Administrative liability tightened for violating currency legislation

Pepeliaev Group reminds you that the amendments to part 1 of article 15.25 of the Russian Code of Administrative Offences tightening the liability for violating currency legislation will go into effect on 13 February 2013.

Part 1 of article 15.25 of the Russian Code of Administrative Offences stipulating liability for illegal currency transactions, and the new version creates a broader definition of such transactions.

Previously they were understood as foreign currency transactions directly prohibited by the law on currency regulation. For example, foreign currency transactions between residents are prohibited, with a few exceptions.

From now on, any transactions that are out of line with Russian currency legislation will be treated as illegal. This applies not only to the directly prohibited transactions, but includes those which may be allowed but only subject to a specific procedure, which has not been complied with. In particular, this applies to transactions which under the law must go through accounts in authorised banks, but have bypassed such accounts.

The new text of part 1 of article 15.25 of the Code of Administrative Offences is worded as follows:

“Effecting illegal currency transactions or in other words currency transactions prohibited by the currency legislation of the Russian Federation or performed in contravention of the currency legislation of the Russian Federation, including buying and selling foreign currency and cheques (including travellers’ cheques) whose nominal value is provided in foreign currency by bypassing authorised banks, or effecting currency transactions, payments under which were made bypassing accounts in authorised banks or accounts (deposits) in banks outside the Russian Federation, when the currency legislation of the Russian Federation does not provide for this, or effecting currency transactions, payments under which are made from the funds, credited to accounts (deposits) in banks outside the Russian Federation when the currency legislation of the Russian Federation does not provide for this – 

shall entail an administrative fine being imposed on citizens, officials and legal entities in a sum between three quarters and the full amount of the illegal currency transaction”.

As the time nears when the revised provision will take effect, it becomes clear that the primary practical effect will be the risk of liability being imposed on the following residents with foreign accounts:

• individual Russian citizens (currency residents) working abroad whose salaries are paid to foreign accounts;
• individual Russian citizens (currency residents) who receive income to their foreign accounts from various sources: interest from deposits, rent payments for real estate, income from selling real estate abroad, dividends, income from securities transactions and other transactions in foreign financial markets, etc.;
• Russian investment companies (currency residents) who receive investment income to their foreign accounts (interest, dividends, proceeds from transactions in foreign financial markets).

Problems may also arise for Russian companies with subsidiaries abroad: their “daughter” companies will not be able to pay salaries into the local accounts of Russian employees.

This is explained by the conservative interpretation of currency legislation under which a currency resident of the Russian Federation may not receive money from another person or company to their foreign bank account: not because this is directly prohibited, but because the legislation does not directly provide for this procedure. There are several exceptions; the law stipulates permission for several situations (individuals effecting non-trading transactions, paying transport organisations, paying branches and representative offices, receiving loans and credits when certain conditions apply, etc.)

The key difference is not the prohibition, but the procedure. For this very reason the former text of part 1 of article 15.25 of the Code of Administrative Offences did not apply to these violations, while the new one imposes the confiscatory fine. If a more liberal interpretation of the law was in use previously and no substantial risks existed because there was no penalty, now the situation has changed drastically.

The risk now extends even to those who notified tax authorities of their bank accounts abroad and show their foreign income in their tax returns – paradoxical as it may seem, law-abiding individuals and organisations will be the first targets for the regulatory authorities.

Unofficial sources suggest that currency control authorities partially acknowledge that the conservative interpretation of the currency legislation is questionable and, most likely, will refrain from applying penalties on individuals. However, the official position of the regulators remains to be seen.

IMPORTANT NOTE: In fact, the provisions regarding the liability will receive the retroactive force. The text of part 1 of article 15.25 of the Code of Administrative Offences stipulates that the liability will be imposed, in particular, for “effecting currency transactions, payments under which are made out of funds, credited to accounts (deposits) in banks outside the Russian Federation when the currency legislation of the Russian Federation makes no provision for this”.

Liability will therefore be imposed:

• for transactions effected from 13 February 2013;
• for the transactions effected from this date, if payments under them are made out of funds credited to accounts in preceding periods.

In our view, if a person transfers the funds from foreign accounts to Russia before 13 February 2013 and then transfers them back, spending these funds carries no risk of liability as long as the tax authorities are notified that such accounts have been opened.

Pepeliaev Group’s lawyers are willing to provide assistance on the practical issues arising when administrative liability is imposed for currency violations and in taking measures to prevent these violations.