Effectiveness 0.05%: How does the Asset Recovery Management Agency 'take care of' confiscated russian assets?

In war conditions, the work of the National Agency of Ukraine for finding, tracing, and management of assets derived from corruption and other crimes (Asset Recovery and Management Agency or ARMA in other words) is being closely scrutinised. This organisation is responsible for managing confiscated russian property and funds. According to preliminary estimates, during the full-scale war, law enforcement agencies transferred assets worth more than 70 billion UAH to ARMA. However, there are still no public reports on how effectively the agency has managed them. Mind gathered information from open sources – law enforcement agencies and activists – in an attempt to find an answer to this question.

To learn about the results of ARMA's work, Dmytro Zhoravovych, the temporary acting head of the organisation, was invited to a meeting of the Temporary Inquiry Panel of the Verkhovna Rada, which took place on May 23. However, he did not attend the event, citing his engagement in another government meeting. This position did not satisfy MPs, so they decided to apply coercive measures against Zhoravovych at the panel's next meeting, accompanied by police officers.

Dmytro Zhoravovych justified his absence at the meeting of the panel by saying, "The questions raised regarding my special presence at the Temporary Inquiry Panel meeting, I consider to be part of the discreditation. Because every day from 8 am to 8 pm, I am in the office and I don't hide from anyone. I am ready to attend the next meeting to answer the questions."

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Therefore, it was Oleksiy Tamozhansky, the Head of the Asset Management Department in ARMA, who had to answer the uncomfortable questions from MPs. The panel’s meeting lasted over four hours due to numerous questions accumulated. MPs and law enforcement officials identified several factors that contribute to ARMA's inefficiency.

What is the essence of ARMA's work? Based on court decisions, assets are transferred to ARMA for management. The agency either sells these assets or transfers them to a legal entity for a limited period for a certain fee. The income from the management is transferred to the state budget, while the costs of asset maintenance are borne by the manager.

"The question concerns the transfer of assets worth billions of hryvnias. These are comprehensive property complexes, vehicles, seized finished products, and other assets. Regarding cars, it's over 100 units. Corporate rights worth 4 billion hryvnias. We have also transferred approximately 42 railcars, 49 land plots, and over 50 tonnes of iron ore products to ARMA," reported the Deputy Head of the Main Investigation Department of the National Police of Ukraine, Sergiy Gaidu.

The meeting of the Temporary Inquiry Panel of the Verkhovna Rada on May 23, 2023. On the photo to the left is Oleksiy Tamozhansky, the Head of the ARMA’s Asset Management Department. Standing next to him is Sergiy Gaidu, the Deputy Head of the Central Investigation Department of the National Police of Ukraine, and Kyrylo Rudyk, the Deputy Head of the Pretrial Investigation Department of the Central Investigation Directorate, National Police of Ukraine

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Kyrylo Rudyk, his colleague from the Pretrial Investigation Department of the Main Investigation Department of the National Police of Ukraine shared a vivid example that illustrates the scale of assets transferred to ARMA: "In just one criminal case involving Viktor Medvedchuk, there are over 600 objects, including real estate and material valuables, including works of art, the evaluation of which we will provide later."

The list of all seized assets is kept in a special register. However, the State Service of Special Communications and Information Protection, the Security Service of Ukraine, and the cyber department of the National Police advised ARMA to close this register during the state of war. Acting head of ARMA, Dmytro Zhoravovych, heeded the advice of law enforcement officials. However, during the TIP meeting, it was revealed that even the person responsible for the asset management direction, Oleksiy Tamozhansky, could not provide specific data on the quantity and types of assets currently owned by ARMA.

According to the data presented during the briefing the day after the TIP meeting by Dmytro Zhoravovych, ARMA has only transferred 13% of all the received immovable property objects and 8% of corporate rights shares for management. However, Zhoravovych believes that the current asset management system is working effectively.

He emphasises that instead of the state, the manager covers the expenses for asset preservation, pays taxes, and employees' salaries. According to ARMA's data, in 2022, the managers spent 748 million UAH on maintaining the assets. However, it is impossible to verify such claims because the agency does not provide supporting documents.

Only during the TIP meeting, Oleksiy Tamozhansky confirmed that in 2022, the state received 34.8 million UAH from the management of arrested assets. This amounts to 0.05% of 70 billion UAH, which is the total value of russian assets currently owned by ARMA.

What is the reason behind the low efficiency of ARMA's work? Upon receiving control of a new asset, ARMA forms a commission to assess the condition of that asset. Then a real valuation of its worth is conducted. However, there are cases where the asset exists only on paper, and therefore, it is impossible to realise it and generate income for the state budget.

"An asphalt plant of the belorussian company, which was involved in road construction in Ukraine, was transferred to us. When we arrived at the site after receiving a court order to take control of it, we discovered that this asphalt plant was a mobile modular facility. It had been dismantled back in 2021 and moved in an unknown direction," says Oleksiy Tamozhansky. "In such situations, we inform law enforcement authorities that there are no assets."

"In a short period of time, we cannot go through all the documents and verify them three times," explains Maksym Zikorchuk, head of the department at the Central Investigation Department of the State Bureau of Investigations. "We need to quickly impose arrests and transfer the asset to ARMA. There may indeed be some defects that can be rectified. We have received amended court orders with a shorter list of assets. However, no asset was stolen or destroyed."

"In a short period of time, we cannot go through all the documents and verify them three times," explains Maksym Zikorchuk, head of the department at the Central Investigation Department of the State Bureau of Investigations. "We need to quickly impose arrests and transfer the asset to ARMA. There may indeed be some defects that can be rectified. We have received amended court orders with a shorter list of assets. However, no asset was stolen or destroyed."

Another reason for the low income from managing the seized russian assets is that approximately 80% of these assets consist of corporate rights of companies and enterprises. The current law prohibits the transfer of corporate rights without the owner's consent. And now, the focus is on suspects involved in cooperation with the russian government.

Dmytro Zhoravovych says that in order to allow ARMA to manage corporate rights without the owner's consent, appropriate changes to the law are needed. However, the parliament has not yet approved these changes.

Also, about 20% of court orders regarding the transfer of assets to ARMA do not prohibit the actual owner from using these assets. This creates a legal conflict between the rights of the manager, the rights of the agency, and the rights of the owner. Therefore, no manager would want to handle such an asset.

Courts also sometimes refuse to arrest production facilities, finished products, or raw materials and only transfer immovable property and corporate rights to ARMA. "This applies to the aluminium powder of the russian company RUSAL. It was not arrested and not transferred to ARMA because the court made such a decision," explained Tamozhansky.

Meanwhile, according to the publicly announced data by the acting head of ARMA, Dmytro Zhoravovych, only 15% of court orders are problematic, "including cases where the asset exists only on paper or where a partial arrest is imposed and ARMA cannot take control of it." According to Oleksiy Tamozhansky's estimates, assets worth approximately 5 billion UAH can actually be transferred to management.

What is happening with these real assets? In 2022, ARMA entered into only 10 contracts for asset management. However, during the same period, Ukrainian courts issued at least 150 rulings imposing arrest on assets and transferring them to the agency's management. These include 116 enterprises associated with citizens of the aggressor country and the republic of belarus, with a total value of corporate rights exceeding 25 billion UAH.

Members of the Temporary Inquiry Panel were surprised by the fact that ARMA lacks a clear plan regarding which assets to transfer to the management of administrators first. According to Oleksiy Tamozhansky, this algorithm is disorganised because "assets are put up for competition as the necessary information is collected, and legal conflicts are resolved."

"After we receive a court ruling on the transfer of an asset, the special commission of ARMA inspects it, conducts inventory, and verifies the conformity of the information stated in the ruling with the information contained in the registers," explains Tamozhansky. "Then we gather information about the asset: accounting, tax, and statistics. These documents are necessary for the valuation of the asset. Only after that do we announce the competition."

In October 2022, during a government meeting, the possibility of allocating 10-20% of hotel and resort facilities, which ARMA manages, for temporarily displaced persons and the rehabilitation of military personnel, was discussed. At that time, the Acting Head of ARMA, Dmytro Zhoravovych, stated that the National Agency had approximately 80 real estate properties that could be used for this purpose.

In the conditions of martial law, the transfer of such assets was supposed to be carried out promptly. However, for example, four months after the transfer, the Tourist and Druzhba hotels in Kyiv still do not have managers as the competitive selections are ongoing. During this entire time, the asset remains in limbo and is under the so-called responsible custody supervised by law enforcement agencies, who handed it over to ARMA..

Hotel Tourist (pictured left) and Hotel Druzhba

And it is not even the worst scenario. As practice shows, there are cases where, while awaiting the competition for a manager, arrested enterprises deteriorate, properties are destroyed, or disappear without a trace. For example, the Aeroc LLC concrete plant owned by russian oligarch Andrey Molchanov, under the management of ARMA, accumulated millions of hryvnias in debt for service contracts and laid off some employees. And there are dozens of such examples.

ARMA managers selected in 2022

Currently, it is known that one of the glaring problems hindering ARMA from maximising the benefits for the state in asset realisation is the inefficient organisation of manager competition..

How do competitions for managers of seized property take place? In 2022 and January-April 2023, ARMA announced 324 competitions for managers. According to Dmytro Zhoravovych, only one participant applied for every third competition, even though the competitions were "widely advertised."

"432 court decisions were received by ARMA during the full-scale war, of which 39% were transferred to competition," Zhoravovych said during a briefing on May 24, 2023. "164 announcements were published on ARMA's website during this time. There is a tab on Prozorro.Sales with information about competitions for managers from ARMA. There are also auctions that freely show such information."

According to Article 21, Paragraph 2 of the Law "On ARMA," assets must be evaluated and transferred under the public procurement system Prozorro. However, until May 2023, the Agency conducted such competitions according to its own established procedure.

Thus, ARMA has created its own, more flexible, rules for conducting manager competitions. Unlike the law on public procurement, an ARMA competition can be held even if only one participant has applied. That is, without competition.

And if two or more participants come to the competition, the tender committee of ARMA votes "for" or "against" a particular proposal. The law on public procurement provides for the automatic determination of the winner based on criteria and evaluation methodology through the electronic procurement system Prozorro. However, ARMA does not have a clearly defined selection methodology. It allows the rejection of other participants' proposals without explanation.

"The selection of the competition winner according to ARMA's procedure is carried out by voting of the committee members outside the electronic procurement system," StateWatch analysts write. "This increases the influence of the human factor on the competition results. And therefore, it does not protect against collusion and the advancement of desired participants through such voting."

"The asset management competitions are quite closed. ARMA can choose not to provide information about an asset and then independently make a decision on the winner. It is a highly corruptible scheme," concluded members of the TIP of the Verkhovna Rada.

The Temporary Inquiry Panel of the Verkhovna Rada gathered information from open sources and the public about the state of affairs in ARMA. Chief of the Asset Management Department Oleksiy Tamozhansky could not provide clear answers to most pressing questions. In the photo, second from the right, is Yaroslav Zheleznyak, the Head of the TIP, and to his right is Anastasiya Radina, the Chair of the parliamentary Anti-Corruption Committee.

Photo by the author

The next day after the TIP meeting, the Acting Chairman of ARMA, Dmytro Zhoravovych, voiced his forecast for budget revenues from managing seized assets, estimating it to be over 1.4 billion UAH per year. "This is under the condition of stable arrests, a favourable market situation, and the absence of additional risks and factors," he specified.

The official website of the National Agency emphasises: "Submissing a comprehensive, high-quality, and well-argued asset management programme is of key importance for competitive selection because the selection of ARMA managers is not just a competition of price proposals but of the content (!) of management programmes."

Oleksiy Tamozhansky also complained that despite extensive advertising, only one applicant applied for asset management in every third competition.

Why is Ukrainian business not interested in managing numerous enterprises, sanatoriums, and elite estates? According to members of the TIP, such a situation is logical because ARMA does not disclose detailed information about its assets. As a result, potential participants cannot prepare a quality application with proposals on how they would manage these assets.

"I found several publications in the media where potential management participants stated that they did not receive enough information about the object, while their competitor somehow obtained this information. And even if you remove corrupt risks, having an advantage in information asymmetry, you confidently apply for this competition. That is why we received only UAH 34.8 million from these billions of assets in the state budget," believes Yaroslav Zhelezniak.

As an example, the TIP analysed the announcement by ARMA regarding the competition for managing the Karpatski Zori ("Carpathian Stars") sanatorium.

On the official ARMA website, there is no detailed information about the objects for which a competition for a manager is announced

"The ARMA Commission visits the facility and verifies the actual presence of these assets. They carry out photographic documentation. This information can be presented in a single document. You should be concerned because the competition's outcome depends on this information disclosure. None of the phone numbers listed on the competition announcement page on the website is working," noted Anastasiya Radina, the Chairperson of the Parliamentary Committee on Anti-Corruption Policy.

The official website of the State Property Fund of Ukraine contains a complete set of documents about privatisation assets, along with the financial indicators of the asset

Commenting on the question of why potential managers cannot see the data about the asset online and are required to physically visit ARMA, Dmytro Zhoravovych stated that he does not consider it a drawback. Instead, he claimed that "it is nothing more than a political insinuation aimed at discrediting me personally," as there is currently a competition for the position of ARMA chairman.