Ukraine

Ukraine Corruption Report

Snapshot

Ukraine_247x163.jpgA 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. Burdensome regulations and favouritism impede fair competition. Ukraine's public procurement lacks transparency due to vague regulations, monopolistic practices and the exemption of state actors from transparency and competition requirements. 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, but President Poroshenko owns a chocolate corporation that saw profits grow by 900% from 2013 to 2014 (Information, Mar. 2015), suggesting extensive corruption and embezzlement by top-level Ukrainian officials. Corruption, extortion, bribery of foreign public officials, abuse of office and facilitation payments are criminalised 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. Legislation applies to foreign persons and corrupt misconduct in the private and public sectors. The Law On the Fundamentals of Anticorruption Policy in Ukraine to Be Effective within 2014-2017 introduces measures for monitoring and effective implementation of anti-corruption provisions. However, a weak judicial system limits the enforcement of Ukraine's extensive anti-corruption laws.

June 2015
GAN Integrity Solutions

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Judicial System

Ukraine's judicial system is undermined by the executive branch and and suffers from widespread corruption and nepotism (NiT 2014). Low levels of expertise and low salaries result in unfair court proceedings (BTI 2014). Generally, companies do not trust Ukraine's judiciary to be an effective and fair broker in business matters. Corruption often leads to questionable and opaque court decisions in commercial disputes. The process of dispute settlement is ineffective because of an inadequate legal framework, and poor enforcement of arbitration decisions further weakens investor confidence (ICS 2014). Businesses perceive the judiciary to be subject to influence from politicians and the private sector (GCR 2014-2015). Ukrainians perceive the judiciary to be the most corrupt public institution in the country (GCB 2013).

In April 2015, Ukraine's High Commission for Judges' Qualification dismissed six judges from different regions of the country for alledged corruption. Criminal charges against the corrupt officials have not been filed, but the Prosecutor General, Viktor Shokin, says he will seek prosecutions in these cases (RFERL, Apr. 2015).

Police

Corruption, extortion and abuse of power are pervasive within Ukraine's police force (HRR 2013). Law enforcement agencies lack autonomy and are largely under the control of the executive (FitW 2014). Companies do not trust the police to uphold law and order (GCR 2014-2015), and the police is perceived as one of the most corrupt institutions in the country (NiT 2014).

Public Services

Foreign companies expanding to Ukraine should be aware of the increased costs of doing business due to corruption within the country's public services. A significant number of companies report gifts and informal payments are necessary to obtain an electrical connection, most foreign firms expect to make facilitation payments when getting a construction permit, while three in ten companies will give a gift to acquire an operating licence (ES 2013). Costs associated with the process of getting all the necessary construction permits and licences in Ukraine are twice as high as in the rest of Europe. Corruption is the most problematic factor for doing business in Ukraine, and dealing with government administrative requirements is burdensome (GCR 2014-2015).

Land Administration

The processes of land administration in Ukraine are negatively affected by corruption, leading to increased uncertainty among foreign investors. The protection of property rights is weak due to extensive bribery and impunity among officials (BTI 2014) and is weaker than in other European countries (GCR 2014-2015). The freedom of private businesses to operate in a competitive market without excessive government interference is persistently violated, and companies are increasingly at risk of hostile takeovers (BTI 2014). The number of procedures and the length of time required to register property exceed corresponding values for the region (DB 2015). Land authorities allegedly receive more than UAH 1 billion in bribes per year (Ria Novosti, Sep. 2014).

Tax Administration

Companies have to deal with red tape and corruption when interacting with Ukrainian tax authorities. Tax regulations are among the most problematic factors for doing business (GCR 2014-2015), and companies spend 50% more time complying with regulatory requirements for filing taxes in Ukraine than in other regional countries (DB 2015). Ukraine's prosecutor general's office considers tax officials to be among the most corrupt in the country (NIT 2014). Busineses report that continuous extortion by corrupt tax collectors makes it very difficult to conduct business. Unofficial tax payments demanded from small businesses are often three times higher than regular tax payments. Companies report that tax controls have become repressive (Epoc Times, Jan. 2012). SMEs report an increasing number of inspections by the tax authorities against businesses belonging to political opponents (FitW 2014).

Customs Administration

Ukraine's customs administration is susceptible to corruption. Corrupt activities at the border represent the third most problematic factor for trade, and burdensome tariffs and demanding customs procedures increase business costs (GETR 2014). Ukraine’s customs service is one of the most difficult to deal with in Eastern Europe (DB 2015). About half of all companies expect to make facilitation payments or to give gifts to obtain an import licence (ES 2013).

Public Procurement

The public procurement system in Ukraine is an area of great concern for foreign investors. The sector lacks transparency and effective regulation, contributing to increased levels of corruption among public officials and contractors (ENP 2014). Almost all companies report bribes, gifts and facilitation payments are necessary to secure government contracts in Ukraine's public procurement sector (ES 2013). Legislation exempts all tenders by government agencies and state-owned companies from transparency and competition requirements, leading to large-scale fraud and corruption (NiT 2014). Corruption in public procurement accounts for 10 to 15 percent of public expenditure in Ukraine (HRR 2013). Information on procurement regulations, tender notices and procedures can be found on the Ministry of Economic Affairs' web-portal on public procurement.

Natural Resources

Graft and corruption are endemic in Ukraine’s natural resource industry. Extraction and transportation of Ukrainian natural gas and oil are monopolised and controlled by the state-owned company Naftogaz. Corruption accounts for USD 4 billion losses in the country's energy sector (NRGI, May 2014). State energy assets are misused for private gain, and the sector lacks transparency. Regulations and pricing are controlled by the government and adjusted to benefit business elites close to the politicians, undermining the development of independent gas and oil transit systems (KyivPost, Feb. 2012).

Legislation

The Criminal Code of Ukraine criminalises active and passive bribery, attempted corruption, extortion, bribery of a foreign public official, money laundering, abuse of office and facilitation payments. The Law On Principles 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 offences. 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. The law provides for protection of whistleblowers: Individuals reporting corruption are legally protected from dismissal or disciplinary action. Sanctions for corruption offences are fines of up to twice the amount of illegally obtained benefits and penalties of up to USD 108,000. The Law On the Fundamentals of Anticorruption Policy in Ukraine to Be Effective within 2014-2017 provides for an independent state anti-corruption authority 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. Ukraine's anti-corruption legislation lacks effective enforcement mechanisms and is limited by a corrupt judiciary (NIT 2014). 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 journalists face pressure from the authorities, police attacks, harassment and violence since the Euromaidan demonstrations. The majority of the print media is owned by pro-government groups, and critical broadcasters experience hostile takeovers. Self-censorship remains widespread. Journalists who investigate corruption face physical and legal intimidation, and Ukraine's media environment is considered 'not free' (FotP 2014).

Civil society organisations (CSOs) in Ukraine are developed and represent a wide variety of interests. CSOs played an important role in helping Ukrainians to demonstrate against the corrupt government during Euromaidan (NiT 2014).

Sources

Topics: Europe & Central Asia