Crux (#07-08 July-August 2013)

Save your Business

It is six months since the new Criminal Code of Procedure came into effect on 1 January 2013. Adoption of the new Code became an important step for the introduction of new regulations, to modernize its law-enforcement system and to pursue reform in this field. Our current panel highlights the latest developments in enforcement and provides for a brief review of anti-corruption legislation catch-up.

Artem Orel, attorney, Ilyashev & Partners

Artem Orel, attorney, Ilyashev & Partners

What are the features of investigation of economic crimes according to the new Criminal Code of Procedure of Ukraine?

Since the new Criminal Code of Procedure (CCP) came into force the investigation of criminal offences has changed significantly. As for the peculiarities of investigation of economic offences, it should be noted that now all economic offences are investigated by the investigators of the internal affairs agencies and the investigators of the agencies that carry out control over compliance with tax laws. The prosecutor’s office is excluded from investigation agencies and exercises supervisory functions in the main.

Currently, the new CCP gives the right to collect evidence and conduct examinations, including on economic offences, not only by the prosecution, but also by the defence. Surely, the possibilities of an attorney as compared to the prosecution are limited.

However, in regular and adequate work of the investigating judge, who first and foremost will be guided by the principle of equality and competitive equality of the parties, the defence party has more preferences. Thus, for example, the investigating judge may, at the attorney’s request, approve a ruling on temporary access to things and documents. It is especially important that at present the courts mostly impose on suspects a preventive measure not connected to deprivation of liberty. Bail is widely used. In fact, at present such a preventive measure as detention is applied only in exceptional cases in Ukraine. According to Articles 182 and 183 of the CCP of Ukraine 2012, in other cases the investigating judge, when making a ruling on the imposition of detention as a preventive measure, shall determine the amount of bail sufficient to ensure performance of the obligations by the suspect or the accused. Accordingly, detention will be applied only if bail is not deposited. Therefore, one of the main leverages (detention) of impact on the suspects and the accused and, accordingly, on the investigation procedure in case of economic offences has almost been mitigated. The use of plea agreements concluded by the accused, the defense counsel and the prosecutor begins to be widespread.

Maryana Sayenko, associate, Asters

Maryana Sayenko, associate, Asters

What are the latest trends in anti-corruption law? What corruption offences would entail criminal liability?

The Parliament of Ukraine currently focuses its efforts on improving and strengthening national anti-corruption legislation. Such policy is implemented through the recent adoption of seve- ral anti-corruption laws, namely Act No. 221-VII of 18 April 2013, Act No. 197-VII of 18 April 2013, and Act No. 314-VII of 23 May 2013. In brief, these pieces of legislation:

— amend the definition of “improper advantage”, replace the notion of “bribe” with “improper advantage”;

— foresee criminal liability for accepting an offer or promise of improper advantage; criminal liability for commitment of corruption related offences in favor of third parties;

— provide for more severe criminal sanctions for corruption related offences, extend the list of persons subject to such liability;

— introduce criminal liability for institutions, companies or organizations, except for governmental, publicly sponsored and international ones, for a specific list of criminal offences, which among others include such corruption-related offences like commercial bribery, bribery of persons rendering public services, offering and giving improper advantage to officials, and abuse of powers;

— provide that legal entities may be subject to the following criminal sanctions: fine, confiscation of property, liquidation of the legal entity.

Even though it is too early to assess the effectiveness of the above novelties, it seems that some troubling contradictions remain.

Bogdan Bilenko, senior associate, Antika Law Firm

Bogdan Bilenko, senior associate, Antika Law Firm

What measures to minimize the criminal risks of doing business in Ukraine would you recommend to your clients? What is the experience of asset protection under a possible prosecution of management or owners of the company?

The initiation of criminal prosecution against an official body (director) should not carry risks for the assets of the company. Criminal punishment, such as forfeiture of property or fines, should be imposed only on the private property and funds of the convicted person. Therefore, the law-enforcement authorities cannot arrest assets of the company so as to provide possible forfeiture of property belonging to the official body (director). If the suspected person owns shares in a company, then during criminal prosecution his corporate rights may be arrested.  The assets of a legal entity may attract the attention of law-enforcement authorities only if their purchase is connected with a criminal offence, the commitment of which is incriminated to the suspected person (are an object of the criminal offence). That is why, in order to save such assets during criminal prosecution, a company has to prove that these assets passed into the ownership of the legal entity legally.

In fact, in this situation the ways to protect the suspected person and the ways to protect the assets of the company will be the same. Both the company and the suspected person will have to prove that the official body of the company did not perform any illegal actions. If during criminal prosecution proof of illegal operations with assets is found they may be claimed within an independent civil procedure.

In practice, law-enforcement authorities often abuse the arrest of assets of legal entities during the pre-trial investigation, when the fact that a crime has been committed has not yet been proven. The new Criminal Code of Procedure, which has been in force since November 2012, provides for appealing against the arrest in court. Therefore, a timely appeal to a court may be an effective way to protect the interests of a company from the illegal actions of the law-enforcement authorities.

Yaroslav Romanchuk, managing partner, International legal center EUCON

Yaroslav Romanchuk, managing partner, International legal center EUCON

What are the risks for companies whose management has been accused of tax evasion in view of the new Criminal Code of Procedure of Ukraine?

Tax legislation establishes financial, administrative, and criminal liability for tax offences. Financial liability exists in the form of fines and penalties that apply to the company — a taxpayer. Financial liability is also a ground of administrative or criminal charges against the company’s officials. Criminal liability for evasion of taxes and duties (mandatory payments) will be imposed on the CEO, chief accountant or other official person in charge of accounting.

If a CEO’s actions are qualified as criminal this may entail not only financial losses for the company but also more adverse consequences for the business, including  damage to the business reputation, leading to the capitalization decrease, or seizure of assets and suspension of licenses, which would temporarily terminate all the business activities of the company.

It should be mentioned that pursuant to the new Criminal Code of Procedure a taxpayer is deprived of the possibility to challenge in court a decision to initiate a criminal case, because initiation of a criminal case has been replaced by an entry of information about the crime in the Unified Register of Pre-trial Investigations and complaints of this kind are not included in the list of complaints that courts consider during the pre-trial investigation.

For example, if information is entered into the Register under an article on a fictitious business, a company’s counterparts may face risks, as all transactions with such a taxpayer may be recognized fictitious. And it is impossible to challenge this information during the pre-trial investigation under the new Code. Thus, a court may consider a complaint only after the pre-trial investigation is completed, but consideration of the complaint at the later stage makes taxpayers unprotected when facing criminal proceedings against them.

Consequently, if a CEO is accused of tax evasion under the new Criminal Code of Procedure, which abolished the possibility to appeal initiation of the criminal case, the company may incur significant financial losses in the form of an additional tax, penalty charges and imposition of fines, which in turn can result in the bankruptcy of the taxpayer.

Taras Lukash, partner, Salkom

Taras Lukash, partner, Salkom

What are the grounds and procedure for detention of persons under the new Criminal Code of Procedure of Ukraine? What are remedies to prevent a possible criminal prosecution?

Detention is a temporary preventive measure.  During a pre-trial investigation, detention can be ordered by an investigating judge at the request of an investigator approved by a prosecutor except in the cases set out below. In case a person detained has not been served with a reasoned detention order issued by a court, he/she should be released immediately. Since detention is one of the measures aimed at facilitating criminal proceedings, the reasons for its application are the same as for other measures of this kind:

— there should be a reasonable suspicion that an offence of such a scale has been committed that gives reasons for the application of the said measures; 

— the needs of a pre-trial investigation justify such an interference in the rights and freedoms of a person to be detained at the request of an investigator or a prosecutor;

— detention facilitates the fulfilment of tasks stated in the request filed by an investigator or a prosecutor.

Under the Criminal Code of Procedure, detention is possible in the absence of a detention order issued by an investigating judge. The said “legitimate detention” gives everyone an opportunity to detain a person under the following circumstances:

  1. when a person is committing or attempting to commit an offence;
  2. immediately after a person committed an offence or during uninterrupted pursuit of a person suspected of committing an offence.

An authorised official may detain a person suspected of committing an offence punishable by deprivation of freedom without a detention order in the following cases only:

  1. if such a person has been caught in the process of committing an offence or attempting to commit an offence; 
  2. if immediately after an offence was committed a witness, including a victim, or evidence left on a body, clothes or a crime scene indicate that it is this person who committed the offence.
Maxym Uslystyi, senior associate, AstapovLawyers

Maxym Uslystyi, senior associate, AstapovLawyers

What preventive measures would you recommend to your clients as business owners to prevent corporate fraud?

The very existence of corporate fraud is as old as entrepreneurship itself. Even though the era of technology we are living in gave us some efficient prevention instruments, it has also inspired various “refined” methods for fraudulent actions. Conspiracy with counterparties, overpricing, kickbacks, billing fake services or supplies of goods, account management fraud, transactions with fake contractors and, etc. There’s huge space for unreliable employees to work out, which usually result in massive financial damages or lost reputation at worst. There’s a set of standard obligatory measures commonly used by more or less all businesses which do not require significant human or financial resources to be involved: developing transparent work flow and documents control, approval of relevant corporate security policies and by-laws, conducting proper human resources management and screening the potential high-risk factors, holding regular and extraordinary internal audits. The listed measures may not suffice for large-scale enterprises, where the large number of employees, high turnover and number of contractors and operations require a special approach, up to a designated structural division being responsible for corporate security. Commonly, additional measures may include the following:

(i) establishing a multilevel decision making process, requiring the approval of certain decisions or transactions exceeding the set criteria;

(ii) splitting certain powers between several employees;

(iii) outsourcing of accounting to a possible extent;

(iv) keeping sophisticated and experienced financial security staff with relevant powers.

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