Crux (#09 September 2017)

Legal Digest

Last month another portion of legislative novelties were submitted by the Ukrainian Parliament and Cabinet of Ministers, which leave many questions to consider. We asked a handful of experts to share their views on the sanctions against the Russian Federation, Iran and North Korea, introduction of the Single Window system, as well as the Interdepartmental Working Group on the examination of problem issues on violations of the rights of commercial entities, the draft law on the mandatory registration of all mobile subscribers and many other issues.


The US President has signed the Countering America’s Adversaries through Sanctions Act. The EU says that sanctions can be a threat to European companies, as companies from third countries that violate sanctions could become targets of sanction actions. Do the sanctions carry a threat for European companies? What is the procedure for appealing against measures contained in sanctions for European companies that find themselves subjected to sanctions?

Vatslav Makarskiy,

Partner, Integrites

The Countering America’s Adversaries through Sanctions Act is a remarkable piece of legislation. It strengthens sanctions against Russian Federation (and Iran and North Korea) in the sense that most changes or amendments to those sanctions proposed by Donald Trump are now subject to congressional review. However, one of the most important and widely discussed repercussions of this document is its influence on countries dealing with Russia in the area of energy resources. The legislation may sanction EU organizations for entering into business with Russia connected to oil and gas.

More precisely, as the legislation in question puts it, the US President may impose sanctions against a person if this person sells, leases, or provides to the Russian Federation, for the construction of Russian energy export pipelines, goods, services, technology, information, or support in excess of certain fair market value thresholds.

There is little that EU companies or even the EU Commission are able to do against the enacted legislation. They have to rely on the discretion of the US President in execution of sanctions in a way that will not hurt America’s allies in the EU. Otherwise, almost the only real (or at least tangible) way to resist the sanctions regime is to apply to the WTO with the notion that EU companies sanctioned for dealing with Russia were treated unfairly and are at a competitive disadvantage. A WTO decision may impose punitive tariffs on the USA.

The only other way to hedge against sanctions is via diplomacy, either work with the US Government to obtain assurances that certain business projects will not be sanctioned, or use the EU Commission’s influence to dispose of targeted sanctions if these were to ever be imposed on EU companies.


On 2 August 2017 the Law On State Aid to Undertakings came into force. According to it Ukraine took the European model of control over state aid to entrepreneurs. In what forms will assistance be provided? What order should be fulfilled, and what criteria should be satisfied to receive state aid?

Sergiy Glushchenko,

Senior Associate, Asters

Under the EU-Ukraine Association Agreement, Ukraine was required to roll out state aid regulation in convergence with the EU acquis. This occurred on 2 August 2017 when the Law of Ukraine On State Aid to Undertakings (State Aid Law) and secondary legislation came into effect. Since then all new state aid measures (except de minimis ones not exceeding EUR 200,000 per undertaking over a period of 3 fiscal years) are generally prohibited and can only be implemented after approval is received from the Antimonopoly Committee of Ukraine.

In this respect, so-called “horizontal” aid measures pursuing objectives of general economic development and sustainable growth (such as SMEs development, regional development programmes, environmental protection measures, job creation, energy saving, professional training, R&D activities, etc.) will have a greater chance of being cleared by the AMCU as opposed to the measures promoting certain priority sectors or certain economic activities (i.e. energy and coal, steel, ship and aircraft building, civil aviation, financial markets). This is because the EU-alike state aid legislation puts emphasis on reduction of sectoral aid and refocuses on “horizontal” aid. Notably, the State Aid Law does not deal with support for agricultural producers as that sector requires special policies for development and support and will not be covered by the Ukrainian state aid regulatory system.

Finally, the State Aid Law only lays down the basic rules and leave the details to secondary legislation, which stipulates (among others) notification procedures for existing and new state aid, investigation of unlawful and misused various procedures, etc. In overall terms, these procedures clarify that state aid providers bear primary responsibility for ensuring that their policy measures and projects comply with state aid rules, though beneficiaries of aid, as well as their competitors, will also be considerably involved in the notification and investigation process.


Draft Law No.7010 proposes to simplify the trade procedure and reduce business time costs for processing goods by single presentation by an enterprise of a unified set of information through a “single window”. How will this initiative reflect foreign economic activities and improve investment attractiveness of Ukraine?

Larysa Antoshchuk,

Head of Tax Dispute Resolution Practice, KPMG in Ukraine

The Single Window system is one of the most anticipated Government pro- mises since 2016, when the first attempts at launching it were made. Since this is the first step that is troublesome, the fresh tool of passing customs has not yet been worked out properly.

Due to certain gaps in the law businesses had to duplicate information and documents in the course of the last year instead of smoothly joining a system similar to those in effect in developed countries around the world. Only 20% of businesses confirmed that they have tried the system since 2016 and almost half of them did not notice a significant reduction in time or resources.

It seems that the analyzed Draft No.7010 has become a solid icebreaker for transforming the Customs Service. By establishing a single electronic database for a range of state authorities, the Draft promises to simplify international trade, making passage through customs faster and less burdensome. The duplication of documents and information required for international trade would be eliminated.

One of the key points of Draft No.7010 is unification of provisions on customs control. This will definitely entail reducing illegal demands and the role of the human factor during clearance procedures though it is subject to the system working properly. Business has no guarantees on whether the system will work as it should do. The authors are not sure either, so they have inserted a few provisions in case when the so-called Single Window does not work. Let’s go for the gloves?


The State Telecommunications Service offers mandatory registration of all mobile subscribers. How do you assess this initiative? Will this project effectively fulfill the goals set out in the explanatory note?

Oksana Krasnokutskaya,

Counsel, AEQUO

Some time ago the State Service of Special Communication and Information Protection of Ukraine published the Draft Law On Amendments to the Law of Ukraine on Telecommunications and theLaw of Ukraine On Radiofrequency Resource of Ukraine Regarding Identification of Mobile Subscribers and Registration of End Equipment with International Identifier for public discussion.

Public discussion regarding mandatory registration of pre-paid mobile subscribers receiving services is not new as this issue has been raised since 2010.

The main goals to be achieved after the introduction of mandatory registration of pre-paid subscribers are the following: facilitation of implementation of mobile number portability service, raising the effectiveness of mobile fraud investigation.

Moreover, since all subscribers will be identified, the possibility of using methods of payment for goods and services using mobile phones will be expanded.

At the same time, mandatory registration of subscribers will unambiguously result in SIM cards registration on the names of figureheads to avoid liability for potential mobile fraud.

The Draft Law requires clarifications regarding the timeline for identification of existing mobile subscribers, the consequences of failing to provide personal data, etc. It is expected that all formalities will be regulated by subordinate legislation.


Draft Law No. 6725-1 proposed the sale of agricultural land in three stages. How do you assess this document in comparison with previous drafts?

Dmytro Bondarchuk,

Associate, EQUITY

On 26 July 2017 the Verkhovna Rada of Ukraine registered Draft Law No.6725-1 On Amendments to the Land Code of Ukraine (regarding the provision of land for agricultural purposes to local producers and introduction of electronic land auctions). The Draft is an alternative to Draft Law No. 6725.

Draft Law No. 6725 On Amendments to the Land Code of Ukraine (regarding the conduct of land auctions online) only proposes to enable all interested persons to participate in land auctions online via the Internet.

In contrast to Draft Law No. 6725, Draft Law No. 6725-1, in addition to the introduction of electronic land auctions, also involves carrying out the sale of agricultural land in three stages. Only individuals, sole proprietors and legal entities whose founders are exclusively citizens of Ukraine who reside or conduct their economic activity in the territory of the village, town, city council or united territorial community where the land plot subject to auction is located (at the first stage of auction), in the territory of the region (at the second stage of auction), in the territory of Ukraine (at the third stage of auction).

Thus, the authors of the Draft propose to protect Ukrainian agricultural land from the situation whereby large agrarian companies could purchase land plots that are either communal or state owned. Instead, it is proposed to place a stake on farms. Overall, Draft Law No.6725-1 should have a positive impact on the development of Ukraine’s food industry, as world experience shows that the agricultural sector in countries with a developed market economy is made up of small and medium-sized agricultural production farms.


The NBU has issued the Draft Law On Currency, which provides the freedom to conduct currency transactions on the principle that “everything that is not directly prohibited is permitted.” How do you assess this initiative?

Sergii Korniienko,

Partner, Antika

In my opinion, the Draft Law On Currency would have a positive impact on business because it fixes the principle of freedom of currency operations that has not existed in our country before. In practice, the implementation of this principle means that any transactions between residents as well as between residents and non-residents that are conducted using foreign currency, can be carried out without any restrictions.

In addition, the abolition of individual licenses for individuals and deadlines for the closure of foreign economic contracts is testimony to the intention of the State to replace the current permissive procedures with more progressive and liberal declarative procedures. I believe that such innovations, combined with abolition of legislation on currency regulation, which was adopted at the beginning of the nineties and does not correspond to current business conditions, should increase the investment attractiveness of Ukraine.

At the same time, it should be noted that despite significant liberalization of currency regulation rules, the NBU reserves the right to impose currency restrictions on the market in order to overcome or prevent a financial crisis. Although the list of such restrictive measures and the maximum period for which they can be imposed are set out in the Draft Law, the restrictive actions taken by the NBU in 2014-2015 will continue until their cancellation after stabilization of the banking and / or financial system of the country, but not earlier than the coming into force of the law on international cooperation of Ukraine in the field of taxation. The existence of such regulations in the Draft Law makes my forecast regarding its positive impact on the conditions of doing business a cautiously optimistic one.


The Verkhovna Rada has registered Draft Law No. 6721that provides changes of currency for the fulfillment of loan obligations in foreign currency to the national currency of Ukraine. What consequences do you think the adoption of this norm will have for the banking system?

Yuliia Sydelnyk,

Legal Assistant, GOLAW

Draft Law No.6721 On Restoring Confidence of Individual Loan Service Consumers in the Banking System of Ukraine is yet another and, most likely, not very successful attempt to help foreign currency borrowers.

According to it, banks will be obliged to provide debtors with restructuring, which looks as follows. An individual foreign currency loan borrower applies to the bank with a request for restructuring. Within a month, the bank calculates the value of liabilities in UAH as of the date of conclusion of the contract at the NBU’s exchange rate on the same date, and the value of liabilities in UAH as of the date of the borrower’s application at the NBU’s exchange rate on the date of application. The resulting difference, as well as the interest and penalties for the entire period of use of the loan, are to be written off by the bank. If the difference is negative, the bank is to refund the overpayment to the borrower.

If upon the calculation of liabilities the borrower has a debt, then the parties are to conclude an agreement on granting a loan for the balance of the debt, recalculated in UAH, as well as approve a new payment schedule. Thus, borrowers will have to return only the principal amount of the foreign currency loan equivalent in UAH at the NBU’s exchange rate as of the date of receipt of the loan. Banks not only miss out on potential profit, but also risk incurring significant losses.

By the way, there was a similar Draft (No. 4895) in 2014, which remained only a Draft Law. With regard to the confidence of borrowers, according to NBU’s statistics, the number of mortgage loans issued from January 2014 to May 2016 increased by UAH 5.975 billion, while the number of banks was reduced by 51 over the same period. Thus, there are doubts as to whether the Draft Law, which takes into account only the interests of one party, namely borrowers, will be allowed to become law.


The NBU has developed Draft ResolutionNo. 42 that provides the introduction of a duty for non-bank financial institutions and commercial agents of banks to open a separate account in the bank and ensure that cash is transferred in Hryvnia to this account. How will this Resolution affect the activities of non-bank financial institutions and commercial agents of banks?


Dmytro Savchuk,

Associate Partner, Lavrynovych & Partners

The NBU initiative connected to establishing the obligation on the part of non-bank financial institutions and agents of banks to transfer cash funds received from individuals to a special bank account relates in the main to the NBU’s intention to extend its control over cash funds.

Currently, cash funds received after encashment are transferred to a general bank account of the above-mentioned organizations. At the same time, the said general bank account also accumulates the funds of organizations received from other business activities. Therefore, for the purposes of control it is difficult to distinguish cash funds that are received from individuals.

If the amendments are adopted, cash funds that are  received and transferred to a special bank account will be allowed to be debited from the account exclusively for the purposes for which they were accepted (e.g., transfer of funds, payment for goods and services). This will enable for a clear tracing of a flow of cash received by a non-bank financial institution and/or a bank agent.

The planned amendments are likely to increase cash funds transactions costs of non-bank financial institutions and agents of banks.

For example, an enterprise transfers funds to different banks taking into account locations of cash desks/terminals that accept cash funds. If a special account for crediting cash funds can be opened in several banks, nothing will change in terms of logistics. However, if the account can be opened only in one bank, a non-bank financial institution/commercial agent will have increased costs regarding encashment and transfer of cash funds from a general bank account in one bank to a special bank account opened in another bank. This in turn will lead to an increase of the cost of their services (commissions).


The NBU has, via Resolution No.78, regulated the use of electronic signature in the banking system. How can this Regulation affect the banking system? Do you think that the Regulation will have a positive effect on the costs of banking products and quality of customer service provided by banks? 

Nickolas Likhachov,

Counsel, Spenser & Kauffmann

The Regulation On the Use of Electronic Signature in the Banking System of Ukraine approved by the Resolution of the Board of the National Bank of Ukraine No.78 of 14 August 2017 places certain obligations on banks with regard to development of internal documents, which will regulate the use of electronic documents certified by electronic signatures.

The Regulation establishes 5 electronic signatures: simple electronic signature; simple electronic digital signature (EDS); EDS, equated with a handwritten signature; EDS of a legal entity; EDS of the National Bank of Ukraine. 

Every type of electronic signature assumes, different kind of reliability, its own usage characteristics, as well as requirements for the creation and storage of electronic documents in the banking system. According to this Regulation, the National Bank of Ukraine has the right to control compliance with the Regulation as well as carry out inspections of information and telecommunication systems used by banks.

From our point of view, the use of an electronic signature may reduce the costs of banking services and increase the quality of services, as it continues the trend of obtaining banking services beyond the branches of a bank.

However, the possibility of the bank and its client using less secure types of electronic signatures (a simple electronic signature or simple EDS) can be envisaged only in a contract signed by the parties personally or with the help of an electronic signature, equated with a handwritten signature (the one with a strengthened key certificate). As an electronic digital signature with a strengthened key certificate is not common, most clients cannot avoid personally signing the main banking documents when establishing contractual relations with their bank.


Through Decree No. 578 the Cabinet of Ministers has created the Interdepartmental Working Group. What are the main objectives behind the creation of this working group? Can this group protect entrepreneurs from violations by law-enforcement officers?

Opanas Karlin,

partner, ESQUIRES

The Working group on the examination of problem issues on violations of the rights of commercial entities by law-enforcement agencies (hereinafter — the Interdepartmental Working Group) that was established by the Cabinet of Ministers of Ukraine is an advisory body to the Cabinet of Ministers of Ukraine.

According to the Decree of Cabinet of Ministers of Ukraine No.578 of 9 August 2017, the Interdepartmental Working Group is called upon to facilitate the coordination of actions of executive bodies in preparing proposals, determining ways and means of resolving issues on establishing boundaries for the proportionality of actions by law-enforcement officials during investigative actions and their responsibility for unlawful acts, the introduction of mandatory video recording of investigative actions, the definition of clear time limits of prejudicial inquiry and other procedural terms in criminal proceedings, as well as the introduction of a special procedure for the removal of digital data in order to avoid cases of interruptions to the activities of commercial entities. Іn addition, the group should prepare draft legislative acts to improve criminal and criminal procedural legislation in order to prevent violations of a commercial entity’s rights during a prejudicial inquiry.

The creation of the Interdepartmental Working Group is testimony to the recognition of the existence of the acute problem of the prosecutions of business by law-enforcement agencies, mainly during a prejudicial inquiry.

The activity of another consultative and advisory body of the Cabinet of Ministers of Ukraine, namely the Business Ombudsman Council, can serve as an example to predict the effectiveness of the Interdepartmental Working Group.

Based on powers provided by legislation, the Interdepartmental Working Group, just like the Business Ombudsman Council, does not possess the rights to protect entrepreneurs from violations of their rights by law-enforcement agencies in specific cases. Consultative and advisory bodies are called upon to collect and analyse crucial issues and prepare proposals on improving the activities of state bodies at the normative level. The results of such activity will influence entrepreneurs in the long-term.

In other words, the result of the work of the Interdepartmental Working Group will be recommendations and proposals for improving legislation rather than directly responding to specific cases of violation of business rights.

At the same time, an appeal to the advisory body of the Cabinet of Ministers of Ukraine regarding specific violations of the rights of an entrepreneur or an investor by law-enforcement agencies сan have a positive effect. On the one hand, it helps to identify systemic problems and tries to eliminate them in the future at a regulatory level. On the other hand, the appeal of the Interdepartmental Working Group to law-enforcement bodies creates a certain psychological background: draws the attention of the leadership of law-enforcement agencies to a particular case, and stimulates law-enforcement agencies to take more responsible actions. In the end, during the analysis of the complaint it is possible to establish the circumstances of violation of the rules of the Criminal Procedure Code of Ukraine and other circumstances that can be used during the judicial protection of violated rights.


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