Article 217. Creation and management of a financial (investment) pyramid of the Criminal Code of the Republic of Kazakhstan, the Criminal Code of the Republic of Kazakhstan

1. Creation of a financial (investment) pyramid, that is, the organization of activities to extract income (property benefits) from attracting money or other property or the right to it of individuals and (or) legal entities without using the funds raised for entrepreneurial activities that ensure the obligations assumed, by redistributing these assets and enriching some participants through contributions others, as well as the management of a financial (investment) pyramid or its structural unit –

     are punishable by a fine in the amount of one thousand to three thousand monthly calculation indices, or by community service for a term of up to one thousand two hundred hours, or by restriction of liberty for a term of up to five years, or by imprisonment for the same term, with confiscation of property.

2. The same acts committed:

     1) by a group of persons by prior agreement;

     2) repeatedly;

     3) by a person using his official position;

     4) with the attraction of money or other property or the right to it on a large scale, –

     are punishable by restriction of liberty for a term of three to seven years or by imprisonment for the same term, with confiscation of property, with deprivation of the right to hold certain positions or engage in certain activities for a term of up to three years.

3. The acts provided for in the first or second parts of this Article, committed:

     1) a criminal group;

     2) with the involvement of money, other property or the right to it on a particularly large scale;

     3) a person authorized to perform public functions, or a person equated to him, or an official, or a person holding a responsible public position, if they involve the use of his official position., –

     are punishable by imprisonment for a term of five to twelve years with confiscation of property, with deprivation of the right to hold certain positions or engage in certain activities for up to seven years, and in the cases provided for in paragraph 3), with confiscation of property, with life imprisonment for the right to hold certain positions or engage in certain activities.

     Note. A person, other than the organizer of a financial (investment) pyramid, who voluntarily declared his complicity in the creation of a financial (investment) pyramid or the management of it or its structural subdivision, as well as actively contributed to the disclosure or suppression of its activities, is exempt from criminal liability, unless his actions contain elements of another crime. 

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Republic of Kazakhstan     

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Types of financial pyramids and proposed measures to prevent negative consequences (Slambekova A.K., judge of the Astana City Court)

 

Slambekova Aisulu Kushkinbayevna

Judge of the Astana City Court

 

Criminal offenses in the sphere of economic activity are provided for in Chapter 8 of the Criminal Code and cover 35 types of crimes.

Today, issues related to the creation of a pyramid scheme (Article 217 of the Criminal Code) are the most relevant, since they affect the interests of an indefinite circle of people.

Statistics for 2022 and 5 months of 2023 in Astana show that criminal cases considered under Article 217 of the Criminal Code account for 1/3 of economic crimes. During the specified period, 33 persons were convicted in Astana for the creation and management of a financial pyramid scheme.

The popularity of financial pyramids is associated with the desire of citizens to invest their money in the activities of a particular financial or investment company in a short time to obtain a guaranteed and sufficiently high profit.

In turn, the organizers and managers of such a financial organization very skillfully and effectively conduct an advertising campaign to raise funds, on favorable investment terms, providing the first depositors with high returns.

Attracting new depositors ensures repayment of obligations to previous depositors. This supports the illusion of a successful financial institution and increases the interest of new investors - unfortunately, future potential victims of a criminal offense.

It should be noted that in most cases, such depositors understand that their profit (fast and high) is directly dependent on how much they themselves, through persuasion or persuasion, will be able to attract new depositors.

Thus, pyramid schemes are one of the types of fraud that have the following characteristics::

They position themselves as investment companies with innovative projects, housing cooperatives, oil production, gold, construction, metal products, etc.;

They massively advertise their activities in social networks and the media, advertisements, presentations, booklets, etc.;

They use phrases or symbols in their names that make them look like well-known companies or brands.;

✔ they publicly guarantee high profitability, significantly exceeding the level of the market indicator;

They promise to invest money in super-efficient projects and get "fast" and "easy" money.;

✔ there is not enough own property to meet all the property requirements of depositors;

The income is formed from attracting money or other property or the right to it of individuals and (or) legal entities.;

✔ does not use the raised money for entrepreneurial activities that ensure the obligations assumed;

✔ Assets are redistributed by enriching some participants with contributions from others.

✔ money is deposited in cash, to an individual's card account, or through payment organization terminals to an electronic wallet;

For the first time, responsibility for the creation and management of a financial pyramid scheme was introduced into the Criminal Code in 2014. Prior to that, this act was considered as fraud.

Article 217 of the Criminal Code provides for responsibility for actions aimed at creating and managing a financial (investment) pyramid or its structural divisions.

The most severe punishment is provided for in Part 3 of Article 217 of the Criminal Code for the creation and management of a pyramid scheme committed by a criminal group, involving money, other property or the right to it on an especially large scale (a sanction of 5 to 10 years in prison).

The amendments to Article 217 of the Criminal Code of 07/12/2022 have tightened the penalty, including the maximum sentence under Part 3 increased to 12 years.

It is important to understand that the subjects of Article 217 of the Criminal Code can only be those who created and managed the pyramid scheme.

However, as a rule, in most cases, the "old" participants in financial pyramids, who have invested their deposits in a financial pyramid and have repeatedly received income from the attracted money of "new" depositors, in pursuit of obtaining fast and sufficiently high incomes, themselves consciously become active participants in financial pyramids.

These individuals initially join the project as contributors, then receive income at the expense of later attracted contributors and become "Leaders".

The "leaders" are delegated by the head of the pyramid scheme.

Often, depositors (victims) are not personally familiar with those who created and run the pyramid scheme.

By contacting the police, they directly point to the "Leader" who advertised the project, made presentations, convincing them that he personally received an apartment or a car, showing the keys, or advertising his bank account, which is replenished "by the hour." That is, it is the "Leaders" who actively invite others to become depositors, explain to the "new" depositors the conditions for joining the financial pyramid, which requires attracting at least two "new" depositors.

At the same time, the "leaders" are not subjects of Article 217 of the Criminal Code, since they did not create a pyramid scheme and do not lead, but only advertise.

In this regard, the indignation of the victims at the actions of the investigative body that terminated the case against the "Leaders" was not groundless.

Therefore, the above–mentioned law of 07/12/2022, by supplementing the Criminal Code with Article 217-1 of the Criminal Code, criminalized the advertising of financial (investment) pyramids - publicly, either through the media or through electronic information resources, which entailed the involvement of persons in it causing significant damage.

Based on the construction of Article 217 of the Criminal Code, attracted money or other property and the income received are different categories.

The organizer of the financial pyramid is engaged in attracting depositors' money in order to generate income and ensure payments to the "old" pyramid participants at the expense of the amounts raised from the "new" participants.

According to the hierarchical structure of the pyramid, the inevitable consequences are the moment when the last depositors who deposited funds at the time of the shutdown of the financial pyramid will not be able to receive their funds.

The collapse of such a pyramid is manifested when the "old" depositors have already unwound their money, having received repeated income, and later the attracted persons who invested their money last – the "new depositors" did not receive income, and the company's activities stopped.

As a rule, the "old" depositors have no claims, and the "new" depositors are recognized as victims. Therefore, the number of persons involved in the pyramid scheme does not correspond to the number of real victims.

In this case, a reasonable question arises, does the form or mechanism of creating a financial pyramid, the number and amount of persons involved in the activities of the financial pyramid affect the types and amount of punishment?

Despite the fact that pyramid schemes have so many forms and there are problems in distinguishing them from other related crimes (fraud), all pyramids have one main characteristic – "The promise to investors to quickly and easily make a big profit if they participate in their program." That is, they do not pursue the goal of making a profit from any real investments or the actual sale of goods to the public.

The study of judicial acts has established that the mechanism of financial pyramids in Kazakhstan is built on various principles.

Often, small financial pyramids do not reach the court. Criminal cases on small types of financial pyramid schemes, for example, those based on the principle of network marketing (cosmetics sales, etc.), have not been encountered in practice by the Astana city court.

Companies under the guise of selling goods / services with the obligatory condition of attracting several additional persons, most often sell them at an inflated price, i.e. there are no retail sales, since the main goal is to attract more depositors - buyers.

According to multi—level pyramids, the first payment of each newly arrived participant is distributed among the members of the pyramid higher in the hierarchy.

To earn more money, each newcomer duplicates the same mechanism, inviting several people whose contributions will be distributed in a similar way.

And so it goes on until the influx of new members runs out.

Pyramids, based on the principle of sending invitations in messengers, operate only in online groups in messengers: WhatApp, Telegram, and more.

Joining the created financial pyramid group is carried out on a paid basis.

Then, for inviting additional persons, they receive a reward from 200% to 400%.

The number of invited participants is unlimited.

For example, A... and E... have created chats in mobile messengers "WhatsApp" and "Telegram" called "Astana.... ainalima cash register", by posting information there in the form of profitable cash deposits, which massively attracted about 2,000 depositors.

The pyramid scheme functioned by redistributing the money of "new" depositors in favor of "old" depositors.

From January to July 2020, the amount of money raised in the financial pyramid amounted to more than 230 million tenge.

In a similar way, in another case, T ... and A ... from June 2018 to April 2020 attracted over 260 million tenge, causing damage to the identified 87 victims by 158 million tenge.

A pyramid scheme based on the principle of investing in investment projects, when a Company publicly declares its activities in areas that are associated with high profitability: oil production, gold mining, construction, metal products.

Publicly guarantees higher profitability than in the market; uses words and phrases or symbols in names, symbols, and advertisements that make them look like well-known companies or brands. However, it cannot confirm the direction of the placement of the attracted funds, information about their placement.

For example, T... and C... actively disseminated false information about their alleged investment programs through WhatsApp and Telegram messengers, Internet resources and the media. At presentations in different cities, the principles of operation of two different business projects were explained to a wide audience: "MMK ..." - metal rolling, furniture manufacturing and others, and in "...Life7" - mining farms.

When investing in mining farms, it was suggested that the invested money could be linked to a personal card and track the receipt of money and interest, transfer money to an electronic crypto wallet and withdraw it using "crypto exchangers".

Indeed, depositors' money was automatically displayed in US dollars, but they did not have access to their money. In fact, electronic money was deposited manually, i.e. it was regulated by persons hired by the organizers.

As a result, from November 2020 to January 2022, 718 million tenge was attracted by depositors to the first company, and 691,000 US dollars to the second, causing damage to the identified 34 victims.

A pyramid based on the principle of buying/selling movable and immovable property at a favorable price, offers:

- purchase movable or immovable property from clients at a price higher than the market price (in installments or at a minimum interest rate);

- offers clients to buy movable or immovable property at a lower-than-market price (with a mandatory down payment).

The organization of a pyramid scheme as part of an organized criminal group (hereinafter referred to as an organized crime group) is distinguished by a sign of stability.

The identification of signs of an organized criminal group in the actions of the persons who created and managed the financial pyramid is evaluative.

For example, according to the notorious financial pyramid scheme of the Nuravto company, it was established that in order to simulate entrepreneurial activity, the organizers and participants of the organized criminal group acquired several LLP companies, on whose behalf they disseminated information that their companies were selling vehicles at prices below market (auction), as well as buying at a price above market.

At the same time, the members of the organized criminal group did not intend to fulfill their obligations, due to the lack of a mechanism for executing contracts, and the money received from citizens was distributed among the LLP members of the organized criminal group who were not engaged in real business activities.

As a result, during the 3 years from March 2019 to October 2021, the members of the organized criminal group concluded contracts with more than 300 individuals on behalf of various LLP companies, attracted funds and property of citizens in the amount of over 7.5 billion tenge (Articles 217, 262 of the Criminal Code).

The stability of the organized criminal group is evidenced by the immutability of its composition, a clear distribution of criminal roles, close interaction with each other, and the well-established criminal schemes. The participants were aware of their membership in an organized criminal group, and they united in advance under the leadership of the organizers to commit crimes related to the organization of activities to extract income from attracting money and property in the form of motor vehicles without using them for entrepreneurial activities, that is, a pyramid scheme.

Given the specifics of modern methods of committing crimes, the organizers of financial pyramid schemes attract investors not only within the same locality or different cities, but also spread them on the territory of other states.

Article 264 of the Criminal Code provides for criminal liability for the creation and leadership of a transnational organized group (hereinafter – TOPG), a transnational criminal organization, as well as participation in them.

For example, a Russian citizen, K..., together with other persons, while outside the Republic of Kazakhstan, created and managed TOPG (264h.1), and also created a financial (investment) pyramid (217h.3).

This company involved citizens of Kazakhstan who became participants of TOPG and the structural divisions of finpyramide were widely distributed in major cities of Kazakhstan, including Astana, Almaty.

As a result, the organizer and participants of the TOPG attracted a total of more than 828 Kazakhstanis, who invested their money in the company's imaginary investment projects totaling 1 billion. 152 million tenge.

In general, the judicial practice on sentencing for the creation and management of a financial pyramid scheme in Astana is uniform.

The measure of punishment imposed by the courts on convicted persons is in accordance with the requirements of Article 52 of the Criminal Code, taking into account the nature and degree of public danger of the crime committed, the presence of aggravating and mitigating circumstances and responsibility, and is fair.

At the same time, the issue of concluding a procedural agreement by the prosecutor only with the defendant requires discussion, with reference to the absence of victims in the case.

For example, according to the procedural agreement, B... was accused of creating and managing a pyramid scheme, a group of individuals by prior agreement, with the attraction of money on a particularly large scale in the amount of more than 215 million tenge.

Considering that the case file contains an investigator's decision to recognize one person as a victim, whose consent was not obtained by the prosecutor, the case was returned to the prosecutor.

When the case was re-filed, the new procedural agreement did not specify the date and full personal data of the victim. Only after the court explained to the victim about the legal consequences of article 614 of the CPC, he refused to conclude a procedural agreement. The case was returned to the prosecutor again.

If the amount of money raised is more than 215 million tenge, the absence of victims is doubtful.

Based on the disposition of Article 217 of the Criminal Code, the direct object of this crime is public relations in the field of investment, and an additional object is the property interests of citizens or legal entities.

In practice, there are victims in all criminal cases. Otherwise, if none of the depositors of the financial pyramid applies to the police, then the perpetrators will not be punished.

A reasonable question arises in cases submitted with procedural agreements, are the "real" victims in the waiting mode, under suspensive conditions in the form of a mediation agreement promising a phased refund?

In the case of a verdict with a procedural agreement without involving the victims in the case, this sentence is not subject to a downward revision after the expiration of the time period provided for by law.

What if, over time, victims who have not received what they promised "decide" to apply for the involvement of the perpetrators?

In order to prevent such negative consequences for victims, it is considered correct to identify all interested parties, clarify their rights and the consequences of concluding a procedural agreement.

Another problem when considering pyramid scheme cases is the resolution of civil claims, which is regulated by Chapter 20 of the CPC and the Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan "On Consideration of civil claims in Criminal proceedings" dated June 20, 2005 No. 1.

The norms of Articles 170 and 339 of the CPC make it possible to leave a civil claim without consideration if civil plaintiffs fail to appear in court and it is impossible to make a detailed calculation, while retaining their right to file a claim in civil proceedings.

However, due to the large number of victims, the issue of determining the exact amount of funds invested and the amount received by the victims as "interest" creates certain difficulties. Victims do not provide bank statements, which can only be obtained upon their application. Due to the large volume of the case, the investigating authority does not always have time to request bank information by issuing an official document.

It is also difficult that 1/3 of the victims usually do not appear and do not attend court sessions. Clarifying the above issues delays the trial.

In such cases, the court is forced to leave civil lawsuits without consideration, which entails appeals from the victims.

For example, the victims appealed the verdict against T... and C... in terms of leaving civil claims without consideration, while retaining their right to appeal to the court in civil proceedings.

The victim demanded to recover KZT 12,603,500, explaining that the money belonged not only to her, but to her sons, spouse and daughter-in-law, but in court she could not specify the amount of money withdrawn by each of them, did not provide a calculation deducting the difference.

Other victims and... and K... filed a lawsuit against the LLP, that is, not against the guilty parties. The court's explanation about the replacement of the defendants was not fulfilled.

In such circumstances, the court's findings on the dismissal of claims comply with the requirements of current legislation.

It should also be noted that due to the poor quality of the pre-trial investigation of financial pyramids, it is necessary to eliminate the gaps made by the investigators in the judicial investigation.

During the analyzed period, five private decisions were issued to the criminal prosecution body and the prosecutor on the facts of a significant violation of the norms of criminal procedure legislation.

For example, when considering a criminal case against a...G…It was established that the defendants had already been arrested at the end of December 2021, and the program created by them was in effect until February 2022, that is, the receipt of money continued. The examination determined the amount of money raised to be more than 840 million tenge until February 2022, while the defendants were charged with the period until December 2021.

The prosecution did not establish where the money received after the arrest of the leaders was invested or received by whom.

All the victims unanimously claimed that the author of the project "S..." is Z..... who integrated this program with another LLP platform, personally traveled to the regions and presented it in order to attract depositors' money, declared herself the author of the project.

The criminal prosecution body, terminating the case against Z ..., according to the note to Article 217 of the Criminal Code, as committed by an accomplice, at the same time, in the reasoning part of the resolution, indicated the creation of the Z ... program "S ... ", describing all the signs of organization and direct execution.

The admission of A..., who invested $103 and earned $61,200, as a victim is also controversial.

The Court reacted to these facts by a private ruling.

The elimination of such gaps in the investigation in the court session by conducting interrogations to establish the time, circumstances of the transfer of funds, the establishment of damage, information about the attracted depositors by the victims, the differentiation of the invested funds by the victims on their own behalf and on behalf of the attracted depositors, their further transfer to higher depositors and leaders, entails a delay in the trial.

 

Currently, individuals who organize financial pyramids successfully use the capabilities of information technology.

Thus, the development of technologies, their active use and implementation in everyday life accelerate the improvement of mechanisms and methods for creating new types of financial pyramids.

As a result, the pre-trial investigation of such cases is delayed for years. This is complicated by the fact that the victims live in different cities, and each of them submits a statement to the police with individual facts at their place of residence in their city.

As a rule, proceedings on such appeals are terminated, with reference to civil law relations.

At the same time, the same actions of one person in different regions are regarded under different articles of the Criminal Code (CC 190 - fraud, CC 217 - financial pyramid, etc.).

Despite the increase in complaints from citizens, investigative authorities begin to act when the number of victims exceeds one hundred people or more, or when publications appear in the media.

All this is due to the fact that the investigating authorities of different regions "do not see" each other's decisions, i.e. there are no specific measures aimed at timely suppression of illegal actions of individuals.

An additional centralized information system based on the ERDR (Unified Register of Pre-Trial Investigations) would allow timely identification of all similar appeals from victims in different regions of the country when registering with the ERDR.

For example, when victim No. 1 contacted the police,In Kokshetau, in relation to a specific person, the ERDR system would additionally record his data (IIN or under what name the person presented himself as "Yerlan, Zhanar, etc. and briefly describe the method of embezzlement or investment of money").

If another victim No. 2 filed a similar complaint against the same "leader and other persons", but already in Pavlodar, when filling in additional data, the ERDR system would integrate with the early information on the appeal of victim No. 1. As a result, information will appear that there is information about this person.

Thus, the prompt identification of the "alleged" client would make it possible to take measures at an early stage not only for financial pyramids, but also for multi-episode frauds.

As for the international experience in financial pyramids, financial pyramids are a phenomenon widespread all over the world, despite the level of economic and social development of the country.

According to information from the Internet source, it follows that the ways, methods and forms of combating such crimes in different countries are also not the same. Some of them are more effective, while others are less so.

At the same time, one cannot deny the influence of the economic and legal space within which certain methods are used.

In Germany, the law prohibits "recruiting participants into structures where income comes from contributions from other participants."

In Canada, there is a "Competition Act", which is a law aimed at combating pyramid schemes.

In the USA and France, they use a participant insurance system by creating insurance funds for investment companies in order to protect against the risk of losing most of their investments in the event of company bankruptcy.

In the UAE and China, the death penalty may be imposed for involvement in the creation of financial pyramids.

The practice of attracting individuals for the creation and management, and later for advertising in Russia, the Kyrgyz Republic and Kazakhstan is similar.

Thus, at present, the issue of the responsibility of persons who actively invite others to become contributors to the pyramid scheme has been resolved.

The analysis showed that people commit such crimes consciously, mostly older women.

Of the 33 convicts, 22 are women, which is 67% or 2/3 of them.

For example, the convicted woman is 70 years old, T... N... and B... 68 years old each, C... 66 years old, and most of the remaining women are between the ages of 45 and 60.

There are facts of pregnant women being sentenced to imprisonment. For example, E... 33 years old, with 4 young children and a 32-week pregnancy, she was sentenced to 5 years in prison.

The courts, when imposing punishment, proceed from the rules of Article 52 of the Criminal Code, taking into account the circumstances mitigating and aggravating criminal liability and punishment.

In total, 33 convicts in Astana alone attracted more than 22 billion tenge and more than 3.5 thousand depositors into the financial pyramid.

Thus, causing harm, the first is to public relations in the field of investment, the second is to the property interests of citizens or legal entities.

At the same time, the analysis showed that basically the majority of victims are pensioners and large families who invested the money they received on credit and are currently paying off loans. Many of them were unable to attend court due to their age and health.

There is a reasonable question, why do people go to create a financial pyramid consciously?

In our opinion, one of the reasons for the increase in such cases may be an excessively lenient type of place of serving a sentence.

Despite the fact that Article 217 of the Criminal Code refers to economic crimes and is included in Chapter 8 of the Criminal Code, the degree of public danger is not inferior to the consequences of fraud, and in some cases, collectively causes even greater harm.

As already noted, within the framework of a single criminal case, victims may live in different cities, and their number sometimes exceeds more than 1,000 persons, and the pre-trial investigation is delayed for years.

During this period, the perpetrators are held in custody.

Based on the requirements of Article 46, part 5, paragraph 1) of the Criminal Code, in case of conviction under Article 217 of the Criminal Code, the place of serving the sentence is determined to be an institution of the minimum security penal system.

Accordingly, by virtue of the requirements of Article 62 of the Criminal Code, time is calculated according to the "one to two" principle, that is, the time spent in custody from the investigation stage to the entry into force of the verdict, i.e. the appeal hearing of the case, is automatically "doubled".

As a result, by the beginning of the sentence, the convicted person is considered to have served almost half of the sentence.

For example, Shch... has been in custody since 06/01/2021 and the sentence entered into force on 11/08/2022. Thus, of the 5 years of imprisonment imposed, he is considered to have served 2 years and 10 months - almost 3 years.

Similarly, the convicted N..., M... and S... were held in custody from January 2020 until the verdict entered into force in March 2022, i.e. 2 years and 2 months. Based on the time taken, these women are considered to have served 4 years and 4 months, out of the 5 and 6 years of imprisonment imposed by the court, i.e. even without arriving at the place of serving their sentence, they can expect to be released on parole and replaced with a more lenient form.

Will the purpose of punishment be achieved in this case?

Serving their sentences in a minimum security facility is unfair and does not meet the objectives of criminal punishment.

Isn't it logical to remove Article 217 of the Criminal Code from Chapter 8 of the Criminal Code and move it to Chapter 6 of the Criminal Code, since in fact these crimes are primarily committed against the property interests of citizens?

It is important to stop the activities of financial pyramids at the earliest stage, not to wait until the number of depositors increases to a critical level.

The complexity of further investigation of such cases directly depends on this, since the number of victims can be minimized and there will be no problems with the long duration of the proceedings, as well as its further consideration in court.

 

Summing up, I think it would be advisable to discuss the proposals:

- on the development of a new regulatory resolution of the Supreme Court on the financial pyramid or amendments to existing regulatory resolutions clarifying: regarding the qualifying feature "repetition"; distinguishing fraud from a financial pyramid; on the obligation to establish the circumstances of the presence of victims, in the case of a procedural agreement in cases of a financial pyramid.

- on amendments to the Criminal Code of the Republic of Kazakhstan, in terms of: inclusion of Article 217 of the Criminal Code in Chapter 6 of the Criminal Code or amendments to Article 46 of the Criminal Code on the prohibition of actions (1) of Part 5 of Article 46 of the Criminal Code to persons convicted under Article 217 of the Criminal Code.

- the initiation before the Prosecutor General's Office regarding the improvement of the KPISU system during registration in the CUI, ERDR, according to additional data from the person against whom the appeal was filed.