The reconstruction of Ukraine is likely to cost more than a trillion euros. The EU wants to use frozen Russian assets for this purpose. But is this feasible in accordance with the rule of law? An analysis by Juliane Kokott.
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"Russia must pay for its horrific crimes. ... (We) will ... ensure that Russia pays for the devastation it has caused with the frozen funds of the oligarchs and the assets of its central bank", tweeted Commission President von der Leyen.
The Union must and will give help and offer a perspective to the fighting and suffering Ukrainians. However, it must remain true to its own principles. The Union sees itself as a union of values. Its fundamental values are the rule of law and human rights, which are granted to every person, irrespective of their origin.
However, the scale of Russia's war of aggression in the middle of Europe seems unprecedented against the background of the post-World War II peace period. Therefore, one is looking for new ways to hold Russia financially responsible, without undermining the stability of the international legal order and trade relations in the long run. Here, a distinction must be made between a mere freeze and the definitive confiscation of assets that could then be used for the reconstruction of Ukraine.
Freezing as a Common Foreign and Security Policy Measure
The freezing of Russian assets can be carried out on the basis of Art. 215 of the Treaty on the Functioning of the European Union (TFEU).
Specifically, with regard to Russia's war against Ukraine, Art. 3 (f) of EU Regulation 269/2014, as amended on 14.11.2022, provides for the freezing of all funds and economic resources owned or held by persons benefiting from the Russian government. The same applies under Art. 3(g) to leading businesspeople or legal entities operating in economic sectors that are a significant source of revenue for the Russian government. On this broad basis, Annex I of the Directive lists an ever-growing number of persons and entities.
As of December 22, 2022, there were 1,412 natural persons, predominantly male, and 174 entities (companies, foundations, associations, movements).
The freeze is a countermeasure under public international law ("reprisal" under older terminology) through which Ukraine and, arguably, the EU can put pressure on Russia to end its illegal war of aggression. However, countermeasures must be proportionate, thus suitable for exerting pressure on the Russian regime in the first place.
Confiscation of Russian Private Property
Even after the other side's breach of international law has ended, freezing could continue to be exceptionally justified as a countermeasure to enforce reparations in a peace agreement.
However, freezing by way of sanctions and as a countermeasure under international law must be temporary. Its point is to exert pressure on Russia to end its criminal war of aggression against Ukraine. The Commission itself emphasises several times in its options paper that freezing is not a first step towards confiscation.
Nevertheless, it is not far-fetched to want to fall back on these frozen assets for the reconstruction of Ukraine. To do so, however, the Union needs a different legal basis than Art. 215 TFEU.
Expropriation on the Basis of Criminal Confiscation Regimes?
Here, the Union could exercise its competence to tackle organised crime to generate funds for the reconstruction of Ukraine. The expropriation of Russian assets may thus be permissible under the aspect of criminal confiscation. Through the competence conferred by Art. 83 TFEU, the Union may establish minimum rules in areas of particularly serious crimes with a cross-border dimension.
These Euro-crimes include, in particular, terrorism, illegal drug and arms trafficking, money laundering, corruption and organised crime. The "minimum rules with regard to the definition of criminal offences and sanctions" may also include the confiscation of instruments and the proceeds of crime. To expand access to Russian assets, the catalog of Art. 83 TFEU was recently expanded to include the new EU crime of "violation or evasion of sanctions" by the Council decision of November 28, 2022. According to a new Commission proposal for a directive on asset recovery and confiscation (COM/2022/245 final), the crime of sanctions violation would also include providing prohibited legal services, trust services and tax consulting services.
Far-reaching Confiscation Plans of the Commission
In the event of a criminal conviction, Art. 12 of the proposed directive provides for the confiscation of the instrumentalities and proceeds of the crime. This is unproblematic from a legal standpoint.
However, the third-party confiscation also provided for in the proposed directive goes further. According to Art. 13(1), it is also possible to confiscate proceeds or other property transferred by a suspected or accused person to third parties.
The prerequisite for this is that "third parties knew or ought to have known that the purpose of the transfer or acquisition was intended to avoid confiscation on the basis of concrete facts or circumstances (...)." Art. 13(2) mentions as examples the transfer free of charge or at a price significantly below the market price.
However, confiscation of third parties cannot be considered if the third party is acting in good faith (Art. 13(3)). Similarly far-reaching is the obligation to confiscate wealth of unexplained origin in connection with criminal activities (Art. 16 of the proposal).
The directive is characterised by the desire to be able to access Russian assets as comprehensively and effectively as possible. Accordingly, by way of one example, the proceeds of a Euro-crime to be confiscated are defined very broadly to mean "any economic advantage derived directly or indirectly from a criminal offence consisting of any form of property, and including subsequent reinvestment or transformation of direct proceeds and any valuable benefits".
The Mere Wealth of Oligarchs Is not Grounds for Expropriation
At least for the layperson, it is prima facie not easy to identify which assets should now be subject to confiscation. However, directives are in principle only binding for member states. When the provisions of the directives are transposed into national criminal law, they can be specified, especially to consider the strict principle of legal certainty that applies in criminal law.
Finally, with regard to the violation of sanctions, the concept of “proceeds of crime” would have to be adapted. This is because Russian assets such as yachts and villas are not, without further incrimination, the "proceeds" of crime. Even under the proposed directive, these yachts or villas would need to have been acquired at least through reinvested assets attributable to a Euro-crime. Or they would somehow have to be proceeds of the newly created EU-crime of sanctions violation or evasion, meaning, under the proposed broad definition of "proceeds," they would have to represent an economic advantage derived at least indirectly through the evasion of sanctions.
Some points remain unclear here, and not only for laypersons. Moreover, rule-of-law standards such as the principles of certainty and predictability of penalties, fundamental procedural rights, judicial review and property rights must also be respected with respect to Russian businessmen and oligarchs.
In Dubio Pro Reo Must Also Apply to Russian Businessmen
In any case, the confiscation competence conferred by Art. 83 TFEU requires a sufficient connection to an EU crime. However, broader definitions of crimes do not help if their commitment cannot be proven. Criminal acts may not be presumed but must be proven in compliance with the procedural guarantees conveyed under human rights conventions. There is strong political pressure to lower the burden of proof normally required in criminal proceedings to actually obtain Russian assets.
Could newspaper articles, Russian citizenship, undeclared wealth, or that a third party owns proceeds or other assets whose value corresponds to proceeds directly or indirectly transferred by a suspected or accused person to third parties (see Art. 13 of the proposal) possibly lead to a shift of the burden of proof?
In criminal law, strict procedural guarantees and rights of the accused apply, particularly the principle of in dubio pro reo, which a state governed by the rule of law must not deny, including to Russian businessmen.
Rule of Law Requirements for Confiscations
The Commission's planned confiscation measures are based on the Union's competence to "establish minimum rules concerning the definition of criminal offences and sanctions in the areas of particularly serious crimes" (Art. 83(1) TFEU). Therefore, criminal procedural guarantees may even apply if confiscations are not based on criminal convictions.
Moreover, asset confiscation can affect individuals similarly severely as a criminal penalty. The European Court of Human Rights, for example, has ruled that even the confiscation of land that has been used for illegal construction is only permissible if the guarantees provided by the Convention on Human Rights for criminal convictions are respected.
In view of these obstacles, a so-called active management of frozen Russian assets is being discussed in the EU. This is expected to result in net proceeds that could be used for the reconstruction of Ukraine. This ensures that the assets as such could be returned to Russia in accordance with international law after sanctions are lifted and, according to the Commission, preserves the principle of State immunity and the fundamental right to property.
State Immunity in Principle Prevents Expropriation of Russian State Assets
Another question to be raised is, to what extent frozen funds of the Russian Central Bank and other state assets can be expropriated to exert more pressure on Russia.
Such considerations are, however, limited by the principle of State immunity. Based on the principle of sovereign equality (Art. 2(1) of the United Nations Charter), no state and no state court is entitled to pass judgment on another state. This applies to sovereign action as opposed to private economic activity. Bank deposits of the Russian Central Bank established by or for the Russian state abroad are likely to serve sovereign purposes. Therefore, in principle, EU states may not take sovereign acts, such as confiscation and expropriation, with respect to the Russian Central Bank.
However, immunity for the core crimes of international criminal law and violations of ius cogens (genocide, crimes against humanity, war crimes, and crimes of aggression) is increasingly limited. Yet, this primarily affects the liability of heads of state and requires at least a close nexus to a very serious violation of international law. These already controversial exceptions do not cover the exploitation of a foreign central bank's accounts. Thus, without further development of international law, Russian central bank funds can hardly be expropriated.
Extended self-defense as an argument for expropriation?
Some thought has been given to the idea, that by expropriating Russian central bank funds and transferring them to Ukraine, the EU would enable Ukraine to better exercise its inherent right to self-defense. It could also be argued that Russia has forfeited its right to immunity through its flagrant violation of international law. Whether however, such a further development would serve the stability of international relations that international law is supposed to ensure, is not certain.
Such a new precedent could also further encourage Italian and Greek, and perhaps Polish, courts to expropriate German schools and embassy compounds abroad, for crimes committed by Germany during World War II. In any case, the International Court of Justice in The Hague has previously barred Italy from enforcing judgments that violate Germany's State immunity.
The Union of Values Should Not Lose its Credibility
The EU defines itself as a union of values that stands above all for guaranteeing, enforcing and disseminating the principles of the rule of law and human rights. A member state's compliance with these values is a prerequisite for the enjoyment of all its rights; payments to member states can be withheld in the event of rule of law deficiencies. This stems from the fact that, according to the case law of the ECJ, the values form the identity of the Union and provide for its credibility. The Union's measures must therefore also meet these high standards.
The freezing of certain Russian assets is justified as a countermeasure under international law to put pressure on Russia. Measured against the EU's own standards and with regard to the stability of the international legal order, however, the proposed expropriation of Russian assets remains a legal challenge.
It should also be kept in mind that states such as Russia and China could in the future invoke the precedents, that the Union may now be setting, against European states and their citizens. This applies to possible restrictions on State immunity, investment protections and property rights.
Prof. Dr. Juliane Kokott is Advocate General at the European Court of Justice and Titular Professor at the University of St. Gallen.
Accounts, Yachts, Villas: Confiscation of Russian Assets to Rebuild Ukraine? . In: Legal Tribune Online, 27.02.2023 , https://www.lto.de/persistent/a_id/51170/ (abgerufen am: 27.05.2023 )Infos zum Zitiervorschlag