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Article 37 of the Law on Foreign Economic Activity (hereinafter “Law on FEA”) imposes special sanctions for the violation of this Law or related laws of Ukraine.

The following sanctions may be imposed upon Ukrainian or foreign economic entities engaged in FEA:

• imposition of a fine in the event of non-timely execution by such entities of obligations prescribed by law;
• application of the individual licensing regime to certain Ukrainian or foreign economic entities, engaged in FEA, in cases of violation by those entities of provisions of this or related laws, which set prohibitions, restrictions or regimes of execution of foreign economic activity;
• suspension of foreign economic activity in cases of violation of this or related laws or in cases of doing acts which may harm the interests of national economic security.

The Ministry of Economic Development and Trade of Ukraine imposes these sanctions based on the application of such state bodies as the State Fiscal Service or the Security Service of Ukraine.

Why may the revealed facts of bringing the goods to occupied territories trigger special sanctions in Ukraine?

Pursuant to Chapter 1 of Art. 10 of the Customs Code of Ukraine

The prerequisite for the movement of goods through customs border of Ukraine is the fulfillment of customs formalities, in particular, the customs clearance of those goods in a manner provided for by the legislation.
Thus, Art. 246 of the Customs Code of Ukraine specifies that:

Temporarily occupied territories are part of the state territory of Ukraine subject to its sovereignty and legislation, and the uncontrolled parts of the border with other states remain the part of the state border, and therefore the customs border of Ukraine.

The movement of goods originating from other states through the border located in the occupied territories is the violation of customs regulations, which may be qualified as customs offence under Art. 482 of the Customs Code of Ukraine that imposes liability for

Such offence meets all conditions necessary for the application of the special sanctions provided for by Law on FEA. Furthermore, the political situation in the occupied territories may potentially affect the recognition of the violation as harming the interests of national economic security. Hence, there are grounds for the application of such special sanction as a temporary suspension of the foreign economic activity.

It is necessary to note that the analysis of recent Orders of the Ministry of Economic Development and Trade of Ukraine regarding the application of the special sanction (suspension of foreign economic activity in Ukraine) to foreign economic entities indicates that the said risk is real.

In particular, such sanction was repeatedly applied to foreign economic entities (including well-known multinational corporations) upon submission of the Security Service of Ukraine, with a reference to the violation of Art. 482 of the Customs Code of Ukraine.

It is hard to imagine that Ukrainian customs officials caught representatives of foreign companies red-handed in an attempt to move consignments through the customs border beyond the customs control. Having in mind that customs formalities on importation are usually carried out by a resident importer (or customs broker on behalf of such resident), it is also hard to imagine the foreign entity committing such violation while carrying out an ordinary movement of goods.

So we can assume that the application of sanctions to foreign entities engaged in FEA is connected with the discovery of the facts of importation of goods to the occupied territories from other countries. The above means that any foreign supplier / manufacturer selling products to the “risky” countries – that is, from the territory of which the importation of goods to the occupied territories may be carried out, risks getting temporarily suspended from foreign economic activity in Ukraine.

Temporary suspension of foreign economic activity in Ukraine means the following:

• the prohibition to import goods to Ukraine;
• the prohibition to provide consulting, marketing, intermediary, and other services to the economic entities in Ukraine;
• the prohibition of any settlement operations with persons and entities in Ukraine;
• the prohibition to grant licenses, trademarks as well as prohibition of barter or lease transactions;
• the prohibition of any contracts with natural persons;
• the prohibition of other possible forms of foreign economic activity.

Thus, if a foreign entity collaborates with the residents of Ukraine, the application of special sanction can have significant negative consequences, making it impossible for such entities to collaborate with residents of Ukraine.

Is it possible to mitigate the risks and if yes, then how?

The only option completely removing such risk is radical, as it means suspending all the commercial operations with those “risky” countries.

However, such risks can also be mitigated by ensuring the most rapid lifting of sanctions.

Paragraph 14 Art. 37 of the Law on FEA determines the grounds for the lifting of sanctions: (1) foreign economic entities, on which the sanctions were imposed, eliminate all violations of legislation of Ukraine or (2) take practical measures that guarantee execution of this Law.

So, for the rapid lifting of sanctions in this case it can be demonstrated that foreign economic entities have taken practical measures to ensure the execution of this Law. These practical measures may be demonstrated by including in contracts with persons or entities from “risky” countries the provisions stating that goods are delivered exclusively for the use and / or sale within the borders of that particular country. And in case of resale outside that country, counterparties shall ensure compliance with all customs formalities established by the law of the country in which the shipment may be carried out. It is also possible to oblige the counterparty to include such a provision in the contracts under which the further resale of goods is executed. For the failure to observe such condition there may be stipulated sanctions or compensation for damages inflicted as a result of non-compliance with such terms.

Thus, businesses (including foreign ones) should consider the risk of temporary suspension of foreign economic activity in Ukraine if their products or goods are discovered to be imported to the occupied territories of Ukraine from third countries without customs formalities being carried out. We recommend establishing the possible safeguards in the event of imposition of these sanctions in advance.

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Kind regards,

© WTS Consulting LLC, 2017

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