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Corporate Liability in Azerbaijan

By Gunduz Karimov (Baker McKenzie Azerbaijani)

I.              Corporate liability deriving from criminal activity

1.             Nature of the liability (criminal, administrative) and basis (crimes committed by directors or representatives, in the interest of or for the advantage of the company)

Under the Criminal Code of the Republic of Azerbaijan (the “Criminal Code”), which was enacted on 1 September 2000, only natural persons could originally be subject to criminal liability. The criminal liability of legal entities was introduced in Azerbaijan on 7 March 2012, with the adoption of the Law on the Amendments to the Criminal Code.

These amendments, however, have not taken effect as yet. They will come into force after the relevant amendments are introduced to the Criminal Procedure Code of the Republic of Azerbaijan, (the “Criminal Procedure Code”), and the Code on Execution of Sentences of the Republic of Azerbaijan, (the “Code on Execution of Sentences”), both of which also took effect on 1 September 2000.

Following these amendments, the Criminal Code introduced the criminal liability of legal entities for certain types of crimes committed for the benefit of the legal entity or in its interests by the following persons:

  • Officials authorized to represent the legal entity
  • Officials authorized to make decisions on behalf of the legal entity
  • Officials authorized to control the activity of the legal entity
  • An employee of the company, as a result of the “nonperformance” of duties by the officials referred to above

Criminal sanctions cannot be imposed on a legal entity if an officer of the legal entity who committed a crime for the benefit of the legal entity or in its interests is discharged from liability due to the expiration of the statute of limitations.

2.             Type of crimes/administrative offenses from which, according to the legislature, corporate liability may arise

Company liability under the Criminal Code will arise if the following crimes are committed:

  • Crimes against freedom and dignity: Kidnapping (Section 144); Human trafficking (Section 144-1); Forced labor (Section 144-2); Illegal actions with documents for human trafficking (Section 144-3)
  • Crimes against the constitutional rights and freedom of people: Disruption of religious ceremonies (Section 167); Compelling others to make religious confessions or financing these actions to produce religious discord or because of religious radicalism or religious fanaticism (Section 167-1); Illegal production, import, sale or distribution of literature, audio and video records, and goods of a religious nature and other information/records of religious content (Section 167-2); Production, storage, distribution of religious extremist records or financing of these actions (Section 167-3); Encroachment on citizens’ rights on the ground of execution of religious ceremony (Section 168); Violation of requirements relating to conduct of religious propaganda, and execution of religious ceremonies and rituals (Section 168-1); Violation of rules on holding of social gatherings (Section 169); Coercing others to become members of political parties (Section 169-1)
  • Crimes against minors and family relations: Involvement of minors in the commitment of crimes (Section 170); Involvement of minors in prostitution or other immoral practices (Section 171); Trading in child pornography (Section 171-1)
  • Economic crimes: Manipulation of sports competitions (Section 192-2); Money laundering (Section 193-1); Acquisition, possession, use and disposal of monetary funds or other property obtained by criminal means (Section 194); Illegal turnover of pharmaceuticals (Section 200-1); Illegal turnover of genetically modified plants or agricultural plants produced by modern biotech and genetic engineering methods, or foodstuff produced with use of genetic materials of genetically modified plants
  • Crimes against public safety: Terrorism (Section 214); Financing of terrorism (Section 214-1); Public call for terrorism (Section 214-2); Conducting of exercises for terrorism (Section 214-3); Hostage taking (Section 215); Fraudulent statement on terrorism acts (Section 216); Banditry (Section 217); Establishment of a criminal community (Section 218); Hijacking of air, water or railway transport (Section 219); Maritime banditry (Section 219-1); Inciting mass unrest (Section 220); Organization of actions that lead to violation of public order or active participation in such actions (Section 233)
  • Crimes against public morality: Illegal trading in pornography (Section 242); Involvement in prostitution (Section 243); Keeping of houses of ill repute (Section 244); Organization or keeping of gambling parlors (Section 244-1)
  • Ecological crimes: Illegal felling of trees (Section 259); Destruction of or damage to forests or other green spaces (Section 260); Violation of the regime of specially protected natural areas and objects (Section 261)
  • Cybercrimes: Gaining illegal access to computer systems (Section 271); Illegal seizure of computer information (Section 272); Illegal interference with computer systems or computer information (Section 273); Turnover of items for cybercrimes (Section 273-1); Falsification of computer data (Section 273-2)
  • Crimes against state authority: State treason (Section 274); Use of military forces of the Republic of Azerbaijan and other military forces provided by legislation against the Azerbaijani people and constitutional state authorities (Section 275); Espionage (Section 276); Endangering the life of state or public persons (Section 277); Staging of violent coups or violent detainers of power, violent change of constitutional form of state (Section 278); Establishment of military forces not provided for by legislation (Section 279); Inciting violent upheavals (Section 280); Public calls against the state (Section 281); Sabotage (Section 282); Incitement of national, racial, social or religious hatred and enmity (Section 283); Establishment of groups with the purpose of participation in military conflicts outside of the Republic of Azerbaijan (Section 283-1); Violation of state secrecy (Section 284)
  • Corruption crimes: Abuse of power (Section 308); passive bribery (defined as the solicitation or acceptance, directly or indirectly, by a public official of a material or other benefits, privileges or undue advantages for themselves or others in consideration for acting or refraining from acting, or providing patronage when exercising official duties (Section 311); Active bribery (defined as an offer, assurance or gift of a material or other benefits, privileges or undue advantages for themselves or others, directly or indirectly, to a public official for themselves or others in consideration for acting or refraining from acting when exercising official duties (Section 312); Exerting illegal influence on the decisions of officials (Section 312-1); Forgery (Section 313)
  • Crimes against public order: Resistance or use of force against public officials (Section 315); Dissemination of confidential information about victims of human trafficking (Section 316-1); Dissemination of information about activities carried out against money laundering (Section 316-2); Forgery, illegal production or sale of official documents, state awards, stamps, letterheads or use of false documents (Section 320); Discret or disparagement of honor and dignity of the president of the Republic of Azerbaijan (Section 323); Desecration of the state flag of the Republic of Azerbaijan (Section 324); Purchase or sale of state awards and official documents (Section 325); Theft and destruction of official documents and stamps (Section 326)

3.             Identification of companies and entities to which liability may apply

Any legal entities may be subject to criminal liability irrespective of their form of ownership, place of business and legal form. Criminal law measures, however, cannot be imposed on the state, municipalities and international organizations.

4.             Corporate liability for crimes committed abroad by its representatives or subsidiaries

The Criminal Code does not specifically address the criminal liability of legal entities for crimes committed abroad and, in absence of the respective practice, it is unclear whether such liability may arise.

The Criminal Code states that Azerbaijani citizens and stateless persons with permanent residence in Azerbaijan who commit crimes (commission or omission of an act) outside the Republic of Azerbaijan are subject to criminal liability under the Criminal Code, unless such persons are prosecuted in the state where the crime has been committed.

Likewise, foreign nationals and stateless persons who commit crimes outside the Republic of Azerbaijan can be subject to criminal liability under the Criminal Code in cases where the crime is directed against the citizens of the Republic of Azerbaijan or against the interests of the Republic of Azerbaijan, as well as in cases stipulated by the international treaties to which the Republic of Azerbaijan is a party, unless such persons are prosecuted in the foreign state where the crime has been committed.

5.             Corporate liability in the case of transactions taking place after the commission of a crime (acquisitions, mergers, demergers, etc.)

Under the Criminal Code, in the event that a legal entity is reorganized before the adoption of the decision of the court in connection with the imposition of criminal law measures, the criminal law measures are imposed on the legal successor of that legal entity.

Additionally, the Criminal Code prohibits reorganization or liquidation of the legal entity from the moment of adoption of the judgment and until its complete execution or cancellation thereof.

II.            Applicable sanctions

1.             Type of sanctions applicable to the company

If the legal entity is found liable for any of the abovementioned crimes, the courts may apply the following penalties to the company:

  1. Fine
  2. Special confiscation
  3. Deprivation of right to engage in certain activities
  4. Liquidation of legal entity

The Criminal Code establishes that liquidation of the legal entity is imposed as a primary type of penalty, a fine is imposed as both primary and additional types of penalty, and special confiscation and deprivation of right to engage in certain activities are imposed as additional types of penalty.

Fines

A fine is a compulsory monetary penalty imposed by the court and kept back in favor of the state. An amount of the fine applicable to legal entities may vary from AZN 50,000 to AZN 200,000 or between onefold and fivefold of the caused damage or earned income.[1]

Additional limits applicable in the event of imposition of a fine on a legal entity are as follows:

  • For infractions – A fine in the amount between AZN 50,000 and AZN 75,000 or from onefold to twofold of the caused damage or earned income
  • For misdemeanors – A fine in the amount between AZN 75,000 and AZN 100,000 or from twofold to threefold of the caused damage or earned income
  • For felony crimes – A fine in the amount between AZN 100,000 and AZN 125,000 or from threefold to fourfold of the caused damage or earned income
  • For grave crimes – A fine in the amount between AZN 125,000 and AZN 150,000 or from fourfold to fivefold of the caused damage or earned income

A fine imposed by the court should not exceed half of the book value of the company’s property.

Special confiscation

A special confiscation is a compulsory and uncompensated seizure of the following property in favor of the state:

  • Tools and instruments used in the commission of crime
  • Money or other property obtained by criminal means, as well as revenues generated by use of these monetary funds or other property
  • Property or any part thereof, in which money or other property obtained by criminal means were converted by way of conclusion of civil deals or otherwise
  • Property used to finance terrorism, armed formations or groups or organized criminal groups (criminal organizations)

Deprivation of right to engage in certain activities

Deprivation of the right to engage in certain activities includes a cancellation of the special permit (license) to engage in certain types of business, as well as prohibition of the conclusion of certain agreements, issuance of shares or other securities, receipt of state subsidies, or other benefits or engagement in other activities.

The following durations of punishment may apply in the event of the imposition of deprivation of the right to engage in certain activities:

  • For infractions – one to two years
  • For misdemeanors – two to three years
  • For felonies – three to four years
  • For grave crimes – four to five years

Liquidation of legal entity

Liquidation of the legal entity is an extraordinary measure of the criminal law that includes the termination of the existence and activities of the legal entity in connection with the crime committed in its favor or in its interests. It does not allow the transfer of any of the company’s rights and obligations to the legal successor.

Liquidation of the legal entity is applied if the legal entity is regularly exploited for the commission of crimes or concealment thereof or money laundering, or if more than half of its property is subject to special confiscation. A fine in the amount of AZN 200,000 may additionally apply in the case of compulsory liquidation of the legal entity.

The Criminal Code expressly excludes political parties, trade unions, state (municipal) enterprises or legal entities that have the controlling stake (shares) owned by the state (municipality) from the list of legal entities that may be subject to liquidation.

2.             Interim measures, cease and desist orders, bans and confiscatory measures

While the amendments to the Criminal Procedure Code have not yet been introduced, it is generally expected that if a legal entity is found liable for the crimes stipulated under the Criminal Code, interim measures, cease and desist orders, and bans and confiscatory measures may apply.

3.             Liability of directors or managers for not having adopted (intentionally or negligently) measures for the prevention of the crime

The negligence of an official (such as director or manager), which includes a failure to perform official duties due to a careless or negligent attitude to the service, causing significant damage to the rights and lawful interests of individuals or legal entities or legally protected interests of the state or society, may lead to criminal liability under the Criminal Code.

III.           Measures and “models” of prevention and effects of the same on corporate liability and applicable sanctions

1.             Consequences of the adoption of a compliance “model” and effects on corporate liability for crimes committed by the company’s managers, directors or representatives (cases in which it is possible to obtain an exemption from liability or a mitigation of the sanction)

The Criminal Code establishes that the following circumstances must be considered during a determination, by the court of criminal law, of measures to be imposed on the legal entity:

  • The nature and degree of social danger of the crime
  • The amount of profit received by the legal entity from the commission of the crime, or the nature and extent of its security interests
  • The number of crimes and the severity of their consequences
  • Assistance with the resolution of crime, exposure of participants, and search and allocation of property obtained through crime
  • Voluntary compensation or elimination of material and moral damages suffered as a result of crime and other measures undertaken by the legal entity to reduce the caused damage
  • The characteristics of the legal entity, including its criminal records and or engagement in charitable or other social activities

While the Criminal Code is silent on any compliance “model” of prevention of the crime (the “Model”), the above provisions imply that legal entities may minimize the risk of incurring company liability if they implement an effective Model. An effective compliance program is the primary method by which a company can overturn or mitigate potential punishment after an indictment for misconduct or wrongdoing. Following best international practices, the legal entity may implement the following measures:

  • Identify the risky activities or areas of activities within the company’s business.
  • Identify the modalities for handling financial resources suitable to prevent crimes.
  • Provide for specific protocols (policies) aimed at planning the formation and implementation of the company’s resolutions with respect to the prevention of potential crimes.
  • Appoint a monitoring body with autonomous powers of control, in charge of controlling the proper implementation and updating of the Model.
  • Provide continuous training on the Model to company employees and representatives.
  • Provide for specific disciplinary sanctions applicable in case of noncompliance with the guidelines provided for in the Model.

2.             Modality according to which a compliance “model” must be adopted in order to benefit from exemption from responsibility or mitigated punishment (codes of ethics, procedures, etc.)

As discussed, the Criminal Code does not provide guidance with respect to the Model. Therefore, a company is free to include any useful information in the structure of the Model, such as a general part listing the relevant crimes under the Criminal Code, a special part listing the most relevant areas of risks of committing the crimes, and a set of protocols regulating the most sensitive areas of business (eg, interactions with public officials, participation in public tenders).

3.             Monitoring: independent person or body to control/supervise, with the purpose of verifying the correct application of the “model”; mode of operation of such person or body

Since the Criminal Code does not expressly provide for a specific mode of operation of the monitoring body, the company is free to establish its own mode of operation.

IV.          Judicial proceedings to determine corporate liability

1.             Court competent to decide the liability of and penalties applicable to the company

The Republic of Azerbaijan has a three-tiered court system, consisting of the trial courts, appellate courts and the Supreme Court. Appellate courts and the Supreme Court have specialized criminal panels. Decisions of trial courts may be appealed at the appellate courts; decisions of the latter, in turn, may be appealed at the Supreme Court. The decisions of the Supreme Court are final and binding.

Felonies and grave crimes are heard by specific courts on grave crimes, which are considered courts of first instance.

An imposition of the criminal law measures to the legal entity does not eliminate the criminal liability of the persons who committed the crime or participated in the commission of crime. Likewise, the termination of the criminal prosecution of the legal entity’s officer does not remove the criminal liability of the legal entity.

Other than as discussed above, since the amendments to the Criminal Procedure Code and the Code on Execution of Sentences have not been introduced yet, the details of judicial proceedings to determine corporate liability remain unclear.

V.           Corporate liability in multinational groups

In setting out the requirements on which the criminal liability of legal entity is based, the Criminal Code focuses its attention on single entities, without providing any specific regulation for when the criminal offenses therein included are committed in the context of a corporate group.

In other words, no provision of the Criminal Code clarifies if and upon which particular conditions, if any, a parent company may be held criminally liable in relation to offenses committed by any of the local company’s top management or individuals subjected to top management’s supervision and control.

VI.          Significant case law concerning corporate liability arising from crimes and draft laws under discussion

As discussed, the amendments to the Criminal Procedure Code and the Code on Execution of Sentences are expected to be introduced. Until then, the criminal law provisions applicable to the legal entities may not be considered in effect.

[1] USD 1 is equal to approximately AZN 1.75 at the moment.