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Save our stakes!

20.05.2014

By Oleksandr Dementiev, lawyer, Ilyashev & Partners Law Firm
Source: Yurydychna Praktyka

A wise prince ought to observe some such rules, and never in peaceful times stand idle, but increase his resources with industry in such a way that they may be available to him in adversity, so that if fortune chances it may find him prepared to resist her blows.

Niccolo Machiavelli, The Prince

In the wake of dramatic developments in downtown Kyiv’s on February 18-20, 2014 and earlier Western powers were no more entitled to remain silent. For instance, the Council of the European Union promptly condemned the use of force in Ukraine, urging to stop violence and respect human rights and fundamental freedoms. The Council called upon the then Ukrainian administration to show restraint and upon the opposition to distance themselves from those who resort to extremism and breach of law. Such “rigorous” response of the EU to the escalation of tension in Ukraine took 75 protesters killed by riot police (as at February 20, 2014). However, it is obvious that the names of those to blame were long on the tables of high-ranking European officials and in everyone’s mouth in Ukraine and worldwide.

It is clear today that it took three winter months for the EU and the US to determine the names of traitors and enemies of the Ukrainian people in fighting for a better future. So quite expectedly, after winter hibernation Western countries burst in a series of economic sanctions affecting persons

It is obvious that some of the blacklisted will take effort to search for effective remedies and possible ways to appeal against the economic and other sanctions applied by the international authorities. The purpose of this briefing memorandum is to provide a summary explanation of the sanctions regime applying to Ukraine/Ukrainian persons, including the sanctions in place, how they take effect, who they apply to, what penalties they carry, and how to challenge them if they are wrongly applied. It is well known that the sanctions regimes are changing rapidly and may be either widened or narrowed.

The European Union

On 5 March 2014, pursuant to EU Regulation No 208/2014 (the “EU Regulation”), all funds belonging to or controlled by 18 persons who, according to the Council, were involved in numerous violations of human rights in Ukraine and the escalation of tensions in the country in general, were frozen. These persons include: Viktor Fedorovych Yanukovych, Vitalii Yuriyovych Zakharchenko, Viktor Pavlovych Pshonka, Oleksandr Hryhorovych Yakymenko, Andriy Volodymyrovych Portnov, Olena Leonidivna Lukash, Andrii Petrovych Kliuiev, Viktor Ivanovych Ratushniak, Oleksandr Viktorovych Yanukovych, Viktor Viktorovych Yanukovych, Artem Viktorovych Pshonka, Serhii Petrovych Kliuiev, Mykola Yanovych Azarov, Oleksii Mykolayovych Azarov, Serhiy Vitaliyovych Kurchenko, Dmytro Volodymyrovych Tabachnyk, Raisa Vasylivna Bohatyriova and Ihor Oleksandrovych Kalinin. As a result of these sanctions, no funds in Member States can be made available, in any direct or indirect manner, to or for the benefit of these persons.

In addition, on 17 March 2014 EU Regulation No 269/2014 came into force, which provides for travel restrictions and asset freezes of 21 other persons identified by the EU Council.

The EU Regulation contains various grounds on which member states may release frozen funds, including payments under pre-existing contracts and to credit interest to frozen accounts, as well as payments for basic needs and legal expenses. It is important to note the EU Regulation also prohibits activities to circumvent the asset freeze. This means that actions assisting, or intending to assist in avoiding sanctions are also a criminal offence and fall within the sanctions.
Each member state shall enforce its own penalties under domestic laws for sanctions infringement.

For example, in the UK the penalties are: for an individual, imprisonment for a term up to two years, or a fine, or both; for a company, a fine. Directors or officers of the company may also be imprisoned or fined. The EU Regulation applies directly to all nationals of EU member states, any company created in the EU and to any business done in whole or in part the EU: it therefore has wide application but only within the EU.

The EU Council has the power to review and amend the list of sanctioned individuals contained in the EU Regulation and, as mentioned above, it is anticipated that sanctions in the future may be widened in terms of prohibited activities and sanctioned persons.

The United States

On 6 March 2014, the U.S. issued Executive Order 13660 (the “Executive Order”) which authorises the U.S. Treasury to freeze the property of any person found to be responsible for or engaged in, directly or indirectly: actions or policies that undermine Ukrainian democratic processes or institutions; actions or policies that threaten Ukraine’s peace, security, stability, sovereignty, or territorial integrity; or misappropriation of Ukraine’s state assets or of an economically significant Ukrainian entity. The Executive Order also authorises sanctions against the leaders of any entities engaged in any of these activities, and any person assisting or providing financial, material or technological support for such activities. Sanctions also may be imposed on persons that have asserted governmental authority over any part of Ukraine without the authorisation of the Government of Ukraine. The sanctions include asset freezes and a prohibition on U.S. persons and companies from doing business with entities or individuals designated under the Executive Order. In addition, the Executive Order also imposes U.S. visa bans on persons who fall within the sanctions.

Simultaneously, on 17 March 2014, the Treasury Department imposed sanctions on four Ukrainian individuals under the Executive Order, namely Sergey Valeryevich AKSYONOV, Vladimir Andreyevich KONSTANTINOV, Viktor Volodymyrovych MEDVEDCHUK and Viktor Fedorovych YANUKOVYCH. Otherwise, specific Ukrainian persons/entities have not been identified by the U.S. sanctions, leaving it open to the U.S.’s interpretation as to which persons/entities and activities fall within the sanctions.

Note that U.S. sanctions apply automatically anywhere in the world and apply to all U.S. citizens and persons. The fines for violations of U.S. sanctions are up to USD 20 million and imprisonment for of up to 30 years.

Switzerland

In Switzerland, 29 persons from Ukraine are currently the subject of asset freezes by the Swiss Federal Government. These include Serhiy Hennadiyovych Arbuzov, Mykola Yanovych Azarov, Raisa Vasylivna Bohatyrova, Mykhaylo Markovych Dobkin, Yuriy Ivanyushchenko, Hennadiy Adolfovych Kernes, Oleksander Viktorovych Klymenko, Andriy Petrovych Klyuyev, Serhiy Petrovych Klyuyev, Borys Viktorovych Kolesnikov, Yuriy Volodymyrovych Kolobov, Volodymyr Vasylovych Kozak, Olena Leonidivna Lukash, Mykola Volodymyrovych Prysyazhnyuk, Viktor Pavlovych Pshonka, Eduard Anatoliyovych Stavytsky, Oleksandr Viktorovych Yanukovych, Viktor Fedorovych Yanukovych, Oleksandr Serhiyovych Yefremov, Vitaly Yuriyovych Zakharchenko, Oleksii Mykolayovych Azarov, Ihor Oleksandrovych Kalinin, Serhiy Vitaliyovych Kurchenko, Andriy Volodymyrovych Portnov, Artem Viktorovych Pshonka, Viktor Ivanovych Ratushniak, Dmytro Volodymyrovych Tabachnyk, Oleksandr Hryhorovych Yakymenko, Viktor Viktorovych Yanukovych.

Like the EU sanctions, these measures apply only in Switzerland to Swiss persons and businesses. Criminal penalties for violations include a fine of maximum ten times of the amount of the underlying transaction, where assets are transferred in breach of sanctions, and a maximum fine of CHF 20,000 for breach of obligation to notify the Swiss authorities.

Challenging Sanctions

A person subject to EU sanctions can challenge their validity before the General Court of the EU (the “GCEU”) or the national courts of an EU member state. Ultimately, the matter is likely to be determined by the Court of Justice of the EU (the “CJEU”) in appeal or reference from the GCEU or member state court. A person against whom sanctions have been wrongfully imposed may seek through the court process: an annulment and a declaration that the sanctions are invalid to the extent they concern the applicant, and damages caused to the applicant by the wrongful sanctions.

The grounds for bringing such actions are: (i) the breach of obligation by the competent authority to state adequate reasons and details of the alleged conduct; (ii) the failure to provide sufficient evidence/justifications, or (iii) where such evidence contains manifest errors.

The EU courts have held that relevant evidence must be disclosed to the sanctioned person as soon as possible and the person has a right to make his views known to the authorities. In the event of a challenge, the burden of proof is on the authorities to establish a solid factual basis for imposing sanctions. This means that as a first step to considering a challenge to EU sanctions, a potentially sanctioned person or business must check: (i) whether grounds for sanctions listing have been provided; (ii) whether an opportunity to present views or observations on imposition of sanctions has been provided; and (iii) where views or observations have been provided, has there been any response from the relevant authority.

At the EU level, proceedings must be instituted within two months of the publication of sanctions or its notification to the affected person. However, it may be quicker to start proceedings in the relevant local EU court (e.g. England) since in the member state courts proceedings are likely to be a better option. Different time frames apply in different member state courts, but depending on the jurisdiction, the sanctioned party may have to act very quickly.

The U.S. authorities have an aggressive track record in identifying and prosecuting sanctions breaches and, not surprisingly, there are many examples of civil and criminal convictions. However, it is also possible to challenge U.S. sanctions and asset and business freezes, on similar grounds to those in the EU, under a process including submitting an application to the U.S. Office of Foreign Assets Control (“OFAC”), with evidence showing insufficient basis to be on a sanctioned list, or where a person has taken measures since being on the list, to justify being removed from it. OFAC may consider the request and a hearing may be held to decide it (this can take up to 6 – 9 months), however, this is decided by OFAC alone. If OFAC denies an application for de-listing, the sanctioned persons may raise a challenge before U.S. courts, however successful court challenges are rare.

In Switzerland, a request for de-listing by a sanctioned person must be made within 30 days from the date of listing. A decision from the Swiss Federal Administrative Court may be expected within two months. The most common grounds for appeal are similar to that in the EU context, i.e., lack/non-existence of evidence for imposing sanctions, and manifest error.

What Happens in Practice?

The key questions for potentially affected persons are how sanctions take practical effect and how and where may they be applied. For example, how sanctions affect international payment transfers and assets owned through offshore jurisdictions such as the BVI and Cyprus, which are regularly used by Ukrainian businessmen and companies.

Firstly, sanctions take effect automatically and as explained above, e.g. the U.S. sanctions take effect “extraterritorially” (worldwide). This means that the compliance departments of financial institutions and service providers are likely to check whether they hold funds in the name of/on behalf of sanctioned persons, and if they do, such funds should be frozen, unless a license making such funds available has been issued by the competent authority in that jurisdiction.

Of course, financial institutions and service providers always hold know-your-client information and it is this information they will use to establish who owns assets under their control. If assets are held on trust for an ultimate beneficiary who is not identifiable to the financial institution, the asset is unlikely to be frozen, but of course care must be taken not to be responsible for assisting in avoiding sanctions, which is illegal under all the sanction regimes. When in doubt, financial institutions and service providers will be cautious.

The situation in relation to offshore trusts is important because, for example in the BVI, the settlor of a trust (i.e., the persons that places the funds into a trust and dictates its terms) will not be seen as the “owner” of the funds that the trust holds and therefore even if the settlor is a sanctioned person, the trust fund may not be frozen.

As for international financial transfers, it is important to note that many Dollar transfers are routed through the U.S. and therefore the originators/beneficiaries of the funds are likely to be checked by the correspondent bank in the U.S. and may be frozen. Significant funds have been frozen in this way.

Conclusions

The result of the above is clear that at present, the U.S., EU and Swiss sanctions contain asset freezes, business restrictions and travel bans against a limited and specific set of people. This list of people may be either extended or narrowed.

It is obvious that the U.S., EU and Swiss authorities will take active steps to enforce and police these sanctions, which will therefore be followed with a diligent and cautious approach by financial institutions and service providers.

The persons affected by sanctions should remember that U.S. Dollar transfers are at particular risk, and that special rules relate to offshore jurisdictions, such as BVI trusts.

It is useful to remember that it is possible to have wrongful sanctions removed and to seek damages for wrongful sanctions and asset freezes, but the persons affected must take care to certainly choose the right jurisdiction in which to take actions and potentially act very quickly, since tight timeframes for challenging the sanctions can apply.

 
© 2017 Ilyashev & Partners / Mobile version