Sanctions Front: Results of the Past Year
By Oleksandr Onufrienko, lawyer, candidate of legal sciences, and Volodymyr Yenich, partner of AVER LEX
The application of restrictive measures (sanction) was one of the most media-active topics last year. It happened not by chance – society’s attention is justifiably focused on the mechanism of limiting the economic opportunities of the Russian Federation and recovering the assets of both the aggressor country itself and the persons associated with it. However, it is not only about the political or media component of sanctions but also about the legal aspects of sanction policy, for which the year 2023 was truly epochal in all aspects: both in terms of regulatory regulation and practical application. This is of great importance, as the success of the post-war recovery of the country largely depends on how successful and systematic the norms of sanction law and the judicial practice of their application will be.
Last year, the improvement of the legal norms governing sanctions relations continued. The most important of them are the following.
Ensuring normal operation in favor of the country of “sanctioned” objects
First of all, the legislator, adjusting the sanction norms, improves and “standardizes” the process of certain restrictions in such a way that the restrictions concern only the persons-owners/managers of assets, while trying to prevent the suspension of the economic activities of the Ukrainian companies themselves (“sanction” objects). Thus, by amending Article 4 of the Law of Ukraine On Sanctions dated 14 August 2014, No. 1644-VII (hereinafter – the Law On Sanctions), the legislator finally established that the very fact of imposing sanctions does not block or exempt such sanctioned objects from paying taxes, fees and other mandatory payments to the state and/or local budgets, as well as other similar obligations. The legislator also clarified that the imposition of arrest on “sanction” assets, or any other encumbrances, including collateral, cannot be an obstacle to such sanctions as the recovery of these assets in state income and the corresponding registration actions in the state register of legal entities (Article 5 of the same Law). In addition, an important clarification has been made regarding the period during which it is possible to file a claim for the application of a sanction in the form of recovery of assets – this is the period of validity of the legal regime of martial law or after its termination or abolition (if the claim for the application of this sanction is filed during the period of the legal regime of martial law).
Definition of management body and disposal of “sanctioned assets”
In 2023, the State Property Fund of Ukraine (SPFU) became the body that is appointed to manage the recovered “sanctioned” assets, as well as to alienate them.
At the same time, the logic and experience of other countries suggest the need to define (or create) a body that would administer all relations related to the application of sanctions, similar to OFAC – the Office of Foreign Assets Control, which is a structural unit of the US Department of the Treasury or the Office of Financial Sanctions Implementation (OFSI) of the United Kingdom. The issues of forming sanctions list, their adjustment, communication with sanctioned persons, representation of the state in judicial and especially in administrative procedures for appealing the imposition of sanctions need to be resolved by one body. And the important issue of issuing one-time permits for payment of legal services by “sanctioned” persons can be carried out by this body, which eliminates the use of arguments by such persons about the impossibility of obtaining adequate legal protection. We expect that such a national body will be created (appointed) this year.
Centralization of information on sanction
And finally, one of the important novelties of the past year is the legislator’s decision to create a unified, open, and publicly accessible State Register of Sanctions – an information and communication system that ensures the collection, accumulation, protection, accounting, display, processing and provision of information on all sanctioned entities. The State Register is created with the aim of providing free public access to relevant and reliable information about them. Obviously, this tool will contribute to a more effective application of sanction mechanisms and the use of confiscated assets to strengthen the country’s economy.
At the same time, in our opinion, the legislator has not taken another necessary and important step towards improving the sanction legislation, which lawyers were waiting for. As known, due to the adjustment in 2022 of Article 4 of the Law On Sanctions, this type of sanctions, such as recovery to the state’s income, is applied, including to assets for which a “sanctioned” person “may directly or indirectly (through other individuals or legal entities) take actions identical to exercising the right to dispose of them” (highlighted by us). At the same time, and this was noted by the High Anti-Corruption Court (HACC) in its decisions, the legislation lacks the definition of “actions identical in content to the exercise of the right of disposal.” Doctrinal and judicial interpretations of the provisions of the Civil Code of Ukraine and the Commercial Code of Ukraine regarding the legal titles of property rights, the right of economic management and operational management, unfortunately, do not yet facilitate the case. In practice, such gaps lead to situations where the HACC is forced to apply the analogy of law (equating, for example, the relationship of disposal to the relationship of control).
Regarding law enforcement practice, the following were important aspects last year.
Cases to challenge the blocking of assets – a disproportionate distribution of the results of court cases
With an increase in the number of cases of appealing sanctions in the form of blocking assets, now the results of the consideration are exclusively in favor of the state. The Administrative Court of Cassation applies an approach in which the legality and validity of the grounds for imposing sanctions are not examined; instead, only the legality of the procedure for adopting the relevant Decrees of the President of Ukraine is considered. It is clear that with such a subject of proof, the satisfaction of the claim is seen as unlikely.
The sanction activity of the National Agency on Corruption Prevention (NACP) is not regulated by norms, but it is highly effective.
The decision to create the information portal “War and Sanctions” (https://sanctions.nazk.gov.ua/) was initially perceived as somewhat unclear in terms of regulatory framework and effectiveness.
The first aspect has hardly changed during the year – indeed, this resource acts as an information source filled with the NAPC, while there is no normative defined status of the portal and the NAPC’s powers to fill this resource are not regulated. However, in terms of effectiveness, it should be noted that this was a genuinely efficient and elegant solution. Undoubtedly, it creates informational influence and problems for entities from the “gray sanctions zone.” At the same time, the status of such information and legal uncertainty surrounding the content of the resource provide the subject with a single mechanism to be excluded from the relevant section, “International Sponsors of War,” on the “War and Sanctions” portal: only to eliminate Ukraine’s claims and stop cooperation with the aggressor country or work in its favor.
Development of a general proof algorithm in cases of sanction recovery
The mechanism for the recovery of assets into the state’s income, the grounds for such claims, the procedure for proof, the substantiation of asset ownership, and, ultimately, almost all issues presented in the claim for the recovery of assets into the state’s income have undergone systematization and normalization over the past year. As a result, a judicial practice has been formed on various aspects of the justification and proof procedures. This was achieved through significant and creative work carried out by the Department of Sanctions Policy of the Ministry of Justice, the judicial panels of the High Anti-Corruption Court, and with the active participation of our lawyer community.
Proving an indirect decisive influence remains equally challenging
As noted above, the main and most challenging issue in the process of recovering assets into the state income – proving indirect decisive influence (identical to the right of disposal) of a sanctioned person on the assets – will likely remain the most difficult this year as well. At the same time, the adoption of the Methodology for determining the ultimate beneficial owner by a legal entity (approved by the Resolution of the Cabinet of Ministers of Ukraine of 19 September 2023, No. 1011) can significantly assist, at least in structuring the process of proof.
The period for consideration of the case for asset recovery have seen significant improvements.
The excessively short terms for the consideration of administrative cases regarding the recovery of assets in state income, which were negatively perceived in 2022 when compared to the complexity and scale of the cases, have been extended at the regulatory level to 30 days from the date of filing the lawsuit in the first instance (15 days for consideration in the court of appeal). At the same time, a breakthrough, or rather, a return to a normal judicial process, occurred at the level of applying general rules by courts to determine procedural deadlines for individual cases, depending on their complexity and volume.
The stages of executing of court decisions
Undoubtedly, the sphere of executing decisions on the recovery of assets in the state income, overseen by the State Property Fund of Ukraine (SPFU), generated the highest expectations. The main challenge, leading to a lack of significant results, was the absence of a detailed regulatory framework specifically for sanction-related cases. Throughout the year, there were no success stories in this area. However, at the end of the year, the SPFU was provided with a relevant regulatory act, namely: the Cabinet of Ministers of Ukraine adopted Resolution No. 1233 on 21 November 2023, titled “Some issues of management of assets recovered in state income.” Therefore, this year we can expect real economic victories from the new leadership of the SPFU in the form of significant funds from the management of “sanctioned” assets and their alienation to the state budget.
And this year, with a high degree of probability, we can expect other innovations: innovations from the State Property Fund of Ukraine in the execution stage, the conclusion of several relevant public cases involving sanction-related recoveries, and the initiation of new cases. Additionally, further detailing of regulatory frameworks is anticipated. Furthermore, we hope that non-material assets, such as works of art, virtual assets, and the like, will become objects of “sanctioned” recoveries.
In addition to the legislative novelties and judicial practice review of the past year, we would like to add the following. We have repeatedly emphasized that the development of sanctions legal relations is moving in a direction where it is not only possible but necessary to talk about the existence of a new branch of national law with its unique methods and principles. At the same time, the quite logical increase in the number of claims for the application of this type of sanctions, as the recovery of assets in the state’s income, refutes the approach to sanctions as a temporary security legal institution, which is not a punishment. Apparently, this institution is becoming more complex and not identical to existing national legal institutions. As we see, the field of sanction law, which has many features of public law, increasingly influences a broad spectrum of private legal relations. In this material, we did not aim to initiate a theoretical discussion about the role and place of sanction law in the legal system and legislation, but the sooner we form a balanced conceptual approach to the formation of sanction legislation, the more qualitative legislative norms and judicial decisions will be. After all, the first serious exam of their quality is not far away. As reported, a claim for compensation for damages caused to shareholders of ABHHoldings S.A. by the nationalization of Sense Bank (formerly Alfa-Bank) was filed with the International Center for Settlement to Investment Disputes. The grounds for recovery included, among other things, the imposition of sanctions on the beneficiaries of the group. Knowing the experienced and financially well-supported opponents we will face in international legal battles, it is clear that the results of the legislator’s work and legal application in the direction of sanctions policy are awaiting serious tests. We hope that we will pass them with dignity, and in the new year we will further doctrinally and practically strengthen such an important national legal institution as sanction law.