Freeze, confiscate, restore? Swiss ideas for future EU sanctions

Following their Arab Spring ousting, the European Union froze the assets of Presidents Ben Ali and Mubarak and well as those of their family and associates – the first so-called misappropriation sanctions ever imposed by Brussels. Three years later, the EU enacted similar freezes on Viktor Yanukovych and his entourage after his fall from the Ukrainian presidency. The deposed leaderships were all suspected of having stolen large sums of public money while they were in office, and so the new authorities hoped to recover these assets and restore them to state coffers. Brussels put together all three sanctions regimes at the request of the post-revolutionary governments and applied them on list of designees these supplied. Thus, the freezes were enacted in order to prevent asset flight – this is a prerequisite for their subsequent recovery.  

The freezes also followed a political rationale: to support the transitions in Tunisia, Egypt, and Ukraine, and help the EU to strengthen ties with the post-revolutionary leaderships. The EU Council agreed the measures as part of a policy of democracy promotion, claiming to freeze the assets of those responsible for misappropriation of state funds and who were thus “undermining the development of democracy in the country”.

Misappropriation sanctions regimes target the funds stolen by corrupt leaders in the hope that they can be restored to the state budget. They differ fundamentally from other sanctions enacted under the Common Foreign and Security Policy (CFSP) in that they are composed exclusively of an asset freeze. Indeed, they constitute the only EU assets freezes unaccompanied by visa bans, which illustrates that they do not aim to stigmatise the ousted leaders as personae non gratae, but rather to contest their ownership of the funds. They are the first EU sanctions to have been imposed against former leaders – bans typically apply to incumbents in power. And they constitute the only examples to date of EU sanctions fighting corruption, as they are intended to facilitate the restoration of public funds stolen by officials. Unlike standard sanctions, they do not intend to seek to compel their targets to change course.

Misappropriation sanctions regimes target the funds stolen by corrupt leaders in the hope that they can be restored to the state budget

Several years after the enactment of the freezes on the Arab Spring countries and Ukraine, how have these measures fared?

Slow progress and litigation woes

Little progress has been made in terms of restoring the assets to the states from which they were stolen. There are three stages in the process of asset recovery – asset freeze, asset identification, and return to the state of origin. The asset freeze is the only one that can be dealt with at EU level under the current legal framework; the subsequent stages are not in the hands of the EU. Instead, they need to be dealt with by the individual member state where the funds are located after the country wishing to recover them has requested legal assistance. This must normally happen after the person who stole the assets has been found guilty of misappropriation and convicted by a court in their home country. In short, the EU has frozen the assets of the former rulers of Tunisia, Egypt, and Ukraine in order to permit their restoration to state coffers. But it lacks the competence take any action beyond freezing the assets. The subsequent phases remain the competence of the EU member states holding the assets. EU member states must cooperate with those third countries wishing to recover the assets once their judiciaries have convicted the culprits of misappropriation.

However, two sets of difficulties hinder progress: Firstly, the states from which the assets were stolen are slow in convicting designees. Sometimes this is due to the difficulty of establishing the ownership of assets that have been cleverly hidden behind a set of complex operations. In addition, investigations often face obstruction on account of political interference in the judiciaries of the countries wishing to recover the funds.

Compounding these issues, the EU faces a problem while it waits patiently for the judiciaries of Egypt, Tunisia, and Ukraine to convict the suspects of misappropriation: and that is that Council designations are vulnerable to court challenges. The EU Court of Justice has established the inadmissibility of freezing assets of individuals who are merely under investigation in their home countries, and has annulled several listings under the misappropriation regimes. There is nothing unusual in Court annulments of Council listings. But what is unique to the misappropriation sanctions is that designations do not originate from EU member states, but from requesting states that do not always substantiate them with sufficient evidence. As a result, the Council finds itself maintaining designations of individuals not yet convicted in their home countries, and sometimes lacking proper information to justify the freeze and to fend off annulments by the Court.

Litigation activity has increased over time, and by the end of 2018 EU courts had dealt with a total of 35 cases: four court cases concern Egypt, 10 correspond to Tunisia, and Ukraine accounts for 21. In almost half of the cases, the Court ruled in favour of the Council; in the other half, it annulled the listings partially or in full. Interestingly, the outcomes of litigation vary from country to country. All Egyptian cases were dismissed, as were 60 percent of Tunisian cases, while in Ukraine the results of litigation are distributed among all categories: 33 percent dismissals, 39 percent partial annulments and 28 percent annulments. This makes Ukrainian designees more successful in litigation than the Council is.

A more radical alternative consists in replicating the entire Swiss legislative framework in force since 2016

All in all, misappropriation sanctions have not been a complete failure. Thanks to the freezes, the EU has been able to build links with the new leaderships in these countries. Still, in the face of unsatisfactory results from an asset recovery viewpoint, could existing mechanisms be replaced with less problematic options?

Reforming or reshuffling the system?

Part of the problem concerns the time frames needed to convict former officials of embezzlement: EU freezes keep being renewed year after year despite meagre progress in the investigation of misappropriation suspects. The EU cannot afford to leave freezes in place indefinitely while designees are under investigation given that, in the absence of convictions, these listings are vulnerable to challenges at the EU Court of Justice. Under the current system, CFSP sanctions are reviewed and renewed year; however, there is no explicit conditional aspect to it. Inserting conditional deadlines for the renewal of measures, following the model of equivalent Swiss legislation, could alleviate the problem. Swiss law stipulates that the extension of listings “is expected to yield tangible progress in pending proceedings”, and that Bern will “decide whether the freezes on these assets will be prolonged on the basis of the progress made in the respective legal proceedings”. The adoption of conditionality – a common tool in EU foreign policy – could incentivise progress in the investigations conducted by those states wishing to repatriate stolen funds. Alternatively, this situation could be rectified by allowing the current EU-wide assets freeze to elapse after an initial one-year period, and replacing them with national assets freezes, to be adopted only in those member states where assets are located. Removing the CFSP freeze would obviate the risk of challenges in front of the Court of Justice of the EU; instead, national courts would be competent. However, these partial reforms also present limitations – notably, they fail to fully resolve the identified problems.    

A more radical alternative consists in replicating the entire Swiss legislative framework in force since 2016. This framework was designed explicitly to deal with the examples discussed above. In contrast to the EU, which only freezes stolen assets, the Swiss law also addresses confiscation and restitution. A similar new EU legislative framework could be devised to cover the freezing, confiscation, and restitution of stolen funds. In addition, because CFSP acts are foreign policy measures, this precludes their use in addressing situations of misappropriation that are not connected to international crises. Instead, legislation enabling the adoption of EU-wide asset freezes addressing misappropriation could be moved to the area of freedom, security, and justice, an EU policy domain better equipped to deal with asset recovery matters.

Alternatively, the Council could craft a horizontal blacklist devoted to addressing misappropriation of funds worldwide. This would dovetail with the current trend towards theme-based blacklists, as well as with the European Parliament’s support for anti-corruption efforts in third countries. Horizontal sanctions regimes addressing cyber crime and the use of chemical weapons are already in place. Legislation allowing the listing of perpetrators of grave human rights violations is currently under discussion in the Council. However, the current proposal lacks an explicit anti-corruption component, in contrast to north American Magnitsky-type sanctions, which acknowledges the link between grand corruption and human rights breaches. From the asset recovery viewpoint, a number of possibilities exist for the EU and its member states to pursue to both improve recovery of assets and strengthen their political relationships with governments they wish to nurture close ties to.

This article is drawn from Clara Portela's report for, CiFAR – Civil Forum for Asset Recovery e.V. – Sanctioning kleptocrats: An assessment of EU misappropriation sanctions. Clara Portela is faculty member at University of Valencia, Spain.​