Legislative Update

This month another portion of legislative novelties came from Parliament and the Cabinet of Ministers, leaving a lot of questions to consider. So we asked a handful of experts to share their views on the draft law on financial leasing, principles of ensuring the cyber security of Ukraine, and the decree that launched the next phase of ongoing IP-reform. We could certainly not ignore the resonant decision on introducing special economic and other restrictive measures, so we tried to examine its possible implications on business.

 

President Petro Poroshenko signed a Decree on implementation of the decision adopted by the National Security and Defense Council of Ukraine (NSDCU) On Introducing Special Economic and other Restrictive Measures (Sanctions) of a Personal Nature. The economic sanctions apply to the 1C Company, the well-known supplier of ERP-systems and a number of other IT companies. What are the possible risks for enterprises that use the products of companies that are on the sanctions list?

Ivan Bozhko

Attorney, Ilyashev & Partners

Last week Ukrainian President Petro Poroshenko signed the Decree on implementation of the decision adopted by the NSDCU according to which Ukraine introduced special personal sanctions regarding individual persons and legal entities. The absence of detailed information about the effective limitations, as well as the excitement heated by the mass media, made it very hard for businessmen and ordinary people to analyze the consequences of adoption of this decision. Once the “emotional heat” had subsided many entrepreneurs started asking logical questions about the risks which use of the products of the companies in the “sanction lists” runs. Let’s review this question using the example of the limitations introduced against the 1C Company.

Among other names, the sanction lists include the 1C group of companies (1C LLC (the Russian Federation) and 1C Multimedia LLC (Ukraine) which specializes in the development and maintenance of software for automation of various activities at the company. According to the decision of the NSDCU, the restrictive measures introduced regarding the mentioned companies are represented by freezing assets, restricting trading operations, preventing the transfer of assets outside Ukraine, cessation of execution of economic and financial obligations, limitation or cessation of provision of telecommunication services, banning state procurement activities in relation to such companies, cessation of issue of permits to import foreign exchange assets and banning the transfer of technologies. It means that the limitation measures only apply to the companies on the sanctions list and do not apply to ordinary users. At the same time, further purchase of 1C products from their developers becomes actually impossible due to the restrictions on transactions with such products. Further transfer of developers’ rights to such products to another legal entity is also doubtful as soon this may be regarded as transfer of technology (although state authorities do not provide any clarifications in this regard). So, the provisions stated in the NSDCU’s decision will not be violated only if the buyers purchased corresponding software from dealers who acquired corresponding products prior to the introduction of limitation measures. As for termination of provision of telecommunication services, such limitations will hardly deal a substantial blow to the users of 1C shortly, as in view of the particularities of the software the absence of updates for the program is not critical and does not influence its functioning. And, vica versa, for other services and software programs the absence of such possibility may be easily compared with total cessation of provisions of services for clients (for example, Yandex-taxi service).

It must be noted that as of today there are no guarantees that the current sanctions will not be somehow particularized and/or extended. In view of the aforesaid, it is virtually impossible to say with confidence that it will be advisable to continue working with the products of those companies on the “sanction list” or start looking for their effective replacement.

 

The Presidential decree introducing special economic and other restrictive measures (sanctions) of a personal nature touches on various regulated sectors. Is it possible for telecoms providers to implement this resolution? How can these measures be reflected in domestic business?

Kateryna Oliinyk

Counsel, Arzinger

The Decree issued by the President of Ukraine on blocking some social networks and services of Russian origin, by which the decision of the National Security and Defense Council of Ukraine was issued in the context of the hybrid war in which Russia relies heavily on propaganda and modern viral social messaging as elements of its information warfare. Therefore, blocking the websites which have access to the personal data of Ukrainian citizens and which are used to disrupt Ukraine is an issue of both national cybersecurity and information security.

However, as the Law of Ukraine On Telecommunications provided for net neutrality in Ukraine, only the major Internet service providers out of 4,000, which are mostly medium and small enterprises, now have the technical capability to block websites. Anyway, there is no legal or technical certainty about the procedure for safe blocking without any collateral damage. Thus, although the major players are taking some steps to block content, all such measures can easily be bypassed now. As John Gilmore, Founder of the Electronic Frontier Foundation, said back in the early 1990s, “The Net interprets censorship as damage and routes around it”.

At the same time, many Ukrainian businesses (lacking, in fact, other alternatives of the same value) used banned social networks for marketing and have built businesses onto these platforms. The shift to another platform, creating a new account and redirection of their subscribers is not an easy process, and without any transition period may cause significant damage for SME in Ukraine.

 

The Government authorized the Ministry of Economic Development to issue all protection documents (patents, certificates) in the field of intellectual property. How can this decision be reflected in the reform of the State Intellectual Property System in Ukraine?

Oleksiy Stolyarenko

Senior associate, Baker McKenzie

By adopting Decree No. 320 on 11 May 2017, the Cabinet of Ministers of Ukraine launched the next phase of ongoing IP reform outlined in the Concept for Reforming the State Intellectual Property System in Ukraine (the “Concept”) that was approved earlier. This phase finalizes liquidation of the State Intellectual Property Service (SIPS) and the transfer of all its functions to the Ministry of Economic Development and Trade of Ukraine (MEDT).

Even though the liquidation of SIPS was announced back on 23 August, 2016, as of now the Government has not made public any guidelines to ensure that the transfer of IP policy is smooth and trouble free. The most straightforward cases of IP rights registration handled by the State Enterprise Ukrpatent would not be significantly affected by this transition. However, in other cases we may expect delays and unusual issues related to the physical relocation of personnel and reestablishment of internal administrative procedures. In particular, delays are possible in a number of procedures, including registration of IP licenses and assignment agreements and representation of the state agency in courts in cases regarding IP rights cancellation. A new Appellate Chamber responsible for all challenges to decisions of the state IP agency on IP rights registration and the procedure for designation of trademarks as well-known in Ukraine, has already been appointed. However, it may still require around a month to get back on track.

In accordance with the Concept the final goal of IP reform is the establishment of the National Agency for Intellectual Property (NAIP). Therefore, we can expect another transfer of IP policy functions from the MEDT to the NAIP. However, it is not clear when the NAIP will be created as the Government has not yet submitted the necessary draft law to the Ukrainian Parliament.

 

Parliament is considering Draft Law No. 2126a On Basic Principles of Ensuring Cyber Security of Ukraine. How would you evaluate this initiative? How will adoption of this draft affect the e-procurement system?

Mykyta Polatayko

IT group coordinator, Sayenko Kharenko

The relevant law regarding cyber security is more than indispensable. For example, there is a need for public officers and state authorities to develop standards of data storage, use of e-mail, and other online services. The Cyber Security Strategy already exists; however, it is still necessary to adopt a legal framework and a clear division of powers and responsibilities between those state authorities responsible for cyber security. For instance, telecommunication companies are looking for details from the state body responsible regarding proper blocking methods to prevent access to online services that find themselves under sanctions.

Unfortunately, the Draft Law does not meet most of the above-mentioned expectations; in many respects, it just mirrors the existing Cyber Security Strategy, providing declarative statements instead of clear regulations, and does not set out the interrelationship between certain essential definitions. Despite all these defects, adoption of this Draft will be beneficial. At least it defines cyber security objects and safety-critical infrastructure, whilst conferring additional powers to state authorities regarding cyber security.

As to the potential impact on ProZorro, the public e-procurement system, it is important to consider the Draft Law and the amendments proposed by certain MPs separately. The mentioned amendments may really block the work of ProZorro as we know it today. However, Parliament has returned the Draft Law for further improvement. Hopefully, the amendments will not be included in the version of the Draft Law submitted for the second reading stage.

 

Draft Law No. 6395 On Financial Leasing which is developed to improve the state regulation of leasing activities, step up the protection of the rights of consumers of financial services and bring the legislation of Ukraine into line with European practice and best world experience, was submitted to the Ukrainian Parliament. What do legislators propose in order to achieve the set goals?

Maryna Fedorenko

Of counsel, AEQUO

In developed countries financial leasing has long been considered a valid alternative to outright purchase and a bank loan for businesses seeking expansion/modernization of their production facilities and individuals willing to acquire vehicles/equipment for their private needs. In Ukraine, however, the size of the leasing market is still relatively small, not least due to undeveloped legislation go- verning this area. In order to improve the legislative framework, the new Draft Law On Financial Leasing (No. 6395) was submitted to Parliament in April 2017.

The above Draft Law provides for enhancing the state regulation of financial leasing activity and protection of all involved parties, including, in particular, via the introduction of:

1) mandatory registration/licensing requirements for those companies acting as lessors in financial leasing agreements; 2) detailed description of the essential terms of leasing agreements, clear requirement on their signing in simple written form (without mandatory notarization); 3) extended scope of rights for parties (e.g. the lessee’s rights vis-à-vis the supplier of the leased property, the lessor’s rights in case of subleasing, early termination of the leasing agreement, provision of false information by the lessee, etc.); 4) grounds and conditions for transfer of title to the leased property in favor of the lessee; 5) specific procedures for arrangements with individuals — lessees (the lessor’s obligation to inform the client in writing of all conditions of the leasing agreement prior to its conclusion, the right of the lessee to unilaterally call off the agreement within 14 days from the date of signing thereof, etc.); 6) rules for engaging third parties to provide ancillary services to the lessee; 7) possibility for the lessors to involve the leasing intermediaries (brokers and agents) for facilitating conclusion of the leasing agreements (through collection/verification of documents, preparation of the agreements, consulting etc.); 8) criminal liability for fraudulent actions aimed at obtaining financial leasing services and for unlawful actions with the leased property.

Despite certain provisions requiring further elaboration, in general, the approach envisaged in the Draft Law and the new provisions proposed by it meet the market’s demand for complex improved legislation governing financial leasing in Ukraine. With the support provided to the Draft Law by market players and the regulator it might be expected that its adoption will not take too long.