Financial pyramids will get their creators to jail

Moscow, June 26, PRIME. Introduction of criminal liability for creation of financial pyramids before the first victims appear has long been overdue, and can only be welcomed in this regard. However, this measure in reality may have some unpleasant pitfalls – the frauds will find the ways around it, and entrepreneurs who conduct perfectly legal businesses may get behind bars.

Last week, the Ministry of Finance submitted to the Government a package of amendments to the legislation, which would enable criminal liability for the organizers of financial pyramids and administrative liability for their participants at the stage of creation of the financial pyramid, and not when it has already collapsed. The current Russian legislation contains no punishment for creation of financial pyramids, and the infamous Sergey Mavrodi, founder of MMM, did time under the “fraud” article.

A new article “Illegal activity of attracting funds” is suggested for introduction into the Penal Code, stipulating up to 7 years of imprisonment and up to 1 million roubles in fines for the organizers and participants of a pyramid, who have invested more than 1,5 million roubles.

Administrative punishment in the form of a fine of up to 15 thousand roubles is stipulated for those pyramid participants, who invested less than 1,5 million roubles, as well as for those who divulged the information on the pyramid activity. The note to the draft law mentions that such liability is necessary taking into account the significant material interests of the investors of financial pyramids themselves to attract new participants.

The head of the FAS Igor Artemiev said to the journalists: “I support this. We have been dealing with financial pyramids for a long time. The latest attempts by Mr. Mavrodi were cut short via the article on dishonest competition, but life shows that the damage is so great, and so many people have suffered, that it is no different from large frauds, which mean long prison time”. He added that, even if the exact wording was hard to write, “I think that the best thinkers of Russia in the sphere of law will get to work on this, and this will be well – one should not create financial pyramids, criminal liability should arise for this”.

Igor Nikolaev, Director of Strategic planning department of the FBK audit and consulting company, agrees that such measure is necessary.

I.Nikolaev told PRIME: “Practice will show whether it is efficient or not. But there is no doubt that it must be implemented. It is a real pity that so many years and so many defrauded persons later we finally arrive at this measure. But rather late than never”.

In his opinion, criminal liability will be a powerful dissuasion for those who still attempt to construct such pyramids.

The expert is convinced that the novelty will not contravene the amnesty on economic crimes declared by the President of Russia Vladimir Putin in Saint Petersburg last week.

The economist said: “The State does not revoke all economic articles. This is stick and carrot policy. The State pardons, but the punishment for such cases will be very harsh”.

However, some experts questioned by PRIME believe that the problem of financial pyramids should not be governed by the criminal law.

Advocate Alexander Bolomatov, Associated Partner of the Law Firm "YUST", is convinced: “I think that the authors of the draft law also understand that the resolution of the problem of defrauded investors cannot lie in the sphere of criminal or administrative persecution. The attempt to resolve a task that is educational in nature by force will only cause the more subtle ways to circumvent the limitations”.

The lawyer shares his conviction that the contravention in the case of financial pyramids will take the form of a semblance of “investment or other legal activity”.

A.Bolomatov also points out the unclear definition of the administrative corpus delicti for the persons, who attract funds to the pyramid. He explained: “It remains unclear, how such person may be brought to liability, if the person has no information regarding the activity of the pyramid”.

Sergey Yarkoev, analyst of RIA Rating, is of the following opinion: “The very idea of the financial pyramid is so closely connected to a large number of fully legal types of business and means of financing, that completely legal business models, devoid of any fraudulent purposes, may incur punishments”.

The expert reminded that, for example, when the State makes lends, it often uses them to pay for its earlier obligations, thus constructing its own pyramid. Yarkoev concluded: “Ultimately the best way to fight such phenomenon is more humane – increasing the financial education of the people”.

The full version of the publication is available here.