Ukrainian corruption hydra is capable of mutations, metamorphoses, and adaptations. Efforts, if not to suppress it, at least to pinch its tail, are futile. Even anti-corruption officials are accused of corruption, while anti-corruption bodies are accused of failing to achieve at least some result. Are the Ukrainians’ expectations of the Financial Investigation Service (FIS) which the new government promises to create too high? It is unlikely since the expectations of already existing bodies are unjustified. However, the emergence of such a Service is noteworthy.

Demand is long-standing

The FIS will fight economic and financial crimes, and who knows, it may be the flagship in the fight against corruption. After all, where big money is rotated, there are temptations to misappropriate them. President Zelensky’s team, together with experts and newly minted parliamentarians, are developing a model of the Service, as stated by the STS (the State Tax Service) head Sergiy Verlanov. This authority may have a different name, but it’s not the sign which is important but the essence. In general, the issue of creating a similar structure has a long history.

“The FIS is not a new idea, but its relevance is debatable,” said Opinion Ihor Guzhva, Doctor of Economics, an expert at the Center for Market Economy Development. “As a result of the administrative reforms of the Ministry of Internal Affairs (MIA), the State Fiscal Service (SFS), the Security Service of Ukraine (SSU), starting with 2014, there is, on the one hand, some duplication of functions, and on the other, there is uncertainty about a single specialized body of state authority responsible for financial and economic crimes. It should be not just a new body, but a completely new state policy and system, primarily aimed to prevent economical crimes instead of manually managing a bunch of individual cases. This system must be integrated into the tax and customs systems, which must also be rethought and restarted in an organizational and meaningful way.”

“The demand for such a service by the public has been maturing for a long time,” assured Opinion Vitaliy Shapran, a financial expert. “I would like to draw attention to the numerous investigations into the facts of money laundering, tax evasion, and claims based on PDGF (Private Deposit Guarantee Fund). We have a situation where law enforcement agencies accept applications and the traces of these cases are lost on the way from the inquiry bodies to the courts, and most cases are essentially falling apart. And this is not just about corruption, but also about ordinary tax evasion schemes.”

Thus, the question of creating a single body was raised before the “Zelensky era”. In March 2017, the Cabinet approved a bill on the Financial Investigation Service. The president and prime minister recognized the document as a priority and it was supported by experts, business associations, foreign partners. The creation of the FIS became a commitment of Ukraine under the Memorandum of Cooperation with the IMF.

Subordination is important

Currently, about 15,000 people are investigating economic crimes. According to the website of the Ministry of Finance, they are allocated between four bodies: tax police, protection of the National Police economy departments and counter-intelligence protection of the state interests in the sphere of the economic security of the SSU, and investigative bodies of the prosecutor’s office. The latter lost these powers de jure but continue to investigate. The results of such an army of anti-corruption officials are disappointing. There is a lot of damage for entrepreneurs, as the force approach is often applied to business, the economic development of the state is hampered, in particular, because of its inability to reveal complex schemes.

In 2018, the draft law #8157 on the National Bureau of Financial Security (NBFS) of the People’s Deputy of Ukraine of the 8th convocation, the head of the Verkhovna Rada Committee on Tax and Customs Policy Nina Yuzhanina was registered.

“Which body the FIS will become will depend on who will create it, for what purpose, in what form,” Ms. Yuzhanina told Opinion. “Our proposed variant in the form of NBFS is thought out and weighed in terms of its functionality. It takes into account the shortcomings in the work of the tax police and other law enforcement agencies in combating economic crimes, including the new ones. What the FIS will be like in the version of the new government can be said by seeing the text of the relevant draft law. I would like to point out that among the advisers of the new government there are experts who have heard our arguments in favor of the NBFS creation.”

Who should report to the FIS? Shall it belong to a particular ministry, security department, or directly governed by a Prime Minister or President? The Ministry of Finance provides its vision for the functioning of the Service: the FIS is the only effective law enforcement agency to detect, suspend, open and prosecute crimes against the interests of the state in the sphere of finances and related fields. It will also do analytics and submit proposals to the Ministry of Public Policy for the Prevention of Economic Crimes.

“The FIS should be subordinated to the Ministry of Finance,” said Ihor Guzhva,“ and, as noted above, be integrated into the activities of the customs and tax services. On a number of issues, the FIS shall work closely with law enforcement and law enforcement agencies.”

“I can only talk about the NBFS,” assured Nina Yuzhanina. “The body shall be subordinate to the Verkhovna Rada and the President since its powers include counteracting crimes, guaranteeing the economic security of the country and counteracting crimes not only for non-payment of taxes but also for the distribution of budget funds. Therefore, such a body cannot be subordinated to the Cabinet of Ministers of Ukraine (CMU) or any other ministry, as they are also budget managers and can become involved in the case, falling under the jurisdiction of the NBFS. Cooperation with anti-corruption bodies is mandatory, it is spelled out in our bill. All information about corruption crimes should be urgently transmitted under the authority of the National Anti-Corruption Bureau (NACB) or the State Bureau of Investigations (SBI).”

Is the Service “toothless”?

The website of the Ministry of Finance emphasized that the new Service’s feature would be to change its force approach to a comprehensive and analytical one. The body will be demilitarized, formed from new people, will be given decent salaries. Vitaliy Shapran believes that civilians with deep knowledge of the Ukrainian specificity of operations should work in the FIS. What about the inability to use force?

“A state agency created to counteract crime cannot be deprived of its power wing, otherwise it will be a bubble,” Nina Yuzhanina is convinced. “If there is crime, then there must be instruments of counteraction. Establishing a purely analytical body without a force unit will increase corruption and impunity. Or, worse, this function will remain with existing law enforcement agencies.”

With the advent of the FIS, financial and banking systems will be able to rely on protection, budget losses will be reduced, the money will be stolen less and taxes will be paid more. The business climate will improve, and investment attraction will shift budge.

“For investors, the key factor is not the presence of authorities to combat economic crime, but the presence of a common economic and legal ecosystem: effective law enforcement, the judiciary, medicine, etc.,” said Ihor Guzhva. “Last but not least is the transport and industrial infrastructure. The infamous Ukrainian highways, difficulties, and unpredictable rail transportation, lack of modern operating terminals, the corrupted and bureaucratic situation with connection to utilities (electricity, water, gas) all play part in investors’ decision. Equally important for investors is the state policy on tax and customs incentives. Most likely, this will not be the new government’s strength.”

In many developing countries, tax, customs, and financial incentives are widely practiced to attract investment. For example, in Turkey, to provide a competitive advantage for an investor, they can exempt from corporate, land, and other taxes, and provide a discount on utility services (for example, an investor will only pay 20% for water / electricity / gas). At the same time, the state has already invested millions in roads, ports, utilities, personnel.

“It is clear that, with the given background, the creation of the FIS in Ukraine is unlikely to provide additional competitive advantages for our country,” Mr. Guzhva continued. “However, I would advise the new government to consider creating a public investor protection service that would protect start-ups from corruption, bureaucracy, unfair competition and economic crime.”

To avoid pressure on entrepreneurs

Opinion asked the experts whether there is a risk that the newly created FIS would stifle business.

Serhiy Dorotych, Chairman of the all-Ukrainian public organization Union for the Protection of Entrepreneurship:

“The risk is always there. It is important that the draft Regulations have been developed with the participation of the public, namely advisory and consultative bodies at the Ministry of Finance, the State Fiscal Service and the Council of Entrepreneurs at the CMU. And after working out, it was publicly discussed at an open meeting of the Council of Entrepreneurs at the CMU, as it was in 2014. It was then that the public pointed out the dangers of the bill and warned of the potential abuse.”

 

Valery Pekar, professor at KMBS (Kyiv Mohyla Business School):

“The main thing is not the name of the new Service, but its structure, tasks, and subordination. In the hands of politicians or law enforcement officers, the FIS will still become an instrument of pressure. Therefore, government subordination, but not in the Ministry of Internal Affairs, would be best. Another important factor is the lack of force units, rather than the staff-analytical nature of the Service. It is also important to amend the Criminal and Criminal Procedure Codes accordingly, otherwise, it will not work.”

 

Elena Shcherban, lawyer at public organisation Center for Combating Corruption:

“Even creating an ideal, by all standards, FIS, in the absence of judicial and prosecutorial reforms it is unlikely to work, so these processes should be carried out in parallel. There should be transparent, open competitions for officials. Also, a thorough internal control procedure should be created for the FIS to avoid abuse. And of course, the prosecutors who will oversee the pre-trial investigation should be carefully selected. Without the reform of these bodies or the provision of any special units in the prosecutor’s office, no safeguards for the establishment of the Service will work.”

 

Vyacheslav Bykovets, CEO of the Union of Small, Medium and Privatized Enterprises of Ukraine:

“The police, the SSU, the tax office, and the prosecutor’s office continue to deal with economic abuse. It has long been a single body. At the beginning of last year, the Verkhovna Rada had to consider the relevant law, but it did not happen. Of course, it is logical to have a single government body, not 3-4, like now. They walk one after the other and, as the Prime Minister said, they are the nightmare of the business. If everything is within the framework of the previous bill, supported by business and the office of the business ombudsman, considered in the Federation of Employers of Ukraine, the Committee of Small and Medium Business at the Chamber of Commerce, and in our Union, then this is normal. And to say that the FIS will stifle business, well, it’s just not true.”

 

Mykhailo Sokolov, expert on agrarian and customs issues:

“Creating a single body for investigating economic crimes is a long-standing business requirement. Purely mathematical it is better to have one checker than several. There is a risk of the FIS using the negative practices of “predecessors”. Necessary preventers are also known: high salaries, recruitment of new people, effective public and political control, the inevitability of punishment in the detection of abuse. In addition, launching such a structure requires a strong, independent and ambitious leader who is personally motivated to excel, including to build his or her political career. This is where the main conflict is hidden – in the Ukrainian political tradition, the emergence and growth of such leaders were still regarded as an undesirable phenomenon. The reason is simple, all our parties are projects with a single leader at the helm. That is their strength and weakness. Whether Zelensky will build another project with a team of leaders we well see later.”

Text by Viktor Tsvilikhovsky

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