Draft Law No. 12406: How Ukraine Plans to Punish Sanctions Violators

On January 14, the President submitted an urgent draft law (No. 12406) to parliament, criminalizing the circumvention and violation of sanctions in Ukraine. While this document awaits consideration by the committee, we are examining its contents.

The draft law proposes amendments to the Criminal Code, the Criminal Procedure Code, and the Law on Sanctions. These changes aim to criminalize violations and circumventions of sanctions imposed by the National Security and Defense Council in Ukraine. This issue became especially relevant after the start of Russia’s full-scale invasion, and now, in the third year of the great war, we may finally see a solution.

Brief conclusions:

• the draft law introduces criminal liability for the violation and deliberate circumvention of sanctions, following the example of the EU Directive adopted in May 2024;
• the proposed amendments are generally of high quality and deserve support;
• it is important to consider the mechanisms of European sanctions legislation that were not reflected in the draft law and incorporate them through partial revision. In particular, a mechanism for granting temporary licenses for the disposal of sanctioned assets should be included.

What we suggest:

• including a mechanism for granting temporary licenses to perform actions (deals, operations, transactions) with sanctioned assets based on the decision of the National Security and Defense Council;
• clearly stating in the draft law that violations of sanctions also include negligence;
• making it a legal obligation for all individuals and companies to inform the authorized bodies about any sanctioned assets known to them to ensure effective blocking;
• considering the introduction of an obligation for sanctioned persons to report their assets to the National Security and Defense Council for the same purpose.

All these proposals are based on European practice.

What is it like now?

Even though, following the full-scale invasion, most of Ukraine’s international partners have strengthened their sanctions policies by criminalizing violations and circumvention, our country still lacks the proper mechanism to hold Kremlin henchmen accountable. 

Currently, the only way to bring violators of anti-Russian sanctions to justice is by charging them with another crime against national security, namely collaboration. However, this approach is not justified, as violations or circumvention of sanctions represent a much narrower crime that may not always fall under the definition of collaboration.

This situation is unacceptable, as the Russian Federation’s military aggression against Ukraine has been ongoing since 2014. Since then, the Law on Sanctions has been in effect in Ukraine, under which sectoral sanctions were imposed on Russia’s military-technical production in 2014, followed by financial sanctions in 2015, including the freezing of assets of over 300 individuals and 90 companies.

If violators of these sanctions had been effectively held criminally responsible since 2014, Russia’s influence on the Ukrainian economy would be significantly reduced by now. Therefore, it is crucial that the necessary changes to the legislation be introduced without further delay.

Amendments proposed in the draft law

Draft Law No. 12406 proposes the addition of a new article to the Section “Crimes against the foundations of national security of Ukraine” in the Criminal Code, addressing the violation of sanctions or their deliberate circumvention. It is important to note that crimes in this section are not subject to a statute of limitations.

Violation of a sanction refers to the failure to fulfill or obstructing the implementation of a sanction. Deliberate circumvention of a sanction involves acquiring assets from a sanctioned person or engaging in any activities with sanctioned assets if committed by an individual who was aware of the sanctions. Deliberate circumvention of a sanction will also be considered as actions leading to the bankruptcy of a sanctioned company or any other actions aimed at altering the ownership of the assets of the business entity.

Criminalization will apply to violations or deliberate circumvention of all sectoral sanctions, with the draft law separately outlining a list of personal sanctions of a financial and economic nature. For some violations, the total value of the subject of the violation must exceed one hundred non-taxable minimum incomes of citizens (UAH 151,400), or the violation will be considered if the subject involves military or dual-use goods, regardless of their value.

It is also important to note that for the crime of circumvention of sanctions, only a deliberate form of guilt is provided while for a violation, both deliberate violation and negligence are considered. However, this is clearly stated only in the explanatory note to the draft law. 

The primary sanction for committing the crime can be a fine ranging from UAH 425,000 to UAH 2.04 million or imprisonment for a term of 2 to 15 years. Additionally, the violator may face the deprivation of the right to hold certain positions or engage in specific activities for up to 15 years, as well as the confiscation or special confiscation of their property.

According to the draft law, legal entities are also liable for violations and deliberate circumvention of sanctions, with penalties including fines and liquidation.

What does the draft law lack?

The draft law is based on the provisions adopted in the spring of 2024 EU Directive on the definition of criminal offenses and penalties for the violation of Union restrictive measures. It aims to unify the EU’s sanctions policy by holding violators of sanctions criminally accountable. The directive outlines an exhaustive list of acts that constitute violations or circumventions of sanctions, along with the associated penalties. EU Member States are required to incorporate these provisions into their national legislation within one year of the directive’s entry into force in May 2024.

The development of draft law No. 12406 in line with this EU Directive is a logical step in Ukraine’s European integration process. This approach to lawmaking deserves support and wider adoption.

Unfortunately, not all provisions of the Directive were incorporated into the registered draft law. In particular, the mechanism for granting temporary licenses for actions (deals, operations, or transactions) involving sanctioned assets is missing. In the EU, this practice is introduced to respect fundamental human rights and fulfill financial obligations. Licensing involves granting temporary permission by the authorized body to a person or company to use a frozen asset, such as funds for covering basic needs, court fees, payments, fulfilling contractual obligations, and so on. 

Ukraine can use this mechanism primarily to preserve the liquidity of domestic enterprises, which often suffer significant losses due to the sanctions. This results in difficulties when the State Property Fund attempts to manage these enterprises after they are seized for state revenue.

To ensure the effective collection of information on the assets of sanctioned persons subject to freezing in the EU, European legislation mandates that all individuals and companies notify authorized bodies about such property. Failure to comply with this obligation is considered participation in the circumvention of sanctions. 

In Ukraine, the asset-blocking mechanism still does not function properly. This is primarily due to the fact that, at the time of the NSDC decision to block the assets of a particular person, the actual list of those assets has not been compiled anywhere. This obligation is assigned to state bodies after the relevant decision is approved by a presidential decree. 

For example, in May 2022, the Law on Sanctions introduced a provision stating that the blocking of assets is carried out by the relevant state authorities, local self-government bodies, and other entities within the scope of their powers. The law also stipulates that the Ministry of Justice, in order to facilitate the future recovery of assets to the state, has the right to involve other state authorities and local self-government bodies in the identification and search of assets. It can also apply to these bodies or their officials with a demand to take actions aimed at temporarily depriving sanctioned persons of the right to use or dispose of their assets.

However, so far, national sanctions legislation does not impose an obligation on individuals and companies to report the assets of sanctioned persons known to them. This is especially interesting because the Law on Sanctions provides security guarantees for individuals who report such assets. Therefore, it looks only logical to implement the EU practice in this part and make informing mandatory.

Another way to ensure the state fully collects information about the assets of sanctioned persons is to impose an obligation on them to report these assets to the National Security and Defense Council after a decision to block is issued.

Conclusions and recommendations

We support Draft Law No. 12406 and hope it will align even more closely with European practices when finalized in parliament. After all, if these European standards are not implemented now, they will have to be adopted later as part of Ukraine’s official EU membership negotiation process. 

Therefore, we recommend:

1. 1. Developing and incorporating a mechanism for granting temporary licenses to perform actions (deals, operations, transactions) with sanctioned assets based on decisions by the National Security and Defense Council. This would primarily help preserve the liquidity of Ukrainian enterprises, which could then be transferred to state ownership and sold by the State Property Fund.
   2. Clearly defining the scope of criminal liability for negligent violations of sanctions to prevent ambiguous interpretations and potential abuses in the future application of the draft law.

• Requiring all individuals and companies aware of sanctioned assets that remain unblocked after the National Security and Defense Council’s decision to report such assets to the authorized bodies. 

1. For more effective asset blocking, consideration should be given to introducing a mandatory requirement for sanctioned persons to notify the National Security and Defense Council about their assets at the blocking stage.