In the Focus of the Reform Index: ARMA-Seized Assets at State E-Auctions: Why Transparency Matters

At the end of November, Cabinet Resolution No. 1250 came into effect. According to this resolution, from now on, the seized assets located in Ukraine under ARMA’s management will be exclusively sold through online auctions in the state’s Prozorro.Sale system. The trading system operates on two levels, with the auction organizer, with whom ARMA will contract for auction conduct, announcing auctions within the Prozorro.Sale system. Separate auction platforms (of which there are over 40) will serve participants, who will use them to submit applications to participate in the auction. This procedural change aims to increase the transparency and efficiency of selling seized property. Additionally, the resolution creates opportunities to sell seized property located abroad.

What else does the new mechanism entail? Will the state benefit from it? Will sanctioned individuals still be able to hide their assets abroad, and will the adopted resolution help utilize the enemy’s property for the benefit of Ukraine?

Transparent rules for asset sale

In the summer of 2023, ARMA opened a registry of arrested assets in criminal proceedings. As of the end of August 2023, the database contains approximately 36,000 records of assets transferred to ARMA’s management. Such property can be sold if a court decision authorizes its sale. However, the registry lacks a filter or consolidated information on assets put up for sale and those sold. To find information about this, one either needed to know the name of such an object in advance or manually review records for each object. Such access to information cannot be considered equal. This created an additional field for potential abuse and potential restrictions on access to purchasing ARMA-seized property. Members of the parliamentary temporary investigation commission (TIC) reported similar abuses while examining specific cases of the sale of such assets.

Furthermore, until recently, the property custodian was responsible for organizing and conducting the sale of assets on their own auction system. Therefore, they had access to information about those who applied to participate and theoretically could disqualify them at their discretion. Among other drawbacks of the previous regulation was the absence of requirements for the auction procedure, which allowed auctions to be conducted arbitrarily. Additionally, information about the sale of assets under ARMA’s custody was not accessible to the public.

Transferring the sale of seized property to electronic auctions in the state’s Prozorro.Sale system minimizes the risk of interference in the auction process and ensures transparency. This is because all information about who purchased the asset, price, number of participants competed for it, and more will be made public. This opens up the market for such assets to businesses and anyone interested in bidding on them.

Prozorro.Sale already has successful examples of selling assets belonging to Russians through e-auctions. For instance, since July of last year, the Deposit Guarantee Fund sold the property of former subsidiaries of Russian banks, JSC MR Bank and PJSC Prominvestbank, through the platform for over UAH 4.7 billion. On average, more than three participants bid on such auctions, and the asset prices increase by a quarter as a result of online trading.

In order to prevent situations where companies without the necessary experience are involved in organizing auctions, the resolution sets several requirements for auction organizers. Only authorized Prozorro.Sale platforms, through which winners of online privatization auctions have entered into contracts for a certain amount and have extensive experience in the system, can sell seized assets under ARMA’s management. They must have a minimum of one year of experience to participate in the selection process and at least two years to earn additional selection points.

The resolution also prevents the sale of seized assets to improper individuals. For instance, according to the procedure, buyers cannot be individuals associated with the aggressor state or under sanctions.

Selling Medvedchuk’s yacht or how to realize seized assets abroad

There is a high level of public interest in the seized property owned by individuals associated with the aggressor state. Some of this property is located in Ukraine, while a significant portion is outside its borders. Corporate rights, complete property complexes, elite real estate, land plots, and vehicles belonging to sanctioned individuals who are subjects of criminal investigations can all be used for the benefit of Ukraine if effectively managed.

In March of this year, the Lychakiv District Court of Lviv transferred the 92-meter yacht owned by Viktor Medvedchuk, which was seized in Croatia, to the management of ARMA. Its estimated value is EUR 200 million. Managing seized property located within foreign jurisdictions was a precedent, and Ukrainian legislation required adaptation to facilitate its realization and fund recovery into the state budget.

The updated resolution has unlocked the sale of foreign-seized assets. For this purpose, ARMA will select a foreign auction organizer with at least three years of experience in organizing the sale of such assets at the international level. 

The Cabinet of Ministers has also established safeguards to control the sale of seized assets abroad, specifying requirements not only for the auction organizers but also for buyers (who cannot be individuals associated with the aggressor state, sanctioned individuals, persons registered in offshore zones, etc.), and basic auction principles, including the transparency of information about the conducted auctions.

ARMA has stated its readiness to organize the sale of such assets with the support of dozens of foreign companies. Most likely, the first seized asset to be sold abroad will be the aforementioned yacht owned by Medvedchuk. Its sale will allow the assessment of the effectiveness of the established mechanisms and the interest of foreign investors in assets held by sanctioned individuals.

Conclusions

The sale of seized property, including that under sanctions, through e-auctions is a way to realize the market value of the enemy’s assets and generate revenue for the state through competition.

Currently, the Prozorro.Sale system facilitates the sale of assets across more than 20 markets, including the leasing of state and municipal property, land markets, permits for resource extraction, scrap sales, and others. Therefore, the government’s decision to sell seized property managed by ARMA through state electronic auctions is more than logical. Expanding transparent and comprehensible rules for the sale of seized assets will help increase revenue for the budget and improve the efficiency of managing these assets.