REPORT ON CORRUPTION IN UKRAINE

Source: GAN Business Anti-Corruption Portal

A combination of rampant corruption, market volatility and political instability in Ukraine represents major business risks for foreign investors. Bribery and facilitation payments are widespread among Ukrainian public officials, severely complicating business registration and trade procedures for international companies. Public procurement also suffers from pervasive corruption, burdensome regulations and favoritism, severely impeding fair competition. Corruption, extorsion, bribery of foreign public officials, abuse of office and facilitation payments are criminalized under the Criminal Code, and official corruption - including conflicts of interest, asset disclosure and gifts and hospitality - is also covered under Ukraine's legislative framework. Ukraine’s anti-corruption laws encompass corrupt misconduct in both the private and the public sectors. The Law On Prevention of Corruption introduces measures for monitoring the effective implementation of anti-corruption provisions. However, a weak judicial system limits the enforcement of Ukraine's anti-corruption laws.

Judicial System

Ukraine's judicial system is undermined by the executive branch and suffers from widespread corruption and nepotism. Businesses report that irregular payments and bribes in exchange for favorable judgments are common. Three out of five Ukrainians consider judges to be corrupt. The process of dispute settlement is ineffective because of an inadequate legal framework and poor enforcement of arbitration decisions which further weakens investor confidence. Judicial unpredictability and an inadequate institutional framework are additional problems for the business and investment climate . Reforms of the judiciary, adopted in mid-2016 provides for a new Supreme Court, the strengthening of judicial independence by appointing judges via a judicial council rather than parliament, and making the court system simpler. The High Qualification Commission has thus far selected 120 judges of the new Supreme Court, while overriding the Public Integrity Council's vetoes of a quarter of the nominees against whom there were allegations of evidence of corruption: The seclection is, nevertheless, still pending the approval of the president . The implementation of the reforms is still underway. Enforcing a contract takes significantly less time than the regional average, but costs are nearly twice as high as the regional average.

Police

Companies face significant risks when dealing with the Ukrainian police. More than half of Ukrainians consider the police to be corrupt . The police has often been able to act with impunity . The United Human Rights mission in Ukraine has highlighted frequent impunity for law enforcement abuses, which they attribute to pressure on the judiciary, as well as the inability and unwillingness of the country's prosecutors to investigate the abuses. In 2015, hundreds of police officers were fired for alleged corruption . However, there have been growing tensions between the police and the prosecutorial service, threatening to undermine reforms . Companies do not trust the police to uphold law and order. 

Public Services

Foreign companies expanding to Ukraine should beware of the high risks of corruption within the country's public services. Corruption is the most problematic factor for doing business in Ukraine, and dealing with government administrative requirements is burdensome . Nearly nine out of ten businesses indicate they face corruption when doing business in Ukraine . Companies indicate that bribery is common in the process of obtaining utility services. The most commonly cited reasons by businesses for engaging in corruption are still given as "to accelerate procedures" and "to have access to certain services" . While obtaining a construction permit takes fewer steps and is done relatively quickly, the costs associated with the process are over three times higher in Ukraine than in the rest of Europe . Starting a business is relatively easy in Ukraine; it involves only four steps and it takes only half the time of the regional average.

Land Administration

Companies face a significant risk of corruption when dealing with Ukraine's land administration. Almost three quarters of companies indicate they expect to give gifts when obtaining a construction permit. The constitution protects property rights, but in practice these rights are weakly enforced owing to an inefficient court system subject to political influence and extensive corruption . In effect, companies report insufficient confidence in the protection of property rights . Expropriation is permitted under the law in criminal cases and failure to meet investment obligations in privatization programs . Companies should also be aware that due to the ongoing conflict in Eastern Ukraine, the military may legally expropriate private property for military purposes . The number of procedures and the length of time required to register property slightly exceed corresponding values for the region.

Tax Administration

Companies have to deal with red tape and high corruption risks when interacting with Ukrainian tax authorities. Corrupt tax officials are a pervasive problem for small and medium-sized businesses. Irregular payments and bribes are common when making tax payments . Tax regulations are among the most problematic factors for doing business ). Companies also report that officers illegally pressure businesses to extort kickbacks in return for illegal tax cuts. The courts now frequently deny requests by the prosecutor for unfounded tax inspections . Courts are increasingly giving fair treatment to private companies, whereas they would give primacy to protecting the state budget in the past. Companies spend 50% more time complying with regulatory requirements for filing taxes in Ukraine than in other countries in the region. In May 2017, Ukrainian law enforcement agencies arrested 23 former high-ranking tax officials on suspicion of helping former President Yanukovych to steal nearly USD 4 billion from the state's coffers.

Customs Administration

Ukraine's customs administration is susceptible to corruption. Corrupt activities at the border represent the single most problematic factor for trade, and burdensome tariffs and demanding customs procedures increase business costs. Companies indicate that irregular payments and bribes are highly common . Companies rate the efficiency of the clearance process as well as the time predictability of the process as poor . Dealing with import procedures takes on average significantly more time than elsewhere in the region  USAID stopped its funding of an anti-corruption project at the Odessa seaport customs facility, citing a lack of cooperation from the local authorities.

Public Procurement

The public procurement system in Ukraine carries high risks of corruption. Companies indicate that bribes are highly common in public procurement procedures . Companies further report that diversion of public funds due to corruption and favoritism in decisions of government officials are very common . About one in six companies indicates that corrupt practices give access to government tenders . Many of Ukraine's State-Owned Enterprises (SOEs) are unable to compete with private companies since they frequently operate at a loss and are subsidized by the government . A new law entered into force in 2016, requiring that all procurement with a value over UAH 200,000 (goods) or UAH 1,5 million (services) has to be conducted via the new e-procurement system.

Nature Ressources

There is a high risk of corruption in Ukraine's natural resource sector. The country's natural resources are exploited by the elite for political largesse and filling their party war chests . Extraction and transportation of Ukrainian natural gas and oil are monopolized and controlled by the state-owned company Naftogaz. Naftogaz has largely been cleaned up from corruption . Ukraine does not fully comply with EITI transparency standards yet and its legislation on transparency standards for the extractive industries is lacking.

Legislation

The Criminal Code of Ukraine criminalizes active and passive bribery, attempted corruption, extorsion, bribery of a foreign public official, money laundering, abuse of office and facilitation payments. The Law on Principle of Preventing and Counteracting Corruption is aimed at preventing and combating corruption in the public sector and requires financial reporting by state officials. The law regulates conflicts of interest by government officials, gifts and hospitality, and public official asset disclosure and introduces a broad list of officials who can be held liable for corruption offenses. Corporations are criminally liable for committing corruption offenses. Law No.1261-VII provides regulations that expand the jurisdictional reach of the anti-corruption legislation to apply to foreign persons working in the private sector. Government officials are obligated to file an electronic asset declaration according to Law No. 1022-VII. Ukraine's Constitution states the president is not allowed to perform any kind of paid professional activity or to be a member of a board of directors at any corporation that aims to generate profit. The law provides for protection of whistleblowers: Individuals reporting corruption are legally protected from dismissal or disciplinary action. Sanctions for corruption offenses are fines of up to twice the amount of illegally obtained benefits, penalties, and other measures including seizure of unlawfully obtained property. Law n the Fundamentals of Anticorruption Policy in Ukraine provides for the independent National Anti-Corruption Bureau to curb corruption among top-level officials, the monitoring of the implementation of conflict of interest regulations, transparent funding of political parties and annual reporting on the implementation of anti-corruption policy principles. In 2017, Ukraine announced that certain entities, particularly companies engaging in public procurement processes worth over AUH 20 million, will be obligated to comply with the "Typical Anti-Corruption Program for Legal Entities" . The measures in this program include yearly corruption self-assessments, an obligation to instruct personnel on anti-corruption laws, and an obligation to establish internal procedures to protect employees who blow the whistle on internal violations  Ukraine's anti-corruption legislation has thus far not been effectively implemented . Ukraine has ratified the United Nations Convention against Corruption and is party to the Council of Europe anti-corruption conventions.

Civil Society

Ukraine's Constitution provides for freedom of the press, but in practice journalists face several restrictions on their work. Self-censorship remains widespread . A new law requires journalists who report on government corruption to file public declarations of their assets, in an attempt to deter journalists. Freedom of access to government information varies; but local governments in particular do oftentimes not comply with requests for information . The majority of media outlets in Ukraine are privately owned by a small number of wealthy businessmen . The government has started the process of privatizing much of the print media . Internet access is generally unrestricted. Ukraine's media environment is considered 'partly free' .

Civil society organizations (CSOs) in Ukraine are developed and represent a wide variety of interests. Civil society generally operates without major restrictions . CSOs have grown in capacity and have been crucial in driving the development of the rule of law since the Euromaidan revolution. Many former activists have entered parliament following the Euromaidan protests . However, the influence of extremist organizations has similarly grown . CSOs have been instrumental in the anti-corruption drive in Ukraine .

Summary (Hrant Kostanyan, Researcher at CEPS, a Senior Key Expert at the College of Europe Natolin and an Adjunct Professor at Vesalius College)

Ukraine’s leadership has fallen woefully short in delivering on its promises to fight against corruption within the judiciary, clean up political party financing and decentralise government functions. The customs service has yet to be reformed, property rights are far from being ensured and state-owned enterprises have not been privatised. Major reforms aimed at combating corruption have consistently been resisted, delayed, manipulated or appear on paper only. The country’s elite must produce more tangible results in order to earn the trust of the citizens and ease the growing fatigue among Ukraine’s international partners.

As seen through the eyes of international organisations, Ukraine made scant progress in fighting corruption in 2016. For example, in Transparency International’s Corruption Perceptions Index, the country improved by merely 2 points and ranks 131th out of 176 countries, accompanied by Kazakhstan, Russia, Nepal and Iran. Ukraine slipped one point in the Global Competitiveness Report, two points in The Economist’s Intelligence Unit’s Country Risk Ratings but went up by one point in the World Bank’s Doing Business Index.

Ukraine’s weak state institutions were never a match for the powerful domestic elites consisting of oligarchs and their political allies, who successfully obstructed the implementation of crucial reforms. Safeguarding one’s personal business interests takes priority over the demand to strengthen the Ukrainian state and the confidence of its citizens in it.

The institutional changes have done little to change behaviour and attitudes. For example, the goal of the independent National Anti-Corruption Bureau is to investigate high-level officials suspected of corruption, but its work has been seriously obstructed since its establishment. The unreformed Prosecutor General’s office, which retains its Soviet-style powers of coercion, undermines the work of the National Anti-Corruption Bureau, whose detectives even got into fist-fights with members of the General Prosecutor’s Office in the course of performing their duties. Moreover, when the Bureau asked Rada to remove the immunity granted to one of the parliamentarians who was under investigation, Rada delayed the process so much that the parliamentarian in question slipped out of the country before he could be prosecuted. Furthermore, the corrupt courts routinely delay hearings for those who have been charged with crimes of corruption. Although the National Anti-Corruption Bureau and the Specialised Anti-Corruption Prosecutor’s Office have made some progress, the commitment they show in carrying out their responsibilities is extremely low (out of 63 indictments sent to the courts, only four people received a prison sentence), and no high-level official has been convicted to date.

The National Agency on the Prevention of Corruption is another stark example of a new institution whose work is undermined by the elites. The composition and the mandate of the National Agency on the Prevention of Corruption are impeccable on paper, but in practice, even its establishment was marred by delays and manipulations on the part of the government in almost every step.

One of the major requirements imposed by the EU on Ukraine was the setting up an electronic database for officials to declare their financial assets. The positive outcome is that over 100,000 Ukrainian politicians and senior civil servants, including the President and the Prime Minister, have publicly declared their wealth. The actual implementation of the system was delayed, however, and when the declarations were finally submitted, they confirmed what Ukrainians had suspected for a long time: the members of their government are much richer than the average citizen. In fact, a Ukrainian who earns an average salary has to work about 125 years to make as much money as an average member of the government. The future of the e-declaration is now under challenge by a group of Rada members who filed a case in the Constitutional Court charging that it is unconstitutional. 

Corruption is pervasive in Ukraine not only at the national level, but also at the regional and local levels. By shifting powers to regional and local authorities, the aim was to bring government closer to the people. Although a body of legislation was adopted to facilitate decentralisation, the administrative capacity of the regional, district and local communities has yet to be built. By simply shifting more power and more money from the national to the local level, the risk of corruption is also transferred – an unfortunate reality that has not been adequately tackled.  As a result, some businesses are now facing difficulties not only at the hands of national but also some local and regional authorities.

Regulating the funding of political parties in Ukraine also remains a daunting task. Most of the parties are paid for and controlled by oligarchs. By having parliamentarians on their payroll, oligarchs secure a role in the politics of the country and thus safeguard their business interests. Rada passed a new party financing law in July 2016, which is another fine piece of legislation on paper, but one that has yet to be enforced despite a massive number of alleged violations. 

The EU is now pushing for the establishment of specialised anti-corruption chambers to function inside the existing court system in Ukraine. In itself, this is a good idea and if done properly it is likely to help Ukraine’s vibrant civil society in its fight for a better future for the country. Yet once again, the formation of one more institution will not save the country.

The lesson for the EU is clear. Progress on paper in Ukraine should not be rewarded. Having a government that calls itself pro-European is not an excuse for leniency on corruption. The EU’s assistance should go to those who fight for a corruption-free European Ukraine and not to those who merely declare themselves as European but act as a ‘wolf in a sheep’s clothing’. It is important that the EU continues to support the dynamic civil society of Ukraine and improves its strategic communication.

The EU should not accept the assertions of high-level Ukrainian officials that the country has made huge strides in the last three years. The EU must firmly insist that the Ukrainian elite engages in genuine state-building by tackling the corruption that has consistently undermined the country’s foundations. And if the authorities do not respond appropriately, the EU should be ready to withdraw its support from Ukraine. More importantly, no one else should be more concerned about the lack of the progress in tackling corruption than Ukraine itself. It is only through reform that Ukraine should be provided much-needed financial support and technical assistance.