Ukraine Corruption Report

Companies face significant risks when dealing with the Ukrainian police. More than half of Ukrainians consider the police to be corrupt (GCB 2015). The police have often been able to act with impunity (HRR 2016). The United Human Rights mission in Ukraine has highlighted frequent impunity for law enforcement abuses, which they attribute to pressure on the judiciary, as well as the inability and unwillingness of the country’s prosecutors to investigate the abuses (HRR 2016). In 2015, hundreds of police officers were fired for alleged corruption (Reuters, May 2016). However, there have been growing tensions between the police and the prosecutorial service, threatening to undermine reforms (Reuters, May 2016). Companies do not trust the police to uphold law and order (GCR 2016-2017).

Foreign companies expanding to Ukraine should beware of the high risks of corruption within the country’s public services. Corruption is the most problematic factor for doing business in Ukraine, and dealing with government administrative requirements is burdensome (GCR 2016-2017). Nearly nine out of ten businesses indicate they face corruption when doing business in Ukraine (UACC 2015). Companies indicate that bribery is common in the process of obtaining utility services (GCR 2015-2016). The freedom of private businesses to operate in a competitive market without excessive government interference has considerably improved since Euromaidan in 2014 (BTI 2016). The most commonly cited reasons by businesses for engaging in corruption are still given as “to accelerate procedures” and “to have access to certain services” (UACC 2015). While obtaining a construction permit takes fewer steps and is done relatively quickly, the costs associated with the process are over three times higher in Ukraine than in the rest of Europe (DB 2017). Starting a business is relatively easy in Ukraine; it involves only four steps and it takes only half the time of the regional average (DB 2017).

Companies face a significant risk of corruption when dealing with Ukraine’s land administration. Almost three-quarters of companies indicate they expect to give gifts when obtaining a construction permit (ES 2013). The constitution protects property rights, but in practice, these rights are weakly enforced owing to an inefficient court system subject to political influence and extensive corruption (BTI 2016). In effect, companies report insufficient confidence in the protection of property rights (GCR 2016-2017). Expropriation is permitted under the law in criminal cases and failure to meet investment obligations in privatization programs (ICS 2017). Companies should also be aware that due to the ongoing conflict in Eastern Ukraine, the military may legally expropriate private property for military purposes (ICS 2017). The number of procedures and the length of time required to register property slightly exceed corresponding values for the region (DB 2017).

Companies have to deal with red tape and high corruption risks when interacting with Ukrainian tax authorities. Corrupt tax officials are a pervasive problem for small and medium-sized businesses (FitW 2016). Irregular payments and bribes are common when making tax payments (GCR 2015-2016). Tax regulations are among the most problematic factors for doing business (GCR 2016-2017). Companies also report that officers illegally pressure businesses to extort kickbacks in return for illegal tax cuts (UACC 2015). Before Euromaidan in 2014, the government frequently used the tax authorities to oppress the opposition; these practices have decreased in frequency since (BTI 2016). The courts now frequently deny requests by the prosecutor for unfounded tax inspections (Kyiv Post, Jul. 2017). Courts are increasingly giving fair treatment to private companies, whereas they would give primacy to protecting the state budget in the past (Kyiv Post, Jul. 2017). Companies spend 50% more time complying with regulatory requirements for filing taxes in Ukraine than in other countries in the region (DB 2017).

In May 2017, Ukrainian law enforcement agencies arrested 23 former high-ranking tax officials on suspicion of helping former President Yanukovych to steal nearly USD 4 billion from the state’s coffers (RadioFreeEurope, May 2017).

Ukraine’s customs administration is susceptible to corruption. Corrupt activities at the border represent the single most problematic factor for trade, and burdensome tariffs and demanding customs procedures increase business costs (GETR 2016). Companies indicate that irregular payments and bribes are highly common (GETR 2016). Companies rate the efficiency of the clearance process as well as the time predictability of the process as poor (GETR 2016). Dealing with import procedures takes on average significantly more time than elsewhere in the region (DB 2017). USAID stopped its funding of an anti-corruption project at the Odessa seaport customs facility, citing a lack of cooperation from the local authorities (Reuters, Dec 2016).

The public procurement system in Ukraine carries high risks of corruption. Companies indicate that bribes are highly common in public procurement procedures (GCR 2015-2016). Companies further report that diversion of public funds due to corruption and favoritism in decisions of government officials are very common (GCR 2016-2017). About one in six companies indicates that corrupt practices give access to government tenders (UACC 2015). Many of Ukraine’s State-Owned Enterprises (SOEs) are unable to compete with private companies since they frequently operate at a loss and are subsidized by the government (ICS 2017). Reportedly, over UAH 150 billion of procurement funds were embezzled between 2010-2014 (OECD 2015). Allegations also exist that USD 1,8 billion in foreign aid was embezzled (Harper’s, Aug. 2015). President Poroshenko owns a chocolate corporation that saw profits grow by 900% from 2013 to 2014 after he ascended to the presidency (Information, Mar. 2015), suggesting extensive corruption and embezzlement by top-level Ukrainian officials.

A new law entered into force in 2016, requiring that all procurement with a value over UAH 200,000 (goods) or UAH 1,5 million (services) has to be conducted via the new e-procurement system (Lexology, Feb. 2016). Additional information on procurement regulations, tender notices and procedures can be found on the Ministry of Economic Affairs’ web-portal on public procurement.

Companies are recommended to use a specialized public procurement due diligence tool to mitigate the corruption risks related to public procurement in India.

There is a high risk of corruption in Ukraine’s natural resource sector. The country’s natural resources are exploited by the elite for political largesse and filling their party war chests (FT, Oct. 2016). Extraction and transportation of Ukrainian natural gas and oil are monopolized and controlled by the state-owned company Naftogaz (ICS 2017). Naftogaz has largely been cleaned up from corruption (The Economist, May 2017). Ukraine does not fully comply with EITI transparency standards yet and its legislation on transparency standards for the extractive industries is lacking (OECD 2015).

The former head of Ukraine’s parliamentary energy committee, Mykola Martynenko, has been detained on charges that he embezzled USD 17,3 million by selling uranium concentrate at inflated prices (OCCRP, Apr. 2017).