Changes in the management of sanctioned assets

Authors: Andrii Shvadchak, Legal Advisor at Transparency International Ukraine

Pavlo Demchuk, Legal Advisor at Transparency International Ukraine.

In late May this year, the Parliament adopted a law that was supposed to put an end to the issue of determining the management entity of sanctioned assets. At that time, the legislation did not give a clear answer as to who exercised such powers on an ongoing basis but instead imposed the obligation to elect a temporary manager of such assets among public authorities, military administrations, or state-owned enterprises, on the Cabinet of Ministers.

Most often, the government entrusted the temporary management of recovered assets to the State Property Fund of Ukraine, so in the end, it was decided to assign to it the functions of managing and selling (pro-)Russian assets recovered to the state’s revenue on an ongoing basis.

However, analyzing that legislative initiative, we noted the lack of resolution of the issue of transferring sanctioned assets managed by the ARMA as one of its risks. After all, the sphere of competency of the Agency regarding such assets ends when the court cancels the seizure of property, the asset is transferred to the ARMA for management, or it is sold in the order of its confiscation.

In addition, as a result of considering dubious amendments when voting for the law, the sale of sanctioned assets was under threat.

Recently, a draft law has been registered in the Parliament, designed to determine the role of the ARMA in the management of sanctioned assets, to engage the agency in the procedures for the forced seizure and sale of property of Russia and its residents, to regulate the procedure for enforcing decisions on the confiscation of assets into the state’s income. Let’s find out what the draft law proposes and what its shortcomings are.  

Current situation

Today, the only authorized body to manage confiscated Russian assets is the State Property Fund. 

The decisions of the High Anti-Corruption Court on the recovery of assets are sent directly to the SPFU to determine the procedure and method of their enforcement. This, for example, can mean further privatization, lease, or even continuing the management of assets by the SPFU to meet the needs of the state. 

The assets themselves are subject to transfer to the State Property Fund within 5 working days from the date of entry into force of the court decision. The Agency manages them and is empowered to sell this property, in particular, in the order of privatization. But in accordance with the requirements of the law, the sale of assets is possible only if they belong to residents of states that carry out armed aggression against Ukraine. 

This wording puts the further sale of Russian assets at risk because, after the case is considered by the court and their recovery to the state’s income, the assets no longer belong to the residents of the aggressor states. As a result, it is impossible to fulfill the requirements of the law for the sale of assets. 

As for the ARMA, the agency deals with sanctioned assets only when they are transferred to its management in criminal cases. In one of our materials, we analyzed that within the framework of criminal proceedings, law enforcement officers had previously seized and transferred to the management of the ARMA the assets of sanctioned Mikhail Shelkov (Demurinskyi Mining and Processing Plant LLC), Viktor Yanukovych (Tantalit LLC), Oleg Deripaska (Mykolaiv Alumina Plant LLC), Yevgeni Giner (shares of JSC First Investment Bank), Arkady and Igor Rotenberg (Ocean Plaza Company), Artemy Lebedev (two apartments in the center of Kyiv), Dmytro Vorona (4 apartments, 1 house ownership and 1 garden house, 10 land plots in Kyiv Oblast).

There are several ways to manage such assets: sale (if this is directly determined by the decision of the investigating judge), transfer of assets to the manager, and the Cabinet of Ministers determining an institution to manage this asset (in exceptional cases, which relate, for example, to the facilities of the military-industrial complex and the aircraft construction industry, which own such assets).

What does it propose? 

The draft law proposes to authorize the ARMA to enforce asset recovery decisions on a par with the State Property Fund. If the asset at the time of the court decision on confiscation is managed by the Agency, such a decision will be sent to it for further enforcement. 

The draft law changes the approach to enforcing decisions on the recovery of assets into the state’s income. It is suggested that, in addition to their sale in the manner prescribed by the Cabinet, the management of assets will be carried out exclusively by transferring them to the management of state-owned enterprises or other economic entities of the public sector of the economy. 

The funds received from the sale of assets by the ARMA, as in the case of the SPFU, are proposed to be directed to the Fund for the Liquidation of the Consequences of Armed Aggression.

In addition, it is proposed to entrust the Agency with new functions:

• temporary management of frozen assets. Asset freezing is another type of sanction; its application necessarily precedes the recovery of assets into the state’s income;
• preparation of government proposals on the forced seizure of objects of ownership of Russia and its residents and further sale of the objects identified by the ARMA.

In addition to activating the role of the ARMA in the sanctions policy, the analyzed draft law concerns its individual powers. Thus, changes in the status of the ARMA relate to the following novelties:

• the powers to request information from all enterprises, institutions, and organizations, regardless of their form of ownership;
• specifying that the ARMA should have free direct access to information systems, whose holder (administrator) is the state, with the possibility of remote information processing or in the mode of automatic data acquisition;
• authorize the Agency to take measures to identify and search for assets not only upon request but also on other grounds;
• the obligation of the corporate rights’ manager to coordinate their actions in the management body of the legal entity with the owner of such corporate rights is removed.

Shortcomings of the draft law

In terms of sanctioned assets and the ARMA

The Agency currently sells seized assets through implementing companies selected in accordance with the legislation on public procurement. This process is imperfect because such a sale was accompanied by many abuses, which is why the NABU initiated a number of criminal proceedings. 

As of now, not all provisions of the legislation that were allegedly used by ARMA officials to abuse their powers have been improved. Not so long ago, the case of selling ammonia of Russian origin attracted the attention of MPs. It highlighted a set of problems, including, in particular, the accessibility of the website of the platform on which the ARMA sold the asset.

Therefore, without improving the process of selling seized assets by the ARMA, it is extremely risky to supplement its mandate with new powers.

The same problem applies to the ARMA’s potential management of frozen assets. 

At present, the ARMA’s operational capabilities do not allow it to effectively process the array of assets that come to it within the framework of criminal proceedings. In 2022, 157 competitions for managers were announced, and only 19 winners were selected. 

The quality of the competitions is also questionable. It was only in May 2023 that the Agency adopted administrative regulations that defined the procedure for preparing for the competition to determine the manager of seized property.

Until recently, the procedure for the competitive selection of the manager of the seized property remained formally undefined. However, at the end of September 2023, the Agency developed and adopted Methodological Recommendations designed to regulate the competitive selection of managers. 

In terms of asset management by the State Property Fund

One of the main shortcomings of the draft law is the proposed mechanism for enforcing decisions on the recovery of assets into the state’s income, according to which the functions of their management are transferred from the SPFU to state-owned enterprises or other economic entities of the public sector of the economy with no alternative. 

In this regard, the results of last year’s monitoring of management efficiency conducted by the Ministry of Economy showed that out of more than 3,200 state-owned enterprises and business entities in which the state’s share exceeds 50%, almost every second enterprise is non-operating or unprofitable.

One of the factors contributing to this situation is the decentralized approach to the management of state assets. Today, the functions of the owner of state property are carried out by more than 80 different bodies and agencies, which leads to different approaches to the management of state property, which, as practice shows, are mostly ineffective.  

To solve this problem within the framework of implementing the reform of public property, the government has been transferring public assets to the SPFU over the past year to create a centralized body for the management of public property. The application of this approach is in line with the OECD guidelines on corporate governance for state-owned enterprises. 

Considering this, the said proposal of the draft law on the transfer of management functions to entities apart from the SPFU is controversial due to the inconsistency with the national policy on the centralization of public property management functions and the high probability of inefficient management of such assets.

However, due to the features of certain confiscated assets, such as monetary resources, historical and cultural values, works of art, their management is not always characteristic of, and sometimes inappropriate for the State Property Fund. In such cases, the government authorized other authorities, such as the Ministry of Justice or the Ministry of Culture and Information Policy, to manage such assets. It seems logical for the Cabinet of Ministers to retain the authority to determine another management entity for certain assets. But the draft law does not provide for such flexibility and concentrates the authority to manage all recovered assets in the hands of the SPFU or the ARMA.

The approach to crediting funds received from the sale of sanctioned assets to the State Budget of Ukraine and directing them to the Fund for the Liquidation of the Consequences of Armed Aggression is also retained in the draft law. But the issue of the disposal of funds that are assets collected into the state’s income remains unproperly regulated. Today, the obligation to direct them to the specified fund is determined by the law on the national budget for the corresponding year, but such regulation is not sustainable. 

Conclusions

Draft law No.10069 is the only currently registered legislative initiative aimed at solving the problem with the sale of (pro-)Russian assets, which is under threat due to the impossibility of the Fund to implement the requirements of the law in practice.  

As you can see, a detailed analysis of the draft law has revealed a number of dubious or even risky proposals contained in it.

Thus, without thorough and real improvement of by-laws regulating the procedures for the sale of assets and the determination of managers of seized assets, delegating the authority to dispose of sanctioned assets to the ARMA is an overly risky idea.

The idea of entrusting the Agency with the functions of temporary management of frozen assets, preparation of proposals, and sale of forcibly seized objects of ownership of Russia and its residents is also unfounded.

The proposed mechanism to enforce decisions on the recovery of assets is controversial due to inconsistency with the national policy on the centralization of public property management functions and the high probability of inefficient management of such assets.

Although it contains positive provisions, for example, removing the obligation of the manager of corporate rights to coordinate their actions with the owner of the seized assets, this still does not exceed the number of threats that this draft law can cause.

Therefore, we recommend revoking and finalizing the draft law, focusing on the transfer of sanctioned assets managed by the ARMA to the SPFU for further management, and improving the regulation of the sale of confiscated assets.