bank secrecy and, in certain cases, secrecy of communications, to the extent such information is ‘necessary for the prevention, revelation and suppression of instances of insider trading and(or) market manipulation’. State secrecy and tax secrecy is excluded, however.

    Russian law remains unclear as to what extent the above CBR’s powers prevail over secrecy of communications, which is an inherent part of the Constitution-protected privacy – the issue is when telecom providers can lawfully reject the CBR’s requests regarding details of communications such as addressees, date and time, or the identity of phone equipment (IMEI). In a series of such cases, the regulator’s position was that its power to compel production in insider trading investigations prevails in absolute terms over the secrecy of communications, while telecom providers tend to appeal to the Constitution to defend the secrecy (likely due to potential criminal liability for its breach). The results were mixed – while three major operators (MegaFon, MTS and Mail.ru) prevailed, another one, Rambler.ru, lost on similar facts within the same court district. It is worth noting that, in the three cases where the operators won, the court did not hold that the CBR cannot access the information protected by the secrecy of communications altogether. Rather, the CBR should do so with the assistance of the Ministry of the Interior (see question 4) and within the latter’s investigatory process, which may necessitate obtaining a court order for access to the protected communications.

    The CBR must provide reasons for its production request, although that requirement can plausibly be fulfilled by a general reference to the investigation in question. We note that there is a series of cases related to FAS’s dawn raids that can be illustrative by analogy. The Supreme Court supported the position that the governmental body’s production request must indicate a sufficiently detailed rationale, failing which the target of the investigation may refuse production. The relevance of this Supreme Court’s position should be assessed for each particular investigation and its dynamics.

    The powers of the Public Prosecutor’s Office in administrative proceedings are generally broader than those of the CBR, although we are not aware of the involvement of the Public Prosecutor’s Office in a major securities investigation.

  31. 16.Will a litigation hold or will other instruction to preserve documentation need to be issued? When?
  32. There is no statutory requirement for the target to do so, but it would be prudent (and represents a common practice) for the senior management to issue one, for example, to preserve a normal working relationship with the regulator during the investigation and to alleviate the risk of liability for the company and its management for destruction of evidence. The details, the range of recipients and the timing need to be determined in light of a particular investigation.

  33. 17.Can the securities and related law enforcement authorities request the production of materials protected by attorney-client privilege or work-product doctrine? Can the securities and related law enforcement authorities use protected materials if it obtains them from third parties?
  34. The attorney-client privilege in Russia applies to information and documents, including those customarily covered by the work-product doctrine in the US, to the extent they are related to legal advice provided by an advocate (ie, a lawyer formally admitted to the Russian Bar). It is important to understand that the absolute majority of corporate lawyers and attorneys in law firms in Russia are not ‘advocates’, an ‘advocate’ having a status akin to that of barrister and required in Russia principally for representation in criminal cases. This is common in foreign proceedings where an attempt to withhold documents under a Russian law attorney-client privilege is made (see, eg, Veleron Holding, BV v BNP Paribas SA, et al litigation in the US). Owing to a lack of court practice on the matter, it is uncertain whether foreign attorney–client privilege and similar doctrines would be given effect in Russia, and this should not be readily assumed. It is common for counsel’s advice or internal compliance reports to be marked as having ‘commercial secrecy’ to help protect their confidentiality in Russia.

    As discussed above (see question 15), the CBR’s powers to compel production are likely to trump ‘commercial secrecy’ or attempts to protect documents from third parties by mere ‘confidentiality’ marks. In principle, the CBR (itself or via the Ministry of the Interior) does not have the authority to require an advocate to produce documents that relate to his or her representation of a client, as this is expressly prohibited under Russian law. In any event, the CBR is restricted from using the information protected by Russian law attorney-client privilege as evidence against the clients serviced by the advocate.

  35. 18.How is confidential information or commercially sensitive information treated by the securities and related law enforcement authorities?
  36. See question 17.

    The CBR may disclose the information that it has received as part of its investigation solely under a court order, except in certain cases of information exchange with a foreign regulator (see question 20).

  37. 19.Can the target of a document request exercise a right not to produce?
  38. There is no right not to self-incriminate, except for individuals who, under the Constitution, cannot be compelled to testify against themselves, their spouse and certain close relatives.

    A groundless refusal to provide documents or a failure to provide those as per the CBR’s request may incur penalties from the CBR, usually in the form of an administrative fine for the target company in the range of 500,000–700,000 roubles. The CBR may impose other measures on market participants that are subject to the CBR’s regulatory oversight, such as an order to cure or a suspension of certain operations or licences. There is no criminal liability for a failure to comply with the CBR’s request.

  39. 20.Do any data privacy or bank secrecy laws restrict the production of materials to a securities or related law enforcement authority in your jurisdiction? An authority outside your jurisdiction? May the company under investigation provide personal or bank customer data on a voluntary basis?
  40. Sharing private data or bank secrecy with the CBR as per its request:

    The fact that the information requested by the CBR as part of the investigation contains personal data or bank secrecy is not likely to prevent its provision in response to the CBR’s request.

    Russian law contains an exemption from a requirement to obtain consent for processing of personal data (including in the form of its transfer to a third party) where the processing is necessary for ‘attaining the purposes set by an international treaty […] or by [Russian] law’, as well as for ‘compliance with the functions, powers and duties set for the operator by Russian law’. In a few cases, Russian courts viewed that the latter exemption applies where clients’ personal data are transferred to the CBR upon the CBR’s request. However, there still remains a constitutional law issue of protected secrecy, and whether the CBR’s powers are sufficient to override it (see question 15).

    In the past, other Russian law statutory exemptions from a personal data consent requirement were available in domestic and cross-border securities investigations where disclosure of employees’ personal data was needed, based on the then-existing facts. Finally, company or group policies on personal data protection and labour law documents signed by the employee in question should be part of the analysis of legal risks involved in the disclosure of personal data to the regulator.

    Voluntary provision of the same by the target to the CBR:

    With regard to information containing personal data, the analysis regarding its voluntary production to the CBR should remain the same, as outlined above for production as per the CBR’s request.

    With regard to information containing bank secrecy, the legal basis for disclosure will need to be analysed specifically in each case and may not be available, as the statutory entitlement to share bank secrecy information with the CBR in insider trading investigations prima facie covers a response to the CBR’s request, rather than voluntary disclosure.

    Sharing of the same by the CBR with a foreign regulator:

    The CBR may share information obtained during its investigation that contains bank secrecy and personal data with its foreign counterparts, as discussed above (see question 13).

    Sharing of the same directly by the target with a foreign regulator as per its request or voluntarily:

    With regard to information containing personal data, some basis for its disclosure to a foreign regulator (whether under a statutory exemption from a consent requirement, or some group or company policy and a prior consent, or a combination thereof) might ultimately be found to exist, depending on the type of personal data in question and the jurisdiction of the proposed transfer. The legal basis and process are likely to involve more uncertainties and judgment than in a domestic transfer. Redacting personal data from the produced documents has worked in the past as a practical compromise from the perspective of both Russian law and a foreign regulator’s agenda.

    With regard to information containing bank secrecy, in abstract, its disclosure by a private party operating in Russia to a foreign securities regulator is heavily restricted, if at all possible: Russian law explicitly provides for information exchange containing such data solely through the mechanisms of the CBR’s cooperation with its foreign counterparts (see question 13).

    Intra-group disclosure of information protected by secrecy in Russia to a foreign parent requires a separate analysis, and is beyond the scope of this publication.

  41. 21.Are there any data privacy, bank secrecy or other laws that restrict where documents or other communications may be stored or reviewed for the investigation?
  42. In general, Russian data privacy and, depending on the industry in which the target or its clients operate, bank secrecy or state secrecy restrict the location of where the information may be processed (including its review and storage), by whom and under which conditions. These considerations are pivotal in arranging the review process in respect of those documents that originate from Russia and their potential production abroad; the concerns are less acute in respect of information that originated from outside Russia, although relevant confidentiality restrictions may still apply cross-border. In certain cases, economies dictated the review process based on servers physically located in Russia to avoid granular analysis in respect of a large mass of documents. Such processing may also require a liaison with authorities supervising compliance with the relevant secrecy regime in Russia.

    On a separate note, the amendments to Russian privacy laws, which became effective on 1 September 2015, provide that an operator of personal data of Russian citizens must generally collect and store such personal data on the territory of the Russian Federation. These amendments should not flatly prevent cross-border transfer of documents containing personal data of Russian citizens to foreign regulators (which should otherwise comply with Russian law), but they are likely to change the previous practices of cross-border investigations involving Russia, in particular, in case of multinationals which tend to centralise them abroad.

  43. 22.Are the securities and related law enforcement authorities able to obtain documents from outside the country?
  44. The CBR can obtain the documents from abroad on its own initiative through cooperation with its counterpart foreign regulator (see question 13). We have seen a trend in the past few years for the increased use by the CBR of information received in this way, particularly from the EU, for conduct of its own securities investigations.

    Witness interviews

  45. 23.Will the securities and related law enforcement authorities conduct witness interviews? If so, will the interviews be on the record? Will the interviews be made public?
  46. The CBR can request verbal or written information and explanations from individuals that the CBR considers to be in possession of the relevant information. The range of such individuals is not limited to officers and employees of the target company. The CBR Inquiry Procedure and the CBR Insider Trading Inquiry Procedure effectively ‘codify’ the CBR practices existent to date in this regard. All such testimony, as documented in the minutes drawn by the CBR (in case of verbal testimony), or written statements by witnesses, or photo-, video- or audio- recordings, form part of materials collected in the course of the CBR’s investigation and, as such, are on the record. These materials are generally confidential (see question 5).

  47. 24.Can witnesses exercise a right not to testify? Will any adverse inference be drawn if they do so?
  48. Please see: (i) question 19 regarding the right not to self-incriminate in Russian law, the limits of that right and consequences of a failure to provide information requested by the CBR for investigation purposes; and (ii) question 10 regarding the approach of Russian regulators to adverse inferences. 

  49. 25.Do witnesses receive separate counsel? Who provides counsel for witnesses?
  50. A witness is not entitled to counsel by virtue of law. A witness may be assisted by his or her counsel, whether at his or her expense or at the expense of the target of the investigation. We are aware of instances where the target’s in-house counsel could attend as well, but it is hardly a general rule – it may be prudent to raise the issue with the regulator should there be a need in counsel’s presence.

    Advocacy

  51. 26.Can the target of a securities or related investigation challenge the investigation in court while the investigation is ongoing?
  52. From the Russian law perspective, two separate questions should be considered:

    • first, can the target challenge the start of an inquiry as unfounded in law?
    • second, can the target challenge the factual findings, usually as presented in the CBR’s act on the results of an inquiry?

    The prevailing approach among Russian courts is that the target of an inquiry may not challenge the order to conduct the inquiry or the act on the results of an inquiry, as both of these documents do not per se impose any obligations on the target. (This court practice is quite consistent with respect to various governmental bodies and is not limited to the CBR.) However, in case of an onsite review, the target is allowed to submit written objections regarding the act on the results of an inquiry. 

    Despite a formalistic approach to defining standing, situations where a legal challenge is appropriate could still exist, but this route is generally unlikely to help annul the results of the investigations altogether and/or stop the case from going forward (ie, at least up to the stage of administrative proceedings at the CBR). The target may of course challenge in court any finding of a violation and/or administrative measures that the CBR imposes upon it (see question 45).

  53. 27.What opportunity will there be to respond to a securities or related law enforcement authority’s theories or allegations prior to the authority bringing charges?
  54. The target of the investigation may make itself heard by the CBR before the CBR decides on the fact of a market abuse and imposes the relevant administrative measures, but the process for such interaction is not expressly set in law. It may take the form of provision of documents supporting the company’s position in addition to those requested by the CBR, presenting written or verbal explanations or providing objections to the act on the results of the inspection. This process should not be viewed as a competitive presentation of opposing positions by the target and the investigation team, but rather as a way to assist the CBR with the investigation in a light favourable to the company.

  55. 28.What form does the advocacy with a security or related law enforcement authority typically take? 
  56. See question 27.

  57. 29.Are statements or advocacy positions taken by an investigated party during the investigation process deemed admissions and binding in future proceedings? Would such statements be made public?
  58. The submissions made by the target during the investigation form part of the materials on which the CBR bases its decision and can be used against the company both at the stage of the administrative proceedings with the CBR and later in court. Generally, the materials of the investigations, including any submissions from the target company, are confidential (see question 5). 

    Timing

  59. 30.What is the limitation period for charges for securities and related violations?
  60. The applicable rules on limitation periods depend on the nature of the proceedings and the relevant liability regime, as follows.

    In case of administrative liability for market abuse, the limitation period for imposing administrative liability is one year from the day when the relevant violation occurred. However, where the relevant pattern of non-compliant behaviour lasted, the regulator may well treat it as a single lasting violation (although reported practice of the CBR and courts somewhat varies), in which case the statute of limitations shall count from the moment when the CBR revealed the fact of non-compliance. The above limitations period cannot be suspended in respect of legal entities; it is deemed suspended in respect of an individual where such individual seeks to transfer the administrative proceedings to a venue in the place of his or her residence, until such transfer is made. There is no equivalent concept of "tolling agreement" in Russian law, but the CBR has authority to invoke the suspension of the limitation period based on the facts.

    We note that a relatively short time frame for imposing administrative liability does not thwart the CBR’s investigations into market abuse even if the determination of the wrongdoing is ultimately made after the statute of limitations expires. The CBR still remains in position to publicly disclose its findings of a wrongdoing (and indeed does so), impose certain enforcement measures other than the administrative liability measures (eg, revoke the CBR-issued authorisations, see questions 37–38) as well as contribute to a criminal investigation into the same underlying facts.

    In criminal proceedings, the limitation period for liability for insider trading and market abuse is generally six years, which runs from when the wrongdoing was committed. This limitations period, however, is extendable up to 10 years if, in particular, the wrongdoing was committed by an "organised group" or if the derived revenue (the avoided loss of the wrongdoer) exceeds 15 million roubles. The limitations period is suspended if the wrongdoer evades the investigation or the court hearing, until his or her seizure or surrender to authorities. We note though that since the introduction of criminal liability for market abuse in Russia in 2010 (with some rules deferred to 2013), there have been very few criminal cases involving market abuse.

    Although we are not aware of instances of Russian civil proceedings for recovery of damages caused to a private party, which would ensue from an administrative or criminal case that established the fact of a market abuse, such proceedings can in theory be possible. The applicable statute of limitations in civil proceedings would be three years from the moment when the claimant learnt about the infringement of his or her rights and the identity of the appropriate respondent (eg, the establishment of a fact of a market abuse in an administrative or criminal case), but no more than ten years after the plaintiff’s rights were infringed. Civil law statutes of limitations are subject to their own rules on suspension and restoration, which take into account various factors, including those related to the plaintiff.

  61. 31.When does the limitation period begin to run?
  62. See question 30. 

  63. 32.What can suspend the running of the limitation period? Can the securities and related law enforcement authorities request a tolling agreement?
  64. See question 30. 

  65. 33.How long does a securities or related investigation typically take?
  66. Under applicable regulations, the term of the CBR’s inquiry into allegations of market abuse (see question 12, Steps 2 and 3) should not exceed eight months. However, this period only relates to certain actions within a broader investigation into alleged violations, and it does not restrict in time administrative proceedings in respect of the target or the relevant individuals (which are nevertheless constrained by applicable statutes of limitations, see questions 30–32). In the past, the CBR’s (and its predecessor’s) administrative cases on market abuse lasted from several months to almost two years.

    Resolution

  67. 34.What is the process for closing an investigation if the investigation does not reveal a violation of securities or related laws? Will the securities or related law enforcement authorities provide written confirmation that the investigation is closed without action?
  68. If the CBR’s investigation reveals no indicia of market abuse, the act on the results of the inquiry (see question 12) should so stipulate, and a copy of that act will be shared by the regulator with the target. The regulator will normally not provide any further written confirmation that the investigation is closed without action. It is notable though that, in one reported incident involving a major Russian industrial conglomerate, the target was said by the CBR to have removed the CBR’s earlier public conclusions on the target’s involvement into a market abuse by having later provided ‘exhaustive explanations’ of the relevant suspect transactions. This incident underscores the importance of proper cooperation with the CBR during its investigation.

  69. 35.How will the resolution or settlement process be initiated?
  70. Russian law does not foresee a possibility of a negotiated settlement with the CBR (nor does it currently foresee opportunities for full leniency in market abuse cases, although the CBR officials were reported to state an intention to modify regulations to allow for full leniency and negotiated settlements). See also question 41.

    In principle, the CBR has to decide, based on the bulk of available information, whether the fact of a market abuse is established and proceed on that basis against the target company and/or any individuals (eg, its officers).

    The analysis and information collected by the CBR can form the basis of, and trigger, criminal investigation proceedings against the individual(s) involved (see question 4).

  71. 36.Who decides whether to proceed with charges and what charges to select? 
  72. See question 35. 

  73. 37.What factors would a securities or related law enforcement authority consider in selecting charges and the severity of any penalty or fine?
  74. See question 38. 

  75. 38.What remedies can the securities or related law enforcement authorities consider? How are penalties calculated?
  76. The panoply of punitive measures that the CBR may pursue for the market abuse, depending on the gravity and context of the violations, as well as the identity of the wrongdoer (ie, an entity regulated by the CBR or not) includes the following:

    • an order to rectify the past violations and/or prevent such violations in future;
    • for entities that are licensed by the CBR or management of the target company accredited by the CBR (where it was involved in the violations) – a suspension or revocation of a professional authorisation or licence previously issued by the CBR, including a revocation of a banking licence for banks registered in Russia;
    • a prohibition on trading in all or particular financial instruments;
    • an administrative fine either on the target company and/or relevant individual(s); or
    • transfer of the CBR’s investigation materials to criminal law enforcement authorities for institution of criminal proceedings against the individual(s) concerned, though the decision on commencement of a criminal case is not the one of the CBR.

    For legal entities, an administrative fine for insider trading or market manipulation shall be calculated as either (a) the ‘excess’ revenue of the wrongdoer resulting from the use of insider information or market manipulation, which is determined as a difference between (i) the revenue actually received by the wrongdoer and (ii) the revenue that the wrongdoer would have received in a regular (lawful) course of business, or (b) the avoided loss of the wrongdoer resulting from the same. The minimum fine is 700,000 roubles. There are no statutory caps for legal entities; for individuals, if such amounts exceed certain thresholds, an administrative case should be converted to a criminal one (see below). The CBR’s practice on calculating fines as per the above formulas, rather than imposing the statutory fixed minimum, is still nascent.

    For officers of the wrongdoer corporate entity an administrative fine shall be in the range of 30,000–50,000 roubles. Alternatively, officers can be subject to disqualification (ie, a prohibition on participation in management or supervisory bodies) for up to two years. The sanction of disqualification can only be imposed by court, not by the CBR.

    The limitation period for imposing administrative liability affects the CBR’s enforcement choice, in the sense that the CBR may impose a fine (or seek disqualification in court) within that period only. Nevertheless, the limitation period is irrelevant for other CBR’s measures described above, nor does it preclude a disclosure by the CBR of the CBR’s findings regarding the fact of a market abuse and the persons involved past its expiration. This is indeed something that the CBR tends to do.

    Compared with administrative law, in criminal law the offense of insider trading or market manipulation is qualified by materiality of the wrongdoer’s excess revenue (or avoided loss) or third-party damages. Criminal liability may arise if any of the excess revenue, avoided loss or damages exceed 3.75 million roubles. If the threshold of 15 million roubles is exceeded, potential criminal liability becomes more severe. To re-emphasise, Russian law does not provide for criminal liability of legal entities.

    See also question 41.

  77. 39.Do illegal profits have to be disgorged, and if so, how are they determined?
  78. In case of an administrative offense of market abuse, the penalty of disgorgement of illegal profits into the budget of the Russian Federation is de facto available to the regulator in the form of an administrative fine, subject to the limitations period (see above).

    In case of a criminal offense of insider trading or market manipulation, the penalty of a fine is not linearly correlated with illegal profits, although in principle the courts have the necessary legal tools to impose the disgorgement of the full amount into the state budget.

    In both cases above, private investors should theoretically have a civil right of claim, following the relevant administrative ruling or criminal conviction, against the wrongdoer for the amount of their damages (subject to civil law measure of damages and the causal link, as proven by plaintiffs). See questions 47–48.

  79. 40.Can criminal charges be brought against companies in your jurisdiction for violations of securities and related laws?
  80. Russian law does not provide for criminal liability of legal entities.

  81. 41.Will the securities and related law enforcement authorities provide a reduced penalty for cooperation? What standard will the authority use when taking into account any cooperation?
  82. Cooperation with the regulator and self-reporting, as well as prevention of adverse consequences and voluntary compensation of the damages caused, are regarded as mitigating circumstances for the purposes of administrative and criminal liability of the relevant entity or individual. However, unlike, for instance, the Russian regime of administrative liability for cartels, Russian securities law or the regulator’s reported practice do not provide for a systemic methodology to decreasing potential liability for market abuse to reflect cooperation with the investigators (or other mitigating circumstances). In general, securing reduced penalty for a market abuse through pre-planned reliance on the statutory mitigating circumstances may not necessarily be a good strategy for a target company or its management, as the CBR does not have the flexibility often seen in other jurisdictions to approach resolution as a deal-maker employing leniency as a tool. In the end, cooperation might turn into self-reporting without the expected benefits of more lenient treatment by the regulator, which is often a deterrent factor.

    On the target’s side, the threshold for ‘mitigating’ circumstances may be high, and checking off boxes on multiple mitigating factors (rather than cooperation only) may be needed to get to a meaningful result. Further, cooperation would imply the target entity’s assistance to the regulator with the establishment of all circumstances (elements) of an administrative violation. With that, a mere provision of documents as per the regulator’s request (even if diligent and meticulous) may not be viewed as such cooperation, as it is deemed the statutory duty of the target. By analogy with the practice of other Russian supervisory bodies, the target will likely need to provide the regulator with evidence of violations earlier unknown to the regulator. The amount of an administrative fine, in any event, cannot be lower than the minimum statutory amount (700,000 roubles). The effect of the party’s cooperation with the CBR on other enforcement measures that the CBR may undertake is even more discretionary. However, in practical terms, a target of the investigation may expect some (uncertain) "leniency" on the CBR’s part in case of active assistance to the CBR’s investigation.

    Finally, and importantly, Russian law does not ipso facto extend any lenient treatment that the target company received due to mitigating circumstances, including cooperation, to the individuals involved in the violation, even if such individuals assisted the regulator in the investigation against the company. The potential of a criminal liability for top-management is, in practice, a deterrent factor against self-reporting or actively cooperating with the regulator by corporate entities.

  83. 42.Are deferred prosecution agreements or non-prosecution agreements permitted?
  84. Such agreements are not known in Russian administrative law, for example, in relation to companies’ liability for market abuse. In relation to individuals, Russian criminal law provides for an instrument of ‘pretrial agreement on cooperation’ between a suspect (or indicted individual) represented by counsel and a public prosecutor, under which an individual may generally obtain reduced criminal punishment in exchange for his or her cooperation with the investigators; admission of a wrongdoing will be required. This agreement is not subject to a court approval, although the court may proceed to a ‘fast track’ trial of an individual with whom the agreement was made only after having received a confirmation from a public prosecutor that the suspect (indicted) actively assisted the investigation.

  85. 43.Will a court need to approve the settlement agreement with a securities or related law enforcement authority?
  86. See question 42. 

  87. 44.If a settlement occurs, will an admission to certain facts or wrongdoing be required?
  88. See question 42. 

  89. 45.Can the findings or decisions of the securities or related law enforcement authorities be administratively appealed? Appealed to a court?
  90. The CBR’s enforcement decisions may be appealed to court. See question 26.

  91. 46.If a decision can be administratively or judicially appealed, what are the consequences of an adverse decision on appeal? What are the consequences of a positive decision on appeal? 
  92. There are four levels of appeal on the CBR’s finding of a violation and/or enforcement measures, all the way up to the Supreme Court of Russia. The case cannot be remanded back to administrative proceedings at the CBR. At the first stage of appeal, if a court finds a legal defect in the appealed decision of the CBR (eg, if the CBR’s decision itself or the decision-making process breached the law, or if there are no grounds for administrative liability or the specific measure applied), the court may repeal the CBR’s decision altogether or in part or to change it as the court sees appropriate. In case of further appeals, a higher court can repeal or change the decision of the lower court or remand the case for new proceedings in the lowest court. 

    Collateral consequences

  93. 47.What are some of the collateral consequences to a resolution or settlement with a securities or related law enforcement authority? 
  94. In case of non-criminal liability, whether imposed by the CBR or in court, its collateral consequences under law depend on the status of the person subject to liability, eg, whether it is a Russian bank, a securities market participant regulated in Russia or a high-level officer in a regulated entity. Potentially strained relationship with the CBR (with which regulated entities do try to keep good working relations) and similar ‘soft’ collateral consequences are beyond the scope of this overview.

    With respect to entities regulated by the CBR, a breach of the market abuse regulations more than once during a calendar year is a discretionary ground for the CBR to revoke their core operating licence(s). For a bank that means a threat of losing its banking licence. Furthermore, a finding of a market abuse may impair the CBR’s assessment of goodwill of the responsible person, which is relevant for the CBR’s consent to high-level management of, and/or ownership of substantial stakes in, regulated entities. To our knowledge, the CBR does not apply the concept of goodwill to legal entities for such purposes, but solely to individuals (eg, in the context of approving certain ownership/control stakes in Russian regulated entities). Hence, this type of collateral consequences should be most relevant to individuals held responsible for market abuse, rather than corporates.

    Finally, an adverse decision in an administrative (or criminal) case is formally a ground for private parties who are deemed "impaired" by the violation (and, potentially, for the Public Prosecutor’s Office acting in defence of a public interest) to bring a civil law damages case against the relevant defendant. Although conceivable in theory, we are not aware of such reported cases in Russia to date.

  95. 48.What are some of the collateral consequences to a conviction or the imposition of liability by a court?
  96. See question 47. 

  97. 49.Can private securities or related legal claims proceed parallel to investigations by securities and related law enforcement authorities?
  98. In the Russian regime of liability for damages to private persons caused by a breach of Russian law (be it an administrative offence or a crime), a private claim should follow the finding of a breach by the regulator or in court (see questions 47 and 48). Although there is no formal restraint on filing private claims in parallel with a regulatory investigation, a meaningful legal remedy may not be available to a private claimant pending the investigation where there exist, at most, mere allegations of a market abuse. Furthermore, the fact of an investigation is generally confidential (see question 5). Please note that the discovery regime akin to that existing in the US does not exist in Russia.

  99. 50.What effect will findings by an authority in another jurisdiction have in private proceedings?
  100. The findings by a foreign regulator may serve as evidence in civil law proceedings in Russia (assuming a Russian court is a proper venue), but do not have a res judicata force, and are to be assessed by court as part of all available evidence. A claim by a private plaintiff for damages caused by actions deemed illegal in another jurisdiction – even if the actions occurred in the Russian territory – is unlikely to have merit if based solely on the foreign regulator’s findings for the reasons discussed above (see question 49).

  101. 51.Can private plaintiffs obtain access to the files or documents the securities or related law enforcement authorities collected during the investigation?
  102. Overall, private plaintiffs’ access to files or documents that the regulator collected during the investigation is quite limited (see questions 9 and 49). Principally, they should rely on a general civil process right to request the court to assist in obtaining specific (enumerated) evidence from persons in possession thereof. Although there are no reported incidents of the sort, it is theoretically possible for a private plaintiff with a proper standing to intervene in an administrative case for market abuse while the case is still pending with the CBR as an "impaired person", with certain process rights such as the right to review all case materials.

     

    * Paralegal Andrey Lipin provided research assistance.

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Questions

    Regulatory environment

  1. 1.What are your country’s primary securities or related law enforcement authorities? 
  2. 2.What are the principal violations or legal issues that the securities or related law enforcement authorities investigate?
  3. 3.If there is more than one authority involved in a securities or related investigation, how is jurisdiction allocated? What is the interplay between the securities regulator and the public prosecutor?
  4. 4.Do the securities or related law enforcement authorities have investigatory powers? Can they bring administrative, civil or criminal proceedings? 
  5. 5.Are regulatory or criminal securities and related investigations public? Under what circumstances? 
  6. 6.Are regulatory or criminal securities and related investigations targeted at the company or the individuals involved, or both?
  7. Investigation procedure

  8. 7.How do the securities and related law enforcement authorities typically begin an investigation?
  9. 8.What level of suspicion of wrongdoing is required for the securities or related law enforcement authorities to begin an investigation?
  10. 9.May the securities or related law enforcement authorities conduct dawn raids? Does this depend on the nature and seriousness of the allegations?
  11. 10.Must the findings of a company internal review be reported to the securities or related law enforcement authorities? When and under what circumstances?
  12. 11.Are whistleblowers a frequent source of information for securities and related investigations? 
  13. 12.Describe the typical phases of a securities or related investigation in your country.
  14. 13.What are the mechanisms by which a securities or related law enforcement authority may cooperate and coordinate with authorities outside your jurisdiction?
  15. 14.Will a securities or related law enforcement authority take into account findings by a law enforcement authority outside your jurisdiction in the course of its investigation?
  16. Document production

  17. 15.What can the securities and related law enforcement authorities require to be produced as part of an investigation? Do the powers of a regulator differ from those of the public prosecutor?
  18. 16.Will a litigation hold or will other instruction to preserve documentation need to be issued? When?
  19. 17.Can the securities and related law enforcement authorities request the production of materials protected by attorney-client privilege or work-product doctrine? Can the securities and related law enforcement authorities use protected materials if it obtains them from third parties?
  20. 18.How is confidential information or commercially sensitive information treated by the securities and related law enforcement authorities?
  21. 19.Can the target of a document request exercise a right not to produce?
  22. 20.Do any data privacy or bank secrecy laws restrict the production of materials to a securities or related law enforcement authority in your jurisdiction? An authority outside your jurisdiction? May the company under investigation provide personal or bank customer data on a voluntary basis?
  23. 21.Are there any data privacy, bank secrecy or other laws that restrict where documents or other communications may be stored or reviewed for the investigation?
  24. 22.Are the securities and related law enforcement authorities able to obtain documents from outside the country?
  25. Witness interviews

  26. 23.Will the securities and related law enforcement authorities conduct witness interviews? If so, will the interviews be on the record? Will the interviews be made public?
  27. 24.Can witnesses exercise a right not to testify? Will any adverse inference be drawn if they do so?
  28. 25.Do witnesses receive separate counsel? Who provides counsel for witnesses?
  29. Advocacy

  30. 26.Can the target of a securities or related investigation challenge the investigation in court while the investigation is ongoing?
  31. 27.What opportunity will there be to respond to a securities or related law enforcement authority’s theories or allegations prior to the authority bringing charges?
  32. 28.What form does the advocacy with a security or related law enforcement authority typically take? 
  33. 29.Are statements or advocacy positions taken by an investigated party during the investigation process deemed admissions and binding in future proceedings? Would such statements be made public?
  34. Timing

  35. 30.What is the limitation period for charges for securities and related violations?
  36. 31.When does the limitation period begin to run?
  37. 32.What can suspend the running of the limitation period? Can the securities and related law enforcement authorities request a tolling agreement?
  38. 33.How long does a securities or related investigation typically take?
  39. Resolution

  40. 34.What is the process for closing an investigation if the investigation does not reveal a violation of securities or related laws? Will the securities or related law enforcement authorities provide written confirmation that the investigation is closed without action?
  41. 35.How will the resolution or settlement process be initiated?
  42. 36.Who decides whether to proceed with charges and what charges to select? 
  43. 37.What factors would a securities or related law enforcement authority consider in selecting charges and the severity of any penalty or fine?
  44. 38.What remedies can the securities or related law enforcement authorities consider? How are penalties calculated?
  45. 39.Do illegal profits have to be disgorged, and if so, how are they determined?
  46. 40.Can criminal charges be brought against companies in your jurisdiction for violations of securities and related laws?
  47. 41.Will the securities and related law enforcement authorities provide a reduced penalty for cooperation? What standard will the authority use when taking into account any cooperation?
  48. 42.Are deferred prosecution agreements or non-prosecution agreements permitted?
  49. 43.Will a court need to approve the settlement agreement with a securities or related law enforcement authority?
  50. 44.If a settlement occurs, will an admission to certain facts or wrongdoing be required?
  51. 45.Can the findings or decisions of the securities or related law enforcement authorities be administratively appealed? Appealed to a court?
  52. 46.If a decision can be administratively or judicially appealed, what are the consequences of an adverse decision on appeal? What are the consequences of a positive decision on appeal? 
  53. Collateral consequences

  54. 47.What are some of the collateral consequences to a resolution or settlement with a securities or related law enforcement authority? 
  55. 48.What are some of the collateral consequences to a conviction or the imposition of liability by a court?
  56. 49.Can private securities or related legal claims proceed parallel to investigations by securities and related law enforcement authorities?
  57. 50.What effect will findings by an authority in another jurisdiction have in private proceedings?
  58. 51.Can private plaintiffs obtain access to the files or documents the securities or related law enforcement authorities collected during the investigation?