Why Quality Valuation of Seized Property Matters: Goldenflora VS. ARMA Case

In January 2024, the ARMA returned more than UAH 16 million to Goldenflora LLC, and all because the auction for the sale of seized assets, in which this company was formally awarded, was declared invalid by the Northern Economic Court of Appeal.

This dispute arose due to the fact that the said company, having provided the highest price offer, was awarded in an electronic auction, signed the protocol of the electronic auction, and paid the funds for the purchased property to an ARMA account within the established deadlines. However, the Agency then canceled this sale. The main reason was the poor valuation of the assets that were planned to be sold.

As a result, the court decided that the ARMA had the right to cancel the auction in cases of undervaluation of assets. Therefore, it did not grant the demand of Goldenflora LLC that it was the winner of the electronic auction for the sale of seized assets.

The story of this case is of interest to us primarily because the valuation of seized assets has often been a field for abuse. In two of the three cases of the NABU, where the heads of the ARMA were served with charges, it was the undervaluation of an asset that was the way to commit an incriminated offense.

New mechanisms for managing seized assets have been introduced in Ukraine since 2015. But examples, as with Goldenflora, show that the updated procedures still fail to function smoothly. There are various cases that can harm either the owner or the national budget.

However, for the ARMA and the national budget, this outcome proves positive because the sale at a reduced price did not take place. But it highlights certain problems. The question arises, in how many cases the sale of assets did take place at an underestimated price, and what to do about it now.

Seized assets can be sold according to the decision of an investigating judge

The ARMA Law defines several ways to manage seized assets:

• placement of funds and precious metals on deposits with the bank;
• transfer to the management of a business or the state.
• sale of the asset.

Previously, the method of management was determined by ARMA officials. That is why in summer 2021, amid corruption scandals with the Agency, the Rada amended the law on the ARMA. According to the amendments, the investigating judge or court must determine whether the Agency should sell the seized assets or transfer them to a manager.

They mostly sell things that are difficult to store or that deteriorate quickly. The law provides for selling such property at market prices. In the future, the funds received are transferred to ARMA deposit accounts, and the money is kept there until the arrest is lifted.

In the Goldenflora case, the HACC judge seized new and used household appliances in June 2021. The case concerned the abuse by Volyn customs officials, which led to evasion of import duty in this unit. In May 2021, the seized property was transferred for sale to the ARMA.

The procedures for the sale of assets have also recently been significantly updated. If earlier, the ARMA used to select platforms from a wide range of participants without specific requirements for their transparency, now such a choice can be made only among Prozorro.Sale operators. Therefore, now the information about the sale of assets will be more extensive, and the algorithms for conducting auctions will be clear and transparent.

In 2021, the assets of Goldenflora LLC were to be sold on SE SETAM, where the ARMA sent an application for sale on the last day of the year.

Market prices: issues when determining them

The valuation of seized property is carried out by a specially designated entity—the appraiser. Its services are ordered by the seller of the asset, while the procedure for selecting the appraiser of the property in case of its sale is not regulated by law.

According to the property appraisal report, which was conducted on February 11, 2022, by Expert Consulting Center LLC, in this case the cost was UAH 15,569,986.35. On April 29, 2022, the ARMA received a letter from the appraisers stating that due to insufficient examination of the valuation object, they made inaccuracies in the identification of property. This significantly affected the result of the calculation. On the same day, SETAM announced the auction as the one that was held and awarded Goldenflora LLC.

Therefore, the question arose, can such an auction be considered completed? What about the UAH 16 million that Goldenflora sent to the ARMA for the products sold?

Contesting the results of the auction: a decision of the Supreme Court

On May 2, the ARMA requested that SETAM review the property appraisal report. According to the results of the revision, it was found that the document did not fully meet the requirements of regulatory acts on property valuation and had significant deficiencies that impacted the reliability of the valuation. However, the reviewers recognized that, after correction, the report could be used for the defined purpose.

Further, the ARMA demanded that SETAM stop the electronic auction and withdraw the asset from sale. In July 2022, the Agency refused to issue a sale certificate of the asset to Goldenflora due to the termination of the electronic auction.

LLC Goldenflora disagreed with the Agency’s actions and sought protection of its rights in court. The case went twice to the Supreme Court, which came to interesting conclusions:

• the ARMA has the right to terminate electronic auctions before their completion;
• The Agency may refuse to enter into a transaction if there is reasonable information about a significant underestimation of the market value of the asset being sold.

This legal position was worded before the update of the procedure for the sale of seized assets in November 2023. The new procedure provides not for the right to terminate the auction, but for the right to cancel the auction.

The organizer may cancel electronic auctions before they are held by its own decision or by the decision of the ARMA. They may be canceled after only if the ARMA decides that there are no grounds for the sale of the asset. This can happen if the decision to seize the asset or transfer it to the ARMA is canceled.

Considering the update of legal regulation and the position of the Supreme Court, it can be assumed that under the new procedure for the sale of assets, the cancellation of an auction due to an underestimated or incomplete property valuation is possible only before the auction. This again raises the issue of the quality of property valuation, its review, and the impact of potential violations on the final result.

The value of seized property is one of the biggest corruption risks

The history of the ARMA remembers cases when, according to the investigation, there were abuses with the valuation of property before its subsequent sale.

• Case of “river sand” and “Auchan plots”

According to the investigation, Ukrainian lawyer Andrii Dovbenko came up with a corruption scheme for the sale of seized property. It entails 4 episodes of the sale of seized assets:

• three land plots in Odesa Oblast, purchased for the construction of shopping centers: they were sold 18 times cheaper than the market value;
• 2,600 tons of river sand of medium and small size in Kyiv Oblast: they were sold with an underestimation of the cost by more than 6 times compared to the market value;
• more than 4,500 tons of urea, sold almost 5 times cheaper than market prices;
• grains, cereals, and oilseeds: sold four times cheaper than the market value.

In these cases, ARMA officials facilitated the selection of a specific appraiser for the seized property. Subsequently, the appraiser underestimated the value of the seized assets, and in the end, certain conditions were established at the auction (the preparation for the tender lasted only 5 days), which caused a specific participant to win.

In the case of river sand valuation, the investigation found that the appraisers deliberately determined its value through the comparison with an irrelevant category of these products (quarry sand) and also applied adjustments for a bargain of 5-30% and a wholesale discount in the range of 0-20%.

Thus, in these three cases, with the help of frauds with property valuation and the subsequent awarding, the state suffered losses of more than UAH 430 million.

Since June 30, 2023, the investigation in the case has been completed, and the defense is reviewing it.

• The case of seizure of the bank’s right of claim 

The investigation believes that former MP Serhii Skuratovskyi took a loan from a bank in the amount of more than UAH 200 million for the construction of an apartment complex. The National Bank then declared the bank that issued this loan insolvent.

So as not to repay the debts, the said MP organized the seizure and sale of the rights of claim through the ARMA at a reduced price. A financial institution controlled by the group members was to purchase it and subsequently cancel or terminate the encumbrances imposed by mortgage agreements and suretyship agreements.

To this end, the MP involved the previously envisaged valuation entities in the competition and ensured the awarding of a pre-selected winner, who would conduct the rights of claim valuation at a reduced price.

As a result, the right of claim, which, according to the prosecution, cost UAH 128.839 million on April 22, 2019, was estimated and sold for UAH 16.5 million.

In this case, on October 10, 2023, the pre-trial investigation was completed, and the materials were provided to the defense.

• The case of a 550-meter apartment on Klovskyi Descent in Kyiv

Another case associated with manipulations concerning the value of seized assets is the sale of an apartment on Klovskyi Descent in Kyiv. According to one of the versions, the ARMA, together with SETAM, tried to sell this property at a price lower than the market value. Thus, pre-selected property appraisers were involved, who determined the value to be 3–4 times lower than the real market value.

However, such an attempt was unsuccessful, as the arrest on the property was lifted and the apartment was removed from sale.

The investigation in this case was closed in April 2021 due to the expiration of the pre-trial investigation.

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As we can see, in two of these cases, the sale at a reduced price did take place, and the lost funds can be returned in the event of a guilty verdict and the granting of civil lawsuits. In the lastly mentioned case, losses were avoided only because the seizure of property was lifted.

The assets that Goldenflora acquired were eventually transferred to the state in accordance with the Law of Ukraine on the Transfer, Forced Alienation or Seizure of Property under the Legal Regime of Martial Law or State of Emergency. In September 2023, the HACC overturned the seizure of this property upon the motion of the acting commander of a military unit.

What is the problem, and how to solve it?

As we can see, the valuation of seized assets creates a serious field for abuse, and the ARMA did not provide the conditions for the high-quality operation of asset appraisers. Therefore, we at TI Ukraine believe that it is appropriate to take the following measures to prevent negative consequences.

• Provide an opportunity for appraisers to inspect seized assets

Quite often, after the transfer of property to the management of the ARMA, it is almost impossible to actually get to the object since the Agency’s employees face opposition from various security companies, lawyers, etc. This calls for the engagement of law enforcement officers.

Under the law, the ARMA has no right of access to assets seized and transferred to management, and there is no liability for not allowing authorized persons of the ARMA to the object. Therefore, it is necessary to improve the legislation in this part, which would allow the authorized persons of the ARMA to provide appraisers with access to the objects under management.

• Ensure review of all valuation reports of assets that are planned to be sold

Article 13 of the Law of Ukraine on the Valuation of Property, Property Rights and Professional Valuation Activities in Ukraine states that mandatory review of a property valuation report is carried out only if it is agreed, approved, or adopted by a public authority or local self-government body. For example, in the case of Goldenflora, the review of the valuation report was not mandatory since it was used by SETAM for the purpose of selling the property.

Given the importance of correctly determining the value of the seized asset, one of the solutions to the problem may be the introduction of a mandatory review of property valuation reports.

• Hold consultations with representatives of property appraisers to identify the biggest issues that may arise in the course of valuation

Given the high number of corruption cases related to the abuse of power by appraisers, a public discussion should be held on ways to prevent them. The most serious problems that may arise with the valuation of seized property and ways to solve them should be identified. For instance, the development of a specific methodology for seized property valuation can help with this.

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The valuation of a seized asset means determining its initial value at which the property will be sold. Therefore, it is crucial that it reflect the real value of the asset because further litigation may be initiated to indemnify the owner of the asset, the seizure of which may be overturned. Moreover, the losses may have to be compensated to the state if the asset is confiscated.