Can Criminal Proceedings Be Used to “Catch up” with Lost Profits?

Criminal law responds to the most significant violations. They can be both obvious — murder, theft, or drug trafficking, and not obvious — abuse of influence, embezzlement in office, tax evasion. 

For the most part, criminal law operates in legal categories and does not often “fit” into the economic sphere. This isn’t always the case. A vivid example of this is the issue of lost profits, which arose, in particular, in the high-profile cases of the Elektrovazhmash plant and Boryspil airport.

Why lost profit is unusual for criminal law

An unusual category of criminal law can include lost profits. After all, lost profits are one of the types of losses — income that a person could actually receive under normal circumstances, if their right had not been violated (Article 22 of the Civil Code of Ukraine). That is, it is inherent in more private-law industries.

The lost profit got into criminal law through crimes related to the violation of intellectual property rights. After all, the “piracy” of the film or the forgery of branded clothes leads to the fact that the owner loses their income, which could have been obtained under normal conditions, if their right had not been violated by other persons. 

This can be considered as serious consequences of the crime, taken into account in the criminal legal qualification. This legal position was expressed in the resolution of the Supreme Court dated October 12, 2021. It would seem logical, but let’s turn to corruption crimes.

If you look at the practice of the HACC regarding lost profits, then at least two cases come to mind. 

The first of them is the case of the Elektrovazhmash plant. In it, officials were convicted for the fact that, through the intermediary of a company controlled by them, registered in Prague, they organized the sale of spare parts to a Lithuanian company. Those spare parts that Elektrovazhmash sold to the Czech company for EUR 600,300, the latter resold to the Lithuanian at almost twice the price — EUR 1.22 mln. As a result, Elektrovazhmash lost UAH 13.7 mln.

There is another case — the one concerning the ex-head and official of the Boryspil airport. The court convicted them for the fact that the state did not receive income from the lease of property due to violation of the competitive procedure established in the legislation.

In both cases, the defense explained its actions, in particular, by economic expediency. In the first case, the Czech company was ready to provide advance payment of the costs for manufacturing the ordered parts. In the second case, the Regional Department of the SPFU held tenders for the right to lease for too long, which would have caused downtime and losses for the enterprise. By the way, it was on this basis that Boryspil Airport admitted that it had not incurred losses.

Therefore, the court assessed the arguments of the defense regarding the economic expediency and those of the prosecution regarding the formal violation of the law.

The line between efficiency and risk

Inefficient performance by managers of their functions can lead to the fact that the business does not receive as much income as its owner desires. Does this mean that the senior management is committing any crimes? Probably not because there are many reasons for the non-profitability of the business. However, there may be cases when business losses may be associated with a negligent attitude of the management to their responsibilities, or even collusion with competitors.

If we are talking about private enterprises, then it is the interest of the owner that the investments are not lost. But if we consider state-owned enterprises, is the state interested in getting the maximum income?

With a little doubt, we can say yes. What, then, should be the reaction of the state to the ineffective performance of its functions by employees, if they are associated with filling the budget?

In the two above cases, the judges partially considered the “economic” arguments of the defense. 

Thus, in the case of Elektrovazhmash, it is indicated that the fact that the Czech company made a partial advance payment of production requires consideration of the value of future money. After all, the cost of goods delivered on the terms of advance payment is usually lower than the cost of goods on delivery.

In the case of Boryspil, the court ruled that the work of the Regional Department of the SPFU and the commissions was organized inefficiently, the deadlines for making decisions were unreasonably delayed. The compliance of the qualifications of specialists with the requirements that apply to them is questionable, since such decisions were made that obviously contradicted the established rules.

But the court still ruled guilty verdicts.

Details are important

In the cases of Boryspil and Elektrovazhmash, the amount of losses was proved by expert examinations, and the defense had serious doubts about their quality. In addition, alternative conclusions of experts were provided, where it was claimed that no harm had been caused.

In the first case, the court independently calculated the amount of losses, guided by the documents that were in the case file. An important role in this was played by the establishment of intent of the accused to sell spare parts to an intermediary at a lower cost and the lack of reliable information about the market value of the procurement item. Therefore, the court decided to subtract the contractual value of the item of the concluded contract from the cost at which the plant had a real opportunity to sell spare parts.

The HACC Appeals Chamber decided to assign a comprehensive merchandising judicial expertise and a forensic economic expertise due to the fact that the experts’ conclusions differed, and there is no complete analogue of the manufactured products.

In the case of Boryspil Airport, the court based its position on the conclusions of experts, although it independently calculated the amount of losses. At the same time, the most important thing was the report on the valuation of the right to lease premises. It was in this report that a specialist on behalf of a NABU detective identified the growth rate of the lease right as the most likely indicator of the growth of the basic cost. The specialist came to the following conclusions based on the analysis of prices on the basis of the concluded lease agreements as a result of the tenders held in 2018. This coefficient was supposed to show how much the cost of leasing premises increases, which is determined by the results of the tender, compared to the basic rent.

Although the defense objected to the use of this valuation report, the court pointed out that any report on the valuation of the lease right has a certain degree of assumptions and represents a statement of the appraiser’s subjective vision. However, such a level of assumption should not lead to data distortion, which will result in the inaccuracy of the conclusions set out in the report.

Difference in approaches

Among the judges of the Supreme Court, there is no unity in the question whether the infliction of a lost benefit can be incriminated to a person within the framework of criminal proceedings.

For example, according to Oleksandra Yanovska, civil and criminal liability are based on fundamentally different principles. If civil liability is based on the presumption of guilt of a person, then, according to Article 62 of the Constitution of Ukraine, it is prohibited to build accusations on assumptions.

The judge argues that the lost profit by its social and legal nature can be determined only as probable. After all, its nature and scope will always have a lack of reliability as a necessary criterion for assessing evidence of material damage. Therefore, it can be recovered only through civil lawsuits in criminal proceedings.

The judge of the Supreme Court, Arkadii Bushchenko, is not so categorical. He agrees with the conclusion of the Supreme Court that the object of protection of Article 176 of the Criminal Code of Ukraine is peculiar. It concerns copyright infringement, and therefore the damage caused by their violation can be expressed in the loss or reduction of the benefits provided by this right. However, Bushchenko believes that the damage in the amount specified in Article 176 of the Criminal Code of Ukraine should be proved beyond reasonable doubt.

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In conclusion, it can be argued that lost profits can be incriminated as grave consequences in corruption criminal offenses only if the evidence indisputably confirms its size.

In the cases mentioned here, the greatest difficulties were in the proper comparison of prices. After all, in the case of Elektrovazhmash, the expert did not have the opportunity to determine the value of similar goods in order to understand how unprofitable the sale was. In the case of Boryspil, the expert’s conclusion was based on the certificate of a specialist who focused on the increase in the cost of rent of other premises in this airport and the airport in Lviv.

The modeling of management actions, which consist in risky investments, can be even more difficult for proving lost profits. They do not have a quick effect but can affect the profitability of the enterprise in the long term.

All these nuances must be considered during the expert examination. Therefore, the court should pay the greatest attention to the adequacy and completeness of the experts’ conclusions, the methodology they used, as well as the source data that they operate.

The subjective side of the incriminated offenses was also of great importance for the court. After all, when it was established that the accused intentionally committed actions aimed at selling goods at a lower price, or at transferring premises for lease non-competitively, it did not take the court much effort to calculate the amount of the damage caused.

However, it should be emphasized that bringing a person to criminal responsibility takes place according to the standard of proof “beyond reasonable doubt,” which requires the provision of evidence, whose quality is absolutely convincing. In cases where the evidence base is not as described, it is advisable to file claims for the recovery of lost profits in civil proceedings.

This publication was prepared with the financial support of the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.