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VB PARTNERS is a boutique law firm, founded in 2005, with specialization in White-Collar Crime and Dispute Resolution. Our unique experience in these areas allows us to provide effective tools to settle conflicts with the state or an unfair counterparty.
Our clients receive the highest level of expertise, individual approach and personal involvement of partners in projects.
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Our key expertise includes investigation of fraud, money laundering, misappropriation of funds and assets, tax evasion and fictitious bankruptcy, abuse of office, negligence and illegal enrichment.
We take a proactive stance in protecting the victims/businesses from illegal actions. Our firm has a developed practice in the sphere of compliance and conduct our own corporate investigations, including with the aim of bringing dishonest partners, contractors and management of companies to responsibility.
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Imposition of Sanctions
Restrictive measures (sanctions) can be initiated by Parliament, the President of Ukraine, Cabinet of Ministers, National Bank of Ukraine, Security Service of Ukraine or by the National Security and Defense Council (NSDC).
The NSDC’s decision to impose sanctions should be implemented by a Presidential Decree. Both acts come into force as of the date they are published in one of three official publications. Posting on a website and publications in other editions are for informational purposes only, but authorities begin to act before official publication. Let me give you an example from 2018.
The President of Ukraine put into effect by his Decree No. 126/2018 of 14 May 2018 a new Decision adopted by the NSDC on 2 May 2018. New individuals and companies were added to the lists, including those from a decision adopted by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).
On 14 May 2018 the above Decree was posted on the President’s official website without lists of sanctioned individuals and companies. The lists were posted on the President’s website on 19 May. On 25 May the National Bank canceled registration of the domestic payment system WebMoney.UA. The President’s Decree, NSDC’s decision and lists were published in the President’s Official Bulletin only on June 5. The publication, itself, was distributed only on 11 June.
Consequences of Sanctions for Business
The law proposes certain measures, but provides the NSDC’s right to apply other sanctions at its own discretion. The most negative for companies are blocking of assets and suspending financial transactions.
For those companies and individuals named in the sanctions lists, such measures entail the impossibility to establish business contacts, enter into transactions and conduct any operations with financial and other assets in Ukraine. For Ukrainian resident companies this means an actual cessation of commercial activity, impossibility to comply with their obligations to the budget and third parties.
Lifting of Sanctions. Foreign and Ukrainian Practice
On 27 January 2019, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) lifted sanctions imposed on En+ Group plc, UC Rusal plc, and JSC EuroSibEnergo, following an earlier notification submitted to the US Congress on 19 December 2018. The companies have reduced the ultimate shareholder’s direct and indirect stake in these companies and agreed to unprecedented transparency for OFAC in their operations by undertaking extensive, ongoing auditing, certification, and reporting requirements.
In Ukraine, journalists who are citizens of Great Britain, Germany, Spain, Israel, Hungary, Estonia, etc. were excluded from the lists. It is obvious that such decisions were dictated by the diplomatic reaction of the European Union.
It is obvious that the National Security and Defense Council should make a decision to lift sanctions if they were imposed on certain individuals and companies hastily and unreasonably, or if companies’ business activities are useful for the national security and defense capacity of Ukraine, or if their application obviously causes damages to the national interests and citizens of Ukraine.
Challenging Presidential Decrees on Imposition of Sanctions
Earlier, Presidential Decrees could be challenged in the High Administrative Court of Ukraine (HACU). The Supreme Court of Ukraine could review the decisions of the HACU.
The position of HACU in these disputes was that the Ukrainian authorities acted within the limits of their statutory powers, and restrictive measures were taken by the state for the purposes as referred to in international legal documents, with the observance of compliance with the interests of state in the field of national security and degree of interference in the rights and freedoms of citizens.
According to updated procedural law, disputes regarding the legality of Presidential Decrees shall be considered in a simplified litigation by a panel of judges of the Cassation Administrative Court. The Grand Chamber of the Supreme Court is the appellate court.
An appellant’s position may be reasoned as follows, depending on the circumstances of a case:
1) decision to impose sanctions is not justified;
2) sanctions are not necessarily imposed in a democratic society and their application violates the right of ownership;
3) imposed sanctions are excessively rigid and violate the principle of proportionality of restricting rights and respecting state interests.
In accordance with Article 1 of Protocol No. 1 to the 1950 Convention, every individual or legal entity has the right to respect of personal/its property. No-one may be deprived of property, except in the public interest and subject to the terms and conditions as provided for by law and general principles of international law.
According to the established practice of the European Court of Human Rights (ECHR), the right of ownership may be restricted only with the simultaneous observance of three conditions: if restriction is established by law; if restriction is in the public interest; if it is necessary in a democratic society, that is, if the principle of proportionality of the interests of the state and an individual has been complied with. Restriction of the property right of a person should be based on a fair balance of public interests and fundamental rights and may not impose an “excessive burden” on an owner (par. 69, 73 of Sporrong and Lönnroth v. Sweden case).
Pursuant to Article 2 of the Code of Administrative Procedure, the court should examine the decision of any authority as to whether it was made:
a) using power for the purpose for which such power has been granted;
b) reasonably, that is, taking into account all the circumstances relevant to decision-making;
c) impartially, in good faith and reasonably;
d) proportionally, with the observance of the necessary balance between any adverse consequences for rights and the objectives which are designated to achieve.
Subject to the above requirements, the Ukrainian authorities (initiator of sanctions, NSDC and President) should determine in each particular case whether the national interests require precisely such a level of interference in the rights and freedoms of an individual or company.
The current position of the Supreme Court of Ukraine towards this category of disputes is as follows.
Rights and freedoms are not absolute, since their exercise is connected with duties and responsibilities and may be subject to formalities, conditions, restrictions or sanctions that are provided for by law and are necessary in a democratic society in the interests of national security. The use of sanctions by the state does not constitute a violation of rights and freedoms, possibility of imposing them is provided for by law and has a legitimate aim — the need to immediately and effectively response to threats to the national security of Ukraine (Resolution of the Grand Chamber in case No. 800/321/17).
Taking into account this formal approach, achieving a positive outcome is unlikely. To date, appellants have lost all disputes. Only in one of the cases (No. 9901/759/18) were proceedings suspended at the request of the President’s representative. A motion is justified by the fact that the procedure for lifting sanctions against a retired individual has already been initiated. Such an error shows how likely sanctions may be imposed as a result of the negligence or malicious intent of the initiators of a measure.
International Judicial Authorities
In the actual situation, a judicial appeal may be used only to bring the problem of a particular person to public discussion or subsequently appeal to international judicial authorities. For example, the filing of an application to the European Court of Human Rights is possible after the exhaustion of national remedies.
Foreign investors may also apply to international arbitration on the basis of investment protection agreements. The latter allow broad interpretation of direct and indirect expropriation of assets, as well as fair compensation for their value. And this primarily refers not to Russian individuals, but to sanctions against European companies. The reasons for their inclusion in the sanctions list are not only unclear, but sometimes too vague and this may cause reasonable doubt about the legitimacy of their aim.
Of course, the main one will be a dispute as to whether expropriation took place or not as such, since the assets of a foreign investor do not become directly owned by the state. Nevertheless, some decisions of the authorities on the procedure for applying sanctions deprive an investor of the ability to manage and control assets. As an example, I will cite Decision No. 1707, taken by the National Securities and Stock Market Commission of 13 October 2015, according to which the shares may be recognized as non-voting. Accordingly, a shareholder with a significant stake of shares loses its/his representatives in management bodies and right to vote on all issues on the agenda. Non-voting shares are not counted when determining the quorum of a shareholders meeting. This opens up the possibility to change the articles of association in favor of the government shareholder or other interested parties.
OFAC publishes official press releases regarding the application of sanctions, but the initiators and reasons for the application of sanctions in Ukraine remain in the dark.
The actions of Ukrainian state bodies often conceal the interests of particular “favorite friends” and financial groups that have nothing to do with national security interests. Therefore, part of decisions may be either a means of pressure on business, or a means of redistributing the market (for example, gambling), or a means of indirect expropriation of assets.
The legitimacy of the aim in disputes should be verified by the Supreme Court with respect to the compliance of the decision with the criteria of reasonableness, objectivity, good faith and proportionality. Only in such a manner may the Rule of law, as stipulated by Article 8 of the Constitution of Ukraine, be guaranteed.
Certainly, I will emphasize the importance of sanctions legislation, and I do not challenge the validity of their application in most cases. But there is a need for the authorities to explain to the people the reasons for imposing sanctions on business, as there is a need for efficient judicial protection against interference which does not pursue a legitimate aim.