Aleksieiev V.S.

Oles HoncharDnipropetrovsk National University (Ukraine)

On Corruption Problem in Ukraine

No one doubts that Ukraine has a corruption problem. According to the 2012 Corruption Perception Index published by Transparency International — Ukraine shares 144th place out of 174 countries together with Bangladesh, Cameroon, Republic of Congo, Syria and the South African Republic.

Nevertheless, Ukraine remains a developing country with a huge market where big profits can be generated. This is the reason why many international corporations do business here regardless of the risk. Although in light of recent anticorruption efforts worldwide, these risks have become unreasonably high. Many governments have passed new legislation that significantly increases the liability for corruption, including bribery of foreign officials. Enforcement authorities have increased the prosecution of corruption-related offences which have resulted in huge penalties for many world-known companies and jail time for individuals.

With the recent enactment of the UK Bribery Act and On Principles of Prevention and Combating Corruption Act of Ukraine (the Anti-Corruption Act) as well as the aggressive enforcement of the US Foreign Corrupt Practices Act (FCPA) (1977), business was finally forced to take affirmative measures aimed at corruption prevention. Therefore, revealing bribery schemes and identifying corruption red flags became of crucial importance for every multinational company in Ukraine.

In Ukraine, many business areas remain highly regulated or controlled by a massive state bureaucracy. For instance, every import shipment should be accompanied, depending on the product, with five to a dozen different certificates that evidence the product registration in Ukraine, hygienic safety, compliance with certain standards or technical regulations, and the like. Practically every business industry has separate regulations that require obtaining numerous licences, certificates and permits, e.g., for construction or agriculture, provision of telecommunication or healthcare services, even retail sales.

These regulatory approvals and associated bureaucracy create an area where virtually every company faces a bribery risk. This is primarily because the rules and procedures for the issuance of various regulatory documents originate from Soviet times where the bureaucracy was unbearable. Even after twenty years, the underlying legislation on permits and approvals contains so many inconsistencies and nuances that it becomes a real challenge to understand them, and not to mention, to carry them out. Such legislative ambiguity and complexity of procedures give significant discretionary powers to government authorities, which could easily delay or reject the application for a certificate or permit. Moreover, the process of getting regulatory approvals remains cumbersome and time consuming to this day because of the inefficient management of the administrative services system. Thus, many companies seek various opportunities to overcome government bureaucracy and to receive permits and approvals that are necessary for daily business.

These circumstances triggered the creation of a new service market of intermediary consultants and agents that help obtain various permits for business. Such consultants often provide quasi-legitimate services: collect application documents, fill in various forms, verify compliance of the application package with relevant legislation, etc. However, in many cases these consultants simply share their fees with government officials who agree to informally review the application package before filing, or accept/process the application on an expedited basis, or issue a permit without real examination of the case. This is how intermediary agents “guarantee” the success of their services. Though such guaranteed success also exposes a company that used the services of a tainted intermediary consultant or agent to bribery allegations. Enforcement authorities often reasonably argue that the company management knew or should have known that certain fees were funnelled to government officials through an intermediary consultant, thereby posing a risk of UK Bribery Act or FCPA violation.

Moreover, the Anti-Corruption Act specifically provides that legal acts adopted or official decisions made as the result of corrupt conduct may be cancelled on this basis by a competent authority or court. In practice this means that once the corrupt conduct is revealed, all certificates, permits and approvals could be challenged and cancelled, including material licences for certain types of commercial activity or registration certificates essential for importing goods into Ukraine.

Even if a company was careful enough to procure all necessary permit documents for its products or operations without paying any illicit payments directly or indirectly, there are other risks of bribery ahead. After the regulatory compliance area, the second biggest group of bribery transactions relates to actual sales of products or services.

Public procurement tenders are commonly known as high risk sales. Many international corporations intentionally do not participate in tenders where public funds are awarded because government officials who run public tenders often require a kick-back payment that could range from 20% to 70% of the contract value from the tender winner. Ineffective public procurement legislation allows government officials to discretionally draft special tender conditions that allow only one product or company to win. Alternatively, government officials may insist that companies use designated distributors that have a longstanding history of successful participation in tenders. As a matter of practice, such successful distributors are often owned by relatives or other affiliates of the government officials responsible for the tender result. In addition to the obvious conflict of interests, these designated distributors also generate inflated prices that provide excessive profits for further distribution to government officials involved in the decision-making process.

Thus, even if a company does not directly participate in a public procurement tender, it may be still exposed to bribery allegations and liability. Under the UK Bribery Act or FCPA use of specific tender companies or payment of separate consultant fees to a third company at the direction of a government official would obviously be a red flag. Moreover, such direct or indirect bribery eventually increases the sales results of the manufacturing corporation and thus, the enforcement authorities may argue that the manufacturer benefited from the improper activity of the distributor who participated in the tender.

The Ukrainian Anti-Corruption Act also specifies adverse consequences for tainted tender results. Under the law, the contracts or other similar documents executed on the basis of corrupt action are deemed to be null and void. This means that business opportunities gained because of illicit arrangements would be automatically negated once the corrupt offence is revealed and no separate process is necessary for invalidation of the tainted contract. Moreover, the Anti-Corruption Act provides that incomes or other benefits resulting from corrupt practices or businesses should be confiscated by the state.