Developers will be made to follow the Criminal Code

Developers will be made to follow the Criminal Code
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The long-expected bill draft on criminal responsibility for co-funders’ fraud, introduced in 2014, has been adopted at last. What is to follow?

On April 20th the State Duma adopted a law according to which criminal responsibility for the unlawful attraction of co-funders’ money in the construction of multifamily houses has been introduced for hoodwinked investors.


Co-investors are protected against fraudulent developers

The adopted law added art. 200.3, “Attraction of citizens’ money in disregard of legislative requirements on apartment blocks or other object construction co-funding”, to the RF Criminal Code. The introduced amendments established two levels of responsibility for unconscionable deals: with the attraction of large (over 3m roubles) and very large (over 5m roubles) sums.

A developer who attracts more than 3m roubles of co-investors’ money now faces a 2-year maximum term of imprisonment, or compulsory work for 360 hours, or compulsory community service for a term of up to 2 years.

The crime of attracting a very large sum (over 5m roubles) as committed by a group of people working in concert will be punished with 5 years of jail, or compulsory work of up to 480 hours, or correctional labour for a term of up to 2 years. But if a developer compensates the wronged financer to the full extent, or takes all possible measures to put the house into operation, he will be free from criminal responsibility.

As follows from the explanatory notes to the adopted law, according to the Ministry of Construction data, there are 70,000 who have invested their money in the construction of houses and who have suffered at the hands of unscrupulous developers.

The document was introduced to the Lower Chamber of the Russian Parliament in 2014 by Deputy Alexander Khinstein.

 —The existing article of the Criminal Code and the sanctions do not fully cover these criminal acts, the parliamentarian explained while commenting on the law. —It is very difficult to prove that a developer who receives a co-funder’s money has any premeditated intention in committing the crime, i.e. not completing the construction of a house. They all say that there were reasons for not having done this, and law-enforcement agencies can do nothing.

According to him, at present the situation with hoodwinked investors remains very disturbing in spite of the measures undertaken by the authorities at all levels. The total number of victims in Russia is about 110,000 people.

—Legislators expect the introduction of this new type of criminal responsibility to stop the irregularities of many slack developers, Khinstein said. —According to the norms, in the case of a developer attracting a citizen’s money without a co-investment contract, foul play arises automatically. The minimal threshold for the actual amount of damages has been established at 3m roubles. It covers almost all realty deals in Russia.

—The draft is very important and relevant. We expect it to help law-enforcement agencies in the struggle against underhand developers and to stop any more citizens being hoodwinked, the deputy said.


…and developers — against unconscientious co-funders?

The adopted bill draft does not appear to be the last word in improving legislation regulating the relationship between developers and co-investors. The authorities think that developers should also be protected – against criminal co-investors. The Ministry of Construction, together with developers, are working out the issue of co-investors’ responsibilities if they prevent an object from going into operation. Nikita Stasishin, Director of the Housing Policy Department at the Ministry of Construction, Housing and Utilities spoke on this.

—We are working with developers to develop measures against future tenancy holders who do not commission the apartments and give false reasons, he explained. We know of such cases and try to protect a developer who meets all the requirements [within the up-dated law on shared-equity construction].

Will it be necessary to adopt a special draft bill? According to Stasishin, the Ministry of Construction may amend 214-FL regarding the financial responsibility of a shareholder if he stops paying for the housing under construction.

— Let’s try to include this, Stasishin said at a recent investment –construction forum, answering a proposal, made by Maxim Gassiev of the “PSN Group” developers’ company, on the inclusion of the financial responsibility of the citizen who ceases financing of the construction project. According to Gassiev, in particular the American school of thought presumes a default procedure, the result of which is that the co-funder loses his investment.

As far as the second block of amendments to 214-FL goes, it will be considered during the spring session, Mikhail Menn, Minister of Construction, Housing and Utilities, said at the 4th annual business forum, “Development: change points”.

By the second reading, the law had been subjected to a number of changes. For example, the issue of a developer’s assets, i.e. co-investors’ money, has long been discussed. Different figures – 1 bln roubles, 500m roubles, etc. – were voiced. But ultimately, it was decided that the number of square meters under construction was the key issue.

As Nikita Stasishin said, developers who erect more than 500,000 m2 of housing and sell them according to the shared equity agreements, the assets must be no less than 1.5 bln roubles. Those who construct dwelling complexes with an area of 2.5 – 10 m2 and attract co-funders’ money via shared equity agreement must have authorised capital of about 10 m roubles (see table).

As Kommersant says, the authorities had to agree with the earlier announced decision – the developer’s capital will be no less than 1 bln roubles, or 5% of the cost of the housing under construction. This was sharply criticized by developers and regional officials.

Besides, according to Mikhail Menn, the Ministry of Construction, Housing and Utilities is considering the opportunity of including a point on share-holders’ individual insurance in the amendments to 214-FL. The Minister remarked that the issue is at present being considered by the expert community, but the Head of the Ministry noted that first of all, the amendments under consideration in the State Duma should be completed.





Maximal area of shared-equity construction (thousand m2)

Minimal amount of a developer’s authorized capital (m roubles)

















More than 500



Source: the RF Ministry of Construction, Housing and Utilities