‘Raiding’ in Ukraine in the 21st century is doing well again

A multi-stage offence

The first stage of grabbing someone’s property is the submission of information on ownership of specific property or property rights by a dummy, based on counterfeit documents or a court verdict, to a state register of real estate or a register of corporate rights. At this opportunity, the information related to the lawful owner is deleted.

The next stage is the forced seizure of the property under the guise of exercising the owner’s rights. Subsequently, the seized facility is sold to the new “bona fide” purchaser or to a whole chain of such purchasers.

Each of those elements separately seems legal. The reason is that in objective terms, ‘raiders’ activities do not differ from corresponding legal actions undertaken by the lawful owner.

The change of records usually takes place under court decisions and proving that a judge issued the decision illegally is very difficult. Unless the judge clearly violated the procedures, holding him/her accountable is usually impossible. Any decision issued by the judge will formally look legal, even if it is based on counterfeit documents. On the other hand, proving that lawyers consciously submitted false documents to the court is extremely difficult since it would be necessary to show that they had been aware that the documents were false.

The physical seizure of the property by ‘raiders’ using force bears signs of plundering (robbery) but it takes place under the guise of official records in the state register. This gives the measures undertaken an appearance of legality and deprives police authorities of the possibility to counteract the seizure effectively, since it looks like a legitimate entry of the owner into their property.

“The subsequent sale of the seized property to a “bona fide” purchaser also looks like the legal exercise of the owner’s right to dispose of their assets,” Sergiei Jarosz, a lawyer and former advisor to the Ukrainian Minister of Finance, describes in Rakurs information service, the vicious circle of appearances of legality constituting the ‘raid’.

“It is obvious that the basis of the ‘raid’ is a situation where the moment of submitting information on a person’s rights to specific property to the state registers does not coincide with the moment of voluntary transfer of physical control of such property by the previous owner. Thus, the ‘raid’ phenomenon is directly linked with the system of the functioning of the state registers,” Jarosz explains.

How the ‘raid’ overcame corruption

The ‘raid’ phenomenon in Ukraine is nothing new. The Ukrainian economy faced the first wave of such seizures in the years 1996-1998. Subsequently, regulations were repeatedly amended in order to mitigate such threats as far as possible. First of all, the system of Ukrainian state registers evolved, eventually to take a centralized form controlled by the Ministry of Justice in 2013.

The ‘raid’ was curbed to make any entry in the records required paying a bribe to the clerks, which ultimately landed in the pockets of people from the Yanukovych team. A semi-official tariff of such bribes was calculated depending on the size and location of the real estate.

Under the anti-corruption program, in 2015 the system was changed by decentralization and delegation of powers to perform changes in the register to several thousand registrars and notaries, acting practically without any control by the state. At present, notaries and registrars are the ones who assess independently whether the documents presented to them are sufficient to perform changes in the register and the Ministry of Justice cannot intervene in this process. State ownership certificates – corresponding to official extracts from land and mortgage registers and the register of entrepreneurs – were also eliminated. The changes entered into force as of January 1^st, 2016.

“Those reforms have triggered another wave of raiding, the major symptom of which is the massive use of counterfeit documents. In order to change the owner or the manager of a legal person registered in Kiev, it is sufficient to present a counterfeit report with a falsified signature to a registrar somewhere in the countryside, and in order to change the owner of real estate – a counterfeit court verdict. Next, the stolen property is sold to a “bona fide” purchaser. It is doubtful whether the judicial authorities can find the person who changed the records using counterfeit documents. In most cases, it is also impossible to hold the registrar accountable since, in formal terms, he did not violate any law, while proving the fact of his collusion with the fraudsters is almost impossible,” Jarosz says.

At the beginning of last year, Volodymyr Pylypenko, a representative of Ukraine in the Venice Commission, warned that the changes proposed by the government could have dramatic consequences.

“Should the new law be passed, it is already possible to foresee tens or perhaps hundreds of decisions being adopted by district courts in favor of the unemployed and homeless for whom ‘donors’ bought shares only to apply to the court on their behalf. The work of tens or even hundreds of large companies may be blocked by the decisions of such courts,” commented Pylypenko for the Ukrainian edition of Forbes.

Farmers are the main victims

‘Raider’ attacks have been known in Ukraine for as long as 20 years, but in winter 2016 a new wave of this phenomenon was observed across all regions of the country.

“Attacks were targeted at enterprises of any ownership form, in any condition, holding any assets or parcels of land – farms, warehouses, petrol stations, shops, pharmacies, car parks, hauliers, construction companies,” Forbes described. The magazine provides a price list: a bribe to a judge for issuing a false verdict, based on which companies are taken over, is an expenditure in the range of USD5-25,000 and the notary fee for authentication of false documents ranges from USD100 to USD1,500.

One of the major areas of raiders’ activity has become the agricultural sector, one of the few sectors generating real profits. According to the data revealed during a farmers’ assembly held in Kiev at the end of October, during the last year the number of farms in Ukraine dropped by almost one-fourth (from 27,000 to only 20,500). It was claimed that raiders are responsible for the decline in the number of farms.

In the Dnipropetrovsk region, 100 kilometers from the Donbas front line, there is a genuine war with raiders who took over two farms with a total area of several thousand hectares, “buying” each of them for a mere UAH1,500, i.e. approximately USD60.

The owners found out about the “sale” by accident. The complaint that they filed to the Ministry of Justice against the illegal re-registration of companies was ineffective. The new “owner” using hired hooligans blocked the harvest. In response, the farm employees blocked one of major roads of the Dnipropetrovsk region.

“All phone calls to law protection services are concluded with the same answer: defend it yourselves. Without the support of state officials such manipulations would not be possible,” argues Valeria Chomutina, representing the farm owners robbed by raiders.

Western aid in raiders’ pockets

Even the Ukrainian nuclear energy sector has been threatened, along with the funds of Western financial institutions allocated to it.

At the end of October 2016, the Ukrainian media informed of the seizure of the company Piwdentepłoenergomontaż (PTEM) – a design and construction institute, which has built 15 units of Ukrainian nuclear power plants.

As described by Forbes, five registrars from Kiev conducted a series of operations and as a result the composition of the company management board was changed. “Later on, ‘court executors’, assisted by Titushky, holding new extracts of state registers entered two offices of the company and presented several enforceable court decisions concerning debt; documents related to the change of managers; as well as decisions on the transfer of money and assets to other companies. Passwords to bank accounts were immediately changed,” the magazine reported.

Besides the head office of the company, the raiders also attacked one of its daughter companies, PTEM-Engineering. This is the company that received funds from the Western Europe for the construction of a storage site for used nuclear fuel from the Chernobyl Power Plant.

The raiders were caught due to inconsistency. In accordance with the company’s Articles of Association, any changes in the management board may be performed only by the general meeting of shareholders, whereas they provided a counterfeit resolution of the supervisory board as the basis for changes in the register.

Although it was possible to restore the former management of the company, Forbes informs that control over bank accounts and the money has not yet been recovered and it is unknown whether it may be recovered at all.

“Based on my experience I can say that the process of recovering control over real estate seized illegally is not fast and may take from several months to several years. In the case of money, the issue is more difficult. If the raiders manage to siphon money to other companies’ accounts, its recovery is problematic,” commented Andrey Molchanov, an advocate dealing with raid cases.

A text message will tell you the truth

Even the Ukrainian Parliament admits that the situation related to raiding looks dramatic. In October, the Parliament passed an act which should help in curbing this practice.

“Today, full protection of property rights, both in relation to real estate and corporate rights, is unavailable. Illegal seizure of property rights held by legal and natural persons has become one of adverse factors affecting the investment climate in Ukraine and confidence of Ukrainian citizens about their future. Therefore, immediate statutory regulation of this issue is required,” wrote the authors of the draft act.

The changes introduce more stringent requirements in relation to making entries. However, they do not change the rule that maintenance of the registers which, in fact, remains beyond the competence of the state. A record in electronic form will continue to be the only proof of holding a property.

The Ukrainian government has also announced the introduction of changes facilitating the prevention of raids. However, they have made no reference to the issues of tightening the system and restoring the reliability of registers. Instead of state guarantees of an ownership immunity, company shareholders and real estate owners were offered registration in an IT system which will automatically inform them of any changes performed behind their back by text messages.

“You can already register at the Ministry’s website and its electronic office, providing a telephone number, and receive information on your property on a 24-hour basis,” informed the Minister of Justice, Pavlo Petrenko.