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European Law

National Bank of Ukraine to Implement EU Free Movement of Capital Directive

U kraine retains a very restric-tive currency control regime, introduced by the National Bank of Ukraine (NBU) as a provisional measure to pre-

vent the outflow of foreign currency from Ukraine.

In accordance with the most recent NBU currency control Regulation No.410 of 13 De-cember 2016, the NBU admitted that the ap-plicable currency control restrictions will remain in effect until such time as the NBU, in the absence of any circumstances affect-ing the stability of the banking and/or finance system of Ukraine, adopts a separate resolu-tion lifting them.

1. National Bank’s Concept for New Foreign Currency Regulations

On 1 December 2016 the National Bank of Ukraine published a detailed Concept for new foreign currency regulations that it intends to develop in the following years (the Concept),

provided that, amongst other things, the eco-nomic conditions in Ukraine are stabilised and cooperation with the International Mon-etary Fund moves forward.

The principal point of the Concept con-sists of developing a new consolidated act on foreign exchange which will replace the multitude of regulatory acts setting out the foreign exchange rules that currently apply. A first draft of such new consolidated act is to be presented as early as the second quarter of 2017.

As a next step, the Concept would in-clude reforms to the relevant tax and money laundering legislation based, as regards the former, on implementation of OECD base erosion and profit shifting recommendations. Eventually, as is stated in the Concept, the restrictive currency control rules would be replaced by efficient tax regulation.

Overall, the Concept is expressed to in-clude the relevant provisions of the European Union law, including in particular Directive 88/361/EEC of 24 July 1988 (the Directive).

2. Directive 88/361/EEC: an Analysis

The Directive is a rather dated but promi-nent piece of European Union law. It is the first piece of community legislation to set out an express obligation on the part of member states to ensure that capital movements are not restricted within the community. To this effect, Article 1 of the Directive obliges mem-ber states to abolish restrictions on move-ment of capital taking place between persons resident in member states.

Most importantly, however, Article 7 of the Directive obliges member states to attain the same degree of liberalisation in respect of movements of capital to or from third coun-tries, as that which applies to operations with residents of other members states.

The Directive does not provide a defini-tion of capital movement. At the same time, Annex I to the Directive sets out a nomen-clature of capital movements, in respect of which member states are obliged to abolish all applicable restrictions.

The nomenclature set out in Annex I to

the Directive provides a list of examples of what constitutes a capital movement, with an express reservation that such list should not be interpreted as restricting the scope of the principle of full liberalisation of capital movements.

The European Court of Justice relied upon the nomenclature provided in Annex I to the Directive to define whether a particular transaction is or is not capital movement for the purposes of the Directive1.

3. Ukraine’s EU Assocication Commitments Relating to Financial Services

Harmonisation of the domestic law with the European Union law is an important part of the 2014 Association Agreement between Ukraine and the European Union (the  Agree-ment). The Agreement is notable, among other things, for setting out detailed obliga-tions for Ukraine regarding implementation of European Union law.

In particular, under Article 133 of the Agreement Ukraine shall ensure that its ex-isting laws and future legislation relating to financial services will gradually be made compatible with European Union law.

Furthermore, under Article 145(3) of the Agreement, Ukraine is obliged to com-plete the liberalisation of capital movements equivalent to the liberalisation in the Euro-pean Union.

A positive assessment by the European Union of the Ukrainian legislation on capital movements, its implementation and contin-ued enforcement is a necessary precondition of a decision by the Trade Committee2 to extend the same treatment to Ukraine with respect to financial services as that which ap-plies between member states of the European Union.

Ario DEHGHANI

Counsel, Head of the Compliance and EU law practices of Redcliffe Partners.He has unparalleled experience of

advising businesses on preventing, identifying, eliminating and mitigating compliance risks at both the national

level and globally. He specialises in advising clients on all types of

compliance matters and in conducting internal investigation, amongst others

related to FCPA and UK Bribery Act issues.

1 See, for example, Joined Cases C/163/94, C-165/94 and C-250 Criminal proceedings against Lucas Emilion Sanz de Lera, Raimundo Diaz Jimenez and Figen Kapanoglu, Case C-222/97 Manfred Trummer and Peter Mayer.2 Trade Committee is an administrative body established under the Agreement monitoring and assessing its implementation by the parties.

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4. Assessment of Future Developments

Implementation of the nomenclature set out in Annex I to the Directive is an express obligation of Ukraine under Appendix XVII-2 to the Agreement.

The said Appendix enumerates the spe-cific provisions of the European Union law which Ukraine is obliged to implement in or-der to obtain the same treatment in respect of financial services as the treatment which applies between European Union member

Redcliffe PaRtneRs

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states. In respect of the nomenclature set out in Annex I to the Directive, the Agreement re-serves a 5 year period, upon expiry of which the Trade Committee shall take a final deci-sion on the timeline of implementation.

Such 5 year period commences on the date of the entry into force of the Agreement, which as of the date of this publication has not yet come into force and applies on a pro-visional basis.

Given that harmonisation of domestic law, in particular as regards the complicated

industry of financial services, is a long-term undertaking, the NBU’s present decision to include use of the Directive as a framework for new currency control legislation should be viewed as a positive signal. However, in practical terms much would depend on whether the turbulent economic conditions would stabilise sufficiently to allow for liber-alisation of currency control measures. And, whether the Ukrainian Parliament would agree with the NBU as to the need to liber-alise them.

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