Bank of Finland -

Russian President Vladimir Putin said that the 2011 relaxation of the criminal code has failed to achieve its intended results. He noted that public officials convicted of bribery under current law usually get off with fines, which is not efficient as most of those fines are never paid.

The law was changed during Dmitri Medvedev's presidency. Many economic crime classifications were eliminated and the possibility of holding suspects in jail during a crime investigation was limited. Penalties for economic crimes were also reduced. The changes were part of reforms to improve the business environment in Russia. They are often cited as one of the major accomplishments of the Medvedev presidency.

The goal of the reform was to reduce coercive practices used on firms. It is not unusual in Russia for competitor firms or corrupt officials to haul companies into court on trumped-up charges in order to push the victim firm out of a certain market, take it over or strip it of its assets. Even the mere threat of a lawsuit is often sufficient to obtain a bribe. Especially charges for tax avoidance have been used for this purpose.

The possibilities of doing so were, however, greatly reduced when the 2011 reform specified that only tax officials could file charges for tax-related crimes. Earlier, it was possible also for the investigative authorities. Under the proposed amendment that Putin submitted to the Duma on October 11, the charging authority would be returned to investigators. The argument for the amendment is that the efficiency in solving tax-related crime has been sharply curtailed.

The bill proposal was so out of the blue that even the economy and finance ministries were unaware of it. Russia's most important economic interest groups - the Chamber of Commerce and Industry, the Union of Industrialists and Entrepreneurs (RSPP), Delovaya Rossiya (represents medium-to-large companies), Opora (represents small firms), the Foreign Investment Advisory Council and Russia's business ombudsman - all urged the president to reconsider the proposed legislation. Even the economy ministry criticised the president's proposal, as did Prime Minister Medvedev, which was exceptional.

The petitioners point out that with the proposed changes, possibilities for using false accusations as a means of extortion on firms would increase again. Businesses would face a more uncertain operating environment and see further degradation of the investment climate. The economy ministry further noted that the damage to the economy from increased harassment of business would be much more costly to society than any possible tax recoveries.

Since the 2011 reform was instated, the volume of charges filed for tax-related crimes has fallen substantially while the number of successful convictions has risen. Business interest groups see this as a sign that the number of baseless prosecutions for tax crimes has diminished.

Many experts say the best way to limit tax avoidance is to make the operations of tax officials more efficient rather than increasing the power of investigative authorities. The problem of unpaid fines cited by Putin could be corrected eg. by freezing the assets of a person suspected of tax fraud or transforming fines into imprisonment penalties.