Denys Shkarovsky, Partner at VB PARTNERS, analyses for Ekonomichna Pravda what the new draft law on criminal liability for circumventing sanctions entails and who will be at risk.
Would sanctions circumvention abroad become a criminal offence in Ukraine?
In June, the Parliament adopted draft law No. 12406 as a basis, which introduces criminal liability for violating or circumventing sanctions. The legislation is expected to be amended in the near future.
Currently, more than 18,000 people are subject to sanctions. Most of them are foreigners with assets abroad. Does the draft law pose any risks to such persons and their assets?
Since 2022, sanctioned persons have often tried to protect their assets from nationalization by disposing of their stakes in parent companies abroad or diluting their stakes in accordance with foreign law. In this context, the cases of Shell and Mikhail Shelkov come to mind. Will transactions concluded abroad by sanctioned persons in relation to their assets be considered as circumvention of sanctions? Will such actions give rise to criminal liability in Ukraine?
What is sanctions circumvention?
Lawmakers define the term ‘circumvention’ to include a wide range of actions. Any actions aimed at concealing the assets of a sanctioned person will be qualified as circumvention: acquisition by a third party, transfer, disguising the origin of assets and the fact of ownership. The value threshold for such actions is UAH 151 thousand.
The circumvention will also include driving a company, directly or indirectly owned by a sanctioned person, into bankruptcy. Such a broad definition of sanctions circumvention creates room for abuse by law enforcement agencies and courts. Investigators and prosecutors will be the ones to interpret whether the actions constituted sanctions circumvention.
Are Ukrainian sanctions extraterritorial?
When presenting the draft law, the drafters argued that Ukrainian sanctions would apply to the foreign assets of sanctioned persons, that transactions with assets abroad under foreign law would be considered to be a circumvention of sanctions and that such actions would be subject to criminal liability in Ukraine.
The drafters referred to the current Ukrainian legislation. The Law on Sanctions extends the asset freeze to all assets owned or controlled by a sanctioned person. There is no reference to their location in the law.
The Criminal Code of Ukraine will also apply to violations or circumvention of sanctions committed abroad. If such an offence is committed by a Ukrainian citizen, he or she will always be subject to criminal liability under Ukrainian law, except in cases expressly mentioned in an international treaty.
Since violation or circumvention of sanctions is a particularly serious crime against Ukraine, foreigners who commit such acts abroad may also be prosecuted in Ukraine.
What do the courts say?
The court practice on this issue has not yet been formed, as the relevant law has not yet been adopted. However, there is already the first decision of the Supreme Court confirming the extraterritorial effect of Ukrainian sanctions.
The case is about a sanctioned person alienating shares in a paper and cardboard company. The transaction was concluded under Austrian law. As a result, it became necessary to make changes concerning the beneficiary of the Ukrainian company. A private notary made such changes. The Ministry of Justice, however, declared the registration actions illegal and revoked the notary’s access to the register of legal entities.
The Supreme Court confirmed the unlawfulness of the notary’s actions. One of the arguments was the position on the extraterritorial effect of sanctions. According to the Supreme Court, Ukrainian sanctions have an extraterritorial effect, as the Law of Ukraine ‘On Sanctions’ provides that all assets, regardless of their location, are subject to blocking and that there is a mechanism for enforcing sanctions through international cooperation.
Here, the Supreme Court refers to the Law of Ukraine ‘On Prevention and Counteraction to Legalisation (Laundering) of the Proceeds of Crime or Terrorist Financing’. This law empowers the Security Service of Ukraine, with the participation of the Ministry of Foreign Affairs, to apply to UN Security Council committees and foreign states for the imposition of sanctions on individuals and legal entities.
The Supreme Court concluded that the alienation of shares in a foreign company by a sanctioned person under the laws of a foreign state is a circumvention of sanctions. This is a single case, but it may become the basis for further practice.
Who is at risk?
The list of persons at risk is not exhaustive. The obvious ones are the sanctioned persons and their counterparties. However, in my opinion, the persons who facilitated the circumvention may also be held criminally liable: notaries, agents, intermediaries, nominees, third parties in whose favour payments were made. Their actions may be qualified as aiding and abetting.
In view of this, checking clients and counterparties in the State Register of Sanctions to prevent criminal prosecution is of particular importance.
Instead of a conclusion
In my opinion, the institution of sanctions in Ukraine has not yet been formed. The relevant law is a framework law, while the sanctions policy is unpredictable and not fully regulated, so there are cases of sanctions being used as an instrument of administrative pressure.
Although criminalization of sanctions violations and circumvention is essential, the proposed draft law is simple and does not regulate all the ‘rules of the game’ in detail.
Given the unpredictable approaches to the application of sanctions and obvious abuses, I do not exclude that the same approaches will be used in bringing to justice for their violation.
