Sale of Seized Russian Ammonia: Lessons to Be Learned

On April 5, 2023, a meeting of the Temporary Investigation Commission (TIC) of the Parliament was held on issues of economic security. At this meeting, the matters of sale of the seized 42,000 tons of russian ammonia from the companies “TogliattiAzot” and “Mindobryva,” as well as 2,200 tons of potassium “Belkali” were considered.

Let’s try to figure out why the ammonia case aroused such interest among parliamentarians and the public. In addition, we will cover, in general, the areas of responsibility of state actors in the field of the sale of seized property.

1. The speed of seizure of property

The first thing that attracted the attention of the participants in the discussion was the speed of seizure. After all, it was the dynamism of the reaction that had to affect the efficient prevention of a probable environmental catastrophe due to the concentration of a large amount of ammonia in one place.

In general, the seizure of property is regulated by the Criminal Procedural Code of Ukraine (CPC of Ukraine). The seizure shall be imposed by the court at the motion of the prosecutor or investigator. It is the pre-trial investigation body or the prosecutor that are obliged to prove the existence of the grounds and purpose of the seizure. Of course, collecting such evidence requires some time and effort.

At the same time, in order to search for property for potential seizure, the investigator or prosecutor must appeal to the ARMA, other state institutions, local self-government bodies, or individuals (Art. 170, part 1, paragraph 2 of the Criminal Procedural Code of Ukraine). 

Therefore, to determine the speed of reaction to the initiated case, it is necessary, in particular, to check how effectively the investigators of the Bureau of Economic Security (BES) used all the mechanisms for collecting evidence. And this will help understand how quickly the BES appealed to the court with a motion to seize the property and transfer it to the ARMA for management.

What can be improved? 

The speed of seizure depends on the speed with which evidence is collected. Even after the property is seized, there may be questions about the quality management of it. This is a part of a much larger planning process before the transfer of property to the ARMA, which we have repeatedly mentioned earlier.

Therefore, parliamentarians should supplement the current CPC of Ukraine with provisions on planning before transferring property to the management of the ARMA.

array(3) { ["quote_image"]=> bool(false) ["quote_text"]=> string(233) "Therefore, to determine the speed of reaction to the initiated case, it is necessary, in particular, to check how effectively the investigators of the Bureau of Economic Security (BES) used all the mechanisms for collecting evidence." ["quote_author"]=> string(0) "" }

Therefore, to determine the speed of reaction to the initiated case, it is necessary, in particular, to check how effectively the investigators of the Bureau of Economic Security (BES) used all the mechanisms for collecting evidence.

2. Compensation for storage of seized property

The ammonia, seized on July 13, 2022, was transferred to the Odesa Portside Plant (OPP) for safekeeping under a court decision until its sale. 

The legislation in some cases allows transferring material evidence to the rightful owner — for safekeeping, if possible, without damage to criminal proceedings (Art. 100, part 6 of the Criminal Procedural Code of Ukraine). This is done to preserve the value of peculiar property.

In the situation with ammonia, the court lawfully determined the Odesa Portside Plant to be responsible for the storage of ammonia because storing this asset required special conditions. However, the question arose: how should the plant be compensated for its storage costs?

Costs related to the storage of things are incurred at the expense of the State Budget in the manner prescribed by the Cabinet of Ministers of Ukraine (Art. 123 of the CPC of Ukraine). The Procedure approved by the Cabinet of Ministers determines that the storage of material evidence is carried out at the expense of the body that transferred the material evidence for storage.

However, the provisions of this procedure are quite outdated and do not consider the current rules on the management of seized property. Moreover, clauses from the Procedure cannot be applied to the case of ammonia because it was the court that decided to transfer the property for safekeeping. If the court did not take such a decision, the problem would be different — who would be responsible for the fact that the seized ammonia would be stored safely?

The procedure for the sale of seized assets at electronic bidding assigns the responsibility for the storage of the seized property to the organizer, which in the case of ammonia was LLC Prydniprovye 2021 (we will cover more later in the text). At the same time, the organizer compensates the costs from their remuneration, which is paid after the successful completion of the bidding. However, since the item of bidding was a peculiar asset, whose custodian was determined by the court, the organizer was not obliged to ensure the storage of such an asset.

At the same time, the ARMA stressed that it was the buyer who bore the costs of receiving, cooling, storing, and shipping ammonia, which in the above case amounted to more than UAH 105 mln for 10,000 tons. However, this is not entirely true. After all, as we have already analyzed above, the current legislation does not regulate the issue of compensation for the costs of storage of material evidence if such a decision was made by the courtIn the same case, the OPP planned to compensate for such costs with an increased price that the buyer had to pay for the shipment of goods.

According to the OPP, not all the winners of the bidding paid such a cost in the sale of these assets. That is, buyers simply did not respond to the paragraph from the additional information to the lot, which referred to the obligation of the winner to pay for the entire period of the asset storage.

What can be improved? 

The mentioned Procedure, which regulates the issue of storage of material evidence by the prosecution, openly contradicts the provisions of the CPC of Ukraine regarding the management of the seized property. Therefore, it should be brought in line with the current law, and the procedure for compensation of costs of enterprises for the storage of seized assets should be regulated.

array(3) { ["quote_image"]=> bool(false) ["quote_text"]=> string(291) "Current legislation does not regulate the issue of compensation for the costs of storage of material evidence if such a decision was made by the court. In the same case, the OPP planned to compensate for such costs with an increased price that the buyer had to pay for the shipment of goods." ["quote_author"]=> string(0) "" }

Current legislation does not regulate the issue of compensation for the costs of storage of material evidence if such a decision was made by the court. In the same case, the OPP planned to compensate for such costs with an increased price that the buyer had to pay for the shipment of goods.

3. Determining the value of the seized property

The seized property is sold at prices not lower than market prices (Art. 21, part 4 of the ARMA Law). At the same time, the procedure for the sale of such property is mostly regulated by by-laws (for example, the Procedure for the Sale of Seized Property at Electronic Auctions) and local acts (for example, the Rules for Conducting Electronic Auctions of Seized Assets at LLC Prydniprovye 2021).

The Procedure for the sale of seized property at electronic auctions states that the starting price of the lot is equal to the market value of the asset in accordance with the appraisal report, and the appraisal of the assets is provided by the auction organizer. The ability to ensure such an appraisal is one of the criteria that the ARMA sets when selecting legal entities to organize and conduct electronic bidding of seized assets.

The ARMA must respond to detected violations of the requirements of the legislation in terms of asset evaluation. Agency officials can make a precept on the elimination of violations of the law, conduct an internal investigation, as well as hold the guilty person accountable as established by law (Art. 10, part 2 of the ARMA Law). 

At the meeting of the TIC, the Agency announced that it had conducted an audit of the circumstances of determining the value of the seized ammonia, and no violations of the law were found. The thoroughness of the measures taken by the ARMA is still to be checked by the TIC, as well as other supervisory bodies. 

The TIC also discussed the issue of non-payment of taxes and fees by buyers of the seized ammonia.

It should be noted that the Procedure for the sale of seized property at electronic bidding does not answer the question whether it is necessary to include mandatory payments in the starting price of the lot. However, when selling the confiscated property within the enforcement proceedings, the cost is determined considering all taxes and fees payable when moving property across the customs border of Ukraine.

What can be improved? 

If the condition for the shipment of the goods was the payment of all due taxes and fees, then such a problem would not arise. Therefore, the normative act regulating the procedure for the sale of property should settle these issues.

The ARMA reports on the developed proposals on amendments to the legislation that will solve the problem of the sale of property under customs control. However, these proposals have not yet been analyzed and discussed publicly.

Issues related to the appraisal of seized property must be addressed comprehensively — together with all the issues in the field of asset appraisal.

array(3) { ["quote_image"]=> bool(false) ["quote_text"]=> string(150) "Issues related to the appraisal of seized property must be addressed comprehensively — together with all the issues in the field of asset appraisal." ["quote_author"]=> string(0) "" }

Issues related to the appraisal of seized property must be addressed comprehensively — together with all the issues in the field of asset appraisal.

4. Accessibility of the website of the bidding organizer

Selection of legal entities that organize and conduct electronic bidding of seized assets is carried out in accordance with the Law of Ukraine “On Public Procurement.” This is defined in the Resolution of the Cabinet of Ministers No. 558 dated August 9, 2017.

In the selection announcements, the ARMA usually notes that the candidate must confirm the compliance with various criteria. One of them is that the electronic trading system is able to provide unhindered access for participants to take part in the electronic bidding.

In the context of the circumstances established at the meeting of the TIC on the accessibility of information on ammonia trading, it is interesting that LLC Prydniprovye 2021 is an authorized participant of the Prozorro.Sale system.

To become an accredited ETS Prozorro.Sale platform, it is necessary to pass testing for compliance with the terms of reference. One of its requirements is the accessibility of the operator’s website to all users on the Internet. In addition, the viewing of auctions on the websites of operators should be available to all viewers without restrictions and the need for additional authorization.

According to the acting head of the ARMA, the Prydniprovye 2021 exchange provides information on lots listed on Prozorro.Sale at one URL, while the information on the sale of seized assets is placed at another. The representatives of the commodity exchange did not explain the reasons for this at the meeting of the TIC.

Therefore, it is worth checking whether there were obstacles in accessing the website of the electronic platform. If so, then it does not meet both the qualification requirements of the ARMA for legal entities and the requirements of Prozorro.Sale and should lose the status of both the seller of the seized property and the certified Prozorro.Sale platform.

What should be improved?

TI Ukraine supports initiatives to sell seized property on Prozorro.Sale. According to the head of JSC “Prozoro.Sale,” such activities do not correspond to the charter of the joint-stock company. In addition, to be able to participate in the competition for legal entities-sellers, a legal entity must have its own electronic trading system, as well as be able to provide storage, appraisal of property, etc. (either independently or on a contractual basis).

Thus, in order to sell seized assets through the electronic trading system Prozorro.Sale, it is necessary:

  • to change the Procedure for the sale of seized assets at electronic auctions;
  • to determine in the charter of the enterprise that JSC “Prozorro.Sale” can participate in the organization of the sale of seized assets.

5. The speed of sale of the seized ammonia

The meeting of the TIC also raised questions about why the seized ammonia was in the process of sale for so long. After all, the first auctions took place in August 2022, and the most recent ones — in March 2023.

According to the ARMA, all the ammonia was not put up for auction at once because the OPP would not have been able to ship it immediately. The ARMA prepared each lot based on the results of consultations with the plant, considering technological features. In fact, it was the plant that decided how much ammonia could be put up at once so that it could be shipped without any obstacles. In addition, attention is also paid to the market situation; no participant could buy 42,000 tons of ammonia at once.

Notably, the division of the asset into lots is the sole responsibility of the ARMA. Like any discretionary power, such a division must be reasonably justified. The explanation that ammonia was sold as quickly as market, logistical, and technological constraints allowed is logical and consistent. Moreover, these explanations can be checked considering the information from the OPP on the shipment of ammonia already sold. 

array(3) { ["quote_image"]=> bool(false) ["quote_text"]=> string(255) "According to the ARMA, all the ammonia was not put up for auction at once because the OPP would not have been able to ship it immediately. The ARMA prepared each lot based on the results of consultations with the plant, considering technological features." ["quote_author"]=> string(0) "" }

According to the ARMA, all the ammonia was not put up for auction at once because the OPP would not have been able to ship it immediately. The ARMA prepared each lot based on the results of consultations with the plant, considering technological features.

Conclusions

Increased attention to the process of selling seized assets both on the part of politicians and the society should be used to the maximum advantage for reforming the ARMA.

Previously, we wrote about what exactly needed to be improved in the current legislation.

If we take a closer look at the sale of ammonia, then we can form such areas of responsibility.

  1. Collection of evidence, seizure of property, and movement in criminal proceedings — Bureau of Economic Security.
  2. Determining the legal entity that will sell the seized assets — Asset Recovery and Management Agency.
  3. Determining the cost of the sale of ammonia — LLC Prydniprovye 2021 is determined as property appraisal, as well as the Asset Recovery and Management Agency in terms of responding to property appraisal.
  4. The speed of sale of the seized property — the Asset Recovery and Management Agency, as well as the Odesa Portside Plant in terms of the promptness of shipping the goods.
  5. Compensation of costs for storage of physical evidence — the legislation does not regulate the current mechanism.

The analysis was prepared by Pavlo Demchuk, legal advisor at Transparency International Ukraine.