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Regular version of the site

The Law Enforcement System Represses Entrepreneurial Activity in the Country

What can and should be done to decrease the pressure law enforcement authorities exerton business? Should the whole law enforcement system be changed or the legal penalties for entrepreneurs softened? Highlights from a discussion club session of the Association of Independent Centers of Economic Analysis on the topic of ‘The Law Enforcement System and Business in Russia: Direct and Indirect Costs’are described below. The session featured special experts Ella Paneyakh and Andrey Nazarov.

When speaking about the pressure law enforcement authorities exerton business, representatives of the business community, experts, and lawyers usually outline two key motives for the actions taken by law enforcement bodies: the illegal takeover of property and corruption. They assert that business is the focus of criminal justice due to its ‘significant ability to pay’. The number of complaints from entrepreneurs experiencing pressure from law enforcement bodies is growing. The results are capital outflow, businesses moving offshore, and a lack of interest in long-term planning and innovation.

What worsens the situation is that even for a minor offense (tax mistakes, errors in accounting), which qualify as ‘Fraud’ under Article 159 of the Criminal Code (75% of the calls made to Business Against Corruption, a non-profit center that assists businesses,concern such offenses), a businessman is threatened with up to 10 years in prison.

During a March 21, 2013, discussion club session of the Association of Independent Centers of Economic Analysis, Ella Paneyakh, Leading Research Fellow of the European University at the Saint Petersburg Institute of Law Application, and Andrey Nazarov, Co-chair of the Business Against Corruption non-profit center, shared their opinions on what constitutes the  ‘law enforcement burden’ on business, what the practice of business regulation through criminal justice leads to, and how to ease the pressure law enforcement bodies exert on business. Evsey Gurvich, Head of the Economic Expert Group and moderator of the discussion, opened the discussion and emphasized: ‘Without solving these problems, it makes no sense to solve all the others’.

Ella Paneyakh: Entrepreneurs are discriminated against by courts just like other representatives of the civil society

It is commonly believed that the business community comes under stronger pressure from law enforcement bodies, and that the main motivation for their ‘repressions’ are the illegal takeover of property or corruption. But this is not so. The Russian criminal justice system is corrupt, but not as much as people think. It is true that business costs related to ‘insurance’ from criminal prosecution are substantial, but we cannot say that entrepreneurs are discriminated against by courts any more than are all the other representatives of the civil society.

The criminal justice system is selective: it investigatescases that are either convenient to go after, or promising in terms of the extent of the corruption involved. It doesn’t compensate victims for damages; it doesn’t defend property rights; and most important, it punishes individual initiative.

For example, only 2% of prisoners are entrepreneurs, and they are acquitted more often than others: from 5-12individuals per 1,000 (among other populations, the acquittal rate is 1 per 1,000). They are more often given suspended sentences, and their cases are more often closed. There is a myth that entrepreneurs are discriminated against as a group. But we need to understand that business representatives are a dangerous ‘victim’; no one uses them to reach plan targetsbut rather to make money.

At the same time, the problem lies in the fact that a business has to constantly hedge itself against criminal prosecution. Minor tax mistakes or errors in accounting can be a reason for criminal prosecution. And the more complicated an action is, the easier it is for it to be interpreted as a violation and cause a criminal case to be opened.

But, as previously stated, the problem lies not in preconceived attitudes toward business but in the work of law enforcement bodies as a whole. Law enforcement bodies cannot investigate complicated cases and intentionally simplify them. Investigators ask police operatives to get them whatever will be easier to work with. The most massive article under which entrepreneurs are judged is Article 159 of the Criminal Code, ‘Fraud’.

Our police are too primitive to prove that someone is really at fault. As situation analysis shows, in most criminal cases against entrepreneurs, the evidence of guilt is not at all substantiated in accordance with international standards. Police officers who investigate simple cases are not legally obligated to check the validity of the materials and evidence, if the suspect doesn’t dispute it. At the same time, courts almost never acquit, and prosecutors almost never close cases where the actions of law enforcement officers taking part in an investigation give rise to doubt.

The criminal justice system is clumsy and simple. All cases are made on the basis of the same logic:

  • Affiliation with land, property, and bank account;
  • ‘Paper trail’: retroactive verification;
  • Privateactivity.

The criminal justice system is selective: it investigates cases that are either convenient to go after, or promising in terms of the extent of the corruption involved. It doesn’t compensate victims for damages; it doesn’t defend property rights; and most important, it punishes individual initiative. Everything that moves can be detected. As a result, businesses are forced to conduct complicated accounting, and to give up complex technologies in order to avoid being interpreted as fraudsters.

Business goes into the shadows to avoid criminal repressions. Successful people become ‘prey’, and that’s why entrepreneurs often give up on growth and success. The law enforcement system represses entrepreneurial activity in the country. When any business can be a criminal one, it takes nothing to rob it, for example, to demand payments for social responsibility, etc.

The costs for businesses are constantly growing and piling up on top of each other. They shorten the horizon of business planning and limit a business’s flexibility and ability to adjust to the economic environment.

These costs are the main problem, and they are underestimated as compared to the myth about prisons being packed with entrepreneurs.

Andrey Nazarov: Economic crimes must be economically unprofitable

Over the last 11 years, 3.5 million entrepreneurs have been sentenced – almost half of all the entrepreneurs working in Russia (7.5 million people). That’s why the popular opinion that the law enforcement system is against business is not ungrounded. There are some economic crimes and criminals, and they must be detected and punished. At the same time, the fact that the level of punishment for an economic crime can be equal to that for murder raises doubts since the punishment is disproportionate to the crimecommitted. The maximum term of imprisonment under the article for ‘Fraud’ is 10 years, the same term for those found guilty under the article for ‘Rape’. Five years of imprisonment can be the sentence for illegal entrepreneurship, while those imprisoned for ‘manslaughter’ get four years.

As a result, businesses distrust the system and are escaping Russian jurisdiction. Today 95% of businesses are offshore, and the capital outflow last year was $57 billion. Seventeen percent of Russian citizens are ready to leave the country.

The solution to this situation is simple. We must make economic crimes unprofitable: for example, make the criminal compensate for damagesby paying a penalty that is 5 to 30 times higher than the damages.

For example, if the damage is 6 million roubles, the penalty can be a multiple of 15. So, an ‘economic criminal’ will have to pay the state a penalty of 90 million roubles. If 33,000 people a year are sentenced under economic articles, the state budget will grow by up to 3 trillionroubles. This will provide an opportunity to solve some budget problems, to cut state costs for housing prisoners, and will ease the pressure on the business community. For example, we’ll be able to eliminate the Pension Fund deficit which is 2.5 trillion roubles. The abolition of criminal punishment will promote the return of businesses and capital to the country.

Some of the economists present at the discussion club session criticized AndreyNazarov’s suggestion to replace criminal punishment with high penalties. ‘If that happens, the state will foster economic criminals to solve budget problems’, Evsey Gurvich joked.

Ella Paneyakh’s assertion that law enforcement bodies are rarely motivated to raid a business when investigating it was also disputed. ‘They punish with one hand, and advance their own business with the other’, experts said.

According to Andrey Yakovlev, Director of the HSE Institute for Industrial and Market Studies, decentralization is necessary to reform the system. ‘The connection between the civil society and law enforcement bodies should take place on low levels independent of the center. The top-down command structure doesn’t work anymore, reforms from above won’t help’, Yakovlev believes.


March 28, 2013