Final Steps in Criminalization of Circumventing Sanctions: Analysis of Draft Law No. 12406 Before Second Reading

On January 14, Volodymyr Zelenskyy submitted draft law No.12406 to the Parliament. It was aimed at criminalizing the circumvention and violation of sanctions in Ukraine. We analyzed this draft law before the first reading and supported its adoption as it would finally allow for the punishment of individuals who were trying to violate or circumvent the anti-Russian sanctions in Ukraine.

However, TI Ukraine also pointed out that it was important to launch a mechanism of criminal liability for those who violate sanctions, following the example of the recent EU Directive, adopted in response to Russia’s aggression against Ukraine, which our partners have recently started applying in practice. This step would further unify Ukraine’s anti-Russian efforts with those of the EU, enabling it to fulfill the mandatory requirement for European integration to align our legislation with the EU acquis.

Currently, as the draft law is being prepared for the second reading, it has undergone certain changes. Unfortunately, not all of them are neutral or positive, but the general content and purpose of this document are preserved.

Brief conclusions:

• the updated version of the draft law lost certain provisions that brought it into line with the EU Directive;
• The revised draft law does not reflect European mechanisms for ensuring human rights, in particular, temporary licenses;
• The primary goal of the law — punishing sanctions violators — has been largely preserved.

What we recommend:

• in addition to the intentional commission of a crime, also provide for negligence in case of a violation or failure to comply with a sanction by officials and financial institutions (amendment No. 209-2 to the draft law);
• in addition to the main punishment in the form of imprisonment and a fine, also provide for the confiscation of violators’ property as an optional form of punishment (amendment No. 34 to the draft law)
• support the draft law in the second reading taking into account the indicated amendments.

Key changes

The negligent form of guilt for violating or circumventing sanctions was removed from the draft law. This change deviates from the new European standard, since the EU Directive demands the criminalization of trade, import, export, sale, purchase, transfer, transition, or transportation of sanctioned goods, as well as the provision of services connected with goods under sanctions even if these actions were taken due to negligence at least in cases when these goods are for military purposes or dual-use.

This provision is important to implement at least due to considerations of the current martial law so that violators cannot avoid liability by claiming they were unaware of the imposed sanctions. Currently, the negligent form of fault can only be returned to the draft law by accepting amendment No. 209-2, which applies to officials of a financial institution. This is justified since the note to the Directive states that “professionals, such as in legal, financial and trade services, should exercise due diligence to prevent any violation of Union restrictive measures.”

The removal of property confiscation from the list of possible punitive measures for violation or circumvention of sanctions is also quite a negative development. In addition to this sanction being in line with the provisions of the Directive, confiscation would enable the use of Russian assets for the benefit of Ukraine. Therefore, this provision should be returned to the draft law in the second reading by accepting amendment No. 34.

Among other changes that are negative but not critical is the increased total cost of the subject of violation as a threshold for criminal liability from 100 to 300 non-taxable minimum incomes (UAH 454,200). In the Criminal Code of Ukraine, this amount is commonly found for the qualification of crimes committed in relation to the subject in a large or significant amount.

The total value of blocked assets that a person must acquire in order for it to be considered a circumvention of sanctions has also been increased from 50 subsistence minimums for able-bodied persons as of January 1 of the reporting year to 150 (UAH 454,200). This change is also not critical, although it deviates from the general standard of the Criminal Code of Ukraine, too.

For the purpose of qualifying the severity of the crime, assets will be considered “large” if they exceed the non-taxable minimum income of citizens by three thousand or more times (UAH 4.54 million) The previous version provided for a smaller amount — UAH 1.5 million. The situation here is similar in the context that most Criminal Code articles typically qualify this as an “especially large amount” of the subject of violation. However, MPs removed the definition of an “especially large amount” of the violation subject from the updated version of the draft law.

Also removed was the provision on the violation or circumvention of sanctions by individuals who hold responsible or particularly responsible positions. This provision is not specified in the Directive; it is, however, typical of the Ukrainian criminal law. However, the change is not critical.

Contracts for the provision of legal assistance to sanctioned persons will not be subject to restrictions; however, the procedure for payment under such contracts must be determined by the Cabinet of Ministers. This exception is precisely in line with European practice, as the right to protection is a basic human right.

In addition to the above changes, during the finalization, MPs did not strengthen the draft law by including other provisions of the Directive. In particular, the mechanism for granting temporary licenses to perform actions (deeds, operations, transactions) with sanctioned assets was not included. In the EU, this practice was introduced to respect fundamental human rights as well as to fulfill financial obligations. Licensing implies that the authorized body will grant temporary permission to a person or company to use a frozen asset, for example, when it comes to funds to cover basic needs, court fees and payments, fulfillment of contractual obligations, etc.

This mechanism would primarily help to keep Ukrainian enterprises financially attractive, since such companies may suffer significant losses due to the applied sanctions. As a result, after the confiscation of these companies by the State Property Fund, it will be more difficult to sell them.

Conclusions

Evidently, while preparing for the second reading, members of the Ukrainian Parliament did not use the opportunity to further harmonize the draft law with the European standards but actually deviated from them more. 

To fix this, when voting for draft law No. 12406 in the Parliament, the MPs should take into account the following recommendations:

• in addition to the intentional commission of a crime, also provide for negligence in case of a violation or failure to comply with a sanction by officials and financial institutions (amendment No. 209-2 to the draft law);
• in addition to the main punishment in the form of imprisonment and a fine, also provide for the confiscation of violators’ property as an optional form of punishment (amendment No. 34 to the draft law)
• support the draft law in the second reading taking into account the indicated amendments.

The introduction of criminal liability for circumvention and violation of sanctions is a critical necessity for Ukraine’s continued struggle against the Russian footprint in our economy and beyond. Therefore, we urge the Parliament to support the draft law in the second reading taking into account the indicated amendments.