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Concept. L.M. Grigoriev, A.A. Kurdin

Leonid Markovich Grigoriev, president of the «Institute for Energy and Finance» foundation, dean of the management school of the International University in Moscow, member of the «SIGMA» group.

Alexander Alexandrovich Kurdin, graduate student in the economics faculty of M.V. Lomonosov MGU (Moscow State University), expert of the «Institute for Energy and Finance» foundation.

Criminal prosecution of economic crime and economic activeness

Active discussions on the need to decriminalize business in Russia are in need of reinforcement with a more detailed economic analysis. A systemic problem is in what degree we are dealing with crime proper, and in what degree – with the excessive activeness of the law-enforcement organs, carrying out their internal departmental unwritten policies. We are hoping for the better and for the decency of the law-enforcement system, but in any case, we find ourselves facing the problem of the imperfection of this system and of legislation. The scales of the influence of the law-enforcement system on the conditions of conducting business in the country substantially exceed simply ensuring that a set of formal norms and rules are being carried out. It is important to take into account the notions of the business community about the rules of the working of the system and the corresponding expectations of businessmen, who determine the decisions adopted by business. The micro-decisions of business are transmitted in the final analysis into efficiency of economic management and the innovativeness and progress of the national economy.

One of the most acute problems of the country in this context is the modernization of criminal legislation and application of the law. As of today, there exist elaborations dedicated to the imperfections of the criminal-law system of Russia in the sphere of the economy, in particular the work of the Institute of the Problems of the Application of the Law (Saint Petersburg) [1], which work is equipped with a serious analysis of statistical materials. At the same time, not only the identification of the problems of legislation and application of the law presents interest, but also an analysis of the economic consequences of the existing situation.

An analysis of the fight against crime in the economic sphere requires isolation of the object of examination. At the present time, the concept of economic crime is not determined unambiguously, which gives rise to indistinctness in determining the boundaries of the object. Pursuant to the Criminal Code of the RF, attributed to the section of crimes in the sphere of the economy (sec. VIII) is a wide circle of crimes against property ownership (ch. 21 of the RF Criminal Code), including, robbery, violent assault with intent to rob, thievery of all kinds, crimes in the immediate sphere of economic activity (ch. 22 of the RF Criminal Code), including, unlawful entrepreneurship, legalization of incomes, evasion from taxes etc., as well as crimes against the interests of service in private organizations (ch. 23 of the RF Criminal Code). Such an understanding of economic crimes presents itself as too broad.

At the same time, an examination of economic crime exclusively within the confines of chapter 22 of the RF Criminal Code does not allow such crimes as, for example, various kinds of thefts (fraud, embezzlement or misappropriation) to be included in the analysis.

Presenting itself as closer in scale is the concept of “corporate crime”, which infers criminal actions on the part of the top managers of an enterprise and its white-collar workers in connection with their professional activity. As a rule, corporate crime is not connected with violence. This phenomenon has been researched in detail in the work of M. Clinard and P. Yeager, Corporate Crime[2]. Indeed, the majority of the articles of chapter 22 of the RF Criminal Code are connected in one way or another with entrepreneurial activity. At the same time, one can partially attribute frauds, thefts, thieveries, bribery of civil servants etc. to corporate crime.

Neighboring with corporate crime in meaning is the concept of “white-collar crime” (introduced by E. Southerland in 1939, examined in detail in an eponymous work of 1949[3]), to which are attributed crimes committed by businessmen and skilled specialists[4] and connected with their official duties. In the indicated works, relying on the experience of the USA, great attention was devoted to an assessment of the role, the scales and the consequences of economic crime and adjustment of the attitude to it on the part of society and the law-enforcement organs. In Russian conditions, characterized by the instability of the system for the protection of property ownership rights, particular importance is acquired by the correctness of the work of the law-enforcement and judicial system in prosecuting economic crime. In our article, we shall specifically address the problem of legislation and application of the law in relation to economic crime.

We shall note that in Russian statistics – both in the statistics of the MVD, and in the data of Rosstat – the existence of a special category is prescribed for reflecting economic crime: “crimes of economic directionality” for the MVD and “crimes in the sphere of the economy” for Rosstat. In both situations, what are accounted are not only the crimes in the sphere of economic activity according to chapter 22 of the RF Criminal Code, but also partially crimes from other chapters: thefts (thievery, fraud, embezzlement or misappropriation) and bribery. Such an approach presents itself as thoroughly justified, although there also exists a problem in connection with the incomplete correspondence of the classifications with one another.

For an approximate assessment of the structure and the scales of the transaction costs connected with the peculiarities of criminal prosecution in Russia, we shall examine the statistics of the process of investigating and transferring to court cases with respect to widespread crimes of an economic character. Here, our analysis is going to be close to the analysis conducted in the work of V. Volkov et al.[5]

Let us examine the correlation between recorded crimes and cases transferred to court under certain articles of the RF Criminal Code, corresponding to economic crimes (fig. 1, 2).

It turns out that under the “Fraud” article (art. 159, only crimes of economic directionality pursuant to the MVD classification are being examined), the law-enforcement organs in recent years have been sending to court only around 70% of initiated cases; moreover, this proportion has remained nearly unchanged in the course of 2003–2008.

A significant part of the cases under the “Fraud” article (being examined as a whole, and not only within the confines of economic directionality) does not end with a court verdict. Thus, in 2009, cases with respect to 21.5% of the persons brought to criminal liability under art. 159 of the Criminal Code were terminated[6]. Together with that, the termination was based, as a rule, not on rehabilitative circumstances (absence of a corpus delicti, non-involvement et c.), but on active repentance or reconciliation with the injured party (nearly 90% of the instances, predominantly under the first and second, “lighter” parts of the article). Therefore, one can not assert that a case “falls apart” in court in the absence of evidence – the parties are more likely attempting to settle it with minimal reputational and other costs. The proportion of not-guilty verdicts with respect to the article under examination comprises a mere 0.6% on average (0.2 % for parts 1 and 2), although for part 3, prescribing fraud in a large amount or with the use of official position, the proportion of acquittals reaches 1.8%; for part 4 (particularly large amount or the actions of an organized group ) – 2.9%. In such a manner, the guilt-presumptive bias is substantially more noticeable for the “lighter” parts of the article. 30.3% of punishments under art. 159 of the RF Criminal Code in 2009 comprised real terms, 43% - conditional suspended ones, 15.2% - fines. As the gravity of the fraud rises (corresponding to the number of the part of art. 159), the proportion of punishments not connected with deprivation of liberty diminishes, completely expectedly. At the same time, with fraud in a large amount or with the use of official position (art. 159 part 3), only 26.6% of the punishments comprised real terms, which is lower than on average for the article, but then very often, in 62% of the verdicts, punishment in the form of deprivation of liberty is set conditionally (i.e. the sentence is suspended).

Figure 1. Fraud of economic directionality (according to the MVD qualification): number of cases initiated and brought to trial

Source: MVD RF.

Under the article “Embezzlement or misappropriation” (art. 160 of the RF Criminal Code) (taking account exclusively of crimes of economic directionality), the proportion of cases that make it to trial comprises 85-90%. The specifics of the crime condition the higher solvability: “theft another’s property, entrusted to the guilty party” automatically assumes insignificant difficulties in discovering the criminal.

On the whole, proceedings in relation to 20% of persons brought to criminal liability are terminated under the given article in courts (2009 data); in so doing, in more than 90% of such instances, what is being spoken of is the reconciliation of the parties or active repentance, as in the situation with fraud, once again predominantly with respect to the “lighter” parts 1 and 2. For parts 3 and 4, prescribing larger amounts of what is stolen, the use of official position or the action of an organized group, instances of termination of cases are practically absent, but then the proportion of not-guilty verdicts attains 1.4–1.5% of all verdicts (under the first two parts – 0.1–0.2%). 10.4% of verdicts prescribe real terms of deprivation of liberty, 57.8% – conditional suspended setting of punishment, 17% – fines. In the same way as in the case with fraud, as the gravity of the crime grows, the proportion of set punishments not connected with deprivation of liberty is reduced.

In examining crimes in the sphere of economic activity (chapter 22 of the RF Criminal Code), we have excluded counterfeiting coinage (art. 186) on the strength of the specifics of the solvability of these crimes: out of the overall quantity of recorded crimes less than 10% are solved.

Figure 2. Crimes in the sphere of economic activity (ch. 22 of the RF Criminal Code, without account of counterfeiting money and securities): number of cases initiated and brought to trial

Source: MVD RF.

According to the statistics of crimes in the sphere of the economy (art. 22 of the RF Criminal Code, without art. 186, taking into account only crimes of economic directionality according to the MVD classification), a mere 55–60% of cases have gotten to trial in recent years. This indicator is especially not great among crimes under the article “Unlawful entrepreneurialism” (37.9% in 2008), the articles on unlawful bankruptcy (16.8% in 2008) and the articles on evasion of taxes (25.3% in 2008).

The proportion of cases under the articles of chapter 22 as a whole that have been terminated in court is rather high. Thus, under the tax articles in 2009 it comprised from 20.6% (with respect to organizations) to 34.9% (with respect to individuals) of persons brought to criminal liability, under unlawful entrepreneurship – 18.4%, predominantly in connection with active repentance, although under certain articles, this indicator was substantially lower (for smuggling – 2.4%). In so doing, the proportion of not-guilty verdicts under the main articles from the given chapter does not exceed 3%.

The punishments under the articles of chapter 22 are predominantly not connected with deprivation of liberty, at any rate with real terms. Thus, under the article “Unlawful entrepreneurship”, real deprivation of liberty in 2003 was prescribed in a mere 5.6% of the verdicts, the setting of punishment conditionally suspended sentences – in 28.8%, fines – in 60.5% of the instances; under the tax articles, 3.9% of the verdicts contained real terms, 50.8% – conditional punishment a suspended sentence, 41.7% – fines. Only with respect to smuggling was the proportion of real terms among the set punishments rather high, comprising 27.5%.

The situation in the sphere of criminal prosecution of economic crimes described above presents itself as not completely optimal from the point of view of public welfare. Opportunities exists for its modification.

The functioning of the system for the protection of property ownership rights as a whole and the system of criminal prosecution of economic crime in particular are always linked with transaction costs. Following the methodology of Nobel laureate of the year 2009 O. Williamson, one can distinguish between ex ante and ex post costs, i. e. before and after the moment of the operation. For the event of criminal prosecution, the critical point-of-departure moment is the issuance of a court decision with respect to the corresponding case. In the given situation, a redistribution of rights takes place, implemented by the court, which adopts a decision on changes in the rights of property ownership and freedom (personal freedom and the freedom to conduct business operations) of the defendant and other interested parties or the preservation of the status quo.

The following can be attributed to ex ante costs to society.

1. Social costs connected with providing for the work of the system of law-enforcement and judicial organs. This kind of transaction costs is an inalienable attribute of the protection of the rights of property ownership. One can assert that it is precisely these costs that must occupy the biggest place in the structure of society’s costs for the support of rights of property ownership. This is possible in the event that the indicated systems appropriately fulfill their functions and do not cause substantial collateral harm to economic activeness.

2. Costs connected with the reorganization of the activity of entrepreneurs. The insufficient effectiveness of the work of the law-enforcement and judicial system conditions the appearance of a significant burden of costs for entrepreneurs and society as a whole, oftentimes not taken into consideration both during research and during the adoption of policy decisions. In the event of criminal prosecution, what is being spoken of is losses in consequence of the implementation of criminal proceedings. That is, in normal conditions, any court cases should not disturb the flow of business activeness. De jure criminal proceedings prior to a court decision should not lead to changes in rights of property ownership and freedom, but de facto in today’s conditions they entail a series of substantial costs for the concrete entrepreneur and society as a whole.

Factually, a suspension or reorganization of business processes at an enterprise can take place. This signifies not only the entrepreneur’s losses (which then, it goes without saying, will not be taken into account, as an example, during the setting of a fine), but also society’s losses. An enterprise is built into certain value-adding chains; a changeover in a series of markets can be linked with significant losses by counterparties. As a result, this can lead to losses for end consumers as well. What is more, the entrepreneur bears reputation losses, and this likewise can induce losses not only for him, but also for counterparties – as an example, on account of the need to create additional guarantees in consequence of increased risks. In the practical sense, what is being spoken of is a reduction in investment, losses of access to lending, violation of agreement and informal relations with partners in the business milieu (who may experience distrust toward a “partner under fire”) and attempts to take out funds or to consolidate them for protection,

At the same time, the entrepreneur might not passively wait for the court decision in attempts to continue customary activity, but select an alternative strategy, not waiting for the start of the criminal prosecution, even if his activity is absolutely lawful. In particular, he might consciously reduce activeness (incl. refuse all risky operations), fully or partially transfer the business into the “shadow” sector or take assets out beyond the border.

Finally, one of the variants of an alternative strategy is to cease production for a bribe. The costs of these phenomena for a concrete entrepreneur and for society have been summarized in table 1. The entrepreneur may adopt a decision in mixed strategies as well; in this situation, the costs are going to match in a certain proportion.

Table 1. Ex ante costs of an entrepreneur and society from the criminal prosecution of economic crime, connected with restructuring the activity of enterprises

Entrepreneur’s strategy

Entrepreneur’s costs

Society’s costs

Passive strategy

Suspension of business processes, reputational losses

Costs of switching to other enterprises and of adaptation

Bribe

The sum of the bribe

Raising of the level of corruption and of administrative barriers

Reduction of activeness, restructuring of activity

Costs from sub-optimal choice of business strategy

Reduction of overall level of economic activeness

Transfer into “shadow sector”

Limitation of legitimate opportunities, reputational losses

Contraction of taxable base, development of a “shadow economy”

Taking assets out beyond the border

Change and complication of organizational structure, adaptation to requirements abroad

Contraction of taxable base, perhaps, of domestic demand and investments

Table 1 shows the connection between the individual costs of a business when conducting affairs in its defense and society’s costs. It is important to distinguish unavoidable costs, which arise during the rightful examination of cases under normal judicial practice, an absence of corruption in the law-enforcement and judicial system. A business’s losses during its grounded prosecution are concurrently social costs – contributions in support of an efficient legal milieu, which contributions in an ideal situation ensure the efficiency of investments of capital and of business in the economy as a whole. Another matter – costs under excessive cruelty of the law, an unsuccessful (not corresponding to the realities of the country) coding of crimes and wrongful actions (or corruption) in the law-enforcement and judicial system. In these situations, society’s costs rise, but are not compensated by a strengthening of the regime. On the contrary – we can speak of systemic excessive costs ex ante.

“Rational expectation” of groundless conflicts between business and the law-enforcement system forces businessmen to conduct protective measures to preserve a business or incomes. The threat of the death of the business (the firm) by way of the taking away of the business (raiderism with the use of court cases), of conviction or being forced to sell assets becomes a part of the systemic problems of the business climate. Practically, this leads to a reduction in investment in the national economy, the diversion of funds toward the consumption of corruptioneers (bribes or a cession of ownership stakes forced), other.

3. Costs connected with the involvement of third parties in proceedings: witnesses, jurors et c.

The following kinds of expenditures can be attributed to ex post costs.

1. Expenditures on penal enforcement, i. e. expenditures on providing for the activity of the penal enforcement service.

2. Costs from incorrect decisions (punishment of good-faith entrepreneurs and continuation of activity by bad-faith entrepreneurs). These costs entail a distortion of the incentives in the economic system and provoke an opportunistic behaviors and a loss of trust in formal institutions.

3. Costs connected with the exclusion of productive forces from economic activity. Even in the event of the adoption of a true decision by a court, the bad-faith entrepreneur or employee turns out to be engaged not in his professional sphere, where his labor would be the most efficient. Besides this, the efficiency of labor is undermined by the absence of incentives, which in a natural manner is inherent to coercive employment.

It is important to note that all these costs – both ex ante and ex post – in a series of situations turn out to be completely justified from the point of view of public welfare, providing for the production of law and order and the support of stable and lasting property ownership rights.

At the same time, the most important objective of the state is the minimization of such costs. In the situation of Russia, there exist serious grounds to assert that in the given direction, there is still a significant reserve for raising efficiency.

The significant proportion of the cases not brought to trial (30% with respect to fraud, 45% with respect to crimes in the sphere of economic activity), i. e. not having led to any result whatsoever, speaks about the fact that a substantial part of the ex ante transaction costs is not connected with public goods, i. e. represents the net losses of society.

Likewise presenting interest is the preservation of a constant proportion from year to year between cases that have been initiated and those that have been brought to trial. This forces one to make an assumption about the presence of a structural obstacle, forming additional costs ex ante. It can be concealed either in incentives for the groundless initiation of criminal cases, or in the existence of insurmountable obstacles in the course of an investigation, brought about either by legal barriers, or, once again, distorted incentives within the law-enforcement system.

The indicated patterns force one to think about the structural reformation of the system that has evolved for the purposes of minimizing so called “dead weight” losses.

The high proportion of terminations of economic cases at the trial stage is conditioned, as it turned out, by active repentance or reconciliation with injured parties. Consequently, in this situation, despite termination, an economic result of the case is present, and one can not speak of the groundless conducting of judicial prosecution. At the same time, there arises the question of why such cases, which de facto end with the compensation of losses and/or the paying out of a forfeit penalty, can not be conducted within the framework of civil-law relations. At the very least, this would signify lower reputational costs. Therefore, in this area as well, the existence of “bottlenecks” impeding the implementation of the protection of property ownership rights within the framework of civil law is completely probable.

A low proportion of not-guilty verdicts is characteristic of the Russian judicial system as a whole, and not only for economic crimes. But an examination of the given phenomenon – the so-called “guilt-presumptive bias” of justice – is beyond the scope of this work. Here we shall note merely that the increase in the proportion of acquittals as the gravity of the crime rises, in particular the amounts of what has been embezzled, likewise allows one to assume the existence of distortions, leading to the realization of the guilt-presumptive bias predominantly in relation to lighter crimes. Such a situation, in its turn, may distort the incentives of economic agents and promote the activization of criminal behavior.

According to the methodology of the new institutional economic theory, when examining the prospects for the development of institutions and the opportunities for their reformation, one ought not to attempt to attain an ideal situation, but to compare the implementable alternatives in consideration of their costs and benefits. Here we shall examine certain generalized solutions, which may influence the sum and the distribution of transaction costs. It goes without saying, the list cited in table 2 is not exhaustive; besides that, the indicated solutions can be complementary.

Table 2. Possible measures with respect to perfecting the criminal prosecution of economic crimes from the point of view of transaction costs

Social costs

Existing situation

High ex ante costs, connected with the reorganization of
business and value-adding chains; substantial ex post costs,
connected with the exclusion of resources from economic
activity under real deprivation of liberty

Narrowing the circle of criminally punishable acts

A reduction in ex ante costs in consequence of a smaller
quantity of initiated cases, a growth in costs in consequence of rise
in the probability of criminal behavior

Preferential use of punishments in the form of fines

A reduction in ex post costs from exclusion of resources,

a growth in costs from the possible continuation of bad-faith
activity by a fraudster at liberty

Strengthening of control over the application of the law

An increase in ex ante costs for the maintenance of the
law-enforcement organs, a reduction in ex ante costs connected with the reorganization
of business, a reduction in ex post costs from incorrect decisions

 

[1] Volkov V.V., Paneyakh E.L., Titayev K.D., Proizvol'naya aktivnost' pravookhranitel'nykh organov v sfere bor'by s ekonomicheskoy prestupnost'yu. Analiz statistiki (The arbitrary activeness of law-enforcement organs in the sphere of the struggle with economic crime. An analysis of the statistics.) (SPb.: IPP EU SPb., 2010).

[2] Clinard M., Yeager P. Corporate Crime (N. Y.: Free Press, 1980; L.: Collier MacMillan Publishers, 1980; New Brunswick: Transaction Publishers, 2006).

[3] Sutherland E. White Collar Crime (N.Y.: Holt Rinehart and Winston, 1949).

[4] Sutherland E. “White-Collar Criminality”, American Sociological Review. 1940. Vol. 5, no. 1. p. 2.

[5] Volkov V.V., Paneyakh E.L., Titayev K.D. op cit.

[6]Here and hereinafter information on verdicts and the termination of cases for 2009 is based on the data of the Supreme Court of the RF’s Judicial Department, Statisticheskiye svedeniya o sostoyanii sudimosti v Rossii za 2009 g. (Statistical information on the state of convictions in Russia for 2009) (http://www.cdep.ru/index.php?id=5&item=316), without account of addition of penalties.

 
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