Planning Asset Transfers to ARMA: Proposals in Draft Law 114733

On August 12, 2024, in line with one of the objectives of the State Anti-Corruption Program, ARMA prepared a draft law No.11473 proposing amendments to the Criminal Procedure Code of Ukraine and other related laws. The Agency proposes its own version of the procedure for informing prosecutors about the discovery of assets eligible for seizure in criminal proceedings — a process commonly referred to as pre-seizure planning.

In our opinion, this draft law is another example of less-than-successful lawmaking, seemingly designed solely to formally fulfill the objectives of the SACP.

Key findings

• The mechanism proposed in the draft law for obtaining clarifications upon requests from law enforcement agencies and the prosecutor’s office already exists; however, it cannot substitute for thorough planning prior to the transfer of assets to ARMA.
• The draft law does not distinguish planning measures prior to asset transfers based on the type of property. For example, such planning measures are not necessary for money management.
• The creation of new secure electronic information exchange systems proposed by ARMA is both costly and time-consuming, with potential challenges in achieving the objectives outlined in the law.

What we recommend:

• analyzing the practice of providing explanations to pre-trial investigation bodies and identifying the most significant mistakes. As the auditors’ findings indicate, this function is not operating effectively; therefore, it is essential to identify mechanisms for their improvement and codify them at the legislative level;
• tailoring the planning obligation prior to transferring an asset to ARMA based on the asset’s complexity. This is because cash management requires no special preparation, whereas managing seized businesses is a far more complex and comprehensive process;
• evaluating the possibilities of using existing information exchange systems instead of creating a new electronic system for ARMA, law enforcement agencies and prosecutor’s offices. The implementation of new secure electronic information exchange systems is costly and time-intensive; therefore, integrating ARMA into existing systems would be a more practical solution.

What is the current state of planning before transferring assets to ARMA, and what are the general problems associated with it?

The concept of planning before the transfer of assets to ARMA (pre-seizure planning) first became a topic of active discussion in 2019. This emerged as a response to the challenge of transferring assets to ARMA that were virtually impossible to manage. For example, we previously highlighted cases where courts transferred only parts of assets instead of the whole — such as transferring premises without the necessary equipment for managing a production complex to ARMA.

All these issues could be resolved if ARMA were involved in discussions with investigators or prosecutors during the stage of filing a motion to transfer assets for management. However, the legislation does not require advance planning for the transfer of assets to ARMA.

The relevant law only states that the Agency provides the investigator, prosecutor, investigating judge, court with written explanations on the possibility of ensuring effective management of the asset and preservation, and, if possible, increasing its economic value (Article 10, Part 1, paragraph 8-1). International recommendations emphasize the importance of advance planning for asset seizure, as it facilitates their effective management.

For instance, the Organization of American States’ Methodological Guidelines for the Management of Seized Businesses specify that the pre-arrest stage should consist of three main phases. 

1. Planning, involving studying information about the commercial or business activities of the relevant company. This should help find specialists or technical experts who could potentially run the company.
2. Receiving information about the investigation from the responsible authorities. This should help identify the reasons and motives behind the decision to seize the specified business. It will also help determine whether the entity is a legitimate business, or a fictitious company used for laundering criminal proceeds.
3. Analyzing preliminary information about the company and its commercial activities. This will not only effectively restrict the owner’s control over the company but also help determine the scope of the company’s assets, as well as the availability of licenses or other official permits required for its operation. To maintain regular financial activity, ARMA must obtain details of the company’s bank accounts and other financial instruments.

Currently, it is common for courts to involve ARMA employees as specialists in hearings concerning the transfer of assets to their management. However, the effectiveness of such involvement is questionable, as ARMA officials often express opinions that ultimately remain at the court’s discretion.

Therefore, it is essential to address the planning process before transferring assets to ARMA effectively, which could ensure:

• reducing the number of assets unreasonably transferred to ARMA, as it may be unable to manage them effectively;
• enhancing the management of seized assets by ensuring higher-quality rulings on property seizures. This means that time will not be wasted on imposing additional seizures, inspecting assets, etc.

What measures does ARMA propose to streamline these processes?

The government draft aims to achieve an ambitious goal: enhancing transparency in asset research and tracing, ensuring effective collaboration, and improving the efficiency of the system for locating and managing assets derived from corruption and other crimes.

To achieve this, lawmakers propose the following:

• transferring not only material evidence but also other property to ARMA for management, provided the Agency confirms, through its explanation, the feasibility of effective management and the preservation or potential enhancement of its economic value;
• requiring investigators and prosecutors to seek a written explanation from ARMA on the feasibility of ensuring effective asset management and preserving or potentially increasing its economic value when preparing a petition for property transfer.
• requiring ARMA to respond to such explanations within five working days;
• specifying that the format of the request for clarification will be established by a joint order of the Prosecutor General’s Office and ARMA;
• establishing a secure electronic system for information exchange among ARMA, the prosecutor’s office, and pre-trial investigation bodies.

However, the objective outlined in the explanatory note to the draft law is unlikely to be achieved through the proposed measures. Below, we explain why.

Disadvantages of the proposed legislative regulation

The approach proposed by ARMA differs little from the existing mechanism for obtaining explanations. For example, it does not suggest differentiating planning measures prior to asset transfer based on the type of asset. Also, the implementation of a secure electronic information exchange system appears unjustified given the current martial law.

1.   The mechanism outlined in the draft law for obtaining clarifications from law enforcement agencies and the prosecutor’s office is already in place; however, it cannot replace the need for planning prior to transferring assets to ARMA

In July 2021, the Law on ARMA was updated requiring investigators, prosecutors, investigating judges, and courts to provide ARMA with written explanations regarding the feasibility of ensuring effective asset management by the National Agency and preserving or potentially increasing its economic value. It was also established that the format of the relevant request would be determined by a joint order from the Prosecutor General’s Office and ARMA. 

However, the ARMA operational audit report for 2022 indicates that the Agency inadequately fulfilled its role in providing clarifications, as well as methodological and consulting assistance to investigators, detectives, prosecutors, and judges on matters related to asset detection, search, evaluation, and management:

• ARMA failed to conduct comprehensive planning to provide such clarifications, and in 2022, the interregional territorial offices did not fulfill the activity plan regarding the provision of methodological and consulting assistance;
• generalization of statistical data on the provision of explanations, as well as methodological and consulting assistance to investigators, detectives, and prosecutors by ARMA and its regional units, contains significant shortcomings.
• and in general, this explanatory function was performed by ARMA formally.

Also, we wish to highlight the auditors’ findings that ARMA’s responses to requests for clarification emphasized procedural guidance on submitting asset research requests to the Agency, rather than addressing the feasibility of effective asset management. This once again highlights a formalistic approach to fulfilling this function.

Therefore, we conclude that the approach to seeking clarification proposed in the draft law already exists but is not being effectively implemented and requires regulation through alternative means.

2. The draft law fails to differentiate planning measures for asset transfers based on the type of property

The authors have currently used the phrasing: “When preparing a motion for the transfer of property to management, a prosecutor or an investigator, in coordination with the prosecutor, shall contact…”. From this, we can infer that the investigator or prosecutor is required to submit the appropriate request each time they plan to transfer an asset to ARMA.

Such a requirement is not entirely justified, as managing money, for example, simply involves depositing it into ARMA’s accounts. Therefore, no special explanations of how to manage them are needed.

Conversely, managing complex assets, such as a seized plant, is significantly more challenging. It requires meticulous planning to address both legal aspects (e.g., the presence of tenants) and practical considerations (e.g., equipment condition, wear and tear, its availability on-site, etc.).

According to the Agency, the general procedure for conducting planning activities should be established through a joint order by the Prosecutor General’s Office and ARMA. However, this regulation would then be developed without the involvement of external experts or broader consultation with specialists. Furthermore, we found no information in the draft law mentioned in the previous paragraph of the analysis regarding the approval of the response format to appeals from subjects requesting explanations. This reflects a limited level of collaboration with the Prosecutor General’s Office in approving genuinely significant regulations.

Notably, the Agency, in collaboration with other entities, has adopted numerous regulations related to asset research. Currently, these processes are governed by at least five procedures jointly approved with various state bodies. Has this effort succeeded in elevating the scope of the search for seized assets to a truly high level? This seems unlikely, as in 2023 ARMA searched for fewer assets compared to previous years.

Meanwhile, one of these procedures stipulates that for ARMA to search for assets abroad, the investigator or prosecutor must present evidence linking the property owner to a specific country. This limitation significantly reduces ARMA’s potential for searching for assets abroad, as investigators or prosecutors may not always possess information about the individual’s connection to a specific jurisdiction. ARMA specialists, however, have the expertise and resources necessary to conduct such research effectively.

This, for example, highlights the shortcomings of regulating certain relationships through departmental regulations. In this manner, the authorities, including ARMA in this case, can take all necessary steps to regulate the performance of their functions effectively and minimize potential workloads.

3.  The creation of new electronic secure information exchange systems is a costly and time-consuming process, and there may be problems with the implementation of the goals set in the draft law

The draft law proposes that the exchange of information on asset research and tracing between the Agency, the prosecutor’s office, and pre-trial investigation authorities be conducted in accordance with the Regulations on the Electronic Secure Information Exchange System.

This provision should be approved through a joint order by ARMA, the prosecutor’s office, and pre-trial investigation authorities. The purpose of this document is to facilitate the prompt submission of appeals to the National Agency and ensure timely reporting of discovered and traced assets. However, the explanatory note specifies that implementing the draft law will not require funding from state or local budgets.

Such an initiative appears questionable, considering ARMA’s previous experience with launching electronic systems. It is worth recalling the history of the Unified Register of Seized Assets, a concept that began to be discussed as early as in 2017. Its launch was accompanied by numerous issues, including certification and the need to obtain necessary approvals. The register began commercial operations back in January 2023 and was made publicly accessible, albeit with numerous data-related shortcomings, only in August 2024.

Given the lengthy timelines involved in working with such systems, it would be more prudent to consider integrating ARMA with existing systems or those currently under development. For example, integrating with the Smereka pre-trial investigation management system would allow ARMA employees to exchange information with the prosecutor’s office and law enforcement agencies, while minimizing the risk of unauthorized access to pre-trial investigation data.

Conclusions

Given the numerous shortcomings in the proposed legislative regulation, Transparency International Ukraine cannot recommend the adoption of draft law No. 11473.

To implement an effective pre-seizure planning system, the following steps are necessary:

• analyzing the practice of providing explanations to pre-trial investigation bodies and identifying the most significant mistakes. As the auditors’ findings indicate, this function is not operating effectively; therefore, it is essential to identify mechanisms for its improvement and codify them at the legislative level.
• tailoring the planning obligation prior to transferring an asset to ARMA based on the asset’s complexity. That is because cash management requires no special preparation, whereas managing seized businesses is a far more complex and comprehensive process;
• evaluating the possibilities of using existing information exchange systems instead of creating a new electronic system for ARMA, law enforcement agencies and prosecutor’s offices. The implementation of new secure electronic information exchange systems is costly and time-intensive; therefore, integrating ARMA into existing systems would be a more practical solution.

Planning prior to the transfer of assets to ARMA is a crucial stage that will enhance the management of seized property. However, its legislative regulation should be approached with great care to ensure that this institution is not merely a theoretical entity or used for statistical purposes.

Unfortunately, at present, neither the legislative initiative proposed by the Agency nor those from the government ensure the implementation of this task. Rather than implementing formal changes, it would be more effective to prepare a comprehensive regulation from the outset that can address all the issues.