We cannot allow rule of law our democracies purport to hold dear to be undermined in imposing sanctions
By Emily Yiolitis
It is not going to be a short war as was originally predicted. We are already past the 110th day. As Ukraine and its people continue to suffer untold devastation at the hands of the Russian army, policymakers have sought ways to curb aggression and penalise Russia on the one hand and to support Ukraine’s beleaguered economy and people on the other.
The most obvious way of achieving this double aim, if we exclude the outright declaration of war, is through the imposition of economic sanctions. Yet the imposition of sanctions, their effect and even their legality have proven to be more elusive than originally foreseen. At best, the sanctions are ineffective and have done little to tackle the illegality of the invasion. At worst, they have backfired, not only against the economies of the states imposing them but also against the rule of law that the democracies imposing such measures, purport to uphold.
But let’s take things from the beginning. Following Russia’s invasion of Ukraine, the EU imposed sanctions on Russia and Belarus. To date, the EU has published six packages of sanctions, the first on February 23 and the latest on June 3. As the aggression escalated, the sanctions became more austere. They are in fact the most severe measures ever imposed by the EU, and although they started out as targeted measures against specific banks and prominent oligarchs close to Putin, today we see that they are implemented by the member states in a blanket fashion against all Russian nationals.
Let’s take a closer look at trusts, as trusts are particularly significant to Cyprus.
In the fifth package of sanctions, Article 5m of the regulation prohibits the provision of services to trusts or similar legal arrangements with a Russian connection, meaning with a settlor or beneficiaries who are Russian nationals, unless they also have citizenship or permanent residence in an EU member state. The competent authorities may grant an exemption if the said services are necessary for humanitarian purposes, such as delivering medical supplies, or for civil society activities that directly promote democracy, human rights or the rule of law in Russia.
Service providers under the fifth package had until May 10 to extricate themselves from such relationships.
The sixth package comes to provide a further prohibition of services, some clarification on exemptions as well as an extension of time. Specifically, Article 5n prohibits the provision of accounting, auditing, book-keeping or tax consulting services, business and management consulting or public relations services to the Government of Russia or to legal persons, entities or bodies established in Russia.
Further exemptions are referenced for which a competent authority may authorise the prohibited activities of 5m and 5n, which relate to trusts, the purposes of which include the administration of pension schemes, insurance policies, employee share scheme, charities, amateur sports clubs, and funds for minors or vulnerable adults.
Also, the deadline to extricate oneself from the provision of trust services, which had originally been set for May 10, 2022, was extended to July 5, 2022. Article 5m(5) introduces a further longstop date, enabling the competent authorities of each member state to grant a further extension on the July 5 deadline, to September 5 for the transactions required to terminate the trusts with a Russian connection which were already in existence on April 9, 2022 and even beyond September 5, 2022 (and not only to complete the ongoing transfers and terminations), provided that the concerned service providers do not accept further funds from the Russian settlors and do not distribute or otherwise provide any benefits from the trust assets to the Russian beneficiaries.
The sixth package almost comes to acknowledge that we have gone a little too far. As trust lawyers, we have been imbued from our university days to accept the great responsibility associated with fiduciary duties. Trust your trustees. The sanctions tell us, forget about these duties, extricate yourself in the fastest way possible, and simply cease acting. At least 5m did, hurrying us along, before the extensions granted by 5n. The sanctions basically gave their blessing to service providers to unburden themselves of fiduciary commitments, saying that it is OK to make hasty, uninformed decisions about the overall trust portfolio, it is OK to transfer assets and trusteeships to far flung jurisdictions and unregulated trustees, it is OK to deplete the trust fund by paying capital gains, transfer taxes and duties associated with transferring assets, as long as you get rid of the Russian connection. It is even OK to make the distributions directly to the Russian beneficiaries, which cannot have been the original intention of the drafting party.
And what of the second aim of the economic sanctions – bolstering the Ukrainian economy and rebuilding the devastated land? This will require vast expenditure. The ploy is to liquidate the frozen properties of the sanctioned Russian persons and use these proceeds to rebuild Ukraine. There is even a proposal to seize the US assets of Russia’s central bank. But who is considering the legal ramifications of these proposals and how they may serve as a double edged sword, undermine the rule of law of western democracies while they purport to uphold international order. The pivotal role that the United States plays in the global economy as a major depository for foreign central banks is largely founded on the strong rule of law it enjoys and the legal protections it affords foreign assets. If these rules of the game were to change, who is to say what the ramifications could be for international world order.
Chapter 2 of the United Nations Articles on the Responsibility of States for Internationally Wrongful Acts, sets out the rules for countermeasures which member states may take to hold another member state accountable for an illegal invasion. Article 49 says countermeasures “shall, as far as possible, be taken in such a way as to permit the resumption of performance of the obligations in question.” If assets are not simply frozen, but seized and sold off to assist in the economic recovery of the Ukraine, they cannot be returned and Russia cannot resume performance of its obligations. The aim of countermeasures should be to induce the wrongdoing state to comply with its international obligations. If the measures are irreversible, they are not inducing compliance but fostering isolationism and anarchy. The intention of the legislator was that the measures taken must be reversible if the sanctioned state ends its unlawful conduct. Otherwise, the law of the jungle applies.
Russia which is a permanent member of the UN Security Council, flagrantly disregarded international law when it invaded the Ukraine. This does not us give carte blanche to disregard international law too. We must rise above and adhere to international law. We cannot allow the rule of law our democracies purport to hold dear to be undermined. We cannot issue blanket sanctions on all Russian nationals, even dissidents. We cannot seize assets, including state assets and liquidate them without considering that we may be setting a dangerous precedent for world order. It reminds me of a 1946 poem by the German pastor Martin Niemöller. It is about the silence of German intellectuals in the face of incremental purging of chosen targets.
“First they came for the socialists, and I did not speak out—
Because I was not a socialist.
“Then they came for the trade unionists, and I did not speak out—
Because I was not a trade unionist.
“Then they came for the Jews, and I did not speak out—
Because I was not a Jew.
“Then they came for me—and there was no one left to speak for me.”
This time let’s speak out and let there be no indiscriminate persecution, blanket generalisations and flagrant violations of established international legal principles. May we uphold the rule of law we wish to impose upon Russia. This can include targeted sanctions against specific persons and entities, freezing and not seizing assets, on a justified basis, and extricating ourselves from fiduciary duties only with extreme care and caution.
Emily Yiolitis is a former minister of justice. This is an excerpt from a speech on EU sanctions given on Thursday at a conference on Wealth and Succession Planning
