Recent Trends in Business Protection

There were several developments recently in the conduct of criminal proceedings, including those related to the criminal liability of companies, operation of law-enforcement and temporary management of arrested assets. Will such developments create greater risks for business activities in Ukraine? Were attempts to address some of them effective? This article provides a key summary of such issues.

Criminal liability of legal entities in Ukraine: a new wave or dormant concept?

The concept of criminal liability of legal entities is developed in many jurisdictions, which is why assessing the related risks is common practice for foreign businesses. As a result, Ukrainian counsels often receive requests from their foreign clients to evaluate such risks within criminal proceedings taking place in Ukraine.

A concept similar to criminal liability for legal entities, namely imposition of measures of criminal law nature (Criminal Law Measures), was introduced in Ukraine in 2014, but it is still rarely applied. There have only been several cases in which the courts have imposed measures of a criminal law nature on legal entities while rendering guilty judgments against their authorized representatives (e.g. directors). Unfortunately, they do not enable the majority of questions businesses may have regarding the application of the criminal law measures in practice (e.g. possible defences) to be addressed.

The verdict of the High Anti-Corruption Court of Ukraine as of 4 March 2024 under which criminal law measures were imposed on a legal entity for its authorized representative providing a bribe in the interests of a legal entity, attracted the attention of the legal community.

It is worth noting that depending on the crime in question, such criminal law measures as a fine, liquidation and confiscation of property (in case of liquidation) can be applied to a legal entity. As all cases available to date related to provision of bribes, only fines were imposed on those companies within respective criminal proceedings.

The difference between the previous cases and the recent verdict of the High Anti-Corruption Court of Ukraine is the size of the fine. The previous guilty judgments stipulated the size of the fine based on the amount of the bribe. In this case, the court applied a higher fine based on the general provisions of the Criminal Code of Ukraine, taking into account the gravity of the crime and the fact that the company had not obtained improper benefit as a result of the committed crime. However, the court did not explain the reasons for such a fine, namely what exact circumstances in the case were considered and how these circumstances influenced its size, as the relevant provision of Art. 96-7 of the Criminal Code establishes ranges for fines.

This verdict does not address many issues related to the application of criminal law measures to legal entities. Neither does it answer the question of selective application of such measures (e.g. their ignorance in the cases where they can be applied). However, it shows that this legal mechanism is not completely dormant and might be applied more often in future.

A couple of weeks after adoption of the verdict, the management of the National Anti-Corruption Bureau announced its work on a draft bill to amend the concept of criminal liability of legal entities in Ukraine. It remains to be seen whether the proposed changes will focus on improving the current mechanism of criminal law measures and its application or introducing a brand-new concept.

Management of arrested assets: looking for clarity

Since the launch of the National Agency of Ukraine for finding, tracing and management of assets derived from corruption and other crimes (Asset Recovery and Management Agency or ARMA) in October 2017, its functioning and, more precisely, management of assets has often been in focus and not always in a positive way.

In view of Russia’s full-scale invasion, issues such as conditions/grounds for transferring assets (funds, movable and immovable property) to ARMA for management, conduct of transparent competitions to select managers for transferred assets, management of corporate rights are once again being discussed.

One of the important questions regarding the grounds for transferring assets to ARMA for management is whether the arrest imposed on such assets in criminal proceedings should also prohibit their use by the owner (typically, the arrest covers at least prohibition to alienate such assets).

Namely, the Law on ARMA stipulates that the agency manages the assets subject to arrest in criminal proceedings with a prohibition of their disposal and/or use, and their value exceeding the established threshold.^[1] The Criminal Procedure Code of Ukraine also sets out the conditions for transfer of assets to ARMA, including additional ones (e.g. it should not hinder criminal proceedings), but does not mention prohibition on use of assets by their owners as one of them.

How should a court approach this issue? Present court practice on the matter is not consistent. There are cases in which the arrests imposed do not clearly ban owners from using the assets under it; or contain only a ban on alienating them (so, the assets still can used by owners, including in commercial activities), but courts grant motions of prosecutors/investigators to transfer such assets to ARMA.

In 2023, ARMA representatives reported that in around 20% of assets transferred to the agency by courts, their owners were not prohibited from using them. According to the agency, it is difficult or impossible in the above circumstances to find managers for such assets. But difficulties in finding managers are not the only implication of the above situation. If ARMA succeeds in finding a manager for such assets, the owner is basically deprived of revenues generated by such assets, which it would continue to receive in the absence of transfer.

This matter can be addressed, for instance, by establishing and implementing clear grounds when the arrest of assets should contain prohibition of their use and the conditions of transfer such assets to ARMA for management (by virtue of changes to legislation or establishing relevant criteria through court practice). In such a case, the prosecution and courts will have clear guidance on how to proceed and owners of assets – understanding about defenses that can be employed.

Another attempt by the National Security and Defense Council and the President to protect business – success or failure?

In January 2024, in response to actions carried out by law-enforcement authorities towards a high-profile businessman, viewed as questionable by some, the National Security and Defence Council of Ukraine adopted, and the President of Ukraine approved a decision to introduce effective mechanisms to protect businesses from possible abuse within criminal proceedings (“the Decision”).

The Decision called on introducing changes to legislation so as to reboot the work of the Economic Security Bureau of Ukraine. Several draft bills have to date been submitted to Parliament with this purpose in mind. However, in the view of the country’s business community, the provisions of those submitted by the Cabinet of Ministers, still require improvement. In any case, it is not yet clear how promptly Parliament will consider and adopt the changes and whether the changes proposed by business will be taken into account.

The most discussed provisions of the Decision relate to recommendations for law-enforcement authorities to refrain from conducting procedural actions in criminal proceedings for three months if such actions may block business activities; and, within the space of three months, to conduct an audit of procedural measures taken against/in relation to business entities in criminal proceedings (e.g. arrests of assets) to determine the feasibility of their further application.

More than three months have passed since the Decision was adopted. At the same time, we are not seeing attempts by law-enforcement authorities to “slow down” with the above measures neither based on our experience nor from the public domain. On the contrary, law-enforcement authorities are initiating new procedural measures and continuing to support those initiated earlier. Neither have we spotted any results of the described audit that was supposed to be carried out.

The reasons for the lack of positive effects from the Decision are the topic of discussion (e.g. advisory nature of the provisions, practical unwillingness of law-enforcement authorities to ensure protection of business). From our experience, when a business needs to protect its rights in criminal proceedings and, depending on the circumstances, it still needs to resort to specific tools – turning to the Department of Investments Protection at General Prosecutor`s Office, Business Ombudsman Council, business associations and others – all of which were available and proved to be effective long before adoption of the Decision.

[1] In the absence of arrest in criminal proceedings, it is not possible to transfer assets in question to ARMA.