Enhancing ARMA’s Institutional Capacity: Analysis of Government Draft Law No. 12374

On January 2, the government registered draft law No. 12374, aimed at ensuring independence and enhancing the institutional capacity of ARMA.

The need for ARMA’s reform has been a longstanding discussion, repeatedly emphasized in the requirements of international partners and highlighted in the European Commission’s report on Ukraine’s progress toward European integration.

While the draft law introduces significant positive changes for ARMA’s institutional development, it also presents opportunities to address specific issues related to transparency and the effective management of seized assets.

Key findings:

• a positive aspect of the draft law is the introduction of revised rules for the competitive selection of the Agency’s chair, the regulation of competitive selection processes for managers of seized assets, and the enhancement of external independent assessments of ARMA’s activities;
• however, the draft law lacks necessary provisions to enhance the transparency of managing and implementing seized assets: planning the transfer of seized assets to ARMA, prioritizing criminal seizures, removing the requirement for corporate rights managers to coordinate their actions with asset owners, and increasing the completeness of information in the Unified Register of Seized Assets.

What we suggest:

• determine that courts in other jurisdictions cannot prohibit the Agency from taking measures to manage seized assets (except in cases involving the application of sanctions), and simultaneously establishing judicial control in criminal proceedings over the quality of asset management;
• implement measures to plan the transfer of assets to ARMA. Such actions should be performed by an investigator, prosecutor, and an ARMA official in cases involving the seizure of complex assets;
• add to the public part of the Register of Seized Assets information about: the start date of property management activities; the announcement of tenders for asset managers; the amount of remuneration to the manager and guaranteed payments; and the results of management control measures;
• reduce ways to counteract the corporate rights manager by removing the obligation to coordinate their actions with the asset owner, strengthen the effectiveness of control over asset management, and implement other targeted changes.

What is it like now?

The current legislation governing ARMA is far from perfect.

When it comes to selecting the head of the Agency, issues such as the politicization of the competition and the lack of clear criteria for evaluating candidates remain problematic. For example, the selection of the ARMA chair is conducted by a panel of eight individuals appointed by various entities, including the Parliament, the Director of NABU, the Prosecutor General, the Ministers of Finance and Justice, and the Head of the State Financial Monitoring Service.

The procedure for selecting managers of seized assets is not formally regulated. The relevant law merely states that assets accepted by the Agency must be evaluated and transferred for management to individuals selected through a tender process, in accordance with the procedures established by legislation on public procurement. However, within the entire set of public procurement legislation applicable to manager selection processes, only the procurement principles are outlined. In practice, the state does not allocate funds for asset management; instead, managers are responsible for ensuring the proper safeguarding of the assets.

Another issue is the audit of the agency’s work. To evaluate ARMA’s effectiveness, an unbiased external perspective is essential. Therefore, recognized specialists with the necessary professional expertise should be involved in conducting the audit. Under current legislation, the commission for ARMA’s external assessment is formed by political actors — the President of Ukraine, the Verkhovna Rada, and the Cabinet of Ministers. This creates a risk of the audit being deemed unconstitutional, and such a model fails to ensure an impartial and independent assessment.

What does the government propose?

The Ministry of Justice, in executing SAP objectives, has developed a draft law proposing comprehensive amendments to the law on ARMA. These suggestions include:

• establishing guarantees of ARMA’s independence and clear grounds for dismissing its head in a separate article;
• revising the Agency’s management selection process with a six-member competition commission, where half are appointed by the government and the other half by international partners who have supported Ukraine in combating corruption;
• granting additional powers to the Civil Oversight Council, particularly in participating in the selection of ARMA employees, overseeing the identification and implementation of asset managers, and monitoring the effectiveness of managing seized assets;
• creating an internal control unit within ARMA to prevent and investigate offenses among Agency employees;
• introducing competitive selection of managers and asset sales through the ProZorro.Sales platform;
• conducting the first independent audit of ARMA’s performance under the new procedure.

Controversial provisions of the draft law

Certain provisions of the draft law are positive, including revised rules for the competition to select the head of the Agency, the regulation of the competitive selection process for managers of seized assets, and the enhancement of external independent assessment procedures for ARMA’s activities. However, the draft law also includes controversial provisions that require improvement. 

1. It is essential to prioritize criminal seizures, enhance the content of the Unified Register of Seized Assets, and implement planning before transferring assets to ARMA

The draft law fails to prioritize criminal seizures over other types of seizures, creating a situation where ARMA cannot effectively manage assets due to the need to consider various seizure types and restrictions.

ARMA often manages assets that are difficult or impossible to handle because owners initiate court cases in civil, economic, or administrative jurisdictions, seeking to prohibit the Agency from managing the assets. This results in the inefficient use of the Agency’s resources and potentially decreases the value of the property. 

The lack of proper pre-transfer planning for asset management necessitates a lengthy preparation process and often leads to the transfer of assets to ARMA that cannot be effectively managed.

The draft law also lacks provisions for enhancing the content of the Unified Register of Seized Assets and implementing planning prior to seizure. Incomplete information in the register complicates the process of civil oversight of the Agency’s activities.

To address these shortcomings, we recommend:

• determine that courts in other jurisdictions cannot prohibit the Agency from taking measures to manage seized assets (except in cases involving sanctions), and simultaneously establishing judicial control in criminal proceedings over the quality of asset management;
• implement measures to plan the transfer of assets to ARMA. Such actions should be performed by an investigator, prosecutor, and an ARMA official in cases involving transfer of complex and comprehensive assets;
• add to the public part of the Register of Seized Assets information about: the start date of property management activities; the announcement of tenders for asset managers; the amount of remuneration to the manager and guaranteed payments; and the results of management oversight measures.

2. The law does not eliminate restrictions on the management of corporate rights

Despite long-standing advocacy by the public and stakeholders, the draft law fails to remove existing restrictions on the management of corporate rights, particularly the requirement to coordinate actions with asset owners.

The constant need to coordinate actions with the owner of corporate rights significantly delays the management process, potentially resulting in asset devaluation and inefficiency. When an owner is unavailable or intentionally delays the approval process, the asset manager is unable to make timely decisions.

Therefore, we recommend to reduce ways to counteract the corporate rights manager by removing the obligation to coordinate their actions with the asset owner and strengthen the effectiveness of control over asset management.

3. Shortcomings in the regulation of qualification requirements, competitive procedures, and grounds for dismissal of the ARMA head

In our opinion, a comprehensive review of the approaches to selecting and dismissing the head of the Agency is essential for a high-quality reform. Currently, the procedure remains highly flawed, which is already impacting ARMA’s performance.

One drawback is the requirement for a legal education and experience in the field of law, which limits the pool of candidates for the position of ARMA head.

This requirement is undoubtedly excessive, as it unreasonably narrows the pool of potential candidates for the position. The head of ARMA should primarily possess managerial experience and a solid understanding of effective asset management principles, while legal support can be provided by the Agency’s specialized divisions.

Previous competitions for the position of ARMA head have demonstrated that relatively few candidates apply. In 2023, only 10 candidates advanced to the final interviews, and very few of them had experience in criminal justice or asset management.

To broaden the pool of potential candidates, the requirements for education and experience in the field of law should be eliminated.

The competition procedure does not include a mandatory stage for completing a practical task.

The government’s draft law does not mandate a practical task as part of the competitive selection process. A practical task can showcase a candidate’s true professionalism, which is why this stage is included in competitions for positions such as the head of SAPO, the head of the NACP, and the director of NABU.

Without a practical test, it is challenging to evaluate candidates’ actual competencies and their ability to resolve specific asset management tasks. Theoretical knowledge and interviews alone do not provide a comprehensive assessment of a candidate’s ability to effectively manage the agency. A practical task, however, also allows for evaluating the applicant’s analytical skills, decision-making abilities, and understanding of ARMA’s specific functions.

The grounds for dismissing the head of ARMA do not include violations of anti-oligarchic legislation

The absence of such grounds for dismissal creates a gap in the mechanisms designed to prevent illegal oligarchic influence on the Agency’s activities. Given ARMA’s work with assets often owned by individuals linked to oligarchic structures, the absence of clear anti-oligarchic safeguards can result in conflicts of interest and inefficiencies in asset management.

Therefore, the list of grounds for dismissing the head of ARMA should be expanded to include relevant anti-oligarchic provisions.

4. Meetings of representatives from public associations are being introduced alongside the Civil Oversight Council

The draft law introduces the concept of meetings of representatives from public associations, in addition to the Civil Oversight Council already established at ARMA. These meetings will have the authority to oversee the competitive selection of Agency employees and participate in other processes.

This duplication of public oversight mechanisms could result in blurred responsibilities and ineffective supervision of ARMA’s activities. The unjustified creation of an additional body complicates public oversight procedures without offering clear benefits.

5. Following the adoption of the law, it is essential to comprehensively and professionally regulate the competitive selection of managers for seized assets through a Cabinet of Ministers resolution

The draft law proposes regulating the competitive selection process for managers of seized assets through a resolution of the Cabinet of Ministers. Given the critical importance of the manager selection procedure for ARMA’s effective operation, we support enshrining the key principles of this selection process at the legislative level.

However, to ensure a truly high-quality asset manager selection process, it is essential to establish a professional environment and properly regulate these procedures.

Conclusions

The proposal to improve ARMA legislation addresses some problematic issues but also includes several questionable provisions that require further refinement. This draft law should only be considered after incorporating the following essential provisions.

To ensure that the requirements of the Ukraine Facility Plan are truly met, it is necessary to:

• determine that courts in other jurisdictions cannot prohibit the Agency from taking measures to manage seized assets, and simultaneously establishing judicial control in criminal proceedings over the quality of asset management;
• implement measures to plan the transfer of assets to ARMA. Such actions should be performed by an investigator, prosecutor, and an ARMA official in cases involving transfer of complex and comprehensive assets;
• add to the public part of the Register of Seized Assets information about: the start date of property management activities and announcement of tenders for asset managers; substantial terms of management contract (remuneration and guaranteed payment); and the results of management control measures;
• reduce ways to counteract the corporate rights manager by removing the obligation to coordinate their actions with the asset owner and strengthen the effectiveness of control over asset management.

In addition, we find it appropriate to propose the following amendments to the draft law:

• remove the requirements for the head of the agency to have higher education in the field of law and legal experience;
• include a provision on violations of anti-oligarchic legislation in the list of grounds for dismissing the head of ARMA;
• add the completion of a practical task as a mandatory stage in the ARMA head selection competition;
• eliminate the concept of the “meeting of representatives of public associations” and transfer its functions to the Civil Oversight Council;
• establish a professional environment and conduct a thorough discussion on the draft resolution of the Cabinet of Ministers regarding the competitive selection of managers for seized assets.

If the government’s draft law is revised to incorporate these comments, it has the potential to become a success story in the reform of ARMA.