Author - Markiyan Bem 

After the start of Russian aggression against Ukraine in 2014, the Ukrainian state took the first steps towards improving the legal tools to fight against the aggressor state. Among other steps, that was the adoption of the Law of Ukraine “On the Sanctions” on August 14, 2014. That Law was subjected to regular criticism due to imperfect mechanisms and questions regarding the constitutionality of a number of its provisions. If the constitutionality of the provisions of this Law is a sufficiently complex and debatable issue, the application of its provisions in practice really raises many questions. 

The issue of the application of the Law “On the Sanctions” became especially acute after the beginning of the process of confiscation of Russian assets based on the decisions of the High Anti-Corruption Court of Ukraine (HACC). Among other shortcomings, there are problems associated with the blocking of sanctioned assets of individuals and the decision to collect them as state income.

Legislative and practical challenges of blocking the sanctioned assets 

In accordance with the legislation, the property of persons subject to sanctions shall be confiscated by pre-imposing sanctions on the relevant property in the form of blocking the assets. The specified type of sanctions is provided forin Clause 1, Part 1 of Art. 4 of the Law of Ukraine “On the Sanctions” implying a “temporary deprivation of the right to use and dispose of assets owned by a natural or legal person, as well as assets subject to direct or indirect (through other natural or legal persons) actions identical to the exercise of the right to dispose of them by such a person.”

Moreover, confiscation of assets shall be preceded by their blocking. However, asset blocking decisions do not specify which specific assets should be blocked. As a result, a part of the key assets that are not directly owned by the sanctioned person but subject to “direct or indirect (through other natural or legal persons) actions identical to the exercise of the right to dispose of them,” may in reality remain unblocked. 

In addition, the decision to block the assets (the decision of the National Security Council and the Presidential Decrees implementing it) usually does not contain any justification, which is a serious problem. Often such a decision is made on the basis of information provided by operatives of the law enforcement agencies, which either contains a very concise and superficial justification, or does not contain it at all. Such reports are usually not supported by any evidence. 

These problems have become particularly acute after the introduction of a sanction in the form of confiscation of assets as state income. For its application, the court must establish whether the property belongs to a specific person or whether they have the ability to actually dispose of it. It is obvious that it demands to first identify such property and prevent its alienation or concealment. 

For this, the Ministry of Justice was empowered to search for relevant property and to find evidence of its belonging to a sanctioned person. However, this process takes a lot of time, and the relevant property may be alienated before the Ministry of Justice files a claim with HACC. At the same time, the Ministry does not have the authority to block such an asset.

After the Ministry of Justice has filed a claim, at its request HACC has the right to take measures to secure the claim, in particular, to prohibit the defendant from taking certain actions. 

However, this measure cannot be an effective safeguard against the removing of property from sanctions, since the claim to the HACC is the final stage of the work on collecting the assets as the state’s income. The process itself usually lasts about a month in HACC, even in the most complex cases (for example, case No. 991/265/23 regarding Oleh Derypaska’s assets). Therefore, the greatest interest is blocking the assets until filing a claim, which can take quite a lot of time.

The question of the validity of seizure of assets within the criminal proceedings

There are currently no legislative mechanisms for taking effective measures to block the assets of persons subject to sanctions. In order to compensate for this shortcoming, in practice a new mechanism was “developed” by state authorities, namely, the seizure of such assets as a part of criminal proceedings. 

Such a conclusion can be made by analyzing the decisions of the HACC regarding the collection of assets as state income, a significant number of which contain a reference to criminal proceedings related to the assets of sanctioned persons. In some cases (for example, case No. 991/265/23 regarding Oleh Derypaska’s assets or case No. 991/1914/23 regarding the Rotenberhs’ assets etc.), assets of sanctioned persons were seized as part of criminal proceedings. In some cases, such assets were also transferred to Asset Recovery and Management Agency office (for example, case No. 991/1542/23 regarding Yevhen Hiner’s assets).

At the same time, usually all the specified criminal proceedings were initiated, and arrests were imposed in April and May 2022.

Some of them are somewhat formal and far-fetched. For example, in the mentioned case regarding Oleh Derypaska’s assets, it was said that as part of one of the criminal proceedings, the corporate rights of a quartzite mining company were seized. The analysis of the decisions in this case confirms that the formal reason for the investigation in the specified criminal proceedings was the abuse of authority by officials of the State Service on Geology and Mineral Resources of Ukraine (Article 364 of the Criminal Code of Ukraine), who allegedly contributed to the “illegal obtaining of special permits for the use of subsoil in the territory of Zhytomyr region, as well as other regions of Ukraine, approving assessment reports without legal grounds, as a result of which the state has incurred grave consequences.” 

It is clear from the same decisions that the real reason for the seizure was actually the fact that this enterprise is owned by the sanctioned persons and sells goods to Russia. However, those circumstances were obviously not the subject of criminal proceedings. Therefore, the imposed arrest appears to be completely unrelated to the investigation on the criminal offense. 

Moreover, these criminal proceedings are usually “factual,” that is, no one is informed of the suspicion. In accordance with the current legislation, in “factual” criminal proceedings, an arrest can be imposed exclusively for the purpose of preserving material evidence (Article 170 of the Criminal Code of Ukraine), which can only include material objects (Article 98 of the Criminal Code of Ukraine). However, there are numerous cases of seizure of corporate rights and intellectual property rights, which cannot be called “material objects” in any way within such criminal proceedings. 

Such circumstances suggest that these proceedings focus not that much on the investigation of a real crime as on blocking the assets of persons subject to actual or potential sanctions. Thus, criminal proceedings in these cases act only as a tool for blocking the assets, which contradicts the tasks assigned to it in accordance with Art. 2 of the Criminal Procedure Code of Ukraine.

The ECHR’s practice regarding the blocking of sanctioned assets

The use of criminal proceedings for such purposes contradicts the principles of legality and the rule of law and can potentially cause problems for the state if persons subject to sanctions file claims with the European Court of Human Rights (ECHR) about violations of their rights, guaranteed at least by Art. 1 of Protocol No. 1 to the Convention.

The practice of the European Court of Human Rights (ECHR) regarding the seizure of property (blocking of assets) is established and extensive. The conclusions of the ECHR in such cases are not in favor of the above-mentioned practice, which has now developed in Ukraine. The key requirements set by the ECHR in this category of cases are that the property subject to seizure must be directly related to the subject of the criminal proceedings, pursue one of the legitimate purposes of such seizure, and be proportionate in light of the purpose of the seizure (see, for example, Kruglov and Others v. Russia, applications No. 11264/04 and 15 others, clause 142–146, East/West Alliance Limited v. Ukraine, application No. 19336/04, clauses 182–207; Džinić v. Croatia, 38359/13, para. 67–82; FU QUAN, s.r.o. v. the Czech Republic, application No. 24827/14, clauses 70–75; Łysak v. Poland, application No. 1631/16, clauses 83–92; and Taganrog LRO and Others v. Russia, application No. 32401/10 and 19 others, clauses 283–284).

Of course, in most of the cases where the HACC issued final decisions, the deadlines for appeals to the ECHR have already passed. However, this gap in the legislation should be further taken into account. This is necessary, among other things, to ensure the indisputability and irreversibility of these decisions and their authority as seen by the international community.

Conclusions and recommendations

There are two ways to improve the legal mechanisms related to the seizure and blocking of sanctioned assets.

First, to introduce changes to the Law of Ukraine “On the Sanctions” and improve the mechanism of blocking the assets, in particular by obliging the body that applies the specified sanction to determine the list of such assets. Also, such a decision must include justification for the need for blocking. It is also advisable to provide the sanctioned persons with slightly greater guarantees of compliance with their rights, in particular, an effective possibility to appeal the decision to block their assets.

Secondly, it is possible to introduce criminal liability for removing property from sanctions. In the framework of such criminal proceedings, the seizure of sanctioned assets will look much more convincing than within criminal proceedings “initiated on the move” regarding tax evasion or legalization of proceeds of crime. It should be noted that such a step would correspond to the position of the European Union.

The publication was prepared with the support of the International Renaissance Foundation as the part of the project "#Compensation4UA/Compensation for war losses for Ukraine. Phase II: ensuring the effectiveness of mechanisms at the national and international level" project.