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Analysis & Opinion
08.04.10 The Noose Tightens On Raiders
By Tai Adelaja

After much procrastination, there are serious efforts afoot to combat the biggest scourge of business life in Russia: raiders’ attacks. President Dmitry Medvedev began his presidency on an optimistic note in 2008, promising to take on corporate raiders – criminals who force victims to sign over assets with little or no compensation – but experts and industry executives say there has been little or no perceptible change since he first threw down the gauntlet. However, things could be about to change, if the proposed amendments to the country’s Criminal Code are any indication.

At a February 26 meeting of Russian businessmen, the president promised to roll out a new set of legislative measures aimed at counteracting the illegal seizure of enterprises and, on Tuesday, introduced a package of amendments to the Russian Parliament that would change the way law-enforcers combat corporate raiding.

If passed, the raft of amendments would reframe Section 170 of the Penal Code, to impose tougher sanctions for knowingly submitting forged documents with the intent to modify the country’s Unified State Register of Companies. Tampering with shareholder registries would now be punishable by a fine of between 100,000 to 300,000 rubles ($3,330 to $10,000), or up to two years in prison, the text of the amendment posted on the State Duma Web site says. Such offenses are currently only punishable by fines. Under Article 185, anyone who knowingly alters a company’s registry or amends the shareholders’ book – a favorite pastime for Russian corporate raiders – is now guilty of the same offence as banknote counterfeiters, which is punishable by a fine of up to 300,000 rubles or up to two years in prison.

The new bill also imposes harsher punishment for falsifying the decisions made at the general meeting of a business’ shareholders, or the decision of the board of directors of a business entity. Applying undue pressure to influence the shareholders’ vote in one way or another, including through the use of coercion, would be punishable by up to five years in prison.

Vladimir Gruzdev, the deputy head of the State Duma Legislative Committee told the Vedomosti business daily on Monday that he would set up an ad-hoc group next week to prepare for the adoption of the draft bill and other anti-raider measures pending before the house, a further indication that legislators are willing to expedite action on the bill.

Past efforts to enact anti-raider laws have met with ferocious criticism. The first anti-raider bill was introduced to the State Duma in January of 2007, but only passed the first reading, since legislators argued that the changes did not go far enough to penalize offences relating to manipulation of the State Register of Companies. Another draft bill "on joint stock companies" submitted to the Parliament in April of 2008 also went no further than the first reading.

Raiding is often a difficult to prove, "intellectual” type of crime that is widespread in many countries, but Russian wheeler-dealers have added a homegrown flavor to the issue by turning it into a systemic risk for businesses, experts say. Russian raiders, they say, often include former intelligence officials, policemen, lawyers and people with ties to well-placed officials. Judges, prosecutors and bureaucrats at all levels are also on their payroll.

Alexander Bastrykin, the head of the Investigative Committee at the Prosecutor's Office, said that raiders almost always receive help from law enforcement bodies in planning and executing attacks. "In many criminal cases, investigators have uncovered inherently unjust judicial decisions, in which raiders were recognized as de jure owners of the seized properties,” Bastrykin told the state-owned Rossiyskaya Gazeta in an interview. “Often, law enforcement officials also have aided the raiders by seizing valuable information from the register of shareholders and later amending it. Raiders are also helped by filing criminal cases on trumped-up charges. Elected officials have also shown an eagerness to facilitate the raiders’ attacks by initiating parliamentary inquiries, distorting news coverage in the media and performing other jobs for the raiders.”

State officials often go unpunished, while seized properties are eventually legalized through a series of murky transactions, Bastrykin said. Raiding is a highly complicated phenomenon because raids are planned and executed by groups that employ highly qualified attorneys and control huge financial resources to grease the palms of state officials, he said.

The number of corporate raids in Russia cannot be estimated accurately because no reliable statistics are kept, but experts estimate that thousands of businesses are taken over in illegal raids every year. The number was particularly high in the pre-crisis years, as criminals scrambled for a share of the national cake through illegal takeovers especially after the privatizations of the 1990s, Valeria Filimonova, the head of PR projects at the Center for Political Technologies, said. “Raiders have become genuine professionals who supply their services to anyone who requests them, from corporate blackmailers to those wanting to take over factories,” Filimonova said.

One of the better-known, high-profile raid cases involved the Hermitage Capital Management, the $1 billion British hedge-fund firm run by William Browder. Jamison Firestone, a lawyer representing Hermitage Capital Management, once the largest foreign investor in the country, said that corporate raiders stole three companies from the firm after investigators raided its offices. He claimed that “these companies were subsequently used to steal $230 million from the Russian budget.” A report issued by the Council of Europe in June of last year, which cited Hermitage Fund as "another example of a Russian-style raid or corporate takeover," appeared to lend credence to such claims.

Raiders have also cracked down on major retail chains, including Yevroset, once the country’s largest handset retailer, and Arbat Prestige, which operated 98 stores nationwide before its closure last year. Yevgeny Chichvarkin, the fugitive former co-owner of Yevroset who fled to Britain in December of 2008, said that he had always suspected that illegal corporate raiders were behind a series of investigations and searches at his company, which started in 2007 and ended up in the sale of his 50-percent stake in the company.

Vladimir Nekrasov, the owner of the decimated cosmetics retailer Arbat Prestige, was arrested in January of 2008 after being accused of evading taxes, totaling 50 million rubles ($2 million), from 2005 to 2006. In an open letter to President Medvedev from his prison cell last year, Nekrasov wrote that investigators had offered him freedom in return for producing evidence on a suspected organized crime boss Semyon Mogilevich. Mogilevich is wanted by the FBI on 2003 charges of fraud and racketeering.

Since his arrest, Nekrasov’s cosmetics giant fell into disarray, defaulting on credit payments to Sberbank and suppliers. In a November 2008 lawsuit, the company was forced to turn four of its stores over to Sberbank, and closed its last store in December.

Nekrasov's lawyer, Alexander Dobrovinsky, is one of the critics of the new amendments put forth by president Medvedev. “The amendments were too little too late, because raiders have seized everything they could lay their hands on in the past years,” Dobrovinsky said in an interview Wednesday. He said the attack on Nekrasov “is a classic case of raiding," and that “legislators must talk to the victims of raiders’ attacks who can share their experience on how best to combat the scourge” before passing any laws. “What is needed is not a law on raiders, but a change in mentality on behalf of judges, registrars and law enforcement agencies,” Dobrovinsky said. “As soon as the new law is out, raiders will concoct a way to bypass it.”

While businesses in Moscow were the raiders' favorite prey in the 1990s, most of the victims now are in the regions, where they are less able to defend themselves than in the capital, a report by the Center for Political Technologies found. Filimonova, whose organization did an extensive study on raiding, said that while the amendments were good, the main wrinkle is how the law is implemented. “It is no secret that raiders are always a step ahead of the law, and there are cases when raiders intimidated judges and altered court documents,” she said. “Nevertheless, one of our recommendations is that the law on raiding should be strict, lofty and free of ambiguities, because raiders are known to exploit gaps in the laws to conduct illegal activities.”
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