Business Crime in Ukraine

Business is a risky activity by definition. However, once a company starts to bring in steady returns and the owner thinks that the main risks are now a thing of the past, they are faced with entirely different kinds of threats.

As a company grows, its management is faced with both internal threats coming from its associates and business partners, and external ones — from competitors, ill-wishers and public authorities.

Protection Against Illegal Actions by Employees

Financial fraud committed by company associates is the most widespread internal risk and quite dangerous. The textbook example of this kind of fraud is an accountant writing off monetary funds from the company’s accounts under a simulated contract in favor of a related party. Often, these kinds of transactions are performed for amounts that are small in terms of the company’s overall turnover. However, over a long period of time the losses will run into hundreds of thousands of dollars.

Despite the widespread nature of the specified threat, it is rather easy to uncover and eliminate it. A rational set-up of access rights to accounting software, impossibility to perform payments from third party computers (including home ones), and also a regular independent audit reduces the risk of this type of fraud to a minimum.

Disclosure of commercial secrets is just as dangerous for a business, as it could lead to far greater consequences than common fraud. It is noteworthy that this kind of data ‘leakage’ often happens not out of malicious intent: by a former associate during a job interview with a competitor or current associates while making posts (including on professional social media). In this case, it is quite easy to minimize this risk by accurately specifying for all associates, whose information is deemed a commercial secret and the negative consequences that its disclosure will entail. In Ukrainian practice, companies often limit themselves to signing an NDA in Western-like style, which does not contain the necessary, pursuant to national law, information and cannot protect the interests of a business.

An accurate structure of the access system to the company’s internal information in a manner that the source of leakage can be promptly identified, or, better yet, prevented, also largely reduces the risk of information leakage. In particular, restriction of access for associates to sensitive information from third party devices is a must for ensuring sufficient control.

Meanwhile, intentional disclosure of information borders on corporate espionage and requires a prompt reaction for the protection of company interests in the area of criminal law.

If the aforementioned safeguards failed and the company suffered from fraud or information leakage, businesses are often not willing to get involved in litigations and criminal cases, preferring to settle the conflict out of court, without prosecuting the offender, which, allegedly, saves money and reduces reputation risks. This practice leads to repetition of offenses and carries a threat of substantial losses, both financial and reputational in the long run.

Therefore, after an associate commits an offense, the company, with the aforementioned system of safeguards in place, will have a certain body of evidence (system log files, IP addresses, video recordings, including of the computer’s home screen) for instigating criminal proceedings under the corresponding article of the Criminal Code.

The prompt legal assistance of an attorney will help to properly record the discovered offense, which will subsequently make proof of guilt in court easier.

Protection Against Illegal Takeovers

A corporate conflict escalating into a hostile takeover is the most dangerous internal risk. As Ukraine does not have a stock market and corresponding financial instruments, such takeovers often border on corporate raiding or illegal takeover, which should be reviewed separately.

The key stage of an illegal takeover is performance of illegal registration actions, which subsequently lead to gaining control over the assets. In recent years, the government has announced its intention to actively combat this illegal scheme. In particular, the government strengthened control over maintenance of state registers and introduced a number of safeguards against registration actions unsanctioned by the owner, which improved the situation to an extent though, unfortunately, the burden of protecting their assets still lies on the owners. Thanks to the opening of access to state registers, businesses now have an opportunity to learn about hostile actions in advance and block them.

An appropriate ownership structure and regular independent legal audit largely reduce the risk of illegal takeover of assets. In addition, it is advisable to limit access to the means of company management, including technical ones.

It is worth noting that criminal proceedings may be launched against a business owner and individuals associated with him/her with regard to white-collar or corporate crimes. In this case, a number of criminal and legal risks emerge not only for such individuals, but also for their entire assets.

For example, after an individual has been notified of suspicion, the court may impose an arrest on all private accounts and assets in Ukraine, including the accounts and corporate rights of controlled companies. As for the suspect, if he is abroad, he can be placed on an international wanted list with subsequent prosecution in absentia.

Therefore, the arrest of accounts, seizure of assets and corporate rights can also be used within criminal proceedings as an element of settlement of a corporate conflict or hostile takeover when the investor’s opponent is the initiator and the injured party.

Furthermore, the law of Ukraine envisages transfer of assets seized in the criminal proceedings into management of a special public authority called the Asset Recovery and Management Agency. ARMA must ensure preservation of the economic value of such assets. For this purpose, ARMA has the right to transfer into management the seized assets to third parties.

The measures listed above can be used not only as a part of the illegal takeover of a company, but also as an element of pressure on the business by law-enforcement agencies. However, Ukraine has a successful legal practice of protection of the investor and his/her assets against all mentioned criminal and legal risks. Usually, these kinds of criminal cases do not contain a critical mass of fundamental proof of guilt, as the pre-trial investigation authority does not have the goal of bringing the case to a guilty verdict in court. Therefore, requesting professional legal assistance, particularly at the early stages of investigation, will largely reduce the number of risks with the subsequent prospect of such a criminal case being closed.

Sanctions Marathon

Lately, Ukraine has begun to apply sanctions against foreign nationals as well as Ukrainian citizens and legal entities. These sanctions envisage full seizure of assets on the territory of Ukraine for a term of three years. Today, sanctions have been introduced against individuals, who, in the opinion of the National Security and Defense Council (NSDC) and the President, are working with the aggressor state — Russia, and are financing terrorist organizations LPR and DPR. Of note is the fact that imposition of sanctions does not envisage mandatory investigation or litigation, which is why there is a risk of increasing the grounds for imposition of sanctions.

The practice of Government Relations, which is often mixed with lobbying or even corruption, is an effective measure of minimization of these types of risks.

In particular, if it is necessary to inform government authorities about existing problems or situations that need to be settled, the companies build a system of communication with the authorities at all levels, with the help of GR specialists, which is then used for building the company’s positive image, among other things.

In case the ‘GR safeguard’ does not work and sanctions are imposed on a company, specialists both in criminal and other areas of the law need to be involved for counteraction and the protection of business interests, now in the legal field. At the moment, taking into account the relative novelty of this risk factor, the practice of protection against sanctions is being built in Ukraine, including by our lawyers, who protect client interests in these situations.

Therefore, on the issue of countering business risks, companies in Ukraine need to be educated and prepared to react promptly to threats. Fortunately, there are many protection instruments available now: from open registers and specialized software for monitoring the changes in the company structure to GR specialists, providing all round services on business protection. However, there are still a lot of gaps in legal fields and in the work of courts and law-enforcement agencies that require regulation and revision, which is the origin of the majority of threats for anyone operating a business in Ukraine.