Сivil forfeiture of unjustified assets through the prism of property rights protection

The news of the US Department of Justice’s claims for the civil forfeiture of assets from a company associated with the Ukrainian oligarch Ihor Kolomoisky in the amount of $70 million, which were illegally withdrawn from the Ukrainian PrivatBank, spread around the world’s most influential media1 . Although his activities have been investigated both in Ukraine and abroad, no country has yet issued convictions. So, on what basis does the US demand the confiscation of his property? US law2 provides an opportunity to file a claim for the confiscation of any assets related to a crime without waiting for a court conviction.

Almost a year ago, the Ukrainian parliament passed a new law3 reflecting the idea of civil forfeiture without a court conviction. At the same time, most of the controversy concerned the possible violation of human rights, in particular the unjustified restriction of property rights.

In this regard, this study is intended to answer an analytical question: what is the Ukrainian model of civil forfeiture of unjustified assets and does it provide protection of property rights through the prism of international standards and the best practices?

The methodological basis of the research is the analysis of legislative acts (Ukrainian, foreign and international): case studies when analyzing decisions of national courts, key decisions of the ECHR and national constitutional courts in terms of civil forfeiture of assets without a conviction by the court; analysis of approaches in the legal literature as well as positions, views, proposals for developing the foundations of civil forfeiture. The method of interviews to obtain opinions and positions of representatives of law enforcement and other state bodies regarding the practice of application and effectiveness of the institution of civil forfeiture of unjustified assets has also been used in the research.

This policy paper is based on a broad study and largely reflects its second part on the Ukrainian model of civil forfeiture. The full version of the study, which is available by the link, contains a more detailed analysis, in particular, of international regulations, foreign models of civil forfeiture in the US, the UK, Colombia, the EU.

1.1 Briefly about the prerequisites for the introdution of civil confisation without a court conviction

Civil forfeiture without a court conviction is an effective tool in the hands of law enforcement officers, which in world practice is considered an effective tool, including the fight against corruption4 , 5 . Various countries use it to simplify the process of returning illegally acquired property, not limited to lengthy and complex procedures within the framework of the criminal process. At the same time, the list of crimes, as a result of which such assets were obtained, and which can be confiscated in a simplified civil procedure, varies from country to country: from a very wide range (from theft to transnational money laundering – like in the USA), to very narrow (conditional linking only to illegal enrichment (as in Ukraine).

However, the reasons for the effectiveness of civil forfeiture without a conviction are common to all:

a) the standard of proof is established at the level of “preponderance of evidence”, instead of the criminal one – “beyond reasonable doubt”, which provides that “any doubt shall be interpreted in favor of the accused”;

b) a dynamic burden of proving guilt has been established – the defense side is deprived of the right not to testify against themselves or their relatives and friends, because the refutationof the unfoundedness of assets is imposed on the defendant;

c) the ability to confiscate property, even if:

• it is impossible to open criminal proceedings for procedural or technical reasons;

• criminal proceedings are closed;

• criminal proceedings are open, but the evidence confirming that the income were obtained illegally is not enough for a criminal standard of proof “beyond reasonable doubt”;

• the national legislation complicates the procedure of investigation in relation to certain categories of persons, such as members of parliament, judges, etc;

• the suspect is endowed with great power and has the ability to pressure witnesses, destroy evidence of a crime, etc.

Usually, the process of civil confiscation outside criminal proceedings can be conditionally divided into 4 stages: 1) gathering of evidence; 2) seizure of assets; 3) the trial phase, when the gathering of evidence is completed and directed to trial, at which the court determines whether sufficient convincing evidence has been provided and whether the rule of law was respected at the first stage; 4) confiscation of property6 .

The Ukrainian model of civil forfeiture, as noted, is associated exclusively with the institution of illicit enrichment and, in fact, is a “procedural-facilitated” version. Thus, the adoption of the law on the civil forfeiture of unjustified assets in Ukraine at the end of 2019 was due to the need to bring to justice the persons whose proceedings were closed as a result of the recognition of the provisions of the criminal law regulating the crime of illegal enrichment unconstitutional7 and the impossibility to do so due to the principle of irreversibility of the law in time. And there were 65 such industries, 27 of which had to be closed completely, and 38 – partially. The amount of assets, the legality of which was being investigated, reached half a billion hryvnias8.

Such a move is neither extreme, nor unexpected. Indeed, firstly, civil forfeiture in world practice is considered an effective tool in the fight against corruption9 , 10. Secondly, as the Colombian Constitutional Court rightly noted, the concept of illicit enrichment is much broader than the concept of a criminal offense – it does not fit within the framework of criminal law and goes into the sphere of property law; and its purpose is not only to impose punishment on the offender, but to deprive the offender of ownership of assets obtained as a result of illegal actions11.

1.2. International regulation and key elements of foreign models (US, UK, Columbia, EU)

Unjustified/corrupt assets are often located in other jurisdictions and the ability to obtain international assistance is an extremely important element of their confiscation. At the same time, in response to previous attempts by Ukraine to impose civil forfeiture, the US Department of Justice has officially warned that Ukraine will not be able to seize foreign property if legislative provisions do not comply with world practice of special confiscation and international principles of democracy and human rights12.

Quite often, the success of the civil forfeiture mechanism is kinked to the experience of Western democracies such as the United States and Great Britain13.

Indeed, historically, the concept of asset confiscation outside of criminal proceedings originated in the countries of the Anglo-Saxon legal system and is based on the idea that if a “thing” breaks the law, the state has the right to confiscate it. In the United States, civil forfeiture/non-conviction based forfeiture laws apply to two categories of property: proceeds of crime and instrumentalities. That is, the proof of the connection between property and criminal activity is a mandatory component. For example, the already mentioned civil lawsuits for the confiscation of two commercial real estate objects acquired with funds withdrawn from Privatbank14 are based on the links with the money laundering crimes under investigation. At the same time, unlike in Ukraine, the civil forfeiture of unfounded assets as a purely anti-corruption mechanism directed against unscrupulous American officials is not established in the USA.

The UK, thanks to relatively recent changes in the legislation in 2018, introduced a special institution of civil confiscation without a court conviction – unexplained wealth order (UWO), – which differs from the American one and is intended to oblige a person to explain the origin of their property. First, the civil procedure is initiated in personam – against the person who owns the asset, and not in rem – against the asset. Secondly, state authorities should not prove the connection of property with a predicative offense. Third, the court decides on the basis of the principle of “evidence preference” that the assets were obtained from unknown sources, without specifying which crime/other illegal action was the source of the proceeds. Fourth, it is the UWO that transfers the burden of proof from the state to the owner of the property, who must prove that the asset’s origin is legal15.

Despite the pessimistic forecasts, now this institution is actively working16. With regard to possible infringement of property rights, the British court has already ruled17 that the intervention takes place only in case of loss of the value of the asset. And since the requirement to simply explain the legality of its origin does not in any way affect its value, there is no violation of Article 1 of Protocol 1 (right to property) (see paragraphs 98–100 of the National Crime Agency v Zamira Hajiyeva decision).

It is important to understand the effectiveness of the application of this mechanism not only in developed countries, but also in developing countries18. Colombia ranks 96th in the Corruption Perceptions Index, Ukraine is 126th, and the United Kingdom and the United States are 23rd and 12th respectively.19The civil confiscation model of unfounded assets in Colombia, like the UK, pursues the same goals as Ukrainian law. At the same time, Colombia will better illustrate the difficulties that Ukraine can face in implementing similar legislation.

Colombian civil forfeiture model exists alongside the legally criminalized illicit enrichment. While the most comprehensive and detailed of its kind in Latin America20, the law did not work well in practice, as the process became lengthy and complicated due to many appeals of both evidence and decisions21. Insufficient staffing in the prosecutor’s office, corruption in local investigative bodies and unwillingness to cooperate with prosecutors, unclear data in registers (especially land registers), imperfect asset management22 and even destruction of documents – all this prevented the effective implementation of the law23.

In terms of respecting property rights, the Colombian Constitutional Court determined that in matters of conflict of private and public interest, the latter should be preferred, because the legal system protects the rightful owner, and the purpose of the law is to hold down the results of illegal activities24.

The practice of European countries also provides for many different approaches to civil confiscation, with most countries enshrining the American model in their legislation.

General European standards that rely upon states to protect property owners’ rights during civil forfeiture without conviction are best reflected in the practice of the European Court of Human Rights.

When considering complaints in the application of confiscation, the European Court of Human Rights formulated an approach according to which the compliance of national law with Article 1 of Protocol No. 1 to the European Convention on Human Rights is determined, which essentially guarantees the right of individuals to peaceful possession of their property and the right of the state to exercise control over the use of property in accordance with the general interest25.

The ECHR’s approach is to provide answers to the following questions: 1) Is the confiscation legal, that is, is it provided for by the national law? 2) Is there a legitimate aim being pursued? 3) Are the measures applied (in our case – confiscation) proportional to achieve this goal?

With the answers to the first 2 questions, difficulties almost never arise. So, firstly, if confiscation is provided for in the law clearly and comprehensively, it is considered legal. Secondly, if the confiscation was applied regardless of the existence of a criminal charge and is rather the result of a separate “civil” judicial proceeding, the purpose of which is to return property acquired illegally, such a measure qualifies as state control over the use of property in the sense of the second paragraph of Article 1 of Protocol No. 1 to the Convention26. After all, confiscation in the case of combating corruption is carried out in accordance with the general interest, so that the use of property is not a benefit for its illegal owners and does not harm the society.

Regarding the third question (in terms of proportionality) the situation is somewhat more complicated, since the court requires that a “fair balance” be sought between the general needs of society and the requirements for the protection of fundamental human rights. Although, in general, there are not many cases where the Court has found the interference with property rights disproportionate, according to the researchers, this is due to the lack of clear criteria for the disproportionateness of such interference and the procedural nature of the requirements that the Court puts forward to domestic law27. Most often, the Court approves a confiscation if it28:

a) is part of comprehensive national strategies to combat serious crimes, b) defendants in such cases should be provided with a reasonable opportunity to prove their own arguments in national courts, both in writing and orally, c) hearings are held in a competitive manner, d) evidence together with supporting documents are dealt with properly.

Perhaps the greatest criticism is caused by the possibility of confiscation of property from persons who are not actually involved in the commission of any crimes that led to the acquisition of the disputed assets, are not officials who may be suspected of corruption, and are not members of their families. At the same time, the purpose of civil forfeiture is not to punish persons, but to confiscate property obtained by illegal means.

The guidelines for the application of Article 1 of Protocol 1 of the ECHR (protection of property rights) state that the ECHR provides the authorities with the opportunity to apply confiscation measures, including from any persons who were believed to have owned and disposed of illegally obtained property on behalf of suspected offenders, or any others without bona fide acquirer status (Raimondo v. Italy; Arcuri and Others v. Italy; Morabito and Others v. Italy; Butler v. the United Kingdom; Webb v. the United Kingdom; Saccoccia v. Austria; Silickienė v. Lithuania)29.

Similar requirements are enshrined in the legislation of the countries of Eastern Europe and Central Asia OECD30, 31. A similar approach is used by US judges, which they call “retroactive law” (used in United States v. Lazarenko32) and which stipulates that the state is deemed as the real owner of the confiscated property at the time of the illegal actions. Therefore, if the property was transferred to the ownership of another person, it is still subject to confiscation, unless the new owner provides evidence that the property was acquired by him as a result of a good faith transaction on a reimbursable basis and does not prove that he did not know that the property is subject to confiscation.

Thus, in accordance with international standards, third parties from whom property may be confiscated include: 1) nominal owners – any third parties, and not only family members or close persons who owned and disposed of illegally obtained property on behalf of the suspects; 2) unscrupulous acquisitors.

Thus, as a general rule, civil forfeiture of assets outside criminal proceedings is not recognized by the ECHR as a violation of property rights, if the state adheres to the principles of legality, legitimacy and proportionality and in practice ensures the procedural rights33 of asset owners.