Russia: asset recovery and confiscation

In order to disrupt corruption and organised criminal activities, and mitigate the consequences of such activities, it is essential that the state deprive criminals of the proceeds of crime and of their benefits. Where such measures are not taken, the proceeds of crime are usually laundered and reinjected into the economy in order to be legalised.

Confiscation of assets is usually regarded as an effective means of fighting against corruption and organised criminal activities, as it allows the state to remove economic profitability of committing crimes primarily related to money laundering, corruption and drug trafficking.

Russia is one of the countries that has implemented various measures aimed at combating corruption and various criminal activities, such as money laundering and criminal gangs. Confiscation of assets gained as a result of criminal activity is one of such measures and is used worldwide. However, this measure does not always work efficiently and often offenders prevail in hiding and dissipating their assets.

According to the recent data of the Supreme Court of the Russian Federation, there has been a gradual growth in the number of confiscations imposed by Russian courts during the last 10 years. In 2008–2011, the average number of confiscations was only about 700 cases per year, whereas in 2012–2015 it was about 950 confiscations on average per year. In 2015 only, Russian courts imposed confiscations in 1,801 cases, which is twice as much than in any of the previous years.1

According to the Russian governmental agency combating money laundering and terrorist financing (Rosfinmonitoring), in 2014 alone it helped the investigative authorities to confiscate more than 3 billion roubles.2 In comparison, during the same year in the United Kingdom the enforcement authority collected £155 million by virtue of enforcing confiscation orders.3

Despite a noticeable increase in the number of confiscations applied by the Russian courts, the total number of cases where this measure was imposed is still relatively small. For example, in the United Kingdom in 2014–2015 the courts granted confiscation orders in 5,924 cases.4 The application rate is significantly higher if the number of total population and crimes of these two countries are compared.

A more detailed look at the Russian Supreme Court’s statistics shows that in 2015 it was applied 473 times for misdemeanour and 1,229 times for felony. The most common application of confiscation was in cases involving bribery (9.3 per cent of the overall number of sentences) and for illegal drug trafficking (0.4 per cent of the overall number of sentences).5

Notwithstanding relatively modest statistical data on the application of confiscation, the Russian government has repeatedly stated its goal to combat corruption and organised criminal activities and indicated that confiscation is a vital weapon in the state’s arsenal to achieve that goal. International cooperation in the field of combating corruption is another priority of the Russian state policy in the anti-corruption arena. The state has made a number of commitments ‘to wage a comprehensive campaign against corruption and ensure that corrupt officials are prevented from concealing and maintaining illegally obtained wealth’.6

Regulatory framework for confiscation of assets by Russian authorities in criminal cases

Since the 1990s, Russia has been extensively developing and updating its legislation with regard to confiscation of property from the proceeds of the criminal activity.

According to article 1 of the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Strasbourg, 1990), which the Russian Federation has been a party to since 2001, ‘confiscation’ is a penalty or a measure, ordered by a court following proceedings in relation to a criminal offence or criminal offences resulting in the final deprivation of property. Article 3 of this Convention states that each party to the Convention shall adopt such legislative and other measures as may be necessary to enable it to identify and trace property which is liable to confiscation, and to prevent any dealing in, transfer or disposal of such property.

Until 2003, confiscation was one of the criminal sanctions expressly named in the Criminal Code of the Russian Federation that was enacted in 1996. It provided for full or partial confiscation of the property of an accused. In 2003, confiscation was eliminated from the legislative acts on the ground that the legislators found confiscation to be of very low efficiency.

The concept was returned back to the Criminal Code only in 2006 as part of Russia’s implementation of the Council of Europe Convention on the Prevention of Terrorism (Warsaw, 2005) primarily for the purposes of fighting against terrorism and in order to allow the enforcement authorities to seize and confiscate property of terrorists (see Bill No. 282601-4).7 Importantly, confiscation was added back not as a criminal sanction but as an ‘other measure of criminal nature’ along with the only measure of such kind until then – compulsory medical measures. Such status means that confiscation may be applied by the court in addition to usual criminal sanctions (fine, compulsory labour, imprisonment). That decision of the legislators was highly debatable among the Russian scholars and legal practitioners.

The significant overhaul in the legal regime on confiscation has caused issues as to the nature and application of such measure by the courts. The regulation today is twofold: confiscation measures now exist both in the Criminal Code and the Criminal Procedure Code.

At the end of last year, the Russian Parliament (State Duma) reviewed a draft bill No. 935311-6 that was intended to make confiscation a criminal punishment again.8 The explanatory note to this draft bill provided that the current regime on confiscation, being used as a special means enabling confiscation of property only from proceeds of criminal activity (and property in which it was converted), lacked a preventive or deterrent effect on the persons committing corruption crimes and proposed to make amendments which would provide for confiscation as a punishment and not an additional measure of criminal nature. However, the bill was withdrawn from the Parliament’s consideration.

Currently the Russian Parliament is reviewing another draft bill that is aimed again at amending the Criminal Code and the Criminal Procedure Code (see draft bill No. 983951-6).9 It provides for the elimination of article 81(4.1) of the Criminal Procedure Code (discussed below) and the introduction of confiscation as a type of criminal sanction rather than a special measure. Moreover, it completely eliminates all provisions in the Criminal Procedure Code relating to confiscation in order to exclude a possibility of confiscation without a judicial decision in an extrajudicial procedure.

Confiscation under the Criminal Code

According to article 104.1 of the Russian Criminal Code, confiscation of property means forced gratuitous withdrawal of property without compensation, and its conversion into the ownership of the state of money, valuables and other property received as a result of committing certain crimes (such as murder, kidnapping, organised criminal activities, terrorism, illicit drug trafficking, money laundering, etc), and any income from that property, as well as income from such property that has been fully or partially transformed. The measure may only be applied by courts. This definition is in line with the international public law (see the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Strasbourg, 1990)).

Confiscation may be imposed only against natural persons. Under Russian law, corporations and other entities are not subject to criminal prosecution. However, property of a corporation or entity may be confiscated if it forms a part of the criminal proceeds.

Given that confiscation is a measure of other criminal nature and not a sanction, there is some uncertainty as to its application by the courts. The law is silent on whether a court has to always decide whether it should grant confiscation or not for qualifying crimes, and how such discretion should be exercised. This presumably can at least partly explain why the confiscation application rate in Russia has been at such a low level and the efficiency of the measure has been constantly questioned.

Article 104.2 of the Criminal Code provides that if confiscation of a specific item is not possible, the court shall issue a decision on confiscation of the amount of money corresponding to the value of the item. In the event there is no or an insufficient amount of money for such confiscation, the court has to issue a decision on confiscation of other property for the same amount. These rules are important as they do not allow the offenders to escape from confiscation of the criminal proceeds by simply moving them beyond the enforcement agencies’ reach by disposing of or dissipating them.

At the same time, article 104.3 provides that if there is no other property of the person who committed a qualifying crime to reimburse all damages caused to the victims of that crime, then the property that is subject to confiscation has to be used for compensation purposes.

Confiscation under the Criminal Procedure Code

As mentioned above, the regime on confiscation is twofold and confiscation may also be applied in accordance with the Russian Criminal Procedure Code.

Article 81 of the Criminal Procedure Code, which deals with real evidence in criminal proceedings such as instruments of a crime, states that real evidence also includes property, money and other valuables gained as a result of criminal activity or acquired in a criminal way. It also provides that when giving a judgment, as well as order or resolution on termination of a criminal case, what to do with real evidence has to be resolved. First of all, property, money and other valuables gained as a result of a criminal activity have to be returned to their rightful owners (article 81(3)(4)).

In the event a dispute over ownership of property arises, under article 81(3)(6) such dispute shall be resolved in civil proceedings. For example, in case No. 44y-272/11, the Court of the Krasnodar Region held that in the event there was a dispute over the ownership to real evidence, the lower court had to apply article 81 of the Criminal Procedure Code and separate this issue from the criminal proceedings to be dealt with in civil proceedings. Given that the lower court failed to do so and confiscated the property without proper legal grounds, the Court of the Krasnodar Region set aside its judgment.

If there is no rightful owner and if a specific crime was committed (namely those referred to in article 104.1 ‘Confiscation of property’ of the Criminal Code), property, money and other valuables gained as a result of criminal activity shall be confiscated by the state in accordance with a procedure adopted by the government of the Russian Federation (article 81(3)(4.1)).

The main issue with the application of confiscation pursuant to the Criminal Procedure Code is that the said procedure has never been adopted by the Russian government. The courts also indicate that such procedure has not been adopted. This has created a situation where prosecutors try to confiscate the property by resorting to other legal mechanisms that were not necessarily envisaged by the legislators. For example, they often seek to confiscate criminal proceeds by resorting to civil law provisions, such as claiming the property to be ownerless. For example, in case No. 2-2447/12 the Oktyabrsky district court of Novorossiisk city stated that there was no procedure for confiscation of real evidence and held that property (illicit trafficking of money) had characteristics of ownerless property, and therefore converted it into the property of the state.

Another ambiguity is that the current wording provides that confiscation may be imposed when a sentence is passed by a court, or there is a ruling of the authorised authorities (such as a court, an investigator or a prosecutor) on the termination of a criminal case (see, for example, case No. 2-4203/2011 of the Nevsky Court of St Petersburg).

Notwithstanding the fact that article 81 of the Criminal Procedure Code states that there may be termination of a criminal case and confiscation of real evidence by an investigative authority, there is no case law where an investigation in the course of criminal proceedings was terminated and an investigator ordered to confiscate property, money or other valuables gained as a result of a criminal activity pursuant to article 81(3)(4.1).

At the same time, there is some case law indicating that an investigator may terminate a criminal case before it has been transferred to the court due to death of the accused and resolve issues relating to real evidence under article 81(3)(4) of the Criminal Procedure Code, that is to return property, money and other valuables gained as a result of a criminal activity to their rightful owner.

Moreover, article 81 refers to article 104.1 of the Criminal Code in regard to confiscation, while confiscation under article 104.1 is applied only on the basis of a judgment of conviction for the qualifying crimes. Such inconsistency creates difficulties in application and interpretation of law.

Both article 81 of the Criminal Procedure Code and article 104.1(1) of the Criminal Code give priority to the returning of such property to its rightful owner. It also protects a bona fide purchaser of such property (article 104.1(3)). The Russian Constitutional Court confirmed that such property has to be first of all returned to its owner and can be confiscated only in cases where a purchaser knew or should have known about the fact that such property formed the proceeds of a crime (see Ruling of the Constitutional Court No. 25-P of 21 October 2014). Therefore, the courts first have to establish who the rightful owner of the property is before deciding on confiscation. For example, in case No. 22K-1263/2013, the Court of the Belgorodsky Region held that the lower court had no evidence of who the owner of the property was, and remanded the case for a new trial to establish this.

Procedure for granting confiscation orders

Pursuant to article 73 of the Criminal Procedure Code, it has to be proved in the course of criminal proceedings, among other things, that property that shall be confiscated has been obtained as a result of committing a crime or is deemed a benefit from such property, or has been used or intended for use as an instrument of crime, or for financing terrorism, extremist activity, organised gangs, illegally armed formation or criminal communities (criminal organisation).

In accordance with article 299 of the Criminal Procedure Code, the court has to establish when rendering a judgment that the property that is to be confiscated has been in fact received as a result of committing a crime or is deemed an income from such property. The court must also determine how to deal with the property that was arrested or seized for the purposes of probable confiscation and what should be done with the real evidence, which includes criminal property.

Article 307 of the Criminal Procedure Code provides that a court must indicate in a judgment evidence supporting its findings that the property that should be confiscated has been obtained as a result of committing a crime or is deemed an income derived from such property.

As explained above, criminal proceedings are not always completed upon rendering of a judgment. There are certain instances when a case is terminated before it has been transferred to the court or even during the trial. Such instances include absence of the event of a crime, absence of the corpus delicti in the act, expiry of a statute of limitations for criminal prosecution, absence of the victim’s application (if the criminal case may be instituted only upon his or her application), lack of a court statement as to the availability of elements of crime, death of a suspect or an accused.

The grounds for termination can be divided into two groups: rehabilitative and non-rehabilitative. The rehabilitative grounds are those evidencing that a prosecuted person was not involved in a crime, or there was no crime committed, while non-rehabilitative grounds may exist when it is proved that there was at least some involvement of a prosecuted person in a crime.

According to article 24 of the Criminal Procedure Code, a criminal case shall be terminated in respect of a suspect or an accused upon his or her death. Death is considered to be a non-rehabilitative ground for termination. It has to be noted that a case would not be terminated automatically in such instance. This would also require a consent of the close relatives of a suspect (accused) as they may insist on continuation of the investigation (trial) to rehabilitate the suspect (accused). This was clarified by the Russian Constitutional Court, which established that the protection of constitutional rights of an individual cannot be achieved without providing his or her relatives with a right to insist on the continuation of the criminal case for his or her possible rehabilitation (see the Ruling of the Constitutional Court No. 16-P of 14 July 2011). In the event agreement of the relatives has not been obtained and the case was terminated, such decision of the investigative authorities, a prosecutor or a court would be set aside if the relatives decide to challenge such decision. The Supreme Court of the Russian Federation, in its Ruling No. 248P11, held that a case had to be reconsidered as long as there was no evidence that the relatives of a suspect had agreed to terminate the case (see Review of cases considered by the Supreme Court of the Russian Federation during IV quarter of 2011).

Other instances where the death of a suspect (accused) would not entail an automatic termination of the proceedings include instances where the investigative authorities find that the continuation of the proceedings is necessary for the purpose of the rehabilitation of a deceased. In a renowned criminal prosecution case against the Russian lawyer Mr Magnitsky after he died in prison, his wife wanted the criminal proceedings to be discontinued. After Mrs Magnistkaya was denied that she challenged this provision of the Criminal Procedure Code to the Russian Constitutional Court as being unconstitutional. The Constitutional Court held that the investigative authorities can decide to proceed with a case if it is necessary to rehabilitate the deceased (see Ruling of the Constitutional Court No. 423-O-P of 22 March 2012).

International cooperation and enforceability of Russian criminal proceedings and claims outside of Russia

As noted above, Russia is a party to a number of multilateral and bilateral treaties that provide for international assistance and cooperation in criminal matters, including those related to confiscation of stolen assets. The Russian Federation actively assists and cooperates with other countries (eg, France, Germany, Switzerland) with international requests for legal assistance. At the same time, there are difficulties in mutual legal assistance with the United Kingdom and the US insofar as these countries do not always provide information to the Russian authorities for asset tracing and confiscation purposes.10

Russia is a party to a number of international multilateral treaties that provide for confiscation of the proceeds from crime, such as the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Strasbourg, 1990), the Criminal Law Convention on Corruption (Strasbourg, 1999), the United Nations Convention against Transnational Organized Crime (adopted by General Assembly resolution 55/25 of 15 November 2000), and the United Nations Convention against Corruption (adopted by General Assembly resolution 58/4 of 31 October 2003).

A special Federal Law ‘On Fighting Money Laundering and Financing of Terrorism’, enacted on the basis of the mentioned conventions, in article 11 provides that the recognition of a conviction judgment and confiscation of assets shall be proceeded pursuant to a corresponding international agreement of the Russian Federation.

Interaction with the competent authorities of foreign countries with regard to legal assistance in relation to confiscation is carried out on the basis of such treaties or based on the principle of reciprocity. If a state asking for assistance is a party to one of the conventions mentioned above, interaction between the states (their competent authorities) with regard to legal assistance in criminal matters, including those related to the return of stolen assets, shall be carried out on the basis of these treaties. In the event there is no treaty between Russia and a country seeking legal assistance, then it is rendered on the principle of reciprocity but that would require such state to provide a guarantee letter that it would act reciprocally towards a request of the Russian authorities.

According to the Step-by-Step Guide on International Cooperation11 adopted by the Ministry of Justice of the Russian Federation in conjunction with the Prosecutor General’s Office of the Russian Federation, it has been actively working and successfully cooperating with the UN Office on Drugs and Crime, the Group of States against corruption of the Council of Europe, the Organisation for Economic Co-operation and Development, the Financial Action Task Force to Combat Money Laundering, and the Eurasian Group on combating Money Laundering and the Financing of Terrorism.

According to the Guide, all requests for legal assistance shall be addressed to the central authority of the Russian Federation, which is the Prosecutor General’s Office or the Ministry of Justice. In order for a request for legal assistance from the Russian authorities to be successful specific rules must be followed, such as the requirements to specify the location of a seized property for the purposes of its eventual confiscation, evidence that there is a connection between the property and illegal operations claimed as the basis for such seizure. The request has also to be accompanied by judicial decisions or to provide for an explanation as to how property seizure shall be executed under the applicable Russian law. The Guide provides that confiscation of property can only be applied if there is a court order or a judicial decision in a criminal case.

In its turn, Russia has successfully resorted to foreign legal assistance when seeking to seize foreign assets of former Russian senior officials and oligarchs for the purpose of their possible confiscation. According to the Head of the General Department of International Legal Co-operation of the General Prosecutor’s Office, Russia seized property worth more than US$350 million in various countries and has returned more than US$110 million from Switzerland. It is now negotiating a return of more than US$500 million back to Russia.12

In March 2016, the General Prosecutor’s Office announced that a Special Working Group will be established to deal with the returning of assets gained as a result of criminal activities in order to promote better international assistance in cases related to return, seizure and confiscation of assets.13

In the context of enforcement of foreign confiscation orders it is also interesting to mention the aspect of their enforceability in insolvency proceedings and inheritance cases. According to the Russian insolvency law, assets gained as a result of criminal activities cannot be treated as forming part of the insolvency estate in the first place and, therefore, are not available for creditors of a debtor who happened to own proceeds of crime. Furthermore, under Russian law real evidence can be confiscated even if it has been included in the inherited estate. However, if such claim is brought in another jurisdiction, the issue as to whether such claim may or shall be recognised and admitted into an insolvency estate or a deceased person’s estate should be governed by the law applicable to that estate (lex fori concursus).

Notes

  1. Statistics of Russian courts, available at www.cdep.ru/index.php?id=79.
  2. Statistics of Rosfinmonitoring, available at www.fedsfm.ru/press/media-review/1555.
  3. Confiscation Orders: Progress Review, available at www.nao.org.uk/report/confiscation-orders-progress-review.
  4. Id.
  5. Statistics of Russian courts, available at www.cdep.ru/index.php?id=79.
  6. Ministry of Justice of the Russian Federation, Asset Recovery: Step-by-step Guide on International Cooperation, available at http://minjust.ru/sites/default/files/13703880-13708920.pdf.
  7. Federal Law ‘On Amending Certain Legislative Acts of the Russian Federation due to Ratification of Convention of the Council of Europe on the Prevention of Terrorism’ and Federal Law ‘On the Prevention of Terrorism’ (Explanatory Note to Bill No. 282601-4).
  8. Bill No. 935311-6 ‘On Amending Certain Legislative Acts of the Russian Federatino due to Introduction of Confiscation of Property as a Punishment’, available at http://asozd2.duma.gov.ru/main.nsf/%28SpravkaNew%29?OpenAgent&RN=935311-6&02.
  9. Bill No. 983951-6 ‘On Amending Certain Legislative Acts of the Russian Federation (Introduction of Confiscation of Property as a Punishment)’, available at http://asozd2.duma.gov.ru/main.nsf/%28SpravkaNew%29?OpenAgent&RN=983951-6&02.
  10. Interview with the Head of the General Department of International Legal Co-operation of the General Prosecutor’s Office, 31 March 2016, available at http://izvestia.ru/news/608141.
  11. Ministry of Justice of the Russian Federation, Asset Recovery: Step-by-step Guide on International Cooperation, available at http://minjust.ru/sites/default/files/13703880-13708920.pdf.
  12. Interview with the Head of the General Department of International Legal Co-operation of the General Prosecutor’s Office, 31 March 2016, available at http://izvestia.ru/news/608141.
  13. News at the General Prosecutor’s Office Official Website, available at http://genproc.gov.ru/smi/news/genproc/news-1068911/.

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