Khodorkovskiy and Lebedev v. Russia

Information Note on the Court’s case-law No. 165

July 2013

Khodorkovskiy and Lebedev v. Russia - 11082/06 and 13772/05

Judgment 25.7.2013 [Section I]

Article 7

Article 7-1

Nullum crimen sine lege

Interpretation of offence of tax evasion derived by reference to other areas of law: no violation

Article 6

Criminal proceedings

Article 6-1

Impartial tribunal

Alleged lack of impartiality of trial judge who had already taken procedural decisions adverse to defence and had sat in trial of co-accused: no violation

Article 6-3-b

Adequate facilities

Adequate time

Need for applicants to study large volume of evidence in difficult prison conditions, but supported by highly qualified legal team: no violation

Article 6-3-c

Defence through legal assistance

Systematic perusal by prison authorities and trial judge of communications between accused and their lawyers: violation

Article 6-3-d

Examination of witnesses

Refusal to allow defence to cross-examine expert witnesses called by the prosecution or to call their own expert evidence: violation

Article 8

Article 8-1

Respect for family life

Respect for private life

Imprisonment in penal colonies thousands of kilometres from prisoners’ homes: violation

Article 18

Restrictions for unauthorised purposes

Allegedly politically motivated criminal proceedings against applicants: no violation

Article 34

Hinder the exercise of the right of petition

Disciplinary and other measures against the lawyers acting for applicants in case pending before European Court: failure to comply with Article 34

Facts – Before their arrest the applicants were senior managers and major shareholders of a large industrial group which included the Yukos oil company. They were among the richest men in Russia. Mr Khodorkovskiy, the first applicant, was also politically active: he allocated significant funds to support opposition parties and funded several development programmes and NGOs. In addition, Yukos pursued large business projects which went against the official petroleum policy.

In 2003 the applicants were arrested and detained on suspicion of the allegedly fraudulent privatisation of one of the companies in the group. Subsequently tax and enforcement proceedings were brought against Yukos oil company, which was put into liquidation. New charges were brought against the applicants relating to alleged tax evasion through the registration of trading companies, which in fact had no business activities, in a low-tax zone, and through allegedly false income tax returns. In 2005 the applicants were found guilty of most of the charges. They were sentenced to nine years’ imprisonment and ordered to pay the State the equivalent of over EUR 500,000,000 in respect of unpaid company taxes. Their prison sentences were reduced to eight years on appeal. Both applicants were sent to serve their sentences in remote colonies, thousands of kilometres from their Moscow homes.

In their applications to the European Court, the applicants complained of various breaches of the Convention, in particular of their right to a fair trial (Article 6 § 1) and of their right not to be tried of an offence that was not an offence when it was committed (Article 7).

Law

Article 6 § 1: Both applicants complained of several distinct breaches of this provision. The first group of their arguments concerned alleged bias on the part of the presiding judge. The second group to procedural unfairness, in particular: a lack of time and facilities to prepare the defence, an inability to enjoy effective legal assistance, and an inability to examine prosecution evidence or adduce evidence for the defence.

(a) Impartiality – The applicants claimed that procedural decisions taken by the judge during their trial were indicative of bias, that the judge had herself been under investigation during their trial and that she was biased because of her previous findings in the case of another top Yukos manager.

As to the first point, the Court had to have stronger evidence of personal bias than a series of procedural decisions unfavourable to the defence. There was nothing in the trial judge’s decisions to reveal any particular predisposition against the applicants. As to the second point, the allegation that the trial judge was herself under investigation was based on rumour, and could not found a claim of impartiality. As to the final point – the fact that the judge had already sat in a case concerning another senior Yukos manager – the Court had previously clarified that the mere fact that a judge had already tried a co-accused was not, in itself, sufficient to cast doubt on the judge’s impartiality. Criminal adjudication frequently involved judges presiding over various trials in which a number of co-accused stood charged and the work of criminal courts would be rendered impossible if, by that fact alone, a judge’s impartiality could be called into question. An examination was, however, needed to determine whether the earlier judgments contained findings that actually prejudged the question of the applicant’s guilt. The judge in the applicants’ case was a professional judge, a priori prepared to disengage herself from her previous experience in the other manager’s trial. The judgment in the manager’s case did not contain findings that prejudged the question of the applicants’ guilt in the subsequent proceedings and the judge was not bound by her previous findings, for example as regards the admissibility of evidence, either legally or otherwise.

Conclusion: no violation (unanimously).

(b) Fairness of the proceedings

(i) Article 6 § 1 in conjunction with Article 6 § 3 (b): Time and facilities for the preparation of the defence – The second applicant had had eight months and twenty days to study over 41,000 pages of his case-file, and the first applicant five months and eighteen days to study over 55,000 pages. The Court noted the complexity of the documents, the need to make notes, compare documents, and discuss the case-file with lawyers. It also took account of the breaks in the schedule of working with the case-file, and of the uncomfortable conditions in which the applicants had had to work (for example, they had been unable to make photocopies in prison or to keep copies of documents in their cells and there had been restrictions on their receiving copies of documents from their lawyers). However, the issue of the adequacy of time and facilities afforded to an accused had to be assessed in the light of the circumstances of each particular case. The applicants were not ordinary defendants: they had been assisted by a team of highly professional lawyers of great renown, all privately retained. Even if they were unable to study each and every document in the case file personally, that task could have been entrusted to their lawyers. Importantly, the applicants were not limited in the number and duration of their meetings with their lawyers. The lawyers were able to make photocopies; the applicants were allowed to take notes from the case-file and keep their notebooks with them. Indeed, the applicants, who both had university degrees, were senior executives of one of the largest oil companies in Russia and knew the business processes at the heart of the case arguably better than anybody else. Thus, although the defence had had to work in difficult conditions at the pre-trial stage, the time allocated to the defence for studying the case file was not such as to affect the essence of the right guaranteed by Article 6 §§ 1 and 3 (b).

The Court further examined the conditions in which the defence had had to work at the trial and during the appeal proceedings. In particular, at some point the judge had decided to intensify the course of the trial and hold hearings every day. However, it had not been impossible for the applicants to follow the proceedings and the defence had been able to ask for adjournments when necessary.

At the appeal stage the defence had had over three months to draft written pleadings and to prepare for oral argument. Although the defence had had to start preparing their appeal without having the entirety of the trial materials before them and although there had been doubts as to the accuracy of the trial record, the Court was not persuaded that any such inaccuracies had made the conviction unsafe. Furthermore, the defence was aware of the procedural decisions that had been taken during the trial and what materials had been added. They had audio recordings of the trial proceedings and could have relied on them in the preparation of their points of appeal. The difficulties experienced by the defence during the appeal proceedings had thus not affected the overall fairness of the trial.

Conclusion: no violation (unanimously).

(ii) Article 6 § 1 in conjunction with Article 6 § 3 (c): Lawyer-client confidentiality – The applicants had claimed that that their confidential contacts with their lawyers had been seriously hindered. The Court reiterated that any interference with privileged material and, a fortiori, the use of such material against the accused in the proceedings should be exceptional and justified by a pressing need and would always be subjected to the strictest scrutiny.

As to the applicants’ complaint that one of their lawyers had received summonses from the prosecution, the Court noted that the lawyer concerned had refused to testify and that his refusal had not led to any sanctions against him. Accordingly, in the particular circumstances of the present case, lawyer-client confidentiality had not been breached on account of that episode.

In contrast, by carrying out a search of that lawyer’s office and seizing his working files, the authorities had deliberately interfered with the secrecy of lawyer-client contacts. The Court saw no compelling reasons for that interference. The Government had not explained what sort of information the lawyer might have had, how important it was for the investigation, or whether it could have been obtained by other means. At the relevant time the lawyer was not under suspicion of any kind. Most significantly, the search of his office had not been accompanied by appropriate procedural safeguards, such as authorisation by a separate court warrant, as required by the law. The search and seizure were thus arbitrary.

Another point of concern was the prison administration’s practice of perusing all written documents exchanged between the applicants and their lawyers during the meetings in the remand prison. Such perusal had no firm basis in the domestic law, which did not specifically regulate such situations. Furthermore, notes, drafts, outlines, action plans and other like documents prepared by the lawyer for or during a meeting with his detained client were to all intents and purposes privileged material. Any exception from the general principle of confidentiality was only permissible if the authorities had reasonable cause to believe that professional privilege was being abused in that the contents of the document concerned might endanger prison security or the safety of others or was otherwise of a criminal nature. In the present case, however, the authorities had taken as their starting point the opposite presumption, namely that all written communications between a prisoner and his lawyer were suspect. Despite there being no ascertainable facts to show that either the applicants or their lawyers might abuse professional privilege, the measures complained of had lasted for over two years. In the circumstances the rule whereby defence working documents were subject to perusal and could be confiscated if not checked by the prison authorities beforehand was unjustified, as were the searches of the applicants’ lawyers.

Finally, as regards the conditions in which the applicants had been able to communicate with their lawyers in the courtroom the trial judge had requested the defence lawyers to show her all written documents they wished to exchange with the applicants in accordance with the prison authorities’ security arrangements. While checking drafts and notes prepared by the defence lawyers or the applicants the judge might have come across information or arguments which the defence would not wish to reveal and which could have affected her opinion about the factual and legal issues in the case. In the Court’s opinion, it would be contrary to the principle of adversarial proceedings if the judge’s decision was influenced by arguments and information which the parties did not present and did not discuss at an open trial. Furthermore, the oral consultations between the applicants and their lawyers could have been overheard by the prison escort officers. During the adjournments the lawyers had had to discuss the case with their clients in close vicinity of the prison guards. In sum, the secrecy of the applicants’ exchanges, both oral and written, with their lawyers had been seriously impaired during the hearings.

Conclusion: violation (unanimously).

(iii) Article 6 § 1 in conjunction with Article 6 § 3 (d): Taking and examination of evidence – As regards the applicants’ complaints that evidence from two experts consulted by the prosecution had been admitted without the applicants being able to challenge it, the Court noted, firstly, that the fact that the prosecution had obtained an expert report without any involvement of the defence did not of itself raise any issue under the Convention, provided that the defence subsequently had an opportunity to examine and challenge both the report and the credibility of those who prepared it, through direct questioning before the trial court.

In response to the Government’s submission that the defence had not shown why it had been necessary to question the expert witnesses, the Court stated that, contrary to the situation with defence witnesses, an accused was not required to demonstrate the importance of a prosecution witness. If the prosecution decided to rely on a particular person’s testimony as being a relevant source of information and if the testimony was used by the trial court to support a guilty verdict, the presumption arose that the personal appearance and questioning of the person concerned were necessary, unless the testimony was manifestly irrelevant or redundant. The two experts had clearly been key witnesses since their conclusions went to the heart of some of the charges against the applicants. The defence had taken no part in the preparation of the experts’ report and had not been able to put questions to them at an earlier stage. In addition, the defence had explained to the district court why they needed to question the experts and there were no good reasons for preventing them from coming to the court. Even if there were no major inconsistencies in the report, questioning experts could reveal possible conflicts of interest, insufficiency of the materials at their disposal or flaws in the methods of examination.

The applicants had also complained of the trial court’s refusal to admit expert evidence (both written and oral) proposed by the defence for examination at the trial. The Court noted that the trial court had refused to admit certain expert evidence which it deemed irrelevant or useless. In that connection, the Court reiterated that the requirement of a fair trial did not impose an obligation on trial courts to order an expert opinion or any other investigative measure merely because a party had sought it and, having examined the nature of the reports in question, the Court was prepared to accept that the primary reason for not admitting certain of them was their lack of relevance or usefulness which matters were within the trial court’s discretion to decide. However, two audit reports (by Ernst and Young and Price Waterhouse Coopers) were in fact rejected for reasons related not to their content but to their form and origins. Unlike the other expert evidence the defence had sought to adduce, these reports were non-legal and concerned essentially the same matters as the reports produced by the prosecution and so were relevant to the accusations against the applicants. By excluding that evidence, the trial court had put the defence in a disadvantageous position as the prosecution had been entitled to select experts, formulate questions and produce expert reports, while the defence had had no such right. Furthermore, in order effectively to challenge a report by an expert the defence had to have the same opportunity to introduce their own expert evidence. The mere right of the defence to ask the court to commission another expert examination did not suffice. In practice, however, the only option that had been available to the applicants under Russian law had been to obtain oral questioning of “specialists” at the trial, but “specialists” had a different procedural status to “experts”, as they had no access to primary materials in the case and the trial court refused to consider their written opinions. In the circumstances, the decision to exclude the two audit reports had created an imbalance between the defence and the prosecution in the area of collecting and adducing “expert evidence”, thus breaching the equality of arms between the parties.

Conclusion: violation (unanimously).

Article 7

(a) Alleged procedural obstacles to prosecution – The applicants had claimed that by virtue of a Constitutional Court ruling of 27 May 2003 they could not be held criminally liable for tax evasion before their tax liability had been established in separate proceedings. The Court was not persuaded that the applicants’ understanding of that ruling was correct. In any event, the alleged “procedural obstacles” did not mean that the acts imputed to the applicants were not defined as “criminal offences” when they were committed. There had therefore been no violation of Article 7 on that account.

(b) Novel interpretation of the concept of “tax evasion” – The applicants had argued that they had suffered from a completely novel and unpredictable interpretation of the provisions (Articles 198 and 199 of the Criminal Code) under which they were convicted. The Court observed that while those provisions defined tax evasion in very general terms, by itself such a broad definition did not raise any issue under Article 7. Forms of economic activity were in constant development, and so were methods of tax evasion. In order to define whether particular behaviour amounted to tax evasion in the criminal-law sense the domestic courts could invoke legal concepts from other areas of law. The law in this area could be sufficiently flexible to adapt to new situations, provided it did not become unpredictable. Thus, although in the criminal-law sphere there was no case-law directly applicable to the transfer-pricing arrangements and allegedly sham transactions at the heart of the applicants’ case, the concept of sham transaction was known to Russian law and the courts had the power to apply the “substance-over-form” rule and invalidate a transaction as sham under the Civil and Tax Codes. The Court reiterated that in this area it was not called upon to reassess the domestic courts’ findings, provided they were based on a reasonable assessment of the evidence. In the present case, despite certain flaws, the domestic proceedings could not be characterised as a flagrant denial of justice.

The Court next turned to the question whether the substantive findings of the domestic courts were arbitrary or manifestly unreasonable.

(i) Charges under Article 199 of the Criminal Code (trading companies’ operation in the low-tax zone and the technique of “transfer pricing”) – While acknowledging that legitimate methods of tax minimisation could exist, the Court noted that the scheme deployed by Yukos was not fully transparent and that some elements of the scheme that might have been crucial for determining the companies’ eligibility for tax cuts had been concealed from the authorities. For instance, the applicants had never informed the tax authorities of their true relation to the trading companies. The benefits of the trading companies had been returned to Yukos indirectly. All business activities which had generated profit were in fact carried out in Moscow, not in a low-tax zone. The trading companies, which existed only on paper, had no real assets or personnel. Tax minimisation was the sole reason for the creation of the trading companies in the low-tax zone. Such behaviour could not be compared to that of a bona fide taxpayer making a genuine mistake. Finally, it was difficult for the Court to imagine that the applicants, as senior executives and co-owners of Yukos, had not been aware of the scheme or that the trading companies’ fiscal reports did not reflect the true nature of their operations. Thus, the applicants’ acts could reasonably be interpreted as submitting false information to the tax authorities, thus constituting the actus reus of the offence of tax evasion.

(ii) Charges under Article 198 of the Criminal Code (personal income-tax evasion) – In so far as the personal income tax evasion was concerned, the applicants had argued that they had given consulting services to foreign firms and that the tax cuts they had received as “individual entrepreneurs” were legitimate. However, the domestic courts had concluded that such service agreements were in fact de facto payments for the applicants’ work in Yukos and its affiliated structures that would normally have been taxable under the general taxation regime and that the applicants had knowingly misinformed the tax authorities about the true nature of their activities. Those conclusions were not unreasonable or arbitrary.

(c) Application of allegedly dormant criminal law – Lastly, the Court did not accept the applicants’ argument that the authorities’ failure to prosecute and/or convict other businessmen who had been using similar tax-minimisation techniques had made such techniques legitimate and excluded criminal liability. While in certain circumstances a long-lasting tolerance of certain conduct, otherwise punishable under the criminal law, could grow into de facto decriminalisation of such conduct, this was not the case here, primarily because the reasons for such tolerance were unclear. It was possible that the authorities had simply not had sufficient information or resources to prosecute the applicants and/or other businessmen for using such schemes. It required a massive criminal investigation to prove that documents submitted to the tax authorities did not reflect the true nature of business operations. Finally, there was no evidence that tax minimisation schemes used by other businessmen had been organised in exactly the same way as that employed by the applicants. The authorities’ attitude could not therefore be said to have amounted to a conscious tolerance of such practices.

In sum, Article 7 of the Convention was not incompatible with judicial law-making and did not outlaw the gradual clarification of the rules of criminal liability through judicial interpretation from case to case, provided that the resultant development was consistent with the essence of the offence and could reasonably be foreseen. While the applicants may have fallen victim to a novel interpretation of the concept of tax evasion, it was based on a reasonable interpretation of the domestic law and consistent with the essence of the offence.

Conclusion: no violation (unanimously).

Article 8: The applicants had complained that their transfer to penal colonies situated thousands of kilometres from their homes had made it impossible for them to see their families. The Court accepted that the situation complained of constituted interference with the applicants’ private and family lives and was prepared to accept that the interference was lawful and pursued the legitimate aims of preventing disorder and crime and of securing the rights and freedoms of others.

As to whether it was necessary in a democratic society, the Curt noted, firstly, that it was very likely that the rule set out in the Russian Code of Execution of Sentences, which provides for convicts in areas where prisons were overpopulated to be sent to the next closest region (but not several thousand kilometres away), had not been followed in the applicants’ case. It was hardly conceivable that there were no free places for the applicants in any of the many colonies situated closer to Moscow. The Court stressed that the distribution of the prison population must not remain entirely at the discretion of the administrative bodies and that the interests of convicts in maintaining at least some family and social ties had to somehow be taken into account. In the absence of a clear and foreseeable method of distribution of convicts amongst penal colonies, the system had failed to provide a measure of legal protection against arbitrary interference by public authorities and had led to results that were incompatible with respect for the applicants’ private and family lives.

Conclusion: violation (unanimously).

Article 1 of Protocol No. 1: The first applicant had complained that, after convicting him of corporate-tax evasion, the trial court had made an award of damages which overlapped with the claims for back payment of taxes that had been brought against Yukos. The Court found, firstly, that the first applicant’s obligation to pay certain outstanding taxes could be considered an interference with his possessions falling within the scope of Article 1 of Protocol No. 1.

However, it was unnecessary for the Court to examine separately the first applicant’s claim that the State had been awarded the same amount of outstanding corporate taxes twice, as in any event, the interference did not have a lawful basis. The Court accepted that where a limited-liability company was used merely as a façade for fraudulent actions by its owners or managers, piercing the corporate veil may be an appropriate solution for defending the rights of its creditors, including the State. However, there had to be clear rules allowing the State to do this if the interference was not to be arbitrary. Neither the Russian Tax Code at the material time nor the Civil Code permitted the recovery of a company’s tax debts from its managers. Furthermore, the domestic courts had repeatedly interpreted the law as not allowing liability for unpaid company taxes to be shifted to company executives. Finally, the trial court’s findings regarding the civil claim were extremely short and contained no reference to applicable provisions of the domestic law or any comprehensible calculation of damages, as if it was an insignificant matter. In sum, neither the primary legislation then in force nor the case-law allowed for the imposition of civil liability for unpaid company taxes on the company’s executives. The award of damages in favour of the State had thus been arbitrary.

Conclusion: violation (unanimously).

Article 18 (alleged political motivation for prosecution): The Court reiterated that the whole structure of the Convention rested on the general assumption that public authorities in the member States acted in good faith. Though rebuttable in theory, that assumption was difficult to overcome in practice: an applicant alleging that his rights and freedoms were limited for an improper reason had to show convincingly that the real aim of the authorities was not the same as that proclaimed. Thus, the Court had to apply a very exacting standard of proof to such allegations.

That standard had not been met in the applicants’ case. While the circumstances surrounding it could be interpreted as supporting the applicants’ claim of improper motives, there was no direct proof of such motives. The Court was prepared to admit that some political groups or government officials had had their own reasons for pushing for the applicants’ prosecution. However, that was insufficient to conclude that the applicants would not have been convicted otherwise. In the final reckoning, none of the accusations against them even remotely concerned their political activities. Elements of “improper motivation” which may have existed in the instant case did not make the applicants’ prosecution illegitimate from beginning to end: the fact remained that the accusations against the applicants of common criminal offences, such as tax evasion and fraud, were serious, that the case against them had a “healthy core”, and that even if there was a mixed intent behind their prosecution, this did not grant them immunity from answering the accusations.

Conclusion: no violation (unanimously).

Article 34: The first applicant had further complained that, in order to prevent him from complaining to the European Court, the authorities had harassed his lawyers.

In the Court’s opinion, there was a significant difference between the first applicant’s allegations under Article 18 and those under Article 34. In so far as his prosecution and trial were concerned, the aims of the authorities for bringing the first applicant to trial and convicting him were evident and did not require further explanation. By contrast, the aim of the disciplinary and other measures directed against his lawyers was far from evident. The Court had specifically invited the Government to explain the reasons for the disbarment proceedings, extraordinary tax audit and denial of visas to the first applicant’s foreign lawyers, but the Government had remained silent on those points. In such circumstances it was natural to assume that the measures directed against the first applicant’s lawyers were linked to his case before the Court. In sum, the measures complained of had been directed primarily, even if not exclusively, at intimidating the lawyers working on the first applicant’s case before the Court. Although it was difficult to measure the effect of those measures on his ability to prepare and argue his case, it was not negligible.

Conclusion: violation (unanimously).

The Court also found, unanimously, a violation of Article 3 of the Convention on account of the fact that the second applicant appeared at his trial in a metal cage and no violation of that provision in respect of the conditions of his detention in the remand prison; a violation of Article 5 § 3 of the Convention in respect of the length of the second applicant’s pre-trial detention and a violation of Article 5 § 4 on account of delays in the review of his detention.

Article 41: EUR 10,000 to the first applicant in respect of non-pecuniary damage; the second applicant’s pecuniary claims were rejected in full.

(See also Khodorkovskiy v. Russia, 5829/04, 31 May 2011, Information Note 141; and OAO Neftyanaya Kompaniya Yukos v. Russia, 14902/04, 20 September 2011, Information Note 144)

© Council of Europe/European Court of Human Rights
This summary by the Registry does not bind the Court.

Click here for the Case-Law Information Notes

 

Full & Egal Universal Law Academy