By 2014, Russia should have established a streamlined and effective system of combating corruption and officials' illegal incomes. Strange as it may seem, this is the likelihood.

By 2014, Russia should have established a streamlined and effective system of combating corruption and officials' illegal incomes. Strange as it may seem, this is the likelihood.

The Russian government proposes to intensify its struggle against corruption quite significantly. Last week the government revealed numerous plans in this regard. Some will be carried out in the near future and others in a couple of years. But the general picture is that by 2014 Russia will have established a system of barriers for corrupt officials.

On March 2, Putin will hold a meeting with the top managers of state companies on introducing restrictions on transactions between state agencies and private companies that are run by relatives of officials or state company top managers. The main question is this: will the inquiries into affiliation be restricted to the transactions of the biggest 25 state companies or will they concern all public sector companies?

Everything must be subject to control

The first attempt to control relations of state companies with "related" firms did not produce the desired effect. Federal ministries failed to receive the required information from the state companies under their jurisdiction. On the one hand, the requirements on revealing information were so vague that the ministries were swamped with tonnes of useless papers that were impossible to analyse. On the other hand, many agencies simply refused to disclose the required information – state banks made references to banking secrecy, while Gazprom is rumoured to have ignored the relevant request of the Energy Ministry without giving any reasons at all. Judging by this, it is possible to expect a decision halting this initiative on March 2.

But it is also logical to assume the opposite. Initially, the meeting was scheduled for February 14 but was postponed to the eve of the presidential elections. Therefore, Putin may use this event for demonstrating his resolve to fight corruption and nepotism to the electorate. In this case, the toughest decisions are likely to be made.

One of them could be the endorsement of the draft prepared by the Ministry of Economic Development on additional measures to ensure transparency in the placement of orders on supplying goods, works and services for state and municipal needs; the purchase of commodities by state corporations, state companies and other state and municipal institutions, state and municipal unitary enterprises and open joint-stock companies where more than 50% of their shares are state or municipal property. The draft lists the positions in the said agencies in which officials must reveal information about their close relatives and companies where they have shares or work as managers. The draft law qualifies 18 degrees of relatives as "close," including former spouses and step-siblings.

HR at ministries and departments are not supposed to analyse this information – it will be published on open data base of government agencies, such as government and municipal sites. "Related" companies will be barred from taking part in tenders on state orders while transactions concluded in violation of this ban will be declared invalid through court.

This will be a way of regular control over the contracting activities of not only the 25 largest state companies, but about 1,500 organisations under state jurisdiction. It will take several months to complete this draft and put it through the State Duma but it will come into force in 2014, if not in 2013.

At its regular session two or three weeks after the said meeting, around March 20, the Presidential Council for Countering Corruption will discuss a draft law on monitoring the expenses of civil servants under the chairmanship of Sergei Ivanov, Chief of Staff of the Presidential Executive Office. Those subject to report are officials appointed by the president and the head of the government; governors, deputies and senators, as well as officials of ministries and departments that are involved in state purchases and expenses. All purchases above the three-year total income of an official will be verified as to the source of the revenue - the data base on the income and property of officials has already been compiled for this period. There is no agreement on who will verify expenses of officials – human resources committees in ministries and departments that are now monitoring income declarations of their officials, or a separate body, for instance, the Federal Service for Financial Monitoring. It is unclear as to how to check bank accounts, especially if they were opened abroad.

Tax evasion equals support for terrorism

A burst in government anti-corruption activities could have been attributed to another short-lived campaign to coincide with the presidential election, but for one circumstance that rules out this out. Many anti-corruption plans are tailored to Russia's international commitments, which cannot be brushed aside after the presidential election.

Thus, last week Russia submitted its documents on the accession to the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions to the Organization for Economic Cooperation and Development (OECD). President Dmitry Medvedev has previously said that Russia's accession to the convention will make it possible to universalise the country's international anti-corruption standards and our legal system.

All parties to the convention (including nearly all European countries and the United States) are obliged to monitor any attempts of their citizens to bribe foreign officials (for instance, during the finalising of agreements and contracts) and identify foreign officials that are taking bribes on their territory. These individuals must be subjected to criminal punishment and companies undertaking the bribery of officials at the expense of state orders must be barred from tenders on state orders for the purchase of goods and services.

It was during the preparations for the accession to the convention and on Medvedev's initiative that the government adopted in April 2011 a package of anti-corruption amendments to the Criminal Code, which envisaged liability for mediation in bribery and also heavy fines for giving and taking bribes. Participation in the convention is bound to promote the development of anti-corruption legislation further.

Last week, Russia again recalled its commitments with regard to the Financial Action Task Force on Money Laundering (FATF). True, they primarily deal with taxes and money laundering but it is common knowledge that corruption in Russia is closely connected with the turnover of unaccounted cash. Entrepreneurs often say that the only reason for cashing money is the need to bribe almost at every step. Furthermore, an opportunity to reduce taxes goes by the name of an additional bonus or payment for risks. Now the risks involved in these deals will see a sharp increase because FATF has just amended the list of crimes that must be considered as a predicate offense for money laundering and the funding of terrorism by adding one point - tax evasion.

In theory this means that organisations and citizens suspected of tax evasion will be automatically verified for complicity in money laundering and financing terrorism - a rather unpleasant process in general. The Russian system will turn this new requirement into a nightmare because, in Russia, law-enforcement bodies are supposed to work towards certain targets. If employees are told by their bosses to find three cases of financing terrorism per month, they will have no other alternative but to do this. Since we have far more citizens and organisations that are minimising their taxes than who are laundering money, let alone financing terrorism, they will be the first in line to be charged with these crimes. For unlucky tax evaders, this would primarily mean an increase in the prison sentence from three years (the maximum term a private individual can receive for tax evasion) to seven years (the maximum term for money laundering).

The risks for entrepreneurs using illegal cash exclusively for bribing officials will grow accordingly. Now the maximum term for bribing an official is three years (for a private individual). However, if law-enforcement agencies qualify this cash used for reducing taxes as money laundering, the term will be increased up to seven years in prison.

The only good news is that to comply with the new FATF standards, we will have to make amendments to the existing legislation, first of all, to the Federal Law 115-FZ on Countering the Legalisation (Laundering) of Illegal Earnings and the Financing of Terrorism. This law makes banks directly responsible for revealing suspicious transactions. Thus, banks are obliged to report all cash transactions of over 600,000 roubles to the Federal Service for Financial Monitoring and give information to other law-enforcement agencies upon request. Such inquiries are mostly in connection with money transfers from accounts of companies whose modest tax payments are not in proportion with their turnover or regarding firms registered at so-called mass-registration addresses. Now banks will have to bear more responsibility, notably, in monitoring their clients' tax payments. Kirill Saskov, head of Kachkin & Partners corporate and dispute resolution practice explained: "To enable banks to identify suspicious deals and report them to authorised agencies, it is necessary to draw up and legally validate the criteria by which banks will be guided." The Federal Service for Financial Monitoring and the Federal Tax Service must come to joint decisions in order to make this practice effective. On the one hand, it should not block the operation of banks, and, on the other, it should not turn the information submitted into a huge heap of useless data that will simply be shelved. It would be best if the said criteria are unequivocal and understandable. This will enable the agencies involved to conduct effective exchange of information," Saskov said. Experts believe these amendments will be drafted and introduced no sooner than in 2014.

Damage caused by cash

The control over relations of state agencies with commercial companies that belong to relatives of civil servants, the monitoring of expenses of government employees, the participation in the efforts to counter bribery of foreign officials and qualifying the use of cash and tax evasion as a possible crime in financing terrorism form the foundations of the new anti-corruption system that is being built today. The crown of this new system is a bold, albeit disputable, idea of a ban on the use of cash for large purchases.

Last summer, Sberbank CEO German Gref sent a letter to Prime Minister Vladimir Putin, suggesting that a war on cash should be declared. He noted that in Russia, cash amounts to 11.9% of the GDP, which is much more than in advanced countries (9.3% in the Eurozone and 6.6% in the United States). Even the economies comparable to ours use much less cash – 5.3% in Mexico and 4.2% in Brazil. A large proportion of cash in turnover impedes the growth of the economy and its modernisation, and prevents the establishment of an international financial centre in Russia. Moreover, the use of large amounts of cash involves high economic costs, both direct – in emission, turnover and storage, as well as in the provision of security and countering of forgery, and indirect – in the loss of interest due to capital withdrawal from turnover, wasted time in queues and additional expenses for processing cash revenues. Gref said that in 2009, direct economic losses amounted to 1.1% of the GDP; including lost interest, this figure equaled 2.3% of the GDP, or almost 0.9 trillion roubles. The letter stressed that a large cash flow always accompanies a huge shadow economy and deprives the government of taxes amounting to 8% of the GDP every year.

In order to fight against this, Gref suggested changing the Labour Code and the Law on Labour Pensions and ordering all salaries, allowances and pensions to be paid via bank transfer. He also proposed that all shopping and service centres should accept bank cards only.

However, Gref compromised his idea in this letter to the prime minister by actively lobbying his project of a uniform electronic payment card - probably why the letter failed to receive an official reply.

However, this does not mean that the idea of banning cash transactions has been abandoned once and for all. Officials began discussing it in the Kremlin and the White House four or five years ago - long before Gref's letter was written. The main obstacles in the way of this idea were also identified at that time – an insufficient network of cash machines in the provinces and the lack of technical potential for its development due to the shortage of high-speed Internet connections in many regions.

As for the Internet, this problem has been practically resolved, owing to the elections - or, to be exact, Putin's directive to install a video monitoring system for relaying voting procedures and counting of votes at the presidential elections. Reporting on the implementation of this directive, Minister of Communications and Mass Media Igor Shchegolev said the other day that over 60% of funds for this project were used not for the actual video systems but for improving the Internet in the regions. Now Internet connections there have become much faster and the tariffs of Internet providers are expected to come down in price. Osman Yambulatov, head of the department of ATM and acquiring services of the TRAST bank, explained: "No doubt, high-speed Internet is the most reliable communications channel and is necessary for creating an ATM network both in the capital and in the regions. However, it is also the most expensive channel, especially in regions that are monopolised by one or a few providers."

One of the ways proposed for resolving the ATM issue in the regions is to establish a Postal Bank using the facilities of the Russian Post and Svyaz-bank (controlled by VEB). The Russian Post (Pochta Rossii) has 42,000 branches – double the number of Sberbank branches. If the Postal Bank had one ATM in each of its offices, it could service the entire country. Although this project stalled for three years, it was then revived together with the reports submitted on stepping up the anti-corruption struggle. Russian Post General Director Aleksander Kiselyov said last week that the best period for launching a federal bank based on the Russian Post is in 18 months time and this deadline must be met in order for the Postal Bank to get off to a good start. There are grounds to hope that in 2014 Sberbank's ATM network will be supplemented with the Postal Bank's two-fold ATM chain and there will be no technical obstacles to the radical restriction of cash payments. It will be interesting to see how these measures will affect the scale of corruption in Russia.

Dmitry Yakovenko assisted in the research for this article.

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A big cash flow always accompanies huge shadow economy

Maxim Rubchenko