Recently, the Verkhovna Rada adopted the draft law that simplifies return of illicit assets. It allows involving private litigation funds in such cases. Isn’t this a risky idea?
The issue of returning stolen assets has long been the matter of concern for Ukrainian society.
For the first time it has become relevant due to case of former Prime Minister Pavlo Lazarenko, who was convicted of money laundering not in Ukraine but in the United States of America. Although, the decision regarding Lazarenko was announced long time ago, stolen 270 million USD has not yet been returned to Ukraine. The reason is lack of recovery mechanism.
This issue became even more relevant after the escape of former President Viktor Yanukovych. The international community has imposed sanctions on him and his entourage, frozen foreign assets, and Ukrainian law enforcement officers and courts are still investigating dozens of criminal cases.
When all new presidents and governments come to power in Ukraine, they promise to bring their predecessors to responsibility and return stolen assets. To do this, they try to change the law on asset recovery.
The National Agency of Ukraine for finding, tracing and management of assets derived from corruption and other crimes (ARMA) was established after the Revolution of Dignity. And legislation on confiscation was improved.
Another step was made during the presidency of Volodymyr Zelenskyi. In October 2019, the Verkhovna Rada voted to return the article which provides punishment for illicit enrichment to the Criminal Code.
This is the instrument of civil confiscation of assets, the origin of which the official cannot explain. However, this is only about Ukrainian assets.
Another initiative has appeared in the Parliament: the draft law on recovery of assets. It allows ARMA to file lawsuits in foreign jurisdictions and involve so-called private litigation funds in such cases.
This is good but risky idea. The fact is that litigation regarding return of assets abroad can take years, and payment of court fees and work of lawyers is expensive. Private litigation funds can solve this issue.
These funds will finance the work of lawyers in foreign jurisdictions, and in case of winning in court the fund will receive the percent from returned assets. It looks like acceptable and mutually beneficial mechanism. But there is a problem.
For instance, the oligarch Igor Kolomoysky, whose assets are on close inspection of law enforcement officers in Ukrainian and foreign jurisdictions, could create “private litigation fund,” for instance in the United States. In this country the state Privatbank filed the lawsuit against oligarch and claimed about losses worth billions.
According to the lawsuit, the oligarch withdrew money from the bank to buy valuable real estate and factories in the United States. Thus, Kolomoysky is creating the fund to finance lawyers in this case. Theoretically, lawyers should defend Ukraine’s interests in court. But will they do so if Kolomoysky finances them?
Most likely, such lawyers will simply delay trial or lose it altogether. This is extremely risky practice.
Authors of the draft law, which has already passed the first reading in the Verkhovna Rada, call it the most important anti-corruption initiative of the year.
Instead, the public criticizes it and points out that private funds in Ukrainian reality can be used by oligarchs to influence on cases against them.
The explanatory note regarding asset recovery draft law refers to the popularity of such funds: “There is widespread mechanism in the world that foresees involvement by the state of litigation funds in financing this process”. Are “private funds” really the panacea? How popular are they in the world?
To get answers to these questions, the EP asked the International Center for Asset Recovery (ICAR), the international institution that deals with return of withdrawn assets, as well as asked authors of the draft law.
Greta Fenner, Director of the International Center for Asset Recovery (ICAR)
— Tell us about the work of the center and its successful cases.
— The International Center for Asset Recovery has been part of the Basel Institute of Management since 2006. The advisory work of the Centre relates long-term programs in Ecuador, Kenya, the Kyrgyz Republic, Malawi, Mozambique, Peru, Sri Lanka, Tanzania, Uganda and Ukraine.
In these countries we provide assistance in nearly hundred asset recovery cases. In 2017-2018 this allowed to return more than 70 million USD of stolen assets. Thanks to flexibility and experience of our team we can provide quick strategic assistance on the number of issues.
These include collection and analysis of operational information, asset tracking, financial profiling, investigation and prosecution strategies, international legal assistance, and cross-border issues.
— What are private litigation funds and how often countries use this instrument in cases regarding refund?
— Agreements on financing of third party litigation by sponsors allow applicants to seek justice through civil actions, which may otherwise be impossible due to excessive costs.
States may use civil asset recovery proceeding if criminal prosecution and confiscation of assets are impossible. However, civil proceeding can be expensive and bear the risk of responsibility at own expense and legal costs of opponents.
Financing of third party litigation by the sponsor is becoming the acceptable method. This is agreement between specialized company-sponsor and the client, who is usually the applicant in the lawsuit. The sponsor finances costs of client’s legal services in exchange for the share from “revenue in the case”.
If the case is successful, the sponsor of financing litigation reimburses the invested capital plus receives the reward for success. If the case fails, the sponsor loses his investments (in case they are not secured), does not receive reward and has no claims regarding payment to the party that had been financed.
ICAR has not been involved in any case regarding private litigation funds. We have not been able to identify any such case with the help of open sources. This does not mean that there were no such cases, but the lack of publicity about them indicates that this practice is not very common.
— Are there cases regarding return of foreign assets by governments through litigation funds, especially in the UK and Switzerland?
— We have not been able to identify any such cases. But this does not mean that such cases do not exist. We just can’t answer that question.
— Do governments use private litigation funds to initiate asset recovery cases?
— The state may collect funds in another state, either by applying to it for legal assistance, or by initiating private civil lawsuit. Financing by litigation funds in foreign jurisdictions is possible only in the second case.
— How long can the trial regarding the recovery of assets take in foreign jurisdictions?
— The length of process depends on the jurisdiction, court proceedings within each country, the complexity of case. Litigations do not usually go quickly. And it can take years to resolve them.
— How often lawsuits regarding the recovery of assets are reconciled with criminal proceedings?
— Criminal proceedings and civil proceedings are usually conducted separately, especially if they take place in different jurisdictions.
Criminal proceedings are considered with higher level of evidence than civil ones. However, difficulties may arise when requests for assets are received both in criminal confiscation statements and civil lawsuits.
— How high is the risk of abuse if the law in the country with high level of corruption allows to attract private litigation funds financed by residents of this country without clear criteria and procedures?
— Litigation financing is current form of financing expensive civil litigation. The main risks are centered around the choice of foreign lawyers and litigation sponsors.
To avoid the risk of using dirty funds to support litigation, the source of litigation funds must be transparent.
The terms of agreement of the process with sponsors should be carefully studied. Sponsors should receive payment only after the recovery of assets. The payment should be defined as percent from the amount collected, but not fixed amount, considering that the amount returned may be less than originally anticipated.
Galyna Yanchenko, co-author of the draft law, Member of Parliament from the party “Servant of the People”
— Tell us more about private litigation funds? Are these law firms?
— Funds (“Litigation funds”) are actually international companies. There are no such companies in Ukraine. There are a dozen of them, let’s say. Maybe a little more. They are mainly based in the United Kingdom and the United States, that means in jurisdictionsappealed to regarding seizure of criminally acquired assets.
— Who will finance private litigation funds?
— Funds rely upon the principle of success fee. That means if they manage to return assets, they get their interest, if they fail, they get nothing then. This is risks they take.
We have clearly stated in the law that they will not receive funds from the state budget. They will receive fee only if they manage to return assets to Ukraine. In this case, they receive certain percent from returned assets.
Usually average interest rate that such litigation funds take ranges from 20-40%. The original draft law does not specify this percent. But it has already been amended. There are several suggestions how to set clearly in the law, prescribe this maximum percent that can be obtained by the litigation fund when assets are returned.
— As for information about owners and donors? Will it be known who will own them? Are there any preventers?
— This are private companies, the law firms. There are a lot of these companies and they value their reputation very much. So, it is clear that everything is transparent there as much as possible.
If one of them ever gets the idea to get money from the person, or company, from legal entity or individual, it will be their first and last case. This is a big risk and everyone knows there everything about each other. Reputation is their fixed capital.
— That means that this is about recognized global renown law firms. How exactly will they be chosen?
— In the draft law we refer to the Cabinet of Ministers. The government must accept and establish the selection procedure. This should definitely be on competitive basis, but this procedure should be determined by the Cabinet of Ministers, as well as the standard agreement.
We would like this to be typical agreement. It is clear that law firms can offer their terms there, but it is important that interests of Ukraine will be still protected.
— The draft law states “private litigation funds”. Thus, there is question. Is it possible that companies, that will have Ukrainian oligarchs among their clients and play on their side, will be included in the conditional list that will be chosen by Ukraine?
— No, no. I think this is out of the question. And moreover, there is already one amendment that we have agreed on. It will be supported by the Committee. It excludes the possibility of Ukrainian companies to participate in such processes. These are exceptionally large foreign, and recognized companies, with the reputation, and global renown. Have you heard about the case of returning assets in Kazakhstan?
— So, the explanatory note to the draft law includes such example. And what is the procedure of selection of these funds, companies in this country?
— I’m not ready to answer you now. The only thing I know is that they used litigation fund to return these assets.