Fund Transfers from Russia to Italy: An Interpretative Framework. 1

Structure of the report:

0. Introduction. 3

i. Research approaches to the analysis of international capital flow. 3

ii. Methodology and sources of information. 4

iii. The Bank of New York affair. 5

I. Fund transfer from Russia: goals, channels and methods of struggle. 8

1. The definition of the problem. 8

2. The current situation in the Russian economy. 10

3. The goals of fund transfer. 13

4. Channels and techniques used for fund transfers. 18

4.1. Receipt of the Central Bank’s permission. 19

4.2. Pretended transactions. 21

4.2.1. Import of goods on terms of prepay 22

4.2.2. Export of goods on terms of pre-delivery 22

4.2.3. Overcharging/undercharging of price of a contract 23

4.2.4. Overcharging of the fines 23

4.2.5. Contract on rendering of services 23

4.3. Offshore companies. 23

4.4. Crediting foreign firms. 25

4.4.1. Non-return of the credit. 25

4.4.2. Overcharging the credit interest rate. 25

4.5. Usage of lacunas in currency regulation. 25

4.6. Funds transferred in cash. 26

4.7. Financial instruments. 27

4.8. Other channels of fund transfers. 28

5. Methods of regulation of fund transfers. 29

1 This report has been prepared by a research team including Dr. Anton Oleynik (Moscow State University / State University – Higher School of Economics, - Director), Dr. Sergey Patrushev (Institute for Comparative Political Science, Moscow), Eugenia Gvozdeva (Moscow State University) and Alexander Kashturov (Central Bank of Russian Federation).© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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II. The role of legal, extralegal and criminal operators in the utilisation of the different channels and techniques. 32

6. The criteria of differentiation of legal, extralegal and criminal operators of fund transfers. 32

7. Definition of legal, extralegal and criminal operators. 33

8. Analysis of operators’ actions in critical situations. 34

8.1. Making contract. 36

8.2. Involving the relatives into the business. 40

8.3. Making business in Italy. 42

9. A methodology for determining the nature of the funds transfer’s operators. 44

10. The factors which explain the choice of channels and techniques of fund transfers, and the characters they have. 45

Supplement.

© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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0. Introduction.

i. Research approaches to the analysis of international capital flow.

Nowadays we observe the widening interest of international community to the question of functioning of the international financial market. This interest could be explained by the process of globalisation implying the rising dependency of national economies upon the international financial market.2 The international financial market have a complex structure, it includes three segments: legal (financial transactions made in the legal framework), extralegal (transactions are made outside of the legal framework) and criminal (transactions are made by violating the Law). Consequently, globalisation of the financial market could lead to the spread of extralegal and criminal economic activity through the national frontiers. The recent investigations on the nature of the capital flow through the Bank of New York accounts and initiatives taken by members of the G-7 in the field of regulation and control of the international capital flow illustrate this danger.

The evaluation of the nature of the international capital flow represents a complex theoretical problem. The number of publications on this problem growing, but most of them are based either on the journalistic investigations, or on the traditional theoretical approaches: economic, legal, statistical, political. It should be mentioned that the problem lying on the intersection of different spheres by definition can not be resolved by an one-dimensional approach. This is why we have decided not to remain in the framework of any one-dimensional approach. The composition of our research team: an economist, a political scientist, a sociologist, a lawyer, allowed us to develop an interdisciplinary approach. So, the specificity of the presented research consists in trying to work out an interdisciplinary analysis of the nature of international capital flows. The institutional economics, especially French theory of conventions (L. Thevenot, O. Favereau, A. Orlean), provided us with the theoretical basis for such multidisciplinary view.

The absence of a single and recognised by all scholars approach explains the difficulties with quantitative estimations of the capital flow through the national frontiers, - the quantitative description is usually the first step in the research. For example, there are several approaches allowing estimating the volume of capital coming on the international financial market from Russia. This explains why during the period from 1992 to 1998 the volume of capital transfer according to different sources varies from $40bln to $400bln. The minimum level - $40bln. – has been done on the basis of the balance of payments (capital transfers are mainly reflected in account «Net errors and omissions»).3 The maximum level - $400bln.- has been done according to data of the General prosecutor’s office and Ministry of Interior (MI), which concentrate on the real estate that was bought by Russian citizens abroad.4

Between these two extremes there are several figures: $230bln according to the

2 It is worth emphasizing that the Nobel prize 1999 in economics was attributed for the studies on this question. 3 А. Галиев, Т. Гурова «Родина теряет детей и деньги» // Эксперт 26.04.99; В. Орешкин, начальник отдела Управления платежного баланса ЦБ, «Баланс на краю пропасти» // Коммерсантъ-Деньги 01.07.98 [А. Galiev, T. Gurova, Native land loses the children and money // Expert 26.04.99; V. Oreshkin, Chief of the department of the CBR [Central Bank] Administration of Balance of Payments, Balance on the verge of disaster // Merchant & Money. 01.07.98]4 «Мониторинг телерадиоэфира: Экономика» от 12.02.99[Monitoring TV and radio broadcasts: Economy, 12.02.99].© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Ministry of Economy (ME), - $130-$140bln for CBR,5 $150bln according to a group of experts,6 - $50-$60bln according to the World Bank and Paris club,7 $130bln according to the international business consulting agency (IBCA) “Fitch”.8

We can so consider reasonable an average estimation of capital transfer made till the beginning of 1999 of about $150-$200bln. The time-series data shows that the dynamics of fund transfers is not steady. For example, according to MI, the peak of fund transfer - $30-$35bln per year – was in 1993-1994 (see the chart)9. At present it is $9-14bln. per year. In Ministry of Finance and Ministry of Economy they think that now the volume is $1-1.5bln per year.10

ii. Methodology and sources of information.

The interdisciplinary approach requires the choice of an appropriate methodology and sources of information. The institutional economics first at all analyses the incentives created by particular institutional environment. Otherwise stated, in order to investigate into the nature of capital flow from Russia, legal, extralegal or criminal, we have to analyse the incentives to economic and financial activity created by the institutional environment in Russia. Such analysis would enable us to construct “ideal types” (in Max Weber’s terms) of legal, extralegal and criminal behaviour. It is important to note that these ideal types are built upon behaviour in many situations, including purely economic behaviour and other aspects of the everyday behaviour. The analysis of incentives and behavioural patterns necessitates the use of a large variety of sources. We have tried to combine sources with different nature: economic, sociological, juridical, political.

The sources used in this report can be divided in six main groups:

5 К. Коньков «Капкан оказался пустым» // Век 23.04.99[K. Kon'kov, Trap turned out empty // Century, 23.04.996 А. Наговицын «Утечка российского капитала за границу» // Бизнес и банки №9 (383) 04.03.98 [А. Nagovicin, Russian capital flight // Business and banks, №9 (383) 04.03.98].7 М. Сидоров «О контрабанде капитала и её масштабах» // Деловой экспресс 16.02.99 [M.Sidorov. On the contraband of capital and its scales // Business express. 16.02.99].8 В. Крайний, «Бег доллара» // Интерфакс Время, 30.09.99[V. Kraini, “Dollar’s run” // Interfax Vremya, 30.09.99]9 «Мониторинг телерадиоэфира: Экономика» от 12.02.99 (Сообщение телеканала НТВ, 11.02.99, 19:00); А. Ивантер, «Насыпная дамба» // Эксперт 26.04.99[Monitoring TV and radio broadcasts: Economy, 12.02.99 (Information of NTV channel, 11.02.99, 19:00)]; A. Evanter, Bulk dam // Expert 26.04.99].10 Интерфакс 11.06.99 [Interfax (Information Agency) 11.06.99].© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Mass media. While preparing this report information data banks of the Central Bank of Russian Federation (CBR) and Federal Tax Police Service (FTPS) were used. These data banks mostly include publications in newspapers, journals and special editions concerning the problem of fund transfers. The statistics about the different types of criminality connected with the money laundering (Art. 174 of the Penal Code of Russian Federation) and the fund transfers was also available. Altogether there were processed about 500 sources including publications in special editions (Expert, Kommersant [Merchant], Dengy [Money]), in central and regional mass media, and materials of special monitoring TV and radio programs;

Official documents (instructions, orders) and analytical materials of the CBR and FTPS. The general overview of the normative documents issued by the CBR in the field of fund transfers has been made. The list of these documents is given in the Supplement. In the same time, there have been analysed the CBR procedures of issuing the permissions for the legal fund transfers.

Interviews of experts. In the report the results of structured in-depth interviews with four experts from CBR and one from FTPS, were used.11

In-depth structured interviews with entrepreneurs, including those who have business contacts in Italy. During the period from November 1998 to July 1999 31 interviews with entrepreneurs of different level – petty, middle, large - were carried out, including 8 interviews with people, who were convicted for economic offences. All these entrepreneurs belong to following sectors of economy: 9 of them work in banks,12 5 - in trade and production of furniture, 3 - in shops of souvenirs and ceramics, 2 - in production of ventilating systems, and 2 - are shuttle traders. The structure of the questionnaire as well as the short characteristic of each interviewed person are presented in the Supplement.

Sociological survey of Russian entrepreneurs. The poll was carried out in June – July 1999 among 174 entrepreneurs, residents of 8 Russian regions. Among the respondents 21% are the directors of small companies; 57% of middle companies; 22% of large companies. The detailed description of the sample and the results of the survey are given in the Attachment.

iii. The Bank of New York affair.

The work on this report has coincided with a series of international scandals connected with the Bank of New York. Although the situation with this affair is still not clear, and the diffused information is far from being correctly analysed and proved, we should emphasise that our findings do not contradict this new information which has not been known at the beginning of our research.

The information about suspicious transactions in the Bank of New York (BONY) has firstly appeared in August 1999. In particular, there were strong doubts about the origins of 100,000 transactions made by three corporate clients of BONY, Benex International, Becs International и Torfinex. The total volume of funds transferred through the accounts of these three firms was evaluated in $4,2 milliards (since 11 The specialists and the managers of middle level (department, branch, etc) of the organisations mentioned above gave their opinion as experts.12 Two of them are the members of the board of directors in banks which are listed among 20 largest banks in Russia, one is the member of the board of directors in bank which is listed among 50 largest banks in Russia, two are the members of the board of directors in banks which are listed among 100 and 200 largest banks in Russia (according to the rating published in the journal Kompaniya [Company] 05.07.99). © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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October 1998 till March 1999). There were some signs persuading that some of these capitals have criminal origins.

More careful analysis has showed that the really criminal capitals represent only a small percentage of these milliards. For example, it has been proved that $300,000 of redemption for the Russian businessman Edward Oleminsky have been transferred through the Benex’s accounts.13 It has been equally proved that in Italy Russian criminals have used the accounts in order to “launder” their revenues from racketing Russian entrepreneurs having business in this country.14 The total volume of all suspicious transfers from the BONY accounts to Italy was about $5,5bln. The purely criminal capitals represent about $200bln of $4,2 milliards transferred through the accounts in BONY.15 The major part of transferred capitals has not criminal origin. Its transfer should be explained primarily by unfavourable institutional climate in Russia (this aspect will be analysed in more detail in the chapter 2). This climate creates incentives for tax evasion and freezing the investments into the national economy (the question of goals of the capital transfers will be studied in the chapter 3). Consequently, the major part of these funds should be considered as legal and extralegal.

As far as the channels of the capital transfers are concerned, all techniques used for transferring the funds on the BONY accounts are described in detail in the present report (see chapter 4). For example, there are suppositions that the BONY accounts were used for accumulation of resources coming from the operations with the American Deposit Receipts (ADR) issued for Russian securities16 (see chapter 4.7). At the other hand, the pretended transactions (see chapter 4.2) were widely used by the owners of capitals transferred through the BONY accounts in order to minimise taxes.17 It is worth emphasising that the addressees of transfers made through the BONY include such respectable corporations as Sony, Volkswagen, Daimler Chrysler, Hewlett-Packard, Nestle, Motorola. Finally, there is information about connections between the BONY accounts and off-shore companies and banks (see chapter 4.3).

Generally speaking, the proposed methodology would appear useful in analysing the cases like the BONY affair. In particular, constructing by international banks the sociological portraits of their potential clients (see chapters 7 and 8) would prevent the banks from opening accounts for criminal and extralegal entrepreneurs. Otherwise stated, the practice of filling in the special questionnaire (see chapter 9) by potential clients would allow the bank to get the information about their legal, extralegal or criminal nature. If Lucy Edwards, Peter Berlin and Alexis Volkov (the accused in the BONY affair) were asked to pass the test, the BONY would be much more vigilant in relationships with them. Although the methodology for defining the type of international financial market’s subjects is far from being finished (there is a need for

13 Коммерсантъ, 21.09.99 [Merchant, 21.09.99]14 “Деньги отмывали рэкетиры” // Российская газета, 30.09.99 [“Racketeers launders the money” // Russian Newsletter, 30.09.99] 15 Время MN, 31.08.99 [Vremya MN, 31.08.99]16 Ю. Панфилова, П. Рушайло, “Деньги русской мафии ищут на фондовом рынке” // Коммерсантъ, 28.08.99. [Yu. Panfilova, P. Rushailo, “Russian Mafia’s Money are found on the securities market // Merchant, 28.08.99]17 Д. Горностаев, «Починок знает, как деньги попали в BONY» // Независимая газета, 09.10.99 [“Potchinok (head of the Russian Ministry for Taxes) how the capitals were transferred to the BONY” // Independent Newsletter, 09.10.99]© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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additional field studies), the results look very promising (these results are given in the Supplement).

© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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I. Fund transfer from Russia: goals, channels and methods of struggle.

1. The definition of the problem.

There is a lot of definitions of the term «fund transfer»: economic, juridical, institutional. For example, the economists speak about the fund transfers in the terms of the search for highest rate of return. “Unrestricted transactions in international assets allow the world economy to invest in the assets with the highest rate of return, wherever they are located. If savers in Britain can earn a higher return by lending in Japan, why should they be forced to lend to low-yielding investment projects in the UK?”18 From the juridical point of view it is defined as the transfer of assets from the territory of one state to the territory of another. The jurists speak about the fund transfers when the period the assets stay abroad is unlimited by the contract terms.

Speaking about assets we mean res corporales and foreign currency: there is no reason to transfer the assets denominated in unconvertible rubles. If we take into account only this meaning of fund transfer, it is not clear why fund transfer from London to New York is called transfer and from Santiago to Miami – capital flight.19

Furthermore from the statistical point of view, fund transfer is evaluated through the balance of payments. The volume of fund transfers made in accordance with the Law could be evaluated with the help of the accounts «Direct investments abroad». Otherwise stated, the volume of fund transfers made since 1993 in accordance with the Law is about 5,3 millions dollars. If we refer to fund transfers made in violation of the law, we should look at the accounts «Net errors and omissions», «Change of debt on defaulted payments from foreign currency and rouble export earnings and non repaid import advances», «Commercial credits and advances granted» and «Commercial credits and advances extended».20 We should take into consideration that not all “net errors and omissions” represent the fund transfers, i.e. the real volume of fund transfers evaluated this way will be less than the sum of this account, 40 millions dollars. Meanwhile the analysis of the balance of payments can give us only a very rough idea of the reasons of fund transfers.

Balance of Payments of the Russian Federation for 1993-99 (neutral presentation) ($ mln.)21

Main Aggregates 1993 1994 1995 1996 1997 1998 1999 (Q1)

CURRENT ACCOUNT 12,792 8,870 7,778 12,011 4,049 2,446 5,068Goods and services 14,215 10,959 11,074 17,212 12,752 14,156 6,115Export 67,898 76,250 93,231 103,555 103,197 87,688 17,831Import -53,682 -65,291 -82,157 -86,343 -90,445 -73,533 -11,716Goods 15,590 17,675 20,476 22,933 17,440 17,306 6,473Export 59,724 67,826 82,663 90,563 89,038 74,751 15,608Import -44,133 -50,152 -62,188 -67,629 -71,599 -57,445 -9,135Services -1,375 -6,716 -9,402 -5,722 -4,688 -3,150 -358Export 8,174 8,424 10,567 12,992 14,158 12,937 2,223

18 D. Begg, S. Fisher, R. Dornbush, “Economics”, London: McGraw Hill, 1991, p. 61319 М. Сидоров «О контрабанде капитала и её масштабах» // Деловой экспресс 16.02.99 [M.Sidorov. On the contraband of capital and its scales // Business express. 16.02.99]. 20 В. Орешкин, начальник отдела Управления платежного баланса ЦБ, «Баланс на краю пропасти» // Коммерсантъ-Деньги 01.07.98 [V. Oreshkin, Chief of the department of the CBR [Central Bank] Administration of Balance of Payments, Balance on the verge of disaster // Merchant & Money. 01.07.98].21 Source: http://www.CBR.ru (Central Bank of the Russian Federation’s homepage).© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Import -9,549 -15,140 -19,969 -18,714 -18,846 -16,087 -2,581Investment income and compensation of employees

-2,302 -1,782 -3,368 -5,339 -8,411 -11,359 -997

Receivable 2,908 3,500 4,278 4,333 4,366 4,300 2,261Payable -5,210 -5,282 -7,646 -9,672 -12,777 -15,659 -3,258Compensation of employees 0 -114 -303 -406 -342 -164 67Received 0 108 166 102 227 301 102Paid 0 -222 -469 -507 -568 -465 -35Investment income -2,302 -1,668 -3,065 -4,933 -8,069 -11,195 -1,064Receivable 2,908 3,392 4,112 4,232 4,140 3,999 2,159Payable -5,210 -5,060 -7,177 -9,165 -12,209 -15,194 -3,223Current transfers 879 -307 72 138 -291 -351 -50Received 1,346 237 810 765 349 223 55Paid -467 -543 -738 -627 -641 -574 -105CAPITAL AND FINANCIAL ACCOUNT

-6,540 -8,538 1 -3,380 3,766 5,469 -4,218

Capital account -284 2,410 -347 -463 -797 -382 -76Capital transfers -284 2,410 -347 -463 -797 -382 -76Received 2,611 5,882 3,122 3,066 2,137 1,704 198Paid -2,895 -3,472 -3,469 -3,529 -2,934 -2,086 -274Financial account -6,257 -10,948 348 -2,917 4,562 5,851 -4,142Direct investment 1,069 538 1,658 1,708 3,640 1,156 334Abroad -142 -101 -358 -771 -2,603 -1,027 -314To Russia 1,211 640 2,016 2,479 6,243 2,182 648Portfolio investment -374 36 -2,408 8,757 45,433 7,779 -528Assets -489 114 -1,705 -172 -156 -256 -23Liabilities 115 -78 -703 8,929 45,589 8,035 -506Other investment -4,131 -11,574 10,408 -14,739 -42,556 -8,339 -5,020Assets -15,330 -17,683 5,042 -29,067 -26,621 -16,122 -6,050Cash foreign exchange -3,619 -5,740 134 -8,669 -13,444 945 201Balances in current accounts and deposits -3,838 162 4,327 -1,000 977 972 -1,098

Commercial credits and advances extended -2,400 -3,698 8,043 -9,501 -6,789 -6,810 -1,799

Loans and credits extended 7,913 9,536 8,641 9,499 7,004 5,345 1,791Arrears -11,619 -12,771 -10,553 -9,475 -3,048 -7,428 -4,058Change of debt on defaulted payments from foreign currency and rouble export earnings and non repaid import advances

0 -3,860 -4,928 -9,773 -11,458 -8,625 -1,016

Other assets -1,767 -1,312 -623 -149 136 -520 -71Liabilities 11,199 6,110 5,366 14,328 -15,935 7,784 1,030National currency 548 -325 391 -230 -38 65 -9Balances in current accounts and deposits 645 1,686 2,464 1,547 -4,694 -2,832 -283

Commercial credits and advances extended 0 -978 -8,050 -799 -64 321 104

Loans and credits received 5,857 2,242 8,508 10,256 12,691 5,806 -1,283Arrears 3,364 3,162 1,131 2,672 -24,339 5,120 2,414Other liabilities 785 321 922 881 511 -697 86Reserve assets -4,354 1,896 -10,386 2,841 -1,936 5,305 969Adjustment to reserve assets22 1,534 -1,844 1,076 -1,484 -19 -50 10422 The statistics on Russia's net international reserves include in the foreign exchange reserves the liquid assets of the Bank of Russia and Ministry of Finance in the resident banks, a procedure that does not accord with the methodology of compiling the balance of payments. That is why an adjustment is made to the item "reserve assets". Latest update on July 1, 1999.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Net errors and omissions -6,252 -333 -7,780 -8,631 -7,815 -7,914 -850Overall balance 0 0 0 0 0 0 0Let us try to formulate an institutional definition of the fund transfer, because it is the institutional economics that, first of all, pays attention to the question of incentives to economic actions. Let us drive apart two terms – capital flight and fund transfer, legal, extralegal and criminal. While using the term “capital flight”, we speak about the investment that was transferred abroad in legal or extralegal way, revenues from which would not be returned to the country.

Capital flight can be explained by unfavourable climate for investment (including the tax regime), unstable environment and ineffective enforcement of property rights, which means for owners of assets much more than a high rate of profit. In other words, we can use the term of capital flight if the institutional environment of a country can not stimulate reinvestment into the national economy.

Speaking about capital flight, the stress is not on the methods of assets transfers but on the incentives to such transfers. On the contrary, using the term «fund transfers» we analyse legal, extralegal and criminal methods of transferring. In some cases, funds of criminal origin23 could be transferred abroad following legal channels (see, for example, part 4.5 “Fund transfers in cash”). And so the fund transfer itself could be the mechanism of the legalisation of criminal capital. Till recently, there were legal opportunities to transfer funds of any origin. «You can buy certificate in bank, to be more correct – even not to buy – you remit a sum of money and then immediately draw it back and get the reference that you have withdrawn the sum – the certificate is the statutory ground for transfer. Where did you take the money? – Withdrew from the account».24

Consequently, the term «capital flight» is used to analyse the goals and incentives to transfer funds from the country with unfavourable institutional environment for business to the country with more effective institutional system. The term «fund transfer» is more of technical character and describes the methods of fund transfer. In our further analysis we will take into account both aspects: incentives to transfer funds and methods of transfer.

2. The current situation in the Russian economy.

In order to evaluate the attractiveness of the Russian economy for the reinvestment we have to look at the statistical indicators describing the situation during the 90s. The GNP has been declining since 1991 (in % to the previous year).25

23 Those that can be classified by article 174 of Criminal Code of Russia «Money or other assets laundering». This article concerns “financial operations and other transactions with money or other assets acquired in a criminal way, as well as using these resources for entrepreneurship and other economic activities”.24 Expert # 125 The source of all statistical data used in this paragraph is http://www.gks.ru (The State Committee for Statistics of the Russian Federation’s home page), if other source is not specified. © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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The index of industrial production also shows a declining pattern. The only years when the industrial production has not been declining are 1997 (one of the reasons for

this fact consists in introducing into the national accounting in 1997 the evaluations of the unofficial, hidden economy) and 1999 (January-August, due to positive effects of currency devaluation in August 1998).

While the dynamics of the Industrial Prices Index allows us to suppose the period of

stabilisation in 1996-1997, this tendency towards stabilisation has appeared to be short-term (%, to December of the previous year, drawn on a logarithmic scale).

The real income has reduced dramatically in 1991-1992, it has stabilised at this “bottom line” in 1993-1997 (in % to the previous year). The August 1998 crisis lead to the second dramatic reduction in real income:

It is worth briefly analysing the Russian tax system. Till now the major part of taxes is paid in Russia by the enterprises, not by individual taxpayers. The ratio of revenues from three principal sources of taxation, the tax on profit, the tax on value added (TVA) and tax on income can be illustrated by the following table (in % of GNP):26

Tax 1992 1993 1994 1995 1996 1997

Tax on profit 3,6 3,4 2,7 2,4 4,3 3,8

Tax on value added 8,3 4,5 3,8 4,1 9,2 9,2

Tax on income 0,0 0,0 0,0 0,2 2,5 2,8

26 “Financial stabilization in Russia”, Moscow: Institute for Economic Analysis, 1995, p.212; “Economy of transition”, Moscow: Institute of Economy in Transition, 1997, p.352-353.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Tax on profit / Tax on income

- - - 1,2 1,7 1,4

So, the enterprises bear the major part of the tax burden. This situation implies a narrow choice for the entrepreneurs: either to consume their revenues, or to look for more favourable tax climate abroad or to hide their economic activity from the State. As far as the last solution is concerned, in 1997 the collected tax revenues represented only 65% of expected by the government’s officials. These ratio were 43,3% for the tax on profit, 68,1% for the tax on value added.27

All these figures allow us to make the following conclusions:

The economic situation in Russia is still far from being stable. Excluding a short period in the mid-90s, the major economic indicators do not show optimistic patterns.

The tax system does not encourage the productive activity in general and official (recorded) productive activity in particular.

The weakness of incentives to invest in the national economy is illustrated by the dynamics of investments (% to the previous year). In contrast with the dynamics of GNP, industrial production, IPI, the volume of investment in current year has never attended the level of the previous year:

The long-term crisis of the investment process is especially dangerous if we take into consideration the rise of the average age of productive equipment. The average age was 8,42 years in 1970; 9,47 years in 1980; 10,8 years in 1990 and 14,9 years in 1996. In 1996, 25,4% of equipment was produced before 1975. Another factor explaining the high demand for investment consists in high (relatively to most developed market economies) profit rate in Russian economy:28

27 “Economic Almanac”, Moscow: Economic faculty – MSU, issue 1, 1998, p.2028 «Экономика переходного периода», Москва: ИЭПП, 1997, с.764[“Economy of transition”, Moscow: IET, 1997, p.764. The Institute of Economy in Transition has a web-site: http://www.online.ru/sp/iet/ ]© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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The supply of investments depends on the factors mentioned above (the uncertainty and the inefficient tax system) as well as on the volume of savings in the national economy. Concerning such important source for investments as savings of population, we could mention the preference for savings in foreign currency (in US dollars). Only a small portion of savings is accumulated on accounts in commercial banks (see table, all numbers concern households).29 Otherwise stated, the relatively high level of profit rate is necessary, but insufficient condition for the high marginal efficiency of capital, the driving force for the investment process in Keynes’ theory. The sufficient condition would consist in the existence of a stable institutional environment with well-protected property rights.

3. The goals of fund transfer.

After briefly analysing the current situation in Russian economy we can come back to the inquiry into the nature of fund transfers. The principal hypothesis could be formulated in the following way: The funds are transferred from Russia abroad for the reason of instability and inefficiency of the institutional environment, including the tax system. Consequently, reinvestment into the national economy «depends on stabilisation in the whole. Frankly speaking, I do not believe in stabilisation in Russia – that it will begin in the nearest future. Almost all thinking businessmen keep the largest part of their assets abroad, because every thinking businessman understands that it is impossible to return 100% of his capital to the country with such unstable political situation, with such a high level of political risk, as it is in Russia. It is a question of pure economic rationality».30

29 Russian Economic Trends, #1, 1998; “Economy of Transition”, p.76630 С. Кочетов «Наверху. Прощение блудных капиталов»// Деньги №38 от 12.10.97 (an interview with A. Khonanyhin, one of biggest Russian entrepreneurs of the beginning of 90-s, who transferred his business abroad). [S. Kochetov, Upstairs. Pardon of prodigal capital // Money, N38, 12.10.97] © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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As one of our experts said, «the problem [with the returning of capital] is the following – capital is transferred, and either it is not returned or it is returned as speculative capital, which can again be transferred abroad in a short time period. The bulk of the capital transferred is connected not with hedge of risks, but with investment of capital somewhere to get profit and use it in commerce... In any case it would be better for our Russian investors to invest in foreign countries than in Russia. They gain the protection of foreign state and can use the press not only of their company but of international Law».31 Incapability of Russian government to protect the interests of its citizens is reflected in extremely low level of trust of Russians their State. Only 3.4% of our respondents think that they can «trust their State».32

If the general task of fund transfer is the search of more favourable institutional environment, then it can be decomposed in the following goals:

To guarantee predictable conditions to make investments. Here we should remember the difference between uncertainty and risk. “We speak of certainty when any action that the decision maker can take have only one possible outcome, known in advance. We speak of risk or uncertainty when at least some of the actions available to the decision maker can have two or more alternative outcomes. We speak of risk when the objective probabilities associated with all possible outcomes are known to the decision maker. We speak of uncertainty if at least some of these objective probabilities are unknown to him”.33 Transitional economy in many researches is described in terms of uncertainty, but not risk, which is always a characteristic of process of investment.34 They mention the deterioration of the old information system existed in the command economy. In the same time, the new information system based on the price signals is far from being functioning. The same is true concerning business networks, the procedures of selling and buying and so on.

Use of effective methods of contract enforcement. Only 9% of entrepreneurs (our respondents) when problem arises would apply to judge, i.e. would use legal mechanism of solving problem. Here is what a businessman said answering the question about effectiveness of protection of commercial interests by Russian law courts: «It is a long procedure, and you can cover only about 30% of all costs and money lost».35 «What are you talking about... of course you can apply and go there till the end of your life trying to find out the truth».36 «You get the decision but not your money. The system is imperfect, there are very many ways to escape punishment».37 On the other hand, there is no substitute for the legal procedures of conflict resolution because the level of impersonal trust is extremely low in Russia. The level of impersonal trust (measured on the basis of the question “Do you think you can trust the people around you?”) is 35%, the level of impersonal

31 Expert # 232 We refer here to the results of a survey conducted in June 1999 by the authors. The sample consisted of 1390 respondents in 12 regions of Russian Federation.33 Harsanyi J. «Rational Behaviour and bargaining Equilibrium in Games and Social Situations», Cambridge: Cambridge University Press, 1977, p.22.34 See, for example, Б. Айкерс, Р. Ритерман «От предприятия к фирме: заметки по теории предприятия переходного периода» // Вопросы экономики №8 1994[B. Ikes, R. Ritterman, “From enterprise to firm: Towards a theory of enterprise in transition” // Vorposy Ekonomiki, #8, 1994]35 Interviewed # 3.36 Interviewed # 5.37 Interviewed # 20.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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trust measured on the basis of a sample of entrepreneurs is even lower, - 25%.38

To compare – the level of impersonal trust in Italy varies from 50 (South) to 60% (North), in France and Germany – from 80 to 85%.39

Minimisation of taxes. In 1998 value added tax was 20%, receipts tax 4%, average profit tax 35%, average social security taxes about 60%. The scale of tax on income is progressive. The tax rates since January 1, 1998 are described in the following table:

Income per year, roubles Tax rate

Less 20,000 (~850 dollars) 12%

20-40,000 2,400 roubles + 15% of all amounts more than 20,000

40-60,000 5,400 roubles + 20% of all amounts more than 40,000

60-80,000 9,400 roubles + 25% of all amounts more than 60,000

80-100,000 14,000 roubles + 30% of all amounts more than 80,000

More than 100,000 20,400 roubles + 35% of all amounts more than 100,000

It is not surprising that this level of taxation draws to invention of numerous schemes to minimise taxes. Following the available estimates,40 the volume of production unrecorded to evade taxes in 1996-1997 was 16,4%, and that of profit – 78,7%. The high rate of tax evasion in Russia allows us to compare this country with those countries which are characterised by high costs of legality (in H. De Soto’s terms):41

Country % of enterprises which pays correctly tax on profit

% of enterprises which pays correctly TVA

Algeria 83 83

Ecuador 63 40

Thailand 60 N.A.

Swaziland 16 39

Niger 9 12

Insurance from inflation. Although a lot of attempts were made to carry out a tough monetary policy, the rate of inflation per year only in 1996-1997 was less than 100. The financial crisis of August 1998 gave an impulse to inflation. In these conditions change of rouble assets into currency helps to protect them from the «inflationary tax» (see the chart drawn on a logarithmic scale)42.

38 For the general sample we refer to the results of the survey conducted by the authors in July 1999 . For the sample of entrepreneurs we refer to the results of the survey with the sample of 174 entrepreneurs.39 Inglehart R., “Culture Shift in Advanced Industrial Society”, Princeton: Princeton University Press, 1990, p.3540 «Неформальный сектор экономики», Москва: ИСАРП, 1998, гл. 8. [Informal sector of economy, Moscow, ISARP, 1998, ch.8]41 Maldonado C., “Entre illusion de la normalisation et le laissez-faire: vers la legalisation du secteur informel?” // Revue Internationale du Travail, 1995, Vol. 134, No. 6, Tab. 142 Институт экономического анализа, «Финансовая стабилизация в России», Москва: Прогресс, 1995, с.198, 207; «Экономический альманах», выпуск 1, Москва: ТЕИС, 1998, с.21. [Institute of economic analysis, Financial stabilization in Russia, Moscow: Progress, 1995, p.198, 207; Economic almanac, issue 1, Moscow: TEIS, 1998, p.21].© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Money laundering. As it was outlined above, fund transfer allows hiding a criminal origin of these funds. To open a deposit in a western bank it is enough to have a document notifying that the capital was transferred legally. For example, a certificate justifying that the amount of money under question was withdrawn from a account in a Russian bank. It is worth emphasising that Russian banks do not require certificates justifying the origin of the money when they open the account. By the way, as experts say, about 10% of all fund transfers have criminal background.43

To have, in case of a crisis in Russia or of prosecution for breaking the law, savings for a rainy day. Many Russians have to make savings because of political, social and economic instability. For example, after the crisis in August 1998 the number of such people, according to our data, rose from 14,5% to 25%:44

The main reasons for savings 1998, % 1999, %We have no savings 40 42For a rainy day 14,5 25Education 13 13Holidays, travels 12 12Medical care 9 11Additional pension 4 9Group of solvent people prefers to have their money invested in real estate abroad; or accounts in foreign banks. What they are looking for is “to place there [abroad] deposits, accounts; to buy real estate – all these are ways to escape. A person prepares ways for escape – for example to Spain – it is known that our people buy there real estates without any problem, and that all these real estates are very expensive...”.45 It should be outlined that incentives to make such investments abroad – for a rainy day – might be opposite to those that are used in fund transfer to protect commercial interests. In first case fund transfer forms conditions for breaking contractual discipline, in second – for its intensification. For example, if an entrepreneur transfers the funds in order to be able to make use of efficient contract enforcement, he is not looking for opportunities to escape from contractual discipline, he is looking to enforce it. Oppositely, if an entrepreneur transfer the funds “for a rainy day”, he 43 «Неформальный сектор экономики», Москва: ИСАРП, 1998, гл. 8. [Informal sector of economy, Moscow, ISARP, 1998, ch.8]44 The figures are based on two surveys conducted in March 1998 (sample – 850 respondents) and in June 1999 (sample – 1390 respondents) by the authors.45 Expert #1.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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creates the favourable conditions for breaking contractual discipline in the future or for escaping from punishment for his offences in the past.

In our further analysis we will use the following grouping of tasks, which are solved by fund transfer:

Aggregate tasks Concrete goals of fund transfers

A. Development of business, investment projects

1) To guarantee predictable conditions to make investments

2) Use of effective methods of contract enforcement

3) Insurance from inflation

B. Minimisation of taxes

4) Minimisation of taxes

C. Provisions with savings in case of crisis/prosecution

5) Money laundering

6) To have, in case of a crisis in Russia or of prosecution for breaking the law, savings for a rainy day

The main reason for grouping the tasks consists in common incentives that lead the entrepreneurs’ actions in three cases. For example, the goals “insurance from inflation” and “use of effective methods of contract enforcement” characterise the actions of entrepreneurs looking for more efficient institutional environment, for more efficient contractual discipline. On the other hand, the goals “money laundering” and “savings for a rainy day” characterise the actions of entrepreneurs looking for escaping from the Law and contractual discipline.

Suppose that the form of transferred funds depends on the task of transfer, then these three tasks correspond the following way:

Aggregate tasks Form of fund transfer % of total volume

A. Development of business

Direct investment in foreign firms 10-15

B. Minimisation of taxes

Deposits in foreign bank and/or direct investment in foreign firm

15-20

C. Provisions with savings in case of crisis/prosecution

Real estate 65-70

As show estimations, the total volume of funds transferred from Russia consists of funds on accounts and deposits in foreign banks ($20-$30bln.), real estate ($15-$30bln.) and direct investments in foreign firms ($15-$30bln.).46 According to some experts, about 15-20% of funds transferred have been returned back to Russia. These funds were transferred to minimise the tax burden. After being “cleaned” from taxes, they are usually reinvested in Russia as short- and medium-term investments of non-resident firms controlled by Russian physical or juridical persons.47 For example,

46 А. Наговицын «Утечка российского капитала за границу» // Бизнес и банки №9 (383) 04.03.98 [А. Nagovicin, Russian capital flight // Business and banks, №9 (383) 04.03.98].47 А. Савкин «В Россию можно вернуть $30-$40 млрд.» // Коммерсант №37 14.10.97 [А. Savkin, It is possible to return $30-$40 milliards back to Russia // Merchant, N37, 14.10.97].© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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block of shares of the largest telecommunications holding, «Svyazinvest», was bought by a non-resident firm, registered in Cyprus with participation of Russian capital.48

Let us now consider the geographical destinations of fund transfers from Russia. The most important fund transfers go to Bahamas, Great Britain, Hungary, Spain, Canada, Cyprus, Latvia, Malta, Nauru, Channel Islands, Holland, USA, Finland, Czech, Switzerland.49 For example, the total volume of Russian funds transferred to Switzerland is about $40bln.50, to Cyprus - $10-$15bln.51 The mentioned above 15 countries can be grouped into: offshore zones, countries with high living standards and neighbouring countries with developing economies. We could hypothesise that there would be a correlation between goals and directions of fund transfer. For example, it is reasonable to suppose that funds transferred to minimise taxes are directed to offshore zones, funds transferred to provide oneself with savings for a rainy day – mainly to the countries with high living standards, funds transferred to develop business – to the neighbouring countries with developing economies. From this point of view Italy belongs to the second group of countries. In this context it is worth emphasising that offshore zones are often used just as a checkpoint in fund transfer to the countries of the last two groups.52

Aggregate tasks Countries to which funds transfers are directed

A. Development of business Hungary, Finland, Czech Republic

B. Minimisation of taxes Bahamas, Cyprus, Latvia, Nauru, Channel Islands

C. Provisions with savings in case of crisis/prosecution

Great Britain, Spain, Canada, Cyprus, Malta, Holland, USA, Switzerland, Italy

4. Channels and techniques used for fund transfers

After describing the ends of fund transfer we will analyse in more detail the means chosen to accomplish this transaction. Otherwise stated, we will turn now to the question of channels and techniques used for fund transfers. Firstly we have to assume that there is no clear demarcation which separates channels or techniques used for different purposes. For example, a businessmen interested in transferring the funds in order to minimise taxes could make use of the whole spectrum of techniques, from absolutely legal to criminal. Even the CBR sets up the resembling procedures for issuing the permissions for direct investments abroad and for some kind of commercial transactions (with duration of 180 days and more).53 The question of correlation between ends of fund transfer and its means will be more carefully studied in the part 10 “The factors which explain the choice of channels and techniques of fund transfers, and the characters they have”. So, we start our analysis to describe the existing channels and techniques used for fund transfer. In particular, our experts 48 С. Будылин «Кипр-батюшка» // Эксперт 08.03.99 [S. Budylin, Cyprus the father // Expert, 08.03.99].49 «МВД знает, где лежат российские миллиарды» // Сегодня 12.03.99; «Мониторинг телерадиоэфира: Экономика» 12.02.99 (Сообщение телеканала НТВ, 11.02.99, 19:00) [MI (Ministry of The Interior) knows, where Russian milliards are kept // Today 12.03.99; Monitoring TV and radio broadcasts: Economy, 12.02.99 (Information of NTV channel, 11.02.99, 19:00)].50 К. Коньков «Капкан оказался пустым» // Век 23.04.99 [K. Kon'kov, Trap turned out empty // Century, 23.04.99].51 К. Левин «Кипр оставили свободным» // Коммерсант-Daily 12.02.99, стр. 7. [К. Levin, Cyprus have left free // Merchant-Daily, 12.02.99, p. 7].52 Интерфакс «экономические новости» от 22.04.99 [Interfax (Information Agency), Economic news, 22.04.99].53 See part 4.1. “Receipt of the CBR’s permissions”.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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indicated the following channels and techniques: receipt of the Central Bank’s permission, pretended transactions, establishment of offshore companies, crediting of foreign firms, use of lacunas in currency regulation, fund transfer in cash, financial products.

4.1. Receipt of the Central Bank’s permission. The Law of Russia «On currency regulation and control» separates exchange operations with currency funds and securities in currency on current and capital exchange operations, connected with fund transfer.54 According to the point 2 article 6 of the Law of Russian Federation «On currency regulation and control» residents should get the permission from the CBR to carry out capital operations. An applicant should provide the CBR or the branch of the CBR with a pack of documents.55 Sometimes it is necessary to give an opinion of other state institution about the expediency of operations or about the validity of such operation. Such conclusions, depending on the type of capital operation are given by the Ministry of Trade (MT) - (former Ministry of Foreign Trade) - as usual on trade operations, or by the Ministry of Economy (ME) - usually on investment operations. These documents are analysed in the CBR during one month. If not all the documents have been presented, and the missing documents are asking for, the examination takes more time. It also happens, when the confirmation from the MT or the ME is necessary. As a rule, these ministries need not less than one month to analyse these documents. For example, to get the conclusion from the MT about the validity of delays in currency profit returning, you should be put down in the waiting list several months ahead. The ministries analyse all these documents according to their regulations. Here is the opinion of one of our experts about the procedure of regulating operations connected with the movement of capital:56

“Question: Are there any preferences in giving the permissions for carrying out the capital operations according to any criteria (the organisational structure, the form of property)? – It should be mentioned that neither in the Law nor in other regulating acts of the CBR there is no special criteria on the large quantity of exchange operations, which can be carried out only with the permission. Question: Can the CBR refuse to give the permission when the applicant presents all the documents necessary to get the permission? – In general, it is quite possible. The CBR can refuse to give the permission even if all the documents were presented and they correspond to the Russian currency legislation. In other words, the bank can refuse to give the permission according to the economic validity of the contract. For example, we may estimate the effect of this operation on the Balance of Payments. In the cases of credits or loans we pay our attention to the amount of capital and to the interest rate”.

And here is the opinion on this procedure expressed by our expert from the FSTP: “All the instructions of CBR always include the exception: “these instructions can be broken with the permission of CBR”. The period of this permission is not mentioned anywhere – whether it is a day, two days, a year. We have a special mechanism to cope with such offences. The first thing our (FTPS’s) officer does, checking foreign economic transactions, is to find out whether the CBR has given the permission, and if it is done – there would be no questions. It is not my competence to find out how it

54 Not all currency operations can be divided on current and capital. For example, the contracts between residents and non-residents denominated in rubles are currency operations without being current or capital.55 See Appendix #1 and 2 to the Letter of the CBR #12-524 dated 06.10.95.56 Expert # 1.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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has been received. But the fact is quite obvious. It does not disturb us because from the point of Law everything has been done correctly”.57

Letter of the CBR #12-524 dated 06.10.95

Appendix # 1.

The main list of documents that are submitted to the CBR

for licensing operations connected with the movement of capital.

The letter-application to the General Department of Currency Regulation and Control of the CBR,

Copies of the founding documents that were certified by a notary,

The documents certifying the registration of the resident that was certified by a notary,

The certificate from the tax institution that the resident has no debt on budget payments and that he has never obeyed the Tax Code,

Credit history from the authorised banks of Russia,

The certificate from the State Committee of Property of Russia if the resident has the federal property at his disposal,

The balance of the resident for the last year with the results of the auditing,

The current balance of the resident,

The report about the financial results (benefits/loses) before the dates of applying to the CBR,

The certificate from the State statistical institution about the coding of the resident.

Appendix # 2.

Additional documents to the main list (Appendix # 1).

In order to make currency investment in buying securities of a foreign firm:

Technical and economic assessment of founding a foreign firm, fulfilling of a joint project, taking part in it,

The conclusion of the Ministry of external relations of Russian Federation about getting their agreement about participation in founding foreign firm,

The copy of the extract from the appropriate register of foreign state about the registration of the foreign firm,

Copies of the founding documents of the foreign firm certified by a notary.

Regulation of the CBR

«On the order of issuing by the CBR permissions

to carry out some types of exchange operations,

connected with movement of capital» dated 20.07.99 #82-П.

§2. This regulation affects the following investment operations:

57 Expert # 4.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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2.1 The investor, who is not a credit organisation, invests the amounts more than $1mln. or its equivalent in other currencies.

2.2 The investor makes payment in equity capital of an off-shore firm.

2.3 The investor makes payment in equity capital of a non-resident – financial company.

2.4 The investor, who is not a credit organisation, makes payments in equity capital of a credit organisation abroad.

2.5 The investor jointly with a non-resident acts abroad.

§3. The order of issuing by the CBR the permissions for fund transfers.

3.2.1 The investor sends to the authorised bank, which operates the investments, the pack of documents, that are listed in the Appendix 1.

3.2.3 If the investor is a credit organisation, then to get the permission for fund transfer from the CBR, a positive conclusion of the ME should be added. The permission of the CBR can not be issued without the positive conclusion.

3.2.4 The authorised bank checks the documents during 5 bank days and if they are in accordance to the Russian currency legislation and the Regulation, then it signs a declaration and sends it to the Department of the Currency Control (DCC).

3.2.5 If there are any recommendations concerning the documents, or the pack is not complete, the authorised bank returns the documents to the investor during 5 bank days to finish them off.

3.2.6 After receiving the documents, the DCC checks if they are in accordance to the Russian currency legislation and the Regulation. In case not all the documents were presented or were filled in with violations or conflict with the Russian currency legislation, then the DCC informs the investor about the refusal and explains the reasons.

3.2.7 When all the mistakes are corrected according to the Russian currency legislation, then the investor sends the documents to the authorised bank, which checks and signs the declaration and then sends the documents to the CBR for getting the permission.

3.2.9 If it is necessary, and when the investor is not a credit organisation, the DCC can send and inquiry to get the opinion of the following ministries: the Ministry of Trade, the Ministry of Foreign Affairs, the Ministry of State Property and other state institutions depending on the type of investment with notification of the investor, and can ask him for additional information.

3.2.10 The whole period of analysing the documents that were sent to the CBR for getting the permission to carry out the investment, that was mentioned in points 3.2.7 and 3.2.9 of the Regulation, should not exceed 3 mounts.

4.2. Pretended transactions. The Civil Code of the Russian Federation defines pretended transactions just as «a cover without the intention to register it in accordance with the law» and qualify them as invalid.58 But the mechanisms of pretended transactions are used very often because it is very difficult to prove the

58 Art. 170 of the Civil Code. © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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intention to make a pretended transaction.59 Pretended transactions are usually made with a non-resident firm in the following forms: import of goods on terms of prepay, export of goods on terms of pre-delivery, overcharging/undercharging of price of a contract, overcharging of the fines and contract on rendering of services.

4.2.1. Import of goods on terms of prepay: a Russian firm transfers advance payment on the account of non-resident firm for the future delivery of goods, but the non-resident firm does not deliver goods because of «its dishonourable behaviour». In reality there is an informal convention between the Russian firm and its foreign partner. According to this convention the Russian firm attends non-delivery of goods. In fact, the non-resident firm just transfers the advance payment on foreign accounts, which are controlled by the Russian firm. For this service, the non-resident firm receives from the Russian partner a fixed amount of money. There exists another, more radical, variant of this scheme, when the Russian firm, the addressee of the delivery, disappears without waiting for the delivery itself.60

4.2.2. Export of goods on terms of pre-delivery: a Russian exporting firm delivers goods, but foreign partners does not pay for it because of their «dishonourable behaviour». As one of our experts said «all contracts concerning prepay or pre-delivery» from Russia are false and usually mean fund transfer.61 We should pay attention to the characteristics of Russian firms, involved in pretended transactions. «Firms, involved in these transactions usually have minimal equity capital - 8400 roubles (~$340) - and about 30% of these firms are registered on names of dead people – it is nonsense from the point of registration of these firms, in fact the founders were dead at the moment of registration the founders. These firms import anything; banks according to their demands buy large amounts of dollars and then transfer them according to false contracts. We should admit, that these firms usually belong to bank system - because ordinary entrepreneurs do not have spare cash in such quantities - they can not buy $1mln. during a month; there should be appropriate turnover. So, to all the appearances, these funds are from banks».62 In other words, the banks make use of this channel in order to transfer funds either on the request of their clients or on their own needs. Minimal equity capital and fictive founders allow the banks to escape from legal prosecution. So, one of the parties involved in this kind of transaction is a mediator (usually it is a one-day firm), that is specially created for this deal, and usually acts in the interest of banks or other firms. «It is a characteristic of Russian business, that activity is carried out not by one juridical person but the network of physical and juridical persons. All these economic entities can be relied on mutual participation in the equity capital, but this is not so necessary. In any case they are controlled from one centre».63

4.2.3. Overcharging/undercharging of price of a contract: prices of contract are often overcharged (undercharged): export prices are overcharged, import prices

59 И. Граник «За фиктивные контракты будут сажать» // Коммерсант-Daily 19.06.99 [I. Granik, They will imprison for pretended contracts // Merchant-Daily, 19.06.99]. Total volume of funds transferred using pretended transactions is $12 bln. (Ю. Сигов «Где и как отмываются российские миллионы» // Новые известия 05.03.99, стр. 1, 6) [Yu. Sigov, Where and how they are washed Russian millions // New Izvestiya (News), 05.03.99, p.1, 6]. 60 М. Сидоров «Где ищет деньги Центробанк» // Деловой экспресс 23.03.99 [M. Sidorov, Where the Central Bank does search money // Business express, 23.03.99].61 Expert # 5.62 Expert # 1.63 Expert # 5.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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undercharged. «You sell your goods not for $10 as it costs but for $3 and agree with your partner that the difference will be transferred to offshore zone or somewhere else. In the case of import you have to pay a little bit more, but you do not have to pay profit tax. In this case you do not have profit - it means that you do not have to pay the tax. As for fund - it is transferred».64 A slightly different situation arises when instead of one kind of goods the Russian firm exports other goods. For example, instead of petrol Ai-76 a company exports petrol of better quality and more expensive - Ai-92. The difference in price remains abroad.65

4.2.4. Overcharging of the fines: high penalty provisions are mentioned in contract and Russian firm is bound to pay them to non-resident firm in the case of breaking the terms of contract (non-resident firm returns them back on foreign accounts of the Russian firm). For example, “a buyer (Russian firm) is bound to pay supplier (foreign firm) penalty provision – say, 25% of customs value of goods, - in case the goods do not pass custom clearance within 24 hours. Obviously, this period is too short. Russian firms pay penalties – it means that they transfer their funds”.66 A little bit more complicated variant of usage of export-import contracts – clearing. “Supposing, non-resident has two contracts – on export and on import. He/she writes a letter to a Russian partner. You owe us $ 1mln. according to contract #02/878-99 and we owe you $ 1mln. according to contract #678/567-95. The Civil Code of the Russian Federation permits to make unilateral clearing without getting the agreement from the partner. It looks like everything is OK, but the non-resident has already been owing for 4 years and the resident has just owed. It means that the non-resident has been using the sum of money during for years. If the interest rate was at least 10%, the non-resident would gain $ 461,100 by using this money as a free credit. Under informal agreement, a certain share of this gain would be kept abroad at the account of the Russian firm”.67

4.2.5. Contract on rendering of services: contracts on services can be used for fund transfers because it is practically impossible to trace the moment when the service crosses the border and what its real price is. For example, “to register a deal with “their” non-resident firm to pay for marketing research or consulting. By the way, it is much more difficult to prove that such kind of transaction is pretended then those concerning goods. All goods can be checked – they have customs declaration. Besides, how can we know the price of consulting? For example, the name of the official who should be bribed, costs millions of dollars”.68 “I know several examples of carrying out marketing research in North Africa. One month costs $100,000. What marketing research can be carried out in one month, especially in North Africa?”69

4.3. Offshore companies. Offshore companies play important role in the schemes of realisation of pretended transactions. As show experts’ evaluations, there are about 60,000 offshore companies with the participation of Russian physical and juridical persons. As it is mentioned above, big Russian companies have in fact a network

64 «Экономический анализ. Валютный контроль» // Эксперт 19.10.98 [Economic analysis. Currency Control // Expert, 19.10.98].65 М. Сидоров «О контрабанде капитала и её масштабах» // Деловой экспресс16.02.99 [M. Sidorov. On the contraband of capital and its scales // Business express. 16.02.99].66 «Экономический анализ. Валютный контроль» // Эксперт 19.10.98 [Economic analysis. Currency Control // Expert, 19.10.98].67 Expert # 5.68 Б. Сафронов, «Борьба с утечкой капиталов приведет к росту цен» // Сегодня 24.03.99 [B. Safronov, Struggle with capital flight will bring about rising of prices" // Today, 24.03.9969 Expert # 1.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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structure, and offshore companies are usually included in the network. “Such networks may include banks, insurance companies and non-resident companies, for example offshore companies, physical persons (middlemen), firms-for-one-day (firms that are bought and exist to carry out only one operation)”.70 There are sectors, for example, oil and oil products export, where offshore firms assure 70-75% of currency turnover. “According to mass media, all exported oil is bought by 12-15 offshore firms which are registered on islands and other offshore zones”.71

In Russia it is common use of offshore firms to make pretended transactions using overcharged (undercharged) prices. This is done to profit from the advantages of favourable tax treatment in the offshore, where a large share of the profits remains. “If there are two regions with different tax regimes, then two tax payers can agree upon the terms of a contract in such a way that in the region with high taxes – the profit will be low, and in the region with low taxes – the profit will be high. Then they agree on order to divide the “extra” profit. So, the prices are set up not by the market, but by the common interests of partners”.72

On this aspect the opinion of the expert from FTPS is interesting: “Fund transfer though offshore companies is almost legal – it is not a tax offence, everything is done as provided by the Law. Economic agent has the right to make the agreement in such a way that the largest part of profit belongs to offshore firm, which does not pay taxes. Though it is still not a crime, it can be declared a socially undesirable deed, as the offshore company is not a subject of economic activity. In the case of dealing through offshore firm, the real deal is made without the participation of the offshore firm, which serves just to minimise taxes”.73

A particular situation arises when the offshore firms receives funds of criminal origin. It is interesting that though offshore zones’ authorities sometimes suspect the criminal origin of capital transferred, they are usually interested in keeping the capital inflow from Russia. Local lawyers run offshore companies owned by Russians, so this business represents a very important source of revenues for the local economy.74 In other words, the offshore zones’ authorities stimulate the legalisation of transferred funds, because the assets invested in Germany or Italy through offshore companies turn out to be completely legalised and “cleaned”. By the way, the leading role of lawyers from offshore zones in the management of Russian funds can partially explain the difficulties faced by Russian exchange control institutions in trying to identify pretended transactions. “The thing is that registration and all operations of offshore companies are carried out by foreign lawyers who will never discover their clients. Otherwise they will lose their business. As a bank lawyer specialised on the legislation on exchange control said, he had never heard that Russian law-enforcement institutions caught at least one offshore company”.75

70 Expert # 5.71 Ю. Гецко, «Оффшорные фирмы и уплывшие деньги» // Независимая газета 26.09.98 98 [Yu. Geschko, Offshore companies and flowed money // Independent Newspaper, 26.09.98].72 «Огонь по воробьям» // Сегодня 01.04.99. [Fire on sparrows // Today, 01.04.99]. In this connection it is appropriate to cite an instance of «Vostoktransflot» («Easttransfleet"») (Vladivostok), the largest (in the past ) navigable company in the world. The company's ships were sold to offshore companies, which then resold them on the real price (RTR TV channel, Program «Strictly confidential«, 21.02.99).73 Expert # 4.74 РИА, Выпуск "Новости Российской экономики" 23.02.99 [RIA (Russian Information Agency), Issue "News of Russian economy" 23.02.99].75 А. Никитин, «На чем уплывают доллары?» // Итоги 26.04.99, с. 45-46 © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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It should be noted that difficulties with definition of criminal and extralegal character of fund transfers are connected not only with the mentioned above conflict of interests of Russian and offshore zones’ authorities, but with usage of effective schemes of money laundering in Russia. For example, among 12,403 crimes that were registered in region of Orel (near Moscow) in 1998, there was no one connected with money laundering (article 174 of the Criminal Code).76

Our expert carried out an analysis of all criminal cases, proceeded in all regions of Russia on article 174 of the Criminal Code, and on tax offences connected with fund transfers.77 His analysis shows there is nothing in common between money laundering and fund transfers even according to FTPS’ data. “My analysis on the effectiveness of article 174 shows that it is not connected with foreign-economic activity in Russia. The article itself is written by ignorant people and is directed against small entrepreneurs. I did not notice even one great deal”.78 So, it is very difficult to prove the connection between money laundering and fund transfers even on the basis of the FTPS’ data.

4.4. Crediting foreign firms. Crediting of non-resident firms can be used for transferring funds at least in two ways:

4.4.1. Non-return of the credit. Non-resident firms can refuse to return the credit, received from a Russian bank or from a Russian firm, and this could be a kind of pretended transaction. In the result, the transferred funds remain on the foreign accounts of the Russian firms.

4.4.2. Overcharging the credit interest rate. The credit interest can be overcharged. “When you receive a credit in dollars for a month and the interest rate is 150 per year – this situation can be considered suspicious. On the other hand, we (supervisory institution) act according to the principles of liberty of contract. And again – the Court should prove that this transaction was pretended and the real goal was fund transfer”.79 The total volume of fund transferred using these schemes reaches the level of $10-11bln.80

4.5. Usage of lacunas in currency regulation. The schemes based on non-return of revenues in foreign currency were often used in 1992-1994, when there was no exchange control. “The first instructions of the CBR were published in 1994 and concerned just export operations. The export-import operations are regulated only since 1997. Barter was regulated only in 1996.”81 But even now the largest part of foreign trade is beyond exchange control. “At present exchange control regulates only 70% of export operations and 60% of import operations – this is as for goods, we can not control services at all. The scope of operations beyond exchange control is enormous as nobody from exchange control can call for the necessary documents.”82

There are 15 customs regimes in Russia now, and only two of them are supervised by exchange control. Beyond exchange control remain such spheres as “operations in

[A. Nikitin, What do dollars flight on? // Itogi [Results] 26.04.99, p.45-46].76 С. Заруднев, «Работа не для одной прокуратуры» // "Орловская правда", 10.02.1999, с. 1 [S. Zarudnev, Work not for the only one public prosecutor's office // Orlov's truth, 10.02.1999, p.1].77 The results of this research has not been published yet.78 Expert # 4.79 Expert # 1.80 А. Гришин, «На валютных реках стоят дырявые плотины» // Сегодня 08.04.98 [A. Grishin, Worn through dam on currency rivers // Today. 08.04.98].81 Expert # 4.82 Expert # 3.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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regime of customs storehouse, temporary storing and others; operations with other countries of CIS and Customs Union – so we can conclude that there are legal ways of fund transfers”.83 “The absence of an integrated control system leaves opportunities for fund transfer. An import contract between Russian and Byelorussian84 firms is signed. But the partner from Byelorussia asks to transfer the sum not on his account, but on the account of another firm, for example, a resident of Latvia (to cancel a credit or to clear check). It is impossible to control the import of goods, works and services from Byelorussia to Russia – there is no customs control, you should not feel down any declaration while your goods cross the border. Or suppose that a Byelorussian firm import goods from other countries. Then it is announced that these goods will be transported to Russia and all payments will be made there. Then these goods disappear. Later they either appear in Russia as goods imported from Byelorussia, or do not appear at all – and then they become contraband goods”.85

Such privileges for foreign firms as free conversion and movement of capital are used to transfer funds too. “The Law now is organised in such a way that non-residents are like “sacred cow”. With currency they can do whatever they want – their activities are unlimited. This situation with non-resident firms is often used in different schemes. The most popular scheme now is the following: a Russian bank gives non-resident a credit in roubles, non-resident immediately exchanges it for dollars and returns the credit in dollars. The bank asks non-resident to put the returned amount not on an account in Russia, but on its foreign account. Clear and nice scheme.”86

4.6. Funds transferred in cash. In Russia there is a strong demand for foreign currency as a mean for savings and as a mean for transactions, above all for US dollars in cash. In 1996-1997 about $ 37bln. in cash were bought by Russians. After the crisis in August 1998 this volume reduced, although during the last year the volume of cash bought by Russians was $ 16bln.87 The most part of the cash dollars circulated in Russia is used for fund transfers. As an analysis of Russian cash currency market shows, “80% of total volume of exchange which is bought on the market, is represented by the deals exceeding $ 2000. I do not think that an ordinary person, who receives an average salary has enough money to buy currency. It is clear that this portion of currency in cash serves shuttle trade and shadow economy”.88

“Question: How much is it possible to transfer funds in cash? – As much as you want. You organise an army of shuttle traders, even it would be better if you organise non-residents – Ukrainians, Moldavians – as according to our Law they can not be punished for these transactions. You recruit 25 people and give each of them $ 150,000 and certificates that these amounts were withdrawn from accounts – and they transfer these amounts”.89 In 1998 $ 10-11bln. were transferred in this legal way (with

83 Е. Халевинская, «Валютный контроль и валютное регулирование» // Финансовая газета. Региональный выпуск № 40 7.10.97 [E. Khalevinskaya, Currency control and currency regulation // Financial newspaper. Regional issue N40, 7.10.97].84 Byelorussia is also a member of Customs Union, as Russia.85 Expert # 5.86 Expert # 3.87 А. Ивантер, «Насыпная дамба» // Эксперт 26.04.99 [A. Evanter, Bulk dam // Expert 26.04.99].88 Expert # 3.89 Expert # 1.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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certificates from banks) from Russia.90 Foreigners spend in Russia twice as little. So, only one from five cash dollars remains in Russia.91

Another form of fund transfers is the withdrawal of currency in foreign countries through credit cards issued by Russian banks. Early it was possible to put on account roubles and then take currency. The withdrawal through credit cards is “limited because people who transfer their funds abroad understand that we can check them at any time. The volume in this sphere is not large, twelve millions dollars per month”.92

4.7. Financial instruments. We refer to: bonds including the Russian government’s bonds (GKO/OFZ), bills, American Deposit Receipts (ADR), spot contracts. To use these instruments, you should have special knowledge and experience, but at the same time their use allows not only transferring funds, but also optimising taxes, avoiding regulations issued by the CBR and so on. “All transactions, connected with these instruments demand for professionalism. The question is that using these products, banks can not only transfer funds, but affect economic standards93 and open currency position. Here is buzz – the bank betrayed not only exchange control institutions, but everybody”,94 including the CBR and the FSTP.

Let us analyse several methods of using financial instruments. Since 1996, when non-residents started operating with GKO/OFZ, the financial instruments have been used very often to transfer profit made on the Russian financial market.

Before August 1998 crisis problems with transfers of the profits could be solved by making spot contracts:95

At the time Т0 a non-resident sold currency on Russian financial market and bought GKO. Simultaneously the non-resident made a forward contract with a Russian resident bank, date of exchange was Т1, when the non-resident received roubles after payment or selling GKO. After the crisis of August 1998, when spot contracts

90 С. Бабаева, «Правительство ограничивает вывоз валюты» // Известия 30.03.99 [S. Babaeva, Government limits currency transfer // Izvestia 30.03.99].91 В. Орешкин, Начальник отдела Управления платежного баланса Банка России, «Баланс на краю пропасти» // Коммерсантъ-Деньги 01.07.98 [V. Oreshkin, Chief of the department of the CBR [Central Bank] Administration of Balance of Payments, Balance on the verge of disaster // Merchant & Money. 01.07.98].92 Expert # 1.93 The CBR sets up standards for commercial banks: the minimal required liquidity level, the level of reserves and so on.94 Expert # 3.95 А. Каштуров, «Импорт институтов в переходной экономике России (на примере института срочных валютных контрактов)», диссертация магистра, Москва: ГУ-ВШЭ, 1999 [A. Kashturov, Import of institutes in the transition economy of Russia (case of spot contracts institute), thesis of master, Moscow: State University - The Higher School of Economics, 1999].© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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disappeared from the market, “dead” GKO were used to transfer funds by other means. Funds invested in GKO by non-residents are considered as investments and can be exchanged and transferred. On the contrary, the resources that non-resident receives from operations on financial market, are concentrated on special account (type “C”) and can not be exchanged. In this situation “a non-resident sells GKO in preliminary accordance to a Russian bank on market prices (operation #1), and then buys these GKO for the price that is twice as much than the first one (operation #2). Bonds are bought for roubles that are on the “non-convertible” accounts of the non-resident, i.e. the non-resident transfers its resources from “C” to “I” account (investment account, consequently the funds become exchangeable and transferable). The profit from these operations with GKO goes to the bank’s account. The bank sends this profit (with the exception of taxes) as if it is a credit or other pretended transaction on corespondent account of the non-resident, and then converts it into hard currency (operation #3). After that currency is transferred on the foreign account of the non-resident”.96

The weakness of Russian equity market allows to transfer funds making use of the difference of the quotations. Suppose, “a non-resident has Russian equities of the issuer, who takes part in ADR program. The non-resident passes the Russian equities to the registration institution here in Russia and gets their equivalent in ADR abroad. Then he sells these ADR in New York or in Chicago and receives currency. A lot of Russian equities are not rated now. For example, there are more that 600 equities that are listed in Russian Trade System (RTS); 30-50 – can be bought or sold on the market and only 5-10 equities are demanded. Most part of equities does not even have indicative quotations, so it is impossible to say whether the equities have been sold at market price or not. Let us imagine that an equity is rated from 1 to 100. The non-resident buys these equities at the lowest quotation (1), and then sells them back to the same firm at the highest quotation (100). Roubles appear on the account (type “I”) of the non-resident; the non-resident is an offshore firm which has no problem with exchange and can easily transfer currency”.97

4.8. Other channels of fund transfers. There are a lot of variants of fund transfers: from export of antiques and works of art to tolling. As for export of antiques and works of art, their popularity and growth of their prices stimulates their extralegal and illegal transfers.98

Insurance companies facing the underdeveloped Russian market for reinsurance, over-trust the most part of their insurance reserves to non-residents. “Nowadays many insurance companies, not knowing whether to invest their money, reinsure abroad, and it is in fact a way to transfer funds”.99

In aluminium industry tolling schemes are widely used – when row materials belong to a non-resident and is returned to him with the exception of a part of finished product, which is a kind of payment. This scheme helps not only to transfer funds, but to minimise taxes. One of the largest aluminium plants, Krasnoyarsk Aluminium

96 В. Арсеньев, «Утечка из-под носа у главы ЦБ» // Коммерсантъ-Деньги, 28.04.99 [V. Arsen'ev, Flight from under very nose of the head of the CBR (Central Bank) // Merchant & Money, 28.04.99].97 Expert # 5.98 РИА, Выпуск "Горячая линия" 1.02.99 99 [RIA (Russian Information Agency), Issue "Hotline" 1.02.99].99 «Кризис в помощь» // Интерфакс-АиФ 04.03.99 [Crisis in help // Interfax (Information Agency) - A & F (Arguments & Facts ) 04.03.99].© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Plant, KrAZ, thanks to tolling has reduced its tax payments on 1/3 in comparison with other factories.100

5. Methods of regulation of fund transfers.

We have analysed the main channels of fund transfer. Now we can examine whether they have a legal, extralegal or criminal character. There is no general answer to this question, as the Law regulating fund transfers is always changing. For example, in 1991-1992, there was no Law concerning fund transfers and, hence, fund transfer of any kind was legal.

Here is an abstract from an interview with entrepreneur actively worked at that time, and later left Russia: “Correspondent: Did you come across fund transfers working in Russia? A. Konanykhin: Yes. But it was not extralegal fund transfers. When I worked in banking system, there was no regulations concerning this question. They were issued in 1992”.101 As far as exchange regulating Laws are being developed, the new schemes of fund transfers are invented, and these schemes do not violate the present Law. In general, the relations between those who are engaged in fund transfers and those who regulate resemble such a game as hide-and-seek. To win in this game you should either find a new place to hide, or predict what new place will be the next. “When it is obvious that the scheme is effective, other banks and companies begin to use it”.102 There is even a kind of market for fund transfer schemes, not “known” to regulating institutions. “Question: How can we estimate the price of a new “not exposed” scheme? – In general, we can not check the whole scheme; we can control only some elements of it. For example, we know that non-resident firms are involved in money laundering schemes. The price of the scheme depends upon who uses it and upon how much money will be laundered. If a client can transfer all his/her money, using this scheme, he/she is ready to pay a certain rate of the amount transferred”.103

The rating list of “popularity” of mentioned above schemes according to our experts is as follows (the numbers corresponds to the titles of paragraphs in part 4, for example, 4.2 means “pretended transactions”):

Period of time or type of transactions 1st expert 2nd expert 3rd expert 4th expert

1998 (after 17.08) – 1999 4.2, 4.4 4.6, 4.2, 4.5 4.5, 4.3 4.3, 4.2, 4.6

1997-1998 (before 17.08.) 4.6, 4.2 4.6, 4.2 4.2 4.6

1995-1996 4.5 4.5 4.5 4.5

Transfer of small amounts 4.6 4.6 4.2 N.A.

Middle: from $100ths. to $ 1mln. 4.6 4.2 N.A. N.A.

Transfer of large amounts 4.2 4.2 N.A. N.A.

Furthermore, the question of legitimacy of the various methods of fund transfers can not be clearly answered because of contradictions between different laws. “The

100 В. Чистяков, «Сальдо, бульдо и Рикардо, или Как можно обобрать до нитки предприятие» // Российская газета 06.07.99 [V. Chistyakov, Balance, Bulance and Richardo, or A way to fleece an enterprise" // Russia newspaper, 06.07.99].101 С. Кочетов, «Наверху. Прощение блудных капиталов» // Деньги № 38 12.10.97 [S. Kochetov, Upstairs. Pardon of prodigal capital // Money, N38, 12.10.97].102 Expert # 1.103 Expert # 1.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Russian currency legislation very often contradicts the Civil Code. According to the Civil Code, you are free to chose your partner and the type of the contract – here it contradicts some points of our Russian currency legislation”.104 Paradoxically, but because of these contradictions the activities of regulating institutions are often beyond the Law. “As it is very difficult “to find and punish”, we use any reasons – if a bank does not have at least one document, then its commercial activities are stopped for a month. That is all what we can do. They use criminal methods – we also use almost…”105

To summarise our analysis, we can speak about three ways of transferring funds. First – legal transfers. For example, when you use credit cards or when Russian banks place their funds on foreign correspondent accounts. Second – criminal transfers when existing Laws are being broken. For example, since July 1999 when a corresponding regulation was adopted the transfer of more than $10,000 in cash has been forbidden. So, the transfer of large amounts in cash has became criminal. The last main channels of fund transfers – so-called extralegal transfers, when you violate the Law in parvo. “As for extralegal fund transfers, it is difficult to say what is an offence in any particular case – many terms can be interpreted in different ways. When entrepreneur explains his/her deed, he/she can give enough arguments to prove that he/she is right. We, as a controlling institution, can interpret the same deed the way we need it, with our arguments. All this extralegal or “grey” channels will violate some of our regulations, that are not important and do not influence the essence of the contract”.106

To conclude, we will try to make a table of regulations concerning the channels of fund transfers. The analysis of the regulating framework allows us to define their nature: legal, extralegal and criminal:

Channel of fund transfers

Corresponding regulations

Pretended transactions

1. Prepay on import contracts without guarantees of full payment of taxes that bank of importer gives to the State, is prohibited. In fact, importers should work only on terms of goods credits.107

2. Exporters and importers fill in “passport agreement” where they right down the number of contracts, the name of contract, price and quantity of goods, the place of delivery. This passport should be showed in bank and at customs. When the CBR and customs receive the document and permit the transfer, they start controlling, when the money will come back.108

3. Banks are prohibited to buy currency on behalf of the clients to pay for import of works, services and the results of intellectual activities.109

4. All custom officers have a list of average prices that should be considered in calculating the custom price of goods.110

104 Expert # 2.105 Expert # 1.106 Expert # 2.107 Эксперт 14.09.98 [Expert, 14.09.98].108 М. Сидоров, «О контрабанде капитала и ее масштабах» // Деловой экспресс 16.02.99 [M.Sidorov. On the contraband of capital and its scales // Business express. 16.02.99].109 А. Ивантер, «Насыпная дамба» // Эксперт 26.04.99 [A. Evanter, Bulk dam // Expert 26.04.99].110 А. Никитин, «На чем уплывают доллары?» // Итоги 26.04.99. © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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5. The period of repatriation of currency earnings has reduced from 6 to 3 months.111

6. Authorised banks must control whether their clients’ operations with currency do correspond to the Law. The banks must provide the CBR with this kind of information.112

Offshore firms The CBR regulates the correspondent relations of Russian banks with foreign that were registered in offshore zones.113

Crediting foreign firms

See §5,6 in section “Pretended transactions”

Lacunas in regulation

Gradual spreading of exchange control on all (90%) operations with currency.

Cash operations

Transfer of cash is limited by $10,000 – with certificates, if the amount transferred exceeds $10,000 – only with special permission of the CBR

Derivatives Prohibition to transfer funds from accounts of investment type (“I”) on the accounts of type “C” (exchange, deposit, transit).114

Other channels Insurance companies can over-trust to foreign companies not more than 5% of total funds of life insurance and 30% of total funds of other types of insurance.115

[A. Nikitin, What do dollars flight on? // Itogi [Results] 26.04.99].But custom officers react only on import prices that were undercharged – in this case custom payments will be lower. But when the price is overcharged, they pay no attention to this fact.111 А. Ивантер, «Насыпная дамба» // Эксперт 26.04.99 [A. Evanter, Bulk dam // Expert 26.04.99].112 Указание ЦБ РФ №500-У от 12.02.99 [Instruction of CBR RF №500-U, 12.02.99].113 Коммерсантъ 23.06.99 [Merchant, 23.06.99]114 В. Арсеньев, «Утечка из-под носа у главы ЦБ» // Коммерсантъ-Деньги 28.04.99 [V. Arsen'ev, Flight from under very nose of the head of the CBR (Central Bank) // Merchant & Money, 28.04.99].115 «Олигополия на старте» // Эксперт 08.03.99 [Oligopoly on start // Expert 08.03.99].© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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II. Legal, extralegal and criminal operators of the fund transfers.

6. The criteria of differentiation of legal, extralegal and criminal operators of fund transfers.

The analysis shows that it is necessary to find the answer to the question of defining the nature of assets that are transferred. We have mentioned at least three criteria which will help us to answer the question. First – the origins of the transferred funds: whether there is connection between these funds and criminal money. In other words, can we speak about money laundering? Second, the goal of fund transfers helps to divide the different flows of capital. For example, funds transferred to develop business are usually legal; to minimize taxes – extralegal, because in this case some norms of the Tax Code are not respected. Third – the channels used to transfer funds leave a mark on the nature of these funds. If funds are transferred in accordance with the Law, then the funds are legal. It is not difficult to notice that funds transferred are legal only when all three criteria are fulfilled: their legal origin is proved, they are transferred to achieve goals not prohibited by the Law and their transfer was carried out within limits of the Law. In other words, to answer the question about the character of fund transfer we should use the following three-dimensional matrix (see the picture):

It is clear that the information which is needed for characteristic is very difficult to collect. As usual, funds transferred have a complex structure. For example, fund transfer can be carried out legally but the goals of this transfer can be extralegal (to minimize taxes). What should be done when usage of all three criteria provides us with contradictory results? In such situations, and they represent the usual case of fund transfers, particular attention should be paid to the subject of transaction, the forth criterion. The subject of transfer whom we would later call operator, but not the object, should be characterized from legal, extralegal and criminal point of view. This change of accent in analysis helps:

To get a complex characteristic of transfer operation, as the operator’s decision about what funds should be transferred, what is the goal and by what channels transfer will be made;

To estimate the influence of fund transfers on the economy of the country where they are transferred. In the long run, this influence can be determined by what kind of decisions will be taken by their owners after the transfer.

The main hypothesis (H1) is that operator carries out economic activity in the country to which he/she transfers funds, using norms and behavioral patterns to which he/she was accustomed. It means that he/she reproduces in new institutional

© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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The origins of the funds

The channels used for the transfer

The goals of the transfer

environment the norms, which were formed by his/her previous economic practice. Materials of the Ministry of the Interior show that dirty money brings to the business practice customs and habits of criminal world.116 From the theoretical point of view, the reproduction of habitual stereotypes of behavior in new conditions can be explained by the transformation of some parts of everyday economic activity in routines which change not so quickly as the environment do.117 Here we would like to quote one of the founders of the institutional theory, T. Veblen: institutions, including behavioral patterns, are “the way of thinking, a characteristic of which is to overcome its existence during unlimited period of time”.118

7. Definition of legal, extralegal and criminal operators.

Let us try to define several types of operators basing on the particularities of their behavioural patterns. This typology will reflect our hypothesis (H2), according to which the analysis of behavioral patterns and norms at the level of everyday life helps us to single out three types of operators: legal, extralegal and criminal. Analytically speaking, we follow Alfred Schutz in his orientation to the study of human behavior on the market rather than to the study of “behavior of prices”.119 First, A. Schutz says that in everyday life people themselves realize typological procedures. And these procedures help them to recognize intentions of other people and inform these people about their own intentions. “The more behavioral model standardized and institutionalized, the more chances to achieve his/her goal has the person who uses this model”.120 The everyday efforts to construct the types are based on common sense. Second, the common sense is used to organize professional activities. As it was shown in the analysis of American jurors’ behavior, carried out by Harold Garfinkel, returning a verdict, they take into account not only the Law but also and mainly their understanding of justice which has been formed by their everyday life.121 It is reasonable to suppose that the economic decisions of operators in the same way reflect their everyday life’s organization. So we suggest the following definitions of these three types of operators:

Legal operator not just obeys the Law, he/she is even oriented to use it as a resource for his/her everyday economic activities. “Normal business should strictly correspond to the Law, then the business is normal. A person can dodge, deceive, but he/she can not live always deceiving, it is impossible, a person is organized in other way. That is why a person always feels in some limits”.122 From this point of view, to be legal operator is not enough to obey the Law – you should always apply to it, organizing your everyday economic activities.123

116 Интерфакс, 4 .06.99 [Interfax (Information Agency), 4 .06.99].117 To get more information about the transformation of everyday economic activities in routines, see А. Олейник, «Социальная политика: пути достижения эффективности» // ПОЛИС – Политические исследования, №5 (47), 1998. [A. Oleinik, Social policy: ways of achievement of efficiency // POLITY - Political studies, №5 (47), 1998].118 Т. Веблен, «Теория праздного класса», Москва: Прогресс, 1984, с.202. [T. Veblen, Theory of the Leisure Class, Moscow: Progress Publ, 1984, p.202].119 A. Schutz, “Le chercheur et le quotidien. Phenomenologie des sciences sociales”, Paris: Meridiens Klincksieck, 1987, p.42-43.120 Ibid., p.33121 H. Garfinkel, “Studies in Ethnomethodology”, Englewood Cliffs: Prentice Hall, 1976, p.114.122 Interviewed # 3.123 As one of our interviewed entrepreneurs said, “We are completely legal. We don’t violate the Law” (#7).© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Extralegal operator does not have to brake the Law, - he/she just does not use it in his/her everyday activities, avoids it as if it is something useless. He/she is not going to use it in his/her everyday activities, although he/she is not going to break it. “You should follow all the restrictions but if there is a gap somewhere you should use it”.124 As he/she thinks, the Law is like “a dreaming nanny, - children can do anything, but they should not make noise in order not to weak her up. We do the same”.125

Criminal operator, on the contrary, is oriented on breaking the Law as for him it is a barrier to goal achievement, first of all economic. “If you started when a traffic light was red – then you broke the Law. But if you have $50 and you know that, then the Law means nothing to you”.126

8. Analysis of operators’ actions in critical situations.

What situations of everyday life of an individual are more informative for defining the type of operator? According to our third hypothesis (H3), analyzing the behavior of an individual in the critical situation, i.e. when alternative norms and patterns can be used, we can determine his/her belonging to one of the three types. While defining the critical situations, we will refer to the idea of French conventionalists (L. Thevenot, L. Boltanski, A. Orlean, O. Favereau, R. Boyer) about the plurality of rules of the game. In complex societies the individual acts following the different rules of the game: market (business activity), traditional (family), industrial (the process of production), civic (political and social activity), ecological and others.127 In these societies with differentiated spheres of everyday activity the individual changes each day many registers, he/she plays many games: at home, at work, with friends and relatives, in public places and so on.

Not all the societies are complex in this sense. In particular, one of the conditions for the differentiation of spheres is an active role played by the State. Michel Walzer speaks about the art of separation of the spheres. The State should become “an agent and protector of separation.”128 For example, the State limits the expansion of market rules of the game over other spheres and prevents transforming political sphere into a kind of political market. If there is no civil society and the State is not able to guarantee the separation of spheres, the clear frontiers between spheres of everyday activity, between different rules of the game do not exist. Consequently, we could consider the phenomenon of extralegal activity as the result of such non separation, non differentiation.

Now we are going to reformulate three our ideal types of entrepreneur in such a way to make use of the criterion of separation/non separation of spheres. From this point of view, the legal entrepreneur is able to manage the complex situations in which many rules of the game are involved. Doing this, he/she relies upon legal framework. As an example of the role that the legal background plays in managing the complex situations we refer to a situation of testimony of suspect’s relatives during the criminal investigations. Till 1993 the Penal Code of the Russian Federation required the testimony of suspect’s relatives even if this testimony might be used against 124 Interviewed # 19.125 Interviewed # 18.126 Interviewed # 23.127 The basic elements of the French theory of conventions are given in special issue of Revue Economique, No.2, 1989 and in the book L. Boltanski, L. Thevenot “De la justification. Les economies de la grandeur”, Paris: Gallimard, 1991.128 M. Walzer, “La justice dans les institutions” // Esprit, Vol. 180, No.3-4, 1992, p.120.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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his/her interest (Art.189, 190). In the Penal Code of 1996 the relatives are liberated from responsibility for refusing to testify (Art. 316).129 So, a compromise was found between the requirements of traditional rules of the game and civic rules of the game.

Next, the extralegal entrepreneur acts on the basis of a mixture of rules of the game, he/she is not able to differentiate the spheres corresponding to each particular set of rules of the game. Finally, the criminal entrepreneur escapes from the problem of differentiation by simply expanding one set of rules of the game over all spheres of activity. We guess that in the case of Russian criminality the expanding set of the rules is the traditional one. The central piece of traditional relationship is the vertical subordination and close control of older members of the family over the younger ones. This tendency towards close subordination and full control over the business which characterizes the organized crime could be illustrated by many testimonies in our interviews. “They (the organized crime) provide you with the money and in the same time they create obstacles for paying it back in time. After this, they set up a “counter”130 and they start manipulating as they want”.131 This thesis is far from being surprising. As the Pino Arlacchi’s study of the Italian Mafia showed, the traditional component plays a very important role in the functioning of the Mafia-type organizations. “The family always stays the base for the activities of the Mafia”.132

It is worth seeing the correspondence existing between three types of entrepreneur and three types of behavior in critical situations as they are defined by French conventionalists. In critical situations the operators face the challenge represented by a plurality of norms and behavioral patterns: “what is important taking into consideration one norm becomes worthless taking into consideration another norm”.133 The conventionalists speak about the compromise, the agreeing on the relativity of all rules and the expansion:134

Type of operator Legal Extralegal Criminal

Type of behavior in critical situations

Searching for compromise.

Accepting the relativity of all rules of the game.

Expanding a set of rules of the game over all spheres.

So, we should search for topics which correspond to critical situations in order to see how the respondent will manage these situations. On the basis of the data in our disposal135, we could propose the following topics:

1) Making contract.

129 Уголовный Кодекс Российской Федерации, Москва: Иван, 1993, с.123-123, Уголовный Кодекс Российской Федерации, Москва: Инфра М-Норма, 1996, 164. [Criminal code of Russian Federation, Moscow: Ivan, 1993, p.123-123, Criminal code of Russian Federation, Moscow: Infra М-Norma, 1996, 164]. The mentioned cleavage is important to understand an event in the Soviet history which is attracting public interest (see Время МН, №74(221), 29.04.99, с.3 [Time MN, №74 (221), 29.04.99, p.3]). In 1932 a 14-year old boy, Pavlik Morozov, witnessed against his father who refused to pay alimentary taxes for Soviets. The child was killed after the process by his relatives. 130 I.e. they fix the “dead line” for paying the money back. Each day of delay means a high penality.131 Interviewed # 29.132 P. Arlacchi, “Mafia et compagnies. L’ethique mafiosa et l’esprit du capitalisme”, Grenoble: Presses Universitaires de Grenoble, 1986 p.173133 L. Thevenot, “Equilibre et rationalite dans un univers complexe” // Revue Economique, Vol. 40, No.2, Mars 1989, p.176134 L. Boltanski, L. Thevenot, Op. cit., p.337-338, 412.135 In the following analysis we will make use of the results of the series of interviews with entrepreneurs and the results of the entrepreneurial survey.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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2) Involving the relatives into the business.

3) Making business abroad (for example, in Italy).

8.1. Making contract. There are many ways to make a contract. As far as the form of the contract is concerned, the Civil Code of the Russian Federation admits three types of contracts: contacts made in oral form, contracts made in a simple written form and contracts certified by the notary.136 Although the economic agents are free while choosing the forms for their contracts, the Law sets up some requirements concerning this procedure. For example, all contracts which exceed the amount of 10 minimal guaranteed salaries (~$34) should be made in written form. Special types of contracts defined by the Law must be made in written form. When economic agents do not rely upon the Law in making contract, the legal norms and guarantees have to be substituted for informal ones. The reputation of the partner based on personified relationships plays such role. “Our business is based on work with people, with individuals. I think it is the right approach. When we give people money we do it not just because of formal reasons. We do it only with those people whom we know well, who would never deceive us and would never let us down. With such attitude we can work”.137 So, the economic agents have always a choice whether to use the norms of the Civil Code, or to avoid them by using the personified relationships, or to violate them. The same is true for each stage of contract making:

Stage of contract making

Legal Extralegal Criminal

Searching for the information (informational channels).

Public channels (used in the marketing studies) are preferable.

Private channels (the networks) are preferable.

Channels are chosen depending on the situation.

Choosing the contractual form.

The written and certified contract is necessary.

The contract might be made in the oral form.

The form of the contract does not matter.

Fulfilling of the contract.

Revising the terms of the contracts, as the probability of unknown ex ante events becomes calculable.

Trial-and-error process.

The fulfilling of the contract depends only on the situation.

Sanctioning the breaking the terms of the contract.

Legal sanctions defined in the contract and in the Civil Code.

The threat for the personal reputation.

Physical violence.

The results of our survey confirm the thesis that three types of entrepreneurs behave differently at each stage of contract making. The results showed the existence of three groups in our sample: the legal entrepreneurs (9 respondents: 5,2%), the criminal entrepreneurs (8 respondents: 4,6%) and a large intermediate group of extralegal entrepreneurs (157 respondents: 90%). The small number of entrepreneurs

136 Ст. 158-165, Гражданский Кодекс, Москва: Инфра М/Норма, 1996, с.101-103 [Art. 158-165, Civil Code, Moscow: Infra М/Norma, 1996, p.101-103].137 Interviewed # 15.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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characterized as legal and criminal is due to the fact that we have tried to construct their “pure” types. On the other hand, the group of extralegal entrepreneurs includes all intermediate cases. In fact, this group consists of a continuum of entrepreneurs characterized by different degrees of legality or criminality. Let us have a look at some results. In the following tables are given the replies on two questions: “Which kind of information do you make use of while preparing the contract?” (Tab. 1) and “How do you verify the degree of reliability of the informational source?” (Tab. 2):138

Table 1 Total Legal operators Criminal operators

Private information 57% 78% 25%

Information received from the business partners

59 78

Marketing studies 35 100

Advertising 25 67 75

Mass-media 22 78 13

Specialized editions 24 89

Table 2 Total Legal operators Criminal operators

I compare the information from different sources

32% 67%

I make use of private channels

53 33 88%

N/A. 14 12

Otherwise stated, the legal entrepreneurs are oriented to the public channels of information (marketing studies and specialized editions like business-to-business directories), they make use of many sources in order to evaluate the reliability of the information, - they look for a compromise between the sources having different nature. «Which source of information do I trust? Reliable. The best source – friends, newsletter, information agency, TV news, when I have made use of it yet and this source has proved its reliability. It is possible to trust such source of information”.139

On the other hand, the extralegal and criminal entrepreneurs think that the only information they can trust is those received by the private channels: from the relatives, friends, business partners. These channels have traditional nature (we use here a French conventionalists’ term). “The private contacts is the only reliable source of information. The people who know me would not deceive me”.140 Here is the description of the way of preparing the contract given by a professional swindler: «Sometimes I could get information from secretary. Another variant is that you have direct conversation with director and you win his favor. When I come to a firm, I

138 The sum in the columns sometimes exceed 100% because the respondents might have chosen two and more variants of reply.139 Interviewed # 14.140 Interviewed # 7.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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never begin with the business; first at all I should find out what a person is the director”.141

We turn now to the question of choosing the contractual terms. In table 3 are summarized the replies on the question “In which form do you usually make contracts?”:

Table 3 Total Legal operators Criminal operators

In written, certified by the notary form

27% 11%

In simple written form

57 89

In oral form 8

It depends (как получится)

26 100%

Consequently, the survey has proved the clear preference of legal operators for making contracts in written (simple and certified by the notary) form. «Everything should be documented. This concerns any question by all means.”142 Alternatively, the extralegal entrepreneurs prefer to make the contracts in the oral form, usual for the personified relationships. They do not see any reason for using the legal norms for making contracts. “Nowadays the registration of such documents can have unpleasant consequences… Why should we make our life more complicated, if I can get money just for receipt? Of course, guys sometimes make inquires about their money. When they need it – we give it back”.143 The criminals act depending upon the situation. It could probably be explained by a common for criminals practice of dividing all partners into two categories: “their own people” and all other people. For the contracts with “their own people” the criminals make oral agreements. For the contracts with all other people they can make use of written contracts. «To calm an individual we could go to the notary”.144

Many interesting aspects appear when we look at the fulfillment of the contract. Firstly, the business plan is understood as a necessary condition for making business mostly by legal entrepreneurs. “Yes, the business plan is always important. Surely, it should not be considered as the most important thing, but it does always matter”.145

The opposite is true concerning the criminals: they never prepare the business plans (Tab. 4, question “When do you make use of business plans?”).

Table 4 Total Legal operators Criminal operators

Always 14% 44%

When the partner suggests it

30 11

141 Interviewed # 31.142 Interviewed # 19.143 Interviewed # 17.144 Interviewed # 29. 145 Interviewed # 19.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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When the bank suggests it

33 44

Never 13 88%

I do not know 6 12

N/A. 4

It is worth paying attention to the behavior of entrepreneurs in unexpected situations which were not fixed by contractual terms (force majeure). By definition, the force majeure cases correspond to our definition of critical situations: there are no ex ante concerted actions, no ex ante established rules of the game. As the replies on the question “How do you behave in the force majeure cases?” show (Tab. 5), the legal entrepreneurs try to foresee all possible situations, and the business plans allow them to do this. Otherwise stated, they search for a compromise between the legal requirement (to fulfill the contractual terms) and the uncertainty of the institutional environment in Russia.146 “Do you change something in your business when a force majeure situation arrives? - Nothing. We can not change anything – if our employee left work, he/she would be replaced, if we do not get the money, we will get it in other places, if we can not do it this way – we can do it another way. There is such a word “needed”, if you die, the responsibility will be retreated from you, but not from the bank.”.147 It should be emphasized that the August 1998 crisis was not considered as a force majeure situation by legal entrepreneurs contrary to the common point of view on this question. “Crisis has not been a force majeure situation. It must have been foreseen.”148 On the other hand, the criminals are ready to broke the contract and to remake it taking into consideration a new reality. An intermediate case is represented by extralegal entrepreneurs who try to “arrange everything”.

Table 5 Total Legal operators Criminal operators

It is always possible to arrange

32 33% 12%

We remake contract 44 22% 88

We try to foresee all possible situations

25 44%

Finally, the significant results could be obtained while analyzing the entrepreneur’s reaction to the not fulfilling of contractual terms. We have asked for this purpose two questions. The first was about the most serious threat for those who do not fulfill the terms of the contract (Tab. 6). It is not surprising that the legal entrepreneurs firstly consider the treat of court examination even if they do not believe in its efficiency. “Usually it lasts for a long time, and can compensate only about 30% of all costs.”149

“Businessmen go to the Court. They seat there for a year waiting for a decision. They get the decision and go the debtor. They call for their money. Then they wait. And do not get anything”.150 For the criminal entrepreneurs, the intervention of the Mafia-type structures represents the only real sanction for breaking the contractual terms.

146 In the French conventionalists’ terms, they search for a compromise between civic and market rules of the game.147 Interviewed # 21.148 Interviewed # 15.149 Interviewed # 3.150 Interviewed # 9.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Table 6 Total Legal operators Criminal operators

Treat of using the connections in the State’s bureaucracy

16% 12

Treat of intervention of the Mafia-type organizations

41 88%

Treat of court examination

30 100%

Treat to personal reputation

31 75

In the second question we have asked about the behavior in a situation when the partner do not pays back a debt (Tab. 7). The criminals do not hesitate to use the violence (with the help of the Mafia-type organizations). “How we solve our problems: if a person does not want to return money, we have to clear the situation – you know what methods are usually used? Any methods. If there is a choice – my life or his life, I shall chose the first variant”.151 It is worth mentioning that in Russia the State’s monopoly on the violence is often used for the private ends. Although our respondents have mentioned a decline in the using of violence in business, in the same time they have spoken about new forms of the violence connected with the State. “Everything can be done in different way – the person that you do not like just will not be a member of business community. The next day his organization will not exist; tax inspection or sanity inspection may quite by chance visit it, they are the guys who connect up “a pump” and pump money. It is an endless story”.152 45% of our respondents think that the “connections with the State’s bureaucracy” characterize the criminal way of making business.153

Table 7 Total Legal operators Criminal operators

I’ll call the police 6%

I’ll start the arbitrage examination

36 33%

I’ll start the court examination

9 44

I’ll call the Mafia-type organization

31 100%

I’ll make use of my connections in the

16

151 Interviewed # 23.152 Interviewed # 12. 153 2nd position of 13, on the 1st position stays “the utilization of the Mafia-type organizations to settle the business conflicts” mentioned by 92% of the respondents.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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police

Other 6 22

8.2. Involving the relatives into the business. The second critical situation consists in involving the relatives into the business. This situation implies a cleavage between the traditional rules of the game based on a superiority of the oldest person and the industrial rules of game based on professional competence and qualification. In the traditional world the person is qualified depending on his/her place in the family. Oppositely, in the industrial world, the person is qualified in function of his/her efficiency, professional competency.154 Consequently, the entrepreneurs put in such critical situation have to manage the uncertainty of rules of the game. If our hypothesis are true, the legal entrepreneurs would be able to find a compromise, the criminal would act following the traditional rule of the game (the priority of domestic rules over industrial and market ones) and the extralegal would switch from one register (traditional) to another (industrial).

Table 8 Total Legal operators Criminal operators

Yes, partners 25% 11% 75%

Yes, rank-and-file 20

I try to do not involve the relatives

37 78 25

I have not such experience

20 44

Most interviewed persons do hesitate to involve the relatives in their business (Tab. 8: “Are there relatives in your business?”). “I do not like introducing professional moments into family relationships. I think the relationships with relatives at work should not be different from the relationships with other employees, but this never happens”.155 “I would not be able to press them [the relatives] like other employees. Consequently, I could not expect so much from them”.156 “How do you imagine a situation when a relative is more older than I am, - how do I work with him/her, especially if he/she is my subordinate?”157 “If you often see a person at home, psychologically you could not perceive him/her as your superior.”158 So, the negative opinion about the involving the relatives in business ought to be explained by the conflict between the traditional (domestic) rules of the game and the market or the industrial rules of the game. Most interviewed persons were not able to find a compromise, probably because there is no legal framework to trace a clear watershed between public and private life in Russia.159 Consequently, these persons should be viewed as extralegal entrepreneurs (especially if they are not able to find a compromise in other critical situations). A rare figure of compromise consists in building up a clan-type organization. “Involving the relatives is advantageous only if

154 L. Boltanski, L. Thevenot, “De la justification. Les economies de la grandeur”, Paris: Gallimard, 1991, p.253-254155 Interviewed # 3.156 Interviewed # 7.157 Interviewed # 9.158 Interviewed # 12.159 V. Shlapentokh, “Public and Private Life of the Soviet People. Changing Values in Post-Stalin Russia”, Oxford: Oxford University Press, 1989.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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members of the Board of directors are going to crate a clan”.160 Or the compromise would consist in involving a relative as future successor in the business. “When you are going to involve relatives, you give them regular work and they will be your successors. It is obvious that they will be in the nearest relations…”161 From the point of view of the criminals, there is no problem at all because the organization should be a simple extension of the family. “With relatives you can relax and trust them. When you work with your relatives – you feel calm… As for me, I prefer working only with relatives and friends. They are our own people. In banking you can not work the other way… ”162

These results are particularly exiting taking into consideration the willingness of our respondents to do the business with friends. If the involving the relatives into the business is considered as a source of problems, the involving the friends into the business – as a desirable condition. “I try to organize my business with my friends who are of high moral. If they can do something, I try to get them to take part in my business”.163 The friends often become the business partners. As the replies on the question “Do your friends often become your business partners?” show (Tab. 9), the criminal entrepreneurs are more oriented to making deals with friends than the Russian entrepreneurs in average.

Table 9 Total Legal operators Criminal operators

Yes 66% 67% 88%

No 30 22

N/A. 4 11 12

Probably, the willingness to involve the friends into the business could be explained by the fact that the entrepreneurs are more free to change their friends than their relatives in function of their business interests. “My circle of acquaintances changed every time when I changed my business. At the beginning of perestroika I was involved in distillery production. I had some friends. Now I changed my business – so my circle of acquaintances changed”.164 So, in the case of friends the cleavage between the traditional and the industrial or the market rules of the game is less explicit. “Now I have friends only because of my business. I communicate with my old friends because we have common business, and I make new friends doing my business. So, my communication is directly related with my business”.165 Otherwise stated, the situation with friends is less “critical” and it does not allow us to trace a clear watershed between legal and criminal operators (see also Tab. 10: “Do your partners often become your friends?”)

Table 10 Total Legal operators Criminal operators

Yes 28% 56% 75%

No 68 22 25

N/A. 5 22

160 Interviewed # 21.161 Interviewed # 14.162 Interviewed # 23.163 Interviewed # 15.164 Interviewed # 12.165 Interviewed # 18.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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8.3. Making business in Italy. The making business abroad is potentially a critical situation. The norms, legal or informal, and behavioral patterns accepted in one country are not necessarily seen as rules of the game in another. So, the expanding the business abroad implies a capacity of the entrepreneur to manage the critical situations. If our hypothesis about the behavior in critical situations is true, the legal entrepreneurs are more oriented to expanding their business abroad than the criminals. The replies on the question “Are you involved in foreign trade?” (Tab. 11) have proved it indirectly.

Table 11 Total Legal operators Criminal operators

Yes 40% 33%

No 60 67 100%

The countries with which our respondents are involved in trade are following: Germany (47% of those who are involved in the foreign trade), Italy (38%), China (30%), the US and Turkey (27% each).166 Italy represents a very particular case. From the point of view of many our respondents, the Italian way of making business lies very closely to the Russian. At least, they feel themselves very comfortable while dealing with Italian partners. “They have a kind of Russian slackness, ability to do emergency job, - that is why it is easier to work with them then with Germans or with Englishmen”.167 “I have a feeling that they and we are a like… Just look how an owner of a shop speaks with his cashier – the same situation as on our market place”.168

Analytically speaking, the Italian way of making contracts includes some common with the Russian elements. Firstly, the choice of the partners in both cases depends upon personal connections, networks and recommendations. “Italian porcelain industry is not very large, everybody knows each other. When a friend calls and says: You can trust this men – it means a lot”.169 Secondly, personal trust is the central piece in making contract in Russia as well as in Italy. It is worth emphasizing that the trust is based not on legal mechanisms of contract enforcement, but on personal connections and acquaintances. “They (Italians) do not give us anything without prepayment – but if they give, the man lives there guarantees our decency. They pay no attention either to contracts or to legal documents”.170 Thirdly, in both cases there is a clear preference for making contracts in oral form. “At present all deals are made according to oral agreement. Of course, there are several document concerning organization; neither we nor our partners ask for legal documents”.171 “With Italian partners – no contracts; it is an oral agreement”.172 The only significant difference in Italian and Russian ways of making business concerns the role of violence in settling the business conflicts. No one of our interviewed persons does not mention that he/she has been faced in Italy with a criminal or simply extralegal use of violence. “As for violence, I doubt that it is possible in Italy. In our country – yes, of course, there – I did not come across”.173 “As far as I understand, there is no threat of gangsterism, or 166 In the sample of 31 interviewed entrepreneurs those who make their business in Italy represent 42% (13 persons). Most of them (5) have contacts in the region of Milan. 167 Interviewed # 10.168 Interviewed # 13.169 Interviewed # 1.170 Interviewed # 8.171 Interviewed # 4.172 Interviewed # 1.173 Interviewed # 6.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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almost no. Neither I nor people whom I know were controlled by anybody in Italy. If you do not have money – they wait, if there is anything else – they can always understand our position, but under condition that you are not a passer-by, and they know you, at least for some time”.174

The conclusion we might draw from such analysis is that the topic “making business in Italy” could hardly be used for differentiation of legal, extralegal and criminal entrepreneurs because in the case of Italy the situation loses its critical character. In the same time, this conclusion is important from another point of view. We hypothesized that the transfer of funds in order to create guarantees is oriented to the countries with a high level of living. Taking into consideration a dual nature of this purpose (legal and extralegal, if the capital’s owner tries to escape the possible crises in Russia; criminal, if the capital’s owner tries to escape from the possible legal pursuits), the particularities of the Italian way of making business could attract the extralegal and criminal capitals from Russia. Italy fulfills two conditions indispensable for fund transfers oriented to create guarantees: 1) the country with a high level of living, 2) the entrepreneurial culture which allows the operators to restart the business if such necessity will appear. One of our respondents, a head of small criminal gang from Lyubertzy (Moscow’s region) had in 1994-1995 an experience of helping a Russian criminal to start his business (buying a hotel) in Italy.175

9. A methodology for determining the nature of the funds transfer’s operators.

According to our last but not least hypothesis (H4), it is possible to describe the nature of the funds transfer’s operator with the help of questionnaire and/or interviews. For example, a person interested in buying a hotel or a house, in opening an account in a bank, in making investments might be asked to fill in the questionnaire and/or to be interviewed. After processing his/her replies, it could be possible to decide whether to provide the interested person with permission or to ask him/her for additional information proving the origins of the funds under question. Such procedure could be used as a kind of the “detector of lie” at the preliminary stages of investigation.

Although the studies necessary to work out the final version of the “test for legality” are far from being accomplished, there are some preliminary results. The test (in oral or written form) should include the following topics:

Making contract: the set of questions about the sources of information, the preferable form of the contract, the fulfilling of the contract, the behaviour in the situations of conflict, the behaviour in the force majeure situations and the sanctions used to punish the breaking the contractual terms.

Understanding the force majeure situations: the situations that could be considered as force majeure situations, the evaluation of the nature of the August 1998 crisis in Russia.

Involving the relatives into business: the set of questions about the experience of making business with relatives, the roles they play.

Trust: the questions about personal, impersonal trust and trust of institutions. As our survey shows, the legal operators are characterised by a high level of impersonal trust (Tab. 12: “Do you think you can trust the people?”). While

174 Interviewed # 12.175 The text of this and some other interviews are collected in appendix “Interviews in prison” because they have not been made on the basis of the standard questionnaire.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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deciding whether to trust the people or not, they rely upon legal guarantees. Oppositely, the criminal and extralegal operator rely only on networks as a support for trust. “How do you decide whether to trust a person or not? – I should have information that he is a good man. Everybody knows each other here – who did something wrong, who “throw” somebody, even accidentally – everybody will know about that. You see it in the eyes – you can trust him or it would be better not to do it”.176

Table 12 Total Legal operators Criminal operators

Yes 25% 56%

No 72 44 88%

N/A. 3 13

Associations with the Law. The criminal operators associate the Law only with “compulsory restriction”. The legal operators see in the Law a “guarantee”, an “obligation”.177

The behaviour in some everyday situations: for example, the road traffic, while choosing a car, while choosing the secretary for the business (two last questions concerns the criteria of choice). As far as the road traffic is concerned, this is a critical situation at least in Russia: there are many rules of the game on the road, - traffic regulations, informal rules and so on.

The preferred countries for fund transfers. The respondent is asked to select countries where he/she would like to have some funds. The proposed countries are selected in such way that they form three groups: countries with a high level of living, neighbouring countries with a developing economy, off-shores.

The synthetic characteristic of the respondent is based on a series of criterions corresponding to each set of questions. At this stage, the methodology is very close to those used in psychological tests like the MMPI or the Lusher’s test. We draw the whole picture of the replies and we calculate an integral evaluation:

10. The factors which explain the choice of channels and techniques of fund transfers, and the characters they have.

In general, an operator of any type can use any channel of transfer. The funds, that were got from selling drugs (criminal capital), funds that were got legally, but taxes

176 Interviewed # 13.177 For more information about using the associations to study the legal culture, see C. Kourilsky-Augeven, O. Zdravomyslova, M. Arutjunjan, “Modele francais et modele russe de socialisation juridique” // Revue d’etudes comparatives Est-Ouest, 1994, Vol. 25, No.4.© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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from which were not fully paid (extralegal capital), and funds that were got legally - all these funds can be transferred using the same channels (for example using pretended transactions).

Suppose that choosing the channel of transfer of the funds operator of any type uses a certain procedure. In the whole, the way the operator chooses the channel can be described the following way.

1) The criminal capital can be transferred without legalization, just smuggled (for Russia - it is concealed cross-border transfer, for example through the territory of other countries of former Soviet Union, through Chechnya, where the custom regime is very weak). Such type of fund transfer is a physical transfer of property and capital in cash - cashless payments can not be used here. To use non-contraband channels of fund transfer the criminal funds should be legalized in a certain degree on the territory of Russia. When the funds are partially legalized inside Russia, then a wide range of extralegal channels can be used. In this case the capital will not be criminal but extralegal. Accordingly, cashless payments can be used for fund transfer. When criminal funds are fully legalized, then these funds can be legally transferred (with the official permission of the CBR). In last case the transferred funds will be almost absolutely legal.

2) Extralegal funds can be transferred using a wide range of extralegal channels of fund transfer. To use the legal channel, for example, according to the permission of the CBR, the capital should be highly legalized. There is no need, though it is not impossible, to transfer extralegal funds using criminal channels when it can be transferred in extralegal way.

3) Operator that has legal funds to transfer can use all three ways of transfer - criminal, extralegal and legal.

This all can be described the following way:

If we examine the channels of fund transfer closer, we will discover the following. Criminal and absolutely legal ways of fund transfer are too radical and unpractical. Criminal way of transfer (contraband) means that even when the funds are abroad - they can not be used without legalization. These funds serve criminal economy, and even if they are transferred, they are still criminal and can not be used in legal economy. To use these funds in legal economy, they should be legalized. That is why this way of fund transfer could be used by a limited number of people.

© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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Absolutely legal way of fund transfer can also be used not by everyone. Getting the permission to transfer is very expensive and takes much time. This procedure is described the following way.

Getting the permission from the Bank of Russia for exchange operations,

connected with the fund transfer.

The Law of Russian Federation «On currency regulation and control» divides exchange operations with currency funds and securities in currency on current and capital exchange operations, connected with fund transfer. The particular category of currency operations for «fund transfer» has not been mentioned in the text of the Law. The list of current currency operations is defined in the law, other currency operations, that were not mentioned in the list are capital operations.

According to the point 2 article 6 of the Law of Russian Federation «On currency regulation and control» residents carry out exchange operations, connected with fund transfer in order, set by the CBR.

There is no single order of carrying capital operations by residents. According to the general order all of them are carried out in permissive (the most part) and registration (the less part) order.

The CBR defined, what exchange operations, connected with the movement of capital, are carried out without the permission - it means that such kind of operations are in fact equated to current operations. Such documents are:

Regulation of the CBR #39 dated 24.04.96, Direction #193-У dated 27.03.98, Direction #611-У dated 21.07.99.

Besides the Federal Law #192-ФЗ dated 28.12.98, defines, that several capital operations (delay of payment or supplies on export or import) are carried out in order, that was set up by Russian government in accordance with the CBR. However, until now the government has not set the order yet. The CBR issued several standard acts, that regulate the order of carrying out operations, getting permissions for such operations.

Regulation of the CBR «On the registration order of payment for taking part in authorized capital stock of organizations that are the residents of Russia by foreign investors» dated 07.07.97 #482;

Regulation of the CBR «On the order of loan funding and credit repayment of financial credits and loans in foreign currency for the period over 180 days from the non-residents by the residents of Russia» dated 06.10.97 #527;

Regulation of the CBR «On the specifications in registration of crediting organizations with foreign investments and on the order of getting the preliminary permission of the Bank of Russia for increase of authorized capital stock of the registered credit organization out of proceeds of non-residents» dated 23.04.97 #437;

Regulation of the CBR «On the order of issuing by the CBR permissions to carry out some types of exchange operations, connected with movement of capital» dated 20.07.99 #82-П.

All these documents are not typical, each of them sets different procedures. But there are common trends. To carry out a capital operation you should get the permission of © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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the CBR. An applicant should provide the CBR or the branch of the CBR with a pack of documents according to the appropriate regulations. As a rule, it is constituent documents for the last period of time (balance, income and expenses statements). Sometimes it is necessary to give an opinion of other government institution about the expediency of operations or about validity of such operation. Such conclusions, depending on the type of capital operation are given by the Ministry of Trade (MT) - (former ministry of foreign trade) - as usual on trade operations, or by the Ministry of Economy (ME) - usually on investment operations.

These documents are analyzed in the CBR during one month. If not all the documents were presented, and the missing documents are asking for, the analysis takes more time.

It also takes, when the confirmation from MT or ME is necessary. As a rule, these ministries spend not less than one month to analyze these documents. For example, to get the conclusion from the MT about the validity of delays in currency profit returning, you should be put down in waiting list several months ahead. The ministries analyze all these documents according to their regulations.

It is clear that all above mentioned acts concern not all the types of capital operations. For all the transactions that are not regulated by special requirements, there are common rules for getting the permission for exchange operation, connected with the movement of capital. These operations are not regulated by a particular act, but there is a list of documents, that should be presented to the CBR to get the permission. This list is approved by the letter of the CBR dated 06.10.95 #12-524. The CBR analyses the documents during one month.

To get the permission from the CBR is really difficult, but this permission is an official document. It is hardly possible,178 that the CBR will give such a document to a «suspicious» resident, or to a resident that has not paid all the taxes,179 or to a resident that has broken the Exchange or the Tax Code, or when it is not clear enough where the resident got his money. It means, that to use the legal way of fund transfer the capital should be legalized.

So, all three types of operators, whether they deal with criminal, extralegal or legal capital, face the same task - to choose the way of fund transfer.

The most legal way of fund transfer undoubtedly is the transfer according to the permission of the CBR, but in this case the operator should mind the main limits:

whether the capital is legal (what is the degree of legalization, the cost of the preliminary legalization before applying for permission);

the price of permission (occasional expenses, payments to lawyers).

Funds can be transferred with less expenses using extralegal channel. The task is defined before the particular channel is chosen.

The criminal way of fund transfer presupposes some expenses and problems with usage of the transferred funds.

The choice of the channel of fund transfer is similar to the choice of investment project, where we can calculate expenses, profit and profit from the IRR. The process consists of several stages, that are based on the answers to the questions:

178 The words «hardly possible» mean that there is still a small chance. 179 The certificate from tax institutions is always necessary when the resident asks for the permission. © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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whether it is possible to use the legal channel of fund transfer (to get the permission from the CBR), whether the capital should be legalized, how much it will cost, how much the procedure of getting the permission will cost;

if the criminal channel of fund transfer can be used, how much it costs, if this channel will be used;

what extralegal ways of fund transfer can be used, how much it costs;

choice of the channel of fund transfer.

Examples:

Suppose, a criminal operator decides to transfer funds on some reason. Basically, when you get criminal money, nobody can check it (even the State). For example, profit from selling drugs – it is just cash money in somebody’s pocket. This money is not involved in economic activity. The next step is to chose the channel. The usage of criminal channel does not ask for legalization of capital on the territory of the country, from which the funds are transferred. Money in cash disappears from the country, - it is physically transferred. Speaking about Russia, nobody needs roubles abroad. That is why some legalization is still needed; for example roubles will be exchanged for US dollars and then transferred in a criminal way. On this stage the government can notice this flow, knowing the average volume of currency bought, «suspicious» buying can be traced. The government can trace not only the volume of suspicious buying, but also the places and even the persons, who buy currency. But after exchange the capital goes out of government control, it becomes again cash in somebody’s pocket.

A criminal operator can make use of extralegal channels too. For this purpose the capital should be legalised on the territory of Russia. The money should be put on a bank account and it does not matter whether it belongs to resident or non-resident of the country. Depending on the degree of legalisation, the operator chooses the channel of fund transfer.

Suppose it is impossible to legalise the capital completely. For example, a juridical person appears, that begins actively “to sell goods or services”. When you check the activity of such firm, it turns out, that there is no real activity, all the contracts are pretended and the real aim is to accumulate the money in the cash register or on the bank account. So, to transfer funds it is necessary to choose the way that permits to do it much more quickly, because the firm will attract the attention of supervisory bodies. In this case, the pretended transactions (import of services in terms of prepay) can be used. The firm pays for the delivery and disappears. The contract is formally fulfilled, in the Balance of Payments it is reflected as import of services. But in fact this payment is the extralegal transfer of criminal funds. Another transfer of such kind is the pretended contract for the import of goods on terms of prepay: 1) you prepay, 2) you do not get the goods, 3) you close your firm.

The contraband transfer is usually used to transfer the criminal capital. If the capital can be legalised, then the other ways can be used. If the capital is legalised inside the country, then much more channels of fund transfers are available. Now it is not necessary to close the firm after pretended transactions. If the capital is legalised inside the country, then the operator of fund transfer looks like being legal (or at least being extralegal).

© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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The main characteristics of fund transfers by extralegal operators are following. The capital is at some degree legal, that is why there is no need to transfer it as quickly as possible. From the other hand, it is difficult to transfer funds, as it is hardly possible to get the permission of the CBR. So, if the extralegal operator does not want to use the criminal channel, the he/she faces a large variety of extralegal channels. To choose the definite extralegal channel the operator should bear in mind the following factors:

The aim of the transfer,

The cost of using the channel,

Whether the concrete channel is concealed,

Accessibility of the object for the transfer.

The aim of the transfer can limit the number of channels of extralegal transfer. If the capital should be transferred in order to develop business (to create a firm or a branch abroad), but legal channels can not be used because of low level of legalisation and high prices to get the CBR permission, then the following variant can be used. The capital here (in Russia) can be entrusted to a bank. This will enable the bank, the trustee, to buy a share in the equity capital of a non-resident firm. Formally (according to the Law of the Russian Federation), the owner of non-resident company is the bank, but the real owner is the resident.

In order to develop business it can become necessary to pass a part of funds to a foreign partner (who can be a branch). Two juridical persons are not allowed to pass property to each other, because according to the Law it is considered as donation. So, other ways of fund transfer should be used. The property could be passed forever or for some time (on the basis of a credit contract). The transfer of property for forever is usually used in the framework of pretended transactions (see chapter 4.2.3 “Overcharging/undercharging of price of a contract”). The perfect way to pass the capital to non-resident is to accept a service from him (see chapter 4.2.5 “Contract on rendering of services”). The foreign firm can be credited for export-import contracts, if transaction does not exceed 90 days (see chapter 4.4 “Crediting foreign firms”). The use of export-import contracts as a channel of fund transfer is allowed only if the period of crediting does not exceed 90 days, otherwise you should get the CBR permission.

Such a goal of fund transfer as optimisation of the tax burden helps to define the nationality of the foreign partner. It is obvious that the profit should be transferred to the non-resident from off-shore, then to the non-resident from “respectable” country. You should mind, that the question of minimisation of taxes is considered in all extralegal channels of fund transfer, as it is the matter of price of the channel of transfer. The way of tax minimising can be concealed the following way: the first partner of the resident will be a non-resident from a “respectable” country (for example, the US), but he will function just as middleman, - the money will be transferred through his account. The presence of such middleman will enable the resident to reduce the attention to him from supervisory bodies. After being transferred through the middleman’s account, the money is directed to an account in off-shore in order to declare the profit.

The price of the contract is calculated according to several parameters. First, to transfer funds you should have a “foreign partner”. It can be a real partner, that is independent from the operator, but co-operates with him. It also can be a dependent firm (for example, an off-shore company bought by the operator). Second, depending © Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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on the channel that was chosen, it is necessary to calculate the expenses for involving or for even buying a bank to carry out such kind of operation. You could need both a resident and a non-resident bank (for example, an off-shore bank in Nauru). Third, as usual any fund transfer is undergo taxation, when you deal with foreign trade, you should also pay customs duties. In situations, when there is an alternative whether to credit the non-resident on export or on import contracts, taking into consideration customs duties it would be better to credit using export contracts (including undercharging of price of the contract): if there are any duties, they are very low. The same analysis of the price is carried out when you should calculate how this or that operation affects the volume of taxes that the resident has to pay.

Concealment of the channel. The type of the channel of fund transfer should correspond to the activity of the firm. If a resident, who is involved in export-import operations suddenly begins to use the securities to transfer the funds (see chapter 4.7 “Financial instruments”), and he had never done it before, then after two or three transactions his activity will attract attention of supervisory bodies. From other side, for such a resident a pretended transaction (a false import contract) will look like his everyday activity: there is a hundred typical import contracts, and it is very difficult to determine which contract is pretended, and which is normal.

The main aim of concealment is to make the channel look like as much legal as possible. The best concealment is to get the CBR permission to transfer funds. But this may be very expensive and only well-to-do operators can afford to spent much time and money to prepare documents for getting the permission. The concealment of the scheme depends on the complexity and on the number of involved subjects. The chart illustrates the activity of the firm, which receives and makes dozens of payments from different addressees per day (it should be mentioned that the accounts in the BONY were operated by firms of such kind):

A stranger can not determine, where the payment A was made, and even what is the terminal point in this transaction. The situation may be complicated by the fact, that at first the money is moved to one transit firm, and then to another. If these firms are in different countries, it is impossible to trace the money. Such a way of concealing funds is good enough: the more accounts the funds had passed through, the more legalized they were.

Accessibility of the object for the transfer. At present for the juridical persons, who are the residents, it is difficult enough to buy currency, especially for advance payments for import of goods, and nobody abroad is interested in roubles. That is why the extralegal operators mainly use the following channels and objects. Export and import schemes are based on the fact that goods are physical capital. The price of services is quite formal, sometimes it is impossible to estimate the price of the service.

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The roubles that are be given to the non-resident on the territory of Russia, can be easily exchanged for dollars by him and then transferred (see chapter 4.5 “Usage of lacunas in currency regulation”). Transferring roubles the main task is to give the money to the non-resident here (for some time or forever). At present there is no difficulties with this procedure.

The capital can be partially legalised on the territory of Russia so that the transfer can be carried out according to the CBR permission. If it is possible to reach the highest degree of legalisation and the operator is ready to cover the expenses of getting the permission, then it is quite possible to apply to the CBR for such permission. In this case the operator becomes legal and he can use all the types of fund transfer – from criminal to absolutely legal.

© Ufficio Italiano dei Cambi© A. Oleynik, S. Patrushev, E. Gvozdeva, A. Kashturov. All rights reserved.Not to be quoted nor reproduced without permission.

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