In April 2022, a criminal case was opened in the United States against Russian oligarch, media mogul, and founder of the Orthodox TV channel “Царьград ТВ”, Konstantin Malofeev

He is accused of violating sanctions imposed by the United States back in 2014, during the first stage of the Russian-Ukrainian war.

The indictment states that Malofeev, contrary to the established prohibitions, hired an American citizen, Jack Hanick, to work for Malofeev's television companies in Russia and Greece, as well as to participate in the acquisition of a television company in Bulgaria. 

In addition, Malofeev attempted to retroactively re-register his USD 10 million US investment to a shell company in order to circumvent the sanctions imposed on him. 

Simultaneously with the indictment, the prosecutor's office announced the confiscation of Malofeev's assets. On 2 February, the court granted the prosecution's motion to confiscate Malofeev's US assets totaling USD 5.4 million.

To better understand how effective such a mechanism of asset forfeiture can be, and whether the path paved by the Malofeev case has the potential to become a ‘crowded avenue’ that will channel Russian funds to Ukraine's needs, we need to understand the legal aspects of this case and the laws underlying the prosecution and confiscation in the United States.

In the United States, a special law (the International Emergency Economic Powers Act or IEEPA) grants the President special economic powers to respond to an ‘atypical and extraordinary threat’ to national security, international politics, or the economy that originates in whole or in part from abroad.

For the special powers regime to be triggered, the President must declare a national emergency about the threat.

In the case of the events of 2014 in Ukraine, such a national emergency was declared by then-President Barack Obama's Executive Order of 6 March 2014. It stated that ‘the actions and policies of persons, including those who have established governmental authority in the Crimean region without the authorization of the Government of Ukraine, that undermine Ukraine's democratic processes and institutions, threaten its peace, security, stability, sovereignty, and territorial integrity, and facilitate the misappropriation of its assets pose an unusual and extraordinary threat to the national security and foreign policy of the United States of America’. 

The national urgency regime introduced by Executive Order 13660 in relation to the Russian-Ukrainian war was constantly renewed by subsequent Executive Orders (No. 13661, No. 13662) and has not been terminated to date.

The same Executive Order 13660 defined broad categories of persons whose US assets should be blocked. 

These include, in particular, ‘persons responsible for, or complicit in, or involved, directly or indirectly, in 

• (A) actions or policies that undermine democratic processes or institutions in Ukraine; 
• (B) actions or policies that threaten the peace, security, stability, sovereignty or territorial integrity of Ukraine.

Concerning a person whose assets are blocked, the Decree prohibits, first, any disposition of any interest in property in the United States, second, the receipt of funds, goods, or services from US persons, and third, the receipt of funds, goods or services by US persons from such person.

While the Presidential Decree defines broad categories of persons whose assets are subject to blocking, the Office of Foreign Assets Control (OFAC) determines the lists with specific names. Malofeev was added to such a list on 19 December 2014.

Section 50 U.S.C. 1705(c) makes it unlawful to violate, attempt to violate, conspire to violate, or cause to be violated any permit, order, regulation, or prohibition imposed under IEEPA. The penalty is up to 20 years imprisonment.

Malofeev's criminal charge is that, after OFAC added him to the list of sanctioned persons, he took action in violation of the restrictions and, in collusion with others, attempted to dispose of the blocked assets.

According to the indictment, in 2013, Malofeev hired a US citizen named Jack Ganik to work for a new Russian cable television news network that was being created by a Russian oligarch. Although the hiring took place before Malofeev was placed on the sanctions list, it was a violation of the sanctions to continue to employ an American citizen after the Russian's assets had been frozen. 

It is important to note that Konstantin Malofeev directly negotiated with Hanik on the latter's salary, payment for his accommodation in Moscow, and a Russian work visa. The oligarch paid Hanik through two separate Russian companies until the end of 2018.

Malofeev also sent a US citizen to work on a project to create and manage a Greek television network, as well as to work on the acquisition of a Bulgarian television network.

The inclusion of the Russian media mogul on the sanctions list resulted in the blocking of shares in a Texas holding company worth USD 10 million, which Malofeev acquired through a shell company registered in Seychelles. 

To get the asset out of the sanctions, Konstantin Malofeev, with the participation of Jack Ganik, agreed to sell the Seychelles company for one dollar to his business partner from Greece. At the same time, the contract of sale of the rights to the company was dated retroactively to make it appear that the disposal of the company took place before Malofeev was added to the sanctions list.

Based on the facts alleged in the indictment, Malofeev is charged with knowingly and willfully, alone and in concert with others, violating IEEPA (50 U.S.C. §1705), Executive Orders (E.O. 13660, E.O. 13661, E.O. 13662), and the Code of Federal Regulations (C.F.D. §589.201).

In seeking the confiscation of Malofeev's assets, the prosecution relied on 18 U.S.C. 981(a)(1)(C), entitled ‘Civil Forfeiture’. 

Under this provision, any property, both real and personal, that constitutes the proceeds of ‘specified unlawful activities’ or conspiracy to engage in such activities is subject to forfeiture in the United States. On this basis, the prosecution sought the forfeiture of all property that constituted or derived from the proceeds of the acts described in the indictment.

According to media reports, District Judge Paul Gardephe (Manhattan Federal Court) allowed the prosecution to confiscate Malofeev's funds totaling $5.4 million. Malofeev did not appeal the decision to confiscate.

According to "Європейська правда", citing CNN, US Attorney General Merrick Garland said that the funds would be transferred to help Ukraine. 

This became possible due to the adoption of the relevant amendment to the State Budget Law for 2023, which paved the way for the transfer of confiscated assets to Ukraine. 

Thus, Malofeev's case may become the first case in which funds confiscated from accomplices of Russian military aggression will be returned to Ukraine. 

Previously, the economic sanctions applied were intended to have a preventive and precautionary effect (to cut off the power supply to the Russian military machine and discourage big business from supporting Russia). But now, there is hope that the sanctions will also serve the purpose of compensating Ukraine and Ukrainians for the damage caused. 

Of course, the amount of confiscated assets is currently disproportionate to the losses that need to be compensated. But we can hope that this is just the beginning.

However, optimism should be tempered, as the legal mechanism used in the Malofeev case may be difficult to scale up. 

First of all, it is important to note that blocked assets are not automatically confiscated, but only as a result of criminal charges against a specific person who has committed a federal crime by violating the restrictions imposed by the sanctions regime. 

Therefore, to successfully scale up this practice, the law enforcement system needs to actively work to identify and investigate all facts of sanctions circumvention by persons on the sanctions lists. This can take a lot of time, which is confirmed by the Malofeev case: the events described in the indictment took place in 2014-2018, and the decision to confiscate the assets has only been made now. 

Therefore, while this case undoubtedly deserves its place in modern history, the key question is how many Russian oligarchs will be successfully prosecuted and their ill-gotten assets confiscated? 

While this path cannot replace broad measures that would cover a significant portion of the damage caused by the war, it can certainly be used as an additional means of bleeding the Russian war machine to the benefit of the Ukrainian economy.

The civil forfeiture applied in the Malofeev case is an alternative to the ‘traditional’ mechanism of confiscation in criminal proceedings. An important advantage of civil forfeiture is that it does not require a verdict finding a person guilty of a crime. 

Property derived from criminal activity can thus be confiscated before the criminal proceedings for the relevant offense are completed. This is exactly what happened in the case of Malofeev, who has not yet been found guilty and the criminal proceedings against him are ongoing.  

A similar mechanism, with lower standards of proof and shorter timeframes, is already in place in Ukraine: the HACC has now issued 11 decisions at the request of the Ministry of Justice that have confiscated assets of Russian oligarchs, MPs, propagandist rectors, and the ‘fugitive president’ Yanukovych.

The decision of the US court to confiscate the assets of Russian oligarch Malofeev will not be able to cover a significant part of the damage caused, but it demonstrates the effectiveness of civil forfeiture as a promising legal tool. In this sense, Malofeev's case may serve as a signal to other states seeking legal mechanisms to compensate for the damage caused by Russian aggression through confiscated funds of war collaborators.

Source: Українська правда