Reforming ARMA’s Institutional Capacity: Analysis of Draft Law 12374-d for the Second Reading

After the first reading of draft law 12374-d on 12 February 2025, discussions on amendments for the second reading continued for over a month. At its meeting, the Anti-Corruption Committee recommended the revised draft law for consideration in the session hall, noting significant improvements in managing seized assets.

Brief conclusions:

• the draft law fully meets the requirements of the Ukraine Facility Plan, as it significantly improves the procedures for the competitive selection of the Agency’s chair, the independent external audit of ARMA, and the transparent selection of managers for seized assets;
• in addition, the regulation proposed by the committee incorporates several other recommendations to enhance the effectiveness of procedures for managing seized assets.

What we suggest: 

• adopt draft law 12374-d in its entirety;
• develop high-quality bylaws to ensure compliance with this law’s provisions.

Key amendments to the updated draft law

The procedure for the external independent assessment (audit) of the Agency’s activities remains largely unchanged compared to the government and revised draft laws. 

Regarding the selection of the ARMA chair, the committee has considered our recommendations to broaden the pool of potential candidates. Now, candidates with an economic education, at least five years of professional experience, and at least three years of managerial experience can apply for this position. The draft law introduces a requirement that candidates must speak a foreign language that is an official language of the Council of Europe and limits the tenure to one consecutive term instead of the previously allowed two. 

Members of the Civil Oversight Council may be involved in assessing the effectiveness of seized asset management. The term of office for Civil Oversight Council members will be two years.

There have also been changes regarding the transparency of the Agency’s work. Under the updated draft law, the ARMA will submit a quarterly report on the management of seized assets in addition to its annual report. It will include, among other details, the number of investigating judge or court rulings on asset transfers to the National Agency, along with the specified management method (transfer to management or sale). ARMA’s data should also include the number of enforced rulings, the number of concluded management contracts, income from asset sales and management, and management costs for each contract.

In addition, the list of public information in the Unified Register of Seized Assets will be significantly updated. After the legislative update, the Register will specify:

• the status of asset management measures, the results of manager appointments, key terms of the management contract (including remuneration), references to concluded asset management contracts, monthly income from seized asset management, management cost compensation, and the outcomes of effectiveness control measures;

• the status of asset sale measures, including references to electronic trading, asset valuation amounts, and income from asset sales.

After the adoption of the new law, the ARMA will gain additional funding sources through the creation of a specialized fund. The fund will be formed from income generated by the National Agency’s asset management and proceeds from asset sales. The Cabinet of Ministers of Ukraine will determine the revenue allocations to this fund from each source.

The ARMA will introduce a new asset identification stage, which will include measures to determine the asset’s characteristics and specifics to assess its manageability and economic value retention. Based on the asset identification results, the National Agency will prepare a conclusion and submit it to the prosecutor.

Changes to the asset management procedure

The most significant changes in the updated draft law concern the management of seized assets.

The ARMA will accept assets from prosecutors within a maximum of 10 business days (or 30 business days in certain cases) and, if necessary, will commission an assessment using funds from the specialized fund. The Agency will retain these assets until a manager is selected through the procurement of specialized organizations in accordance with public procurement legislation.

The Cabinet of Ministers will approve a management contract template, and the manager will be required to insure the property and its liability to third parties. The manager will be liable for any damage caused in accordance with the Civil Code of Ukraine.

To enhance asset management efficiency, assets will be classified as simple or complex. The following types of assets will be classified as simple:

• cash, 
• single movable or immovable property, including vehicles, 
• assets primarily managed through fee-based use without requiring comprehensive measures for their operation. 

The following types of assets will be classified as complex:

• unified property complexes, 
• assets (or asset pools) that require organizing economic activities to sustain production or other industrial processes, 
• assets requiring a special permit for management and operation or those related to licensed activities, 
• shares in the authorized (pooled) capital, stakes, portions, or asset pools valued at more than 20,000 subsistence minimums for able-bodied persons as of January 1 of the year the National Agency accepts them for management.

The requirement for corporate rights managers of Russian or Belarusian companies to coordinate their actions with the company’s management body or the asset owner will be abolished.

The exceptional cases of asset management defined in Article 21-1 of the ARMA Law will be expanded to include a new provision: upon request from military administration bodies, seized assets may be temporarily used to accommodate military personnel and internally displaced persons, as well as for the rehabilitation of military personnel and individuals affected by the armed aggression of the Russian Federation.

The ARMA will develop an indicative asset management plan, which will include:

• general information about the asset, including its name, characteristics, description, ownership details, existing encumbrances or restrictions, utility bills, and other mandatory payments; 
• information on the asset’s geographical location or ongoing storage arrangements; 
• information on the asset’s market value or appraisal; 
• expected asset management costs; 
• potential sources of income that can be generated from asset management; 
• analysis of asset management risks and measures for their mitigation; 
• recommendations on the optimal asset management approach; 
• expected outcomes of asset management, including the projected monthly revenue. 

The plan may be modified at the initiative of the manager or the ARMA if circumstances arise that could impact management effectiveness.

The selection process for asset managers will vary depending on whether the asset is classified as simple or complex. 

If an asset is classified as simple, the selection process will be conducted through the electronic procurement system in two stages: 

1. preliminary qualification of participants; 
2. selection of the manager for a simple asset through an auction among pre-qualified participants. 

This process will establish a preliminary list of potential managers who meet the required criteria. This selection process will be ongoing, and the ARMA must evaluate submitted applications within 10 business days. 

The selection of a manager for specific assets will be conducted through an auction based on the lowest proposed remuneration. The announcement of such a selection must be published no later than 20 business days after the National Agency signs the acceptance certificate. 

It is important that an auction participant who submits an abnormally low offer must provide justification for it. The ARMA may reject such an offer if it is abnormally low or if it comes from a person connected to the asset owner or the individual involved in the case. For the auction to be valid, at least two participants must take part.

Managers of complex assets will be selected through a different procedure: 

1. Announcement of the selection procedure for participants; 
2. Submission of documents for participation in the selection of a complex asset manager through the electronic procurement system; 
3. Disclosure of participants’ offers and their assessment for compliance with qualification requirements; 
4. Determination of the manager of a complex asset through an auction among participants who meet the qualification requirements.

The Commission for the selection of the manager of complex assets will consist of eight members: four appointed by the ARMA, and one representative each from the business ombudsman, the National Securities and Stock Market Commission, the Ministry of Economy, and the Ministry of Justice.

For the selection of managers of complex assets, a requirement will be established that they cannot be competitors of the business being transferred to management.

It is important that the draft law sets strict requirements for the information the ARMA must publish when selecting a manager. This ensures that a broad audience can access asset data and participate in the manager selection process.

This means that judicial appeals of competitive procedures will no longer be grounds for halting the selection of a manager after the new law is adopted.

The new law will introduce a separate procedure for selecting the “manager of last resort.” If a manager for simple or complex assets cannot be determined under the standard procedures, the ARMA will procure asset management services through open auctions in accordance with the Law of Ukraine on Public Procurement. Participants who refused to enter into an asset management contract will be barred from participating in such procurement based on the results of the selection procedures for managers of simple and complex assets.

With the adoption of the law, the sale of seized assets will be conducted through Prozorro.Sales. The bylaw should also establish deadlines for the sale of assets.

Monitoring the effectiveness of managing seized assets has also undergone major changes. In particular, in the updated text of the draft law:

• details the purpose of the audit: control over ensuring that the manager maintains the economic value of the asset, complies with the requirements of the asset management agreement, and does not have a potential or real conflict of interest between the asset manager, their owner, and related parties;
• determines that documentary verification of the effectiveness of asset management will be carried out at least once a month, and on-site verification at least once every three months;
• establishes that the ARMA may involve representatives of other government agencies in monitoring asset management effectiveness when special knowledge is required.

The draft law also defines the grounds for termination of the asset management contract: 

• failure of the manager to comply with the essential requirements of the management contract for more than two months, 
• the existence of a potential or real conflict of interest between the asset manager and the asset owner, related persons, or suspects (accused) in the criminal proceedings in which the relevant assets were seized; 
• attempts by the manager to alienate assets or any part thereof.

Changes in sanctioned assets

These discussions contributed to shaping the provisions of the draft law regarding the management of assets seized from sanctioned persons and transferred to the ARMA. 

In the updated version of the regulation, it is established that if a court issues a decision to recover assets for the state budget under Article 5-1 of the Law of Ukraine on Sanctions, the asset management contract will terminate upon the transfer of the asset to the State Property Fund of Ukraine or another state authority, a public-sector business entity designated by the Cabinet of Ministers of Ukraine in accordance with this law.

In addition, assets subject to a court decision enforcing the sanction provided for in Article 4, Part 1, Paragraph 1¹ of the Law of Ukraine on Sanctions, which has entered into legal force, must be transferred to the State Property Fund of Ukraine or another state authority, a public-sector business entity designated by the Cabinet of Ministers of Ukraine in accordance with the procedure established by the sanctions legislation.

The sale of assets will be prohibited if a statement of claim for their recovery has been filed and accepted by the court for consideration under the Law of Ukraine on Sanctions, until the court decision in such a case enters into legal force. The only exceptions are assets that are rapidly deteriorating.

The draft law also regulates the procedure for handling war bonds procured by the ARMA using seized property, for which the HACC has decided on recovery. The State Property Fund sends the relevant court decision to the ARMA, which then transfers the war bonds and accrued income to the state by decision of the Cabinet of Ministers for further repayment and cancellation, leading to a corresponding reduction in state debt. 

It is important that, in this way, the HACC decisions on recovery will be implemented regarding: 

• domestic government loan bonds (“war bonds”) procured with cash placed in the accounts of the National Agency;
• funds used by the National Agency to procure domestic government loan bonds (“war bonds”);
• assets sold by the National Agency under this Law, for the sale of which the National Agency procured domestic government loan bonds (“war bonds”).

Regulating the transition period 

The articles defining asset managers will come into force six months after the analyzed draft law takes effect. This period should be sufficient to develop a comprehensive bylaw. 

The ARMA has six months from the date of the law’s entry into force to inspect and evaluate assets previously transferred to the Agency but not yet assigned to managers. The goal is to determine the nature of these assets, assess their value, and evaluate their potential for effective management.

If the Agency determines that an asset cannot be managed effectively or its value cannot be maintained, it will inform the prosecutor in the relevant case, providing justification for changing the management approach or taking other necessary measures.

If the Agency determines that the asset can be effectively managed, the ARMA will have 40 business days after completing the asset valuation to announce the selection of a manager in accordance with Articles 21-3 or 21-4 or to take measures under Article 21-1.

After the meeting of the Anti-Corruption Policy Committee, the draft law also amended the Law on Corruption Prevention regarding the monitoring of officials’ lifestyles—a procedure related to electronic declaration, which is implemented by the NACP, not the ARMA. We at TI Ukraine believe that the legislator should avoid the problematic practice of incorporating provisions unrelated to the primary subject of a regulatory legal act. 

In its 2021 study, TI Ukraine proposed removing the lifestyle monitoring mechanism from the legislation. In our view, this would enable the NACP to concentrate on thoroughly verifying official declarations, particularly in the search for unjustified assets. This approach aligns with international standards, which advocate for a single procedure to verify the assets of officials, rather than assessing their diversification.

Conclusion

Taking into account the above theses, we can conclude that the draft law aligns with the requirements of the Ukraine Facility Plan. This version of the draft law significantly improves the procedures for the competitive selection of the Agency’s chair, the independent external audit of the ARMA, and the transparent selection of managers for seized assets.

In addition, it finally incorporates the following recommendations we previously provided:

• the pool of candidates for the ARMA chair has been expanded;

• it is determined that courts of other jurisdictions cannot prohibit the Agency from determining the manager of seized assets;
• measures have been introduced to plan the transfer of assets to the ARMA (identification stage);
• the public part of the register of seized assets has been supplemented with information on measures to manage seized assets, income, and expenses on them;
• ways to counteract the corporate rights manager of Belarusian and Russian arrested companies have been reduced;
• the effectiveness of control over asset management has been strengthened.

After the adoption of this law, many bylaws will need to be developed and adopted by various entities. The Cabinet of Ministers of Ukraine alone will need to approve approximately 10 documents, including the procedure for storing assets by the National Agency and the procedure for selecting a manager for complex assets. 

Before implementing these amendments, the Prosecutor General’s Office must be also involved, as a joint order with the ARMA will approve the form of the prosecutor’s request, the procedure for access to seized assets for identification in criminal proceedings, the procedure for determining asset value for the prosecutor’s request regarding asset management and preservation or its economic value, and the list of documents confirming the asset’s value.

Such an array of bylaws is a positive trend, as it limits the ARMA’s discretion and, consequently, reduces the potential for abuses. At the same time, a responsible approach must be taken to developing all these regulations to ensure that everything outlined in the draft law functions as intended by its creators.