Latest round of Ukrainian sanctions against Russian-based IT companies complicates observance of mandatory accounting in Ukraine

May 18, 2017

With effect of May 17th, 2017, Ukraine extended sanctions against individuals and legal entities related to pro-Russian separatists and the Russian Federation. The relevant decision of the National Security and Defense Council of Ukraine (NSDC) “On the enforcement of personal special economic and other restricting measures (sanctions)” was passed on April 28th, 2017 and put into effect by order No. 133/2017 of president Poroshenko that was signed on May 15th and published officially on May 17th 2017. After this latest extension, a total of 1,228 individuals (http://www.rnbo.gov.ua/files/2017/phiz_osob.pdf) and 468 legal entities (http://www.rnbo.gov.ua/files/2017/Yur_osob.pdf) are covered by Ukrainian sanctions.

 

Operators of Russian social networks and provider of 1-C accounting software are covered

 

Persons and entities covered by the order No. 133/2017 face assets freezes, restrictions of business activities, exclusion from public tenders and other restrictions for periods between one and three years. The order attracted significant media attention as it includes Russia's most popular website and social network operators, including the operators of social networks VK.com and Odnoklassniki, search engine Yandex and of the Mail.ru email service. Until recently, these internet services have been popular with many Ukrainians despite political tensions between Ukraine and Russia.

 

Further, approximately a dozen legal entities producing or distributing the “1-C” accounting software were covered by the latest extension of sanctions, too. While attracting less media attention, the consequences on businesses operating in Ukraine may be significantly more severe, taking into account that “1-C” so far has hold an almost monopolistic position as software for small and medium size enterprises in Ukraine.

 

Legal mechanism of sanctions

 

Legal restrictions are specified for each affected individual or entity in Annexes to the decision of the NSDC, typically prohibiting repatriation of funds, pausing commercial operations, interrupting provision of telecommunication services, restricting use of intellectual property rights, restraining fulfilment of contractual and financial obligations, and exclusion from public tenders.

 

Order No. 133/217 assigns the Ukrainian government, the intelligence service SBU and the National Bank with further implementation of the new legal restriction. As of mid-May 2017, websites of sanctioned IT companies were still accessible from Ukraine. However, technical limitations are expected to be introduced in the near future, as Ukrainian internet providers are obliged to technically block access to websites of sanctioned website operators.

 

No fines are foreseen for users of sanctioned websites, and Ukrainian legislation does currently not foresee legal restrictions on using technical circumvention (i.e. IP obfuscation, VPN software) for accessing foreign websites.

 

Impact on 1-C accounting software environments

 

As in other ex-Soviet countries, the 1-C (“odin-ess”) enterprise software has been for many years a de-facto standard software for automating financial and accounting operations of small and middle businesses in Ukraine. Typically, statutory and management accounting and reporting to state authorities are handled by the 1-C enterprise software suite, which included ongoing updates implementing changes in taxation, forms etc. A vast majority of Ukrainian businesses using 1-C relied on its accuracy and compliance with effective accounting requirements.

 

Order No. 133/2017 extended sanctions for the first time on the producer of 1-C software (Russian legal entity “OOO 1-C”) and on its most relevant software distributors in Ukraine, e.g. LLC “1C Multimedia Ukraine” (Kiev); LLC “1C-Tellur Module” (Lviv); LLC “1C-Rarus Soft” (Kharkhiv); LLC “Skyline Software” (Kiev), DP “EvroSoftProm” (Kiev).

 

Order No. 133/2017 did not prohibit holders of active licenses the use of 1-C software. However, any future use of 1-C will likely face increasingly severe difficulties:

  • No extension of software licenses for operative 1-C software installations will be possible through the sanctioned producer and distributors of this software.

  • Online software updates, bug fixes and actualizations to changes in taxation, accounting rules or other laws are restricted, as the provision of telecommunication services was prohibited to the sanctioned producer and distributors of 1-C software.

As Ukrainian business operators’ obligation to comply with effective accounting standards exists independently from the practical availability of standard software, companies using 1-C are liable for accounting errors caused by software that is obsolete or faulty. Ukrainian users of 1-C software should therefore reassess compliance procedures regarding accounting and reporting, as reliance on correctness of 1-C software cannot be taken for granted anymore.

 

 

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