Russian one. This is why member states of the EaP must keep a strong cooperation with precise perspectives of development and prosperity.<fnref n="37" />

As a consequence, in between the game of powers, the countries of the European Eastern Neighbourhood must facilitate economic and political developments. The EaP is for now what seems to have the strongest influence in the region, especially regarding Ukraine, Georgia and Moldova, with many set goals. In this regard, the access to other countries through the global market is important. The geography of states presents several challenges, more specifically in relation with Georgia. This can be seen through for example the cross-border cooperation which facilitates the development of regional infrastructure networks and thus support trade.<fnref n="38" />

## CONCLUSION

Originally, Eastern Partnership set the goal of bringing Eastern Europe and the South Caucasus closer to European standards. Undoubtedly, the economic and financial crisis of the eurozone and a more determined Russian policy have undermined the European capacity to model in the region. For too long, European actors have focused their attention on governments rather than on civil society. In fact, the EU needs to involve civil society actors in the main negotiations, through the exchange of information and consultation.

Furthermore, it is hardly surprising to see Russia in the current debates. Moscow, which can be regarded as a “soft power” toward the ancient soviet region, retains privileged positions in a space that it considers a privileged area of interest, as shown by its diplomatic activism.<fnref n="39" /> The conflict with Russia is not yet completely frontal today as the European Union continues to demand the application of the Minsk agreements and maintains pressure through sanctions.

However, with regards to the year 2017, the EaP has made improvements towards the settlement of goals regarding the major issues between the EU and its ENP. The cooperation based on democracy, human rights and security and development stability, is far from the one the EaP used to know back to its beginning. In this regard, the leaders of the EU, even if still reticent to any adhesion of these countries, are aiming for maintaining a strong partnership despite many other influences in the region. In this sense, it is without doubts that a strong European influence is set throughout its Eastern Neighbourhood. Besides, its ambition regarding the partnership program is thus legitimate.

Without considering to what the evolution of the EaP will lead, it is in any case essential that it does not appear as placing the countries to which it is addressed with an obligation to make an exclusive choice between the European Union and Russia. The Eastern Partnership should not lead these countries to exclude any relations with Russia, as the maintenance of links with Russia can not result in the exclusion of the Partnership. Convergence is to be found between the Eastern Partnership and Russia.<fnref n="40" /> Besides, the influence of a fast-growing China towards the extreme East is also an important consideration regarding the possible evolution of the EaP. According to the professor and French diplomat Maxime Lefebvre, the EU must not abandon the voluntarism of its neighborhood policy, but the experience of the last fifteen years should encourage it to be modest,

<footnote n="37">³⁷ C. Bret, «Du partenariat oriental au rapprochement avec la Chine, l'Europe de l'Est est-elle sur la voie de l'émancipation diplomatique ?», France Culture, 30 November 2017.</footnote>

<footnote n="38">³⁸ A. B. Tatjana Muravska, «Towards a New European Neighbourhood Policy (ENP): What Benefits of the Deep and Comprehensive Free Trade Agreements (DCFTAs) for Shared Prosperity and Security?», *Political and Legal Perspectives of the EU Eastern Partnership Policy*, Springer, 2016, p. 23.</footnote>

<footnote n="39">³⁹ F. Parmentier, *L'UE À L'ÉPREUVE DU PARTENARIAT ORIENTAL*, Institut Jacques Delors, 2013.</footnote>

<footnote n="40">⁴⁰ Sénat, «Le Partenariat oriental : une nécessaire refondation», 23 May 2018.</footnote>
realistic and flexible. Nor should the EU restrict its priority horizon to its immediate eastern or Mediterranean neighborhood, as it was written in 2003.<fnref n="41" />

## REFERENCES:

**Academic articles:**

Casier, T. (2014) Building a Stronger Eastern Partnership: Towards an EaP 2.0, Global Europe Centre University of Kent.

Chochia, A. (2012). The European Union and its policy towards the neighbors from South Caucasus. L'Europe unie/United Europe, 6, 27-35.

Chochia, A.; Popjanevski, J. (2016). Change of Power and Its Influence on Country's Europeanization Process. Case Study: Georgia. In: Kerikmäe, T.; Chochia, A. (Ed.). Political and Legal Perspectives of the EU Eastern Partnership Policy (197-210). Springer International Publishing.

Evas, T.; Batura, O. (2016). Eastern Partnership and ICT. In: Kerikmae, T and Chochia, A (Ed.). Political and Legal Perspectives of the EU Eastern Partnership Policy (35-57). Springer-Verlag Heidelberg.

Hoffmann, T.; Chochia, A. (2018). The Institution of Citizenship and Practices of Passportization in Russia's European Neighborhood Policies. In: A. Makarychev, T. Hoffmann (Ed.). Russia and the EU Spaces of Interaction (223-237). Routledge, Taylor&Francis Group.

Kerikmäe, T; Nyman-Metcalf, K; Gabelaia, D; Chochia, A (2014). Cooperation of Post Soviets with the Aim of not being "Post" and "Soviets". In: N. Šišková (Ed.). From Eastern Partnership to the Association. The Legal and Political Analysis (144-159). Cambridge Scholars Publishing.

Kerikmäe, T.; Chochia, A. (Eds.) (2016). Political and Legal Perspectives of the EU Eastern Partnership Policy. Springer International Publishing.

Kerikmäe, T.; Nyman-Metcalf, K. (2012). Less is more or more is more? Revisiting universality of human rights. International and Comparative Law Review, 12 (1), 35-51.

Misnikov, Y. (2016) Democratisating the Eastern Partnership in the Digital Age: Challenges and Opportunities of Political Association Beyond the Language of Official Texts. In: Kerikmae, T and Chochia, A (Ed.). Political and Legal Perspectives of the EU Eastern Partnership Policy (35-57). Springer-Verlag Heidelberg.

Muravska, T. (2016) «Towards a New European Neighbourhood Policy (ENP): What Benefits of the Deep and Comprehensive Free Trade Agreements (DCFTAs) for Shared Prosperity and Security?», Political and Legal Perspectives of the EU Eastern Partnership Policy, Springer.

Parmentier, F. (2013) L'UE À L'ÉPREUVE DU PARTENARIAT ORIENTAL, Institut Jacques Delors.

Petrov, R. (2016) «Implementation of Association Agreements Between the EU and Ukraine, Moldova and Georgia: Legal and Constitutional Challenges,» Political and Legal Perspectives of the EU Eastern Partnership Policy, Springer, 2016.

Tsybulenko, E.; Pakhomenko, S. (2016). The Ukrainian Crisis As A Challenge For The Eastern Partnership. In: Kerikmäe, T.; Chochia, A. (Ed.). Political and Legal Perspectives of the EU Eastern Partnership Policy (167-179). Springer International Publishing.

Vernygora, V.; Troitino, D. R.; Västra, S. (2016). The Eastern Partnership Programme: is pragmatic regional functionalism working for a contemporary political empire? In: T. Kerikmäe and A. Chochia (Ed.). Political and Legal Perspectives of the EU Eastern Partnership Policy (7-22). Germany: Springer International Publishing.

**Official websites:**

European Council, Council of the European Union, «Eastern Partnership summit, 24/11/2017,» November 2017. Accessed at: http://www.consilium.europa.eu/en/eapsummit/

<footnote n="41">⁴¹ M. Lefebvre, «diploweb.com La revue géopolitique,» La politique étrangère européenne : quel bilan ?, 2 June 2016.</footnote>
European Union External Action, «Eastern Partnership,» European Union External Action, 19 October 2016. Accessed at: https://eeas.europa.eu/topics/eastern-partnership/419/eastern-partnership_en

European Union External Action, «Participation of ENP countries in EU programmes,» 8 January 2016. Accessed at: https://eeas.europa.eu/headquarters/headquarters-homepage/11079/participation-enp-countries-eu-programmes_en

K. B. / K. Jongberg, «The European Neighbourhood Policy,» European Parliament, January 2018. Accessed at: http://www.europarl.europa.eu/aboutparliament/en/displayFtu.html?ftuId=FTU_5.5.4. html

S. Communications, «European Neighbourhood Policy (ENP),» European Union External Action, 21 December 2016. Accessed at: https://eeas.europa.eu/headquarters/headquarters-homepage/330/european-neighbourhood-policy-enp_en

Sénat, «Le Partenariat oriental : une nécessaire refondation,» 23 May 2018. Accessed at: http://www.senat.fr/rap/r15-797/r15-7972.html

Other regulatory documents:

C. Bret, «Du partenariat oriental au rapprochement avec la Chine, l'Europe de l'Est est-elle sur la voie de l'émancipation diplomatique ?»,» France Culture, 30 November 2017. Accessed at: https://www.franceculture.fr/emissions/les-enjeux-internationaux/les-enjeux-internationaux-jeudi-30-novembre-2017

E. Commission, «Review of the European Neighbourhood Policy,» chez JOINT COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS, Brussels, 2015.

EU Neighbours East, «Eastern Partnership: Panel on security, defence policy and civil protection meets in Brussels,» 18 May 2018. Accessed at: https://www.euneighbours.eu/en/east/stay-informed/news/eastern-partnership-panel-security-defence-policy-and-civil-protection.

Le dessous des cartes, «Transnistrie: le pays qui n'existe pas,» Arte, 19 May 2018. Accessed at: https://www.arte.tv/fr/videos/078191-012-A/le-dessous-des-cartes/

M. Lefebvre, «diploweb.com La revue géopolitique,» La politique étrangère européenne : quel ?, 2 June 2016. Accessed at: https://www.diploweb.com/La-politique-etrangere-europeenne.html
# The Influence of Creating a Common Defence System to EU's Foreign Policies

TUULI DUNDER

UNIVERSITY OF TURKU, FINLAND

**Abstract:** This text aims to highlight the possible outcomes of creating a common defence system for the European Union. The text enlightens the different defence cooperation scenarios and furthermore introduces the pros and cons of having really tight cooperation in the field of defence. By reading this work one should be able to understand that creating a common defence system for EU is problematic because of its original foreign policies. Shortly put, this text deals with the disharmony of EU policies and high level of cooperation in military defence.

**Keywords:** conditionality, defence policy, security dilemma, European Union, peace

## 1. INTRODUCTION

### 1.1 EU's Foreign Policy

Since forming the European Economic Community, its foreign policy was always somewhat economic-orientated. When Maastricht Treaty (TEU) and thus the European Union was established in 1992, EU's foreign policy took a turn: Maastricht Treaty lays down the principles and values according to which European Union is supposed to function – respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities.¹² In addition pluralism, non-discrimination, tolerance, justice, solidarity and equality between women and men are mentioned in the same article.

These values form the foreign policy of the EU. Article 21 of TEU points out that the Union's actions on the International scene shall be guided by the principles that have inspired its own creation, intending the principles mentioned above. This basically means that alongside of economic goals, EU was now also engaged in promoting these values in question – and still is.

EU wants to see itself as a „peacepromoter” in the world politics. This is in fact why EU is the biggest donor in the world, accounting for 60 % of official development assistance (Member States and European Commission aid taken together) provided to more than 160 countries, territories and organisations worldwide.<fnref n="3" /> The EU is also the main trade partner of poorest countries: 40 % of its imports come from developing countries.<fnref n="4" /> The financial aid can be linked with EUs values, since EU uses value conditionality as a policytool: EU lays down the rules according to which the state should operate, and if those rules are followed, the financial aid is provided.<fnref n="5" /> This is one of the ways Union can promote its principles in foreign relations, and has worked well for example in EU-ASEAN relations.

One of the priority areas and main objectives relating to foreign policy of the EU is conflict prevention.<fnref n="6" /> It has for example been part of conflict resolution in Colombia and supported the post-war Colombia by 163 million euros in 2007-2013 in order to create the conditions for the rule of

<footnote n="1">¹ Treaty on European Union, article 2</footnote>

<footnote n="2">² Kerikmäe, T.; Nyman-Metcalf, K. (2012). Less is more or more is more? Revisiting universality of human rights. International and Comparative Law Review, 12 (1), 35–51.</footnote>

<footnote n="3">³ D. Castaneda (2012), *The European Union in Colombia: Learning How To Be a Peace Actor*, Paris Papers, IRSEM</footnote>

<footnote n="4">⁴ D. Castaneda (2012), *The European Union in Colombia: Learning How To Be a Peace Actor*, Paris Papers, IRSEM</footnote>

<footnote n="5">⁵ E. Fierro (2013), *The EU's Approach to Human Rights Conditionality in Practice*, Martinus Nijhoff Publishers</footnote>

<footnote n="6">⁶ D. Castaneda (2012), *The European Union in Colombia: Learning How To Be a Peace Actor*, Paris Papers, IRSEM</footnote>
law, justice, human rights, productivity, competitiveness and trade.<fnref n="7" /> EU also froze the cooperation with ASEAN for three years when Burma/Myanmar joined ASEAN in 1997: the goal was to put pressure on ASEAN countries as one of their main trading partners so that they would force Burma/Myanmar to stop exploiting the citizens and thus preventing the possible conflict.<fnref n="8" /> EU has also been a great part in negotiating the famous Iranian nuclear deal. Regarding to this specific field in the next chapter I will introduce the idea of the EU's common defence system and the driving forces behind the idea.

## 1.2 Common Security and Defence Policy

Common Security and Defence Policy (CSDP) of the European Union is an integral part of the EU's comprehensive approach towards crisis management, and has been on voluntary and soft basis for the whole time of its existence.<fnref n="9" /> Attempts to move towards common defence have been part of the European project since its inception, yet it still has not materialised<fnref n="10" /> – common defence remains as a policy, not an integral system of European Union. This basically means that defence for EU is a soft power, and in a large scale European Union Member States are not co-operating in a military level.

CSDP enables EU to take some preventative measures, but that's about it. The former president of European Commission, Jean-Claude Juncker, sees it this way: "We need to work on a stronger Europe when it comes to security and defence matters. Yes, Europe is chiefly a soft power. But even the strongest soft powers cannot make do in the long run without at least some integrated defence capabilities."<fnref n="11" /> Though article 42 (6) of TEU provides the possibility for a group of like-minded Member States to take European Defence to the next level, the co-operation remains on voluntary basis and almost non-existent.<fnref n="12" />

The Common Defence System has been discussed for a long time, and one of the reasons is the worsening situation of the global politics – also in European Union's neighbourhood, such as in Ukraine.<fnref n="13" /> The current High Representative Federica Mogherini and a member of Commission, Jyrki Katainen, have launched a reflection paper on the future of European Defence, where they define the framework and future for EU's common defence.<fnref n="14" /> According to the paper, more needs to be done if the Union is to take greater responsibility for European security. I will now introduce three scenarios that the paper suggest for the future cooperation.

First scenario is “security and defence cooperation”, which seems to be pretty close to what EU has now. Cooperation would remain voluntary and include small-scale military missions and operations aimed at crisis management. EU would enhance cooperation between its partner countries simultaneously reinforcing its own resilience. The cooperation with NATO would intensify, though the responses to non-conventional threats would remain largely on national basis,

<footnote n="7">⁷ European Commission, International Cooperation and Development, Colombia, retrieved from https://ec.europa.eu/europeaid/countries/colombia_en 16.5.2018</footnote>

<footnote n="8">⁸ N. A. de Flers (2010), *EU-ASEAN Relations: The Importance of Values, Norms and Culture*, EU Centre, Singapore Working Paper No. 1 June 2010</footnote>

<footnote n="9">⁹ European Union External Action, CSDP, retrieved from https://eeas.europa.eu/topics/common-security-and-defence-policy-csdp_en?page=1 21.5.2018</footnote>

<footnote n="10">¹⁰ European Commission, *Defending Europe*, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>

<footnote n="11">¹¹ European Commission, *Defending Europe*, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>

<footnote n="12">¹² European Union External Action, Permanent Structured Cooperation Factsheet (9.3.2018), *Deepening Defence Cooperation among EU Member States*</footnote>

<footnote n="13">¹³ Sayapin, S.; Tsybulenko, E. (Eds.) (2018). The Use of Force against Ukraine and International Law. Jus ad bellum, jus in bello, jus post bellum. The Hague: Springer, T.M.C. Asser Press.</footnote>

<footnote n="14">¹⁴ F. Mogherini, J. Katainen (June 2017), *Reflection Paper on the Future of European Defence*, European Commission</footnote>
meaning that the main focus of for example combating terrorism would be on states responsibility – with increased support from the EU. The technological cooperation would increase, but only a little bit: states would still continue to produce and develop the platforms by themselves. So there would be a little increase in everything, but no major changes.

The second scenario, “shared security and defence”, is already more serious. EU would engage fully in external crisis management, and the cooperation with NATO would be more military one also on EU’s side. There would be greater financial solidarity: there would be aligned defence planning, common development and procurement of complex platforms and shared intelligence. Member States would have coordinated surveillance operations, and the threats falling below the threshold of the Washington Treaty would be taken into account more seriously and actively. In this scenario the defence cooperation would be more of a norm than an exception, and the EU would drastically build up its capacity.

In the last scenario the aim is clear: Unions common army. This so called “common defence and security” would enable EU to exploit the article 42 of TEU fully: the protection of Europe would become a mutually reinforced responsibility of the EU and NATO. The paper further suggests that in this scenario security threats should be systematically monitored and assessed jointly, the strategic planning should happen in EU level and the defence forces of the Member States should be integrated on a higher scale. There would be permanently available forces for rapid deployment on behalf of the Union, and the defence planning in its whole would be fully synchronised. Basically EU would unite and integrate the defence systems of Member States by moving the strategic planning and command on the EU level.

In this paper I will mostly focus on the third scenario, and what would be the consequences of this change for the European Union’s foreign policy. I will consider this through EU’s current policies, how they would be affected and why. I will look this scenario through economic and international security theory approaches and come into a conclusion: would the change be negative or positive or neither?

## 2. ECONOMIC APPROACH

Scenario 3 would require some serious flows of money. Examining the effects of uplifting the EU’s military expenditures (on the required level of scenario 3) for EU’s economy has an important point. The EU’s role as a peace promoter in the global politics has grown since the 90’s. This global standing has been possible because of the achievements made in the human rights field – and the conditionality policy has been a major tool in these achievements. The conditionality policy, though, does not work if EU doesn’t have the money to sustain it: if the money is started being put in military assets, it is away from something else. First things to cut would probably be donations, development programmes abroad and other peace promoting measures EU is known for. Below I will observe the influence of raised military expenditure on EU’s economy and its effects on EU’s foreign policy.

Comparing the numbers, Union’s military expenditure is approximately half of that what US spend on defence: in 2014 EU and its Member States spent 227 billion euros, whereas USA put 545 euros in military assets.<fnref n="15" /> Basically this means that USA puts 2% more of its GDP on military expenditure – in total 3,3%.<fnref n="16" /> The problem doesn’t lie in these numbers: the expenditure itself does not guarantee the quality of defence, and the GDPs of these two are hardly comparable. The Union’s

<footnote n="15">15 European Commission, Defending Europe, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>

<footnote n="16">16 European Commission, Defending Europe, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>
problem is inefficiency, which has its roots in the lack of cooperation and integrity in the field of
defence.

The point is that while US has about 30 types of weapon systems, EU has 178 of them –
US has 1 type of main battle tanks, 4 different ship systems and 6 in aircraft, while the numbers in
the Union are 17, 29 and 20.17 Around 80 % of defence procurement is run on a purely national
basis, leading to this costly duplication of military capabilities – the lack of cooperation between
Member States in the field of defence and security is estimated to cost annually between 25-100
billion dollars.18 Duplications decrease the effectiveness and complicate the possible cooperation
in defence between states. The problem is that uniting states’ technological platforms of warfare
would be unbearable burden to many of the states, since it would require much more capital than
the costs of duplications. On the other hand, the elimination of duplications would be much more
long-sighted than sticking in the current system.

The European Commissions “Defending Europe Factsheet” also claims, that more Europe
in defence would have positive spill-over effect on the European economy: at the moment the
European defence industry generates a total turnover of 100 billion euros per year and 1,4 highly
skilled people are employed directly or indirectly – each euro invested in defence is generating a
return of 1.6 in particular in skilled employment, research and technology. Though I don’t suspect
the validity of this argument, the University of Massachusetts has researched that virtually any other
form of government spending, from health care to infrastructure to alternative energy development,
produces one and one-half time as many jobs per billion dollars spent as spending on military.19
This is why to my mind the spending on military assets and justifying it by promoting it as a job
creator is an invalid argument.

Also the World Bank and International Monetary Fund (IMF) found in their joint research
that for the average country a doubling of military expenditure reduced the growth rate for a period,
eventually leading to a reduction in the level of income of 20 percent.<fnref n="20" /> The bulk of financial
resources for common defence would come from national sources<fnref n="21" />, and this is why the movement
towards scenario 3 should be really slow, since the states can’t financially handle the drastic increase
in military expenditure. Too rapid development in the field could seriously harm EU’s economy
and its political standing as the richest region in the world, and thus also affect negatively on its
foreign policy.

A Global Strategy for the European Union’s Foreign and Security Policy 2016 has defined
a framework for EU’s outer relations: “It has long been known that preventing conflicts is more
efficient and effective than engaging with crises after they break out. We will therefore redouble
our efforts on prevention, monitoring root causes such as human rights violations, inequality,
resource stress, and climate change – which is a threat multiplier that catalyses water and food
security, pandemics and displacement.”<fnref n="22" /> The realization of scenario 3 is not planned to focus only
on pre-emptive measures: the point is to prepare for the worse and to be able to intervene conflicts.
As the former statement highlights, it is not that effective. The money put on military would of

<footnote n="17">17 European Commission, Defending Europe, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>

<footnote n="18">18 European Commission, Defending Europe, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>

<footnote n="19">19 W.D. Hartung, C. Lutz (April 2017), *The Military Budget and the Costs of War: The Coming Trump Storm*, Brown University</footnote>

<footnote n="20">20 P. Collier (2006), *War and Military Expenditure in Developing Countries and Their Consequences for Development*, The Economics of Peace and Security Journal, 2006 vol 1 n. 1, ISSN</footnote>

<footnote n="21">21 F. Mogherini, J. Katainen (June 2017), Reflection Paper on the Future of European Defence, European Commission</footnote>

<footnote n="22">22 European Union Global Strategy (June 2016), *Shared Vision, Common Action: A Stronger Europe*, retrieved from http://eeas.europa.eu/archives/docs/top_stories/pdf/eugs_review_web.pdf 22.5.2018</footnote>
course also reduce the assets put in pre-emptive measures, and the EU's foreign policy would be reshaped – if EU starts to emphasize the importance of being prepared to war over eliminating the reasons leading to it, to me it sounds like a dramatic change in its foreign policy.

The stronghold of EU has always been the money. As Montesquieu stated, peace is the natural effect of trade; also liberal economic theorists have argued that capitalist economic systems and the free exchange of goods in an international market economy are the best guarantors of peace.<fnref n="23" /> As I mentioned in my introduction, EU is the major trade partner of many developing countries and regional coalitions – the amount of money EU has enables it to support states financially and lifting them to stand on their own feet. If this bulk of money is started to direct on defence instead of import, EU starts to create an environment which actually might require cooperation likely to scenario 3.

The duplication in EU's military expenditure is a frustrating wormhole, which should be gotten rid of, and thus it would be good for economy to increase the cooperation. The attempts to reach scenario 3 should be taken really slow: the economy is the power asset of EU, and it enables EU to promote peace and prevent conflicts through trade, aid and different kind of policy tools. Without the most stable regional economy in the world, EU would lose its political stand, which even a strong military could not replace.

### 3. SECURITY DILEMMA

The main argument for building EU's common defence capacity is the unsafety of the globe: the common idea is that one has to own a strong military in order to be fully safe. Even the European Commissions' factsheet on Defending Europe underlines that the citizens of EU will feel and be safe only by advancing firmly along the path of defence.<fnref n="24" /> European Union's role in the global politics have been based on its peacebuilding capacities, which arise from EU's somewhat neutral and soft approach on international conflicts. In the following chapter I will introduce the security dilemma and the probable consequences of EU's militarization according to scenario 3: I will examine the EU's global stand and reputation and how that would change if common defence system would be built.

The point of having a common defence is the fact that great military would serve as a deterrence for other states: it's a statement for being able to act if certain circumstances aren't met, and thus it is also a pre-emptive measure in a sense. The problem is the security dilemma by John Herz which is well summarized by Glenn H. Snyder: "The theory says that even when no state has any desire to attack others, none can be sure that others intentions are peaceful, or will remain so; hence each must accumulate power for defense. – Consequently, each party's power increments are matched by the others, and all wind up with no more security than when the vicious cycle began, along with the costs incurred in having acquires and having to maintain their power."<fnref n="25" /> It has been researched that each time one country raises its military expenditure there will be a ripple effect across the region – further, as neighbours respond to the initial increase, the country that increases its military expenditure may itself respond with further increases: the classic process of arms race.<fnref n="26" /> This will definitely apply also in regional military cooperation, since for example US and Russia

<footnote n="23">²³ Jack S. Levy (1998), *The Causes of War and the Conditions of Peace*, Rutgers University</footnote>

<footnote n="24">²⁴ European Commission, Defending Europe, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>

<footnote n="25">²⁵ G.H. Snyder, 1984, *The Security Dilemma in Alliance Politics*, World Politics vol 36 n. 4 pp. 461-495, Cambridge University Press</footnote>

<footnote n="26">²⁶ P. Collier (2006), War and Military Expenditure in Developing Countries and Their Consequences for Development, The Economics of Peace and Security Journal, 2006 vol 1 n. 1, ISSN</footnote>
might feel themselves threatened if EU joins the armament race. In the end of the day, something that seems to be pre-emptive measure could actually be the wire for explosives.<fnref n="27" />

The argument is also supported by the dyadic-level “power preponderance” hypothesis, which holds that war is least likely to occur when one state has a preponderance of power over another and is most likely when there is an equality of power.<fnref n="28" /> It is also found that regional wars escalate to global wars only under conditions of a deconcentration of naval power and economic wealth at the global level.<fnref n="29" /> Though this kind of information may be hard to swallow, I think it should be taken into account: the fact is, the more powerful state has no real interest in attacking the other military coalition if it does not feel threatened. On the other hand if the military assets of the arguing countries/communities are equal, the dispute will be much more likely to escalate since both are feeling threatened and not willing to compromise. Also to my mind the negotiating standings of the “under powered” states are not necessarily worse: the global scene takes care of the fact that the state with stronger military can’t blackmail the weaker state, or there will be political consequences.

As not being the most powerful military coalition in the world, it is hard to admit that becoming one wouldn't help either. The US military records have been acknowledged, and to reach that level of defence capability would require too much financial sacrifices at this point. The fact is also that other states are already trying to respond to the defence level of the US: to my mind EU joining the game wouldn't probably have that much of an effect, but EU not joining the game could be a statement to many other actors to not join either. High military expenditures may inadvertently contribute to the risks that it is attempting to reduce,<fnref n="30" /> and at this point the non-militarization would probably lead for more security. The problem is, could EU ever become a strong factor in the world politics, if it doesn't join the game?

To my mind – yes. The comment of current lieutenant colonel of North-Korean Army, Hyong Myong-jin, underscores it well: “As long as America reserves the right to keep more nuclear weaponry, the limitation of our nuclear power can’t be discussed.”<fnref n="31" /> When the states are too equal in their military assets, there is usually no space for negotiations. The most powerful state is not necessarily the one who has the most weaponry or soldiers: to me it occurs that it might as well be the one who is most listened in the global platform. European External Action Services’ Chief operating officer David O’Sullivan has also said that the absence of a military in the region is an asset to the EU in negotiations,<fnref n="32" /> referring to the six party talks on denuclearisation of North Korea. Though it might be hard to acknowledge, the absence of EU’s military might actually be its trump.

The scenario 3 aims to build a strong, well organized military between the Member States. In this scenario a lot of money would be put in assets that are used only if the war occurs. The scenario underlines the importance of military for security, and I think this would change EU's foreign policy drastically. These kind of changes would cause other states to wonder whether they should start arms race too. I think first of all states would really start to pick up their enemies and

<footnote n="27">²⁷ For Russian foreign policy, please see: Hoffmann, T.; Chochia, A. (2018). The Institution of Citizenship and Practices of Passportization in Russia's European Neighborhood Policies. In: A. Makarychev, T. Hoffmann (Ed.). Russia and the EU Spaces of Interaction (223–237). Routledge, Taylor&Francis Group.</footnote>

<footnote n="28">²⁸ Jack S. Levy (1998), *The Causes of War and the Conditions of Peace*, Rutgers University</footnote>

<footnote n="29">²⁹ Jack S. Levy (1998), *The Causes of War and the Conditions of Peace*, Rutgers University</footnote>

<footnote n="30">³⁰ P. Collier (2006), *War and Military Expenditure in Developing Countries and Their Consequences for Development*, The Economics of Peace and Security Journal, 2006 vol 1 n. 1, ISSN</footnote>

<footnote n="31">³¹ K. Pajari (April 2018), *Pohjoiskorealainen sotilas Hyong Myong-jin ei ole koskaan käynyt ulkomailla – ”Haluaisin matkustaa Amerikkaan ymmärtääkseni mikä heitä vaivaa”*, Helsingin Sanomat retrieved from https://www.hs.fi/ulkomaat/art-2000005656480.html 26.4.2018</footnote>

<footnote n="32">³² A.S. Millard (2017), *The EU's Potential Role in the Six Party Talks and Denuclearisation*, Baltic Journal of European Studies, Tallinn University of Technology vol 7 n. 2</footnote>
partners: to this day EU has been sending a message that enemies are not necessary, you can actually try to get along with everyone – by creating an army it states the opposite.

This would probably lead to new, stronger partnerships with certain states, and maybe cause friction with some relationships. In this case EU should also take into account for example their energy resources: they should be very well secured, since at the moment EU is dependant on external resources. There should be no way any state could actually blackmail EU, which would be more probable if having a stronger military – the security of the people would be undermined. Thus in order to secure safety of the citizens EU should truly focus on becoming independent also in other levels than military assets, which would probably also reduce the trade rate and in some extent the cooperation with other states.

In addition, the European Neighbourhood Policy (ENP) would probably be enhanced, and the relationships with neighbouring states would be tightened – EU wants to secure its back and neighbouring states want the support of a strong power.33 The bigger picture is pretty much clear: EU could not stand with straight back with its human rights driven policies, if joining the conflicts violently each time they occur. The scenario 3 states that EU would take more active role in conflicts in the field34 – if Syrian war has thought us something, it would be that running for “help” in the field does not increase safety or the possibility of the war to end. The important steps towards peace and cooperation are made around the table – probably the main idea of having the scenario 3 would be better negotiating standings in these discussions in question. EU’s foreign policy would turn from conflict resolution by human rights promoting to conflict resolution by threatening.

4. CONCLUSION

In 2015 the US invested more than twice as much as the total spending of EU Member States on defence, and China has increased its defence budget by 150% over the past decade.35 It is no wonder EU feels like it should keep up with the most influential political actors. The rapid changes in EU's policies towards defence are reshaping the whole image and political appearance of the Union – in good and in bad.

There are pros and cons of having the scenario 3 alike defence cooperation. In the current global situation, great military creates credibility: it means that in the end you have the means to put others do what you want, if they don't comply otherwise. This, however, don't go together with EU's current foreign policy strategies – the money flows put in the military would be away from trade and other effective ways on promoting peace and preventing conflicts.

Both aspects are arguable. At the moment EU is a soft power, where human rights conditionality is one of the main policy tools on handling the global situation and guaranteeing EU's status as an effective political actor. The EU's opinion is also widely considered, since it is the richest coalition in the world and has a great effect on global economy. The current situation enables EU to affect through soft means.

The situation though is not enough for EU. The Union wants to be more powerful, and more heard. EU has come to a point where its current policy tools are not powerful enough to make a change in the global politics. EU seems to be going towards a direction, where its foreign policy would be still driven by the principles of Maastricht treaty, but the means for promoting these values would be more forceful. The foreign policy of EU would become more action driven and maybe

<footnote n="33">33 Kerikmäe, T.; Chochia, A. (Eds.) (2016). Political and Legal Perspectives of the EU Eastern Partnership Policy. Springer International Publishing.</footnote>

<footnote n="34">34 F. Mogherini, J. Katainen (June 2017), Reflection Paper on the Future of European Defence, European Commission</footnote>

<footnote n="35">35 European Commission, Defending Europe, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.52018</footnote>
even more effective – by the cost of being labelled as any other meaningful actor in the global politics right now. The problem lies in the deep question of whether through militarization EU gains more negotiating power or actually loses it.

## REFERENCES:

Millard, A. S. (2017) The EU's Potential Role in the Six Party Talks and Denuclearisation, Baltic Journal of European Studies, Tallinn University of Technology vol 7 n. 2

Castaneda, D. (2012) The European Union in Colombia: Learning How To Be a Peace Actor, Paris Papers, IRSEM

de Flers, N. A. (2010) EU-ASEAN Relations: The Importance of Values, Norms and Culture, EU Centre, Singapore Working Paper No. 1 June 2010

Collier, P. (2006), War and Military Expenditure in Developing Countries and Their Consequences for Development, The Economics of Peace and Security Journal, 2006 vol 1 n. 1, ISSN

### Treaty of European Union

Hartung, W. D., Lutz C. (2017) The Military Budget and the Costs of War: The Coming Trump Storm, Brown University

Hoffmann, T.; Chochia, A. (2018) The Institution of Citizenship and Practices of Passportization in Russia's European Neighborhood Policies. In: A. Makarychev, T. Hoffmann (Ed.). Russia and the EU Spaces of Interaction (223-237) Routledge, Taylor&Francis Group.

Kerikmäe, T.; Chochia, A. (Eds.) (2016) Political and Legal Perspectives of the EU Eastern Partnership Policy. Springer International Publishing.

Kerikmäe, T.; Nyman-Metcalf, K. (2012) Less is more or more is more? Revisiting universality of human rights. International and Comparative Law Review, 12 (1), 35-51.

Levy, J. S. (1998) The Causes of War and the Conditions of Peace, Rutgers University

Pajari, K. (2018) Pohjoiskorealainen sotilas Hyong Myong-jin ei ole koskaan käynyt ulkomailla – ”Haluaisin matkustaa Amerikkaan ymmärtääkseni mikä heitä vaivaa”, Helsingin Sanomat retrieved from https://www.hs.fi/ulkomaat/art-2000005656480.html 26.4.2018

Sayapin, S.; Tsybulenko, E. (Eds.) (2018) The Use of Force against Ukraine and International Law. Jus ad bellum, jus in bello, jus post bellum. The Hague: Springer, T.M.C. Asser Press.

Fierro, E. (2013) The EU's Approach to Human Rights Conditionality in Practice, Martinus Nijhoff Publishers

European Commission, Defending Europe, retrieved from https://ec.europa.eu/commission/sites/beta-political/files/defending-europe-factsheet_en.pdf 16.5.2018

European Commission, International Cooperation and Development, Colombia, retrieved from https://ec.europa.eu/europeaid/countries/colombia_en 16.5.2018

European Union External Action, CSDP, retrieved from https://eeas.europa.eu/topics/common-security-and-defence-policy-csdp_en?page=1 21.5.2018

European Union External Action, Permanent Structured Cooperation Factsheet (9.3.2018), Deepening Defence Cooperation among EU Member States

European Union Global Strategy (June 2016) Shared Vision, Common Action: A Stronger Europe, retrieved from http://eeas.europa.eu/archives/docs/top_stories/pdf/eugs_review_web.pdf 22.5.2018

Mogherini, F., Katainen J. (2017) Reflection Paper on the Future of European Defence, European Commission

Snyder, G. H. (1984) The Security Dilemma in Alliance Politics, World Politics vol 36 n. 4 pp. 461-495, Cambridge University Press
# Anti-Money Laundering Risks and Challenges at the Time of Crypto Currencies

HELI MEKLIN

TALLINN UNIVERSITY OF TECHNOLOGY, ESTONIA

**Abstract:** This paper gives an overview on both the challenges and risks that crypto currencies offer for anti-money laundering (AML) legislation. It also points out the possible directions and developments which need to take place in that field. The paper also briefly introduces the concept and function of crypto currencies, as well as the subsequent development of the AML regime. It points out the challenges related to the anonymity as well as the unclear status of the crypto currencies compared to traditional fiat currencies. Finally, the paper discusses the economic effectiveness and disadvantages of current AML procedures, in addition to taking a look at the disadvantages as well as the effects of money laundering in general.

**Keywords:** Anti-money laundering, crypto currencies, tax evasion, tax haven, EU anti-money laundering directive

## 1. INTRODUCTION

<figure><img src="image_3.png" /></figure>

Crypto currencies offer intriguing new methods for those interested in tax evasion, money laundering (ML) or terrorist financing, as individuals may remain anonymous while being in control with the movements of their money.

Anti-money laundering (AML) regulations generally occur after the constantly developing laundering methods. However, crypto currencies offer further challenges by the high level of anonymity in their use as regulators are inevitably behind in the current technological developments. Most of the governments also have yet to fully consider the possible acute AML risks related to crypto currencies.<fnref n="1" />

Since the inception of the most well-known crypto currency, Bitcoin, in the autumn of 2008, the significance, use and value of crypto currency has increased enormously.<fnref n="2" /> Due to the fact that crypto currencies can be converted to conventional fiat currencies and vice versa, as well as allowing the user to remain anonymous, they are very likely to be misused.<fnref n="3" /> The exact amount of contribution of crypto currencies for the money laundering combined with its economical, social and political effects is unknown, but expected to be growing. This creates an urgent need for the development of AML regulations and procedures which also have an effect on crypto currencies.

This paper discusses aspects of the AML risks and challenges related to crypto currencies, aiming to create the further understanding and comprehension needed to find solutions for this complex issue. Firstly, the paper briefly introduces the concept and function of crypto currencies, as well as the subsequent development of the AML regime. Secondly, the paper points out the possible AML risks and introduces suggested AML methods specific for crypto currencies. Finally, the paper discusses disadvantages of money laundering, and the economic effectiveness of the AML procedures.

<footnote n="1">¹ Omri, M.Y., Are Cryptocurrencies ‘Super’ Tax Havens? Michigan Law Review First Impressions, Volume 38, 2013, p. 2</footnote>

<footnote n="2">² Sanchez, E. G., Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens. University of Florida Journal of Law and Public Policy, Volume 28, Number 1, 2017, p. 169</footnote>

<footnote n="3">³ Virga, J. M. International Criminals and Their Virtual Currencies: The Need for an International Effort in Regulating Virtual Currencies and Combating Cyber Crime. Brazilian Journal of International Law, Volume 12, Number 2, 2015. p. 515.</footnote>
## 2. CRYPTO CURRENCIES

### 2.1 Virtual currencies, crypto currencies, and decentralized currencies

Today, crypto currencies, as well as other virtual currencies, are widely used for paying for a range of goods and services. Another function of crypto currencies is that they can be held as an investment.<fnref n="4" /> The most well-known crypto currency, Bitcoin, which also holds the largest market share, came in to existence in October 2008 as the protocol of it was introduced in the Internet by an alias called Satoshi Nakamoto. Crypto currencies are distinguished from other virtual currencies as “the ownership of a particular unit of value is validated using cryptography”.<fnref n="5" /> The issuance and use of crypto currencies are controlled by mathematical functions as well as cryptography. The other specification is the decentralized administration. Crypto currencies have no central administrating authority and no central monitoring or oversight, as the record of transactions is kept by using a blockchain technology.<fnref n="6" /> The actual parties of the transactions remain anonymous, as no personal information is required for the exchange of crypto currencies.<fnref n="7" /> Cryptocurrencies are possible due to blockchain technologies. They come in the category of newly developed technologies, which are very often not easy to protect through intellectual property legal systems (including patents) across the world. Maintaining secrecy or lead times can therefore be more crucial than actually patenting them. Such secrecy can, legally speaking, sometimes be problematic.<fnref n="8" />

### 2.2 Obtaining and trading crypto currencies

Crypto currencies can be obtained by mining. However, they are also traded in exchanges, which offers a way to the market for non-miners. Exchanges can also function as a way to cash out or convert to other virtual currencies.<fnref n="9" /> All virtual currencies in existence today total over 100 billion USD.<fnref n="10" /> Due to their anonymous nature, crypto currencies make an excellent method for different types of money laundering activities, both nationally and internationally. Any new technology will be very quickly exploited for malicious purposes as Agnes Kasper’s historical overview shows<fnref n="11" />, but crypto currencies have their own very favourable features for misuse. It is unknown to which extent crypto currencies contribute to the regime of money laundering, as well as what the costs of it are in both national and global economies.<fnref n="12" /> Yet, the reality is that the amount is growing.<fnref n="13" /> In order to prevent individuals committing crimes which still remain undetected, development of effective AML regulations and procedures for crypto currencies are considered necessary.

<footnote n="4">⁴ Sanchez, E. G., Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens. University of Florida Journal of Law and Public Policy, Volume 28, Number 1, 2017, p. 178</footnote>

<footnote n="5">⁵ Piazza, F. Bitcoin in the Dark Web: A Shadow over Banking Secrecy and a Call for Global Response. Southern California Interdisciplinary Law Journal, Volume 26, Number 3, 2017. p. 528</footnote>

<footnote n="6">⁶ The FATF Guidance for a Risk-Based Approach; Virtual Currencies. www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf, p. 27</footnote>

<footnote n="7">⁷ Piazza, F. (2017), supra nota 5. s. 528</footnote>

<footnote n="8">⁸ Dutt, P.; Ferraro, S.; Chochia, A.; Muljar, R. (2018). Using Patent Development, Education Policy and Research and Development Expenditure Policy to Understand Differences Between Countries – The Case of Estonia and Finland. Baltic Journal of European Studies, 8 (1), 123–153.at page 124</footnote>

<footnote n="9">⁹ ACAMS. Cryptocurrency Compliance: An AML Perspective. files.acams.org/pdfs/2017/Cryptocurrency_Compliance_ An_AML_Perspective_S.Scott.pdf p. 13</footnote>

<footnote n="10">¹⁰ ibid. p. 5</footnote>

<footnote n="11">¹¹ Kasper, A. The Fragmented Securitization of Cyber Threats. p. 159-165. In Kerikmäe, T. ed., Regulating eTechnologies in the European Union – Normative Realities and Trends, Springer, 2014</footnote>

<footnote n="12">¹² Sanchez, E. G., Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens. University of Florida Journal of Law and Public Policy, Volume 28, Number 1, 2017, p. 176</footnote>

<footnote n="13">¹³ Sanchez, E. G., Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens. University of Florida Journal of Law and Public Policy, Volume 28, Number 1, 2017, p. 191</footnote>
## 3. MONEY, MONEY LAUNDERING AND ANTI-MONEY LAUNDERING

### 3.1 Money laundering

Money laundering has traditionally referred to the laundering of drug money. This has been extended to theft, fraud and an increasing number of other offences. The definitions may vary, but the common thread is that money laundering makes illegal income appear legal. Currently, money laundering is considered to cover a range of issues from laundering money from criminal sources, to hiding beneficial ownership for tax evasion as well as terrorism financing. From a legal perspective, there has been a large paradigm shift from the early stages of money laundering.<fnref n="14" />

### 3.2 Anti-money laundering

To fight the disadvantages of money laundering, the policies of anti-money laundering have been developed during the past decades. The EU enacted its First AML Directive in June 1991, introducing main preventative measures such as client identification, record-keeping and central methods of reporting suspicious transactions.<fnref n="15" /> However, a change and a success in the AML regime happened when the regulatory framework changed from a rule based to a risk based approach (RBA). This change shifted more responsibility of AML processes to self-interested Financial Institutions. In the EU this change had happened by the 3rd AML Directive in 2005.<fnref n="16" /> Due to RBA, Financial Institutions have become liable to collect information on their customers and report them to the authorities.<fnref n="17" /> The 5th EU AML Directive, published recently on 19th June 2018, extends the scope of the European Unions regulatory authority to virtual currency platforms. It remains to be seen how the new Directive will affect the use of crypto currencies for the purposes of money laundering both within and outside the EU.

### 3.3 Money

The concept of money, in relation to money laundering, also has various definitions. “A stock or flow, proceeds, wealth or income” can be considered as money.<fnref n="18" /> Crypto currency has generally not yet been considered as ‘money’ or ‘currency’ in many jurisdictions, and its legal status varies. The businesses which deal in crypto currencies are therefore not yet considered as money services businesses (MSBs), and therefore do not have the obligations or responsibilities of MSBs. However, for instance Germany has recognized Bitcoin as a form of private money. Also the US treats Bitcoin as “a currency” in certain situations.<fnref n="19" /> Conversely, Hong Kong does not consider any virtual currencies as “currency” or “legal tender”, nor does it consider dealers providing virtual currency services as falling under the definition of a MSB.<fnref n="20" />

<footnote n="14">¹⁴ The Amounts and Effects of Money Laundering – A Report for the Ministry of Finance February 16, 2006
www.ftm.nl/wp-content/uploads/2014/02/witwassen-in-nederland-onderzoek-naar-criminele-geldstromen.pdf p. 5</footnote>

<footnote n="15">¹⁵ European Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering</footnote>

<footnote n="16">¹⁶ Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing</footnote>

<footnote n="17">¹⁷ Pellegrina, L.D., Masciandro, D. The Risk-Based Approach in the New European Anti-Money Laundering Legislation.
Review of Law & Economics, Volume 5, Issue 2, s.932-933</footnote>

<footnote n="18">¹⁸ The Amounts and Effects of Money Laundering – A Report for the Ministry of Finance February 16, 2006
www.ftm.nl/wp-content/uploads/2014/02/witwassen-in-nederland-onderzoek-naar-criminele-geldstromen.pdf p. 5</footnote>

<footnote n="19">¹⁹ Omri, M.Y., Are Cryptocurrencies ‘Super’ Tax Havens? Michigan Law Review First Impressions, Volume 38, 2013, p.6</footnote>

<footnote n="20">²⁰ The FATF Guidance for a Risk-Based Approach; Virtual Currencies.
www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf, p.18</footnote>
# 4. AML COMPLIANCE CHALLENGES RELATED TO CRYPTO CURRENCY

## 4.1 Challenges related to the legal status and global reach of crypto currency

Due to the fact that crypto currencies are mainly not yet considered as currency, the AML procedures developed to monitor the movements of conventional fiat currencies may not be strictly adaptable to crypto currencies. Additionally, the fact that crypto currencies do not require Financial Institutions in order to function means that the RBA approach and AML compliances of Financial Institutions, as well as the supervisory power of the authorities monitoring them, do not extend to crypto currencies. However this is to be changed within EU, due to the 5th AML Directive.

The international nature and the global reach of crypto currencies heighten their potential AML risks. The dealers, and other entities involved, with transactions are often located in several different countries, which also makes it difficult to define which authority is responsible for AML compliance. Dealers may frequently be located in the countries that do not have adequate controls.<fnref n="21" /> This makes it challenging to investigate and control crypto currencies thus increasing their potential misuse.

# 5. SOLUTIONS FOR AML PROCEDURES RELATED TO CRYPTO CURRENCIES

## 5.1 Base on the existing AML practise

Despite the different legal status of crypto currencies related to fiat currencies, the suggested solutions for AML procedures of crypto currencies are mainly about building procedures based on existing AML requirements and practices. Investigation methods of accounts and transactions for fiat currency may vary from country to country, but the main methods are based on tracking down certain types of transactions, following financial activities of certain listed persons or accounts that are considered to have a higher risk of money laundering. These would then be adapted and practiced for accounts or virtual wallets (VW) used for crypto currencies.

## 5.2 Application on crypto currencies

In order to apply the described kind of existing procedure models, the businesses dealing with crypto or other virtual currencies would firstly need to be considered as MSBs. If this were the case, the obligations such as registration, customer due diligence (CDD), as well as reporting suspicious or certain prescribed actions, would be similar to those of the MSBs dealing with conventional fiat currencies.<fnref n="22" /> The difficulty of this approach is, as earlier stated, that not many countries yet consider crypto currencies as “currency”. Additionally, the definition of what monitoring activities of anonymous accounts and anonymous transactions would mean in practice still remains unclear. The transactions are anonymous with crypto currencies and besides the blockchain, no other records of transactions are kept. This makes it highly difficult to follow the transactions and the origin of the money.<fnref n="23" />

In order to enable the above-mentioned AML procedures to take place, crypto currencies would need to go through some kind of a legitimatization process. According to Edgar Sanchez in his article “Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens”, this would

<footnote n="21">²¹ The FATF Guidance for a Risk-Based Approach; Virtual Currencies. www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf, p. 32</footnote>

<footnote n="22">²² ibid. p.15</footnote>

<footnote n="23">²³ Sanchez, E. G., Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens. University of Florida Journal of Law and Public Policy, Volume 28, Number 1, 2017, p. 188</footnote>
require firstly the recognition of crypto currencies as legal tender as well as that secondly crypto
currencies exchanges would be required to maintain some kind of user identification records.<fnref n="24" />

# 6. A TAX ASPECT TO AML PROCEDURES AND CRYPTO CURRENCY

## 6.1 Taxation challenges of crypto currency

One possible AML risk related to crypto currencies is the opportunity to use them as a tax haven. From a taxation point of view, the approaches for crypto currency are still developing. The US and Germany tax crypto currency movements in the same manner as capital gains. In the US, crypto currencies are considered as property for purposes of income taxation. Individuals are accountable for gains and losses of investments as well as crypto currency exchanges. These are taxed at capital gains and losses rates.<fnref n="25" /> However, if crypto currency is never converted to fiat currency, or if an individual never reports the ownership of crypto currency, then the taxation does not take place. For example, the US tax system requires voluntary reporting, so it is at the own discretion of the individual as to whether the reporting on crypto currency is made or not.<fnref n="26" />

## 6.2 Crypto currency – a new tax haven?

Mariam Omri, in her article “Are Cryptocurrencies ‘Super’ Tax Havens?” points to an idea that as governments are finally gaining success in limiting the use of off-shore tax havens, this might increase the use of crypto currencies as a kind of a tax haven. This can be considered as a very major potential risk, as crypto currencies possess many of the very characteristics of tax heavens thus “Earnings are not subject to taxation and taxpayers’ anonymity is maintained.”<fnref n="27" />

Additionally, using crypto currencies has an advantage on traditional tax havens since, as previously mentioned, they are not dependant on Financial Institutions.<fnref n="28" /> Due to the tightening regulations on Financial Institutions AML compliances that have taken place during the past years, it is considered that tax-evaders might opt out of the traditional tax havens and choose crypto currencies instead.<fnref n="29" /> It could therefore be suggested that governments, in addition to concentrating on preventing the misuse of financial systems with offshore tax havens, could also develop enforcement mechanisms for tax authorities to discover funds hidden in crypto currency accounts.<fnref n="30" />

## 6.3 Suggested actions for detecting taxable income

Omri suggests actions for detecting an individual's taxable crypto currency income. According to her, governments may try to detect the owners of crypto currency accounts by detailed and complex statistical analysis. The disadvantages of this method are, that it could be used only in particular cases. Similarly to Sanchez's idea, Omri also suggests that since there are intermediaries or dealers facilitating the exchange of crypto currencies, they must have some information on the account holders or VW owners and therefore it might be possible for supervising authorities to regulate such intermediaries in the same manners as Financial Institutions. However, if the transaction happens only

<footnote n="24">²⁴Sanchez, E. G., Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens. University of Florida Journal of Law and Public Policy, Volume 28, Number 1, 2017, p. 188</footnote>

<footnote n="25">²⁵ ibid. p.187</footnote>

<footnote n="26">²⁶ ibid. p.187</footnote>

<footnote n="27">²⁷ Omri, M.Y., Are Cryptocurrencies ‘Super’ Tax Havens? Michigan Law Review First Impressions, Volume 38, 2013, p. 2</footnote>

<footnote n="28">²⁸ Omri, M.Y., Are Cryptocurrencies ‘Super’ Tax Havens? Michigan Law Review First Impressions, Volume 38, 2013, p. 2</footnote>

<footnote n="29">²⁹ ibid. p. 2</footnote>

<footnote n="30">³⁰ ibid. p. 8</footnote>
in crypto currency and no conversion is made to fiat currencies, the transactions will avoid such regulations.

Omri still suggests disallowing payments and makes the use of crypto currency generally more difficult, thus making it a less interesting option for tax evasion purposes.<fnref n="31" /> This would certainly have an effect, but it would obviously make it more difficult to benefit from the positive aspects of crypto currencies for those using them in a legal manner.

## 7. CONSEQUENCES OF MONEY LAUNDERING VS. ECONOMIC EFFECTIVENESS OF AML PROCEDURES

Money laundering is a growing industry. The International Monetary Fund (IMF) has estimated money laundering as being 1-2% of world GDP.<fnref n="32" /> It is clear that not detecting it would not easily considered as an option.

### 7.1 Disadvantages of money laundering

Money laundering has various direct and indirect, short and long term, national and international, micro and macro economic, as well as social and political effects. These include, inter alia, lower revenues for the public sectors of various states, more burdens on those paying taxes, artificial increase in prices, unfair competition between states, as well as the distortion of investment and savings.<fnref n="33" /> ML also poses risks to the stability, integrity and reputation of the financial systems. It also obviously increases the crime rate as well as transferring economic power to criminal individuals and activities. On a larger scale ML has the potential to undermine political institutions, foreign policy goals and the citizens' trust in them.<fnref n="34" />

### 7.2 The effectiveness and economic effectiveness of AML policies

The disadvantages of money laundering are inevitably great. However, developing adequate regulations as well as performing and supervising AML compliance takes effort and involves large amount of actions ranging from the police, the financial institutions, the regulators, through to the supervisory authorities. ML is obviously hard to detect and the enforcement of AML regulations generally remains constantly challenging. The recent traditional fiat money laundering cases in Baltic states, such as the Latvian ABLV and the Estonian Verso bank<fnref n="35" /> as well as the case with Danske Bank's Estonian branch all show, that even when large amounts of money (Danske €200 billion<fnref n="36" />, Verso €179 million<fnref n="37" />) during a long period of time are laundered through the banks (that are supposed to be committed to AML compliance), it takes a long time before effective control actions are brought against the Financial Institutions to bring the illegal activity to an end. Additionally, it is most likely

<footnote n="31">³¹ Omri, M.Y., Are Cryptocurrencies 'Super' Tax Havens? Michigan Law Review First Impressions, Volume 38, 2013, p. 2</footnote>

<footnote n="32">³² The Amounts and Effects of Money Laundering – A Report for the Ministry of Finance February 16, 2006
www.ftm.nl/wp-content/uploads/2014/02/witwassen-in-nederland-onderzoek-naar-criminele-geldstromen.pdf, p. 38</footnote>

<footnote n="33">³³ The Amounts and Effects of Money Laundering – A Report for the Ministry of Finance February 16, 2006
www.ftm.nl/wp-content/uploads/2014/02/witwassen-in-nederland-onderzoek-naar-criminele-geldstromen.pdf p. 84-95</footnote>

<footnote n="34">³⁴ ibid. p. 160</footnote>

<footnote n="35">³⁵ ECB revokes licence of Estonian bank amid money laundering probe
www.reuters.com/article/banking-estonia/ecb-revokes-licence-of-estonian-bank-amid-money-laundering-probe-idUSL8N1R92LY</footnote>

<footnote n="36">³⁶ Milne, R., Binham, C., Inside Danske's €200bn 'dirty money' scandal
www.ft.com/content/712f995e-c57b-11e8-bc21-54264d1c4647</footnote>

<footnote n="37">³⁷ Värk, J., Estonian banks used to launder 1.6 billion dollars.
news.postimees.ee/4053513/estonian-banks-used-to-launder-1-6-billion-dollars</footnote>
that the persons behind the illegal activity manage to benefit and disappear well before any actions are made.

It could therefore be questioned as to whether the AML is worth all of the effort or at least whether the ratio between costs and effectiveness is reasonable.<fnref n="38" /> The economic effectiveness of AML could be considered as an achievement of the results of AML policy goals which appear as a reduction of laundering, or prevention of laundering and future crime and the efficiency, when all this is done at the lowest cost possible.<fnref n="39" /> Regarding crypto currencies, the actual effectiveness or efficiency of AML procedures is still difficult to measure, as the whole amount of ML with crypto currencies remains unclear, based on the previously mentioned specifics of crypto currencies.

Despite the relatively massive efforts and costs of AML procedures, it is currently considered that the advantages of AML policies are higher than the disadvantages. Currently the effect is considered to based on the deterring effect,<fnref n="40" /> as it is often the case in the opaque market of digital assets and services. Taking the example of the recent case of China trying to regulate the national monopolist internet search engine Baidu.com (although here not money-laundering, but antimonopoly law was the focus of protection of public interests), the significance as well as shortcomings of the possibilities of regulating and controlling digital assets was demonstrated very clearly.<fnref n="41" /> Means of creating the deterring effects have included increasing the probability of being caught for ML, or increasing the punishment for ML and the transaction costs of ML.<fnref n="42" /> In addition to the deterring effect, different kinds of effects that would lead to decreasing ML would need further investigation, as well as the ones specific to crypto currencies.

## 8. CONCLUSION

Crypto currencies, amongst other virtual currencies as well as new technologies related to payments and investments, offer as yet unknown opportunities in both legal and illegal manners as the variety of payment and investment methods available. These enable a larger variety of business models, customers and services a higher level of anonymity. The bigger structural changes that the wider use of crypto currencies might bring are related to independence from the traditional Financial Institutions. It can be concluded that crypto currencies and new payment technologies pose very high AML risks, including inter alia, the variety of actions such as laundering criminal money, using the anonymity for terrorist financing as well as the very tempting opportunity to use crypto currencies as tax havens. The biggest challenges in relation to developing adequate AML policies for crypto currencies are the unclear and varying legal status of crypto currency and the high level of anonymity provided by decentralized administration of blockchain technology. Legal professionals should train and educate themselves adequately in order to match a rising demand for legal counselling on this matter<fnref n="43" />. Governments and other authorities working against money laundering have yet to fully consider AML in the context of crypto currencies. A further investigation is needed in order to create

<footnote n="38">³⁸ Unger, B., Ferwerda, J., Van Den Broek, M., Deleanu, I. The Economic and Legal Effectiveness of the European Union's Anti Money Laundering Policy. UK, Edgar Elgar Publishing Limited, 2014. P. 2</footnote>

<footnote n="39">³⁹ Unger, B., Ferwerda, J., Van Den Broek, M., Deleanu, I. The Economic and Legal Effectiveness of the European Union's Anti Money Laundering Policy. UK, Edgar Elgar Publishing Limited, 2014. p. 5</footnote>

<footnote n="40">⁴⁰ Ferweida, J. The Economics of Crime and Money Laundering: Does Anti-Money Laundering Policy Reduce Crime? Review of Law and Economics, Volume 5, Issue 2, 2009. p. 923</footnote>

<footnote n="41">⁴¹ Hoffmann, T.; Wang, Z. (2016). Enforcing Chinese Antimonopoly Law in the Internet Industry: An Analysis with Special References to Baidu.com. China and WTO Review, 2 (2), 223–256.</footnote>

<footnote n="42">⁴² ibid. p. 923</footnote>

<footnote n="43">⁴³ For details see Kerikmäe, T.; Hoffmann, T.; Chochia, A. (2018). *Legal Technology for Law Firms: Determining Roadmaps for Innovation*. *Croatian International Relations Review*, *24 (81)*, 91–112, 92</footnote>
adequate regulations, procedures as well as other decreasing effects of money laundering procedures and policies.

## REFERENCES

**Books:**

Kasper, A. (2016). The Fragmented Securitization of Cyber Threats, IN: Kerikmäe ed. Regulating eTechnologies in the European Union – Normative Realities and Trends, Springer, Pages 159-165.

Unger, B., Ferwerda, J., Van Den Broek, M., Deleanu, I. The Economic and Legal Effectiveness of the European Union's Anti Money Laundering Policy. UK, Edgar Elgar Publishing Limited, 2014.

**Legal materials:**

European Council Directive 91/308/EEC of 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering

Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing

**Journal articles:**

Dutt, P.; Ferraro, S.; Chochia, A.; Muljar, R. (2018). Using Patent Development, Education Policy and Research and Development Expenditure Policy to Understand Differences Between Countries – The Case of Estonia and Finland. Baltic Journal of European Studies, 8 (1), 123–153

Ferweida, J. The Economics of Crime and Money Laundering: Does Anti-Money Laundering Policy Reduce Crime? Review of Law and Economics, Volume 5, Issue 2, 2009. Pages 903–928.

Gordon, R.K., On the Use and Abuse of Standards for Law: Global Governance and Offshore Financial Centers. North Carolina Law Review, Volume 88, Number 2, 2010. Pages 501-594.

Hoffmann, T.; Wang, Z. (2016). Enforcing Chinese Antimonopoly Law in the Internet Industry: An Analysis with Special References to Baidu.com. China and WTO Review, 2 (2), 223–256.

Kerikmäe, T.; Hoffmann, T.; Chochia, A. (2018). Legal Technology for Law Firms: Determining Roadmaps for Innovation. Croatian International Relations Review, 24 (81), 91–112, 92

Omri, M.Y., Are Cryptocurrencies ‘Super’ Tax Havens? Michigan Law Review First Impressions, Volume 38, 2013, Pages 1-11.

Pellegrina, L.D., Masciandro, D. The Risk-Based Approach in the New European Anti-Money Laundering Legislation. Review of Law & Economics, Volume 5, Issue 2, Pages 931–952

Piazza, F. Bitcoin in the Dark Web: A Shadow over Banking Secrecy and a Call for Global Response. Southern California Interdisciplinary Law Journal, Volume 26, Number 3, 2017. Pages 521-546.

Sanchez, E. G., Crypto-Currencies: The 21st Century's Money Laundering and Tax Havens. University of Florida Journal of Law and Public Policy, Volume 28, Number 1, 2017, Pages 167-192.

Virga, J. M., International Criminals and Their Virtual Currencies: The Need for an International Effort in Regulating Virtual Currencies and Combating Cyber Crime. Brazilian Journal of International Law, Volume 12, Number 2, 2015. Pages 512-527.

**E-materials:**

ACAMS. Cryptocurrency Compliance: An AML Perspective.

files.acams.org/pdfs/2017/Cryptocurrency_Compliance_An_AML_Perspective_S.Scott.pdf
(24th April 2018)

The FATF Guidance for a Risk-Based Approach; Virtual Currencies.

www.fatf-gafi.org/media/fatf/documents/reports/Guidance-RBA-Virtual-Currencies.pdf
(24th April 2018)

The FATF Report – Virtual Currencies, Key definitions and Potential AML/CFT Risks

www.fatf-gafi.org/media/fatf/documents/reports/Virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf (24th April 2018)
The Amounts and Effects of Money Laundering – A Report for the Ministry of Finance February 16, 2006
www.ftm.nl/wp-content/uploads/2014/02/witwassen-in-nederland-onderzoek-naar-criminele-geldstromen.pdf (24th April 2018)

Milne, R., Binham, C., Inside Danske's €200bn 'dirty money' scandal

www.ft.com/content/712f995e-c57b-11e8-bc21-54264d1c4647 (7th Oct 2018)

Värk, J., Estonian banks used to launder 1.6 billion dollars.

news.postimees.ee/4053513/estonian-banks-used-to-launder-1-6-billion-dollars
(24th April 2018)

ECB revokes licence of Estonian bank amid money laundering probe

www.reuters.com/article/banking-estonia/ecb-revokes-licence-of-estonian-bank-amid-money-laundering-probe-idUSL8N1R92LY

(24th April 2018)
# Should the United Kingdom discard the Wednesbury Unreasonableness test in the National Court and apply the Proportionality test?

SHAMAISE PETERS

TALLINN UNIVERSITY OF TECHNOLOGY, ESTONIA

**Abstract:** Although the judgment in the British case Associated Provincial Picture Houses Ltd. Vs Wednesbury Corp was rendered seven decades ago, the case still lives on through debates on whether its central principle infringes on individual constitutional rights today. The Wednesbury unreasonable test is a standard utilized by the United Kingdom to establish if an administrative action was completely unreasonable. By reviewing verdicts where Wednesbury unreasonableness were enacted, it is argued that the courts did not apply a systematic and impartial approach as the proportionality test demands. This paper will provide a historical background of both the Wednesbury and Proportionality test while discussing the importance of judicial review. Moreover, the paper will compare both principles to prove that there is a necessity to change the test of judicial reform in the United Kingdom. This reform will also take into account the future development of the court systems within the European Union.

**Keywords:** Appeal Cases, Civil Code of Germany, European Court of Human Rights, England and Wales Court of Appeal Civil Division, European Union.

## I. INTRODUCTION

The Judicial Review procedure is a creation of constitutional law which, provides assistance for any act of violation that may have occurred during a legal decision. This court procedure enforces the power of judges to nullify administrative decisions made by other officials of government on the ground that they are prohibited by the Constitution.<fnref n="1" /> The procedure of judicial review is paramount as it allows individuals with administrative and legal authority to be subjected to the rule of law in the determination whether decisions are proper and within the confines of the law. There are two tests applied in judicial review proceedings within the broader European jurisprudence, they are the Wednesbury and the Proportionality tests. It is important to note for the purpose of this research, The United Kingdom applies the Wednesbury unreasonableness test as oppose to other European countries which adopts the latter. The question then arises as to why the United Kingdom solely resort to this method of testing in judicial review proceedings while those who follow the civil system considers proportionality as an effective method in judicial review. An analysis will be made on this theory and examine the propositions and oppositions of both tests and decide if there is a necessity for the United Kingdom to modify the current practice of judicial review.

## 2. JUSTICE IN JUDICIAL REVIEW

A fundamental requirement of justice is that an aggrieved person should be able to challenge state action before an independent court.<fnref n="2" /> The grounds by which such a challenge will be accepted must be clear and appropriate. This type of scrutiny is measured by the Wednesbury unreasonableness or the proportionality test. This article argues that the proportionality and the Wednesbury unreasonableness tests are different formulations of the same criteria, since both

<footnote n="1">¹ Rappaport M. (2013) The Constitutional Basis for Judicial Review.</footnote>

<footnote n="2">² Mustafa H. (2014) Wednesbury, Proportionality and Judicial Review.</footnote>
provide for a context-specific variable intensity review. It also argues which test provides the best analytical framework that will exercise the best adjudication by judges.

1. History of Proportionality

The principle of proportionality was originally demonstrated by the German constitutional courts.<fnref n="3" /> This concept can be traced to the principle of necessity developed in the jurisprudence of Prussian administrative courts in the field of police law. It was instrumental in ensuring that the power and authority of the state does not infringe the constitutional rights of members of society. In the codification of Prussian Law Article 10(2) of the Allgemeines Landrecht of 1794 authorized the government to exercise police powers in order to ensure public peace; however, at the same time, it also limited those powers to such measures that were essential for achieving that goal. The article stated that “the police is to take the necessary measures for the maintenance of public peace, security and order.<fnref n="4" /> This act showed the structure of proportionality as the Prussian Supreme Administrative Court examined whether the measures adopted by the police went beyond what was considered necessary for attaining a relevant objective.<fnref n="5" /> According to Bernard Schlink on ‘Proportionality in Constitutional Law’ defines and explain the principle of proportionality as:

"If you pursue an end, you must use a means that is helpful, necessary, and appropriate. A means that does not help to reach the end is not a real means—to use it would be out of proportion. It is also out of proportion to use a means that does more than necessary, for example a means which is more harmful or more expensive than necessary. It is equally out of proportion to use a means that is inappropriate because, even though it is necessary, by using it you do more harm than the end is worth or you spend more than you gain.”<fnref n="6" />

Consequently, this principle was adopted and became a principle applied by the European Court of Human Rights and is supported by the European Convention for the Protection of Human Rights.⁷⁸

Proportionality has been in the focus of legal discussion recently also very prominently in the field of private law, where a ‘proportionality principle’ was established on 16 June 2011 by the European Court of Justice (ECJ) on the interpretation of Article 3 of Directive 1999/44 (the Directive)<fnref n="9" /> in its joint decisions ECJ C-65/09 and C-87/09 (Weber/Putz),<fnref n="10" /> According to Thomas Hoffman:

"[The] significance of the 'proportionality principle' for European contract law can hardly be overestimated,, as the ECJ basically established by this judgment, with or without intent, a doctrine of general strict liability in contract law, which so far has not existed in but a few European legal systems beyond common law"<fnref n="11" />.

<footnote n="3">³ Mathews J. (2016) Proportionality Review in Administrative Law.</footnote>

<footnote n="4">⁴ Sweet A. (2009) Proportionality Balancing and Global Constitutionalism.</footnote>

<footnote n="5">⁵ Arai-Takahashi Y. (1999) Proportionality – a German approach.</footnote>

<footnote n="6">⁶ Schlink B. (2012) Proportionality in Constitutional Law: Why everywhere but here?</footnote>

<footnote n="7">⁷ Justice Garry Downes, on behalf of Administrative Appeals Tribunal (2008). Reasonableness, Proportionality and Merits Review.</footnote>

<footnote n="8">⁸ Kerikmäe, T.; Hamulak, O.; Chochia, A. (2016). A Historical Study of Contemporary Human Rights: Deviation or Extinction? Acta Baltica Historiae et Philosophiae Scientiarum, 4 (2), 98–115.</footnote>

<footnote n="9">⁹ Directive 1999/44/EC of the European Parliament and of the Council of 25 May 1999 on certain aspects of the sale of consumer goods and associated guarantees [1999] OJ L171/12.</footnote>

<footnote n="10">¹⁰ Joined Cases C-65/09 and C-78/09 Gebr Weber GmbH v Jürgen Wittmer and Ingrid Putz v Medianess Electronics GmbH, Judgment of the Court of Justice (First Chamber) of 16 June 2011.</footnote>

<footnote n="11">¹¹ Hoffmann (2014). The Weber/Putz "Proportionality Principle": Determining Subsequent Performance Anew?, p. 383</footnote>
The issue of proportionality in EU legal system, can, also be presented in the context of supranational and constitutional dialogue.<fnref n="12" />

### 1.1 The elements of Proportionality

In order to determine whether a decision was legitimate the proportionality review consists of four steps; 1) Legitimacy 2) Suitability 3) Necessity 4) Proportionality (stricto sensu). This procedure was exemplified in Germany's Federal Court on a travel traffic regulation which has been used as precedent to adjudicate constitutional rights claims since the 18th century.<fnref n="13" />

### 1.2 Facts of the Regulation

In this case, the Minister of Transports issued regulations banning most heavy goods trucks from highways during day time weekend hours.<fnref n="14" /> The elements of proportionality were executed as follows:

a. Legitimacy – This step ensures the course taken by the Government have a legitimate purpose. For instance, improving road safety and inconveniences of road congestion.

b. Suitability – This is similar to the first but examines whether the decision is appropriate and can provide credibility that the aim will be beneficial.

c. Necessity – This step measured whether the measure is necessary to achieve its stated goal.

d. Proportionality (stricto sensu) – The final step weighs if the benefits of the decision exceeds the burden it imposes does the challenged measure survive.

## 2. The principle of Wednesbury Unreasonableness

Moreover, Wednesbury unreasonableness can be defined as a review that is concerned with the process of reasoning employed in adopting the particular decision in that the focal points are the reasons advanced for a decision.<fnref n="15" /> The principle of Wednesbury originated in The United Kingdom in a landmark case of Associated Provincial Picture Houses Ltd. v. Wednesbury Corp. 1948. The Court of Appeal held that it could not intervene to overturn the decision of the defendant corporation simply because the court disagreed with it. To have the right to intervene, the court would have to form the conclusion that:

1. The corporation, in making that decision, took into account factors that ought not to have been taken into account, or

2. The corporation failed to take account factors that ought to have been taken into account, or

3. The decision was so unreasonable that no reasonable authority would ever consider imposing it.

The court ruled that the complaint did not correlate with any of the three limbs of this test. Therefore, the claim was unsuccessful and the decision of the Wednesbury Corporation was endorsed. The test which constitutes the three categories in this case, is identified as the "Wednesbury test".<fnref n="16" /> The term "Wednesbury unreasonableness" is used to describe the third limb, of being "so unreasonable that no reasonable authority could have decided that way."<fnref n="17" />

<footnote n="12">¹² Kerikmäe, Tanel (2009). Estonia in the European Legal System: Protection of the Rule of Law through Constitutional Dialgue. (Tallinna Ülikool / Tallinn University). Tallinn: Tallinn University</footnote>

<footnote n="13">¹³ Mathews J. (2016) Proportionality Review in Administrative Law.</footnote>

<footnote n="14">¹⁴ 4 Germany's Federal Constitutional Court evaluated such a measure in the Ferienreiseverkehrsordnung [Holiday Travel Traffic Regulation] case. Bundesverfassungsgericht, 26 BVerfGE 259 (1969)</footnote>

<footnote n="15">¹⁵ Rappaport M. (2013) The Constitutional Basis for Judicial Review.</footnote>

<footnote n="16">¹⁶ Srirangam V. (2016) A difference in Kind- Proportionality and Wednesbury.</footnote>

<footnote n="17">¹⁷ Ibidem</footnote>
As a result, the national courts of and Wales has permitted this test as a resort when deciding if a case was justified. The test of proportionality is adopted in the United Kingdom as a directive from the European Union or applied to cases with a European Union dimension. 18

### 3. Comparison of the Wednesbury Unreasonableness and Proportionality

The proportionality test may be considered as lengthier and more complicated before applying a decision, but proportionality may be a more lenient test in operation. For example, although the decision in Smith/Lustig-Prean was held not to be unreasonable, it was held to be disproportionate.19 While the court argued reasonable opinions why the claimants were dismissed from their duties due to moral decency. The decision can be viewed as inequality in law as their fundamental rights of expression were grossly affected. Moreover, Wednesbury unreasonableness has been considered a 'safety net' test, whereby the case is deemed so outrageous as to not fall into other categories of review, proportionality is a starting point test to which one would automatically go.20 The result of this is, they would argue, that where a proportionality assessment is engaged, it is presupposed that the alleged act, rule, or decision is presumptively unfair because it infringes a right, so it must be justified by the person doing it. Contrastingly, unreasonableness review presupposes the act is lawful, putting the burden of proof on the affected party to show that it is not. According to Paul DeBurca, the objections fail to realise that proportionality review being applicable to all administrative decisions does not mean that it would be the only head of review, and that it has better normative and practical justifications than rationality review. Furthermore, proportionality requires that the decision-making body justifies its choice in response to a challenge in exactly the same way as rationality: the criteria are what differs and not the direction of the burden of proof.21

### 4. Proportionality as more reasonable?

The principle of proportionality as a procedure of judicial review can be deemed as a more practical and unbiased instrument for individuals who are seeking to have justice. The Wednesbury unreasonableness approach can be viewed as arbitrary by basing the sole criteria on irrationality. This method is often restricted and has limitations in being applicable to every type of case that arises within the court. For instance, in the case Lustig-Prean and Beckett v United Kingdom (2000) 29 ECHR 548 exemplified that Wednesbury reasonableness is not effective as the proportionality test.

#### 4.1 Facts of the Case

Lustig-Prean and Beckett were British naval personnel who, in separate cases, were dismissed from the Royal Navy after their homosexuality acts were discovered. Lustig-Prean and Beckett suspected that their dismissal, together with the intrusive nature of the investigations conducted by the Military Police into their sexuality, violated their right to privacy under Article 8 ECHR.

#### 4.2 Judgement

The European Court of Human Rights held that the Article 8 rights of Lustig-Prean and Beckett had been breached. The UK government immediately suspended discharging homosexuals and within months had changed the law. The court examined the investigations

<footnote n="18">18 Ibidem</footnote>

<footnote n="19">19 Ibidem</footnote>

<footnote n="20">20 De Burca G. (1993) The principle of Proportionality and its Application in EC Law.</footnote>

<footnote n="21">21 Academic D (2015). Proportionality VS Wednesbury.</footnote>
that were executed and found there was undeniably intrusive and a violation of privacy in
accordance to Article 8 (right to respect for private and family life) of the European Convention
on Human Rights. The Proportionality test in this case exemplified fairness and faith in the law
as oppose to the former unreasonable approach.

5. The Benefits of Proportionality

The Wednesbury reasonableness is yet to provide an effective domestic remedy in
respect of Convention rights in this case which can be seen as unconstitutional because the
threshold set by domestic courts for proof of irrationality had been placed so high and the
standard of Wednesbury was so low, it had effectively denied the applicants prospect of remedy.
It can be stated that judges will develop a nature of biasness when analysing if a decision was
unreasonable by a previous arbiter. To solely rely on reasonableness as a determining factor to
administer justice is evidently irrational. The procedure of proportionality allows for a more
credible approach by examining reasonableness and other factors such as if the decision was
suitable, necessary and proportionate. The claimants appealed to the European Court of Human
Rights who applied the proportionality test where claimants received justice that was previously
denied. Wednesbury unreasonableness was created before the European Union developed the
Human rights acts, and it is apparent the principles are outdated and does not serve the sole
purpose in judicial review and ensuring justice is administered. Finally, the upcoming Brexit
may have an impact on the relevance of the Wednesbury test as well; for example, just private
international law implications may be solved on base of existing pre-EU-treaties<fnref n="22" />, the UK
would probably recur more strongly to its established standards as the Wednesbury test than
aiming at a harmonisation with continental practices.

CONCLUSION

In conclusion, it is stated by adjudicators that both tests serve the same purpose in the area
of judicial review and seeks to ensure decisions fall under the spectrum of rule of law. Although,
the applications may differ depending on the jurisdiction this may work seamlessly in law.
However, the United Kingdom should resort to the test of proportionality as a way of judicial
review, as this application will form flexibility in decision making. On the contrary, the act of
Wednesbury unreasonableness may be considered as unique as it was adopted within that
jurisdiction and has been functioning in its capacity accordance to law, but this act is outdated and
not applicable effectively with issues arising from a modern jurisprudence, especially in relation to
human rights.

LIST OF REFERENCES

Scientific Articles

De Burca G. (1993) The principle of Proportionality and its Application in EC Law. Available at https://academic.oup.com/yel/article-abstract/13/1/105/1701335. Accessed at April 23rd, 2018.

Hoffmann T. (2018). The Brexit and Private International Law: An Outlook from the Consumer Insolvency Perspective. In: Ramiro Troitino, D.; Kerikmäe, T.; Chochia, A. (Ed.). Brexit: History, Reasoning and Perspectives (237–248). Springer International Publishing AG

<footnote n="22">²² For details see Hoffmann(2018). The Brexit and Private International Law: An Outlook from the Consumer Insolvency Perspective.</footnote>
# Legal Capacity of Artificial Intelligence

JAANA SILD

TALLINN UNIVERSITY OF TECHNOLOGY, ESTONIA

**Abstract:** Artificial Intelligence is a rapidly developing field of technology, surrounded by a fair share of excitement and controversies. Current narrow AI systems are not autonomous enough to consider their legal capacity to be an important issue, however as the technological landscape develops, the smaller the gap between human and computer intellect becomes. Moreover, the existence of a robot with a citizenship sets a potential precedent for the future and raises the relevance of the topic.

**Keywords:** Artificial Intelligence; Robot Rights; Robot Legal Capacity

## 1. INTRODUCTION

<figure><img src="image_4.png" /></figure>

The aim of this paper is to analyse the further development of Artificial Intelligence and the probability of robots gaining legal rights. The topic of Artificial Intelligence (AI) has become remarkably popular and it is reviewed in different news outlets almost daily. The paper gives a brief overview of the AI history and current state and the future development of AI. After that the paper gives an outline of the meaning of the legal capacity and its different forms. The last part of the paper focuses on the legal capacity of AI and talks about the current situation as well as why it might become an issue in the future. Lastly the paper briefly outlines the potential actions that could be taken in the field. Moreover, there is an already existing AI device that holds status of citizenship, this could potentially set a precedent in the future.

## 2. BACKGROUNDS OF ARTIFICIAL INTELLIGENCE

### 2.1. General definition of an AI

The study of intelligence is one of the oldest disciplines and started over 2000 years ago when philosophers tried to understand how humans perceive and understand the world around them. Some philosophers believed that the mind is like a machine and operates on internal encoded language. This paved a path to the study of Artificial Intelligence (AI), which in itself is one of the newest disciplines.<fnref n="1" />

The term- AI- was first coined in 1956 in Dartmouth, USA<fnref n="2" />, the concept underlying AI can be traced back to ideas expressed by Charles Babbage, Ada Lovelace, and Alan Turing<fnref n="3" />. The definition established in Dartmouth referred to a machines' ability to understand, think and learn in similar ways to human beings, which would indicate the possibility of using computers to simulate human intelligence.<fnref n="4" /> One of the founders of AI, M. Minsky, defined AI as: "the science of making machines do things that would require intelligence if done by men."<fnref n="5" />

<footnote n="1">¹ Russel, S. et al. Artificial Intelligence: A Modern Approach. Prentice Hall 1995, pp 3-4, p 27.</footnote>

<footnote n="2">² Pan, Y. Heading towards Artificial Intelligence 2.0. Engineering 2, 2016, p 410.</footnote>

<footnote n="3">³ Calo, R. Artificial Intelligence Policy: A Primer and Roadmap, vol. 51 U.C.D. L. Rev. 399 2017, p 401.</footnote>

<footnote n="4">⁴ Pan (2016) supra nota 2, p 410.</footnote>

<footnote n="5">⁵ Edwina L. Rissland, Artificial Intelligence and Law: Stepping Stones to a Model of Legal Reasoning. Yale Law Journal vol. 99, no. 8, 1990, p 1958.</footnote>
Currently there are two approaches to AI technology, that both rely on machine learning-narrow and wide intelligence<fnref n="6" />. A narrow AI system can perform specific single functions, often surpassing human abilities in the same field. However, they will never reach the cognitive depth of humans. AI systems with wide or general intelligence have the ability to “think” and reason similarly to humans, currently general AI systems are completely fictional. <fnref n="7" /> In short, a robot can either operate intelligently because of automated or human-controlled directions or can literally be intelligent and operate without any external directions. <fnref n="8" />

## 2.2. Current and future state of the AI developments

The field of AI dates back to the 1950s, the techniques used today were developed by researchers decades ago, however, the interest, excitement and controversies around AI has been rapidly increasing over the last years. This can be attributed to a vast increase in computational power and access to training data, which has led to breakthroughs in machine learning <fnref n="9" />, combined with the new advances made by industry, the potential application of AI has grown substantially. According to CB Insights – Google, Microsoft, Twitter, Intel, Apple and other information technology companies have acquired about 140 entrepreneurial firms in the field of AI from 2011 to 2016 <fnref n="10" />.

Narrow AI systems are used to provide users with more accurate data catered specifically to their needs- for example movie, book and restaurant suggestions are composed by AI systems on many popular platforms, among others Facebook and Netflix.
It is clear that with the current state of AI technologies there is no issue of machines themselves having natural and legal rights. The industry can create an AI that matches or even surpasses human intelligence in some specialised fields, but it is at least 60 years away from creating an AI that could match human intelligence generally<fnref n="11" />.

Computers and robots are becoming more and more “human-like”, they are becoming increasingly self-directed and are able to generate content without direct human control. Scientists are as well working on designing computers with enhanced emotional intelligence, that in the long run may narrow the capacities between humans and computers. <fnref n="12" />

# 3. GENERAL CONCEPT OF LEGAL CAPACITY

Legal capacity of a natural or a juridical person determines what a person can do within the framework of the legal system. A person with legal capacity has a certain set of rights and obligations, for example they can enter into binding agreements, sue and be sued.

There are copious different approaches to the definition of legal capacity within legal scholars. Some scholars believe that legal capacity is the ability of a person to have or be able to create certain rights and responsibilities and the term “person” itself is not merely limited to a natural person, but

<footnote n="6">⁶ For a more detailed differentiation of weak and strong AI see Kerikmäe, T.; Hoffmann, T.; Chochia, A. (2018). *Legal Technology for Law Firms: Determining Roadmaps for Innovation*. Croatian International Relations Review, 24 (81), 91–112, 92</footnote>

<footnote n="7">⁷ Semmler, S. et al. *Artificial Intelligence: Application Today and Implications Tomorrow, 16 Duke L. & Tech. Rev.* 85 2017-2018, p 86.</footnote>

<footnote n="8">⁸ Larson, D. *Artificial Intelligence: Robots, Avatars, and the Demise of the Human Mediator*, 25 Ohio St. J. on Disp. Resol. 105, 2010, p 108.</footnote>

<footnote n="9">⁹ Calo (2017) *supra nota 3*, p 402.</footnote>

<footnote n="10">¹⁰ Pan (2016) *supra nota 2*, p 409.</footnote>

<footnote n="11">¹¹ Pan (2016) *supra nota 2*, p 411.</footnote>

<footnote n="12">¹² *Massaro, M. et al. Siri-Ously? Free Speech Rights and Artificial Intelligence*, 110 Nw. U. L. Rev. 1169, 2016, p 1172.*</footnote>
includes all beings capable of having powers and duties and in today's legal systems this also includes juridical persons <fnref n="13" />.

**3.1. Legal capacity of natural person**

The notion of “natural person” and “human being” are usually treated as synonyms<fnref n="14" />. Legal scholar Visa A.J. Kurki states that in Western legal systems natural persons are human beings, who have been born, are currently alive and are sentient<fnref n="15" />. Moreover, to be a legal person the ability to play a social role, currently or in the future, is required. This can be defined as an ability to communicate and express ideas in a way that is understood by the majority of the world.<fnref n="16" />

**3.2. Legal capacity of juridical person**

Most of the jurisdictions in the world allow certain entities other than natural persons to acquire rights and obligations, for example corporations. Those entities that are not human, but are still granted legal capacity are referred to as juridical persons. A juridical person similarly to natural persons can own property, enter into contract, sue and be sued. However, they do not have rights to vote or enter into marriage, as those are seen as inherent human rights only. <fnref n="17" />

# 4. LEGAL CAPACITY OF AI

**4.1. Current state of AI legal capacity**

In my opinion, it is clear that legal capacity can and should only be granted to autonomous AI systems, whose intelligence levels are equivalent to that of a human, therefore this chapter will only focus on general AI systems, because only those are capable of potentially reaching the required level of intelligence. The number of various AI systems keeps expanding and people will be compelled to live side by side with AI devices that realistically mimic human behaviour. Interactions with these kinds of AI devices will introduce new socioeconomic, legal, and ethical issues, especially if the device at hand, is as intelligent or even perhaps even more, than humans themselves. <fnref n="18" />

As it was mentioned in the previous chapter the term “natural person” is seen as being synonymous with “human being”. However, in the autumn of 2017, Saudi Arabia granted a citizenship to a human-like robot created by Hansen Robotics, that goes by the name of Sophia<fnref n="19" />. Even though Sophia is very humanlike, its intelligence is very limited and it falls under the category of narrow AI systems and the whole citizenship is most likely a publicity stunt by Saudi Arabia to attract business. As there are common and internationally recognized denominators for granting citizenship<fnref n="20" /> which Sophia does not meet, granting citizenship to this robot can probably rather be

<footnote n="13">¹³ Naucius, M. Should Fully Autonomous Artificial Intelligence Systems Be Granted Legal Capacity, 17 Teises Apzvalga Law Review 113, 2018, p 115.</footnote>

<footnote n="14">¹⁴ Ibid. p 117.</footnote>

<footnote n="15">¹⁵ V. Kurki, Revisiting legal personhood: Paper for Spanish-Finnish Seminar in Legal Theory, 2016, p 18.</footnote>

<footnote n="16">¹⁶ Naucius (2018) supra nora 12, p 119.</footnote>

<footnote n="17">¹⁷ Ibid. pp 120-121.</footnote>

<footnote n="18">¹⁸ Larson (2010) *supra nota 7*, p 110.</footnote>

<footnote n="19">¹⁹ Griffin, A. Saudi Arabia grants citizenship to a robot for the first time ever. The Independent, 2017. https://www.independent.co.uk/life-style/gadgets-and-tech/news/saudi-arabia-robot-sophia-citizenship-android-riyadh-citizen-passport-future-a8021601.html(23.04.2018).</footnote>

<footnote n="20">²⁰ See for details e.g. Hoffmann, T.; Chochia, A. (2018). The Institution of Citizenship and Practices of Passportization in Russia's European Neighborhood Policies. In: A. Makarychev, T. Hoffmann (Ed.). Russia and the EU Spaces of Interaction. Routledge, Taylor&Francis, and for a discussion of citizenship criteria in a regional context Hoffmann, T.; Makarychev, A. (2016). Russian Speakers in Estonia: Legal, (Bio)Political and Security Insights. In: Makarychev, A.;</footnote>
seen as a pageant. Anyhow, it does not change the fact that Sophia is the first robot in human history to be recognised with citizenship and therefore, this could potentially set a precedent for future developments.

## 4.2. Potential problems and solutions related to AI legal capacity

At present, truly autonomous AI systems remain just a work of science fiction, however, the potential legal controversies involving general as well as narrow AI systems already exist. Any new technology is prone to be misused and exploited for malicious purposes, proven by the fact that there was need for measures to combat computer fraud and misuse as early as mid-1980s<fnref n="21" />, while the industry itself was in early development, and AI will surely not be an exception and therefore there is a need for measures to prevent potential maltreatment. As with all unregulated fields, regulation poses peculiar challenges to legislators because implementation of such regulative measures can result in unforeseeable effects which could hamper development in the future.<fnref n="22" />

Intellectual property scholars have been contemplating for at least thirty years, whether a computer system can be considered an author in relation to copyright<fnref n="23" />. Moreover, computer speakers, such as Apple's Siri, are becoming more self-directed and are able to produce content further from direct human control, which raises a question whether AI speakers should be allowed freedom of expression<fnref n="24" />? Another controversy relates to criminal liability of AI subjects. If an autonomous AI device, which is not controlled by human, commits a crime, who should be held liable<fnref n="25" />? Hallevy believes that AI devices should be granted criminal liability, if it can understand, that the actions performed by it are against the law<fnref n="26" />.

The increasing automatization of electronic devices lessens the possibility of minor changes of law to accommodate the problems<fnref n="27" /> and it is clear that significant legal changes are inevitable<fnref n="28" />.

Over twenty years ago Lawrence Solum directly addressed whether AI systems should be granted legal rights to which he concludes, that as long as cognitive science confirms that the processes producing AI behaviour are similar to human mind, there is a very good reason to treat AIs as humans and therefore grant them rights. Moreover, legal personhood already includes non-humans, such as juridical parties, therefore it is possible to conclude that human status is not a necessary condition for a legal personhood.<fnref n="29" /> Juridical personhood, by creating new classifications, can be used to potentially grant rights to non-humans. This way AIs could enjoy the rights and responsibilities of a juridical person, without employing rights of natural persons, which are currently seen as being inherent exclusively to human nature.<fnref n="30" />

<footnote>Yatsyk, A. (Ed.). Borders in the Baltic Sea Region – Suturing the Ruptures (147–173). Basingstoke, UK: Palgrave Macmillan</footnote>

<footnote n="21">²¹ Kasper, A (2014). The Fragmented Securitization of Cyber Threats, In: Kerikmäe (Ed.) Regulating eTechnologies in the European Union – Normative Realities and Trends, Springer, p 158.</footnote>

<footnote n="22">²² Sepp, Paula-Mai; Vedeshin, Anton; Dutt, Pawn (2016). Intellectual property protection of 3D printing using secured streaming. In: Kerikmäe, T.; Rull, A. (Ed.). The Future of Law and eTechnologies (81–109). Cham: Springer at page 87.</footnote>

<footnote n="23">²³ Sobel, B. Artificial Intelligence's Fair Use Crisis, 41 Colum. J.L. & Arts 45, 2017, p 48.</footnote>

<footnote n="24">²⁴ Massaro (2016) *supra nota* 11, p 1172.</footnote>

<footnote n="25">²⁵ Naucius (2018) *supra nota* 12, p 127.</footnote>

<footnote n="26">²⁶ Vladeck, D. Machines without principals: liability rules and artificial intelligence, Washington law review vol. 89, 2014, pp 122-123.</footnote>

<footnote n="27">²⁷ Teubner, G. Rights of Non-humans? Electronic Agents and Animals as New Actors in Politics and Law, Journal of Law and Society, vol. 33 (4), 2006, p 508.</footnote>

<footnote n="28">²⁸ Ibid, p 20.</footnote>

<footnote n="29">²⁹ Massaro (2016) *supra nota* 11, p 1179-1180.</footnote>

<footnote n="30">³⁰ Naucius (2018) *supra nota* 12, p 121-122.</footnote>
## 5. CONCLUSION

It is evident that at this time the AI technology has not yet developed far enough for us to consider legal capacity of AIs a pressing issue. However, AI technology and with that their competences will develop over time- and quickly. Robots are already capable of mimicking human behaviour and emotions, which leads us to believe that the time when they will be able to produce such emotions themselves is not too far away. There are many social and legal issues that could rise with the further development of AIs, starting from copyright going all the way to criminal liability. All of those potential issues, raise a question whether AI systems should be granted legal capacity or not. At this point in time, we cannot predict what is the right solution and whether we will even require it.

## REFERENCES

Calo, R. Artificial Intelligence Policy: A Primer and Roadmap, vol. 51 U.C.D. L. Rev. 399, 2017

Edwina L. Rissland, Artificial Intelligence and Law: Stepping Stones to a Model of Legal Reasoning. Yale Law Journal vol. 99, no. 8, 1990

Griffin, A. Saudi Arabia grants citizenship to a robot for the first time ever. The Independent, 2017. https://www.independent.co.uk/life-style/gadgets-and-tech/news/saudi-arabia-robot-sophia-citizenship-android-riyadh-citizen-passport-future-a8021601.html

Grimmelmann, J. There's No Such Thing as a Computer-Authored Work – And It's a Good Thing, Too, 39 Columbia Journal of Law & the Arts, 2016

Hoffmann, T.; Chochia, A. (2018). The Institution of Citizenship and Practices of Passportization in Russia's European Neighborhood Policies. In: A. Makarychev, T. Hoffmann (Ed.). Russia and the EU Spaces of Interaction. Routledge, Taylor&Francis, forthcoming

Hoffmann, T.; Makarychev, A. (2016). Russian Speakers in Estonia: Legal, (Bio)Political and Security Insights. In: Makarychev, A.; Yatsyk, A. (Ed.). Borders in the Baltic Sea Region – Suturing the Ruptures. Basingstoke, UK: Palgrave Macmillan, 147–173

Kasper, A (2014). The Fragmented Securitization of Cyber Threats, In: Kerikmäe (Ed.) Regulating eTechnologies in the European Union – Normative Realities and Trends, Springer, p 158

Kerikmäe, T.; Hoffmann, T.; Chochia, A. (2018). Legal Technology for Law Firms: Determining Roadmaps for Innovation. Croatian International Relations Review, 24 (81), 91–112

Kurki, V. Revisiting legal personhood: Paper for Spanish-Finnish Seminar in Legal Theory, 2016

Larson, D. Artificial Intelligence: Robots, Avatars, and the Demise of the Human Mediator, 25 Ohio St. J. on Disp. Resol. 105, 2010

Massaro, M., Norton, H. Siri-ously? Free Speech Rights and Artificial Intelligence, 110 Nw. U. L. Rev. 1169, 2016

Naucius, M. Should Fully Autonomous Artificial Intelligence Systems Be Granted Legal Capacity, 17 Teises Apzvalga L. Rev. 113, 2018

Pan, Y. Heading towards Artificial Intelligence 2.0. Engineering 2, 2016

Russel, S., Norvig, P. Artificial Intelligence: A Modern Approach. Prentice Hall 1995

Semmler, S., Rose, Z. Artificial Intelligence: Application Today and Implications Tomorrow, 16 Duke L. & Tech. Rev. 85 2017-2018

Sepp, Paula-Mai; Vedeshin, Anton; Dutt, Pawn (2016). Intellectual property protection of 3D printing using secured streaming. In: Kerikmäe, T.; Rull, A. (Ed.). The Future of Law and eTechnologies (81–109). Cham: Springer

Sobel, B. Artificial Intelligence's Fair Use Crisis, 41 Colum. J.L. & Arts 45, 2017

Teubner, G. Rights of Non-humans? Electronic Agents and Animals as New Actors in Politics and Law, Journal of Law and Society, vol. 33 (4), 2006

Vladeck, D. Machines without principals: liability rules and artificial intelligence, Washington law review vol. 89, 2014, pp 122-123
# Estonian Russian Relations

ELLIOTT J. GRIMM

TALLINN UNIVERSITY OF TECHNOLOGY, ESTONIA

**Abstract:** In this paper the author attempts to analyze and interpret relations between Russian and Estonia. Using a historical and cultural lens he tries to identify and dissect problems and their cause so solutions can be mapped out for long lasting peace and stability so both countries can enjoy eudemonia.

**Keywords:** International Relations, War of independence, Ethnic Displacement, Alien Passport, Citizenship laws

## I. INTRODUCTION

In the year 1991 Estonia shed off the Soviet Union's choke hold on the country and regained its independence. With the help of glorious imagery of the of the “golden age”<fnref n="1" /> that existed in Estonia from 1918-1940 caused a groundswell of patriotic fervor that had gathered into an unstoppable tidal wave that when slammed against the hull of the already weakened Soviet Union, this proved to turn the USSR back and make it seek higher ground and shelter amongst its own chaotic downfall. Estonia having restored its independence still had many points of contentions with Russia and vice versa, just as the parting of a romantic partnership can leave both sides with many points of disagreement it is best for both parties to be able to solve differences in a civil and cordial manner so each can go about and pursue its of destiny.

This paper intends to explore Russian and Estonian political relations, pre-and post-Soviet era what events led up to so much tensions and hostility between the countries, I will be examining the historical, ethnic and border disputes that have driven a rift between the two countries it seems that the main problem with relations between the two countries is that Estonia and the western world sees the present-day Estonia as a continuation of the original Estonian state from 1918 and Russia we will look at the considerations on how this affects the alliances and other points of relations with all countries in the world.<fnref n="2" />

## II. HISTORICAL DEVELOPMENT BEFORE 1918

To correctly interpret the historical aspect of Russian and Estonian relations one must go back much further than the collective memory of the vast majority of the western population. For this paper, I will start with how Russia came to acquire the territory now known as Estonia, (which had previously been under German and Danish rule) which was previously ruled by Sweden<fnref n="3" />, life was very good for the common people and they enjoyed many freedoms under that rule. The Russians defeated the Swedish rule in the area in the conflict known as the Great Northern War in 1710 around this time is when the modern idea of Estonia came to be, but even up until 1918.

Estonia had an elite class of Germans that ran most of the affairs of the country and got along well with the Russian rule, this is going to be an ongoing theme for Estonians who were caught between Russian and German influence for quite some time. In the early 1800s a great resurgence happened with the Estonian peasants of interest in Estonia folklore and culture. Around

<footnote n="1">¹ Richard C. Visek. (1977). Creating the Ethnic Electorate through Legal Restorationism: *Citizenship Rights in Estonia*. (pg. 315-320).</footnote>

<footnote n="2">² *Ibid*</footnote>

<footnote n="3">³ Andres Kasekamp. (2010). *A History of the Baltic States*. United Kingdom: Palgrave Macmillan.</footnote>
this time is also some of the first noticeable nationalistic ideology that challenged the Russian
influence. During this cultural awakening, there was a push to change the national language to
Estonian, and the Saga of Kalevipoeg was written, the first song festivals and fire of nationalistic
spirit was rampant. In 1889 Russia there was something called Russification<fnref n="4" />, a push to wipe away
the German and Estonian culture and replace it with Russian culture and language. This is
something important to remember because during the Soviet time many Estonians say this is exactly
what happened as well. This forced dissolution of Estonian culture by Russians sits well in the mind
of Estonians.<fnref n="5" />

III. ESTONIAN WAR OF INDEPENDENCE AND STATEHOOD

With the collapse of the Russian empire in World War I Estonia was granted autonomy by
the provisional government at the time, right before the October revolutions in 1917 Estonian
Bolsheviks Violently seized power from the fledgling Estonian government. When peace talks
between the German and Russian empires crumbled the Bolsheviks retreated to Russia and Estonia
was once again being occupied by German forces, in the midst of the chaos, on Feb 23rd Estonia
declared its independence. Days later German forces entered Tallinn, the Estonians fought both the
Germans and Russian to win its independence in 1918. Adjacently, Latvia, Lithuania and Finland
were also fighting wars of independence at that time. It has been said that the only reason for
Estonians independence has been because of Russia's "weakness"<fnref n="6" /> and certain critics of the Baltic
nations identity has been fabricated only to provide grounds in which to have a leg up for
independence and is mostly fiction<fnref n="5" />, that the interest in Estonian folklore, and western ideals free of
Russia was inspired by a determination to independence. Other opinions have shown that the
Bolshevik revolutions was not something that the Baltics admired much and that too could have
been an inspiration for independence. On February 2nd 1920, the Estonians and Russians signed the
Tartu Peace treaty,<fnref n="7" /> where Russia explicitly relinquished all rights and sovereignty of Estonia, the
people and territory, see article IV of the Treaty of Tartu: "*During one year from the day of ratification of the present Treaty, persons of non-Estonian origin women, and children, less than eighteen years of age, take the nationality of the husband or the father, unless there exists between man and wife any contrary agreement. The people who have opted for Russian nationality must, within a year from the date of their choice, leave Estonian territory; but they maintain their rights over the property and can take with them their movable property. In the same way persons of Estonian origin living in Russia can opt for Estonian nationality within the same length of time and under the same conditions. Each of the contracting Governments reserves the right to refuse acceptance to its citizenship of such persons. Note. In case of doubt about the origin of persons, all those who could have been personally registered or whose parents would have been registered in a rural or urban community, or in a "class" on the territory now composing the State of Estonia, shall be considered as Estonians.*"<fnref n="8" />

This part in the Treaty of Tartu will have a big effect on who shall become Estonian Citizens
later. After the Treaty of Tartu was signed Estonia were quickly recognized as a sovereign state and

<footnote n="4">⁴ *Ibid*</footnote>

<footnote n="5">⁵ Ibid</footnote>

<footnote n="6">⁶ Richard C. Visek. (1977). Creating the Ethnic Electorate through Legal Restorationism: *Citizenship Rights in Estonia*. pp. 315-320.</footnote>

<footnote n="7">⁷ Andres Kasekamp. (2010). *A History of the Baltic States*. United Kingdom: Palgrave Macmillan</footnote>

<footnote n="8">⁸ Treaty of Tartu (1940). Accessible: https://truecostmovie.com/img/TSR/pages/section_01/1920_Treaty_of_Tartu.pdf, 20.04.2018.</footnote>
was accepted into the League of nations in 1921. For 22 years Estonia was an independent free to pursue its own political and cultural aspirations.

## IV. ESTONIA IN WORLD WAR II

The Molotov-Ribbentrop was signed between Nazi Germany and the Soviet Union in 1939 which divided Eastern Europe between the two as far as influence was concerned in an effort to avoid conflict between the two nations.<fnref n="9" /> Estonia was determined to stay neutral in the conflict but the Estonian government eventually allowed Soviet bases to be built after many threats being issued from the Soviet Union. Once again, the little state of Estonia was being occupied in June 1940 and a full military invasion happened. Soon the USSR put a puppet government that asked to be accepted into the USSR. This is another major point of contentions for experts in Russian-Estonian relations, if this is considered legitimate and if the Treaty of Tartu is still legally binding. During the Soviet occupation, there were many arrests and execution and deportations to Siberia happened most of the figures range around 30,000 in total from 1941-1949. During the Soviet occupation in the 1940s the general consensus of the Estonians was negative towards the occupation.

Germany invaded Russia in Operation Barbarossa in June 1941 and soon reached Estonia and liberated it from the Russians. The initial joy of the Russians leaving soon faded when the Estonians realized that Nazi Germany was not going to be restoring power back to the Estonians. Some Estonians were drafted and fought in the German army and Waffen SS. In late 1944 Germany was being pushed back by the Russian army and they left Estonia which was subsequently taken over by Russia again. Rule of Estonia one more time changed hands, the government of Estonia operated from Sweden until 1992.

Estonia was fully occupied by the USSR from 1944-1991. During the second World War, much of Estonia had been destroyed and much of its population had been killed, forced to flee or deported to Siberia. During the Soviet occupation, there still was resistance from Estonians. There was a group called the Forest Brothers who resisted the occupation this band of guerilla fighters operated until the early 1950s. This period in Estonian history is much like most of the Soviet Bloc countries, a tight-fisted rule, deportations, KGB constantly monitoring what was going on, times of fear and uncertainty, many Russian workers were also brought into Estonia, and changing the demographics of Estonia forever. In the 1970s Estonians became increasingly away of the cultural and demographic change in their society once again Russification was on the forefront of everyone's mind, and in the 1980s many Nationalist groups started to pop up in Estonia.<fnref n="9" /> In the late 1980s Soviet power began to wane and there was a loosening of the tight grip the Soviet Union had over Estonia. In this period until 1992, Estonia regained political control over itself. A full withdrawal of Soviet power happened in 1994, and in 1998 Estonia joined the European Union. On 29 March 2004 Estonia joined NATO along with many other countries directly along the Russian border. With the arrival of NATO forces in the Baltic countries, Russia made noise about it but did not have an intense reaction. This reaction was surprising because the Cold War had been over for over a decade and along with the United States backing out of the Ballistic missile treaty should have been a big red flag that Europe, the United States and the powers that be still viewed Russia as the enemy and parking troops right along its border to many people seems like a direct threat to Russian security.

The history of Estonia has been a turbulent one, changing hands so many times with so many countries and the loss of self-determination, loss of demographic homogeneity. One can understand the hesitation Estonians have to trusting outsiders and how wary they can be of foreign

<footnote n="9">⁹ Andres Kasekamp. (2010). *A History of the Baltic States*. United Kingdom: Palgrave Macmillan. (pg. 126)</footnote>
influence, it had been passed around by so many countries, one can realize that Estonia is extremely
wary of losing control of its country in the future.

V. BORDERS

Currently, Russia and Estonia have cleared up some of its border disputes, but tensions are still high. Certain parts of the border require Estonian citizens to pass through Russia to go to other Estonian towns and many security concerns arise from such strange issues. In 1994 the border disputes between Russia and Estonia led to Boris Yeltsin stating that he would not yield "one centimeter of land"<fnref n="10" /> during that time Estonia was seeking to reclaim land that it claims to be part of its territory before world war two, since the borders had been drawn by Russians there were many points of dispute and areas that had been purposely and strategically drawn in direct benefit to Russia. The treaty of Tartu very clearly outlined the border of Estonia and Russia but Russia does not recognize the current state of Estonia as a continuation of the 1918 independent state. As we can see here is another example of Problems arising from the legal status of Estonia, has Estonia been an independent country for 100 years or 27? The United States never recognized the Baltics as part of the Soviet Union so the legal status is up for interpretation depending on the vantage point of the subject.

On 29 March 2004 Estonia joined NATO<fnref n="11" /> and now many other countries directly along the Russian border now contained NATO forces, Russia made noise about it but did not have an intense reaction, but the cold war had been over for over a decade but United States backed out of the Ballistic missile treaty. So that must have made Russia quite uneasy and signaled that that the United States still viewed Russia as the enemy and parking troops right along its border seems like a direct threat to Russian security.

On 29 March 2004 Estonia Joined NATO Along with Many other countries directly along the Russian Border, with the arrival of NATO forces in the Baltic countries, Russia made noise about it but did not have an intense reaction. This reaction was surprising because the cold war had been over for over a decade and along with the United States backing out of the Ballistic missile treaty Should have been a big red flag that Europe, the United States and the powers that be still viewed Russia as the enemy and parking troops right along its border to many people seems like a direct threat to Russian security.

1. *Ethnic aspects*

After the reestablishment of independence on August 20th, 1991 Estonia was in a very strange predicament, out of the approximately 1.5 million citizens only about 63% of these were ethnic Estonians. This can be mainly attributed to mass deportations and importations of non-Estonian citizens into Estonia. Russia who had originally supported Estonian independence soon accused Estonia of "constructing a system of social apartheid against ethnic Russians"<fnref n="12" /> (Estonia has accused Russia of Violating the Treaty of Tartu) Forced or mass deportation has always been used as a tactic of war to subjugate people dating back as early as the Assyrians for example, a way to cut the roots from the land that people have and make them easier to rule. And it is obvious that the Estonians when drafting their citizenship policy were keenly aware of this fact and feared political power from falling into the hands of non-Estonians. As of April, 1st 1990 the Estonian citizenship requirements were passed by the Riigikogu, the basis of Citizenship as per the Estonian constitution

<footnote n="10">¹⁰ http://old.themoscowtimes.com/news/article/tmt/345760.html (accessed 21.10.18)</footnote>

<footnote n="11">¹¹ Andres Kasekamp. (2010). *A History of the Baltic States*. United Kingdom: Palgrave Macmillan. (pg. 231)</footnote>

<footnote n="12">¹² Aleksandra Kuczynska-Zonic. (2017). The securitization of national minorities in the Baltic states. Accessible: https://www.degruyter.com/view/j/bjlp.ahead-of-print/bjlp-2017-0011/bjlp-2017-0011.xml20.04.2018. 20.04.2018</footnote>
§ 8 was by Jus Sanguine. Russian non-citizens could apply for temporary residence permits and had one year, this was extended to July 12th, 1996 almost all of the 345,000 people who applied for residency were approved, but 70,000 Did not even bother to apply for residency and were thus considered illegal<fnref n="13" />. In 1992 Estonia passed a law of the freedom of movement, except in the case of criminals awaiting trial and other such obvious reason it is obvious that this was meant to state that Non-Estonian Citizens were free to and encouraged to leave Estonia.<fnref n="14" /> The 1995 Law on Citizenship made it more difficult to become a citizen, permanent residency was expanded to 5 years instead of 2 and narrows Estonians requirement accessibility for passing the language portion of the citizenship test, have an Estonian loyalty oath and have a permanent income, and have a working knowledge of the way the Estonian government works.<fnref n="15" />

Estonians and Russians are very different culturally and with the language gap being another bridge to cross, most of the Russians were influential people and did not speak Estonian. After the reestablishment of independence on August 20th, 1991 Estonia was in a very strange predicament out of the approximately 1.5 million citizens only about 63% of these were ethnic Estonians.<fnref n="16" /> This can be mainly attributed to mass deportations⁴ and importations of non-Estonian citizens into Many Russians who had originally supported Estonian independence soon became disillusioned.<fnref n="17" />

Many Estonians are quite concerned with the problems this can cause internal unrest and foreign influence on internal affairs have been heavy on the minds of the native population; just recently a man was found to have been spying on Estonia for years, and giving this information back to Russia, this can only help deepen the mistrust Native Estonians have for Russians.

According to the International Center for Defense and security on April 26, unrest and vandalism broke out in Tallinn. During these events, the city suffered damage, the likes of which has not been seen since the air raid by the Soviet Air Force in 1944, Estonia had planned on moving a statue from the soviet era commemorating the soldiers who died fighting the Nazis during WW2 to a different Location, ethnic Russians Help protests that soon escalated into riots. It was soon apparent that Moscow was heavily involved in the orchestrations of the events, foreign agitators were present in Estonia, and this highlighted the cavernous rifts between Estonians and ethnic Russians living in Estonia, and Russia's intent to grant citizenship to ethnic stateless Russians residing on Estonian territory – as recently still practiced in the Caucasus<fnref n="18" /> – did not alleviate relations either. Mass propaganda campaigns from Russia could possibly destabilize the country and leave it open to a physical threat, one that Estonia alone would not be able to handle on its own, even with civilian volunteers and the small NATO force, a strike could be too quick for NATO to react in time before Estonia falls to a foreign power yet again.

<footnote n="13">¹³ Richard C. Visek. (1977). Creating the Ethnic Electorate through Legal Restorationism: Citizenship Rights in Estonia. Accessible: http://heinonline.org/HOL/Page?handle=hein.journals%2Fhilj38&div=17&g_sent=1&casa_token=86DwfJS52nQAA AAA%3AqOb3klThQOO_GoOXOo3tDTXqV2BAqjMD4DEiTr20he97b5YEXQY3Pxxrha28ZDYF80iu7-GrMwA&collection=journals, 23.04.2018.</footnote>

<footnote n="14">¹⁴ For details see Hoffmann, T.; Makarychev, A. (2016). Russian Speakers in Estonia: Legal, (Bio)Political and Security Insights. In: Makarychev, A.; Yatsyk, A. (Ed.). Borders in the Baltic Sea Region – Suturing the Ruptures (147–173). Basingstoke, UK: Palgrave Macmillan.10.1057/978-1-352-00014-6.</footnote>

<footnote n="15">¹⁵ Michael E. Brown. (1993). *Ethnic Conflict and International Security*. United Kingdom: Princeton University Press</footnote>

<footnote n="16">¹⁶ Andres Kasekamp. (2010). *A History of the Baltic States*. United Kingdom: Palgrave Macmillan.</footnote>

<footnote n="17">¹⁷ Michael E. Brown. (1993). *Ethnic Conflict and International Security*. United Kingdom: Princeton University Press.</footnote>

<footnote n="18">¹⁸ On the Georgian case of passportization see Hoffmann, T.; Chochia, A. (2018). The Institution of Citizenship and Practices of Passportization in Russia's European Neighborhood Policies. In: A. Makarychev, T. Hoffmann (Ed.). Russia and the EU Spaces of Interaction (223–237). Routledge, Taylor&Francis Group.</footnote>
## VI. CONCLUSIONS

The historical aspect plays a vital role, instilling in the collective memory of Estonians a negative feeling, xenophobia and mistrust towards the Russian population that live in the borders of Estonia, national pride is not a bad thing unless its drives a wedge between people in the country, Estonia has been under occupation and ruled over by many countries, some have been fair and just and some have instituted policies that were heinous and vile at best, self-determination means so much to a people who have had so very little much of it.

Ethnically, it is very hard to have two so distinctly different groups of people living in the same borders, I have seen this many times in countries such as Iraq and Israel, one side must assimilate and feel completely integrated for a strong sense of trust and social cohesion or else one side will consistently feel marginalized and oppressed by the other. There are qualms on both sides of the Russian and Estonian ethnic divide, Estonia not doing enough to reach out and make policy and be more inclusive of Russians within their borders, and on the Russian side there is a sense that they do not want to be Estonian and in some ways feels to many Estonians that they are waiting for Russia to come back, this is an unacceptable view if you want to live within another nation's borders and breeds resentment and mistrust which is not a good foundation for a healthy ethnic relationship. Both sides have to do much more to try and bridge this gap and it does seem like many attempts are being made, but only time will tell.

By understanding more easily the contention points, we can identify good leaders who have the right temperament and multifaceted thinking to find peaceful solutions to bridge the cavernous gaps between these two countries and restore as normal relations as possible, and on a diplomatic scale, the European Union should realize that Russia's foreign policy has essential changed during the last decade and respectively adapt their Russia strategies<fnref n="19" />. There are no quick solutions to this conflict and will take many years and much negotiations to build up trust, empathy and respect needed to solve this. Education<fnref n="20" />, openness and avoiding emotional reactions seems to be the best way to deescalate, and the teaching of comparative law and legal cultures in central and Eastern Europe has a paramount function here<fnref n="21" />. But only time will tell in which directions the seas of the geopolitical scape will ebb and flow like the rising of the tides hopefully there are no catastrophic storms on the horizon on this journey into the seas of time for the two nations.

## REFERENCES

* Braghiroli, S.; Hoffmann, T.; Makarychev, A. (2018). How to study and teach Russia and the EU. In: Andrey Makarychev, Thomas Hoffmann (Ed.). Russia and the EU Spaces of Interaction. Routledge.

* Brown, M.E. (1993). Ethnic Conflict and International Security. United Kingdom: Princeton University Press.

* Hoffmann, T.; Chochia, A. (2018). The Institution of Citizenship and Practices of Passportization in Russia's European Neighborhood Policies. In: A. Makarychev, T. Hoffmann (Ed.). Russia and the EU Spaces of Interaction (223–237). Routledge, Taylor&Francis Group.

<footnote n="19">¹⁹ On the entire issue recently Makarychev, A.; Hoffmann, T. (Ed.) (2018). Russia and the EU – Spaces of Interaction. Routledge, Taylor&Francis Group books/details/9781138303799/[forthcoming].</footnote>

<footnote n="20">²⁰ On the education aspect see Braghiroli, Stefano; Hoffmann, Thomas; Makarychev, Andrey (2018). How to study and teach Russia and the EU. In: Andrey Makarychev, Thomas Hoffmann (Ed.). Russia and the EU Spaces of Interaction. Routledge books/details/9781138303799/ [forthcoming].</footnote>

<footnote n="21">²¹ Hoffmann, Thomas (2014). Reflections on Opportunities for Comparative Private Law in Academia: Central and Eastern Europe. Review of Central and East European Law, 39, 1–17.</footnote>
Hoffmann, T.; Makarychev, A. (2016). Russian Speakers in Estonia: Legal, (Bio)Political and Security Insights. In: Makarychev, A.; Yatsyk, A. (Ed.). Borders in the Baltic Sea Region – Suturing the Ruptures (147–173). Basingstoke, UK: Palgrave Macmillan

Hoffmann, Thomas (2014). Reflections on Opportunities for Comparative Private Law in Academia: Central and Eastern Europe. Review of Central and East European Law, 39, 1–17.

Jonsson, O.; Seeley, R. (2015). Russian Full-Spectrum Conflict: *An Appraisal After Ukraine*. Accessible: https://www.tandfonline.com/doi/abs/10.1080/13518046.2015.998118, 20.04.2018.

Kasekamp, A. (2010) A History of the Baltic States. United Kingdom: Palgrave Macmillan.

Kresock, D. M. (1944). Ethnic Cleansing in the Balkans: *The Legal Foundations of Foreign Intervention Note*. Accessible: http://heinonline.org/HOL/Page?handle=hein.journals%2Fcintl27&div=11&g_sent=1&casa_token=&collection=journals, 20.04.2018.

Kuczynska-Zonic, A. (2017). The securitization of national minorities in the Baltic states. Accessible: https://www.degruyter.com/view/j/bjlp.ahead-of-print/bjlp-2017-0011/bjlp-2017-0011.xml, 20.04.2018.

Kukk, K., Raun, T. (2007) Soviet deportations in Estonia: impact and legacy. Estonia: Tartu University Press.

Kuus, M. (2002). European Integration in Identity Narratives in Estonia: A Quest for Security. Accessible: http://journals.sagepub.com/doi/abs/10.1177/0022343302039001005, 21.04.2018.

Laurence, J. (2009). The Effect of Ethnic Diversity and Community Disadvantage on Social Cohesion: A *Multi-Level Analysis of Social Capital and Interethnic Relations in UK Communities*. Accessible: https://academic.oup.com/esr/article-abstract/27/1/70/448535?redirectedFrom=fulltext, 22.04.2018.

Makarychev, A.; Hoffmann, T. (Ed.) (2018). Russia and the EU – Spaces of Interaction. Routledge, Taylor&Francis Group.

Orttung, R. W.; Overland, I. (2011). A limited toolbox: Explaining the constraints on Russia's foreign energy policy. https://www.sciencedirect.com/science/article/pii/S1879366510000394, accessed 20.04.2018.

Shlapak, D.A.; Johnson, M.W. (2016) Reinforcing Deterrance on NATO's Eastern Flank: Wargaming the Defense of the Baltics https://www.rand.org/content/dam/rand/pubs/research_reports/RR1200/RR1253/RAND_RR1253.pdf

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# An Analysis of The Applicability of GDPR to Blockchain Technologies

YUSEF WARD

TALLINN UNIVERSITY OF TECHNOLOGY, ESTONIA

**Abstract:** Blockchain technologies have been an emerging sphere, engulfing a plethora of fields by their simplicity and functionality, yet to what extent these features will be applicable is uncertain. This research article will tackle the employability of the basic structural nature of blockchain technologies under the new European Union data protection regime. In particular it will briefly examine the three main points of conflict between blockchain technologies and the newly enacted European Union data protection policy: the right to be forgotten, data minimization and privacy by design.

**Keywords:** GDPR, Blockchain, European Union, Technology.

## I. INTRODUCTION

The exponentially growing and encompassing presence of technological implementation has creeped into nearly every sector and part of human life. At a time when data and its use has transitioned from scarce to overwhelmingly abundant, the control and usage of data has become crucial to internet users and corporations. The rapid integration of technology has ignited a need for legislators to create guidelines and regulations on how the new currency – data – should be utilized and stored to avoid its maluse in the form of manipulation and extreme centralization by major corporations of the technology industry. In light of the current state of data usage, the European Union (EU) replaced Directive 95/46/EC (Data Protection Directive) of 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data with the General Data Protection Regulation (GDPR) that will begin to be enforced on 25th May, 2018. The GDPR could be noted as the first large-scale privacy regulation in the new era of technology and it is set to “harmonize data privacy laws across Europe, to protect and empower all EU citizens’ data privacy and to reshape the way organizations across the region approach data privacy”. As the GDPR is about to be enforced, there are manifold questions to be addressed on how to apply the regulation and how to coordinate the regulation’s application for businesses in the EU.<fnref n="1" /> The GDPR was built to focus on centralized data controllers. This gives rise to the question of how the emerging Blockchain (BC) technology should be applied and regulated under the General Data Protection Regulation. The maxim of “take control of personal data” are integral parts of the GDPR and blockchain solutions, yet there appears to be contradictions in the applicability of BC to GDPR.

This paper will firstly outline the main functions and features of the GDPR and BC, and consequently transition into an analysis of how the GDPR can be applied to blockchain technologies and what are the challenges and solutions to the implementation.

<footnote n="1">¹ Dobrin, S.; Chochia, A. (2016). The Concepts of Trademark Exhaustion and Parallel Imports: A Comparative Analysis between the EU and the USA. Baltic Journal of European Studies, 6 (2), 28–57.</footnote>
## II. AN OVERVIEW OF BLOCKCHAIN TECHNOLOGY

Blockchain technology is based on the infrastructure of a distributed ledger technology (DLT)<fnref n="2" />. A DLT creates an ability to share and store data using multiple nodes, independent computers, rather than a centralized source of data. Blockchain technology is, in essence, a form of transfer of data; this creates vast possibilities for its use in spheres such as finance, medicine and contracts. As Vitalik Buterin, the co-founder of one of the largest BC solutions, Ethereum, notes, “A blockchain is a magic computer that anyone can upload programs to and leave the programs to self-execute, where the current and all previous states of every program are always publicly visible”.<fnref n="3" /> A blockchain is a chronological set of transactions constituted of blocks containing information about each transaction<fnref n="4" />. The blockchain has three identifying elements. Firstly, the BC is continually appended to and is permanently stored, every transaction is added to the chain. Secondly, the BC is stored in a completely decentralized peer to peer form, where every user has a copy of the entire blockchain; with every correctly implemented transaction the BC is updated. Thirdly, the BC is asymmetrically encrypted meaning every user has a private and public key to verify and conclude transactions<fnref n="5" />. The decentralized design makes it almost impossible to tamper or reverse transactions in a blockchain<fnref n="6" />, which will prove vital in the discussion of GDPR compatibility to BC.

## III. KEY FEATURES OF THE GDPR

Before addressing the applicability of blockchain under the GDPR, the key features that adhere to GDPR's purpose of providing harmonization of data privacy laws across member states of the EU must be outlined.<fnref n="7" /> The GDPR encompasses a wide variety of new rights and concepts, the most notable of which for the discussion are right to data portability (RDP), right to be forgotten (RtbF), data minimization and lastly, privacy by design. The regulation applies to any form of 'personal data' related to a 'data subject' (natural person); according to Article 4(1) of the GDPR a data subject is “an identifiable natural person [...] who can be identified, directly or indirectly”. The 'personal data' regulation has to be complied with by companies that use data controllers or data processors, a data controller “means the natural or legal person, public authority, agency or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data” and a data processor “means a natural or legal person, public authority, agency or other body which processes personal data on behalf of the controller”. The GDPR has set strict guidelines to what is personal data and how and who is able to utilize it in what way, this is in line with the purpose of creating a completely harmonized understanding of data laws within the Union including non-EU based companies that obtain personal data from citizens of the EU, reaching from production, services to logistics and delivery<fnref n="8" />.

<footnote n="2">² Swan, Melanie. *Blockchain*. O'reilly.(2015). p. 2.</footnote>

<footnote n="3">³ Buterin, Vitalik. *Ethereum Blog*. (2015). Visions, Part 1: The Value of Blockchain Technology</footnote>

<footnote n="4">⁴ Nakamoto, Satoshi. (2009). *Bitcoin: A peer-to-peer electronic cash system*</footnote>

<footnote n="5">⁵ Ollers, F.Xavier and Majlinda Zhegu. *Research Handbook On Digital Transformations*. (2016). p. 226</footnote>

<footnote n="6">⁶ Notheisen, B., Cholewa, J.B. & Shanmugam, A.P. *Bus Inf Syst Eng* (2017) 59: 425.</footnote>

<footnote n="7">⁷ Dutt, P.; Ferraro, S.; Chochia, A.; Muljar, R. (2018). Using Patent Development, Education Policy and Research and Development Expenditure Policy to Understand Differences Between Countries – The Case of Estonia and Finland. *Baltic Journal of European Studies*, 8 (1), 123–153.</footnote>

<footnote n="8">⁸ For GDPR compliance e.g of delivery robots see Hoffmann, T and Prause, G (2018), at 5.2.</footnote>
## IV. ARISING CHALLENGES AND PROPOSITIONS FOR BC COMPLIANCE UNDER THE GDPR

Prior to analyzing the possible challenges for blockchain-based solutions with the enforcement of the GDPR, an analysis of what data could be considered “personal data” and who the regulation applies to must be addressed. The conditions set for data not being personal i.e. anonymized under EU regulation entail “processing personal data in order to irreversibly prevent identification”<fnref n="9" />. The constrained definition of anonymous data leaves only a specific data type to be recognized as anonymous, identifying most data as “personal” in the framework of the GDPR. The data utilized in a DLT and specifically personal data and public keys in a blockchain would exhaustively fall under the category of “personal data”<fnref n="10" />, thus creating a need to regulate how this information in a BC is handled. As transactional data along with public keys would qualify as personal data, the rights enacted under the new data protection regulation would apply. Since blockchain is a form of decentralized transactions, it is questionable to whom the GDPR’s requirements of upholding a standard for personal data usage is addressed. Blockchains and specifically public ones have no central organization to adhere to, each node is contributing to the block equally, this creates a point of uncertainty, as nodes cannot be classified as data controllers or even joint controllers which “jointly determine the purposes and means of processing” according to Art. 26(1) GDPR, yet nodes do not determine the purposes or means of processing of other nodes in the blockchain. It is evident that the GDPR has set a legal framework primarily for centralized collecting of personal data, making it unpredictable how this framework would apply to distributed ledger technologies based on the concept of a completely decentralized environment and especially public blockchains. As an estimated assumption, the GDPR’s regulation would apply to a BC software’s public key and transactional information. Specifically, the newly created concepts of data minimization, privacy by design, right to access and right to be forgotten will be explored in relation to blockchain.

### 1) The Right to be Forgotten

Modern day electronic device usage for purposes of online communication, participation and better management of our private time and resources comes with the latent risk of collection and storage by third parties of our personal data.<fnref n="11" />

Under article 17 GDPR sets a right for a data subject to erasure of personal data that is “no longer necessary in relation to the purposes for which they were collected or otherwise processed” and if the data subject withdraws consent for processing data. As earlier mentioned public blockchains function on an “append only” principle, making it close to impossible to delete any data processed on a blockchain. The main data at hand when analyzing blockchains is transactional information and public keys. As stated in the Open Data Institute report, “the irreversibility and transparency of public blockchains mean they are probably unsuitable for personal data”<fnref n="12" />. The usage of transactional information can be avoided in a blockchain environment, by storing the personal data in a database without affecting the blockchain itself and complying with data regulation<fnref n="13" />. In regard to public keys, an argument for a “legal ground for processing” established

<footnote n="9">⁹Commission Regulation (EC) No 05/2014 of 10 April 2014 anonymisation techniques, WP 216, 10.4.2014, p 3</footnote>

<footnote n="10">¹⁰ Matthias Berberich and Malgorzata Steiner. Blockchain Technology and the GDPR – How to Reconcile Privacy and Distributed Ledgers. (2016)</footnote>

<footnote n="11">¹¹ Dutt, P; Kerikmäe, T. (2014). Concepts and Problems Associated with eDemocracy. In: T. Kerikmäe (Ed.). Regulating eTechnologies in the European Union: Normative Realities and Trends (285–323). Springer Verlag at page 288.</footnote>

<footnote n="12">¹² Knowledge et al. "Applying Blockchain Technology In Global Data Infrastructure – The ODI". *Theodi.Org*. (2018)</footnote>

<footnote n="13">¹³ Finck, Michèle. Blockchains and Data Protection in the European Union. (2017)</footnote>
under Article 17(1)(b) could be expanded. The foundation of blockchains is built upon the usage of public keys, thus this would be taken into account when balancing the power entrusted between data controller and data subject.

## 2) Data minimization

Data minimization is in contradiction with BC technology in the same way as the right to be forgotten is. The BC is “append only” and practically immutable. The requirement of the GDPR under data minimization is that data must be “collected for specified, explicit and legitimate purposes and not further processed in a manner that is incompatible with those purposes”. All data pertaining to the blockchain is needed, thus it could be strongly argued that data minimization should not be adhered to for BC software. It is still quite unclear if the European Union would view the storage of BC data as applicable to the requirement of “legitimate purpose”, yet it seems probable that an argument towards that point of view would be regarded and assessed by the Union. This argument comes in line with other innovative spheres such as big data and machine learning, which must tackle similar challenges in light of the GDPR. To date there is no practical solution or alternative to storing data on a blockchain, as this is the stamp of certainty that is valued as a major feature of the blockchain.

## 3) Privacy by Design

Data protection by design and by default under Article 25 GDPR, also known as privacy by design, is also a new addition to data privacy within the EU. The privacy by design clause means that all the regulations of the GDPR must be considered when creating an online solution, some of which have been mentioned previously. The measurement of privacy by design must be analyzed on a case by case basis. The general requirement is to account for regulation changes, yet as analyzed blockchain technologies face several legal issues in the matter. One of the ways one can attempt to comply with privacy by design is to remove transactional information. It is unknown yet to what extent that would soothe the acceptance of BC under the GDPR.

# V. CONCLUSION

As discussed in the paper, it is still unclear how blockchain technologies will be viewed under the newly enacted regulation, the GDPR, and legal practitioners just as well as advisors should familiarize themselves intensively with the technology itself just as well with the new business levels emerging from it in order to match an exponentially rising demand for legal services based on blockchain technology.<fnref n="14" /> There seem to be certain areas of incompatibility between the regulation and the newly emerging technologies such as privacy by design, the right to be forgotten and data minimization.

If this confliction is seen from a holistic lens; data protection and cybersecurity issues overlap, dealing with legal gaps in data protection may lead to unexpected impacts in other regimes, such as new security concerns, hence a comprehensive review of data regulations is necessary<fnref n="15" />.

These are just some of the manifold points of conflict and it will be interesting to see how European Union legislators and data protection officers will balance proportionality in the possible conflict between data protection of users and the promotion of emerging technologies. The

<footnote n="14">¹⁴ For details see Kerikmäe/Hoffmann/Chochia, Legal Technology for Law Firms: Determining Roadmaps for Innovation.</footnote>

<footnote n="15">¹⁵ Kasper, A. (2014) Legal Aspects of Cybersecurity in Emerging Technologies. In: Kerikmäe, T. (ed.) Regulating eTechnologies in the European Union – Normative Realities and Trends, Springer, p. 215</footnote>
European Union's motive of upholding a high standard of data regulation is in a state of uncertainty, just as blockchain technologies are in terms of their structure and usage.

## REFERENCES

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Beck, Roman & Müller-Bloch, Christoph. (2017). Blockchain as Radical Innovation:

Framework for Engaging with Distributed Ledgers as Incumbent Organization. 10.24251/HICSS.2017.653.

Dobrin, S.; Chochia, A. (2016). The Concepts of Trademark Exhaustion and Parallel Imports: A Comparative Analysis between the EU and the USA. Baltic Journal of European Studies, 6 (2), 28–57.

Dutt, P; Kerikmäe, T. (2014). Concepts and Problems Associated with eDemocracy. In: T. Kerikmäe (Ed.). Regulating eTechnologies in the European Union: Normative Realities and Trends (285–323). Springer Verlag at page 288.

Dutt, P.; Ferraro, S.; Chochia, A.; Muljar, R. (2018). Using Patent Development, Education Policy and Research and Development Expenditure Policy to Understand Differences Between Countries – The Case of Estonia and Finland. Baltic Journal of European Studies, 8 (1), 123–153.

Ethereum Blog. (2015). Visions, Part 1: The Value of Blockchain Technology – Ethereum Blog. [online] Available at: https://blog.ethereum.org/2015/04/13/visions-part-1-the-value-of-blockchain-technology/ [Accessed 7 Apr. 2018].

EU General Data Protection Regulation (GDPR): Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation), OJ 2016 L 119/1.

Finck, Michèle, Blockchains and Data Protection in the European Union (2017). Max Planck Institute for Innovation & Competition Research Paper No. 18-01. Available at SSRN: https://ssrn.com/abstract=3080322

Hoffmann, T., Prause, Gunnar. On the Regulatory Framework for Last-Mile Delivery Robots. *Machines* 2018, *6*, 33.

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Kerikmäe, T.; Hoffmann, T.; Chochia, A. (2018). Legal Technology for Law Firms: Determining Roadmaps for Innovation. Croatian International Relations Review, 24 (81), 91–112.10.2478%20/cirr-2018-0005.

Matthias Berberich; Malgorzata Steiner, Blockchain Technology and the GDPR – How to Reconcile Privacy and Distributed Ledgers, 2 Eur. Data Prot. L. Rev. 422 (2016)

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Notheisen, B., Cholewa, J.B. & Shanmugam, A.P. Bus Inf Syst Eng (2017) 59: 425. https://doi.org/10.1007/s12599-017-0499-8

Olleros, F. Xavier, and Majlinda Zhegu. Research Handbook On Digital Transformations. Edward Elgar Publishing. (2016). p. 226

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# A Short Presentation of Romanian Economy, Business Ethics and Economic Growth

NICOLETA VASILCOVSCHI PHD,

SOCIAL STUDIES AND ECONOMICS TEACHER
QiLu Sino-Canadian Program, Shandong, China
nv333@protonmail.com

MIHAELA AFANASOV,

LAWYER
Leaua and Associatii, Bucharest, Romania
mihaela.afanasov@leaua.ro

**Abstract:** Economic development is a multidimensional process that involves improvement of social, political, legal and business platform of a nation. Over the last two decades global issues affected the international relations and businesses around the world. Globalization helped many countries to achieve their economic development nowadays, but also brought many challenges for international businesses and societies. The first part of this article presents the Romanian economic structure, the economic growth, its measurement and limitations. Then is given a general description of economic growth process, showing the benefits and costs of economic growth, the structure and impact of modern technologies for the consumers and producers who are interacting in the globalized economic system. In the second part, it is analysed the manner in which business ethics can affect economic development. In fact, in this section are evaluated the connections between technological advancement, economic growth and the enforcement of law in international affairs. This last section gives a general description concerning the role of business ethics for the economic development.

**Key words:** Romanian economy, economic growth, business ethics, international law.

**JEL Codes:** F63, F02

## 1. INTRODUCTION

For the last centuries, economic development is one of the main objectives in the agenda of advanced economies and of the countries in development. The globalized economic system was created by the change and interaction of international financial institutions, and the creation of new businesses to answer the modern needs of consumers over the world. Some countries tried to change and adapt their economic systems with international standards in order to achieve a stage of transition from third world to the market economy. But there is not just the economic growth the only factor affecting the countries development. Many other factors including social challenges and ethics in international affairs also can affect the process of economic development of a country.

The historical changes from classical liberalism to modern liberalism and the advancement of socialist doctrines impacted the economic development and the structure of modern economy. In addition to this, international law adapted its strategies to support countries in process of development to achieve their objectives and to achieve a sustainable economic growth process.

The work of different international organizations showed that there is still the need for many countries, including Romania, to have a sustainable economic growth. Therefore an analysis is necessary to show which factors influence the development process, how is the economic growth organized and what is the role of technology to achieve specific economic goals. In addition to this, it's important to find the connections between a sustainable economic growth that promotes
economic development of a country and business incentives, and ethics in international economic affairs. In this paper will firstly be given several economic information, followed by an interdisciplinary law-economics analyse of the main factors affecting economic development process.

## 2. THE ROMANIAN ECONOMY, THE ECONOMIC GROWTH, AND GLOBALIZATION

Romania's economy developed from central planned economy to a market economy. Before 1989, Romanian economy was based on a strong industrialization process. After 1989, the economy of the country encountered periods of recession and economic growth, following a business cycle that constantly changed. For instance, the period 1980-1990 was characterized by a centrally planned economy in which the industrial development was implemented and the country encountered periods of drastic reduction in the food supplies; the period 1990-2000 was characterized by transition from central planned economy to market economy, period 2000-2008 had an increase in the consumption of products from European Union, especially after 2007, when Romania became a member of European Union. Romania had a period of increase in consumption with high economic growth rates between 2000 and 2008. The financial crisis of 2007-2008 affected Romania bringing a drop in the country's GDP of 6.7 percent in 2009, followed by a smaller fall of the GDP of 1.6 percent in 2010.<fnref n="1" />

The process of economic development is implemented with slow steps, and even if the country is a member of European Union, because its corruption and undeveloped infrastructure, mixed with an inefficient system of internal production, there are many differences between its economic development and the development of western advanced economies of the EU platform.

Economic growth refers to the capacity of a nation to satisfy over a period different material wants of its population. It includes an increase in national production over the time, meaning that more goods and services are produced, bringing an expansion of national production with the possibility to increase the standards of life.

There are different sources of economic growth. Firstly, supply factors, resources which are used to produce the final output (GDP) determine the growth rate through the quantity of the inputs used and their productivity.

The productivity is the efficiency of using the inputs, where a same amount of resources can produce a larger amount of output. Very important in this context are the human resources, the stock of skills and knowledge that represents the human capital and can be improved through a good education system, and on-going training, and investment in research.

Other supply factor is represented by investment and capital accumulation, which is a long term investment for future production capacity. For instance, the investment in capital goods like building, equipment, inventories.

There are two types of investment: one of them is public or government investment in public facilities, like health, education, communication networks, road infrastructure, and the other type is private or business investment for their buildings, machinery, equipment, or also called the investment in capital factors of production.

Technological progress, new scientific and technical skills can increase the productivity that is represented by the output per worker, per unit of time and can be achieved with more research and development.

<footnote n="1">¹ Daianu, D, Murgescu, B. (2013). *Which Way goes Romanian Capitalism? Making a Case for Reforms, Inclusive Institutions and a Better Functioning European Union*. Berlin: Friedrich-Ebert-Stiftung, p.6</footnote>
Secondly, demand factors are represented by population that can increase through net migration, that is the increase from immigration minus the loss from emigration and natural increase, which is represented by the difference between births and deaths.

There are several conditions that a country's population will have to achieve in order to conduce to economic growth. First, it has to be productive and a large amount of it in the work-force, second, it has to be well-educated, healthy and third it has to be motivated by spiritual or material incentives, and by a dynamic leadership.

Economic growth rate is calculated from the changes at the level of Real GDP.

### Economic growth rate formula:

$$ \text{Growth rate} = \left[ \frac{(\text{Real GDP n} - \text{Real GDP n-1})}{\text{Real GDP n-1}} \right] * 100 \\ \text{Where n represents present year and n-1 represents past year.} $$

GDP can be used for the calculation of economic growth, but as a measure of well-being or the quality of life in a society, it is quite limited. This is because the other variables are not included and they have a strong impact on every citizen or community. They are: income distribution, composition of output, quality of environment, education, health, and hours worked, and also other variables like life expectancy or literacy rates.

Economic growth has costs and benefits. An important benefit is the increase in social welfare, this helping people in need with the minimum budget per month. But growth places a greater demand on scarce amount of resources. The costs of businesses are increasing and they are passed on to consumers as higher prices, this process being costs push inflation.

In the table 1 is given a list of benefits and costs of economic growth.

<table><caption>Table 1. Benefits and costs of economic growth</caption><thead><tr><td>The benefits of growth</td><td>The costs of growth</td></tr></thead><tbody><tr><td>Increased participation in international trade</td><td>Structural unemployment</td></tr><tr><td>Increased leisure time</td><td>Inflation</td></tr><tr><td>Increased social welfare</td><td>Misallocated resources</td></tr><tr><td>Improved social mobility</td><td>Exports became more expensive and imports increase</td></tr><tr><td>Better life standards</td><td>Externalities and social costs</td></tr></tbody></table>

Source: own representations

From a general perspective, economic development includes economic growth, bringing an improvement for social and business conditions of a country. However, the economic development process is more complex during the accelerated globalization process of XXI century because is not including just the economic growth that is relying on the GDP changes, but is also related to other social and political factors.

Todaro and Smith presented a global perspective on development, also showing the classic theories on economic growth and development, followed by contemporary models of development and underdevelopment.<fnref n="2" />

It's difficult to give a unique definition for economic development, a relevant definition will possibly be related with the manner of measuring the process of economic development. Therefore,

<footnote n="2">² Todaro, M., & Smith, S. (2009). Economic development (10th ed.). Boston: Addison Wesley.</footnote>
generally, it can be argued that economic development represents the ability of a nation to create a
sustainable increase in its Gross National Product of over 5 %.

3. BUSINESS ETHICS AND THE GLOBALIZED ECONOMIC SYSTEM

A definition of business ethics will generally refer to finding a balance between economic needs and social, moral issues within the activity of companies. More accurately, ethics tries to determine the moral guidelines of people's actions within economic activities, from managers to employees, with focus on obtaining a correct attitude between companies and their employees, clients, suppliers or other collaborators, companies and communities, companies and state authorities or even states themselves when they put on the role of economic actors.

Within a rapidly developing economy of the last years and on the verge of globalization which becomes more evident every day, business ethics being also globalized will need to find new ways to adapt and offer the best possible solutions in such situation.

This is quite challenging if we are to observe the variety of economic, social, moral, cultural systems which meet and often confront each other in a globalised economic development.

If seen on a smaller, national level, business ethics would generally touch issues such as the security and equitable treatment of employees in all work related aspects, the quality of products and services, honest and correct practice between economic agents, correct publicity, protection of environment. However, when extended to an international economic environment, such issues, on one hand, would take over new dimensions and, on the other hand, would not cover all problems deriving from an international context. Among such challenges, created or potentiated by a globalised economic environment, we may think of aspects related to antitrust, internet and e-commerce policies, automation and artificial intelligence, climate change and environment protection, or global sustainable development.

As historically, moral and not law was the first form of regulating human relations<fnref n="3" />, we accept that rules of ethics in general and of business ethics in particular are not equivalent to legal rules and are pre-existent to the latter, nevertheless the role of legislation in the regulation and promoting of business ethics cannot be denied, the more so in the context of a globalised economy, when legal instruments may become the path to finding objective solutions among a wide range of divers elements. Maybe among the best examples of promotion and enforcement of business ethics through legislation would refer to the development of antitrust regulations.

4. CONCLUSIONS

Every social system is influenced by local and international factors allowing the changes to
create a platform of economic recession or economic growth. The factors that bring economic
growth for different countries are based not just on strictly economic measurements, but also on
social aspects and ideologies that can influence consumption and investment. At the end of 1989,
beginning of 1990, Romania had to radically change its ideological system that made its economy
to slowly be transformed from a command economy to a market economy.

The short description of Romanian economic changes was given in this paper to show that a country with a transitory ideological and economic system needs time to adjust its market and an important aspect in this context is that the country had to get ready to embrace the challenges of capitalism after almost three decades of centralized economy.

<footnote n="3">³ Muresan, J-D, Graniceru, A.C. (2013) *Etica in noua economie*, Bucharest: Editura Universitară, pp.7-9.</footnote>
The factors affecting economic growth are not isolated in laboratories, they are parts of the business cycle and need a mix of productivity and technology under the coordination of an efficient human capital.

The role of international law is to prevent the business failures to affect the market and to offer the best strategies for small businesses to develop.

## REFERENCES

Daianu, D, Murgescu, B. (2013). *Which Way goes Romanian Capitalism? Making a Case for Reforms, Inclusive Institutions and a Better Functioning European Union*. Berlin: Friedrich-Ebert-Stiftung.

Muresan, J, D, Graniceru, A-C (2013). *Etica in noua economie*. Bucharest: Editura Universitară.

Todaro, M., Smith, S. (2009). *Economic development* (10th ed.). Boston: Addison Wesley.
# The Evolution of the European Legislation in regard to the Transplantation of Organs, Tissues and Cells of Human Origin, and its Implementation by the Romanian State

LECTURER DR. OLIMPIU SABAU-POP

UNIVERSITY OF MEDICINE, PHARMACY, SCIENCES AND TECHNOLOGY OF TIRGU MURES

*Abstract:* The results of successful transplant surgery over nearly six decades have made organ and tissue transplantation a world-class medical practice that has brought enormous benefits to patients, making it the only treatment possible. It is clear that the use of organs and tissues for transplantation involves risks, which is why security measures have been taken regarding their donation, collection, processing, preservation, storage, transport and use. At the European Union level, it was deemed necessary to create a unitary legal framework to ensure that organs and tissues intended for transplantation have a similar level of quality and safety.

## 1. INTRODUCTION

<figure><img src="image_5.png" /></figure>

The transplantation of organs, tissues and cells is a topic of major importance in the social life of national and international collectives, it is present in the consciousness of individuals and gives rise to a great interest in the field of medical development.

The concept of donation is for the first time used as an understanding of civil law, corresponding to a free or non-remunerated transfer of a good or an asset between two parties. The effect of donation was understood exclusively as a patrimonial transfer by which the donor's patrimony is reduced and the donee's patrimony is increased, as defined by the 1864 Civil Code. More than 150 years later, the New Civil Code added the definition of organ transplantation/donation under Art. 68, namely: 'The collection and transplantation of organs, tissues and cells of human origin from living donors shall exclusively be done in the cases and under the conditions provided for by law, with their written, free, prior and express consent and only after having been informed. In all cases, the donor has the right to withdraw his consent until the time of collection.'

If initially the concept of donation had an exclusively patrimonial connotation, through the development of medicine social reality gave another meaning to the notion of donation, namely the chance of life and health.

The medical world borrowed the concept from Civil Law giving it another stand-alone meaning, but one that had to be institutionalized. The development of medical science has challenged the world's legislators to regulate this matter of organ, tissue and cell transplantation. What the normative sequence did was only to adapt to the social-human relations in deep development and evolution. At supra-state level and in the interstate relations, the normative acts were those that eventually created the premise of the development of organ, tissues and cells transplantation and the interconnection between the world's transplant centers.

Organ transplantation, one of the most spectacular medical performances of the twentieth century, has become a routine therapeutic method that saves the lives of a large number of people around the world, but unfortunately the progress in medicine is not enough, the number of patients on waiting lists far exceeds the number of donors.
Although the modern history of transplantation is relatively short, the idea of transferring an organ from one human being to another prevails since ancient times. The first description of human organ transplantation appears in texts dating back to the 4th century BC in ancient China, when the mythical Chinese surgeon Tsin Yue-Jin “exchanged the hearts of two soldiers; one endowed with a strong will but a weak spirit and the other conversely afflicted”<fnref n="4" />.

The first scientific attempts, however, occur at the end of the 19th century - the beginning of the 20th century, when the first human transplant (skin graft)<fnref n="5" /> was successfully performed, followed by the first successful corneal transplant in 1905.

Transplants have experienced remarkable progress after solving the problem of uncontrolled thrombosis and poor blood circulation in the organs transplanted by discovering the end-to-end anastomosis of small vessels.<fnref n="6" />

Another important moment in the history of transplants is the year 1954, when the first human kidney transplant was successfully performed between monozygotic twins<fnref n="7" /> and in 1967 the world's first human-to-human heart transplant was performed<fnref n="8" />. At the same time with the development of immunosuppressive therapy, the first liver transplant with the receiver's survival is performed in 1967⁹.

The history of Romanian transplantation begins in 1980, with the first successful liver transplant carried out at Fundeni Hospital, followed by the first kidney transplant from a deceased donor performed in Timișoara. A new stage started only after December 1989, the first reference year being 1992, when the first kidney transplant program in Romania was established in the center of Cluj-Napoca.

In 1997, the first multiorgan collections were carried out - at the General Surgery Clinic of Fundeni Hospital a kidney was collected from a brain-dead donor and at the Floreasca Emergency Hospital a liver and kidneys were collected<fnref n="10" />. Two years later, the first cardiac transplant was performed at the Floreasca Emergency Hospital.

In 2004, the first combined kidney-pancreas transplantation and the first stem cell transplantation in cardiology succeed, and one year later the first stem cell transplantation in liver diseases is performed<fnref n="11" />.

<footnote n="4">⁴ A. Z. Crawford, D. V. Patel, Ch. NJ. McGhee, A Brief History of Corneal Transplantation: From Ancient to Modern. Oman Journal of Ophthalmology, 2013, Sep-Dec; no. 6 (Suppl. 1), pg. 12-S-17;</footnote>

<footnote n="5">⁵ LA. Fariña-Pérez, J. L. Reverdin (1842-1929): The Surgeon and the Needle. Archivos Espanoles de Urologia, 2010, May, no. 63(4), pg. 269-74;</footnote>

<footnote n="6">⁶ R. M. Sade. Transplantation at 100 Years: Alexis Carrel, Pioneer Surgeon. The Annals of Thoracic Surgery, Vol. 80, Issue no. 6, 2005, pg. 2415-2418; S. A. Carrel: Father of Vascular Anastomosis and Organ Transplantation, Indian J Vasc Endovasc Surg, 2018, no. 4, pg. 115, the first transplantation was performed by French surgeon Alexis Carrel, who transplanted a dog's kidney by relocating it to the throat, first publishing the results of his organ transplantation research in October 1905, subsequent to his success publishing a series of scientific papers and thus marking the beginning of organ transplantation science.</footnote>

<footnote n="7">⁷ M. Hatzinger, M. Stastny, P. Grützmacher, M. Sohn, The History of Kidney Transplantation, Der Urologe Ausg., 2016, no. 55(10), pg. 1353-1359;</footnote>

<footnote n="8">⁸ J. G. Brink, J. Hassoulas, The first human heart transplant and further advances in cardiac transplantation at Groote Schuur Hospital and the University of Cape Town. Cardiovascular Journal of Africa, 2009, no. 20(1), pg. 31-35;</footnote>

<footnote n="9">⁹ A. T. Wan Song, V. L. Avelino-Silva, R. A. Arruda Pecora, V. Pugliese, L. A. C. D'Albuquerque, E. Abdala, Liver Transplantation: Fifty Years of Experience, World Journal of Gastroenterology, 2014, no. 14; 20(18), pg. 5363-5374;</footnote>

<footnote n="10">¹⁰ The National Transplant Agency website: https://www.transplant.ro/Istoric.aspx?AspxAutoDetectCookieSupport=1;</footnote>

<footnote n="11">¹¹ R. Deac, The History of Organ Transplantation in Romania. Chirurgia 2010, no. 5, pg. 597-602;</footnote>
## 2. THE EUROPEAN AND DOMESTIC LEGISLATION ON THE TRANSPLANTATION OF ORGANS, TISSUES AND CELLS OF HUMAN ORIGIN

The results of successful transplant surgery over nearly six decades have made organ and tissue transplantation a world-class medical practice that has brought enormous benefits to patients, especially where it is the only treatment possible.

It is clear that the use of organs and tissues for transplantation involves risks, which is why security measures have been taken regarding their donation, collection, processing, preservation, storage, transport and use. The new social reality had no legal framework, the organ transplantation pioneers in the medical system have gone ahead of the law, therefore the legal system had to catch up and regulate this matter by introducing ethical and legal rules in order to guarantee the protection of the moral values of society, the autonomy, the fundamental human rights<fnref n="12" />.

The operation of national and international transplantation systems and the application of best practices in the field through the use of innovative medical technology and treatments significantly reduces the risks associated with organ and tissue transplantation<fnref n="13" />. Systems have been created by the legislative framework, so organ and tissue transplantation is governed by national and community legislations, international covenants, regulations, correlated with the obligation of transplant participants to observe them.

At EU level, it was deemed necessary to create a unitary legal framework to ensure that organs and tissues intended for transplantation have a similar level of quality and safety. Standards contribute to the public's confidence that the human organs and tissues collected in another Member State have similar guarantees to those originating in their country of residence<fnref n="14" />.

The national legislations of the Member States may have some peculiarities, but overall they all have to follow the same general principles regarding the prohibition of marketing or the consent of the donor.

At the European Union level and in Romania, the activity of organ and tissue transplantation is regulated by the following normative acts:

* Directive 2004/23/EC of the European Parliament and of the Council of March 31, 2004, on setting standards of quality and safety for the donation, procurement, testing, processing, preservation, storage and distribution of human tissues and cells.

Until the enactment of this Directive, the domestic laws of the Member States did not have a unitary vision in this area, so it was necessary to create a supranational, binding legal and recommending legal instrument for the Member States in preparation of the legal harmonization that was to foster a unitary legal treatment of the matter.

This Directive regulates the common standards that ensure both the quality and the safety of the donation, collection, testing of human tissues and cells and of those contained in manufactured products intended for human use in order to reduce the risk of infection and to prevent transmission of diseases.

<footnote n="12">¹² D. A. Luscalov, Legal and Ethical Aspects of Organ Donation and Transplantation, Clujul Medical, 2012; vol. 85, no. 4, pg. 560-565;</footnote>

<footnote n="13">¹³ Directive 2010/53/EU of the European Parliament and of the Council of July 7, 2010, on standards of quality and safety of human organs intended for transplantation. The Official Journal of the European Union. L 207: 14-29;</footnote>

<footnote n="14">¹⁴ Directive 2004/23/EC of the European Parliament and of the Council of March 31, 2004, on setting standards of quality and safety for the donation, procurement, testing, processing, preservation, storage and distribution of human tissues and cells. The Official Journal of the European Union. Chapter 15, vol.11: 129-140;</footnote>
The Directive also requires the establishment of specific technical requirements for the implementation of the process, from organ procurement to distribution and transplantation, as well as the existence of a national accreditation system for tissue banks.

Directive 2004/23/EC of the European Parliament and of the Council of March 31, 2004, has been harmonized into the Romanian legislation by:

Government Ordinance no. 79/2004 for the establishment of the National Transplant Agency approved with amendments by Law no. 588/2004 and its subsequent amendments and additions;

- Law no. 95/2006, republished, on health reform, and its subsequent amendments and additions;

- Order of the Minister of Public Health no. 1242/2007 for the approval of the Standards for the selection and evaluation of tissue and/or cells of human origin donor, emergency alert systems and procedures, personnel qualification for human tissue and cell banks, quality system, import and export of tissue and/or cells of human origin, relations between human tissue and cells banks and third-parties and of the Procedures to verify equivalent quality and safety standards for imported tissue and/or cells of human origin, and its subsequent amendments and additions;

- Order of the Minister of Public Health no. 1763/2007 laying down technical requirements for the donation, collection, testing, processing, preservation, distribution, coding and traceability of tissues and cells of human origin for therapeutic purposes and notification of serious adverse events and serious adverse reactions during their transplantation, and its subsequent amendments and additions.

➤ Directive 2006/17/EC of February 8, 2006, implementing Directive 2004/23/EC of the European Parliament and of the Council as regards certain technical requirements for the donation, procurement and testing of human tissues and cells.

This Directive brings new regulations with respect to Article 28, items (b), (d), (e), (f), and (i) of Directive 2004/23/EC on: standards on requirements for the procurement of human tissues and cells, selection criteria for the donor of tissues and/or cells, laboratory tests required for donors, cell and/or tissue procurement procedures and reception at the tissue establishment, requirements for the direct distribution to the recipient of specific tissues and cells, notification of adverse reactions, preparation of annual reports by the Member States.

With regard to the donation of reproductive cells by couples, a number of simpler procedures are established for the use of cells by a third party.

Directive 2006/17/EC of February 8, 2006, implementing Directive 2004/23/EC of the European Parliament and of the Council has been harmonized into the Romanian law by:

- Order of the Minister of Public Health no. 1242/2007 for the approval of the Standards for the selection and evaluation of tissue and/or cells of human origin donor, emergency alert systems and procedures, personnel qualification for human tissue and cell banks, quality system, import and export of tissue and/or cells of human origin, relations between human tissue and cells banks and third-parties and of the Procedures to verify equivalent quality and safety standards for imported tissue and/or cells of human origin, and its subsequent amendments and additions;

- Order of the Minister of Public Health no. 1763/2007 laying down technical requirements for the donation, collection, testing, processing, preservation, distribution, coding and traceability of tissues and cells of human origin for therapeutic purposes and notification of serious adverse events and serious adverse reactions during their transplantation, and its subsequent amendments and additions.
➤ Commission Directive 2006/86/EC of October 24, 2006, implementing Directive 2004/23/EC of the European Parliament and of the Council as regards traceability requirements, notification of serious adverse reactions and reactions and certain technical requirements for the coding, processing, preservation, storage and distribution of human tissues and cells.

The scope of this Directive concerns the standards of quality and safety of human tissues and cells in their process of coding, processing, storage, preservation and distribution to healthcare centers for human use.

As a novelty, the *Single European Code* is introduced to facilitate cross-border transplantation within the Member States.

Also, the Annexes to this Directive unitary establish the minimum requirements for the accreditation, designation, authorization and licensing of the Tissue Centers, the requirements for authorization of processes in Tissue Centers and the procedure of expedited notification for serious adverse reactions and events suspected in Tissue Centers.

Commission Directive 2006/86/EC of October 24, 2006, implementing Directive 2004/23/EC of the European Parliament and of the Council has been harmonized into the Romanian legislation by:

- Order of the Minister of Public Health no. 1242/2007 for the approval of the Standards for the selection and evaluation of tissue and/or cells of human origin donor, emergency alert systems and procedures, personnel qualification for human tissue and cell banks, quality system, import and export of tissue and/or cells of human origin, relations between human tissue and cells banks and third-parties and of the Procedures to verify equivalent quality and safety standards for imported tissue and/or cells of human origin, and its subsequent amendments and additions;

- Order of the Minister of Public Health no. 1763/2007 laying down technical requirements for the donation, collection, testing, processing, preservation, distribution, coding and traceability of tissues and cells of human origin for therapeutic purposes and notification of serious adverse events and serious adverse reactions during their transplantation, and its subsequent amendments and additions.

➤ Directive 2010/53/EU of the European Parliament and of the Council of July 7, 2010, on standards of quality and safety of human organs intended for transplantation.

This Directive lays down the rules for ensuring the quality and safety standards of human organs intended for transplantation in order to assure a high level of protection of human health.

A set of principles governing organ donation are laid down, namely: donation is voluntary and unpaid, any compensation received by living donors is limited to covering costs and lack of income caused by donation; prohibiting media coverage of the need for or availability of organs when it is aimed at obtaining a financial gain; the procurement of organs is carried out on a non-profit basis.

Conditions are provided for: protection of personal data, confidentiality and security of information processing; the exchange of information between the relevant Member State authorities, the existence of records of procurement organizations and the operation of intra-Community trade as well as exchanges with third countries (non-EU countries).

Directive 2010/53/EU of the European Parliament and of the Council of July 7, 2010 has been harmonized into the Romanian legislation by:

- Law no. 95/2006, republished, on health reform, and its subsequent amendments and additions;

- Emergency Ordinance no. 35/2012 for the modification and completion of some normative acts in the field of health.
- Order no. 613 of May 29, 2014, for approval of the information procedures with respect to the exchange of human organs intended for transplantation between Romania and the other Member States of the European Union

➤ Commission Implementing Directive 2012/25/EU of October 9, 2012, laying down information procedures for the exchange, between Member States, of human organs intended for transplantation.

This Directive complements Directive 2010/53/EU and establishes uniform procedures for the transmission of information between Member States regarding the donor and the donated organ, the traceability of organs, the reporting of incidents and of serious adverse reactions.

The interconnection between Member States is carried out by the European Commission.

This directive has been harmonized into the Romanian legislation by:

- Order of the Minister of Health no. 613 for approval of the information procedures with respect to the exchange of human organs intended for transplantation between Romania and the other Member States of the European Union

➤ Commission Directive 2012/39/EU of November 26, 2012, amending Directive 2006/17/EC as regards certain technical requirements for the testing of human tissues and cells.

Annexes II and III to Directive 2006/17/EC are amended and Member States are required to enact administrative acts for the uniform testing of tissues and cells.

This directive has been harmonized into the Romanian legislation by:

- Order no. 371 of March 15, 2013, amending and supplementing the Technical requirements for the donation, collection, testing, processing, preservation, distribution, coding and traceability of tissues and cells of human origin used for therapeutic purposes and notification of serious adverse events and serious adverse reactions during their transplantation, approved by the Order of the Minister of Public Health no. 1,763/2007.

➤ Commission Directive (EU) 2015/565 of April 8, 2015, amending Directive 2006/86/EC as regards certain technical requirements for the coding of human tissues and cells.

This Directive amends the provisions of Directive 2006/86/EC on the format of the Single European Code, the minimum requirements for the management of the Single European Code, the addressability, accessibility and maintenance of the European coding system.

Commission Directive (EU) 2015/565 of April 8, 2015, amending Directive 2006/86/EC has been harmonized into the Romanian legislation by:

- Order no. 417/2017 of April 06, 2017, amending and supplementing the Technical requirements for the donation, collection, testing, processing, preservation, distribution, coding and traceability of tissues and cells of human origin used for therapeutic purposes and notification of serious adverse events and serious adverse reactions during their transplantation, laid down by the Order of the Minister of Public Health no. 1,763/2007.

➤ Commission Directive (EU) 2015/566 of April 8, 2015, implementing Directive 2004/23/EC as regards procedures for verification of equivalent quality and safety standards for imported tissues and cells.

The Directive amends and supplements the provisions of Directive 2004/23/EC with respect to the imports into the European Union of human tissues and cells as well as of products manufactured or derived from human tissues and cells and intended for human use. Tissue import centers will need to be accredited, authorized and licensed by the authorities and be subject to control by the competent authorities.

Commission Directive (EU) 2015/566 of April 8, 2015, has been harmonized into the Romanian legislation by:

- Order no. 1257/2017 of October 30, 2017, amending and supplementing the Order of the Minister of Public Health no. 1,242/2007 for the approval of tissue and cell donor selection