The Turkish Capital Markets Board (CMB) has decided to initiate administrative and criminal proceedings against several public companies and their management for the alleged distribution of "disguised profits".
What is disguised profit distribution?
Disguised profit distribution is the transfer of income by a public company, its subsidiary or affiliate to related parties through transactions contrary to market practice, and "commercial prudence and honesty" as defined under Article 21 of the Capital Markets Law (CML). Under that article, disguised profit distribution decreases or prevents the increase of the profits or assets of a public company, its subsidiary or affiliate.
What are the sanctions?
The CML provides for civil, criminal and administrative sanctions for a distribution of disguised profit. A related party which has benefitted from the transfer of income is obligated to return the income, together with interest, to the affected companies within a CMB-defined grace period.
Procedurally, the CMB first requests that the related-party recipient return the income unlawfully distributed. If that request is not satisfied, the CMB may file an action to declare the underlying transaction void, to recover the funds, and to discharge and replace the public company's executives involved in the disguised profit distribution.
The CMB can also impose on the company administrative fines from TRY 20,000 to TRY 250,000 (approx. USD 9,000 to USD 110,000) but not less than twice the funds unlawfully transferred to related parties.
Lastly, the CMB can submit a criminal complaint with the public prosecutor to initiate criminal proceedings against the company's responsible executives. Conviction may result in imprisonment for three to seven years and a judicial fine. Criminal sanctions can be avoided if, prior to the initiation of a criminal investigation, the persons involved pay to the Turkish treasury twice the amount illegally transferred and also refund to the company the amount improperly transferred.