The Challenge of Corporate Raiding in Russia
Posted: January 3, 2013 at 5:57 pm, Last Updated: April 11, 2013 at 5:07 pm
by Aaron Beitman
In a previous post examining the connection between property rights and criminal law, it was noted how the problem of insecure property rights in Russia is exacerbated by unequal treatment of crimes against property in the country’s criminal code. As a result, there is a high level of uncertainty for many entrepreneurs in Russia. Writing in the edited volume After Putin’s Russia: Past Imperfect, Future Uncertain, Shelley notes that property acquired by force, coercion, or deception during Russia’s privatization process in the early 1990s is now often redistributed by corporate raiding. These extralegal ownership changes have affected property from small residential buildings to the Russian operations of British Petroleum.
In this context of high uncertainty around property rights, extensive corruption and poor corporate governance have facilitated the rise of the phenomenon known as corporate raiding in Russia. According to Thomas Firestone, the Resident Legal Advisor at the U.S. Embassy in Moscow, corporate raiding or “reiderstvo” in Russian, is not merely a protection scheme. Instead, corporate raiders seek not only a portion of a target business’ profits, but the entire business itself. Firestone notes four basic corporate raiding schemes: bankruptcy, corporate, litigation, and land schemes. In the bankruptcy scheme, the raiding company usually acquires a substantial portion of the target company’s debt, forces the company into bankruptcy by demanding immediate repayment of the debt, and then corruptly obtains control over and manipulates the bankruptcy proceedings to take complete control of the target company. Corporate raiding schemes often involve the corrupt acquisition of control over the target company by falsifying internal corporate documents and/or corruptly obtaining control over a significant portion of the voting stock or the board of directors of the target company. In litigation schemes, the raider files one or more civil lawsuits against the target, often in a remote location where the raider has influence over the local judiciary, and then obtains a judicial order authorizing seizure of some or all of the target’s assets. Similar to corporate schemes are land raiding schemes in which raiders falsify real property documents to illegal take control of physical assets.
Efforts to combat corporate raiding in Russia, however, are beset by a number of serious problems. In a research paper commissioned by TraCCC’s Vladivostok Center, A.D. Astafiev, a leading official in the Military Affairs Directorate of Primorskii Krai, an administrative district in Russia’s Far East that includes Vladivostok, outlines contemporary challenges to combating corporate raiding in Russia. As Astafiev suggests, criminological investigations conducted by Russian scholars illustrate that while the Russian state has taken measures against corporate raiding, it appears that levels of corporate raiding have not declined. This is due, in part, to low qualifications and capabilities on the part of the law enforcement agencies tasked with addressing corporate raiding. In light of the fact that corporate raiding is greatly facilitated by corruption in law enforcement and the judiciary system, one wonders how to escape this endogeneity trap.
Astafiev highlights, in particular, the challenges in creating a database to track and monitor investigations into corporate raiding cases. Most importantly, the latency of crimes related to corporate raiding is very high, meaning that crimes facilitating corporate raiding or the actual corporate raiding itself are not reported to the police or are reported but not processed by the police due to some additional reason, such as the payment of a bribe. Additionally, Astafiev notes how it has been observed that different law enforcement agencies compete with each other over the control of businesses and property. In other words, one law enforcement agency may choose to investigate a potential case of corporate raiding merely in the interest of cutting out another law enforcement agency connected with the corporate raid in question. As a result, upholding the law may be less of a motivation for law enforcement agencies in pursuing a corporate raiding case than the desire to gain control over valuable assets.
In an interview with the ITAR-TASS news service, Russia’s official business ombudsman, Boris Titov, had a few interesting things to say on the topic of corporate raiding in his country. Titov’s main responsibility, according to ITAR-TASS, is to change the views of Russia’s entrepreneurs, many of whom have some of the lowest opinions about current political and business conditions in the country. Titov acknowledges how poorly property is protected in Russia and identifies a troubling development, namely that state officials—especially from law enforcement agencies—have become increasingly involved in corporate raiding.
While Titov’s pronouncements are a good sign from Russian officialdom, it remains to be seen how much can be done to address the problems described here. Perhaps 2013 will see improvements in Russia’s business climate, which will hopefully benefit the country as a whole.
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- Dark Commerce forthcoming November 2018 May 7, 2018
- Dr. Shelley discusses sanctions and beneficial ownership on BBC Newsnight April 11, 2018
- BBC Newsnight on Russian oligarch Oleg Deripaska features Dr. Shelley April 11, 2018
- TraCCC alumna article on Water Scarcity published at Wilson Center April 4, 2018
- Organized Crime and Terrorist Financing (German) April 2, 2018
- Kleptocratic Regimes and National Security: A Pervasive Threat and How It Can be Neutralized April 2, 2018
- Dr. Shelley to speak at Helsinki Commission on March 28th, 2018 March 27, 2018
- House Financial Services “Exploring the Financial Nexus of Terrorism, Drug Trafficking, and Organized Crime” March 21, 2018
- Opioid Epidemic Conference Report March 21, 2018
- World Bank and International Monetary Fund Host Talk on Illicit Financial Flows October 24, 2014