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Business Relations with Russia: How Criminal Proceedings Are Investigated

Date of publication: 1 December 2023

Volodymyr Adonin, Attorney at Law

Source: Yurydychna Gazeta

A criminal investigation involving a Russian element in a Ukrainian business should be viewed from the perspectives of different parties – investigating bodies and Ukrainian companies.

Problems of Ukrainian business with a Russian element

In domestic business, a presence of a Russian element is not going to result in direct criminal liability. This discussion pertains to Ukrainian companies in which citizens or legal entities from the Russian Federation held shares at the onset of the full-scale invasion. In the spring of 2022, various sources reported on the approximate number of Ukrainian companies that had some level of Russian ownership. There were about 20,000 such companies. The Ukrainian authorities understandably wanted to cut ties with Russia and limit assets held by Russian residents within Ukraine in light of its criminal acts.

To address these issues, several legislative acts were adopted, including:

  1. The Law of Ukraine “On Amendments to Some Legislative Acts of Ukraine Concerning the Establishment of Criminal Responsibility for Collaborative Activities”. This law added a new criminal offense to the Criminal Code of Ukraine: collaborative activity (Article 111-1).
  2. The Law of Ukraine “On Amendments to the Criminal and Criminal Procedural Codes of Ukraine Regarding the Improvement of Responsibility for Collaborative Activity and the Specifics of Applying Measures for Crimes Against National and Public Security”. This law introduced a new criminal offense: aiding and abetting the aggressor state (Article 111-2).
  3. The Law of Ukraine “On the Basic Principles of Compulsory Arrest in Ukraine of Property Rights of the Russian Federation and its Residents”.
  4. The Law of Ukraine “On Amendments to Some Legislative Acts of Ukraine as to Increasing the Effectiveness of Sanctions Related to the Assets of Individuals”. Chapter 1 of this law, along with other provisions of the Criminal Code, had already established responsibility for crimes against the national security of Ukraine before 2014. The events of 2014 and 2022 necessitated changes in how actions by the aggressor country were classified.

In such way, according to Article 111-1 of the Criminal Code, collaborative activity encompasses many actions. Key examples include:

  • Transferring material resources to the armed or militarized formations of the aggressor state.
  • Engaging in economic activities in cooperation with the aggressor state.

Article 111-2 of the Criminal Code outlines additional actions that constitute aiding and abetting the aggressor state, such as:

  • Transferring material resources or other assets to representatives of the aggressor state, its armed formations, and/or its occupation administration.

It is also impossible to ignore Article 110-2 of the Criminal Code, which provides for criminal liability for the financing of actions committed with the aim of violently changing or overthrowing the constitutional system or seizing state power, changing the borders of the territory or the state border of Ukraine.

But should the Ukrainian part of the business be held accountable for the fact that Russian residents were among the participants of Ukrainian companies as of 24 February 2022 and this has been legal?

Even after a full-scale invasion, it is not easy for investigating bodies to prove the direct intent that the income received by residents of the Russian Federation in Ukraine went directly to finance any actions against Ukraine. Therefore, investigating bodies should distinguish between the part of domestic business owned by Ukrainian citizens and owned by residents of Russia. In practice, unfortunately, the entire burden of such a “symbiosis” is borne, regrettably, by Ukrainian business owners and their employees. Laws of Ukraine “On the Basic Principles of Compulsory Arrest in Ukraine of Objects of Property Rights of the Russian Federation and Its Residents” and “On Amendments to Some Legislative Acts of Ukraine Regarding the Increase of the Effectiveness of Sanctions Related to the Assets of Individuals” are not used very carefully, which leads to the deterioration of economic indicators, payment of taxes, etc.

How does it look in practice? After the opening of criminal proceedings under the specified articles, the assets of Ukrainian companies are blocked in almost all cases, in particular: arrest of corporate rights, cash, movable and immovable property, fixed assets, finished products and/or raw materials. However, in my opinion, it would be enough to limit ourselves, for example, to the arrest of that part of corporate rights belonging to residents of the Russian Federation. As for the other burdens, it clearly does not fit into the tasks that must be achieved in any criminal proceeding. In practice, there are already dozens of cases when a superficial investigation of the ownership structure of Ukrainian companies and their management by investigating bodies led to the complete shutdown of such companies and, as a result, unemployment, failure to receive income and fees from various budgets at such a difficult time.

At the same time, on 24 February 2022, the National Bank of Ukraine adopted Resolution No. 18, according to Clause 15 of which the servicing banks stopped the execution of expense operations on the accounts of residents of the Russian Federation/Republic of Belarus, on the accounts of legal entities (except banks), the ultimate beneficial owners of which are residents of the Russian Federation/Republic of Belarus, with the exception of some payments on the territory of Ukraine. Almost all Ukrainian business, in which there is or was some fate of the Russian element at the time of the full-scale invasion, immediately felt the full weight of such an element. The above-mentioned articles of the Criminal Code have led to many Ukrainian companies becoming defendants in criminal proceedings.

It should be noted that one of the mandatory conditions for bringing to criminal responsibility is the presence of a mandatory intention to cooperate and/or finance everything connected with the aggressor state.

Problems of investigating bodies

Usually, the investigating authorities do not burden themselves with finding out the presence or absence of direct intent of the Russian element of the Ukrainian business, when it comes to the qualification of those or other actions that may have the composition of crimes listed in Chapter I of the special part of the Criminal Code. In most cases, the investigating bodies fail to bring the Russian element to real criminal responsibility, since the residents of the Russian federation – the owners of Ukrainian business shares – almost did not visit Ukraine after the events of 2014, and even more so after 24 February 2022. Therefore, the investigating authorities stop at the notification of suspicion to residents of Russia and begin the procedure of “recovery” of their assets.

Such “recovery” looks different in practice. Let’s consider two main and, in fact, valid options. The first option is the transfer of property to ARMA (Asset Recovery and Management Agency) for management or sale. Such a mechanism of confiscation of assets without an indictment was effective even before the full-scale invasion, and after it was successfully used by the authorities investigating the assets of the Russian element.

The second option is the application of sanctions provided for in clauses 1–1, part 1 of Article 4 of the Law of Ukraine “On Sanctions” due to the decision of the Supreme Anti-Corruption Court on the claim of the Ministry of Justice of Ukraine. In practice, 100% of such claims are satisfied, the result of which is the recovery of such assets belonging to a natural or legal entity, as well as assets in respect of which such a person can directly or indirectly (through other natural or legal entities) perform actions identical to the content of the implementation of the right to dispose of them.

The above formulation is to a certain extent identical to the doctrine of alter ego ​As you know, the doctrine of alter ego is applicable in the case of the presence of a set of signs that testify to the inseparability of the company from the personality of its actual controller and is a certain variety of the doctrine of “piercing the corporate veil”. Its application is extremely exceptional and requires overcoming an extremely high threshold of proof.

Signs of inseparability of the company from the person-controller include:

  • interference in the economic activity of the company;
  • directing its income to its own benefit;
  • implementation of such activity of the company, primarily serving the interests of such person-controller, and not the interests of the company itself;
  • the actual takeover of the company’s business or property by the controller;
  • there is a legal basis for such an actual takeover.

But the issue of overcoming the extremely high threshold of proof in the High Anti-Corruption Court of Ukraine is already the burden of the Ministry of Justice of Ukraine, so it is no longer a problem for investigating bodies, as, for example, obtaining proper and admissible evidence of the intention of the Russian element, which was mentioned above. But in one way or another, the consequence, unfortunately, does not separate the fate of Russia from the fate of Ukraine, and business is sold as one “package”.

Since the beginning of the full-scale invasion, all large and almost all medium-sized businesses with a Russian element in their structure have faced claims from the investigation. The paradox is that those who, without waiting for such claims, got rid of the Russian element in their structure, do not look innocent in the eyes of the system against the background of those who did not have time or could not get rid of such an element for one reason or another.

Moreover, the investigation is already actively interested in companies in which there was a Russian element even before the events of 2014, while forgetting all the general principles of criminal law and the norms of the Constitution of Ukraine, which declares that: “Laws and other normative legal acts do not have a retroactive effect in time, except when they mitigate or eliminate a person’s responsibility. No one can be held responsible for actions that were not recognized by law as offenses at the time of their commission”.

Unfortunately, there is no foolproof algorithm for businesses to protect themselves entirely. What steps do Ukrainian businesses typically take to sever ties with the Russian element, which no longer wishes to be represented in Ukraine after 24 February 2022? Primarily, they attempt to buy and sell business shares. However, direct transactions have been impossible since 24 February 2022, and purchasing shares from Russian residents poses an even greater risk than retaining such shares within the business structure. Such actions could lead to accusations of transferring material resources to representatives of the aggressor state or financing actions aimed at violently changing or overthrowing the constitutional system.

There have been instances where contracts for the purchase and sale of shares were signed both before and after the start of the war, yet neither are often considered legitimate. This is typically because the actual payment may not have been completed due to time constraints or because of payment delays followed by prohibitions from the National Bank of Ukraine (NBU).

Recognizing the impasse, some Russian elements sought buyers abroad. Upon finding such buyers, the Russian elements closed deals involving companies with foreign registration or citizens of other countries. Subsequently, amendments were made to the statutory documents of Ukrainian companies, and registration actions were carried out in Ukraine. However, even these agreements put domestic businesses at risk, as they are often viewed as fictitious attempts by the Russian element to maintain influence over Ukrainian companies and their revenues. Typically, the Ukrainian part of the company had no control over the choice of the buyer for the Russian shares.

The primary goal for domestic businesses in such situations was to quickly rid themselves of the Russian element, which inevitably required at least minimal communication with Russian residents to achieve this objective. Unfortunately, in any scenario, the actions of Ukrainian businesses could be interpreted as aiding the aggressor state in implementing or supporting its decisions.

In summary, Ukrainian businesses, both those that have already severed ties with Russian elements and those that have not, should prepare for increased scrutiny from the state if they have managed to avoid it thus far. The primary arguments against domestic businesses include:

  • maintaining the influence of the Russian element on the company;
  • allowing such elements to make management decisions;
  • engaging in fictitious purchase and sale transactions, especially those backdated according to investigations.

Therefore, Ukrainian companies should not wait but instead prepare counterarguments addressing these points. Moreover, there are frequent cases where Ukrainian companies, which have never had a Russian element, find themselves at risk merely for purchasing raw materials from EU countries and other sources.

While these actions seem innocuous, such companies still become entangled in criminal cases. Investigations often allege that various foreign companies are controlled by Russian residents, thereby indirectly contributing to the enrichment of the aggressor state. But that’s another story.