Businesses Forced to Pass On up to 50% of Their Turnover as Bribes in Recent Years – FEU

2014/02/27 • News

9_1_small (1)Business entities in all economic sectors and segments in Ukraine, without exception, are facing the problem of corruption. Depending on the type and area of their activity, businesses have been forced to pass on up to 50% of their turnover in recent years as bribes. This is the figure announced on February 26 by Deputy Chairman of the Board of the Federation of Employers of Ukraine (FEU) Dmytro Oliynyk in the course of an expanded meeting of Kyiv City employers.

“We understand that entrepreneurs are frequently subjected to demands for bribes by officials; however, once businesses refuse to comply with unlawful demands of government representatives and to enter into corrupt conspiracies, corruption as a social evil in business and in the state will be defeated,” emphasized Oliynyk.

According to employers’ experts, over UAH 160 billion of national wealth was diverted from legal turnover into officials’ pockets annually only in connection with the principal corruption schemes. This means that the society and the national economy were being deprived of resources needed for development. FEU also notes that countless enterprises in Ukraine simply disappeared as a result of “too close” contacts with corrupt officials.

This is why Ukrainian businesses are introducing an Anti-Corruption Initiative. The FEU stresses that an integral part of the initiative is that, from now on, the FEU will conduct its own anti-corruption investigations. The FEU is also introducing a so-called anti-corruption map of Ukraine, which will track all occurrences of corruption. The map will be broken down by regions and cover all state and local authorities, enabling businesses to systemically and openly publicize all uncovered corruption schemes.

In addition, the Federation of Employers of Ukraine, drawing on relevant international experiences, and especially the experience of foreign business associations, has already developed specific documents and legislative initiatives that should help eliminate existing corruption schemes in Ukraine, as well as deter future schemes. FEU is also ready to share these documents with the new government which, the Federation hopes, will be able to respond to them professionally.

MANIFESTATIONS OF CORRUPTION THAT HAVE BEEN PUBLICIZED BY THE FEDERATION OF EMPLOYERS OF UKRAINE – A NON- EXHAUSTIVE SAMPLING:

Public procurements

According to official data of the State Statistics Service, planned public procurements using state funds, funds of state and municipal enterprises, and enterprises with at least 50% state ownership, were UAH 274,183.4 million in 2013.

According to enterprises’ data, “kickbacks” range from 15% to 50% on average.

Thus, the corruption component in public procurements amounts to UAH 50 to 137 billion.

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Tax administration

Despite a decline in real GDP and a 10% reduction in exports, VAT payers received a record- high level of reimbursements in 2013, amounting to UAH 53.4 billion. Yet the residual amount of unreimbursed fees has remained practically unchanged.

These facts alone suggest that a significant portion of reimbursements occurred on the basis of fictitious claims.

In the meantime, honest taxpayers were requested to pay approximately 30-35% as “kickbacks” in cash as a fee for receiving the reimbursement.

Businesses estimate that the total value of the “corruption market” in VAT reimbursements amounted to at least UAH 15-20 billion in 2013.

At the same time, VAT reimbursement is far from being the only corrupt component in the work of tax authorities. For example, according to FEU experts’ estimates, last year the government lost at least UAH 1.7 billion in excise taxes due to the shadow alcohol market.

The total size of corruption market in connection with the work of tax officials, which includes business expenditures associated with resolving issues resulting from additional tax levies, launch of criminal investigations, etc., has amounted to at least UAH 40 billion in 2013.

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Customs

For most goods that were imported in containers carried by cargo trucks, importers were offered customs clearance services, under which they would pay 50% of the duty to the Ukrainian government and the remaining 50% in cash to intermediaries who offered “assistance.” There was practically no chance to refuse the offer of “assistance,” as this would result in a multi-fold increase in stated customs value – resulting in a more expensive customs clearance cost.

Another field of corruption involves the transit of smuggled goods, whereby certain companies are able to smuggle without having to pay anything for customs clearance. This activity has reached the point where “popular” companies engaged in dumping are directly competing with each other by offering more favorable customs clearance conditions at the expense of reduced payments – primarily, reduced payments to the government.

Employers estimate that the customs’ corruption market has exceeded UAH 40 billion in 2013.

The corruption component associated with smuggling of oil alone has amounted to UAH 7 billion in 2013. This amount of the budget’s tax losses is verified by comparing the Ministry of Energy data on consumption and production of oil products with the Ministry of Revenues data on export and import of oil products.

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Grains

At present, the situation in the grain market is such that, to obtain permits for the transit of grains through the territory of Ukraine, grain traders are making additional informal payments of amount UAH 152 per ton (i.e., 9% of official FOB export price). Taking into account the US Department of Agriculture forecast that Ukraine is expected to export over 31 million tons of grains during the 2013-2014 market years, we are talking about corruption on the scale of approximately UAH 5 billion per year!

In the meantime, according to grain traders’ data, the bulk of this amount (i.e., approximately 63%, or almost UAH 3 billion) is being paid to the services affiliated with the Ministry of Agricultural Policy (e.g., State Veterinary and Phytosanitary Service of Ukraine, State Agricultural Inspection of Ukraine), with the remainder going to State Sanitary and Epidemiological Service of Ukraine, State Railroad Transport Administration, oblast state administrations, and State Environmental Inspectorate of Ukraine.

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Registration of Land Lease

In order to complete a state registration of a single land lease agreement (property right), an unofficial bribe of UAH 300 to UAH 1,300 is required. Since there were approximately 4.7 million land lease agreements concluded in 2013, we calculate that:

Agricultural producers have lost approximately UAH 1 billion due solely to the corruption schemes in registry services.

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Use of Mineral Resources

Over 820 special permits for exploitation of subsoil resources were issued in 2013 alone. In each instance, requirements for this special permit include monitoring and scientific support – which, in reality, are a bureaucratic corruption scheme. As, according to our calculations, approximately 2,000 licenses were issued over the last 3 years, this means that businesses were paying up to UAH 200 million for monitoring services only.

For many businesses, the contract amounts per mine are UAH 150 thousand to UAH 3 million. Thus the total amount of such payments is many times higher. The further use of these funds following their transfer into the accounts of specialized state enterprises managed by the State Geology and Subsoil Agency is unknown.

Furthermore, in 2013, the State Geology and Subsoil Agency has conducted almost 1,500 planned and spontaneous inspections of resource users in 2013, issuing 459 decisions to suspend the special permits or the businesses’ operations. By law, renewal of a special permit requires a positive opinion to be issued by a specialized geological company. The cost of such an opinion ranges UAH 60 to 250 thousand. Thus, the additional amounts paid by businesses total at least UAH 100 million per year.

So taking into account the cash bribes, the sector has been “laundering” at least UAH 500 million annually.

Source

Translated by: Olga Ruda

Edited by: Anonymous

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