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Partner, Head of South Ukrainian Branch, Arzinger
Sanctions under Ukrainian Laws
The regime of national sanctions is quite a new legal institution in Ukraine. On 14 August 2014 the Verkhovna Rada of Ukraine enacted the Law On Sanctions, which provides a legal framework for imposition of sanctions in response to external threats. According to Article 3 of the Law On Sanctions Ukraine may apply sanctions against individuals and legal entities in response to actions by a foreign state, foreign legal entity or individual, or other parties creating imminent and/or potential threats to national interests, national security, sovereignty and territorial integrity of Ukraine, supporting terrorist activities and/or violating human and civil rights and freedoms. Other grounds for the imposition of sanctions are resolutions of the United Nations General Assembly and Security Council, decisions and regulations of the Council of the European Union and the existence of a violation of the Universal Declaration of Human Rights, the Charter of the United Nations.
The main peculiarity of a sanction under the Sanctions Law is that it is not a kind of punishment for the certain direct violation but mainly a general response by the country to the aggressive or unfriendly actions from the counterpart in question. And, as a result, its cancellation doesn’t often depend greatly on the sanctioned person’s or entity’s behaviour.
Lists of sanctioned persons and restrictive measures in respect thereof may be proposed by the Cabinet of Ministers (the Government), Verkhovna Rada of Ukraine (the Parliament), the President of Ukraine and the Security Service of Ukraine. Those propositions must be passed by the National Security and Defence Council of Ukraine, enacted by a Presidential decree and approved by a Resolution of the Ukrainian Parliament within 48 hours of the issue of the Presidential Decree.
On 22 September 2015 personal sanctions were imposed by Ukraine on a number of individuals and legal entities (mostly of Russian origin) associated with supporting the continuing violation of the national sovereignty and territorial integrity of Ukraine. Restrictive measures were introduced under the Presidential Decree of 16 September 2015 No.549/2015 On Decision of the National Security and Defence Council of Ukraine of 2 September 2015 On Application of Personal Special Economic and other Restrictive Measures (Sanctions) for a period of one year. In October 2016 the list of sanctioned persons and legal entities was reapproved and also enlarged by Presidential Decree No. 467/2016 of 17 October 2016.
Summarising the data from the lists of persons under sanctions it may be concluded that the following restrictive measures are the most common types of imposed sanctions: freezing of assets (temporary restriction of right of the entity to dispose of its property); preventing removal of funds from Ukraine; blocking of business and financial transactions; ban on participation in public procurement; ban on financing companies that are subject to the sanctions.
Further to the Law On Sanctions and the Presidential Decree a few bylaws have been approved by various authorities in order to enable practical implementation of the imposed sanctions.
The National Bank of Ukraine adopted Resolution of 1 October 2015 No.654
On Providing Implementation and Monitoring of the Efficiency of Personal Special Economic and Other Restrictive Measures (Sanctions). The abovementioned Resolution obliges financial bodies to provide the National Bank of Ukraine with actual information on the status of a sanctioned person’s bank accounts, to abandon approaching such persons, void execution of financial obligations, operations in their favor and freeze appropriate monetary assets.
The Resolution and amendments made hereto are intended to:
1. authorize a bank to verify the identity of the holder of electronic means of payment and reject transactions involving the use of electronic means of payment held by persons under sanctions;
2. allow subsidiary banks incorporated in accordance with applicable laws of Ukraine to be recapitalized by banks against which the sanctions were imposed in order to prevent Ukrainian banks from being withdrawn from the market, which could result in additional financial pressure on the Deposit Guarantee Fund and the State Budget of Ukraine;
3. prevent Ukrainian banks from transferring funds to the accounts of persons under sanctions and/or to the accounts of Ukrainian banks opened with entities under sanctions except if these funds are intended for the recapitalization of subsidiary banks incorporated in accordance with applicable laws of Ukraine.
Thereafter, the legislator made amendments of 27 January 2016 to the Order of Notary Actions Execution by Notaries of Ukraine. When an individual or a legal entity applies to a notary to carry out an action, the notary has to check if any personal economic sanctions are applied to such a person. If it is so, the notary will deny carrying out any notarial action. In such a way, this provision is an extra guaranty of implementing of such a personal economic sanction as freezing of assets.
Amendments were also made to the Order of State Registration of Legal Entities and Individuals-Entrepreneurs. This Order provides for the state registrar’s obligation to check personal economic sanctions application only when a person applies for increasing the statute capital of the legal entity which has a non-resident person as its shareholder possessing major influence on the legal entity’s activity. The above-mentioned Order does not stipulate any other provisions that oblige state registrars to check application of personal economic sanctions regarding a person applied to the state registrar.
Sanctions for the Violation of Foreign Trade Regulations
In addition to the Law On Sanctions, sanctions may also be imposed by the Ukrainian Ministry of Economic Development and Trade for the violation of foreign trade regulations. Those sanctions are individual licensing of foreign trade transactions and temporary prohibition of foreign economic activity. Individual licensing means that any export-import operation, including any payments, is subject to prior permission from the Ministry. Prohibition means complete cessation of foreign economic operations. These sanctions may be imposed against both Ukrainian and foreign entities. Unlike previously described, those sanctions are always imposed for the specific violation of law and can respectively be removed if the violation is corrected.
Until quite recently the most frequent reason for such sanctions was the violation of terms of payment under the sale and purchase contracts between Ukrainian and foreign entities. Ukrainian law requires that payments under an import-export contract be carried out no later than 120 days after custom clearance of goods1. In practice it means that an exporter has to receive payment no later than 120 days upon sending the goods abroad and an importer has to receive purchased goods no later than 120 days upon making an advance payment. In case of violation, (regardless of the reason for it) the Ukrainian entity will be fined (0.3 % per day of the amount of the debt). If the violation is caused by the foreign counterpart the Ukrainian entity has to file a lawsuit in the court of arbitrage before the expiry of the above mentioned 120 days. Furthermore, the Ministry of Economic Development may impose a sanction against the foreign entity.
But now sanctions have also been imposed for violations of the trade ban with Crimea. The annexing of Crimea caused an unprecedented event in the history of modern Ukraine: Russia extended its jurisdiction to the territory of Ukraine. After the annexation of Crimea, Ukraine adopted the Law On Temporary Occupied Territories (TOT), which regulates the status of Crimea as well as the procedure of entry therein. In accordance with part 1 of Article 4 of the Law On Temporary Occupied Territories the temporarily occupied area shall be subject to a special legal regime of crossing of boundaries of the temporarily occupied area, the performance of transactions, the holding of elections and referenda, the exercise of other human and civil rights and freedoms.
To provide the opportunity to conduct commercial activities between Ukraine and Crimea for the period of temporary occupation, the Ukrainian Parliament adopted the Law On Free Economic Zone (FEZ), which defines specific features of the exercise of economic activities within the temporarily occupied territory of Ukraine and establishes the Crimea Free Economic Zone (Crimea FEZ). The Law On Free Economic Zone came into force on 27 September 2014. According to para 1.1 of Article 1 of the Law On Free Economic Zone the Crimea FEZ shall be implemented within the boundaries of two administrative territorial units of Ukraine: the Autonomous Republic of Crimea and the city of Sevastopol. Pursuant to para 1.2 of Article 1 of the Law On Free Economic Zone the administrative boundary between the territory of Crimea FEZ and the rest of the territory of Ukraine shall coincide with the land administrative boundary between the Autonomous Republic of Crimea and Kherson Region. The Crimea FEZ was introduced for ten full calendar years starting from the effective date of the Law On Free Economic Zone (that is, until 27 September 2024). In accordance with sub-para 4 of para 12.6 of Article 12 of the Law On Free Economic Zone the temporary border control shall be implemented at the Crimea FEZ administrative boundary.
To sum up the provisions of both the Law On Temporary Occupied Territories and the Law On Free Economic Zone entry to Crimea is only possible via check-points at the border of Kherson Region and Crimea, and any delivery of goods to Crimea is only possible subject to custom clearance at the custom checkpoints there. As a result, the delivery of goods to Crimea from the territory of Russia became contraband in terms of Ukrainian legislation as it is performed beyond Ukrainian Custom Service checkpoints. Every company delivering goods to Crimea from the territory of Russia violates Ukrainian law and may be sanctioned. The Security Service of Ukraine monitors deliveries to Crimea and appeals regularly to the Ministry of Economic Development and Trade to impose sanctions against the violating companies
1 The term is not negotiable but it can be changed by the National Bank of Ukraine depending on the current account balance.