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Караємо зашкварених мажоритарників

Holding those responsible for syphoning money from procurements.

Watchdogging for public procurement of drugs.

Map Ukrainian Politically Exposed Persons (PEPs)

Foreign partners condition Ukraine to fight corruption. We are monitoring how Ukraine implements these obligations.

Exploring corruption and learn to fight it.

Helping to return the money stolen by corrupt officials back to Ukraine.

‘Zero’ declaration means impunity for illicit enrichment of Ukrainian bureaucrats – Krasnosilska

Following pressure from the International Monetary Fund, on Aug. 15 the electronic declarations system of public officials will be launched.

Parallelly, criminal liability for illicit enrichment comes into effect.

However, politicians are very creative in finding ways to avoid both publicity of their assets and questions regarding the sources of their incomes. Their solution seems to be hiding allegedly corrupt assets within the framework of the voluntary asset disclosure program (so called one-time or “zero” declarations) and subsequent comprehensive control over expenses of each and every Ukrainian.

The general idea of the program is as follows: firstly, give all Ukrainians an opportunity to disclose their assets with guarantees against administrative and criminal liability; secondly, impose a low tax rate on declared assets; and lastly – introduce a system of control over all expenses in order to tax amounts that exceed declared assets.

The idea is not uncommon. Programs for voluntary disclosure of assets are run in at least 47 countries all over the world (including most European Union member states) and are intended to make compliance, rather than non-compliance, more preferable to taxpayers.

However, in the case of Ukraine specific features of the program turn it into a new tool for corruption. The way the program was drafted proves that politicians not only realize corruption risks, but actually aim at introducing them.

The origin of the idea

The respective draft law was developed by the President’s Administration and was offered as a response to the offshore Panama Papers scandal.

The draft law was offered for adoption to a special working group on counteracting offshore money laundering. The working group included legislators, public officials (including those from the Ministry of Finance) and experts from the civic sector and business.

However, as soon as experts started to criticize the draft and demanded amendments be made, the head of the working group and the head of the parliamentary committee on taxation, Nina Yuzhanina, refused to publicize any more drafts of the law.

As of now, Yuzhanina states that final draft law will not even be presented to members of the working group until political decision on its adoption is taken. Taking into account on how fast the Ukrainian parliament adopts laws driven by “political will,” the public will see final provisions of the draft law a few days or even hours before its adoption, and legislators will be left without an opportunity to offer amendments.

The political will for the draft law will be seen as early as July.

A new tool for corruption

According to the available version of the draft law, it offers all Ukrainians, including those who are public officials, to submit a voluntary, one-time declaration of all assets (also known as zero declaration). Subject to declaration are savings (including that in cash), immovable property, costly movable property, securities, other material and nonmaterial assets. It is not clearly defined what should be considered as a costly movable property for the purpose of taxation. It could end up being that rural Ukrainians will have to declare cows.

Declarations should be submitted within a very short period of time – 3 months. This can hardly be administered by tax authorities, which create long lines at every regular reporting period, even with a 10 times less declarants.

Voluntary disclosure is supposed to be promoted through financial incentives.

After paying 5 percent of the value of assets, the declarant may not be subject to any other tax penalties.

This is much cheaper than the regular 18 percent income tax and all respective penalties that are applied if tax non-compliance is detected.

However, there is neither a clear guidance on how to calculate the value, from which the tax must be paid, nor guarantees against double taxation of assets that have already been properly taxed.

At the same time, the tax authorities preserve all opportunities to question the amount of tax that must be paid as a consequence of voluntary disclosure. Therefore, the submission of an asset disclosure declaration still creates additional fiscal risks.

Everyone who does not submit the declaration is presumed to possess UAH 1 million (approximately $37, 000) with no exceptions. There is no guarantee against non-taxation of these virtual UAH 1 million.

However, the purpose of a one-time declaration goes further than to identify and tax assets. Officials aim to introduce a system of total control over expenses and lifestyle of the population.

Fiscal invasion

The draft law offers to oblige businesses, notaries and banks to report every case of provision of goods and services for individuals, as well as every transaction among individuals worth more than UAH 150, 000 ($5,500) per item to fiscal authorities. For every individual, the tax authorities are supposed to compare the yearly value of his/her transactions with his/her declared assets (or UAH 1 million, if declaration was not submitted) and, after an imperfect verification procedure, tax the difference.

However, businesses and anti-corruption activists have long been claiming that the State Fiscal Service, under Roman Nasirov, tends to be very selective in identifying underpaid taxes. For example, officials of the SFS supposedly overlooked as much as UAH 60 million of underpaid taxes of a company owned by Nasirov’s father-in-law.

Moreover, tax authorities obviously have neither the resources nor the capacity to introduce such a comprehensive control over the expenses of 26.6 million people (economically active population). Therefore, control will inevitably turn out to be selective. The tax authorities receive an additional tool of pressure on each and every Ukrainian.

The draft law is also sold as a measure to treat the shadow economy and a remedy for deficit of budget revenues as part of tax reform. But will the economy benefit? Unlikely.

Turning the shadow economy into a black market

The introduction of such an extensive mechanism of control without proper reform of the SFS may not bring Ukraine closer to eliminating the shadow economy and developing a culture of paying taxes. The result may be contrary to that proclaimed.

Firstly, the disclosure of assets will not bring expected revenues. Given the extremely low level of public trust to tax authorities (and authorities in general), people simply will not declare their assets. In the Russian Federation in 2016, a similar campaign on the voluntary disclosure of assets was launched and thus far has resulted in 2,500 submitted declarations, while administrative pressure on people to declare assets was huge. In 2015, Ukraine has already failed at an attempt to implement a corporate profit tax amnesty program – so called fiscal compromise – for which only 6,764 entities applied (most of which were already subject to administrative and/or criminal proceedings for tax offenses).

Secondly, control over expenses will not increase public incomes. Selective application of the procedure allows for “overlooking” unjustified expenses of moneyed people.

Lastly, de-shadowing of the economy is not going to happen. The demand for opportunities to hide transactions from fiscal authorities will bring about an immense supply of semi-legal operations with assets and property. The number of undetectable cash transactions is estimated to increase, thus bringing more of the economy into the shadows. On the contrary, the legal market of immovable property and the banking system are likely to suffer from lack of resources.

But who may benefit from one-time declaration of assets?

The answer seems to be – corrupt public officials and those possessing illegal assets. The most important incentive for the disclosure of assets is guarantees against liability. Anyone who submits the declarations may not be subject to administrative liability; for example, a public official may not be charged with an offense of submitting false declarations of assets (a special declaration for public officials). The declarations should be classified and will be restricted for use of fiscal authorities only. This will limit chances for bodies such as the Anti-Corruption Bureau and the Agency for the Prevention of Corruption to detect unjustified assets and open investigations. Declarants will not be obliged to provide explanations on the sources of their incomes for acquiring assets.

Most importantly, the declaration may not be presented as evidence in сriminal proceedings.

Authors of the draft tried to soften the latter provision by allowing the use of a declaration as evidence when it is proven that declared assets were acquired as a result of some corruption-related felonies.

However, lawyers stress that this still prohibits using a declaration to support prosecution: a declaration may be presented only after everything is proven by other means.

A declaration, under any circumstances, may not be used to prove money laundering and seizure of property through abuse of office. The latter is in breach of FATF recommendations, that clearly prohibit tax compliance programs from allowing any exemptions from anti-money laundering regulations and liability.

These guarantees apply to public officials as well, despite the fact that public officials are subject to limitations and criminal liability for illicit enrichment. The same guarantees are offered to people who did not pay taxes from legally acquired assets – and those who allegedly stole money or resources from the state.

Such incentives for programs of voluntary asset disclosure are absolutely uncommon for most countries. A general approach to motivating people to disclose assets is through opportunity to avoid imprisonment for tax-related crimes and no, or substantially decreased monetary penalties. Even an opportunity to pay less taxes on voluntary disclosed assets is not a common rule. There is no foreign example of incentives for voluntary disclosure that include guarantees against liability for non-tax-related misconducts.

This considered, the campaign on voluntary disclosure is designed to provide amnesty for illegal assets. Corrupt public officials receive an opportunity to secretly legalize assets for a moderate price of 5%, and in return to avoid criminal liability for illicit enrichment and false statements in asset declarations. Essentially, the state loses an opportunity to recover the assets allegedly stolen from it, while corrupt tax authorities are given a tool to become even more corrupt.

It is ironic how the president linked the described initiative to the Panama scandal. After the Panama scandal the public demanded politicians and other wealthy people to make their assets public instead of hiding them offshore. The President took the demand for more transparency seriously, understanding it as a threat to such possessions and in turn offering a new opportunity to hide and secure assets.

The proposed system of voluntary disclosure of assets is also part of a cynical lie to the EU and the IMF. With one hand the President signs commitments to introduce control over and publicize the declarations of public officials, to enact criminal liability for illicit enrichment and money laundering and to resource independent investigative and anti-corruption bodies with all the necessary tools and capacities.

These commitments are part of the visa liberalization action plan and memorandums with the IMF. The President never misses a chance to claim that Ukraine has accomplished its obligations and is waiting for her international partners to take their steps.

Yet at the same time, the other hand of the president introduces a voluntary declaration program that completely undermines the online e-declaration system for state officials, and decimates the capacities of the newly launched anti-corruption bodies to identify and prosecute the illicit enrichment and money laundering by state officials.

By Anastasia Krasnosilska for Kyiv Post