Armed injustice: abuse of the law and complex crime in post-Soviet Russia.

• Author: Firestone, Thomas

"For man, when perfected, is the best of animals, but, when separated from law and justice, he is the worst of all; since armed injustice is the more dangerous, and he is equipped at birth with arms, meant to be used by intelligence and virtue, which he may use for the worst ends." (1)

"[A] club is a primitive weapon, a rifle is a more efficient one, the most efficient is the court. "

Nikolai Krylenko, Commissar of Justice of the Soviet Union, 1936-1938 (2)

1. INTRODUCTION

   Abuse of the legal system has become a central technique in various fraudulent and extortionate schemes in Russia. Examples include:

   * "commissioned" criminal prosecutions brought for the purpose of extorting money from the victim or driving him out of business;

   * "intellectual property squatting" in which "squatters" exploit legal loopholes to register rights to a trademark or patent then initiate extortionate legal proceedings against alleged "infringers";

   * "corporate raiding" (3) in which criminals use corruptly obtained legal documents, such as shareholders' resolutions, court judgments and state registration documents, as justification to seize a victim company's assets; and

   * collusive litigation in which private parties create a pretextual lawsuit to obtain a predetermined judicial ruling which is then used as part of a scheme to misappropriate the victim's assets. (4)

   American businesses, such as Hermitage Capital and Starbucks have reportedly been victimized by the practices described in this article and, according to a U.S. federal judge, "esteemed" U.S. law firms have been used as an instrument in at least one such scheme in the United States. (5) From a purely criminal standpoint, such schemes are brilliant. Using the law as both sword and shield, the perpetrator turns the victim into a legal defendant, misappropriates the state's legal enforcement power for private ends, and obtains a cover from liability through the claim that he is merely enforcing a legal fight.

   Despite a wealth of quality literature on the various manifestations of organized crime in contemporary Russia, analysts have failed to isolate and study this dangerous trend. (6) This article attempts to fill that gap by: (1) identifying and explaining some of the most common schemes relying on manipulation of the legal system; (2) tracing the historical origins of this phenomenon; (3) analyzing the steps the government is taking to combat the problem; and (4) identifying possible implications of this study for those concerned with the rule of law in Russia.

2. SCHEMES RELYING ON ABUSE OF THE LEGAL SYSTEM

   1. Commissioned Prosecutions

      Commissioned criminal prosecutions ("zakaznye dyela"), a term referring to (a) criminal cases "commissioned" by third parties as a way of sabotaging business competitors and (b) criminal cases initiated by law enforcement for extortionate or other improper purposes, are probably the most clear-cut examples of criminal legal abuse in Russia. (7) As Genri Reznick, the head of the Moscow City Bar Association, recently said, "commissioned prosecutions" are the "most repulsive phenomenon in our justice system." (8)

      The problem of commissioned cases is widespread and openly recognized at the highest levels of government. In 2008, President Medvedev called on law enforcement to stop "terrorizing" business through "attacks" motivated by commercial aims. (9) Prime Minister Putin recently stated that the majority of regulatory inspections of businesses (often the first stage of a criminal case) were likely "commissioned." (10) And in 2006, Prosecutor General Yuriy Chayka identified commissioned prosecutions as a major problem for Russia, acknowledged at least 20 such cases in Russia's Central Federal District alone, and promised a review of all criminal cases to determine if they had been commissioned. (11) Of course, the United States has seen its share of abuse of the criminal justice system for extortionate ends. But in the United States, such cases typically involve extortion of criminals who are, by definition, vulnerable to the threat of criminal prosecution. (12) In Russia, however, extortionate prosecutions have expanded to target legitimate businesses, a feat accomplished by the creative use of legal loopholes and ambiguities to create a threat of criminal prosecution which would not otherwise exist.

      One example of the creative abuse of legal ambiguity is provided by the so-called "Chemists Case," in which corrupt agents of the State Drug Control Agency (FSKN) tried to extort money from the owners of a chemical business. As part of the scheme, the agents brought criminal charges against them for the distribution of diethyl ether, a chemical solvent commonly used as an anesthetic. (13) The agents relied on Article 234 of the Russian Criminal Code, which criminalizes the commercial distribution of so-called "virulent" substances, a term nowhere defined in the criminal law. (14) The absence of a statutory definition allowed the officers to rely on a list of allegedly "virulent" substances that had been prepared by an outside expert who had no official status or legislative or administrative authority. (15) After a disavowal of the list by the Ministry of Health and a public campaign highlighting the absurdity of the prosecution, the case was eventually dropped. (16) However, the subjects each spent at least seven months in jail. (17)

      Similar cases, relying on contradictions and ambiguities in Russian law related to the anesthetic ketamine (which was prohibited by one official act, but authorized for veterinary anesthetic purposes by another) were brought in 2003 against veterinarians for administering ketamine to pets during routine operations. (18) In these cases, drug control agents set up sting operations in which they brought animals in for treatment. As soon as the veterinarian administered ketamine, they arrested him. (19) Approximately 20 such cases were initiated during 2003. (20) Eventually, the Ministry of Agriculture officially approved the use of ketamine for veterinary uses and almost all of the criminal cases were closed. (21)

      Another common technique of subjecting businesses to enhanced penalties for the purpose of facilitating extortion involves the use of Article 171 of the Criminal Code, "Illegal Enterprise" ("operating an illegal enterprise without registration or a special permit (license), in cases where such permit (license) is obligatory"), in conjunction with Article 174.1(1), which criminalizes the use of illegally generated proceeds for "pursuance of entrepreneurial or another economic activity." (22) Because Article 174, in contrast to U.S. money laundering laws, is not based on a list of specified unlawful activities, any crime (with the exception of certain tax offenses) can be used as a money laundering predicate. Thus, taken together, these two statutes allow corrupt law enforcement officers to use a paperwork violation in a company's registration documents to charge the business owners with illegal entrepreneurship, declare all of the business's proceeds illegal, and then threaten the owners and employees with aggravated money laundering (an offense which carries up to 15 years incarceration and a fine equal to the defendant's total earnings). (23)

      For example, such a scheme was allegedly used in the so-called "Pharmacists' Case." In that case, the lead defendant, Fyodor Dushin, co-owned a pharmacy in the city of Podolsk with a business partner, Vagif Kuliyev. Kuliyev sought to buy him out, but Dushin refused. According to Dushin, Kuliyev then initiated a criminal case against him and helped law enforcement officers plant false evidence, ostensibly showing that the pharmacy was distributing prescription medicines without an appropriate license. This formed the basis for an Article 171 illegal entrepreneurship charge which, in turn, provided a basis for charges of money laundering by an organized group under Article 174.1. Eventually, Dushin was sentenced to seven years incarceration and 10 of his employees were each sentenced to two years incarceration. (24)

      According to Viktor Denisenko, a businessman in Taganrog recently subjected to similar charges, there are currently five prosecutions relying on the same combination of Articles 171 and 174 just in the city of Taganrog (population of approximately 260,000). (25) The abuse of these statutes has become so widespread that lawmakers recently announced a plan to redraft parts of the Criminal Code in order to make such schemes impossible by, for example, excluding proceeds from "illegal entrepreneurship" from the scope of Article 174. (26)

   2. Intellectual Property Squatting

      "Intellectual property squatting"-the practice of registering trademarks and patents on brands and products already in use and then threatening civil or criminal litigation against the existing rights holders if they do not pay--is another prime example of legal abuse in Russia. According to one analysis, the business of misappropriating others' brands has reached "colossal proportions." (27) Russia has even spawned a class of professional IP "marauders"-lawyers who specialize in identifying trademarks and patents vulnerable to attack, registering them, and then initiating litigation against the true rights holders in order to force a buyback. (28) Allegedly, they earn hundreds of millions of dollars annually. (29) One famous trademark squatter, Sergey Zuykov, stated publicly that each successful case of squatting brings him approximately $10-15,000. (30)

      Russia's IP squatters rely on a variety of legal techniques. For example, under Article 1486(1) of Part IV of the Civil Code, which regulates intellectual property rights, a trademark can be invalidated if not used for more than three years and anyone has the fight to file an application to cancel a trademark on the grounds of non-use. (31) Zuykov relied on this provision to cancel and then reregister the Russian trademark of...