BUSINESS

Firms to Face 90-Day Freeze For Wrongdoing

Companies are going to face a more extreme administrative sanction for legal violations then ever before. A law, signed by the Russian President on May 9, will empower the authorities to initiate an administrative suspension of operations for 90 days before the court.

In extreme cases, such as threatened harm to human life and health, material damage to the environment, trafficking of narcotic substances or money laundering, the law provides for an interim measure, such as a temporary ban on operations for up to five days before the case comes before the courts. What's more, the five-day suspension can be enforced by regulatory authorities at their own discretion.

The need for clear legislative regulation in freezing company operations has long been a hot issue in business and state authority relations. To date, numerous laws and normative acts have raised complicated issues for proper suspension of company operations up. The recent increase in the activities of Russia's supervisory and controlling authorities has only added to business concerns.

A more structured official response arrived at the end of April, when the Duma adopted a specific law to deal with administrative violations (published in the official daily Rossiskaya Gazeta on May 13, 2005).

What the law clarifies immediately is the cause and the extent of the punishment to which companies are liable. Suspension of operations is applied in almost 30 administrative cases and granted by the court for a period of up to ninety days. That amends previous rules that encouraged mostly non-judicial closure of operations. When the law comes into effect a judge's ruling on suspension of operations will be enforced by the bailiffs immediately following its adoption.

A company or individual entrepreneur judged to be party to any of the above will face a temporary closure of operations, as well as a termination of the freedom to use devices, items, buildings and structures, or carry out certain business activities.

Nonetheless, formally the suspension may be subject to early termination by a judge if the circumstances on the basis of which the punishment was imposed are eliminated.

However, as mentioned earlier, the law also introduces the option of a short temporary ban that gives non-judicial regulatory authorities the power to suspend operations up to five days before the case is to be considered by the court.

According to the law, a temporary ban may be applied in exceptional cases in order to prevent negative effects on human life in cases where they cannot be prevented otherwise. The interim measure is imposed in most cases by the head of a regulatory authority, which may create a basis for abuse of company rights.

It is evident that potential negative effects may be done to a business if such power is exercised by non-judicial authorities. This strikes us as an extremely unfavorable legislative amendment, which in its nature contradicts the general meaning of the law: that any administrative dispute is to be controlled with judicial instruments.

Though the bent of the law seems to be positive, the interim measure of a temporary ban may be very harmful for business activities.

The practical aspects of the new law will be felt more distinctly once it comes into effect August 12 this year, ninety days from its official publication in Rossiskaya Gazeta.

Ivan Smirnov is a senior associate and Edward Zadubrovsky an associate at the St. Petersburg office of EY Law.

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