Changes in Management of Seized Assets: Legal Analysis

A group of MPs headed by Oleksii Movchan registered draft law No. 8311 “On Amendments to Certain Legislative Acts on Improving the Sanctions Policy and Increasing the Effectiveness of Management of State, Municipal Property, and Seized Assets” in the Verkhovna Rada.

The Committee of the Verkhovna Rada of Ukraine on Economic Development is in charge of its consideration. Transparency International Ukraine experts analyzed the document and identified its advantages and disadvantages.

What is the status of the current legal regulation?

Today, an economic operator of the public sector of the economy (for example, a state-owned enterprise, or a joint-stock company with a share in the state capital of 50+1%) can manage the seized assets without a tender by the decision of the Cabinet of Ministers only upon the notification of the ARMA. For this, there is an exhaustive list of circumstances:

1. when there is a risk of disruption and/or interruption of the operation of such assets, which may lead to emergencies or disruptions in heat, power, electricity, water supply or wastewater disposal or natural gas supply;
2. if there is a risk of interruption of the operation of enterprises, institutions, and organizations of the military-industrial complex and/or the aircraft industry, which own such assets.

At the same time, the sale of real estate is prohibited, and movable property can be sold by the decision of the investigating judge with the presence of at least one of the following grounds:

1. the property is subject to rapid deterioration;
2. the property quickly loses its value;
3. the cost of storing movable property during one calendar year is more than 50 percent of its value.

The High Anti-Corruption Court (HACC) may decide on the claim of the Ministry of Justice of Ukraine (MoJ) to recover to the national budget assets belonging to an individual or a legal entity, as well as assets in respect of which such a person can directly or indirectly (through other individuals or legal entities) perform actions that are identical in content to the exercise of the right to dispose of them. The method of enforcement of this decision is determined by the Cabinet of Ministers. Read more about the management of confiscated property in this material.

Seized assets accepted by the ARMA are subject to evaluation, which is conducted by evaluation activity subjects determined by the results of the competition, and transfer to the management of legal entities or individual entrepreneurs determined by the results of the competition in the manner prescribed by the legislation on state (public) procurement.

At the expense of the funds placed on the accounts of the National Agency in the national currency, the ARMA may decide to purchase bonds of the internal state loan “War Bonds” in the amounts agreed by the Cabinet of Ministers of Ukraine, but not more than in the amount of 80 percent of the funds accounted for in the deposit accounts of the National Agency. In addition, the ARMA has such powers for the period until the termination or cancellation of martial law, as well as within one month from the date of its termination or cancellation.

Legal regulation and organization of the activities of the National Agency of Ukraine for finding, tracing and management of assets derived from corruption and other crimes is the competence of the Verkhovna Rada Committee on Anti-Corruption Policy.

The ARMA sells assets on the following platforms: the Commodity Exchange “PRODAZHI,” the State Enterprise “SETAM,” the Commodity Exchange “PRYDNIPROVYE,” and others, which are selected through a competition organized by the ARMA independently. And the procedure for the sale of the seized property is regulated by the Resolution of the Cabinet of Ministers.

What is proposed to be changed?

The draft law covers many areas. It should be noted that this document does improve certain aspects of the activities of the ARMA.

The draft law proposes:

• to provide that the transfer of assets to management will be conducted according to the results of the competition in the manner prescribed by the Cabinet of Ministers of Ukraine;
• to introduce publicity of the results of competitions to determine asset managers and their publication in the Unified State Register of Assets Seized in Criminal Proceedings and in the electronic trading system in which auctions for the sale/forced sale of assets are held;
• to clarify the provision on the functioning of the Unified State Register of Assets Seized in Criminal Proceedings, the data entered into it, as well as on the ARMA’s informing the Cabinet of Ministers of Ukraine about the data entered into the said Register;
• to formalize the requirements for electronic auctions, in which forced sale will be implemented, and the procedure for their implementation;
• to establish the obligation to inform and publish information about the seized assets under the ARMA management, etc.

However, there are also controversial provisions. Thus, regarding the management of seized assets and sanctions, the document provides the following proposals.

1. To enable the Cabinet of Ministers of Ukraine during the period of martial law and within one year after its abolitionto decide on the transfer of assets from the management of the ARMA to the management of other economic operators of the public sector of the economyfor the use of such assets to ensure vital humanitarian, military, or other needs that have arisen as a result of the armed aggression of the Russian Federation.

Moreover, to provide the CMU with the opportunity to independently initiate the transfer of assets from the management of the ARMA to other economic operators of the public sector of the economy in other exceptional cases determined by the current legislation.

The authors of the draft law propose to provide an opportunity for public sector economic operators to use any property transferred to the management of the ARMA to ensure vital humanitarian, military, or other needs that have arisen as a result of the armed aggression of russia. However, to some extent, this approach may contradict the main purpose for which the ARMA was created in Ukraine: preserving the economic value of the assets seized in criminal proceedings.

As a general rule, seized property is transferred to the ARMA, that is, its owner is not yet deprived, but only limited in right of ownership. That is why the legislation provides for special procedures for the selection of a manager who is responsible for ensuring the safeguard of assets, their proper use. Therefore, the national budget does not incur expenses to ensure this.

Indeed, in conditions of war, there may be a need for the state to use the property of other persons. This is regulated by the Law of Ukraine “On the Transfer, Expropriation or Seizure of Property under the Legal Order of Martial Law or State of Emergency.” The main thing it provides for is a preliminary or subsequent full reimbursement of the value of the property, as well as a special procedure for making a decision on its expropriation.

In the practice of the HACC, there are cases when the seized property (funds) were transferred to the needs of the Armed Forces of Ukraine without the consent of the owner. The court applied the provisions of the above-mentioned law so that in case of acquittal of the accused, the value of their property would be compensated.

The proposed amendments to the Law on the ARMA do not establish special compensation mechanisms in case of loss or destruction of property as a result of its use by economic operators of the public sector of the economy. This creates additional grounds for affirming the unlawful nature of interference with property rights.

Additional attention should be paid to the uncertainty of the content of the legal wording “in order to ensure the vital humanitarian, military, or other needs that have arisen as a result of the armed aggression of the Russian Federation.”

The legality of interference with property rights, which is guaranteed by Article 1 of Protocol I to the Convention for the Protection of Human Rights and Fundamental Freedoms, shall also be assessed in the light of the accessibility, clarity, and predictability of legislation and its application.

Given that the normative content of this provision is not covered in the legislation, there is no methodology for assessing the presence of such a goal and a mechanism for countering possible abuse, such a statement contradicts the component of legality as a guarantee of legitimate interference with property rights.

2. To provide for certain changes in the activities of the ARMA and its management of seized and sanctioned assets, aimed at improving the effectiveness of the management of seized property and improving the sanctions policy.

The authors of the draft propose to expand the list of objects that can be sold by the ARMA by returning to the version of part four of Article 21 of the Law of Ukraine “On the National Agency of Ukraine for Finding, Tracing and Management of Assets Derived from Corruption and Other Crimes,” which was in force before the amendments to Law No. 1648-IX.

The abuse of the discretion of the ARMA in determining the way of managing the seized property — transferring it to the manager or selling it at an auction — was the main reason for registering draft law No. 5141, which later became Law No. 1648-IX of 14.07.2021.

Moreover, the NABU conducts pre-trial investigation in cases related to the alleged abuse of powers by ARMA officials together with SE “SETAM” and other entities.

One of the reasons for such abuses was the uncertainty of the provisions of the Indicative List of Property, that, including items or large batches of goods, the storage of which is impossible without unnecessary difficulties due to bulkiness or other reasons, as well as goods or products that are subject to rapid deterioration, etc. This list is not exhaustive.

It can be argued that changing the platform for the sale of assets will increase the quality of tenders, but the decision to sell or transfer the asset to the manager will be made by the ARMA. Therefore, there is still room for abuse, and to minimize this risk, it is necessary to leave the decision on the sale of assets with the investigating judge.

3. To provide for a separate type of sanction in accordance with the legislation on sanctions —forced sale— on par with the recovery to the national income.

Today, the Law of Ukraine “On Sanctions” states that the court decision on the application of sanctions for the recovery of assets to the state’s income (provided for in Article 4, part 1, clause 1-1 of this Law), on the day of its entry into force, is sent to the Cabinet of Ministers of Ukraine to determine the entity, procedure, and method of its implementation. At the same time, the recovered property can be transferred only to the temporary management of certain state bodies or institutions.

The procedure and method of implementation of such a sanction are not defined in the law. Neither are there examples that would allow tracking certain trends in the adoption by the Cabinet of Ministers of decisions on the definition of entities, procedure, and methods of implementation of such court decisions.

It would be fair to assume that the recovery of assets has a similar legal mechanism of implementation as the confiscation of property under the Criminal Code of Ukraine. After all, both consequences for the owner are to deprive the person of property rights, are applied by a court decision on behalf of the state, and do not provide for compensation. The main way to dispose of confiscated assets is sales, but there are exceptions.

The sanction proposed by the authors of the draft will consist in the mandatory sale of the property in respect of which it was applied, and the acquisition of domestic government bonds for the proceeds. Making such amendments to the Law of Ukraine “On Sanctions” without determining the main shortcomings of the implementation of the current law and ways to eliminate them by amending the bylaws seems unreasonable.

Additionally, the draft law does not distinguish between the recovery of an asset and its forced sale. Such discretion of the Ministry of Justice does not improve the quality of legal regulation because the discretion of state bodies should be based on certain criteria. Moreover, the court will not be able to assess why the MoJ chose this or that type of sanction.

4. To stipulate that for the period of martial law and within one year after its expiration, the ARMA in the appropriate currencydecides to purchase domestic government bonds “War Bonds” at the expense of such funds.Moreover, this should take place within three working days from the date of crediting (placement) of the funds received from the sale of assets to the accounts, in the amounts agreed by the Cabinet of Ministers of Ukraine, and in the amount of 100% if we are talking about sanctioned property; to stipulate that such regulation also applies to the funds available in the accounts of the ARMA at the time of entry into force of this draft law. 

Domestic government bonds of Ukraine are securities placed exclusively on domestic capital markets and confirm Ukraine’s obligations to reimburse the bearers of these bonds for their nominal value with the payment of income in accordance with the terms of bond placement (Article 16, part 3 of the Law of Ukraine “On Capital Markets and Organized Commodity Markets”).

Given that we are talking about the purchase of domestic government bonds for funds that are seized and the ownership of which has not been terminated, it is worth considering the possibility of returning these funds to the owner without losses in case of early cancellation of the arrest or acquittal of the accused.

According to the Ministry of Finance, only investors who purchased domestic government bonds with early repayment and only on condition that such bonds have been in circulation for at least 15 months can exercise the right to present government bonds for early repayment. Early repayment of such government bonds is made on the date of the coupon payment (interest payment). If necessary, investors can sell domestic government bonds on the secondary market by contacting a securities trader who has a brokerage license from the National Securities and Stock Market Commission (NSSMC).

Sale in the secondary market can be both profitable and unprofitable. Therefore, these risks should be considered when deciding to purchase domestic government bonds so that the state does not bear responsibility to the owner of the asset for not preserving its value.

Conclusions

The main provisions of the draft law No. 8311 are aimed at improving the management system of seized assets, in particular, by increasing the transparency of these processes. Therefore, Transparency International Ukraine supports the adoption of the draft law as a basis for further revision and improvement of its provisions for the second reading.

It is worth considering that the ARMA was created due to the lack of an effective mechanism for managing seized property in order to preserve its economic value in criminal proceedings, insufficient efficiency of tracing property for the purpose of its arrest by law enforcement agencies and considering the recommendations of the European Commission within the framework of the dialogue between Ukraine and the EU on visa liberalization. Therefore, leveling the main function of this body — to ensure the safety of seized assets — through the expansion of its powers can create threats to the implementation of these recommendations.

We propose:

• to reformulate clause 3, part 1, Article 21-1 of the Law on the ARMA with reference to the Law of Ukraine “On the Transfer, Expropriation or Seizure of Property under the Legal Order of Martial Law or State of Emergency” or to specify its provisions using existing legislative wordings. For example, to clarify the term “social need” in the Law of Ukraine “On Alienation of Land Plots and Other Objects of Immovable Property Located on Them in Private Ownership, for Social Needs or for Reasons of Social Necessity”;
• to leave the choice of management method in the form of sale of seized property at the discretion of the investigating judge, while specifying, in the manner set forth in the draft law, the grounds for transferring property for sale. And also, to specify the resolution of the Cabinet of Ministers of Ukraine “On the Indicative List of Property…,” which is canceled at this time;
• not to amend the Law of Ukraine “On Sanctions,” supplementing it with a new type of sanction, but to focus on the formation of a bylaw regulatory framework in order to effectively implement the sanction in the form of recovery of assets into the state’s income. At the same time, it should be noted in the Law on the ARMA that the ARMA manages the property to which the above-mentioned sanction is applied;
• to determine that the book value (in cases when it is possible to establish it) will be the starting price of the seized assets for the purpose of their sale, but if the property is transferred to the manager, it is mandatory to conduct property valuation;
• to resolve the issue of parliamentary control over the activities of the ARMA by amending the relevant resolutions of the Verkhovna Rada of Ukraine, and not by amending the law;
• to define the terms used in the draft law, or to indicate that they are used in the meanings given in the current legislation (in particular, it refers to “guarantee fee,” “registration fee,” “auction,” “auction by the method of a step-by-step reduction of the starting price and subsequent submission of price offers”).

Author: Pavlo Demchuk, Legal Advisor at Transparency International Ukraine

This publication was prepared with the financial support of the European Union. Its contents are the sole responsibility of Transparency International Ukraine and do not necessarily reflect the views of the European Union.