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. Last Updated: 07/27/2016

Polite Debt Collectors in Hot Demand

When the financial crisis hit, Danny Cruz found himself in a situation familiar to many business people in Russia: He was owed money and he had problems collecting it.

Cruz, who earlier this year started New Solution Ltd., an information technology consulting firm, was owed a sum "in the five figures" by three Russian banks for which he had been working.

"The banks didn't pay their depositors and they didn't pay their consultants, either," he said.

Most businessmen in Cruz's situation are equally unwilling to write off the debts or to resort to violent means of collecting them, but at the same time they have little faith in the Russian court system. They look for an informal but legal way to recover their money.

For Cruz, the solution to his problem came from a direction he said he didn't anticipate f his security firm.

"We have a very good relationship with our security firm, but I didn't know they were in this line of business," he said, adding that the topic had come up casually in conversation. Cruz declined to name the firm, saying only that they were former KGB officers and did work with the tax authorities.

Cruz said the banks paid their debts within days, for which he gladly paid the security company 15 percent.

He said it was also important to him that violence not be used. "I told them we wanted to keep these banks as clients," he said. "From what I understand they called up and talked about who they know in the market" with the implication that the bank wouldn't want others in the market to know they weren't paying their debts.

A glance through a telephone book reveals a large array of "full-service" security firms, but the methods to collect debts employed can range from genuine negotiation to strong-arm tactics.

One businessman, who said his company had successfully used the services of another security firm run by former KGB officers, said he thought their effectiveness was mostly in intimidation.

"They basically show up and look imposing," he said. "If there's any violence, we don't know about it, and, of course, we would try to discourage anything like that."

Western security professionals warn against foreigners taking extralegal measures to collect debts.

"The danger of functioning that way is that you may initiate a series of events over which you have no control," said one security company employee, who did not want to be identified.

"If you're using a criminal element to fight a criminal element there's no guarantee that you'll get justice for yourself," he cautioned. "Reliable, trustworthy and honest security companies won't even take your case if you are asking them to go in without proof and rough up the party."

Many companies, in fact, will only try to collect a debt after an arbitration court has ordered the debt to be paid, he said. Some even offer legal services in getting such a decision.

This is sometimes enough. "Contrary to popular belief there are corrupt police in this town who engage in law enforcement activities," the security expert said. "There are even conscientious police in this town who do not engage in exorbitant levels of corruption."

But Russia's courts do not have clear mechanisms for implementing their decisions. Instead, debt collection experts say that a court decision is usually only part of a strategy. Blackmail is also useful.

Security firms sometimes uncover dirt on debtors and then threaten to call in the tax police.

The threat of a tax audit is one of the most effective, nonviolent means of persuading someone to pay up, said an accountant who has advised some clients in this area and who asked not to be identified.

A related method that will work for some businesses with funds frozen in a bank is to make a deal with the tax authorities to pay early, using the frozen funds.

"You tell the tax guys, 'Here is the money we owe, you just have to get it out of the bank,'" he said, adding that the tax authorities are often willing to go along with this sort of deal. 'The tax police are going to be better at getting money out of a bank then you will."

"Of course, if you've got $10 million in receivables this is probably not an option for you," he said.

As with most things in life, experts say prevention is the best medicine.

"Debt collection in Russia is not a very successful venture," said Ted Shah, one of the directors of Eagle Bear Security, which has been operating in Russia since 1994. "If I were going to recommend anything, prior to going into business, do due diligence and offset any liabilities you are going to have."

While this may sound like common sense, according to Joe Serio, director of the Russian branch of the international investigation firm Kroll, a lot of companies are now paying for their lack of caution while entering an unfamiliar market.

"A lot of companies were so excited to get into this market that they released a significant amount of goods without really having strict enough controls over their distributors," he said.

"Now they often are having to start from the beginning, with due diligence," Serio said. "They need to find out if a distributor is going to become violent, for example, things that strictly speaking they should have done before going into business."

"The bottom line is that a lot of companies are never going to see their receivables again," he said.