In Ukraine, the institution of sanctions was introduced in 2014 with the adoption of the Law of Ukraine ‘On Sanctions’.
The law was a response to Russia’s annexation of Crimea and the armed conflict in eastern Ukraine.
In 2014, the legislator mentioned two groups of sanctions:
- sectoral (in relation to a specific sector of the economy);
- personal (in relation to a specific person who threatens national security).
In total, 25 types of sanctions were envisaged: blocking assets, preventing the withdrawal of capital from Ukraine, cancellation or suspension of licences and other permits, etc.
The last type, ‘other sanctions that meet the principles of their application’, makes the list non-exhaustive.
In May 2022, a new type of sanction was introduced – the recovery of assets of the Russian Federation’s accomplices into the state’s revenue (nationalization of assets).
Strategic importance of sanctions compliance for business
In the context of active imposition of sanctions to combat the aggressor, sanctions compliance has already become an integral part of business processes.
This is due to the extremely high cost of cooperation with a sanctioned person or representative of the Russian Federation.
The consequences of such cooperation in Ukraine are described below.
- Reputational and/or commercial damage. Collaboration with a sanctioned person or an accomplice of the Russian Federation may result in contract cancellations, which will inevitably lead to losses.
- Limited liability for inadequate supervision. An example of this type of ‘punishment’ may be the application of enforcement measures by the regulator to banks and other financial institutions, or the cancellation of registration actions.
- Imposition of personal sanctions. An example is the imposition of sanctions in May 2023 on a group of companies in Cyprus that provided fiduciary services to companies associated with sanctioned persons.
- Recovery of assets to the state’s revenue at the request of the Ministry of Justice. Cooperation with a sanctioned person who is an accomplice of the Russian Federation today may become a ground for asset recovery in the future.
This is confirmed by the asset nationalization cases that have been considered by the High Anti-Corruption Court.
The greatest risk of asset nationalization is posed by:
- Co-investment
Financing an asset jointly with the aggressor state’s accomplices may be grounds for its nationalization.
In general, you will need to take an open stance and be prepared to disclose the shareholding structure, the structure of the legal entity (including its history), and the details of the agreement with the ‘partner’;
- Lending by accomplices of the aggressor state
Receipt of funds from accomplices of the Russian Federation may indicate that they have a claim to the asset. This, in turn, confirms the control of the sanctioned person over the asset, which is the basis for its nationalization;
- Acquisition of assets from sanctioned persons
The Ministry of Justice may argue that the transaction to acquire assets from an accomplice of the aggressor state is fictitious. Its sole purpose is to remove the asset from the risk of nationalization. In this case, the bona fide acquirer will have to prove the reality of the transaction.
- Criminal liability. Although there is currently no criminal liability for violating/ circumventing sanctions, cooperation with sanctioned persons may be classified as a crime against security, money laundering, etc.
Recommendations for Businesses to Minimize Sanctions Risks
It is obvious that it is more profitable to prevent a problem than to solve it. Effective internal compliance will help minimize sanctions risks.
Recommended tools:
The State Register of Sanctions
The Register was launched in January 2024. It contains information on all legal entities and individuals subject to sanctions in Ukraine.
In addition, sometimes the information in the State Register of Sanctions appears even before the publication of the relevant decree of the President of Ukraine.
- The Defence Intelligence of Ukraine’s War and Sanctions portal
This portal replaced the War and Sanctions portal managed by the National Agency on Corruption Prevention, but does not contain a section on international sponsors of war.
Instead, the new portal contains information on persons involved in the deportation of Ukrainian children; foreign components in Russian weapons; sanctions lists of partners; ships that entered Crimea, transported grain, fuel, etc., in violation of sanctions, etc;
- sanctions lists of foreign states;
- specialized databases (OpenSanctions, LexisNexis, World-Check, etc.).
Practical steps to take in case of sanctions
There are different options for action in case of sanctions against a business or its counterparties.
If sanctions have been imposed on a business, there are two options for their lifting:
- by challenging the Presidential Decree in the Supreme Court as a court of first instance;
- in administrative proceedings by applying to the relevant authorities (the initiator, the National Security and Defence Council, the President of Ukraine).
The following difficulties may accompany sanctions lifting.
- Lack of official information on the grounds for their imposition at the appeal stage. Neither the NSDC decision to impose sanctions nor the Presidential Decree enacting it will contain the grounds for the restrictive measures.
This is clearly not in line with international standards (as emphasized by the UN High Commissioner for Human Rights) and the practice of international institutions that also apply sanctions.
- Lengthy consideration of this category of cases by the Supreme Court (from 1 to 5 years). This is due, firstly, to the fact that the initiator of the sanctions classifies the grounds for their application.
Most often, information on the grounds for imposing sanctions is classified as ‘secret’. This means that a business representative needs to obtain a security clearance and access to state secrets, which is carried out under a separate procedure. The procedure takes up to 6 months.
Secondly, the timeframe is affected by the workload of judges. Cases on sanctions lifting are considered by a panel of five judges. The absence of at least one of them leads to a postponement of the hearing. Replacement of one judge results in the case being considered from the beginning.
- Lack of clear regulation of the administrative cancellation of sanctions. The Law on Sanctions only provides for such a possibility. However, the timeframe and procedure are not regulated.
As for the imposition of sanctions on counterparties, as mentioned above, the cost of cooperation with a sanctioned person is too high.
Advice for business:
- due diligence of all transactions with a sanctioned counterparty;
- real separation of business, withdrawal from partnership, termination of agreements;
- proactive GR communication on decisions made.
Criminalization of sanctions violations in Ukraine: what should businesses prepare for?
In April 2024, the EU Council adopted a directive that:
- obliges all EU members to criminalize sanctions violations;
- sets out minimum rules for defining and punishing sanctions violations as a crime.
This directive was mandatory for implementation by EU member states by May 2025. It also prompted Ukraine to return to the issue of criminalizing sanctions violations/ circumvention after unsuccessful attempts to do so in 2020, 2021 and 2023.
In 2024, the Ministry of Justice, together with the Institute of Legislative Ideas, prepared draft amendments to the laws of Ukraine.
Comprehensive amendments to the Criminal Code of Ukraine, the Criminal Procedure Code of Ukraine, and the Law on Sanctions were proposed.
The main proposals are listed below.
- A direct prohibition on violating and circumventing sanctions. The following intentional actions will be understood as circumvention of sanctions:
- activities restricted by sanctions without special permission;
- failure to provide or provide false information about assets subject to blocking;
- failure to update information about the beneficiary of blocked assets;
- actions with blocked assets, including their transformation, disguise, or any concealment.
- Recognition of violation of sanctions as a crime. It is proposed to supplement the Criminal Code of Ukraine with two types of crimes:
- intentional violation of special economic and other restrictive measures (sanctions);
- negligent violation of special economic and other restrictive measures (sanctions).
- Obligation to declare frozen assets. The requirement to report frozen assets has existed in EU law since 2014. In Ukraine, persons subject to the asset freeze sanction are also required to declare their assets.
In addition, even non-sanctioned persons will have to provide information if their assets are owned or used by a third party subject to sanctions.
All immovable and movable property worth more than UAH 151,400, securities, corporate rights, intangible assets, cryptocurrencies, etc., will be subject to declaration.
Persons who have already been sanctioned will be required to provide such information after the issue is settled by a Cabinet of Ministers resolution.
- Issuance of official permits to sanctioned persons to perform actions.
The draft law is expected to be registered with the Verkhovna Rada by the end of 2024.
Volodymyr Vashchenko and Denys Shkarovsky for Yuridichna Practika
