Cover Story (#06 June 2016)

Proactive Thinking

UJBL: What are the most frequently used schemes in practice for withdrawal of assets from Ukraine? What businesses are at special risk?

Tetyana Ivanovych: Before answering this question, let’s sort out what is meant by “withdrawal of assets”. In the last 2 years the term has been used more and more frequently in the Ukrainian media and on television. Surely, there are more than enough reasons for this: annexation of Crimea, the revolution, as well as the quite difficult situation in Donetsk and Lugansk Regions.

At the same time, we should not forget that transfer of ownership from one proprietor to another, including the international context, is a natural element of the economic process and the current era of globalization. So there is nothing extraordinary in this phenomenon. It’s a different issue that in a period of formation and development of market relations, as well as harsh political and economic crises, and Ukraine is now experiencing just such a period, any right can be challenged by various “schemes” and money-laundering.

Therefore, by answering this question, I would like to separate the concepts of lawful and unlawful withdrawal of assets from Ukraine.

As to the former, in the first place it is necessary to point out the ongoing restructuring of a company’s assets — establishment of an international holding company — when, for various reasons, often for tax planning purposes, some assets are grouped into one business unit, and others — in other business units.

Also, from my own private clients’ practice, I would like to point out that widely used mechanisms for structuring private capital, such as trusts and foundations, also provide for legal withdrawal of private assets from Ukraine.

The thing is that Ukrainian legislation does not provide effective (flexible) mechanisms for preservation and inheritance and transfer of private capital for future generations, as can be offered by countries from the Anglo-Saxon legal system. In other words, Ukrainian jurisdiction is “non-competitive” compared to many other countries. That is why private clients structure their private assets using trust structures, funds and other financial mechanisms, which leads to an enormous outflow of capital from Ukraine.

With regard to schemes of illegal withdrawal of assets, the most commonly used are such classic schemes through means of pledge of property, withdrawal of assets under direct fictitious transactions (mostly for provision of services) with non-resident companies to a bona fide purchaser, and there are others.

 

UJBL: How is circumvention of the law carried out? Can we say that Ukrainian legislation actually allows the legal withdrawal of assets?

Valentyn Zagaria: I do not think that Ukrainian legislation assists withdrawal of assets. Almost all schemes for assets withdrawal are close to criminal acts. Unfortunately, when assets withdrawal is carried out, it is presented as a completely “white” deal, but it, nevertheless, has some elements indicating theft or attempted theft. Ukrainian legislation does not contribute to withdrawal of assets, but there is another problem — law-enforcement bodies, which have to deal with this, including courts. I can give an example. By placing assets a Ukrainian bank performs illegal transactions with them, violating the corporate documents of the bank, and does not notify Ukrainian authorities about such transactions. Furthermore, finally the asset is transferred to a third party that was to obtain the asset legally. But if we evaluate this situation from the perspective of criminal law, there are a number of articles of the Criminal Code under whose provisions such an act falls.

The question is how effectively does the legal system of Ukraine work, namely, law-enforcement authorities, in terms of investigation of these violations, and how effectively do other authorities work to recover assets to Ukraine. This raises the issue of efficiency and skills of lawyers who are engaged in this. Obviously, it is not enough to be an expert in Ukrainian law on recovery of any asset withdrawn illegally from the country.

Nickolas Likhachov: Usually circumvention is performed by several formally legal actions, which in aggregate will constitute a crime, since they were aimed at withdrawal of assets and, possibly, stealing them from their original owner. These could be either bank depositors or budget funds. Circumvention of the law is never performed by a single direct action because this action would be easier to track.

UJBL: To which jurisdictions is withdrawal carried out most often? What is the reason for this?

V. Z.: Withdrawal of assets occurs mainly to offshore jurisdictions, in particular, to jurisdictions that are least cooperative in terms of information exchange. The banking systems of quite developed countries, for example, of respectable European jurisdictions, are usually used at the first stage. Subsequently money “floats away” much further, where the banking system is less transparent. As a rule, actually at the offshore, to which the asset is being withdrawn, the fraudster appears formally neither as a director nor as a shareholder. This again explains why it is so difficult to deal with withdrawal of assets from Ukraine.

N. L.: Actually, withdrawal of assets is never carried out directly. Often a two-stage or three-stage mechanism is used, when the asset is initially withdrawn to a completely understandable for Ukrainian regulator’s jurisdiction, which is not suspicious. The problem begins when such asset leaves the second, whiter jurisdiction, to the third, fourth, fifth jurisdiction and, ultimately, is set in the offshore.

T. I.: Private clients, when choosing optimal structure of ownership and management of wealth, try to solve several important tasks for themselves at once. These are succession, flexibility in transfer of assets to future generations, assets protection tasks from claims of third parties, security and privacy issues as of beneficiaries, and ensuring a favorable image.

Depending on the priority of the above-stated tasks and of assets type, we choose the most attractive jurisdiction. Among the most frequently used jurisdictions one can highlight the Netherlands, Luxembourg, Jersey and Guernsey islands, the Cayman Islands, Panama.

 

UJBL: Which jurisdictions most effectively contribute to tracing and freezing assets?

N. L.: Actually the United Kingdom contributes most to assets tracing. Everyone knows that English courts often appear in the news, freezing certain assets of known businessmen. This is due to the fact that English law has such a clearly defined mechanism that English courts have an opportunity to issue orders on information disclosure about certain assets and to freeze those assets worldwide. That is, in fact, if we can find the link and show that our debtor, or person who committed potential theft, is connected with the UK (for example, his house, bank account, any other assets that are in the UK), we get the opportunity to apply to an English court and, using special mechanisms, to request a court to obtain an order on information disclosure in support of our investigation, which may proceed in Austria, Ukraine or any other country.

UJBL: What algorithm of assets recovery actually exists in practice? In this context the term “forensic accounting” is often used. What does it mean, and what role does it play in this process?

N. L.: The algorithm for recovery of withdrawn assets is a whole set of specific actions aimed at finding hidden assets whose whereabouts are unknown. This process can be called detective. Forensic accounting is a new word for the Ukrainian market, which appeared in Ukraine not more than two years ago. In fact, it is judicial accounting expertise, which has something in common with an ordinary audit, but still has a lot of differences. In fact, a forensic accounting expert must be an auditor, an economist, a lawyer, and a detective at the same time. He builds a chain and makes a report that shows the movement cycle of assets in a particular institution. It can be a bank or state institution, which would show how such a model worked for years before deliberate theft or loss of assets occurred. As a result, this tangle of transactions shows at what point something went wrong. However, forensic accounting is not the core of assets tracing, it is one of components of a bigger mechanism. Companies that are experts in forensic accounting never act on their own when it comes to global cross-border asset tracing. An mportant role is played by companies that are engaged in financial intelligence, and this is an even newer scope of activities for Ukraine. In practice, it is a combination of detective information, intelligence, analysis and forensic accounting. In unison this results in the fact that each unit, each individual company is doing its part of a job, which leads to cross-border tracing.

 

UJBL: It is well-known that the process of tracing and recovering assets can last for years. How can this be avoided?

V. Z.: This process can take years if a person does not understand what the process of tracing assets involves. If a person understands it correctly, moreover, has properly formed a team, then this can be avoided. Such a team should include Ukrainian and foreign lawyers, firms that are engaged in forensic accounting and financial intelligence. In our turn we established partnership with leading lawyers who are engaged in recovery of assets in key European jurisdictions, as well as with companies that specialize in forensic accounting and intelligence. This gives us an understanding of the interaction algorithm. If the lawyer does not understand what the process is, and how to work with it, the process can actually last for decades.

N. L.: Moreover, the sooner the customer addresses the problem, the easier it will be to reach the asset at the finish line. After all, the longer that the coordination of plans lasts, the greater the chances for the other side to hide these assets. That is why the key point is time. The sooner a person seeks professional help, the greater the chances that the process will be successful and effective.

 

UJBL: Please provide an illustrative example of successful assets recovery to Ukraine from your own legal practice.

N. L.: It is such a new and sensitive area that customers do not always want publicity. We hope that soon we will be able to provide information on some case studies.

UJBL: Why, in your opinion, were the assets of fugitive politicians not recovered to Ukraine?

V. Z.: I think that the political component should be removed from the question. Ukraine does not return the assets not only of politicians, Ukraine does not return anything at all. In Ukraine people understand what the process of assets recovery is; few people realize that this requires a combination of lawyers and experts in many jurisdictions. The state can only do one thing and that is to open criminal proceedings and appeal to Ukrainian courts under personal guarantee of an individual. That is all. Unfortunately, criminal cases that were initiated tend to die at the stage of pre-trial investigation, even without getting to court. Once certain institutions come to professionals and are ready to use subject language, assign tasks and pay, as foreigners just will not work for free, then it will become possible to have the first success stories in this area.

N. L.: The person who withdrew assets, of course, does not want them to be found. The person who stole a billion is willing to spend a hundred million so that no one finds this billion. Due to lack of will and funding, unfortunately, it is impossible to start the process simultaneously in five jurisdictions. However, it is important to understand that even without substantial financing, with a properly formed team and set strategy one can “pick low-hanging fruit” and, due to assets that are easier to exact, extend and finance further tracing and “reach” the main asset.

 

UJBL: In February of this year the National Agency for Identification, Tracing and Management of Assets Obtained through Corruption was created. What is the role of this body in the chain of assets recovery to Ukraine?

V. Z.: This National Agency specializes in assets withdrawn by means of corruption. We specialize in assets withdrawn by quasi-legal means, first and foremost, on assets withdrawn through the banking system, i.e. from banks, which as a result of such withdrawal are in the process of temporary administration or liquidation. Our mission is to help in the tracing and recovery of assets withdrawn through the banking system.

 

UJBL: What legislative innovations should be introduced by the Ukrainian Parliament for bringing Ukrainian legislation into line with international standards?

V. Z.: You do not need to introduce anything, because we will soon surpass any Parliament in the world in the number of laws adopted. Except perhaps in terms of simplification of procedures related to hiring of professionals. For example, we are negotiating with several institutions and cannot be employed because of bureaucratic procedures and instructions. That is, withdrawal of money takes one day and its recovery — years, as state institutions cannot afford themselves to hire lawyers for half a year because of internal bureaucracy. With regard to Ukrainian legislation, I adhere to maximum liberalization. It is necessary to remove excessive formalism, which only prevents authorities, intended to be engaged in tracing, to carry out their work effectively.

N. L.: It is important to disregard Ukrainian jurisdiction in cross-border assets tracing. Ukrainian jurisdiction and Ukrainian state institutions can really go through the criminal branch, and this is what they do well. I would only recommend optimizing the workflow of Ukrainian criminal authorities with foreign criminal authorities to make better use of this tool. But if the goal is to find an asset abroad, then the last place where you should look is Ukraine. That means that Ukrainian legislation cannot affect the process of tracing assets abroad.

T. I.: We live in an era of globalization. Sooner or later Ukraine will have to bring local legislation into line with international standards. Moreover, Ukraine has a chosen vector of development, aimed at the European Union.

The most important thing you need to do is to follow international initiatives of the Organization for Economic Cooperation and Development (OECD), which are aimed precisely at solving global problems also caused by illegal asset withdrawal and money laundering. In particular, first and foremost it is necessary to join the multilateral agreement for automatic exchange of tax information (CRS), which will enable implementation of international standards of tax information transparency in Ukraine.

At this positive moment I would like to note that on April 28 the President of Ukraine signed the Decree On Measures to Counter Reduction of the Tax Base and Transfer of Profits Abroad, which established a working group on issues of de-offshorization. We hope that this working group will take into account OECD recommendations during the preparation of relevant draft acts.

 


Spenser & Kauffmann
Key facts:

• Year of establishment

2006

• Number of lawyers/partners

25/5

• Core practice areas

Litigation & Dispute Resolution

Real Estate and Land

Insurance and Tax Disputes

Corporate

M&A, Banking and Finance

Criminal Law

International Arbitration & Cross-Border Litigation

Private Clients

Intellectual Property, IT and Antitrust

Tax

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