The suits in Strasbourg – Yukos Oil, tax evasion and human rights

27 September 2011 by Rosalind English

Oao  Neftyanay Kopaniya Yukos v Russia (Application no. 14902/04) – read judgment 

The collapse of the Russian oil giant Yukos following enforcement proceedings for multi-billion tax evasion has not prevented the ghost of the now-defunct company appearing in Strasbourg as a “victim” of the Convention.  After majority shareholder Mikhail Khodorkovsky  was prosecuted and imprisoned for fraud, the assets of Yukos were seized and the company was declared insolvent in 2006, and liquidated a  year later.  Nevertheless, the Strasbourg Court accepted its application because the issues raised by the case “transcended the person and the interests” of the applicant company. Striking out such claims, said the Court,

would undermine the very essence of the right of individual applications by legal persons, as it would encourage governments to deprive such entities of the possibility to pursue an application lodged at a time when they enjoyed legal personality…

The case raises interesting questions with regard to the policing and punishment of tax evasion, a matter which Strasbourg generally prefers to leave to national authorities. Whilst the wide margin of appreciation generally granted to a national governments cannot be boundless, there glimmers behind this ruling a reflection of  troubled water between the Council of Europe and its largest constituent. By admitting and upholding some of the complaints, Strasbourg signals its readiness to castigate failures in due process. But the rejection of the more fundamental charge of political motivation, though not exactly an olive branch, is proffered at least as a sign of non-aggression.

The case

The applicant company – no saint, even in the unsaintly tradition of Strasbourg “victims” – had engineered large-scale tax evasion schemes causing unprecedented damage to the State’s fiscal affairs whilst creating substantial riches for the company’s shareholders.  The Russian tax authorities  found that the company, having acted in bad faith, had failed properly to reflect these transactions in its tax declarations, thus avoiding the payment of VAT, motorway tax and corporate property tax.  The total assessment of the company’s liability, including fines and interest, amounted to some 300 million Euros. This amount was reduced slightly on appeal but the domestic courts all upheld the legal basis for the tax claims. Following enforcement proceedings the company was liquidated.

Yukos brought complaints under Article 6 (1) and (3) concerning the short time periods available for preparation for trial and the lack of reasons given for the appeals against it. It also invoked Article 1 Protocol 1 in connection with allegedly unlawful, arbitrary and disproportionate imposition and enforcement of the 2000-2003 tax assessments. It argued that the authorities had been politically motivated to destroy the company and expropriate its assets, contrary to Article 18 of the Convention, which provides that

The restrictions permitted under [the] Convention to the said rights and freedoms shall not be applied for any purpose other than those for which they have been prescribed.

Yukos contended that the motivation behind the prosecution of Mikhail Khodorkovsky and other owners and senior officials of the applicant company showed that the proceedings against it, taken as a whole, were abusive.  The company sought 73 million Euros in damages by way of satisfaction under Article 41.

Judgment of the Court

The ruling is not yet final and does not deal with the question of the award of damages and costs. On the substantive issues however the Court held that there had been a violation of Article 6 because the applicant company had had insufficient time to prepare its case before the lower courts; that there  had been a violation of Article 1 Protocol 1  regarding the imposition and calculation of penalties; but that there had been no violation of Article 14, in conjunction with Article 1 of Protocol No. 1 concerning whether Yukos had been treated differently from other companies.

The Court also held that there had been no violation of Article 18.

Interestingly, in considering the arguments under Article 1 Protocol 1, the Court of its own motion invoked the rarely-used prohibition on retrospective penalties in Article 7.  This provision reflects the notion of the rule of law and the requirement of lawfulness implicit in all the Convention provisions, which requires that only law can define a crime and prescribe a penalty. While it prohibits, in particular, extending the scope of existing offences to acts which previously were not criminal offences, it also lays down the principle that the criminal law must not be extensively construed to an accused’s detriment, for instance by analogy. It follows that offences and the relevant penalties must be clearly defined by law. This requirement is satisfied where the individual can know from the wording of the relevant provision and, if need be, with appropriate legal assistance, what acts and omissions will make him criminally liable (see Coëme and Others v. Belgium).

Pursuing this line of reasoning, the Court concluded that the tax authorities had changed the rules applicable at the relevant time. Their decision to order the applicant company to pay double fines represented a reversal and departure from the well-established practice directions of the local courts. Accordingly, the Court found that part of the impugned tax assessment was not in accordance with the law, as required by Article 1 of Protocol No. 1.

The dissent

The dissenting judges were at one in the view that the Court had disregarded its own case law in refusing to apply the usual wide margin of appreciation enjoyed by national governments in tax disputes.   Judge Jebens did not agree that the tax authorities had departed from the usual application of the relevant law. The authorities’ action

was consistent with the essence of the offence and did not broaden the scope of offences which could lead to prosecution for tax evasion and imposition of penalties. It is important that the novel interpretation of Article 113 did not set aside the rules on time limitations for the imposition of penalties due to tax evasion, nor did it shorten the time-limits for the imposition of such measures.

The acts in question constituted tax offences at the time when they were committed and the penalties requested by the Ministry and eventually imposed by the courts were no heavier than those applicable at that time.  He therefore would not have found a violation of Article 1 Protocol 1. Other dissenters part company with the Court’s findings on Article 6.  The decision to seize the applicant’s primary business asset and the speed of the enforcement proceedings to collect tax payments did not seem clearly unreasonable; the measures applied by the enforcement bodies were to a large extent determined by the company’s unlawful actions. On the facts,  it was not clear to the minority judges whether any other effective remedies existed and whether their adoption would have led to the goal of collecting taxes and penalties, in satisfaction of the public interest.

Tax persecution not politically motivated

Despite its positive findings on the substantive issues Court was not prepared to go the distance required for a finding of a violation under Article 18. Having established that  the company’s debt in the enforcement proceedings resulted from legitimate actions by the respondent Government to counter the company’s tax evasion, the Court concluded that there was

no indication of any further issues or defects in the proceedings against the applicant company which would enable it conclude that there has been a breach of Article 18 of the Convention on account of the applicant company’s claim that the State had misused those proceedings with a view to destroying the company and taking control of its assets.

It is no surprise that the Court refused to find a violation at this level, and it is predicted that any finding it reaches by way of compensation under Article 41 will not be anywhere near the sum claimed by the applicant.

It is easy to forget that we are not alone in our travails with the Strasbourg Court.  Russia’ s uneasy relationship with Strasbourg, exacerbated by the proliferation of adverse judgments over the years, does not need any further inflammation. Currently there is a bill before the Duma which would allow the Russian Constitutional Court to block the ECHR rulings. The Russian blog RiaNovosti comments that  the government cannot allow this bill to be passed because Russia’s expulsion from the Council of Europe will lead to its international isolation –

the confrontation between Russia and the ECHR will be limited to tough words without any real political consequences.

It remains to be seen whether the parties will request a referral of the case to the Grand Chamber. They have three months to decide on an appeal.

Sign up to free human rights updates by email, Facebook, Twitter or RSS

More on this topic:

• European Court straddles the fence on Yukos
• Russia violated rights of Yukos oil company, rules European rights court