Crux (#12 December 2019)

Legal Digest

Last month was rather rich in legislature-changing activity, and some of these actions caused strong waves of discussion, particularly the so-called Unbundling Law and Draft Law No. 2233, both of which caused quite noticeable changes in the energy field. Other substantive legislative acts are the governments Drafts On Regulating Gambling and No. 2179 On Preventing and Countering Legalization (Laundry) of Proceeds of Crime, Financing Terrorism and Financing Proliferation of Weapons of Mass Destruction. The UJBL editorial team asked experts to provide some comments on these legal issues.

The Ukrainian Parliament adopted Law No. 2239-1, known as the Unbundling Law. Why should results be expected?

Taras Dumych, Partner, Wolf Theiss

The Unbundling Law, the draft of which was passed by the Parliament on 31 October 2019 and was consequently signed by the President into law, is a law which carries two messages: good and bad. Lets start with the good one it unblocks the unbundling process and gives a chance for it to be actually completed by the end of 2019.

Meeting the above deadline is important, not only from the point of view of Ukraines commitments under the Energy Community Treaty (ECT), but also from the point of view of Ukraines position in the three-party negotiations process involving Ukraine, the EU and Gazprom on the transit of Gazproms gas via Ukraine from 2020 and beyond. Having a new certified gas Transportation System Operator (TSO) in place will enable Ukraine to increase its leverage in its bargaining position that all, Ukraine and its GTS, EU and its TSOs and Gazprom, should be subject to the same rules of the game, as provided for by the ECT and applicable EU regulations.

However, theres also a bad message attached to the Unbundling Law: it seems that the Ukrainian Government has given up on the idea of involving a foreign partner for the TSO. The Unbundling Law has completely revised Article 21 of the Natural Gas Market Law, as a result of which the options and terms for a possible involvement of a partner for the TSO have been completely deleted, while the sanctuary of sole state ownership over the TSO has been cemented.

Although there have been discussions about candidate-partners not willing to pay for the ticket to actually become the TSO partner, that should not cause surprise the TSO would not be the owner of gas transportation assets anyway, as these would remain in state ownership. The real value of the partner will not be in the state getting a lump sum amount for the stake in the TSO, but in bringing a real, preferably EU-based partner, who will be interested and capable of working out a business deal with Gazprom (which certainly will not be easy) to ensure that the transit of gas via Ukraine continues on a long-term basis and in commercially feasible volumes beyond 2020.

For the moment, the Unbundling Law is the victory of a short-term view over a long-term view. For the purpose of retaining optimism about the future of the Ukrainian gas transportation system, one should view the law as a transitional law to the ultimate legal framework that is actually needed.

The Ukrainian Parliament adopted Draft Law No. 2233 on 12 November. What are the provisions in the Draft?

Maksym Sysoiev, Counsel, Dentons

On 12 November 2019 the Ukrainian Parliament adopted in the first reading Draft Law No. 2233 of 4 October 2019 On Introduction of Changes to Law of Ukraine On the Electricity Market (available in Ukrainian athttp://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=67031). Inter alia, the Draft Law is aimed at further regulation of the PSO mechanism for buying electricity under the green tariff (the GT) or auction price (to be established on the basis of the auction price which will be awarded during auctions which are expected to be launched in 2020). The Draft establishes the power of the Cabinet of Ministers of Ukraine (the CMU) to levy on the State Enterprise Guaranteed Buyer (GB), purchaser of electricity produced from renewables under the current scheme of support in Ukraine, a special obligation to direct the difference between incomes and expenses gained during its fulfilment of special obligations in the amount approved byNational Commission On State Regulation in the Sphere of Energy and Utilities (the Regulator) to cover expenses related to performance of special obligations. In accordance withthe Law of Ukraine On the Electricity Market one such obligation is the purchase of all electricity produced under GT and auction prices.

Please note that earlier, on 21 August 2019, the CMU introduced changes to theResolution On Imposing Special Obligations on the Participants of Electricity Market to Secure General Social Interest in the Process of Electricity Market Functioning approved by Resolution of Cabinet of Ministers of Ukraine No. 483 of 5 June 2019 and starting from 29 August 2019 the Resolution established a similar special obligation for the GB (it specifically covers producers under GT and the auction price, but is silent with respect to approval of the respective amounts by the Regulator). In accordance with the changes to the Resolutionthe amount of electricity produced by PrJSC Ukrhidroenergo to be sold to GB was increased from 20% of all produced by its hydro power plants to 35%, and electricity produced by State Enterprise National Nuclear Energy Generating Company Energoatom at nuclear power plants from 75% to 90%. Now, under the Resolution, the electricity is sold to the GB at the fixed price. PJSC NPC Ukrenergo, as the transmission system operator, and distribution system operators, shall purchase 80% of electricity necessary for compensation of technological losses from the GB at capped prices. This is because the GB may sell electricity which has not been sold to the mentioned operators and suppliers of universal services (suppliers of electricity to households under the regulated tariff) on the day ahead market. Thus, the GB should able to accumulate income as a result of the performance of such public service obligations, which may be used to pay for electricity produced under the GT.

Regardless of the foregoing changes to the Resolution, The Electricity Market Law does not provide for such a special obligation or the CMUs powers to levy it. Thus, the respective special obligation can be challenged due to its inconsistency with primary legislation. The discussed change, that is set to be introduced by the Draft Law, will help the Ukrainian government to arrange sustainable financing of the GB via respective special obligations until other market mechanisms are introduced.

Please also note that the Draft Law also introduced powers of the Regulator to establish price caps on the day-ahead market and intraday markets until 1 July 2023, which is evaluated by experts and EU as a negative change because it distorts competition on the electricity market. Please note that price caps were established temporarily with the launch of the market on 1 July 2019 for 9 months by the respective rules of the day-ahead market adopted by the Regulator even though such powers were not envisaged by The Electricity Market Law. The Draft Law will give the Regulator powers to establish price caps.

Parliament approved in the first reading Draft Law No. 2300 on cancellation of the government monopoly on ethyl spirit production from 1 January 2020. What are the main arguments for adoption of this Draft?

Oleksandr Aleksyeyenko, Partner, Marchenko Partners

Draft Law No.2300 on demonopolization of the spirits sector is expected to be adopted by the end of 2019. The Draft provides for cancellation of the state monopoly for production of spirits from 1 January 2020; establishing licensing terms for the production and wholesale of spirits; complete liberalization of the export of spirits by spirits producers; allowing import of certain spirits only by state companies until 1 January 2022. The Draft predominantly aims to deshadow the spirits sector of the Ukrainian economy.

Ukrspyrt, the state-owned company subordinated to the Ministry for Development of Economy, Trade and Agriculture, is currently a major producer of spirits in Ukraine. However, the status quo may change quite soon due to arrival of private players to the sector. Ukrspyrts financial results have been continually falling and the overall activity of the sector has lacked transparency and integrity for many years. The recent fine imposed by the AMCU on Ukrspyrt in 2018 for abuse of dominance clearly demonstrated where the current state monopoly was in terms of its role on the spirits market. Its commercial policies have been recognized by the AMCU as sporadic, non-transparent and discriminatory.

Another declared parallel aim of the government is to privatize state-owned spirits companies. However, in such circumstances, rapid demonopolization of the spirits sector may make such state-owned spirits facilities less attractive for privatization.

Overall, one may only welcome another sector being open to competition and expect fairer competition and ethics rule to operate in the sector.

Generally, adoption of the law will not automatically eliminate all transparency problems with the spirits industry but will create a completely new environment for the sector with private companies playing significant roles. Greater private involvement in the industry frequently brings more competition with more efficient functioning of the economy.

Yet, one should expect to combine decent declarations with intricate approach to the spirits industry. Such approach shall provide for the license terms being clear and straightforward, practice of the license terms application being non-discriminatory, new players at the market treating their counterparties fairly and non-discriminatorily. The regulators should be quite thoughtful and attentive and not substituting the current state monopoly with a potentially abusive dominance of a couple of private market players.

On 17 October Draft Law No. 2285 which is intended to regulate gambling was registered in Parliament. How topical is this issue at the moment?

Iryna Glushchenko, Associate, AEQUO

Fair play or Foul play? The business of regulating gambling in Ukraine may be just as unpredictable as a game.

The attempt to regulate gambling in Ukraine is definitely not a one-and-done kind of affair, despite apparent efforts to make it pass as such.

Gambling appears to be a painful issue here, despite Ukraine being a potentially lucrative market. Draft Law No. 2285 is roughly a decade away in time from the law that banned gambling in emergency fashion in 2009. The ban made gambling illegal, yet astonishingly prevalent. Its aim was to eliminate all gambling once and for all while the new Draft is one of a few dozen draft laws proposed in the last decade that call for regulating all gambling via a single law. Interestingly, the law that banned gambling and the laws that aim to reinstall it, cite the same reasons for their adoption protection of human rights and state interests. The Draft Law also aims to promote investment.

The biggest takeaways of the new Draft are a) a special agency to regulate gambling, b) all known kinds of gambling and their online versions will be allowed, c) a registry of self-limited people will be introduced, d) there will be a limited number of licenses issued, and e) gambling will have to adhere to international rules on fair play.

The Draft Law is convoluted with details on how to organize casinos, but lacks a broader perspective. The goals of the Draft do not match the means proposed by it. Against the backdrop of fighting ludomania the drafters suggest confining casinos to 5-star hotels while allowing all sorts of online gambling to a wide public and actual betting and lottery points to be established without serious restrictions.

A Chinese proverb says: If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time. The same rings true for regulating gambling. Certain decisions are fine if taken at the spur of the moment, as this may add spice to life. Others should follow a thorough consideration. Lawmaking takes it to another level but making good laws requires having a vision of a society and its future.

Regulating gambling requires knowing the most popular and trouble-causing types of gambling for this country, and what loopholes are being used to overcome existing strict limits. Moreover, it requires knowing where Ukraine wants to arrive in terms of gambling, be it a direction towards more sport-style gambling like poker clubs to cater to sophisticated gamers, or lavish casinos confined to five-star hotels to attract wealthy tourists. Or there may be a way to take a slow approach and eliminate the obvious negative consequences that any mafia produces in a society. As none of this is found in the Draft Law and its preparatory documents, the law, if adopted, risks becoming a situational document likely to be changed once the tables turn.

Parliament approved Draft Law No. 2179 in the first reading. What are the key provisions of this Draft?

Rodion Kokosh, Senior Associate, EQUITY

The Verkhovna Rada approved in the first reading Draft Law No. 2179 On Preventing and Countering Legalization (Laundry) of Proceeds of Crime, Financing Terrorism and Financing Proliferation of Weapons of Mass Destruction, which is a version of the FATF Recommendations and the 4th Directive of the European Union against money laundering and financing terrorism adapted into national legislation.

The aforementioned Directive has already been implemented in all EU member states and is mandatory for countries intending to join the EU. Moreover, adoption of the finalized Draft Law will help not only to reach a new quality level of financial monitoring, but also ensure receipt of the second tranche of macro-financial assistance from the EU in the amount of EUR 500 million.

It is worth pointing to the main positive changes introduced by the given Draft Law:

making transactions exceeding 400,000 hryvnas rather than those exceeding the present 150,000 threshold transactions to be reported on to the State Financial Monitoring Service of Ukraine

refining the procedure for business entities to disclose their final beneficiaries (controllers) and strengthening requirements for identification by initial financial monitoring entities of beneficiary owners of their clients

reducing the features of threshold transactions (under the new Draft Law, the number of features of threshold transactions will be reduced from 17 to 4)

introducing an updated verification system which does not require the presence of a client.

The Draft Law also suggests adding to the Criminal Code of Ukraine new Articles 258-6 Terrorism Training and 258-7 Entering and Leaving Ukraine for Purposes of Terrorism. Criminalization of the aforementioned acts is a requirement of the 5th FATF Recommendation, Convention No2178for the Suppression ofFinancingofTerrorism and Resolution of the UN Security Council.

To the negative aspects of the Draft Law one must refer a large number of evaluative notions and criteria to specify, for example, the grounds for freezing assets related to terrorism and its financing. Neither does the Draft include a list of offences for which a sanction such as removal of an official of an initial financial monitoring entity from office can be imposed.

At the same time, to implement the requirements of Article59 of the EU Directive the Draft Law suggests introducing penalty sanctions of up to 10 million tax-free minimum incomes of an individual for banks and financial institutions and up to 1 million tax-free minimum incomes of an individual for other persons. For example, a penalty for violating requirements to due diligence (identification and verification) of a client has been raised significantly from 500 tax-free minimum incomes of an individual to 20,000 tax-free minimum incomes of an individual.

Summing up the aforementioned in respect of the Draft Law and accounting for its positive thrust, it can be concluded that the given Draft Law needs further formalization, particularly in the aspect of specifying grounds to correlate assets with terrorism and its financing, being an independent reason for initial financial monitoring entities to stop the transactions of clients.

NBU Resolution No. 122 increases tariffs on providing banks with cash. What is the reason for such changes and how does it affect banks and their customers?

Kateryna Breduliak, Senior Associate, EVRIS

From 25 October 2019 in accordance with NBU Resolution No.122, the NBU increased tariffs on providing banks with large denomination banknotes. As the NBU declared, such innovations will stimulate banks to receive not only high denomination banknotes. In turn, citizens and cashiers will have banknotes for exchange and issue when calculating. Such changes in tariffs will certainly have an effect on increasing the monetary value for consumers and reducing the amount of cash in circulation. Thus, the following tariffs are set for the amount of banknotes issued upon receipt of banknotes: UAH 1,000 0.3%; UAH 200 500 0.25%; UAH 1-100 0.2%.

Before the change in tariffs for cash backing of banks, the tariff was 0.2% of the amount of banknotes issued.

The main reason for adopting the increased tariffs is to promote to Ukrainians the transition to non-cash payments using payment cards. With the NBUs changes, cash in circulation will be less, thus gradually increasing revenues received by the government. Such transition to, or increase in, non-cash payments will allow the State Tax Service of Ukraine and banks to control the cash flow of legal entities and individuals. Consequently, money laundering, bribery and tax evasion opportunities are reduced. In addition, in future the transition to cashless payments will reduce the cost of issuing, updating and storing paper money.

Certainly, NBU Resolution No.122 will facilitate the transition to non-cash payments and reduce the size of the shadow economy. However, it should be taken into consideration that most Ukrainians are afraid of falling victim to scams. According to data of the cyber police, crimes related to payment cards became more common in Ukraine last year. Criminals stole a total of UAH 670 million from bank customers, which is why Ukrainians are reluctant to use payment cards.

President Volodymyr Zelensky signed the law which ratifies the tax agreement with the United States of America. What are the main points of this agreement, and its consequences for business?

Kateryna Hamretska, Manager, KPMG in Ukraine

On 29 October 2019, Par-liament ratified the Agreement between the Government of the United States of America and the Government of Ukraineto Improve International Tax Compliance and to Implement FATCA to comply with international obligations undertaken on 7 February 2017. The main obligations taken by Ukraine are as follows:

Ukraine undertakes unilaterally to obtain information about reportable accounts and exchange respective information automatically with the U.S. Internal Revenue Service on an annual basis;

The Obligation to obtain information about U.S. reportable accounts lies within reporting financial institution of Ukraine in which the respective reportable account is maintained;

A U.S. reportable account means a financial account maintained by a reporting financial institution of Ukraine held/controlled by a U.S. citizen;

The information to be obtained and exchanged with respect to each reportable account includes the name, address and U.S. TIN of a U.S. citizen; account number; the account balance or value as of the end of the calendar year in question, etc.;

The first information exchange is to be made before 30 September after the Agreement comes into force and shall include information about the reporting accounts starting from 2012. The reporting period for all subsequent information exchange is deemed to be a calendar year.

If the reporting financial institution fails to report, it will be subject to mandatory 30% withholding to be made by the members of the U.S. banking system or other states that have signed the Agreement or banks that have joined the respective Agreement.

Ukraine is currently working on harmonization of its internal legislation with the provisions of the Agreement aimed at eliminating collisions between its internal laws and provisions of the Agreement. Certain draft laws (i.e. Draft Law No. 2102 and Draft Law No. 2103) were already prepared and registered with the Ukrainian Parliament with the aim of enabling banks and other financial institutions to disclose information treated as confidential to Ukrainian state authorities; to introduce a reporting procedure, its stages, scope and sanctions.

It is expected that the respective draft laws will be adopted by the Ukrainian Parliament by the end of 2019. Accordingly, business should analyze the impact of the Agreement on its commercial activity as soon as possible in order to identify whether its account may be treated as reportable accounts under the Agreement or if it is treated as a reporting financial institution under the Agreement obliged to obtain and exchange information to avoid penalties envisaged by the Agreement.

On 12 November President Volodymyr Zelensky signed Law No. 202-IX. What are its main provisions?

Dmytro Nikulesko, Attorney at Law, Ilyashev & Partners

The goal of the latest changes in the Customs Code (Law No. 202-IX of 17 October 2019) is to encourage better protection of items of intellectual property while transferring goods through the customs border based on previous practices. However, not all experts and rightsholders share the opinion that all amendments are positive and required.

The great number of opponents disagreed with the changes related to the measures aimed at supporting protection of intellectual property rights that are not going to be applied to original goods, i.e. goods that were manufactured with the consent of the rightsholder or goods manufactured by the person authorized by the rightsholder (part. 3 Article 397 of the Customs Code of Ukraine). In fact, if an importer/exporter can prove that the products are original ones and manufactured with the consent of the rightsholder, the customs officers shall not stop the transfer of these goods.

This amendment caused the most disputes. The opponents of the changes have stated that the Customs Code establishes in Ukraine the international principle of exhaustion so that so-called grey imports are going to be fully legalized. Opponents mainly include large corporations supplying a wide range of products that got used to dividing up markets and controlling the prices of products on each market.

The authors of the law state, in their turn, that that is not true. In their opinion, these amendments do not establish the international principle of exhaustion, but instead stipulate that the customs bodies should not fight with grey imports, but with fraud, pirated goods and counterfeit products. Simultaneously, they emphasized that the sale of goods can be prohibited by a court that shall adopt decisions on whether the goods in question were imported legally.

Also, in the updated code the list of intellectual property objects that can be under customs protection was changed. From now on, utility models are not covered by this list.

The purpose of the removal of utility models is the fight against so-called patent trolls. Maybe this change will be effective, although a great number of specialists have asked the question as to why industrial designs remained in the list, so do patent trolls use them even more compared to utility models?

Among other significant changes, there is a definition of the term pirated goods, a more extended definition of counterfeited products, providing an opportunity for the prescheduled release of goods (also aimed at fighting patent trolls), and the list of cases when the customs bodies can take measures to encourage the transfer of goods was extended, etc.

On 15 November President Zelensky signed Law No. 199-IX which creates the only state electronic system in construction industry. What are the main aspects of this Law and what is the goal of its adoption?

Dmitriy Nikolov, Attorney, Ader Haber

The main purpose of Law No. 199-IX is to overcome those problems which arise due to the lack of digitalization in the construction industry (such as limited choice of the method of submitting documents for receiving a number of administrative services; inconvenient time to submit documents for receiving administrative services; considerable time and material resources for collecting documents for obtaining administrative services in the construction sphere due to the lack of electronic interaction between the entities providing administrative services and other problems, etc.). Moreover, the verification of real estate by a potential investor was useless due to the fragmentation of public information. The overly broad powers of architectural and construction inspection in canceling construction permits was another significant problem.

This law has partially solved these problems. In the construction sphere the law provides for: 1) creation of a unified state electronic system as a part of the urban planning cadaster (everyone has access to it); 2) submission of documents in electronic form for receipt of all administrative services; 3) reduction of the list of documents to be submitted for administrative services; 4) introduction of electronic interaction between state electronic information resources and entities for receiving administrative services on the one-stop-shop principle; 5) receiving the results of administrative services in electronic form; 6) introducing an ID for a construction object; 7) cancellation of construction permits and other declarations is possible only through a court decision (there are two months to file such a lawsuit); 8) new address assignment rules; 9) new rules for technical inventory of real estate; 10) advertising restrictions.

We give a positive evaluation of the digitalization of administrative services in construction. The adopted law should have a positive impact on the construction industry as it reduces the time for administrative services; reducing corruption risks in the provision of administrative services; providing publicity for the provision of administrative services; openness and availability of information about the participants of construction, the life cycle of construction sites and completed construction objects; restriction of the rights of regulatory authorities.

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