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Protecting Property Rights
In a Little-Noticed Ruling on Monday, the Constitutional Court Sought to Bolster Property Rights in Russia

Russian Constitutional Court"Russia's Criminal Code lacks effective protection for property rights," the judges of the country's Constitutional Court said on Monday as they ruled to radically curb the powers of courts and investigators to arrest or seize properties not directly linked to criminal activities. The court, which traditionally rules on whether or not certain laws or presidential decrees are in sync with the Constitution, found several provisions of the country's Criminal Code in violation of the nation's main law. Legal experts say the court's ruling will further improve the country's investment climate by providing additional guarantees on the sanctity of private and corporate property rights.

Properties of bankrupt enterprises will now be exempt from indefinite arrest, according to Monday's ruling. So are assets belonging to people who are not under criminal investigation or directly involved in on-going criminal cases. The court struck off several provisions of the country's Criminal Code, which had allowed investigators to impose an indefinite arrest on the property of persons who are neither suspects nor accused.

"This is a long awaited decision," Ruslan Koblev, the senior partner at Koblev & Partners, said. "Corporate attorneys have long complained about giving investigators too much leeway to arrest, seize or confiscate properties whose owners are not under criminal investigation." Koblev said that with the ruling, "investors can rest assured that their input into any company cannot be as easily confiscated."

Assault on the sanctity of property is not uncommon in Russia, with many investors nervous about the ease with which the rich and powerful can use prosecutors and judges to settle business disputes. The January 31 ruling arose from court action instigated by two Russian companies and one Russian citizen, Gazeta.ru reported Tuesday. They all argued that investigators arrested their property even though they had had no direct involvement in the criminal cases that triggered the prosecutors' action. The judges declared one of the cases in violation of the Constitution and ruled that the law was improperly applied in the other two cases.

The first of the three cases decided Monday involved the publicly-owned Novosibirsk Real Estate-M, whose general director was accused of fraudulent dealings with the company's real estate. Local investigators placed the company's assets under arrest after opening a criminal case against its director but refused to release the assets two years after criminal proceedings were suspended. The company's legal representatives said investigators told them that the company is not the subject of criminal investigation. In a unanimous ruling, read by Constitutional Court Judge Gennady Zhilin, the court affirmed that the seizure of the properties of individuals or legal entities that are not players in a case under investigation, is unconstitutional. Zhilin said the situation with the real estate firm is "curious," Gazeta.ru reported, and ordered that the ZAO Real Estate-M case be reconsidered.

Like the first, the second case illustrates how misinterpreting the law enabled officials to hold companies to ransom through the illegal seizure of company assets. The Volgograd Solomatinskoye grain enterprise went bust in July 2008 and company executives immediately launched bankruptcy proceedings. But local investigators soon swept in to seize the company's assets on court orders, citing as justification for their move the fact that the company's general director was under criminal investigation. The move, the Constitutional Court found, had prevented the company from concluding its bankruptcy proceedings or paying debts to its creditors. By issuing an order to arrest the company's property, the lower court both misinterpreted and misapplied existing laws, the judges said.

"The court was obliged to be guided not by the provisions of the Criminal Code but by the Law on Bankruptcy, which does not involve arrest of the debtor's property during bankruptcy proceedings," the judges said in their ruling. Such arrests, the judges said, would not allow a company filing for bankruptcy to discharge its debt-repayment obligations.

The court also directed a lower court to retry the case of Yekaterinburg resident Lyudmila Kostareva. Kostareva's son ran foul of the law and was placed on a federal and international wanted list. In 2003, investigators obtained court orders to seize Kostareva's offices and when the criminal case against her son was suspended in 2007, investigators refused to release her property as the son had not yet been traced. The Constitutional Court ruled that while a temporary arrest of property could be justified during the on-going criminal investigation, it is unconstitutional to restrict the use of property for an indefinite period.

"When there is reason to believe that the property has been obtained through crime, or used for criminal activity, the seizure of property can be imposed," Zhilin said, Gazeta.ru reported. "But when the suspect or the accused went into hiding, and the property of another person is under arrest, it turns out that the owner bears the costs associated with the property, even though he cannot exercise control over it." The seizure of property is "clearly unjust," he said, especially when a person is neither the accused nor a suspect in a criminal case. The judge also pointed out that since the statute of limitations for some crimes is 15 years while others could run indefinitely, the seizure of property becomes the illegal confiscation of property over a long period of time. "It is therefore necessary to amend legislation to prevent such situations," Zhilin said.

"This ruling will deter courts and investigators from imposing punishment by association, which is a principle enshrined in the main law of the land," Ilya Alexandrov, the senior partner at Alexandrov & Partners said. "Logic demands that the prime suspect in a criminal case must always be separated from those who have no formal connection to the crime."

Monday's ruling invalidates parts of the provisions of Article 115 and 208 of Russia's Criminal Code as they contradict some basic provisions of the Constitution "to the extent that they do not include effective means of protecting the legitimate interests of a property owner." Zhilin said the State Duma should amend the Criminal Code to incorporate measures "minimize damages to property owner in connection with the arrest of his property." Instead of restricting the use of property, law enforcers should instead encourage property-owners to continue using it while monitoring the movement of funds derived from such property so that they are not used to finance criminal activities, Zhilin said. In addition, legislators may also want to develop a mechanism to compensate property owners for losses arising from the unjustified use of such coercive measures as the seizure of property, he said.

"While this ruling may not have direct connection with the on-going campaign to improve the investment climate in Russia, foreign investors will surely welcome any move that clarifies their situation as legal entities and protects their property from willful arrest or seizure," Alexandrov said. "It is salubrious to the investment climate inasmuch as it gives additional guarantees to investors about the rule of law and the sanctity of private property rights in Russia."

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