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50Law and Modern States № 3 — 2013
SPECIFIC FEATURES OF THE LEGAL FRAMEWORK IN THE DOMAINS OF ENTREPRENEURIAL BUSINESS AND THE COUNTERACTION OF CORRUPTION: COMPARATIVE RESEARCH
Alexei Ivanov
Post-graduate student at the International Institute of Public Administration and Management of the Russian Presidential Academy of National Economy and Public Administration
Abstracts: The article analyses the regulatory and legal framework for business regulation and the counteraction of corruption in certain countries (Finland and Singapore) that have low corruption levels according to the worldwide corrupt practices rating. We reveal a relationship between corruption level and the conditions for entrepreneurial business. Recommendations are given on how to reduce the level of corruption and to improve the economic climate in the Russian Federation
Keywords: corruption, entrepreneurial business, legislation of foreign countries, Finland, Singapore, Russia
The author selected as subjects for research the two countries that, for the last five years, have been ranked highest by Transparency International, the non-governmental international agency This agency was organized to fight corruption and to research corruption levels in states all over the world . Their rankings are based on the framework of the corruption perception index (CPI) and reflect a state's annual score for how its corruption is perceived by analysts and entrepreneurs. 1
The author also analysed the Doing Business in 2009 — 2013 reports .2 These reports present the results of annual research by the
1 Corruption Perception Index (CPI) // Transparency International Russia (Centre of Anti-Corruption Research and Initiative). URL: http://transparency. org. ru/ indeks-vospriiatiia-korruptcii/blog.
2 Doing Business — 2013: Reasonable Approach to Regulating Activity of Small and Medium-Sized Enterprises. URL: http://russian. doingbusiness. org/reports/ global-reports/doing-business-2013; Doing Business — 2012: Doing Business in a More Transparent World. URL: http://russian. doingbusiness. org/reports/ global-reports/Doing%20Business%202012; Doing Business — 2011: Improving 56
World Bank Group, including their estimation for 185 countries of how simple it is to do entrepreneurial business there Their research conclusions are presented in the form of the Ease of Doing Business Index The study covers eleven key indicators of the yearly cycle in the operation of a company The research methodology called Doing Business and the analysis model that is applied appear to be the only standard tools in use across different countries The methods are specially designed to estimate how the legislative activity of the state influences business
To determine the rating coefficient, the World Bank Group takes into consideration indicators such as how easily one can register property and enterprises, obtain a permit for construction, connect to the electric power supply and find financing. Among the other factors they consider are the tax burden, mechanisms for protecting investors, the situation with foreign trade, methods for dealing with insolvency issues, provisions for the execution of contracts, and the hiring of workers . One more indicator, called Reasonable Approach to Regulating Activity of Small and Medium-Sized Enterprises, requires an assessment of the normative acts that regulate the activity of small and medium-sized enterprises and the procedure for their implementation
The author analysed constitutions, codes of law and national and local regulations in the states selected for the research Criteria such as geographical position, population, population density, ethnic differences, national ways of thinking, and affiliation of the legislation of the countries with a particular national legal system were also taken into consideration We set out below some facts that characterize the two states
Finland is a north European state, bordering on Sweden, Norway and Russia. Its legal system belongs to the Scandinavian (“northern”) legal system . 3 In comparative jurisprudence many academic lawyers distinguish this Scandinavian system as a standalone legal system, and it is followed in such states as Sweden, Norway, Iceland, Denmark and Finland A number of scholars consider the Scandinavian legal system to be a variation of the Romano-Germanic legal system A . Malmstrom places it between the Romano-Germanic legal system and the common law F Schmidt, while sharing the above view,
Conditions for Entrepreneurs. URL: http://russian.doingbusiness.org/reports/global-reports/Doing%20Business%202011; Doing Business — 2010. URL: http://russian. doingbusiness.org/reports/global-reports/Doing%20Business%202010.
3 Saidov A.Kh. Sravnitelnoe pravovedenie i juridicheskaja geografija mira. [Comparative Jurisprudence and Juridical World Geography.] Moscow: IGPRAN, 1993.
Law and Modern States № 3 — 2013
Law and Modern States № 3 — 2013
adds that European civil law is more dogmatic than the legal system of Scandinavian countries Since Russian law also belongs to the Romano-Germanic legal system, it is easy to see that the systems of legal regulation in Russia and Finland have much in common It is significant that from 1809 to 1917 Finland was part of the Russian Empire, and this explains the similarity of the sources of legal control, the pragmatic approaches to the law, the legal norms and the constitutions in Russia and Finland Decrees of the court also play a prominent role as a source of law in Finland
So far as concerns entrepreneurial activities, there is a distinct similarity in the constitutions of Finland and Russia. Article 34 of the Russian Federation Constitution states that all citizens have the right to use their abilities and property freely for entrepreneurial activities, whereas Paragraph 18 of the Constitution of Finland, entitled “Entrepreneurial Business and Right to Work”, declares that all citizens have the right to gain income by means of hiring employees, conducting entrepreneurial business and working in the manufacturing sector, and that nobody can terminate an individual's employment without a legal decision We can trace the similarity between this Paragraph and the Labour Code of the Russian Federation, where analogous norms are stipulated in Section 8, entitled “Protection of Labour Rights and Liberties”
On its CPI (corruption perception index) score, Finland was ranked 5th, 6th, 4th, 2nd and 1st for the years from 2008 to 2012, with the best result being achieved in 2012.
The Criminal Code of Finland does not refer to the notion of corruption, but it contains provisions concerning the taking of bribes by officials, and the prescribed punishment for taking bribes ranges from a financial penalty to imprisonment for up to four years There is no special anti-corruption law
By comparison, the Russian Federation adopted the Federal law “On Counteracting Corruption” in 2008, but Russia's corruption perception index in 2012 placed the country in 133rd position, next to such states as Honduras, Iran and Guyana . The comparison allows us to suggest that the basic weapon in the struggle against corruption should be rooted in a society's understanding of the immorality of corrupt practices, rather than in legislative measures per se
In Finland there is a special legal agency that examines cases of crimes and minor offences committed by high-ranking officials including the President Cases subject to investigation by this special court also include those involving corrupt practices We can judge this agency's efficiency by the fact that over the last ten years six government executives and 23 higher government officials were either dismissed or 58
retired on the grounds that it had been shown that they were somehow involved in corrupt practices .4 There are comparatively few officials in the state machine in Finland, and their duties and responsibilities are clearly spelt out in regulatory legislation The fundamental principle is the transparency of the state administration, and all transcripts and minutes are open for inspection by the general public
The rankings on the Ease of Doing Business Index in the Doing Business global reports for Finland were 14th, 16th, 13th, 11th and 11th for the last five years, so Finland took 11th place in the rankings for 2012 and 2013. The primary factors in this achievement are as follows: the regulatory and legal framework that is used to control the relationships between the authorities and the businesses of entrepreneurs is long-established and operates as a smooth-running mechanism; and the level of corruption in the country is very low.
In Finland, the basic regulatory legislation that governs entrepreneurial activities is the 2006 Law “On Joint Stock Companies”, which was intended to rejuvenate the country's general economic situation The rules regulating company debts and the protection of minority shareholders' rights have proved to be especially effective The law gives special consideration to regulating the activities of small firms One of the principal indulgences provided for small businesses and start-ups is a reduction of the minimum required stockholder capital from 8,000 to 2,500 Euro
Unlike the Russian Federal Law “On Joint-Stock Companies”, the Finnish law stipulates that there is no need to have a sole executive officer (which would be shown by the existence of the post of Director or General Director) This provision can be explained by the equality that is typical of the entrepreneurial environment in Finland, and that is barely achievable in Russia with its traditional and clear vertical business hierarchies
A special place in Finland's legal framework is given to the 2011 Law “On Competition”, which can be compared to the Russian Federal Law “On Protection of Competition”. There are also two laws that regulate legal relations in the area of entrepreneurial activities for nonresidents, namely, “On Control over Investments”, and “On Control Over Acquiring Companies in Finland by Foreigners” Within the framework of these laws, foreign natural and legal persons can acquire shares in Finnish companies unless this contradicts the provisions of
4 Psikhologo-akmeologicheskie tekcnologii protivodeistvija korruptsii v sisteme gosudarstvennoj sluzhby: uchebnoe posobie [Psychological and Acmeological Technologies of Counteracting Corruption in the System of the State Service: Study Guide] / Ed. А. А. Derkach. — Moscow: Publishing House RAGS, 2010.
Law and Modern States № 3 — 2013
Law and Modern States № 3 — 2013
Article 2 “On Important National Interests” or Article 3 “Enterprises Subject to Monitoring” of this latter law National interests are thought to require protection against such factors as threats of a social, economic, ecological or geographical character According to the provisions of Article 3, the Finnish authorities monitor businesses with an annual turnover or balance of more than 166 million Euro, and enterprises which employ more than 1,000 people.
The term “foreign owner”, according to the law, refers to an entity whose habitual residence is outside Finland, or a foreign organization or fund, as well as a Finnish organization that is controlled by one or more foreign owners To comply with Article 5 of the law, a prospective foreign owner must win the approval of the Employment and Economics Ministry before he or she can acquire an interest in a company subject to monitoring, if the prospective foreign owner wishes to take control (or to control more than 1/3 of the voting rights), except in certain cases specified by the law
The position of entrepreneurs in the area of fiscal law is regulated by the Law “On Taxation of Profit and Earned Income”. Two more laws, which regulate legal matters on the stock market, are also of interest to us — the Law “On Securities” and the Law “On Trading Standard Options and Futures”
The city of Singapore is situated on the island with the same name in Southeast Asia The island is separated from the southern end of the Malay Peninsula by the narrow Johore Strait, and its neighbouring countries are Malaysia and Indonesia The country comprises 62 islands . Before 1963 Singapore was a British colony, so its legal framework is based upon English common law
According to its corruption perception index (CPI) scores for 2008 to 2012, Singapore was ranked 4th, 3rd, 1st, 5th and 5th, and was one of the leading countries, with well-established anti-corruption policies The government's position in this sphere is consistent, clear and unequivocal Singapore developed a regulatory and legal framework designed to counteract corruption, based on the Law “The Prevention of Corruption Act”. In addition, a specialized governmental agency, called the Corrupt Practices Investigation Bureau (CPIB) was set up The CPIB is politically independent: it is headed by a Director, who reports only to the Prime-Minister No high-ranking official can either affect an investigation in some way or put pressure on the Bureau officers
The CPIB is authorized to launch investigations into alleged corruption in the government sector. Special attention is paid to public law enforcement officials, who, by the very nature of their work, are subject to the temptation of corruption to a greater degree (in Russia it is the Department of Internal Security of the Ministry of Internal 60
Affairs of Russia that deals with such issues) The CPIB's functions also include processing complaints against public servants and monitoring the legality of their actions (in Russia the procuratorate conducts similar activities) Besides this, the Bureau investigates crimes committed in the private sector
Under the law the Bureau has right to make searches and to control the bank accounts and money transfers of those persons who are suspected of corrupt practices, without a court decision These rights are spelt out in Article 15 “Right to Make an Arrest” and Article 22 “Search and Seizure” of the abovementioned law. These Articles stipulate that the Director or a Bureau investigator can arrest a suspect without an arrest warrant
Articles 11 and 12 of this Singaporean law define corruption crimes connected with members of parliament and the government . Article 26 regulates cases in which suspects attempt to hinder the investigation There are sanctions in the law for false statements and for giving misleading information (in Article 28, the sanction being a financial penalty of 10,000 Singapore dollars or one year of imprisonment). The law, or more precisely Article 36 of the law, also guarantees the protection of informants (in the Russian anti-corruption law there is no analogous article, and, in practice, the Russian system for the protection of informants does not function well)
In the ratings for the Ease of Doing Business from 2009 to 2013, Singapore has consistently taken first place Singapore has not conceded victory to such powerful economies as those of Germany and China, which, by expert estimates, is a considerable achievement By comparison, in the global report “Doing Business — 2013” Russia takes only the 112th place for this measurement, in close vicinity to such countries as Jordan (106th) and Pakistan (107th) .
Singapore is one of the countries where the entrepreneur can register his or her company very easily and comfortably. The Company Register in Singapore operates a web portal that allows a company to be registered entirely via the Internet, and to be officially set up within one or two days It is possible to register the following types of company: company limited by shares, company limited by guarantee, and unlimited company
According to Article 205 of the Law “On companies” the directors must appoint auditors within 3 months of the date of the official incorporation of the company, and, according to Article 171, the directors must appoint a secretary within 6 months of that same date In the Russian legislation similar rules are stipulated in the Laws “On State Registration of Legal Entities and Individual Entrepreneurs” and “On Limited Liability Companies”, and by Article 95 of the
Law and Modern States № 3 — 2013
Law and Modern States № 3 — 2013
Russian Federation Civil Code “General Provisions on the Additional Responsibility Company”
The Singaporean Act “On Income Tax” and Part 6 “Accounting and Audit” of the Law “On Companies” correspond in many instances to the Tax Code of the Russian Federation . We should also note the Singaporean law “On Electronic Transactions”, which provides for security in conducting electronic transactions, within the framework of the UN Convention on the Use of Electronic Communications in International Contracts, adopted by the United Nations General Assembly on November 23, 2005 A similar draft law “On Electronic Commerce” is being developed in Russia; it will regulate the relevant legal relationships
Singapore's Competition Act of 2004 resembles the Russian Federal Law “On Protection of Competition”, whereas the International Arbitration Act is analogous to the Russian Law “On International Commercial Arbitration” of July 7, 1993
Although each of the three countries we have analysed is headed by a President, the form of state structure is different in each: Russia is a presidential-parliamentary republic, Finland is a presidential republic, and Singapore is a parliamentary republic As opposed to Finland and Singapore, which are unitary, Russia is a federation, and its Parliament and Federal Assembly consist of two chambers — the Soviet of the Federation and the State Duma The legal framework of all the three states is founded on a constitution, and the regulatory and legal frameworks that regulate entrepreneurial activities and the counteraction of corruption in the three states are similar in many instances Certain differences in the Singaporean legal framework can be easily explained by the fact that it belongs to the Anglo-Saxon legal system Considering the parameters of the area and the demographic status, we can see that Russia is much bigger than the other two states in our study. While F inland and Singapore are alike in the number of their inhabitants, the population density in Singapore is notably higher The economic climate is favourable for entrepreneurial activities in the two states in the study (the Ease of Doing Business index for the last five years rates Finland and Singapore very highly), and in many ways this can account for their respective levels of corruption (the CPI rating — the rating according to the corruption perception index) The low corruption level in Finland is associated with the national mentality, with the fact that Finnish society is aware that corruption is immoral Crimes related to corrupt practices in the civil service are very rare indeed, and the attitude of society to wrongdoers, and quite often not only to them in person but also to their relatives, can be described as an aversion Enabling the creation 62
of an environment that works against corruption, the regulatory and legal framework for the regulation of entrepreneurial activities is noted for its tolerance, and therefore it provides comfortable conditions for entrepreneurs and for those who are engaged in other ways in this sphere
The Finnish model of fighting against corruption is, in my opinion, unacceptable for Russia (today's Russia), for a number of reasons . In the first place, our society is not ready to admit, in full measure, the immorality of this phenomenon, or to recognize the economic damage that results from corrupt practices We cannot fully beat corruption, but we can definitely reduce its scope; what it takes is to start, and, however banal it may sound, one should start with oneself In today's Russia it is still next to impossible to achieve the required results in many state organizations “without an envelope”, but when compared with the situation in the 1990s, one cannot but notice a positive shift . In the second place, a “soft” regulatory and legal framework in the domain of the counteraction of corruption by no means fits with our mentality, and neither can it match the practice of acquiring real property and opening accounts in foreign banks by our civil servants, who often put their own assets into the names of their close relatives
I am confident that to begin with Russia needs radical measures, especially as regards the legal framework In this context the experience of the Republic of Singapore is worth considering In my opinion, a Russian anti-corruption agency should urgently be established, reporting directly to the President Its priority task should be to investigate corrupt practices among high officials, and to return many billions which have been stolen in different ways, including through corruption . For the sake of justice, officers of this agency should be subject to additional penal responsibilities
In order to increase its ranking on the Ease of Doing Business Index, and to improve the economic climate and the environment for entrepreneurs, Russia should:
1. Create favourable conditions for business; that is, it should:
a) Improve the regulatory and legal framework in the domain of business regulation, so that it provides for transparency and effectiveness in business and removes all kinds of obstacles to this These efforts should be based on the experience of foreign countries, including Finland and Singapore;
b) Render state assistance in the area of credit financing and subsidization, and exclude double standards;
c) Counteract corruption, specifically by applying methods of legal control and taking direct law enforcement actions in relation
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Law and Modern States № 3 — 2013
to both civil servants and entrepreneurs, and provide for a rapport and interaction between representatives of businesses and state structures
2. Develop small and medium-sized entrepreneurial businesses, and increase their share of the GDP of the country. By the estimates of different experts, small and medium-sized businesses contribute between 15 and 20 per cent of GDP. In the countries of the European Community they contribute up to 50 per cent
In Singapore there are about 130,000 small and medium-sized enterprises, which amounts to 92 per cent of all the enterprises in the country; these businesses contribute approximately 35 per cent of the added value on the total produce and more than 25 per cent of Singapore's GDP. Besides, 7 per cent of the annual gain in employment is provided by small and medium-sized businesses Naturally, the state supports this economic sector in many ways
Small and medium-sized businesses are of paramount importance in the social and economic life of Finland Of all the companies registered in the country, more than 90 per cent qualify as small and medium-sized enterprises (SMEs) Their aggregate annual turnover is 52 per cent of the total turnover from all companies, and they contribute 50 per cent of the GDP 50 per cent of all workers are employed by SMEs, and up to 60 per cent of new jobs are also created by SMEs The share contributed by SMEs to the total exports of the country amounts to 17 per cent, and their exports are growing faster than those of large businesses
3. Reduce the level of inequality in income distribution. In the Russian Federation in 2012, the ratio between the average income of the 10 per cent of the population with highest income and the 10 per cent of the population with the lowest income was 16.4:1. By comparison, in Finland the average corrected net disposable income of the 20 per cent of the wealthiest people is 44,992 USD per year, while the 20 per cent of population with the lowest incomes have 12,236 USD per year, which means that the split is 3.7:1. In Singapore the situation is worse than in Finland, but better than in Russia: the split is 9 .7:1.
Thus, to develop entrepreneurship we can only succeed by solving a number of socioeconomic, political and legal problems, and the experience of different countries can prove very useful
