U.S. Magnitsky Sanctions Unenforceable in Bulgaria

Ben Keith writes for Thomson Reuters on 27 March 2023

The prevalence of corruption in Bulgaria is so high that both the United States and the UK have imposed sanctions on current and former government officials and oligarchs to try and stamp out corruption. In the absence of a coordinated strategy between the EU, United States and UK, however, corrupt individuals are able to dodge the intended impact of financial sanctions by hiding behind EU bureaucracy.

As a result, the rule of law and business environment in Bulgaria remains high-risk for corruption and makes investment in the region extremely precarious.

Court ruling says U.S. Magnitsky Act cannot be applied in Bulgaria

A recent decision by the Bulgarian Supreme Administrative Court has confirmed that designated entities can use the EU’s Extraterritoriality Blocking Statute, under which EU member states do not recognise the extraterritorial application of third-country laws, such as the U.S. and UK’s sanction regimes.

On the day of the ruling, Asen Vassilev, Bulgaria’s deputy prime minister, clashed with Delyan Peevski, a sanctioned DPS MP, during parliamentary debate. This followed Vassilev’s announcement that the government is preparing domestic Magnitsky legislation.

Bulgaria erupted with anti-government protests against state corruption in 2020, as millions of euros in EU funding disappeared from the public purse into the pockets of oligarchs. It was reported at the time that a mafia of oligarchs in effect operated a parallel state in Bulgaria, controlled through business, the judiciary and the police. The level of corruption and political instability in Bulgaria poses significant risks for businesses with supply chains and investment in the region.

The next general election, scheduled for April 2, will be the fifth in two years. Dr Radosveta Vassileva, an exiled legal scholar, has  discussed the failure to meet public demand for anti-corruption legislation and judicial reforms.

“Regrettably, Bulgaria’s status quo forces rel[iance] on a panoply of Trojan horses to sabotage anti-corruption reforms and save actors implicated in corruption from accountability. The latest disappointment is President Rumen Radev, who seems to be collaborating with the parties accused of corruption — namely, GERB and DPS — behind the scenes,” Vassileva said.

The Council of Europe’s anti-corruption monitoring body recently criticised Bulgaria for its “ineffective justice system and the absence of any real monitoring of officials’ assets”. It raised concerns about the lack of effectiveness in the judiciary’s responses to corruption offences involving top government officials.

International Magnitsky sanctions

International Magnitsky sanctions are designed to root out corruption and human rights violations by targeting individuals with asset freezes and travel bans, as opposed to sanctioning a whole regime, to maintain diplomatic relations while targeting abusers.

The Magnitsky sanctions against Bulgarian oligarchs, imposed first by the United States in 2021 and most recently by both the United States and the UK in February this year, have brought into sharp focus the EU’s failure to implement effective anti-corruption reforms in Bulgaria while continuing to pump millions of euros into the country.

In 2021, the United States sanctioned three Bulgarian oligarchs and a network of 64 entities owned or controlled by them under its Global Magnitsky Act. Those sanctioned were:

• Vasil Bozhkov, Bulgaria’s richest man, who fled to Dubai in 2000. Bozhkov bribed government officials, including a current political leader and the former chairman of the now-abolished State Commission on Gambling (SCG).

• Delyan Peevski, a former member of parliament and media mogul, also based in Dubai. Peevski engaged in corruption, using influence peddling and bribes to protect himself from public scrutiny and exert control over significant institutions and sectors in Bulgarian society. In September 2019, Peevski actively worked to negatively influence the Bulgarian political process in the October 27, 2019 municipal elections.

• Ilko Dimitrov Zhelyazkov, former national security official and board member of Bulgaria’s largest state energy company. Peevski engaged in corruption through Zhelyazkov, his front man. Peevski and Zhelyazkov had an official placed in a leadership position to embezzle funds to them in 2019.

The sanctions had significant ramifications for Bulgaria’s political and economic landscape when the government blacklisted all related entities, meaning state-owned companies ceased dealings with them and national banks seized their assets. The sanctions prompted the development of Bulgaria’s own anti-corruption legislation, to fill a gap where U.S. sanctions could not be enforced domestically.

In May 2022 a draft “Bulgarian Magnitsky Act” was leaked. Vassilev, Bulgaria’s finance minister at the time, now deputy prime minister, said the draft bill was intended to protect the Bulgarian economy and financial institutions in the event of sanctions imposed by a third country.

Coalition and opposition politicians denied its existence and disputed its democratic foundations, however. 

“The idea of such a bill is creeping fascism. The draft was probably found somewhere in the archives of [Stalin’s secret police chief] Lavrentiy Beria and, collated with the writings of Himmler and Goebbels, has resulted in a fine work. The powerholders are thus seeking to subjugate their coalition partners,” said Tomislav Donchev MP, of the Movement for Rights and Freedoms party.

In February this year, the United States  expanded it Bulgarian sanctions regime in a coordinated effort with the UK, by designating a further five individuals. The individuals added to the list were:

• Rumen Stoyanov Ovcharov, a former Bulgarian member of parliament and member of the Bulgarian Socialist Party (BSP) National Council.

• Aleksandar Hristov Nikolov, former chief executive and deputy director of Kozloduy Nuclear Power Plant (KNPP).

• Ivan Kirov Genov, a former chief executive of KNPP and former MP with the BSP. Ovcharov, Nikolov and Genov coordinated personal commissions by diverting service contracts for KNPP to their own business interests.

• Nikolay Simeonov Malinov, a former MP who leads the pro-Russian lobby group Russophiles National Movement. He was arrested and charged with espionage in September 2019 for spying for Russian-backed interests. He bribed a judge and went to Russia to receive the Friendship Medal from President Vladimir Putin, which came with a 2.5 million Russian ruble award.

• Vladislav Ivanov Goranov, a former minister of finance. Goranov used his position to facilitate the bribery of Bulgarian officials and deprive the Bulgarian government of tax revenues in favour of Bulgarian oligarchs.

The UK also sanctioned the three Bulgarian oligarchs: Bozhkov, Peevski and Zhelyazkov.

Challenge to lawfulness of implementing foreign sanctions

Litigation ensued immediately after the U.S. sanctions in 2021, as business partners and associates of the designated individuals, including Peevski’s mother and Bozhkov’s wife, challenged the lawfulness of implementing foreign sanctions in the absence of any domestic anti-corruption legislation.

In the ruling by the Bulgarian Supreme Administrative Court on February 3, 2023, it was held that, under EU regulations, the U.S. Magnitsky sanctions could not be enforced in Bulgaria. The government blacklist was, in effect, revoked by the ruling.

Two years on from initial talks concerning a Bulgarian Magnitsky Act, political division on the issue is still extremely fraught, which only adds to the country’s political uncertainty and instability for investors. Corruption runs at the highest level in the Bulgarian parliament, and investment in the region remains a high-risk activity, particularly while it is open for corrupt individuals to hide behind the local political stalemate and EU inaction.

This article was first published in the Regulatory Intelligence section of Thomson Reuters on 27 March 2023, you can view the original article here.