Anticorruption Conditionalities as Miracle Makers for Ukrainian Reformers
In Spring 2014, immediately after the Revolution of Dignity and the start of Russian occupation of Crimea and Eastern Ukraine the international community prepared an important comprehensive package of financial support to Ukraine.
The main donors were the International Monetary Fund and the European Union, who made such a support highly conditional to the implementation of real reforms in Ukraine with big focus on the anti-corruption. In addition, the EU renewed a dialogue on granting Ukraine visa-free travel, which was also linked to a set of very precise anti-corruption commitments taken by the Ukrainian Government.
Now the visa free regime is granted to Ukraine, billions of USD and Euro were poured into the Ukrainian economy by the EU and the IMF, however the question remains topical – whether Ukraine did properly its homework regarding fight against corruption.
The IMF committed to provide Ukraine with $17.5 billion loans during four years. IMF already transferred USD 13.2 bln out of 17.5 bln planned, namely USD 4.5bn in 2014, USD 6.7 bn in 2015, Usd 1 bln in 2016, and USD 1bln in 2017.
The EU granted direct financial support through 2 key mechanisms: state building contract – EUR 355 mln in 2014-2015 and macro-financial assistance – EUR 1.2 bn in 2015-2017 out of 1.8 bln planned. In addition to financial bonuses Ukraine received visa-free regime with the EU (done as of June 12, 2017.)
There are four main group of documents, where anticorruption conditionalities are elaborated in details: the IMF memorandums with UA Government, EU-Ukraine Visa liberalization action plan, EU state building contract and EU macro-financial assistance agreements.
Some of the conditionalities are specific for a certain donor, but there are many which are required in synergy by both the EU and the IMF and were reflected in all the agreements.
The anticorruption conditionalities could be generally grouped into those
- requiring Ukraine to tackle immunity of senior officials who are committing corruption crimes
- granting public access to the information of state expenditures and assets of public officials.
The first set of obligations was focusing on establishment of new independent institutions with power to investigate and prosecute corrupt conducts of public officials, which also include opportunity to recover their ill-gotten assets.
The second group of anti-corruption obligations aimed more to bring light into how the state spends tax-payers money and what is the real wealth of public officials. On practice both groups of the demands should work all-together: journalists and civil society should get better tools to reveal and report publicly about corruption, while new law enforcement agencies should independently investigate such corrupt conducts of public officials with aim to put such people in jail and confiscate their assets.
Read the fresh overview of Ukraine’s level of anti-corruption conditionalities implementation:
Corruption investigation and prosecution
Establishment of NABU
All donors required Ukraine to establish a separate independent agency empowered to conduct criminal investigations of senior public officials. The agency meant to resolve the problem of impunity of senior officials who are abusing their office and powers to rob the country in amounts totaling to the percentage of its GDP.
This is exactly what IMF people felt when came to Ukraine in Spring 2014 asked by Ukrainian interim government for financial help and identified almost zero reserves at the accounts of the state treasury – the state budget was literally emptied by Yanukovych and his associates.
To prevent the state funds to be embezzled again the IMF decided to link 17.5 blns of its loans to the establishment of the “independent anti-corruption agency with broad investigative powers” to bring state officials to justice.
The anti-corruption investigative agency became also the key of the EU anti-corruption conditionalities to Ukraine reflected in EU-Ukraine State Building Contract, EU Macro-financial assistance contracts and the EU-Ukraine Visa Liberalization Action Plan (VLAP).
In October 2014 Ukrainian parliament passed a law establishing such an agency – the National Anti-corruption Bureau of Ukraine (NABU). However, conditionalities of foreign donors were not limited only to the passage of the legislation setting up a new agency – both the EU and the IMF were requiring proper implementation of the law. Moreover, the EU (through EU-VLAP mechanism) and IMF were regularly assessing the level of the implementation of the law and were regularly updating requirements regarding NABU.
While all donors emphasized the need to make the agency independent, the IMF was the most specific in clarifying what they mean by “institutional and operational independence from any external influence” of NABU. In particular, the IMF required:
Establishment of SAPO
After successful selection of the NABU director and staff, and its launch, it became obvious that, NABU can’t be really independent without independent prosecutors, who are overseeing all cases of NABU and prosecuting them in courts. Therefore, in 2015 there appeared in IMF Memorandum and EU VLAP report the new requirement to Ukraine – to establish a Specialized Anti-corruption Prosecutor’s Office (SAPO).
Formally such a prosecution should be part of the Prosecutor’s General Office, however, it should have strong autonomy and guarantees of independency. Both the EU and the IMF were focusing hugely on the procedure of selection of the head of specialized anti-corruption prosecution.
The IMF Memo to this regard was super specific and contained very detailed language, as such:
“To ensure a timely, fair, and balanced appointment process, we will make the following amendments to the Law on Prosecutor’s Office: At least five members of the Selection Committee for the head of the Anti-Corruption Prosecutor’s Office and his/her deputies will be nominated by a decision of parliament, in order to eliminate the risks of challenging the results of the selection. These persons will be of impeccable reputation, high professional and moral qualities, and authority in the society…”
The Specialized anti-corruption prosecution was established by Law dated 25 April 2015. The Law on Prosecution was amended in order to make the SAPO more independent from the General Prosecutor on 18 February 2016.
Selection commission to select SAP management was formed in August-November 2015.
However, there was a lot of public distrust to the selection commission, which contained notorious prosecutors from the PGO. Under pressure from the EU and the civil society the composition of the commission was partly changed in November 2015.The commission selected Head of SAPO on 30 November 2015 and since then NABU obtained legal right to start criminal investigations as there were appointed prosecutors assigned to oversee the work of detectives and prosecute cases in courts.
With first cases investigated by NABU and prosecuted by SAPO which were brought to courts it became obvious that existing corrupt judicial system is not willing and capable to deliver justice in high profile corruption cases and therefore the anti-corruption court is needed in Ukraine.
The NABU and SAPO big mission to hold liable senior officials for corruption is unachievable without independent and professional judges, who could hear their cases.
Establishment of anti-corruption court
Therefore, the first requirement to Ukraine to establish the anti-corruption court appeared in the IMF documents on 1 September 2016, which evolved into the benchmark reflected with more detailed language in March 2017:
“To ensure that prosecution of acts of corruption by senior officials receives a specialized and prioritized judicial response, we will operationalize the anticorruption court established by the June 2016 Law on the Judiciary, consistent with the European Convention of Human Rights and other standards of the Council of Europe.To this end, by mid April 2017 we will submit relevant legislation to parliament, and we expect this legislation to be adopted by parliament by mid-June 2017 . This legislation will include provisions to ensure budgetary autonomy and adequate security of the anticorruption judiciary framework and establish the selection process for anticorruption judges.”
The IMF is again focusing on the selection process of the anti-corruption judges and has put a deadline for Ukraine to finish with anticorruption judges selection by January 2018.
The EU joined the IMF in calling on Ukraine to establish the Anti-corruption court, however, such an expectation was not transformed to the formalized conditionality.
EU Commissioner Hahn stated on 1 September 2016 that “Work on the establishment of anti-corruption courts should also start as soon as possible in order to put in place also this important missing element of the overall anti-corruption reform.”, The Head of EU delegation, Hugues Mingarelli emphasized on the importance of creating an Anti-Corruption Court in Ukraine in March 2017.
Achieved: independent, transparent and fully operational NABU investigating cases against senior officials, including the Head of State Fiscal Service, heads of state-owned companies, judges, MPs, senior prosecutors; specialized anti-corruption prosecution was set up;
To be done: anticorruption court (IMF benchmark), wiretapping right for NABU (IMF benchmark), 3-tier approach in anti-money laundering reporting, track record of successful prosecution of illicit enrichment cases.
Backsliding attempts: NABU audit, NABU exclusive jurisdiction.
The establishment and launch of proper work of the NABU, the SAPO and the Anti-corruption Court has a punitive nature and allows to catch and bring to justice senior officials for committing corruption crimes.
In addition to such a punitive measure, key donors of Ukraine altogether conditioned the government to adopt a crucially important corruption preventive measure – an effective asset disclosure mechanism.
Both the EU and the IMF conditioned its support to the need to set up a public registry of electronic asset declarations of Ukrainian public officials.
There was however, slight differences in approach of the EU and the IMF:
- IMF required to oblige all public officials who are under NABU investigative jurisdiction to submit electronic asset declaration in public registry; the EU did not focus such a requirement only to senior officials under NABU jurisdiction
- IMF required to allow NABU to verify and investigate asset declarations of senior officials under its jurisdiction; while the EU was requiring Ukraine to establish a separate agency to maintain the electronic registry and to verify the e-declarations.
In addition, the EU required Ukraine to set up a mechanism for verification of the conflict of interest of public officials and to develop a new system of political party financing.
Establishment of NAPC
On October 14, 2014 Ukrainian parliament adopted legislation establishing National Agency for the Prevention of Corruption (NAPC) with authority to set up a national registry of electronic asset declarations. A new extensive form of asset declaration was prescribed in the law, as well as stricter administrative and criminal liability for non-submitting asset declaration and for false statement was introduced.
The first wave of e-declarations of senior public officials took place in September-October 2016 and it included asset declarations of the President, the Ministers, the MPs, judges, prosecutors, heads of state-owned enterprises and other top officials. The proper e-declarations system supposed to be operational already back in December 2015, when the European Commission issued a positive report regarding implementation of the Visa Liberalization Action Plan by Ukraine. However, this report contained a few anticorruption commitments which were still not ready as of December 2015 including e-declarations system regulation and launch.
Ukraine received 3 more months to deliver needed legislative changes and 4 months for senior officials to submit e-declarations (IMF wording):
“Implement asset disclosure requirements for high-level officials. By end-December 2015, the Ministry of Justice will ensure that applicants and newly appointed officials to high-level positions under the NAB’s jurisdiction file their asset disclosures electronically. The disclosures will be directly and freely available to the public on a single website shortly after the submission. In line with legislation, all high-level officials will report their assets electronically by end-April 2016.”
However the actual deliverable was again postponed until October 2016, which in turn caused the significant delay with IMF tranche. The postponment of e-declarations system launch happened because of the problems with establishment of the NAPC, which has a mandate to maintain e-declarations registry. The management of the agency was selected by the special commission only in December-March 2016. Such a delay was caused by improper work of the selection commission, some of which members appeared to be weak, biased, loyal and worked very slow.
The weak commission selected compromised and weak management of the NAPC. Specifically, since October 2016 until February 2017 the NAPC failed to verify a single asset e-declaration, while effective mechanism of e-declarations verification was one of key EU requirements before granting visa free regime to Ukraine.
Improper work of NAPC in verification of e-declarations undermines possible criminal investigations of illicit enrichment cases by NABU.
NAPC is already conducting verification of conflict of interests of public officials – another EU requirement, however, without proper legal regulation, which is causing selective approach for such verifications.
The agency is regular conducting selective administrative investigations against officials, who are criticizing senior authorities.
For example, a few cases against MP Sergiy Leshchenko for purchasing apartment and for obtaining 300$ fee for lecturing at the university or a case against Yulia Marushevska, former head of Odessa tax regional administration, for issuing 20$ bonuses for herself. Meantime, the head of NAPC Natalya Korchak fails to declare the car she uses.
Finally, the NAPC regularly fails even to maintain the proper work of the e-declarations registry blaming for that foreign donors, who provided assistance to the agency.
Additionally, the NAPC did not react properly on the failure of entire Security Service Agency management to submit e-declarations to the united public registry. The Security Service Agency in direct violation of the Law on Corruption Prevention set up a parallel asset disclosure system and considered it as a state secret. AntAC submitted a lawsuit against the SSA requiring the management of the agency, which does not include undercover agents, to submit asset declarations to the registry maintained by NAPC. While the NAPC itself did not have concerns in this regard.
Moreover, the NAPC closed public access to the e-declarations of some military prosecutors, again violating legal requirements. AntAC is challenging such a decision of NAPC in courts as well.
On 10 February 2017 Government assessed negatively the work of the NAPC and asked its head Korchak to resign, however she refused. Therefore, Government introduced in the parliament a draft law which changes the management and its structure and called MPs to support it.
On 9 June 2017 Rouslan Ryaboshapka, one of four NAPC managers, resigned asking parliament to support the change of the NAPC management and its structure.
Achieved: advanced system of electronic asset disclosure with >1 million declarations of public officials submitted, open and accessible in the Internet.
To be done: e-declarations verification (EU-VLAP, EU MFA), conflict of interest verification (EU-VLAP).
Backsliding: e-declarations for anticorruption activists; NAPC conducting selective investigations and political persecutions; closing public access to e-declarations of officials from certain agencies.
Access to information & public procurement
Access to the information about who owns what in Ukraine and how state funds are being used was one of key requirements from the EU to Ukraine. Most of these requirements except an effective mechanism of beneficial ownership verification, which is also a condition of the IMF, are well implemented.
“By end-March 2015, the relevant legal framework will be revised to ensure that asset disclosures for the high-level officials subject to NAB’s jurisdiction include information on beneficial ownership and control of any funds or other assets (as defined by the FATF), and that the NAB can use its powers to ensure the reliability of these assets disclosures at any point in time.” (IMF wording.)
During 2014-2015 Ukraine made extensive public access to the state company house, including company beneficial ownership information. In addition, public access was granted to the ownership information in land cadaster and in the registry of immovable property. Moreover, there was adopted and implemented the law on public access to information about all spendings of the state treasury https://spending.gov.ua. Such a transparency significantly increased tools for journalists and civil society to expose and report about corruption.
Both the EU and the IMF were requiring Ukraine to reduce exemptions from the public procurement law, which was successfully done in 2014. This uncovered spending of about 250 bln UAH annually. Afterwards, Ukraine implemented the comprehensive public procurement reform called Prozorro which so far has saved UAH 26,9 billion.
Finally, the IMF required Ukraine to outsource procurement of medications from the state to the reputable independent international organizations, including the UNDP. Ukraine successfully implemented such a requirement, which leaded to economy of 28,6 mln USD at the procurement of medications for patients and decrease of delays in medicines delivery. The reform helped to eliminate corruption schemes, which were for decades existing in the procedure of the procurement of medications by state.
However, there are attempts to discredit this reform and return to the state the power to conduct procurement of medications.
Achieved: Ukraine achieved unprecedented level of transparency by granting public access to the company house registry including beneficial ownership information, land cadastre, registry of immovable property, e-declarations. Moreover, through PROZORRO reform there was significantly increased level of transparency of public procurement.
To be done: beneficial ownership verification mechanism (MFA).
Backsliding: attempts to rollback the outsourcing of procurements of medications to international organizations.
The EU required Ukraine to update its seizure and confiscation legislation, which should put Ukraine in line with UN Convention against Corruption and the EU Directive 2013/42/EU. These international standards permit seizure and confiscation of criminally obtained assets owned by third parties. In addition, the EU required Ukraine to set up an Asset recovery agency, which should effectively manage seized and confiscated assets and trace assets on the request of national and foreign law enforcement agencies. Finally, the EU expected Ukraine to deliver track record in asset recovery.
The IMF in its conditionalities emphasized on the need of NABU to have proper legislative regulation of assets seizure and confiscation.
In 2015-2016 Ukraine adopted a set of asset recovery legislation which brought Ukraine in line with the European directives.
The legislation established the Asset recovery and management agency (ARMA). The head of agency was selected in December 2016.
Currently ARMA has not started its operations yet and didn’t adopt “operational guidelines, including a framework for inter-agency cooperation”, which are required by the EU Microfinancial Assistance Agreement.
The leverage of the EU and IMF was crucial in driving for the anti-corruption reform in Ukraine and important positive steps were achieved as a result. Especially, the most visible result is in the sector of access to information and government transparency, which transformed Ukraine into one of the most transparent country among Eastern Partnership countries and a heaven for investigative journalism reporting. This increased amount and quality of corruption reporting in Ukraine, however, there is still lack of proper law enforcement reaction into such kind of public reports.
A set of IMF and EU anti-corruption conditionalities aimed to target impunity of senior officials and therefore focused on establishment of new anti-corruption infrastructure with powers to investigate and prosecute corrupt conducts of senior officials, whose ill-gotten funds should be timely traced, seized and later confiscated. While there is success with NABU operations, there is still lack of indictments and confiscations for grand corruption. The anti-corruption court is not established yet and remains to be key IMF and the EU anti-corruption priority for the upcoming months.
NABU resists constant attacks from other law enforcement agencies and parliament, which is willing to limit the agency’s powers and undermine its independency.
The history of NABU auditors appointment is itself a vivid illustration of such attempts of politicians to take over control on NABU. The process of the selection of auditors started in late 2016. However, due to political pressure he ordinary bureaucratic procedure was postponed for more than a year.
On 21 December 2017, the Parliament Committee on Combating Corruption selected as the result of transparent and independent selection procedure recommended Robert Storch as NABU auditor.
On 23 February 2017, in the day of Parliamentary confirmation of Robert Storch as NABU auditor, some MPs suggested unknown UK citizen Nigel Brown as an alternative candidate. Nigel Brown strangely appeared in the parliament at the day of the hearing in parliament. During the month MPs tried to overcome public pressure and appoint Nigel Brown as an auditor. As a result, the Parliamentary Committee on Anti-corruption announced new round of selection of NABU auditor which is still ongoing.
In addition, there are constant problems with work of the NAPC, which still did not conduct a single e-declarations verification disregarding it was one of key EU requirements prior granting visa free regime to Ukraine.
Asset recovery and management agency is formally set up, but didn’t start actual operations and it is unclear when it will deliver first results.
The IMF has already disbursed the largest part of promised loans and the negotiations regarding next 1 bln loan are ongoing. There were significant delays of the last 2 IMF tranches specifically because of weak implementation of some crucial anti-corruption conditionalities. The EU already granted visa free regime, which was linked to the set of anticorruption conditionalities with particular focus on proper e-declarations system, including verification mechanism. There is however, only partly implementation of this and other requirements by the Ukrainian government.
The EU delivered almost all promised “carrots” to Ukraine and is losing its leverage. There is still EU commitment to transfer 600 mln Microfinancial assistance to Ukraine by the end of 2017. In order to receive the support Ukraine has to show results in a) e-declarations verification, b) beneficial ownership information of companies verification, and c) operationality of ARMA.
The EU has also decided to introduce post visa liberalization monitoring mechanism, which has to ensure proper implementation and continuality of reforms by tracing and preventing roll backs, especially in anti-corruption sector. The detailed regulation of such a mechanism is under development now by the European Commission.
Meantime, AntAC launches its own civil society mechanism of monitoring on Ukraine’s level of anti-corruption conditionalities implementation.