Lawyer Olavs Cers: Criminally obtained funds are not the same as money of unknown origin
Entrepreneurs, lawyers, and also journalists faced new procedures and new amendments to the law last year, which make it significantly more difficult to obtain information from the Enterprise Register (ER). How do you see this problem? Is it a problem?
This is a very serious problem. The story began in October 2019 - the Enterprise Register publicly stated that it wanted to reduce the amount of information available to the public. The argument was that there were personal data that needed to be protected and the ER had already encountered problems because proceedings for the disclosure of personal data were initiated in which ER had to defend itself. On November 28, 2019, amendments to the Law on the Enterprise Register were adopted, which included the principle that there is data available to anyone and there is data that is available only if a person addresses a special request to the ER, and then the ER evaluates whether to give this data.
The data that is publicly available is very simplified - you can find out about the name, registration number, legal address, type of activity, names, surnames, and personal identification codes of the board members, participants, information on taxes and turnover. The amount of publicly available information on joint-stock companies is similar, except for information on shareholders. But as soon as it is a question of the minutes of the participants' meetings or any other documents in the registration file, the person must apply to ER with a motivated application. ER then examines the application and decides whether to issue the requested documents or not.
I can cite one example that illustrates this situation a little. The limited liability company (SIA in Latvian) has had several members of the board in different periods of time, but ER excluded one of them from the board by its decision. One of the participants of SIA started to wonder why, because the decision of the ER referred to the decision of the State Revenue Service (SRS) in an administrative violation process. Our client - a member of SIA - quite naturally wanted to know what process the SRS had about this board member and why this board member cannot perform his duties. When the SIA participant applied to the ER himself, he was told that such information would not be provided, because it is a decision of the SRS, which is not available to other people. When such an answer was received, as a lawyer, I wrote an application on behalf of the client, why this decision of the SRS is needed (this SIA is involved in several legal proceedings). ER issued this decision of the SRS to me as a lawyer. From this decision, we learned that the revoked member of the Board had an administrative violation, the consideration of which was within the competence of the SRS, and he was prohibited from performing the duties of a member of the Board for a certain period of time. As a result, it took about a month and extensive writing to get this information. However, there is nothing secret in this information or anything that offends this person - it is normal commercial information, and it is only logical for a SIA member to know why a board member has been removed from the board member position by the ER. Also - if someone sees that a member of the board of SIA has been removed on the initiative of ER, he has the right to know what the reason was, to check and evaluate his cooperation partner, including within the scope of the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing also called the Prevention Law. Unfortunately, such information is no longer easily accessible, it must be specifically requested. Also, for example, when studying various schemes implemented by unscrupulous merchants, even nuances such as different applications to the ER, certificates in the registration file and protocols may be relevant, for example, to verify the interconnection of persons or forgery of signatures.
The addresses of the company's officials are no longer available in the information of ER or Lursoft. So, if I want to file a lawsuit against a board member or shareholder or address him with a complaint or claim, I cannot do so by looking at the ER statement, as this information is not publicly available. Then I have to write a request to the ER again or contact the Office of Citizenship and Migration Affairs to get this data. Usually, it is possible to find it out, but these activities again waste time, which is already lacking in some legal proceedings, especially when it is necessary to react quickly to some illegal activities.
On October 8, 2020, further amendments to the Law on the Enterprise Register of the Republic of Latvia were adopted. They include the well-known article on journalists' permanent access to the non-public part of ER information. Various types of information are needed to carry out journalistic research, but it is now very difficult to obtain it: journalists have to provide all kinds of certificates and proof that they are allowed to carry out such research. Journalists opposed it but achieved nothing. It can be seen that the acquisition of information is gradually becoming more and more limited under various pretexts. It is not that information cannot be obtained at all, but a system is created in which different types of information have to be obtained from different institutions by writing requests and then waiting for a response. This, in turn, takes a lot of time and resources, including for the institutions themselves. It also puts a strain on ER staff, who are forced to evaluate the many requests. It is not always the case that the document is easily accessible and there is no problem in receiving it. ER then writes detailed refusals on several pages, why they refuse to issue any documents. Such refusals are subject to appeal, and new administrative proceedings are started for virtually nothing. And everyone has more work.
Returning to the so-called Prevention Law and the amount of information available in the ER, there is still a problem with identifying the real beneficiaries, which is not directly related to the above-mentioned amendments to the law but exists in itself. It is possible to find out the true beneficiaries of SIA quite simply, at least the formal members of SIA can be identified without any problems, but for joint-stock companies (JSC) it is very difficult, sometimes even impossible, to find out the true beneficiaries. Namely, the current register of shareholders of the JSC is kept only by the Board of the JSC, it does not have to be submitted to the ER at all. Consequently, there is no possibility for a third party to verify the true beneficiaries as listed by the JSC and they must rely on the ER records. However, in my lawyer's practice, there was a recent case where the ER itself did not recognize the true beneficiaries of a JSC registration file but required a third party to prove them, which is impossible if the JSC does not cooperate.
Last December, five sworn attorneys sent an open letter to Attorney General Juris Stukāns requesting an immediate end to the established uncontrolled practice of initiating criminal proceedings following reports from the Financial Intelligence Unit (FIU). As the authors of the letter pointed out, it is not acceptable to uncritically accept the FIU's view on the fight against money laundering. Lawyers expect a more active and understandable position of the Attorney General on these issues of public importance. Do you also agree with colleagues?
Yes, I have read and support this letter because I have dealt with these issues in my own legal practice. For example, the letter rightly points out that it is wrong to equate criminally obtained funds with funds of unknown origin. No matter what the bank or FIU has doubts about - all transactions, a particular transaction, the owner of the funds or one of its partners - everything is "thrown into one pot" and reduced to the initial freezing and subsequent seizure of all funds within the framework of criminal proceedings.
The procedure in these cases is that the credit institution initially reports suspicious transactions or doubts about the origin of the funds to the FIU. The FIU, in turn, decides to freeze funds, and this is where the first problem emerges. It is pointless for the owner of the frozen funds to explain or submit anything to the FIU, as the FIU does not hear him out and does not consider the case on the merits, but is guided only by the information provided by the bank or another person and the material collected. Of course, the owner of the funds can formally appeal the FIU decision to the General Prosecutor's Office, but this also has no rational consequences and is essentially a pointless process. Because while the Prosecutor General's Office is evaluating the complaint, the FIU has already forwarded the materials to the police for the initiation of criminal proceedings. Consequently, the Prosecutor General's Office formally responds to the complaint - the case has already been sent to the police, so all ambiguities must be resolved there. And in all cases that I know myself or that I have discussed with colleagues, the Attorney General's Office usually upholds FIU decisions, indicating that there has been a formal basis for making such a decision and that the unit has sufficient material at its disposal. In essence, these complaints and the material in the FIU's possession are not assessed by the Prosecutor General's Office. As I said, while this formal appeal is taking place, the FIU has already forwarded the material to the police, and once the owner of the funds has gone through a formal but essentially pointless appeal procedure, he still goes to the police. In turn, in all such cases, the police initiate criminal proceedings, and the funds are then already seized within the framework of the criminal proceedings by a court decision. Tough, but this whole procedure takes place before anyone has heard the views of the fund owner at all. The police is the first and only place where a money owner can finally start proving something. So why is this appeal procedure necessary if it does not lead to anything? You can complain, you can not complain, but the materials from the FIU still go to the police to initiate criminal proceedings. At the same time, if such a complaint is not lodged, the police or the court may say at a later stage of the proceedings - well, why didn't you complain when you found out about the freezing of funds?
In turn, the next and biggest problem begins in the police, let's call it the second problem. No one explains to the owner of the money what he should prove! This is also mentioned in the lawyers' letter and in other publications on the subject. There are cases when a money owner asks: “We have had numerous transactions over a long period of time. Tell me, which of these transactions made you suspect that they were proceeds of crime?” But no one answers that question. It is formally stated that the owner of the funds must prove the origin and legality of the money himself. Just like in an old fairy tale: go there, don't know where, bring that, don't know what… And then the money owner has to prove the legality of all transactions throughout the account, not knowing exactly what is expected of him and what has caused suspicion. Namely, the owner of the money is not given the opportunity to defend himself qualitatively against the allegations made.
On the other hand, the period can also be very long, as the requirements of the Prevention Law are unfortunately applied retroactively - even to transactions made before or around 2000. And in fact, the current requirements of the law apply. If the transaction took place, for example, in 2005, then it would be logical to conclude that the bank had acknowledged that everything was in order at that time the transaction has been recognized as legal, but now - in 2021 - everything has to be proven, including where the person has acquired these funds before they were transferred to the bank. It is logical that in many cases such evidence no longer exists because it has not survived. It's hard to believe that many people have kept records for more than 20 years of the amounts of money used in bank transfer transactions and in respect of which all the then mandatory and necessary bank checks have been carried out.
Another vivid example of how these cases are already handled in criminal proceedings. There is Section 627 of the Criminal Procedure Law, which determines how proceedings are conducted for criminally acquired property.
Initially, one criminal case is initiated - the bank reports suspicious transactions to the FIU, the FIU forwards the materials to the police, and the police initiate criminal proceedings. But the police have the opportunity to divide this process into two parts - to continue the main process of money laundering but to separate the other - as a side process - of the criminally acquired property. And if the basic process is delayed, as is the case in most proceedings, then this supposedly “side” process is realized very quickly only for criminally obtained property. It may also be the case that the money seized in the main proceedings is recognized as criminal property in this "side" process and the money is transferred to the state budget, but the initial criminal proceedings can continue for years without even prosecuting anyone until sometime in the distant future it is terminated, for example, due to limitation. But the money has long been taken away and transferred to the state budget.
The third problem in such processes could be outlined here. Article 627 of the Criminal Procedure Law contains a norm that causes confusion in a large part of lawyers - the materials in the case of criminally obtained property are the secret of an investigation. They may be inspected by the person conducting the proceedings, the prosecutor, and the court. But the owner of the money himself or his lawyer, who has to go to court to defend himself, can get acquainted with the materials in the case with the permission of the person conducting the proceedings and to the extent specified by him.
Then imagine the situation in court! There is the court that has all the materials in front of it. There are materials from the bank, from the FIU, from the SRS, maybe also answers to requests from various foreign services - there is a set of materials, evidence that has been collected within the framework of criminal proceedings and even before that. The owner of the money should be able to defend himself at that moment, dispelling all doubts, but how can he defend himself if he does not see this set of materials? He must contact the one conducting the proceedings to get acquainted with the materials, but he may not allow it or allow it only formally - to a limited extent. As a result, a situation arises in which the owner of the money goes to court without even knowing - what exactly he is being accused of, what evidence there is in the case - he cannot defend himself at all. But the court may decide to recognize the money as criminally obtained and transfer it to the state budget. And often these things are for very large sums of money - hundreds of thousands and millions of euros. It is a strange situation, to put it mildly.
Last year, a number of new amendments to the Criminal Procedure Law were adopted, several of which make it more difficult for lawyers to defend clients...
Amendments to the law are as they stand and lawyers must work with them. Something can be objected to only if an application is submitted to the Constitutional Court. If these amendments to the law apply to anyone in such a way that it affects his fundamental rights, then he will be able to apply to the Constitutional Court. Or a foreign investor whose funds have been frozen for who knows how many years or even been seized in this way will go to international courts and his losses will be recovered from the state. Then perhaps the legislator will realize that such regulation is wrong.
The Council of Sworn Advocates asked the President not to announce the amendments, but this was ignored.
Yes, there are also many publications that point out that lawyers are being ignored. Unfortunately, this is the case. Not only about these amendments, but also about other laws. The same is true of the Insolvency Law, where a representative of the advocacy is in the working group, but the objections of the advocacy are very rarely taken into account.
Why do you think lawyers have such a weak lobby? After all, the lawyers are well educated, well-off, some are also politically influential, but the group, in general, does not have a lobby in legislation.
It's hard for me to explain. If only with the busyness of lawyers in the performance of their duties, there is no time left for lobbying. Because lawyers are in virtually all working groups. There are certainly working groups that take the recommendations into account. But there are two topics - the Criminal Procedure Law and the Insolvency Law - in which the advocacy can really achieve almost nothing.
You cannot complain about the inactivity of lawyers - lawyers go to working groups, dedicate their time and knowledge to it, but they are not always heard. It seems it's time to get more active!