Changes in liability for illegal currency transactions

What's new?

Federal Law No. 194-FZ, dated 12 November 2012, introduces amendments to Part 1 of Article 15.25 of the Russian Code on Administrative Violations. The amendments expand the definition of the "illegal currency transaction". The changes will come into effect in February 2013.

In accordance with the current law, an "illegal currency transaction" is a currency transaction that is prohibited by Russian currency control legislation.

The amendments broaden the definition of an illegal currency transaction and add to the list of illegal currency transactions those transactions which are performed with other violations of currency legislation but currently are not explicitly prohibited by law. The list of such transactions, which remains open, indicates the following prohibited transactions:

• sale and purchase of foreign currency and cheques (including traveller cheques) nominated in foreign currency not through the authorised banks;
• performing currency transactions, the settlements under which are performed not through the authorised banks or through accounts (deposits) opened with banks abroad, on the grounds not permitted by Russian currency control legislation;
• performing currency transactions, the settlements under which are performed using the funds credited to accounts (deposits) opened with the banks abroad, on the grounds not permitted by Russian currency law.

The amount of the fine for the above violations will be from three-quarters to the full amount of the illegal currency transaction similarly to the current version of 1 Part of Article 15.25 of the Russian Code on Administrative Violations.

What does it mean for you?

The forthcoming amendments add clarity with respect to those transactions that are performed in violation of currency control legislation but are not expressly prohibited. In the current version of Part 1 of Article 15.25 of the Russian Code on Administrative Violations this provision is ambiguous. In this respect the currency control authorities tried to apply sanctions to all currency transactions that violate currency control legislation, not only for performing currency transactions expressly prohibited by currency law. In fact, such broad approach to the idea of the "prohibited currency transactions" (including the transactions that violate the law) was not always supported by court practice. As mentioned above, Rosfinnadzor initiated the amendments to Part 1 of Article 15.25 of the Russian Code on Administrative Violations, which broaden and clarify the corresponding provision. Such clarification will allow Rosfinnadzor to hold residents liable under a larger number of grounds, including cases of performing transactions that violate currency control legislation.

Let's take a detailed look at the transactions specified in the new version of Part 1 of Article 15.25 of the Russian Code on Administrative Violations.

Sale and purchase of foreign currency and cheques (including traveller's cheques) nominated in foreign currency not through the authorised bank.

Unfortunately, the wording of the Article is not precise enough to settle a long-time dispute: is it necessary for an authorised bank to be a counterparty in a transaction on buying and selling foreign currency, or is it enough to use accounts opened with authorised banks in order to comply with currency law requirements? We have always adhered to the standpoint that an authorised bank must act as a counterparty in the transaction. As far as we know, this requirement is similarly treated by Rosfinnsdzor. With the adoption of this statutory provision the law enforcement practice will possibly help to end the dispute.

Performing currency transactions, the settlements under which are performed not through the authorised banks or through accounts (deposits) opened with banks abroad, on the grounds not permitted by Russian currency control legislation.

As an example of such prohibited currency transaction we can name settlements in cash between residents and non-residents. Moreover, potentially, in accordance with our practice, the currency control authorities may treat this provision broadly. Specifically, not only as a prohibition of currency transactions in cash, but also as a prohibition of settlements through the accounts of third parties, e.g., payment agents, as well as involvement of third parties in settlements due to the transaction structure.

Performing currency transactions, the settlements under which are performed using the funds credited to accounts (deposits) opened with the banks abroad, on the grounds not permitted by Russian currency control legislation.

Russian law specifies a limited list of the grounds for crediting funds to a foreign bank account. It also specifies that funds from foreign bank accounts can be used only if an account was opened and the funds were credited to it in accordance with the legislation. Transactions on crediting funds to a foreign account, as well as further settlements using the illegally credited funds, can be viewed as illegal currency transactions.

Currently, only the transactions on using funds that were illegally credited to foreign bank accounts can be expressly deemed illegal. That said, operations on crediting funds to foreign accounts in cases not prescribed by law is not expressly listed among illegal transactions. Possibly, the legislator presume that crediting funds on foreign bank accounts fall under the scope of Clause (b) (i.e. currency transactions performed through the accounts other than opened with authorised banks).

The examples of such illegal currency transaction are described below:

• usage of funds credited by a resident to its foreign bank accounts in the form of dividends, other income from securities including, for example, income from selling securities etc.; and
• usage of funds obtained by a resident employee as salary from a foreign employer on the employee's foreign bank account.

As we see, recently Rosfinnadzor has been focusing on improving detection of currency transaction that violate currency control legislation. Rosfinnadzor has also been working on introducing changes to the regulatory framework in order to increase efficiency of holding individuals and entities liable for violating currency law. The forthcoming amendments actually prove the current trend and is one of the stages of this work of Rosfinnadzor.

How can we help?

In view of the above, we expect an increase in the number of cases of holding residents liable for illegal currency transactions.

Our experience in providing advice on currency control issues will help us to perform diagnostics of your current transactions in order to identify potential risks arising from adoption and upcoming entry into force of the above changes.

Such diagnostics are necessary because, judging by our practice, currency control issues often fall out of the companies' scope of attention when they structure complex transactions or implement major projects with foreign companies. The fines for breaching currency control legislation are high, that's why quick identification and management of risks can help to avoid material financial losses.

We are also ready to provide necessary assistance during audits of Rosfinnadzor, help you to prepare substantiations of your standpoint, develop a defence strategy, etc.