Sanctions by Ukraine’s NSDC: How to Appeal to the ECHR

Valeria Gudiy, Partner, Attorney at Law

Source: Yurydychna Praktyka

Under martial law, the sanctions mechanism in Ukraine has become one of the key instruments for protecting national security, but at the same time it has created significant risks for businesses that may be included in the lists by mistake or without proper analysis.

NSDC sanctions are special economic and other restrictive measures that can be applied preventively to prevent violations and restore the violated rights, freedoms and legitimate interests of Ukrainian citizens, society and the state. The list of sanctions is quite extensive, ranging from deprivation of state awards and cancellation of official visits to temporary deprivation of the right to use and dispose of assets in relation to which such a person may directly or indirectly (through other individuals or legal entities) perform actions identical in meaning to the exercise of the right to dispose of them.

In Ukraine, another sanction may be applied – the confiscation of assets belonging to a natural or legal person, as well as assets in relation to which such a person may directly or indirectly (through other natural or legal persons) perform actions equivalent in substance to the exercise of the right to dispose of them. Such a sanction is no longer perceived as a restrictive measure, but is the most painful measure and, given the absence of an established mechanism for reviewing such a sanction, carries the greatest risk of violating the rights of entities that, for one reason or another, may have been added to the Unified State Register of Sanctions by mistake.

If a company or owner is included in the National Security and Defence Council sanctions list, this may result in:

• suspension of banking operations and financial transactions;
• loss of partners and contracts;
• risk of assets being seized by the state (if asset freezing sanctions are applied);
• reputational damage, which may halt business development.

Main Risks of NSDC Sanctions for Business

The application of NSDC sanctions is perceived as a negative marker for further business activities in Ukraine:

• existing counterparties refuse to cooperate, and new ones are in no hurry to enter into transactions;
• banking operations may be blocked and financial transactions restricted for persons under sanctions;
• every action of such persons is subject to careful monitoring;
• the application of NSDC sanctions creates significant reputational risks.

In the current Ukrainian reality, given the legally established mechanism, persons learn about sanctions by accident. We are increasingly hearing from our clients about the unpredictability of sanctions, as there is no communication with businesses before they are imposed.

Under martial law, there is a risk that when sanctions are imposed on a large number of foreign and domestic companies and individuals, the real grounds for such measures are not analyzed at the appropriate level. In practice, this may lead to companies or individuals who have no connection with the actions of the aggressor state and do not pose a threat to Ukraine’s national interests being forced to challenge the decision to impose sanctions on them in Ukrainian courts.

There are numerous cases of sanctions being imposed on international entities that have assets and developed business processes in Ukraine, or on the ultimate beneficial owners of Ukrainian companies. Therefore, in cases of erroneous application of sanctions to such entities, it is necessary to take a measured approach to protecting their violated interests.

In such circumstances, businesses need a clear defence strategy, especially when asset freezing sanctions are imposed, which may become the basis for the confiscation of assets in favour of the state.

According to the Law of Ukraine “On Sanctions”, a sanction in the form of confiscation of assets belonging to a natural or legal person, as well as assets that such a person may directly or indirectly dispose of, is provided for in Article 4(1)(1-1) of this Law and is of an exceptional nature and may be applied by the High Anti-Corruption Court only during a period of martial law under the following conditions:

• such a person has already been subject to a sanction in the form of asset freezing;
• the person to whom the sanction is applied has, through their actions, created a significant threat to the national security, sovereignty or territorial integrity of Ukraine (including through armed aggression or terrorist activity) or has significantly contributed (in particular through financing) to the commission of such actions by other persons.

Appealing National Security and Defence Council Sanctions in Ukraine

NSDC sanctions are imposed by decree of the President of Ukraine, which the sanctioned person has the right to appeal to the Supreme Court by filing an administrative claim. According to statistics on the consideration of such cases by the Supreme Court, the process takes a long time – sometimes more than a year.

It is important to understand that appealing NSDC sanctions to the Supreme Court does not create legal opportunities to avoid or postpone sanctions in the form of asset forfeiture to the state if the grounds for this are established by the Ministry of Justice of Ukraine and subsequently by the High Anti-Corruption Court (HACC).

It is the Ministry of Justice that applies to the HACC for the application of sanctions in the form of asset forfeiture, and such cases, unlike disputes in the Supreme Court, are considered expeditiously.

The total duration of court proceedings in the HACC is determined by Article 283-1(4) of the Code of Administrative Procedure of Ukraine: a case on the application of sanctions in the form of confiscation of property to the state’s revenue “shall be decided by a panel of three judges of the High Anti-Corruption Court within 30 days from the date of receipt of the statement of claim by the court”.

In view of Article 5-1(2) of the Law of Ukraine “On Sanctions”, the HACC acts more as an administrative body than a court, since the Ministry of Justice applies to it with a claim precisely for the application (!) of sanctions. In other words, the process in the HACC is essentially an administrative procedure, and this is the “first instance” where individuals first learn about the possible potential application of sanctions in the form of confiscation of their property for state revenue.

According to the Code of Administrative Procedure, a person against whom sanctions are being considered has five days to respond to the Ministry of Justice’s claim, which sometimes runs to hundreds or even thousands of pages, including appendices. The Code does not provide for the procedural right to submit a response by other participants, such as third parties in the case – their procedural rights are limited to providing explanations to the court.

It is crucial for businesses to understand that property or corporate rights in a Ukrainian company may be the very asset that will be blocked by a decision of the National Security and Defence Council, even if the company itself is not formally subject to sanctions.

Based on claims filed by the Ministry of Justice, the High Anti-Corruption Court collects corporate rights in Ukrainian companies, movable and immovable property for the state’s revenue in order to counteract hostile activities of individuals to the detriment of society’s interests. However, without proving the existence of public interest in the collection of shares in the authorised capital and other property of Ukrainian companies as state revenue, there is a risk of state interference in property rights, which does not correspond to legitimate goals and public interests and actually creates a risk of disproportionate interference in the right to peaceful possession of property.

International Mechanisms for Business Protection: Appeals to the European Court of Human Rights

If the results of the consideration of sanction cases by Ukrainian courts are unsatisfactory for the plaintiffs, if there is confidence in the violation of certain rights and interests guaranteed by the Convention, complaints may be submitted to the European Court of Human Rights after exhausting national remedies.

To date, the ECHR has not yet made any final decisions on complaints against Ukraine regarding violations of certain articles of the Convention by national state institutions in the process of applying sanctions. At the same time, there are no negative decisions either, which gives hope to complainants and room for legal argumentation.

Ukrainian courts must consider sanction cases with particular care, as the application of sanctions and compliance with the provisions of the European Convention on Human Rights are on a knife-edge.

There may be obvious signs of violations of such rights as:

• the right to a fair trial (Article 6 of the Convention);
• the right to an effective remedy (Article 13 of the Convention);
• the right to peaceful enjoyment of property (Article 1 of the First Protocol to the Convention);
• the prohibition of discrimination (Article 14 of the Convention), if sanctions are applied selectively to certain companies or owners without reasonable criteria.

If there have indeed been violations of fundamental rights guaranteed by the Convention, including by Ukrainian courts, we recommend that you do not neglect your right to appeal to the ECHR. If the complaint is upheld, the ECHR’s decision, which will become final, may serve as grounds for Ukrainian courts to review sanction cases under exceptional circumstances.

Business Protection Strategy

In our work, we protect and represent our clients’ interests, analyze risks and provide legal advice on compliance with Ukrainian legislation and prevention of sanctions violations.

The Ilyashev & Partners Law Firm team:

• assists businesses in forming their legal position when appealing NSDC sanctions in the Supreme Court and the Grand Chamber of the Supreme Court, represents interests in the High Administrative Court during the consideration of the Ministry of Justice of Ukraine’s claim for the recovery of assets to the state;
• prepares and submits complaints to the ECHR if national remedies have been exhausted;
• conducts sanctions compliance to verify counterparties and minimize risks;
• provides recommendations on conducting business in compliance with sanctions legislation.

Given that it is impossible to completely eliminate the risk of a counterparty being associated with a sanctioned person, it is highly recommended to at least perform sanctions compliance checks on counterparties, especially when planning to acquire business assets in Ukraine. Such checks will help minimize potential sanctions risks and provide an additional level of protection for the business.

What Should Businesses Do Now?

We advise companies not to wait, but to start developing their own sanctions strategy right now:

• check counterparties for sanctions risks;
• if sanctions are imposed, gather evidence to prove to the Supreme Court that there are no grounds for applying sanctions;
• use all national remedies to open the way to the ECHR;
• develop a defence strategy taking into account the potential international dimension of the dispute.