Today, the penalty for this offence is stipulated in Article 185.1 of the Criminal Code. The definition is fraudulent evasion or submission of incomplete or misleading information leading to heavy damage (over RUB 1mn). Partner at Legal Capital Mikhail Malinovsky says the responsibility for false disclosure lies with all the signatories: General Director, Chief Accountant, Auditor etc., if proved guilty. They face up to two years in prison and a maximum fine of RUB 300k or up to two years’ worth of inmate’s wages or other income.

The workgroup has proposed a criminal penalty for false information even if the intent has not been proved, “since it is nearly impossible to prove it”, says a source. To prove intent, means such as phone tapping would be required, however, it is not allowed for use in investigating crime punishable by up to two years’ prison sentence. Deputy Finance Minister Alexey Moiseev has confirmed that such amendments have been drafted and forwarded to the State Duma. Chairman of the Duma Financial Markets Committee Natalya Burykina says the proposals will be debated along with amendments introducing financial company executives’ personal accountability for fraudulent reporting.

“Essentially, the exclusion of ‘intent’ will mean that any action including a mistake is to be classified as a crime, which is at odds with the entire concept of criminal law”, says Head of Head of White Collar Crime Practice at Egorov Puginsky Afanasiev and Partners. She says the logic of this initiative is on par with making spelling errors a criminal offense. “I hope the Central Bank and the Government intend to purge the industry, not put pressure on business”, says CEO of a listed Russian company. Deputy Chairman at Sberbank Bella Zlatkis, on the contrary, “fully supports” the working group’s effort to stiffen issuers’ responsibility for fraudulent reporting: “This boosts trust in the Russian stock market and protects investor interests”.

Companies frequently make mistakes in RAS and IFRS reporting, especially if accounting standards depend on professional opinions and interpretations, says Partner at EY Igor Buyan. A company with many affiliates bears a higher risk of mistake, he adds, however, with adequate internal controls in place, mistakes are not substantial enough to affect investors’ opinion.

Experts have a hard time recalling big reporting fraud scandals in Russia, or indeed, those that incurred criminal punishment. However, the world has seen similar cases, for instance, the Enron and WorldCom scandals in the USA in the 2000’s. The Enron case triggered the collapse of one of the major audit companies at the time, Arthur Andersen, in June 2002.

Yulia Orlova, Margarita Papchenkova

Project Group №1