Dirty Russian Money in Favor of Ukraine: Plans on How to Do It in Europe

Throughout the last year, the Ukrainian community watched how in some European countries, assets related to russians who supported Putin’s regime were found. When these assets were seized, and the owners’ access to them was limited by sanctions, there was a wave of approval in the Ukrainian media environment — it was said that this property could and should be transferred to Ukraine as compensation for the losses caused by the war.

However, after 400+ days of the full-scale russian invasion, there has been very little shift in such confiscations. And there are many reasons for that because even recovering such a property is a very difficult task.

However, how can such assets be searched for? What problems in this matter already exist in the European legislation, which of them can be solved, and which are still pending? And how soon will it be possible to transfer russia’s “dirty” money to Ukraine? Let’s find out the details.

What documents should regulate the confiscation of ill-gotten assets in Europe?

The EU remains one of the biggest havens for dirty money. According to some estimates, illegal activities generate EUR 110 bln annually, which is about 1% of the bloc’s GDP. According to Europol, even when investigations are started against criminals, only 2.2% of criminal proceeds are frozen and seized, and only 1.1% are confiscated. Thus, criminals keep 98% of illegally acquired gains. 

Currently, the EU is in the process of updating the Asset Recovery Directive, which is a good opportunity to make sure that criminal proceeds cannot be kept, and criminals, kleptocrats, and participants in organized crime will not be able to hide their illegally acquired wealth in the EU. For its part, Transparency International EU has prepared recommendations on how to improve all stages of asset recovery: from tracing and seizing to confiscating and returning the proceeds of crime. Considering these recommendations will positively influence the interests of Ukraine. After all, we count on the support of the EU in searching and confiscating the assets of russian kleptocrats.

Currently, the legal basis for the return of such property in criminal cases is the above-mentioned Asset Recovery Directive, adopted in 2014. However, the system of asset recovery differs significantly in the countries of the Union and contains a number of gaps, while the authorized bodies are often underfunded. 

In fact, this was the impetus for the European Commission to submit a draft proposal for the revision of the Directive in May 2022. The implementation of such recommendations should improve the system in a number of key areas, including widening the scope of the Directive, empowering the Asset Recovery Offices with stronger mandates, and creating Asset Management Offices in all member states.

However, this proposal has a number of shortcomings, in particular, it does not go far enough in expanding the grounds of non-conviction based confiscation and insufficiently addresses the issue of returning assets to the victims of crimes and their social reuse. The proposal focuses primarily on organized crime, and while this aspect is crucial, a focus on corruption would be an important addition to changes to such an important document.

How are russian assets confiscated in Ukraine?

Currently, in Ukraine, in addition to criminal proceedings, as it is already being implemented in the EU, there are two other mechanisms for the confiscation of russian assets: through the imposition of sanctions in the form of recovering the assets of a person in favor of Ukraine and the forced seizure of property of russia and its residents.

Consequently, the main difference from what the above proposal to the EU Directive stipulates is that in Ukraine, unlike the European Union, the grounds for confiscation of russian assets include not only a conviction in a criminal case. This can be explained by the fact that in the EU, sanctions are not considered as a mechanism for confiscation, but primarily as a means of political pressure.

There are also clearly defined grounds for imposing sanctions on a person. That is, russian citizenship alone, for example, is not a reason for imposing sanctions or a crime punishable by confiscation of property.

In some countries of the block, circumvention of the imposed sanctions by a person is a crime for which confiscation may be provided. And currently, the EU is moving towards unified criminalization of circumvention of the sanction — so that any such attempts are punished.

Thus, the EU is working to confiscate the money of russian kleptocrats, who try to circumvent the sanctions, for example by hiding their assets, through a criminal process. This process is lengthy but reliable in terms of compliance with international legal standards.

In Ukraine, the sanctions mechanism is currently the main one for the confiscation of russian assets. It is through such mechanism within the country that the High Anti-Corruption Court has already confiscated with its relevant decisions the assets of russian oligarchs Shelkov and Deripaska in Ukraine, as well as some property of rectors and members of the russian duma, who supported the war in Ukraine.

Ukrainian confiscation mechanisms are not without risks, as Transparency International Ukraine has already written here.

So, let’s move directly to the recommendations that would facilitate the confiscation processes in the EU, given that there are many assets of interest to Ukraine in the European Union.

What is the plan on how to track such assets in Europe?

When a criminal investigation takes place, one of the key difficulties is linking the assets with their real owners.

Assets are often owned by legal entities with complex ownership structures, for, example, by using a number of companies registered in various offshore jurisdictions and shell companies. This is how, according to Bloomberg, last year, russia managed to hide USD 80 bln of its surplus from energy trade in Europe.

The EU needs to tackle this problem by creating better anti-money laundering rules. To ensure a functioning system, the police, and other competent authorities must first have timely and unrestricted access to accurate and complete ownership information, what the EU still needs to work on.

 In addition, all member states have a designated Asset Recovery Office responsible for tracing the proceeds of crime. These offices are often not provided with the necessary human and financial resources, which must be corrected.

Cross-border cases also show that more cooperation is needed when authorities attempt to identify proceeds of crime or assets belonging to sanctioned individuals or legal entities. This became especially relevant when, in March 2022, the European Commission established the Freeze and Seize Task Force to ensure coordination to implement sanctions against russian and belarusian oligarchs.

Management of seized assets

The seizure means transferring the asset to the disposal of the authorities, but it does not equal confiscation. Even if the authorities seize the assets, they still belong to the legal owner until a court order is issued for their confiscation. 

Maintaining real estate or even a car requires special expertise which, for instance, local police officers might not have. And this can be a problem because state authorities are obliged to maintain the good condition of physical assets. If the court issues an acquittal — the asset is returned to the owner. Therefore, when a seized asset loses its value due to depreciation or worsening condition, the owner could legitimately claim compensation for this, and the state, which could not save the property, will have to compensate for the damage.

EU member states currently have designated Asset Management Offices (similar to the Ukrainian ARMA), but the upcoming Directive will streamline their responsibilities. States should provide the necessary resources to these offices for proper asset management. In addition, information on seized assets needs to be systematically collected and subsequently transferred to the European Commission and published in a unified format.

Confiscation of assets

The fact that the current level of confiscation in the EU is so low can be explained by lengthy and burdensome court proceedings for such confiscation. 

In such cases, the State confiscates the proceeds or instrumentalities of a crime for which a conviction of an offender has been recorded. Therefore, law enforcement agencies need to prove a direct link between the crime and an asset of a person which is subject to confiscation. The requirements for such cases are very high, and therefore it may be difficult for investigators to gather sufficient evidence against the accused for confiscation to be ordered.

Unfortunately, EU member states do not fully use alternative ways to seize illicitly acquired assets, by means of non-conviction based confiscation. That is, without the holder of the assets having been convicted of a crime first. 

Unlike confiscation by court order, the threshold of proof for non-conviction confiscation can be lower, or the burden of proof may pass from the prosecution to the party from which the assets are to be confiscated. When coupled with necessary human rights and rule of law safeguards, non-conviction based confiscation can be a useful tool in the fight against grand corruption.

Some countries, such as the UK, already use the so-called “unexplained wealth orders.” A competent authority can initiate this procedure if a person’s wealth and/or possessions appear to be out of step with their legitimate sources of income. In such cases, the person needs to prove that they acquired the asset from lawful income. 

Such a procedure should be possible for foreign and domestic politically exposed persons (PEPs).  Banks, auditors, company service providers and other actors of sectors that are required to follow anti-money laundering rules need to pay extra attention to PEPs. Since such persons are entrusted to perform state functions, they pose a higher risk of potential corruption. The text of the draft Directive needs to be expanded to cover PEPs, and not just members of organized crime groups.

Many corrupt foreign politicians and their cronies, not only from russia, hide their stolen wealth in Europe. They invest in real estate, expensive cars, and luxury goods, and store millions of euros in EU banks — in the knowledge they are unlikely to be investigated. Even after being toppled from power, it can take over a decade to secure a conviction against such an official and return the stolen assets. We witnessed this in the case of the former president of Tunisia, Zine El Abidine Ben Ali.

Return and reuse of assets

What should be done with assets that were successfully confiscated? These ill-gotten gains were stolen from the society, and the best course of action is to give it back to the victims. 

The authorities should put the resources they collect from confiscation into a separate budget with a targeted social reuse. In cases where selling an asset is not financially beneficial, the physical assets can be given to the local population, like in Italy, when confiscated real estate became a community house. This will help to engage with the community and show them that the state institutions and the law enforcement authorities are committed to fighting criminals and protecting the interest of the public.

However, without proper safeguards, repatriated funds could end up being diverted by other corrupt officials. It is critical that a wide range of stakeholders, including civil society organizations, be involved in the return process. And that is why a mechanism should be developed to ensure that returned resources are being distributed in a transparent and accountable manner.

For example, the updated French legislation in March 2021 allows for the value of recovered assets to be handed to development organizations. That is, these funds will no longer be transferred to the general budget of France, but will be returned through a separate budget program to the foreign state from which the funds were stolen — to finance cooperation and development.

For Ukraine, such an approach would be appropriate in the hope that the EU countries will transfer the assets and funds, confiscated from russians and russian enterprises. Currently, the fact of transferring such assets to Ukraine has not yet been officially enshrined in the legislation or legislative initiatives of the EU. However, it is also necessary to understand that the funds transferred from the EU are not the only way to rebuild Ukraine.

In addition, EU member states currently do not have a good overview over the processes of returning and reusing assets. Such information needs to be collected into a single database to ensure transparency and accountability.

Therefore, the European Union will have to go through a difficult path before it can effectively confiscate and transfer dirty russian money to Ukraine. It should be clarified that these confiscations will only assist justice in terms of seizing the criminal assets of russians, but they will not replace court sentences for war crimes committed by them.

We very much hope that the above recommendations will be considered by our international partners. After all, strong institutions of confiscation and return of assets obtained by criminal means will become a pledge not only to punish russian embezzlers and oligarchs, but also a “scarecrow” for all other criminals. And Ukraine will eventually be able to get more funds for recovery and reconstruction.

Authors: Roland Papp, Senior Policy Officer on Illegal Financial Flows, Transparency International EU

Nataliia Sichevliuk, Legal Advisor at Transparency International Ukraine

This publication was prepared with the financial support of the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.