Crux (#11 November 2017)

Legal Digest

The UJBL editorial team has monitored recent changes in legislation as well as new drafts this month. The most significant drafts our team went through include the Draft on Amendments to the Economic, Civil Proceedings and the Code of Administrative Proceedings, joining the Statute of the International Renewable Energy Agency, draft on Cooperation with the International Criminal Court, drafts regarding circulation of crypto-currencies in Ukraine and on the insurance system. Our team also inquired about the decision of the Deposit Guarantee Fund (DGF) on Regulation of Dutch auctions and the letter-orientation on preventing the violation of the rights of business entities signed by the Prosecutor-General of Ukraine.

The Resolution of the Cabinet of Ministers of 21 June 2017, No. 688 provides transfer of the State Land Cadastre to Blockchain technology. How will this innovation affect data security in the system?

Elizaveta Beley,

Associate, Antika Law Firm

According to the statement of the Ministry of Agrarian Policy, the updated State Land Cadastre will operate on Blockchain technology.

At this stage, only the procedure for checking the extract from the State Land Cadastre is transferred to Blockchain technology. All key processes of the State Land Cadastre are the electronic database of land plots and the history of conducted transactions is stored in the old electronic register.

It should be noted that earlier only notaries could verify the authenticity of an extract from the State Land Cadastre as well as those who had a connection to the State Land Cadastre. Now any person can do this. This is important for the state, since all information will be protected from falsification and the use of smart contracts will mean automation of operations in the future.

Of course, when receiving an extract from the State Land Cadastre, all the data on the land plot, cadastral number, location, purpose, area, ownership, owners, tenants, will be included in the Blockchain database.

Each extract from the State Land Cadastre will be supplemented with a separate sheet. The hash of the Blockchain a unique identifier in the Blockchain database and QR-code will be printed on the sheet. Anybody can check the accuracy of the information on the statement. You can check out the statement using QR-code. The IT department of the state land registry center developed a mobile application for the purpose.

In the second stage, the representatives of the Ministry of Agrarian Policy promise to transfer to Blockchain a database of State Land Cadastre. Owners of land plots will receive a private Blockchain-key. Then it will be impossible to change the information in the State Land Cadastre without the participation of the landowner. At the third stage, they promise to use Blockchain to hash all State Land Cadastre transactions.

It is still unclear how it will work in practice and in what terms the blockchain will be implemented in the State Land Cadastre by representatives of the Ministry of Agrarian Policy.

The Regulation of Dutch auctions has been approved by decision No. 4387 of the Deposit Guarantee Fund (DGF) of 28 September 2017. The DGF plans to sell bank assets, the liquidation period of which ends within 6-9 months at these auctions. How would you comment on this novelty?

Aleksandr Savchenko,

Lawyer, Law Firm EVRIS

We consider this innovation to be quite positive and encouraging in terms of solving some existing problems with the sale of assets belonging to insolvent banks. As is well known, one of the main problems of the current procedure, which is usually used to sell assets of insolvent banks, is its long duration. This is due, among other things, to the fact that if the assets are not sold at the initial price, a sale should be carried out at subsequent trades, at which the price can be reduced. The conduct of each subsequent bidding, in turn, involves the implementation of appropriate formal procedures, including the adoption of appropriate decisions by the Fund and observance of statutory time limits. The said duration, among other complications, gives unscrupulous borrowers plenty of time to take appropriate action on available funds and property, aimed at avoiding actual debt collection. Unlike the above procedure, the application of the Dutch auction (the main feature of which is that the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneers price, or a predetermined minimum acceptable price is achieved) will accelerate the sale of assets, since such sale will be more likely to be carried out in the same bidding and at a more or less real market value of such assets. It can also enable additional potential buyers to be attracted.

On 5 October, Prosecutor-General Yurii Lutsenko signed a letter-orientation on preventing the violation of the rights of business entities. Is this document capable of preventing illegal pressure on business by law-enforcement agencies? What additional measures for business protection does this letter oblige prosecutors to apply?

Maxim Salii,

Associate, Equity

The Prosecutor-General of Ukraine signed a letter of orientation to prevent the violation of rights of business entities.

The signing of this letter has been triggered by a repeated call from the business community, including those addressed to the President of Ukraine, to prevent the violation of their rights during investigative actions.

Analysis of the contents of the document shows that it enshrines almost the same provisions as those contained in the Code of Criminal Procedure of Ukraine and it does not have any independent value.

To talk about positive innovations that are not duplicated in the Code of Criminal Procedure, this is a new procedure for approving the involvement of special units in investigative actions. In particular, now such involvement requires the receipt of approval from the head of the regional prosecutors office, as well as compulsory video recording of the search procedure.

The signing of the letter by the Prosecutor General is only a forced measure and the need to respond to the instructions of the President and the Prime Minister rather than a measure to influence the process of elimination of violations.

Since law-enforcement officers often ignore the provisions of the Code of Criminal Procedure, which has a higher legal authority than the letter of the Prosecutor-General, there is not much hope that the requirements contained in the letter will be complied with.

Despite all the external doubtfulness of this prescription, still there is a hope that the authority of the Prosecutor-General will influence law-enforcement officers and they will begin to adhere to the letter of the law more conscientiously.

The Verkhovna Rada registered Draft Law No. 7179 On Amending Certain Legislative Acts of Ukraine regarding Cooperation with the International Criminal Court. What changes in the criminal process should be expected with its adoption?

Andriana Fozekosh,

Attorney, AVER LEX

Despite the fact that Ukraine has not ratified the Rome Statute, in accordance with two declarations of Ukraine, it did accept the exercise of jurisdiction by the International Criminal Court (ICC, Court) with respect to crimes relating to deaths during protests in the period of 2013-2014 and relating to the situation in Eastern Ukraine.

In this regard, the legislative framework should be prepared for effective cooperation with the ICC. Draft LawThe Committee on Legislative Support of Law-Enforcement recommended that Parliament adopt Draft Act No. 6580 No. 7179 proposes to include in the Criminal Procedure Code of Ukraine a new chapter on direct cooperation with the Court.

It is important that the ICC conducts an investigation not in parallel to the domestic one, but in those cases where the state is unable to provide an effective investigation. After the ICC has commenced an investigation, the Ukrainian side transfers the criminal proceedings.

At the same time, cooperation by Ukrainian state bodies with the Court will mean a maximum contribution to the investigation of crimes, which includes committing procedural actions at the request of the ICC on legal aid: searches, interrogations, service of documents, arrest, handing over of persons.

The effectiveness of the ICC depends largely on the effectiveness of cooperation with the state. The Draft Law determines the competent authorities for cooperation with the Court the Prosecutor Generals Office of Ukraine (at the stage of pre-trial investigation) and the Ministry of Justice of Ukraine (at the trial stage).

Thus, the criminal procedure will not undergo fundamental changes at the internal level. The proposed provisions of the Draft Law generally describe the procedure of cooperation and largely overlap with the rules for the provision of international legal assistance. In the global sense, access to the level of international criminal justice is an important step for Ukraine towards establishing effective investigations and fair decisions on the most serious crimes that are of concern to all Ukrainians as well as the international community.

The Committee on Legislative Support of Law-Enforcement recommended that Parliament adopt Draft Act No. 6580 On Amendments to the Criminal Procedural Code of Ukraine (on improving the procedure for the restoration of criminal proceedings or its individual materials lost at the stage of pre-trial investigation and judicial review) in the first reading. How can this affect the criminal process?

Opanas Karlin,


In our opinion, it is too early to talk about how such legislative initiative will be reflected in the criminal process because Draft Law No.6580 contains some deficiencies. Thus, Article 531-1 of the draft Criminal Procedure Code provides that those criminal proceedings, in which the sentence has already taken effect, but not enforced, shall be restored. Should the decision be made on resumption of a pre-trial investigation when there is a court sentence? According to the same article in the draft Criminal Procedure Code, those criminal proceedings, in which the court sentence has not taken effect for other reasons, shall be restored. However, the Draft Law does not contain explanations regarding what is meant by other reasons.

Of course, the Draft Law pursues the right goal, namely to provide the possibility for courts to make a decision on the accused, despite the lack of criminal proceedings materials left in uncontrolled areas. Many of these accused persons are still awaiting court decisions, which in turn is a violation of Article 6 of the Convention for the Protection of Human Rights and Fundamental Freedoms, which establishes the right to a fair and public trial within a reasonable period of time. Nevertheless, the mechanism for reaching this aim needs to be further developed.

Parliament adopted presidential Draft Law No. 6232 On Amendments to the Economic Procedural Code of Ukraine, the Civil Procedure Code of Ukraine, the Code of Administrative Proceedings of Ukraine and other legislative acts. How will the Law affect judicial proceedings?

Olena Pertsova,

Attorney at Law, Pavlenko Legal Group

The procedural rules of the game will change radically with the adoption of new codes. And we are talking not about cosmetic changes but global changes: the definition of the jurisdiction of disputes, the rules for providing evidence and its assessment by the court, terms of consideration of cases, its review in a high court. Naturally, all these changes will affect the judicial proceeding.

Worthy of separate mention is the Supreme Court, the role and importance of which should improve qualitatively. First of all, this is connected with the creation and functioning of the Grand Chamber of the Court, the purpose of which will be to ensure the unity of judicial practice. If in this regard the Supreme Court meets its expectations, then in a year or two we will be able to get common understanding on the acute issues of judicial practice, which, unfortunately is missing at the moment. This in turn will help both the courts of the first and the appellate instance, because the decisions adopted by the Supreme Court will become the benchmark and guidebook for judges.

Together with that the next year or two will be difficult for the entire legal community and courts, since any global changes always entail a different understanding of certain norms. As much as we dont want it, a difficult transformational period is ahead of us for this reason. Experience shows that in a few years most of the acute issues will be removed both through the elaboration of judicial practice and by polishing the codes via appropriate changes to them.

The Draft Law on Ukraines accession to the Statute of the International Renewable Energy Agency (IRENA) has been submitted to Parliament for consideration. What opportunities would be available for Ukraine after joining this organization?

Marta Halabala,

Senior Associate, Asters

Ukrainian President Petro Poroshenko submitted to Parliament Draft Law No. 0164 of 5 October 2017 on Ukraines accession to the Statute of the International Renewable Energy Agency (IRENA). IRENA is an intergovernmental organization to promote adoption and sustainable use of renewable energy. It was founded in 2009 and its statute came into force on 8 July 2010 and is headquartered in Abu Dhabi.

The main goal of IRENA is to promote the widespread and increased adoption and use of renewable energy with a view to sustainable development. As Ukraines energy independence is a priority, and according to the Energy Strategy of Ukraine until 2035, renewable energy sources are expected to be the fastest-growing sector in terms of power generation with an envisioned share increase to 25%, membership of IRENA gives Ukraine a unique opportunity to attract the best world experience, technologies and investments in clean energy projects. Also, such membership of IRENA will give Ukraine the opportunity to apply to the Abu Dhabi Fund for Development which has collaborated together with IRENA to create a joint Project Facility to finance transformative and replicable renewable energy projects in developing countries. The Fund offers long-term soft loans at 1-2% for a period of up to 20 years. The Funds budget currently stands at USD 350 million.

Moreover, Ukraines joining IRENA would allow the Agency to get assistance in improving the legislative framework, attracting investments and building capacity in renewable energy, to provide additional guarantees to potential foreign investors in investing in green projects in Ukraine and to cooperate with developed countries in this field and get access to IRENAs databases on the latest technologies and developments, the best world practices and, most importantly, effective mechanisms for financing projects for the production of green energy.

The National Bank has called on Parliament to adopt Draft Law No. 1797-1, which would change the insurance system in the country. What changes in the legal framework may insurers face with enactment of this document?

Stanislav Karpov,

Senior Associate, Insurance and Tax Disputes Practice, Spenser & Kauffmann

Financial market participants do emphasize that passing new regulations in the area of insurance is vital. It is not just a matter of out-of-date regulations, which are commonly represented by the Law On Insurance, as the archaic legal framework also impedes the development of other sectors of the economy.

Representatives of the National Bank of Ukraine have recently noticed that particular legislative barriers obstruct further development of the banking system. With regard to the above-mentioned, the National Bank of Ukraine has encouraged parliamentarians to support a number of laws, including Draft Law No. 1791-1 On Insurance.

Taking into account that the Draft Law has just passed the first reading, there are no doubts that it is subject to significant amendments. Nevertheless, some regulative innovations that insurers may face in the near future are already worth mentioning.

Most of the amendments are aimed at aligning insurance regulations with European Union requirements. The Draft law sets out, in particular: i) a classification of types of insurance based on different classes of insurance; ii) brand new requirements regarding an insurers solvency; iii) corporate governance requirements; iv) procedure for intermediary activities.

Moreover, the Draft Law offers new insurance products to the market, for example Investment Life Insurance (even though some insurance companies had already tried launching similar kinds of insurance in their business practice).

The key difference between investment and non-investment life insurance is that a policyholder may choose an asset to invest in by himself. As a result, it will enable him to make more risky investments and, therefore, earn higher profits. However, as long as a policyholder determines the investment direction, he also bears the risk of losses. Thus, investment life insurance, unlike the general one, does not provide an obligation for the insurer to ensure profitability to the policyholder.

Narrowing the list of permissible organizational and legal forms down to joint stock companies may be noted as another change that may affect many insurers. In the opinion of the initiators of the draft law, it will allow the effectiveness of control over insurance companies to be increased due to the accessibility of the financial statements of joint stock companies.

It worth mentioning that the legislation in force also allows the establishing of an insurance company in such forms of business organizations as a general or commandite partnership as well as an additional liability company. For such companies, the draft law prescribes a two-year transition period to bring the organizational and legal form into line with new requirements.

For instance, there are currently almost one hundred insurers, which were incorporated as an additional liability company in Ukraine.

With regard to insurance activities, the authors of the Draft Law propose amendments enabling the parties to enter into an insurance agreement in the form of an electronic document. It should have a positive impact on business as it simplifies the conclusion procedure of the contract itself, reduces operational expenses and, therefore, make an insurance product more attractive to customers.

Parliament supported the Draft Law On the Principles of Cybersecurity of Ukraine. What are the main differences of this draft from previous ones, for example, Draft No. 2126a?

Vitaliy Yakushev,

CEO, Cybersecurity Company 10Guards

The draft law On the Principles of Cybersecurity of Ukraine is a framework document. I would say it is a platform, and the Government will form more specialized laws and regulations on its basis.

Many provisions of the law are declarative in nature, but even in this general form, it may cause business risks that will address critical infrastructure facilities: i) stringent requirements to introduce a comprehensive information security system certified in Ukraine, which is practically useless today and is not in line with current world best practices; ii) state agencies that are not currently ready to provide assistance in protecting against cyber threats will determine cybersecurity requirements for critical infrastructure facilities.

Therefore, the attention of cybersecurity experts and companies representatives should be focused on subsequent laws and regulations in the next six months. These documents will contain the main innovations. Updated standards for building secure systems; assessments and audits; procedures and methodologies for their implementation, as well as frequency.

This law is the foundation stone of a powerful system of cybersecurity in the country and business in particular. The next steps (related laws and regulations) can significantly change the states approach to cybersecurity, from declarative requirements to real practical recommendations based on best practices.

To positive changes of this law we can also attribute a toughening of responsibility for a negligent attitude to the protection of important state data, including the personal data of citizens.

Security requirements for supervisory control and data acquisition (SCADA) increase the safety of industrial enterprises, which makes them more attractive for investments.

Draft Law No.7183 On Circulation of Crypto-Currency in Ukraine proposed to determine the legal status of a crypto-currency and the legal basis for the organization and activities of subjects of crypto-currency transactions. How can this initiative be reflected on doing business and the general economic situation?

Denys Beregovyi,

Partner, Axon Partners

Some say that when you add the word blockchain to your CV, it doubles your prospective salary. The same rule definitely applies to the market value of corporations (have a look at the story of RiotBlockchain). No wonder Ukrainian MPs decided to keep up with trends and to add crypto and blockchain to their agenda. However, being trendy is hard and the first attempt to regulate cryptocurrencies in Ukraine is, in the main, a failure.

In particular, Draft Law No. 7183 On Cryptocurrency Circulation offers totally new terminology not only for Ukrainian legislation, but for the crypto market in general. For instance, crypto-wallet has become crypto-basket and a cryptocurrency is defined as a software codesaved in a blockchain as a software code. The definition of a crypto-miner is also an odd one each owner of a crypto-wallet (or basket) can be considered a cryptocurrency miner.

Anyway, the core ideas of the draft are recognizing a cryptocurrency as an exchange medium (which is in accord with practices of states like Holland, for example) as well as authorizing the NBU to regulate the cryptocurrency market, imposing taxation on crypto exchanges and waiving the states liability for a cryptocurrencys volatility.

Although some of the ideas might be decent raw material to work on further drafting, no wonder that alternative draft No. 7183-1 was presented soon after the initial one. The alternative is more comprehensive and accurate in definitions, suggests licensing for crypto exchanges and sets out the powers of the National Commission on Securities and Stock Exchange to regulate crypto derivatives and cryptocurrencies deemed to be financial assets.

I am still not sure whether either of these two drafts should be adopted by Parliament, as both of them have flaws. However, discussion of this topic is already something for a state known globally for its technical expertise in blockchain.

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