The European Lawyer

Russian Federation Corporate/Commercial

4 Feb 2012

International Fraud and Asset Tracing - Russia

Editors: Herbert Smith CIS LLP - Dmitry Kurochkin, Vladimir Melnikov, Marat Agabalyan, Maxim Frolov

1. MANAGING the INTERNAL INVESTIGATION
There are no specific provisions or guidance in Russian legislation in relation to the measures which can be taken to prevent corporate fraud or to manage an internal investigation with respect to a suspected fraudulent action. As such, when conducting an internal investigation, an employer is obliged to comply with the general rules and principles of Russian legislation.
The key issue that arises for an employer where an internal fraud is discovered is to investigate it and pursue the wrongdoers. An offence, depending on the level of its seriousness will either amount to: (i) fraud (which is a criminal law concept); (ii) an administrative wrongdoing (a less severe offence punishable by law); or (iii) a wrongdoing which only entails employment law sanctions.
The feasibility of pursuing wrongdoers depends on whether an employer is able to obtain and collect the necessary evidence confirming the involvement of the respective employee in corporate fraud. In addition, it is also important to ensure that the evidence collected does not expose the employer to any liability for a breach of any statutory requirements and may be used in subsequent court and other proceedings against the employee.
Fraud is a criminal offence in Russia. Accordingly, the investigation will be carried out by the law enforcement authorities and related charges will be brought by them and considered by the criminal court. However, it will usually take some time until the company discovers fraud and files a complaint with the law enforcement bodies. Unless stated otherwise this overview does not deal with the criminal law aspects of prosecuting fraudsters.
The company can file a civil law claim (eg, for damages) against the wrongdoer even without initiating criminal proceedings. Further, acquittal of an employee in criminal law proceedings does not preclude the initiation of civil law proceedings by an employer.
However, in practice, many Russian companies prefer not to disclose any information about a fraud that has been perpetrated against it and do so only after a very detailed investigation of the facts. In particular, before the initiation of any legal proceedings companies try to investigate the position themselves and evaluate their chances of succeeding in any subsequent actions. Accordingly, internal investigations are common but sometimes they are not formally regulated by any law or internal regulations.

2. REGULATIONS GOVERNING THE INTERNAL INVESTIGATION PROCEDURE
The Labour Code of the Russian Federation of 2001 (the ‘Labour Code’) is the main piece of legislation governing the relationship between the company and its employees. The Labour Code does not contain any specific rules relating to internal investigations (other than in connection with work-related accidents) but provides that employment relations may be governed by the company’s internal regulations. Any provisions in the internal regulations that worsen the position of an employee by comparison with his position under employment legislation will not be enforceable. Accordingly, internal regulations cannot place excessive burdens on employees or breach their personal rights and freedoms under Russian law. Where such rights are breached, employers may be liable for violations of employees’ rights and, inter alia, the CEO and responsible officials of the company may be suspended from holding managing positions.
The lack of statutory rules in relation to internal investigation procedures results in employers in Russia adopting regulations providing for internal control (eg, using email screening programmes, audio and video surveillance, etc) and/or investigation procedures at their own discretion. Such regulations may also set out the obligations of employees in the course of investigations. In the event of a corporate fraud such internal regulations provide an employer with the means of obtaining and collecting the requisite evidence confirming the involvement of a suspected employee in a corporate fraud. However, given that there are no mandatory requirements as to formalisation of the internal investigation procedure, absence of written regulations do not automatically preclude an employer from obtaining evidence.
To ensure that such internal regulations are binding on the employee, an employment agreement should contain a provision according to which an employee is bound to abide by the internal regulations. Pursuant to article 22 of the Labour Code, an employer must notify each employee of any internal regulations and ensure that the employee has reviewed them. This applies regardless of whether the employee is employed before or after the introduction of such regulations. For these purposes the employee should either: (i) sign the internal regulations; or (ii) confirm his consent to be bound by them in a separate document. Should a dispute arise the employee’s signature can be used by the employer to evidence the employee’s knowledge of and consent to such internal regulations.
It is not entirely clear whether policies, handbooks, conduct rules, etc typically adopted by large multinational companies and developed by their foreign head office would be taken into account by the Russian courts as obligatory rules for their employees in Russia. However, if: (i) internal regulations are adopted; (ii) the employment agreement provides that the employee is obliged to follow such internal regulations; and (iii) the employee confirms that he was made aware of them, this should give an employer a significant degree of comfort in the event that an internal investigation is carried out, in particular with regard to the obtaining and collecting of requisite evidence on the basis of such internal regulations. In addition, foreign companies operating in Russia often ensure that local employees sign Russian versions of the regulations to avoid any argument being made by an employee that he did not in fact understand what he was signing.
Evidence obtained may be used by an employer in: (i) civil law claims within the framework of criminal proceedings against the fraudster; and (ii) in separate civil proceedings initiated against the fraudster.

3. RETRIEVING DOCUMENTATION
3.1 Retrieving hard copy and electronic documents
As soon as it is known that an internal investigation is under way, there will be an increased risk of fraudsters taking steps to cover their tracks. In this case an employer will need to take steps to ensure that fraudsters are unable to impede any internal investigation and interfere with or destroy the relevant documents and information which might constitute evidence, eg hard copy and electronic documents.
Again, given that there is no statutory regulation or guidance in relation to the procedure for retrieving hard copy and electronic documents, it is desirable to include any procedures in relation to internal investigations in the employer’s company regulations.
In relation to hard copy documents, in some cases, it may be enough to merely request documents from employees. This can be effective if the employee is co-operative and understands the scope of the exercise. More often, it is necessary to visit the employees and examine the documents or information located at their workstation to obtain all information which may be relevant. While the absence of internal regulations does not preclude an employer from conducting such searches it is prudent to ensure that internal regulations stipulate the procedure for searching employees’ workplaces and retrieving any relevant hard copy documents.
Usually, retrieval of electronic documents is done by copying data from a company’s or employee’s server, hard-drive and computer. Again, such actions may be carried out as part of the internal investigation in accordance with internal regulations, if any, but, as mentioned above, absence of such internal regulations should not preclude the employer from retrieving such documents in any event.
In practice, in order to avoid any possible breaches of the employees’ right to privacy (see section 3.2 below) and to have even greater comfort, employers usually include in an employment agreement provisions according to which an employee will be warned that his/her workplace (eg, room, desk etc) and computer may only be used for employment related purposes.
Despite the possible carve-outs which may be included in an employment agreement and/or internal regulations, it is still possible that an employee will keep personal belongings or personal emails at his workplace or on his computer. Generally, an employer should seek to ensure that any documents or information obtained from an employee’s workplace and/or computer relates to that employee’s employment activity.
Article 88 of the Labour Code obliges an employer to grant access to its employees’ personal information only to specifically authorised personnel in order to enable such personnel to carry out specific functions. Such personnel must be under strict non-disclosure obligations. Again, it is desirable for the functions of such personnel and the data to which they are to have access to be set out in the internal regulations. Only such personnel can obtain access to a suspected employee’s documents. This is to avoid the accidental disclosure of any personal information that may be encountered among documents located at an employee’s desk and computer.
In the event that an employer (including authorised personnel) retrieves any personal information, an employer has a duty to comply with the confidentiality regime set out in article 88 of the Labour Code and in article 7 of Federal Law No 152-FZ ‘On Personal Information’ dated 27 July 2007. Such information must not be disclosed to third parties. An employer may incur the following types of liability for any unauthorised disclosure of personal information: (i) civil (the employee is entitled to claim compensation for moral harm caused by the employer); (ii) administrative (the legal entity may be subject to a fine amounting to RUR 100,000 (approximately US$4,000)); and criminal (there is no concept of criminal liability for legal entities under Russian law, therefore only individuals (eg the employer’s authorised personnel) may be subject to such liability).
It is not permitted to conduct physical searches of employees without their consent. A forced search is reserved only to the police. The same applies to the detention of an employee at office premises against his will except when an employer performs such actions in anticipation of the arrival of the police. In accordance with article 38 of the Criminal Code of the Russian Federation, detention will not be considered unlawful if: (i) there was no other means of dealing with the suspected employee; and (ii) excessive force was not used in the circumstances. Otherwise, any searches or detainment will be unlawful and may constitute a separate offence.

3.2 Privacy
Article 23 of the Constitution of the Russian Federation of 1993 (the ‘Constitution’) sets out the general rule according to which private life is inviolable and according to which every individual has a right to privacy in relation to correspondence, telephone calls, post, telegraph and other messages. Furthermore, article 24 of the Constitution stipulates that obtaining, saving, utilisation and dissemination of private information is only permitted with the consent of the relevant person. These provisions of the Constitution correspond to the provisions of international human rights legislation.
In the event of litigation, the general test according to which the court decides an issue related to the admissibility of evidence will be whether documents were obtained in breach of the basic provisions on human rights legislation. If documents were obtained in breach of such provisions eg, privacy in relation to correspondence, telephone calls, etc, they may not be admitted as evidence in support of the employer’s case because such evidence will be deemed to have been obtained unlawfully.

3.2 Installation of monitoring software, audio recording and video surveillance
In accordance with article 21 of the Labour Code, an employee is entitled to receive accurate and complete information relating to his/her conditions of work, which arguably includes information regarding surveillance of his/her work place. Therefore, an employer should inform employees of the intention to install email screening programmes or audio and video surveillance. Any evidence obtained by this means is admissible in court provided certain formalities are complied with, such as, for example, the provision of information regarding how the evidence was obtained and providing of course that the evidence was obtained lawfully.

3.3 Obtaining oral evidence from employees
Oral evidence is typically obtained during an interview which is not formally regulated. In particular, the law does not provide for any advance notice of what is to be discussed in the course of an interview or for an advanced copy of the documents to be referred to during the interview. Refusal by an employee to answer questions cannot be sanctioned.
In civil proceedings (when the employer files a claim against the employee) the procedure for obtaining oral evidence is stipulated by the Civil Procedure Code of the Russian Federation of 2002 (the ‘Civil Procedure Code’). Article 68 of the Civil Procedure Code provides that parties to a lawsuit (claimant and defendant) and third parties (party/non-party interveners) are entitled to submit to the court ‘explanations’ which are not ‘witness statements’ because such parties cannot be witnesses. As such they are not liable for giving false evidence.
In accordance with article 69.1 of the Civil Procedure Code, any individuals who may have knowledge of the circumstances of a case may be questioned as witnesses and must give true oral statements. However, article 69.4.1 of the Civil Procedure Code provides that an individual has the right to refuse to give evidence if such statement could be used against him/her and his/her close relatives (eg, husband against his wife and vice versa, brothers and sisters against each other, etc). Therefore, an employer is entitled to obtain witness evidence in civil proceedings from, eg its other employees (who are not defendants and/or third parties (party/non-party interveners)). It should be noted however, that witnesses do not submit written witness statements in Russian court proceedings because a witness can only give oral evidence in court. That said, notes may be taken during an interview with an employee and such notes may be converted into a formal document signed by the employer and the employee. Such notes may subsequently be admissible in civil proceedings as documentary evidence.

4. PRIVILEGE
The concept of ‘legal professional privilege’ is not applicable under Russian law which is explained in part by the lack of disclosure or discovery in Russian proceedings. The only comparable concept relates to the protection of documents and information passing between an attorney and his client during the course of providing legal services. Under this concept nobody (not even the court or regulatory authorities) can seek to obtain from an attorney documents or information related to the provision of legal services. Furthermore, according to the Civil Procedure Code, witness immunity also applies to representatives (a concept larger than attorneys) in civil law proceedings in relation to matters which became known to them during the course of discharging their duties as representative.
Russian procedural legislation is unfamiliar with the concept of disclosure, pre-trial or otherwise, from counter-parties or third parties. Therefore, there are no legal grounds provided for by current legislation that empower an employer to obtain any documents/information from their employees in advance of court proceedings. However, each party to court proceedings may, during the proceedings, apply to the court with a motion to call evidence from a counter-party or third party. The court then issues the request and serves it on the respective counter-party or third party. In the event that the requested evidence does not exist or cannot be submitted (eg, because it is no longer within that party’s control) within the time determined by the court, such parties must inform the court within five days from the date of receipt of such request. In the event of a failure to submit such evidence without justifiable reason the respective party may be penalised by the court by fines in the region of US$40. This does not however, relieve that party from the obligation to submit the required evidence. In addition, if the relevant party refuses to produce the relevant evidence to the court, the court may base its conclusions on the submissions of the other party. This court’s procedural power is of minimal use in Russia and is incomparable to the fully fledged disclosure exercise used in the UK and US.

5. DISCLOSURE FROM THIRD PARTIES
5.1 No disclosure from third parties at application of the claimant
In respect of disputes between an employer and an employee, both Russian civil and criminal law are unfamiliar with the concept of pre-action disclosure from third parties at the request of the claimant. Therefore, there are no legal means provided by current legislation entitling the employer itself to obtain any documents or information in other forms from third parties in advance of court proceedings.
However, it is possible to seek and obtain interim measures in relation to documents or information that may potentially be used in evidence in court proceedings. For present purposes, the relevant provisions are contained in the Law on the ‘Basics of Russian Legislation in Relation to Notaries Public’ No 4462-1 dated 11 February 1993. In accordance with this Law, following an application by an employer, a competent notary public may: (i) interrogate witnesses; (ii) review evidence; and (iii) appoint an expert. Moreover, in certain circumstances these actions may be carried out by a notary public ex parte.

5.2 Disclosure from third parties pursuant to applications/decisions of investigating authorities
The ability to obtain evidence from third parties in support of an employer’s claims before commencement of proceedings is only provided for by Russian criminal legislation. This may be done in the course of pre-trial stage of criminal proceedings. However, the employer’s role in this respect will generally be limited to filing a complaint in relation to an alleged crime with the relevant authorities (but not with the court). All actions in relation to obtaining information in whatever form from third parties will be conducted by the above authorities themselves (and not by the employer). Such complaints are often resorted to by employers when internal frauds are discovered in order to exert additional pressure on the alleged fraudsters.
In this context, the Criminal Procedure Code of the Russian Federation of 2001 (the ‘Criminal Procedure Code’) provides, inter alia, for the following: (i) search of third parties’ premises and subsequent seizure of relevant documents; (ii) seizure of particular documents; and (iii) interrogation.
The possibility of searching the wrongdoer’s premises (other than residential) and seizing relevant documents is permitted by article 182 of the Criminal Procedure Code. Such searches may only be conducted following an order of the investigating authorities (the same is applicable to seizure of particular documents and interrogation). A court resolution should be obtained for similar actions in relation to the residential premises of the wrongdoer.
The Criminal Procedure Code also provides for a number of measures that are only possible following a relevant court order: (i) seizure of postal and facsimile correspondence; and (ii) recording of telephone conversations.
Should one of the above measures be resorted to by the competent authorities, the alleged fraudster will not be notified in advance.

6. STEPS TO PRESERVE ASSETS/DOCUMENTS
6.1 General
A criminal fraud case will be initiated by the law enforcement agencies after the relevant complaint by the employer.
In order to obtain compensation for damages suffered (other than criminal sanctions against the fraudster) the employer is then entitled to file relevant civil claims against the wrongdoer within the framework of such criminal proceedings (eg, claims for compensation of damages). Although civil law claims may additionally be filed independently, they may be suspended until a criminal judgment is rendered pending establishment of certain facts.

6.2 Steps under civil procedure law
Assuming an employer initiates a civil law case against an employee, the employer will be entitled to apply for one of the types of injunctive relief provided for by the Civil Procedure Code in order to preserve assets or documents. Such injunctive relief may relate either to: (i) freezing of assets or seizing of documents; or (ii) to prohibiting the fraudster or other persons from taking certain actions in relation to particular assets or documents. The court will consider a relevant application ex parte and apply special tests for interim relief.
Should the fraudster or relevant third parties breach injunctions imposed by the court, they may be subject to a fine of up to US$40, and the employer will have a claim for damages arising from non-compliance with the relevant court orders. Non-compliance with a court order is a separate criminal offence punishable with imprisonment for up to two years.
Only injunctions appropriate to the main claim will be granted by the court.

6.3 Steps under criminal procedure law
The law enforcement authorities may apply to the court for a freezing injunction in relation to the property misappropriated by the fraudster.
Should a relevant order be granted by the court, the fraudster’s disposal and use of such property will be restricted or prohibited. Moreover, in certain circumstances, such property may be confiscated and transferred to the custody of the owner or a third party at the discretion of the investigating authorities. Russian legislation stipulates a list of property that cannot be subject to a freezing injunction (eg, a suspect’s sole residence, etc).

7. CIVIL PROCEEDINGS
7.1 Claims against the wrongdoer
Damage resulting from fraud may be caused by the employee either in the course of employment, or outside the scope of his employment. Below we address both scenarios.
Under article 232 of the Labour Code an employee is required to compensate an employer for the damage he has caused to his employer while performing his obligations under the employment contract. However, only actual damage (not lost profit) is subject to compensation and such total compensation is limited to the relevant employee’s monthly salary.
The employer will be entitled to compensation for the full amount of damage suffered only: (i) if this is expressly provided by law; or (ii) if an agreement to that effect was previously entered into between the employer and the suspected employee and the wrongdoer falls within one of the limited categories of employees specifically indicated by law (eg, cashiers where monies for which they are responsible disappear, etc).
Under article 243 of the Labour Code, where there is a criminal court judgment holding the employee guilty of fraud, the damage must be compensated in full.
If damage is inflicted outside the scope of the fraudster’s employment (ie, it is not related to the fraudster’s obligations under an employment agreement), article 1064 of the Civil Code of the Russian Federation of 1994 (the ‘Civil Code’) stipulates that such damage must be compensated in full.

7.2 Claims against other parties to a fraud
Under the Civil Code, an employer is entitled to seek the invalidation of fraudulent transactions and the return of assets of which the employer was deprived as a result of an alleged fraud. In this context, pursuant to article 179 of the Civil Code, a transaction made ‘under fraud, coercion, threat, bad-faith agreement by the representative of one party with the other party’, may, on application by the deceived party, be declared invalid by the court. If a transaction is declared invalid, the party who committed the fraud will be required to return to the innocent party everything obtained as a result of the fraudulent act, or to provide appropriate monetary compensation and also compensate the deceived party for actual losses (not lost profit).
Should the misappropriated assets be held by third parties as a result of a series of transactions, a number of claims for invalidation of a chain of relevant transactions will be required.
That said, Russian legislation generally protects bona fide purchasers, which may cause difficulties in retrieving misappropriated assets from third parties. As a general rule, in order to claim the relevant assets from a bona fide purchaser, the employer will have to demonstrate that it has been unlawfully deprived of those assets. In addition, some assets (eg, securities payable on demand) may not be claimed back from a bona fide purchaser. In any event, however, the employer will be entitled to claim damages from the wrongdoer.
Apart from the above claims, provided for by the Civil Code and the Labour Code, there are a number of other remedies provided for by specific legislation.
For example, under the Federal Law ‘On Joint Stock Companies’ No 208-FZ dated 26 December 1995 (the ‘JSC Law’), directors are obliged to act in good faith and in the best interests of a company. Further, pursuant to article 71 of the JSC Law directors of a joint stock company will incur liability for damages caused by their fraudulent actions or omissions.
Moreover, should documents or information transferred within the framework of the fraud be of a confidential nature, the fraudster may be subject to civil, administrative or criminal liability under the Federal Law ‘On Trade Secrets’ No 98-FZ dated 29 July 2004.