Under Article 37 of Law No.959 "On Foreign Trade Activity" from April 16, 1991, Ukrainian authorities have extensive powers to impose so-called "special sanctions" on importers/exporters and their foreign counterparts for "violations of foreign trade and related laws".

Such sanctions interrupt the normal course of business and may lead to considerable financial losses. There are cases where sanctions have been applied in order to put pressure on companies that are in dispute with customs authorities. Below we provide comments on applicable rules and practices in respect of these sanctions.

There are two forms of special sanctions: the temporary suspension of foreign trade activity ("FTA") and the individual license regime of FTA.

Temporary suspension of FTA

Nature: restriction of a company's customs clearance operations and settlements under foreign trade contracts. Duration: from the date indicated in the order for imposing the sanction until the date when the relevant violation has been eliminated, but not to exceed 3 calendar months. After the 3 month period, the sanction can be extended by a decision of the court or changed to the individual license regime.

Individual license regime of FTA

Nature: Conditional restriction of a company's customs clearance operations and settlements under foreign trade contracts.

Customs clearance or payment under a foreign trade contract is possible subject to individual license from the Ministry of the Economy. Each license is subject to charge of 0.2% of the contract value of the goods or services.

Duration: from the date indicated in the order for imposing the sanction until the date when the relevant violation has been eliminated.

The form of the sanction is defined by the initiating state authority. In the absence of clear guidance, it appears that authorities tend to apply temporary suspension of FTA as the more severe sanction for violations which they consider to be grave violations (e.g., contraband or large amount of overdue foreign currency debt).

What is viewed as a violation?

Typically, sanctions are imposed on the violation of the following:

  • Foreign Currency Settlements Law (Articles 1 and 2) – failure to complete foreign trade settlement within the statutory period of 90/180 days;
  • Toll Operations Law (Article 6 and other)– failure to comply with various requirements;
  • Corporate Profit Tax Law (Articles 2 and 13) - Failure to comply with withholding tax requirements;
  • Customs Code (Articles 97, 267, 352, 355 and others) – failure to comply with customs clearance rules and customs valuation rules.

Enforcement

The procedure for the initiation of sanctions is as follows.

Initiator: The state body that has the status of a controlling authority (usually tax or customs office) that detects the violation of foreign trade or related legislation and makes a submission to the Ministry of the Economy for the imposition of sanctions.

The State Security Service of Ukraine also has and uses the power to make submissions related to foreign exchange control and customs violations based on information received from tax and customs authorities.

Approving body: Ministry of Economy (ME)

The role of the ME is to approve a document on the imposition of a sanction within the statutory 30 day period. There is no formal hearing at the ME, where the accused party could have the opportunity to argue its case and defend its position. Moreover, it is doubtful whether the ME has the competence to double-check the conclusions of the initiators regarding alleged tax or customs violations.

A sanction is documented by the ME's order signed by the minister. The order indicates the date on which the sanction comes into effect. Within 3 days of the date of the order, the ME sends hard copy and electronic notifications to customs authorities to ensure control of customs clearance of goods, and to the National Bank of Ukraine. The National Bank, in turn, notifies commercial banks to ensure control of payments under contracts with the relevant entity. Effectively foreign trade transactions are suspended from the date when the bank and/or customs service receive notification of the sanctions.

The notification of sanctions is delivered to the company against which sanctions have been imposed via the local state administration at the location of the company's registration (there could be a substantial delay before company becomes aware of the sanction). As regards foreign companies, there is no notification procedure, and it could be the case that such company remains completely unaware of the imposition of sanction against it.

Remedy tools

It is possible to appeal an ME order in the administrative court. However, an appeal does not suspend the sanction and the company will continue to be subject to the sanction during the appeal process, which could last several months.

Other tools available in practice include application to the ME for: (i) termination of the sanction if there is proof that the violation has been eliminated and (ii) temporary suspension of sanctions if there are valid reasons, such as on-going litigation with the authority that initiated the sanction.

Practice

The information on Ukrainian and foreign companies which are subject to special sanctions is posted at the ME's web-site: http://www.me.gov.ua/control/uk/sanktions (in the Ukrainian language only). We provide several examples of recent sanctions cases below (according to the orders of ME available from public sources):

  • Ukrainian subsidiaries of large multinational corporations (the soft drinks industry, nutrition and foods industry) were subject to the individual license regime of FTA for the alleged failure to complete foreign trade settlement within the statutory period and for the alleged violation of customs valuation rules, respectively. The sanctions have subsequently been suspended but not yet terminated (ME order No. 155 of February 18, 2010, No. 415 of April 20, 2010 );
  • Several BVI and Belize companies allegedly controlled by one of Ukrainian oligarchs were subject to temporary suspension of FTA for the violation of tax rules (ME order No.664 of June 14, 2010);
  • A UK company was subject to the individual license regime of FTA for its alleged failure to make payment within the statutory period to a Ukrainian seller (medium-sized brewery). The amount of debt was less than £10,000. Although the violation was allegedly on the part of the buyer (the UK company), the same sanction was applied to the Ukrainian seller (orders of the ME order Nos. 263 and 268 of March 24, 2010).

Implications for businesses

Sanction legislation has been in existence for more than 10 years (the current wording of Article 37 of the law has been effective since 2005). However, there was no noticeable impact for the transparency of businesses until 2008.

The vague wording of legislation and the nontransparent "punishment" process creates grounds for the abuse of the law by authorities. A recent trend is that controlling authorities use sanctions to bring pressure upon entities in the course of a dispute and there have been several cases of the imposition of sanctions (individual license regime) against major importers and the subsidiaries of large multinational companies. Authorities realize that even the threat of import/export transactions being suspended can compel the import/exporter to "cooperate".

There is the risk that authorities could increasingly use such practices. Entities that are exposed to risk of sanctions include:

  • Importers that are in dispute with customs;
  • Importers who face the risk of noncompliance with specific customs regimes (e.g. tolls, temporary importation);
  • Exporters that experience difficulties with collecting cash for export supplies. Even a minor debt can lead to somewhat expensive sanctions;
  • Foreign entities that have overdue debt to Ukrainian suppliers/partners;
  • Foreign entities that have failed to comply with Ukrainian tax registration and withholding tax requirements.

It is advisable to monitor the risk of sanctions and develop risk management plans where appropriate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.