How Ukrainian sanctions are applied

Ukraine’s sanctions regime was established in the 2014 Law of Ukraine “On Sanctions” (No. 1644-VII) as a decisive legal response to Russia’s aggression. The law sets out a national legal framework for imposing restrictive measures on natural persons and legal entities whose conduct puts Ukraine’s sovereignty, national interests, security, and territorial integrity in danger.

Since its adoption, the law has been evolving to address new concerns. Subsequent amendments expanded the scope of sanctions, streamlined the designation procedure, and provided for confiscation of assets through specialized judicial proceedings.

A clear understanding of the sanctions process is important for any business or individual planning to invest in Ukraine or already having assets under its jurisdiction.

Nature of sanctions

Under Ukrainian law, sanctions are defined as special economic and other restrictive measures, applied to safeguard the national interests, security, sovereignty and territorial integrity of Ukraine. As the Grand Chamber of the Supreme Court of Ukraine explained in its decision dated 6 July 2023 in case No. 9901/376/21, «Sanctions under Law No. 1644-VII are not a form of punishment or legal liability.” Rather, “[t]hey serve as restrictive economic measures targeting individuals and entities that pose a threat to Ukraine’s national interests, national security, sovereignty, or territorial integrity».

Grounds for sanctions

Grounds for sanctions are set out in Article 3 of the Law of Ukraine «On Sanctions». It provides that sanctions may be applied to foreign states, legal entities, and individuals, entities under their control as well as other persons if their actions:

• Threaten national interests, security, sovereignty, or territorial integrity;
• Contribute to terrorist activities and/or violate human rights and freedoms, the interests of the society, or the State;
• Violate international law, facilitating the occupation of Ukrainian territories, expropriation or restriction of property rights;
• Misuse vessels or aircraft in activities creating actual or potential threats to Ukraine`s national interests, national security, sovereignty or territorial integrity.

Sanctions may also be imposed pursuant to resolutions of the United Nations General Assembly and Security Council, or in accordance with decisions and regulations of the Council of the European Union.

One of the most common reasons for imposing sanctions is the threat to Ukraine’s national interests, security, sovereignty and territorial integrity through direct or indirect support for Russian aggression against Ukraine. (e.g. financing or supplying resources to Russian army), economic collaboration with entities in occupied territories, etc.

Procedure for imposing sanction

In Ukraine, sanctions are imposed by decisions of the National Security and Defence Council of Ukraine (NSDC) as a result of the following procedure:

1. Initiation of proposal: The procedure begins with a formal proposal to the National Security and Defense Council of Ukraine (NSDC) from the Verkhovna Rada of Ukraine, the President of Ukraine, the Cabinet of Ministers of Ukraine, the National Bank of Ukraine, or the Security Service of Ukraine.
2. NSDC Consideration and Decision: the NSDC reviews the proposal and evaluates its factual and legal bases. If the NSDC supports the proposed measures, it decides to impose sanctions – either personal or sectoral.
3. Enactment: an NSDC decision must be enacted by a Decree of the President of Ukraine. Decisions on personal sanctions – measures applied against a person or legal entity – take effect immediately upon the enactment by a Presidential Decree.

Decisions on sectoral sanctions – measures of a non-individualized character applied against a foreign state or industry in that state – must be both enacted by a Presidential Decree and approved within 48 hours by the Verkhovna Rada. They enter into force upon the parliamentary resolution. For example, in 2023 sectoral sanctions were imposed on some financial institutions of the Russian Federation and on defense industry entities of the Russian Federation and the Republic of Belarus.

After being enacted, decisions on sanctions are published at the State Registry of Sanctions accessible at (https://drs.nsdc.gov.ua/), which is maintained by the NSDC.

Legal Consequences and Remedies

Article 4 of the Law of Ukraine «On Sanctions» sets out the following non-exhaustive list of restrictive measures that may apply individually or in combination:

• Asset freezing;
• Suspending economic and financial obligations;
• Preventing capital transfer from Ukraine.
• Cancelling or suspending licenses and permits;
• Banning entry into the territory of Ukraine (for individuals); or
• Confiscating assets.

The Grand Chamber of the Supreme Court of Ukraine affirmed in its decision dated 6 October 2021 in case No. 9901/26/21 that only sanctioned persons or entities «whose rights, freedoms, or legitimate interests are directly affected», may challenge a sanctions decision before courts. Such challenges may be brought under the administrative proceedings before the Supreme Court of Ukraine, which acts as the first-instance court to hear such cases. Judgments of the Supreme Court may be appealed to the Grand Chamber of the Supreme Court, whose decision is final.

Confiscation of assets as a sanction under Ukrainian law

While some sanctions may be temporary, confiscation of assets is not.

The Ukrainian law ‘On Sanctions’ defines confiscation as an ‘exceptional measure’ that may be applied to individuals or entities whose conduct has:

• Created a significant threat to the national security, sovereignty, or territorial integrity of Ukraine; or
• Substantially contributed, financed, or otherwise assisted third persons posing such threat, including through such action as:
  • Paying taxes and fees to the state budget of the aggressor state, where the total of payments (excluding customs duties) over the last four consecutive tax quarters exceed the equivalent of UAH 40 million for a legal entity and UAH 3 million for an individual;
  • Providing donations, charitable contributions, sponsorship assistance, or other gratuitous transfers of funds or other assets to state authorities or military administrations of the aggressor state, or persons engaged in the prohibited activities, where the total value of contribution in a year is not less than UAH 750,000.

For confiscation process to commence, two requirements must be present: (1) a person or entity has been already subjected to an NSDC sanction in the form of asset freezing and (2) a confiscation claim has been filed during martial law or after its termination, provided that the claim was initiated while martial law was in effect.

A confiscation claim is filed by the Ministry of Justice of Ukraine before the High Anti-Corruption Court (HACC), which has exclusive jurisdiction over such cases. If the claim is upheld, HACC issues a judgment ordering the transfer of assets to the state. The judgment does not take effect immediately and can be appealed to the HACC Appeals Chamber within 5 days. Following a review of the appeal, the HACC Appeals Chamber issues a judgment that becomes final and effective immediately.

Assets following Confiscation

Once the asset of a sanctioned entity has been confiscated, the state may auction them to the highest bidder that meets mandatory auction requirements.

Article 388 of the Civil Code of Ukraine provides that state property sold to a bona fide purchaser cannot be reclaimed by a previous owner.

At Koziakov & Partners, our team, experienced in Ukrainian and international law, provides legal support on matters related to sanctions and asset confiscation.