Article 7.3.
Political Financing

The Law on Political Parties is the main law governing the financing of political parties in Ukraine. In particular, it defines the main ways of financing political parties, limits of funding, and sets out reporting and control requirements. In turn, the detailed regulation of election campaigns is stipulated by the Electoral Code of 2019.

Requirements for Funding of Political Parties
According to the law, a political party is a non-profit organization, i.e. it can only spend money to carry out its statutory activities. Two possible sources of income for political parties are voluntary contributions to support the party and state funding. The Law on Political Parties clearly defines the term “contribution to support a political party” and sets out an exhaustive list of restrictions on receiving such contributions. In particular, the contributions are prohibited to be paid by the following entities: State authorities and state-owned enterprises; a legal entity whose ultimate beneficiary is a high-ranking official (with certain exceptions); a citizen, legal entity or state of a foreign country; a citizen of Ukraine under the age of 18; a legal entity providing state authorities with services, goods or works in the sum of more than EUR 3700. It is forbidden to make anonymous contributions, to donate more than EUR 75000 by an individual, and EUR 150000 by a legal entity during the year, etc. Contributions paid by several legal entities owned by one beneficiary owner are considered one contribution. Contributions in the form of works, goods, and services are allowed.

To ensure compliance with these restrictions and transparency of the parties' activities, regular reporting and annual audits (internal for all parties and external for those receiving state funding) are required. The party’s report is submitted to the NACP each quarter and contains information on funds available on all accounts, securities, real estate, vehicles, etc.; contributions made in any form, as well as other funds received by a party; payments and expenses; and financial liabilities. Reports of political parties are publicly available and have been published in a special POLITDATA register since May 2021. The reports are verified by the NACP. Administrative and criminal liability is provided for violation of the established rules.

Reporting of Political Parties
Quarterly reports by political parties are a key tool for checking political finances. Until May 2021, each political party submitted its reports to the NACP in two forms, namely, in electronic (PDF and XLS) and paper form. The NACP, in turn, published these reports on its website (in PDF and XLS formats). Despite their openness and accessibility, this reporting format had several shortcomings. The reports published on the website were massive and often of poor quality. Interviewed experts emphasize that their processing took a lot of resources and time because before the direct analysis the reports had to be unified, cleaned, and digitized. Paper reports, in turn, were very large and required a significant amount of paper. For example, to print a report of one fairly large political party it was necessary to consume 70-80 packs of A4 sheets of paper. Transporting such a report to the NACP required several cars or one truck.

In May 2021, the situation radically changed when the NACP fully launched the electronic system POLITDATA for reporting by political parties. Its launch significantly increased transparency in political funding. On the one hand, civil society was now able to check the report in a shorter time and more efficiently due to the fact that information is accessible and unified, and on the other hand, political parties save their resources and time when submitting their reports. Unlike the usual posting of copies of reports on the NACP website, POLITDATA provides for automatic processing of such information. In particular, in addition to displaying reports in XLS format, POLITDATA provides information in the form of statistical and practical data with a search engine to find the required report. All data in POLITDATA is placed in the open data format, particularly in API (machine-readable format), which greatly simplifies working political party reports out by the public. Since 2021, political party reports are submitted exclusively in the electronic form to POLITDATA. For this purpose, political parties and their branches are registered in the system. As of September 2021, 112 political parties (out of more than 600) have been registered with POLITDATA, and 31 reports have been submitted. After the full-scale invasion of Russia, since February 24, 2022, access to the public part of POLITDATA has been restricted to protect the data of parties and other users under martial law. As of September 2023, access remains restricted. The head of the NACP has declared his desire to improve the work of the portal.

Despite the increasing transparency in political financing, political parties have the right not to submit such reports at the time of writing of this report. In April 2020, a law, that postponed the submission of reports by parties until the end of the quarantine imposed by the COVID-19 pandemic, entered into force. Taking such measures looks more like the whim of political parties than an urgent need since the quarantine hardly poses any obstacle to submitting such reports. And on March 7, 2022, the Law of Ukraine On protection of the interests of those submitting reports and other documents during martial law or a state of war came into force. The law stipulates that, among other reporting documents, party reports must be submitted within three months after the end or termination of martial law or a state of war for the entire period of non-reporting. Thus, parties have been able to avoid submitting their reports for more than three years now. Because of this, the public has not known how much money was spent for the local elections held in October 2020, and how political parties spent state funds.

On 26 September 2023, the President of Ukraine signed the Law that restores the obligation of all political parties to report on their finances and property, as well as the functions of the NACP to verify these reports. The law specifies that parliamentary parties will be obliged to submit previously unsubmitted reports (for 2020-2023) on property, income, expenses and financial liabilities within 90 days after the law comes into force. Other political parties will have to report 120 days after the law comes into force. The law also sets a 90-day deadline for the NACP to verify reports. It is worth noting that due to the pause in reporting for almost three years, the NACP has faced a number of problems since the agency has a large number of reports at once, which will not allow them to be processed qualitatively due to the short deadlines for inspections. Secondly, those political parties that reported during the quarantine period and war period may be in a worse position than others because their reports can attract more attention from the NACP and the public.

The reports on election campaign funds are published on the websites of NACP, Central election commission (CEC), Territorial election commissions (TEC), etc. in pdf and xls formats. Despite the launch of the electronic system, the submitted reports will not be placed on POLITDATA. Such an approach leads to the same shortcomings as those related to the quarterly reports happening before, specifically, their processing will take a long time and require resources. It is unlikely to result in effective state and public control of election campaigns finance.

The level of openness and accessibility of the reports on local election campaign funds are low. There are no problems with this in the national elections (president and parliament), and the CEC and NACP publish election campaign reports in a timely and complete manner; however, the situation is worse in local elections. The public monitored the publication of reports by political parties and candidates in 15 major Ukrainian cities during the local elections in 2020. The results found that local branches of political parties did not publish 55% of their final financial reports. In turn, mayoral candidates published only 44% of all reports. The quality of inspections of reports is also poor. The results of a sample analysis conducted by the public showed that a significant part of TECs did not check any report, although, in situations where the checks were conducted, they were of declarative nature. Experts believe that this problem arises because TECs are much busier with vote counting and processing of election results, and thus do not have enough capacity to properly audit financial statements.

Financing of Political Parties
Despite of the openness of financial statements of political parties and the ability to control everything incoming to the party’s budget, it cannot be said that political parties in Ukraine are fully transparent. It is almost impossible to understand who finances political parties and how big the financing is. Legislative requirements for party financing can be easily circumvented with the help of developed schemes, the most popular of which are described below.

1) Use of fictitious donors. This scheme is as follows: a person who is interested in financing a political party hands the cash over to another person (he or she is called “pidstavna osoba”). This person, in turn, transfers, identifying his or her name, the money to the party’s bank account and receives a reward for such a transaction. Given that the maximum sum of a voluntary contribution paid by an individual is EUR 75000, it is not necessary to involve many fictitious donors to transfer big money. According to experts, besides fictitious “poor” donors (whose insolvency can be easily proven), there are also schemes with fictitious “rich” donors. That means that political parties are looking for people who can easily explain the legality of their earnings and use them to fund political parties. For example, one party received funds directly from the top management of large Ukrainian companies owned by an oligarch.

2) Use of fictitious legal entities. This scheme is similar to the previous one, but legal entities are used instead of individuals. For example, in 2019, one of the largest political parties in Ukraine received approximately EUR 90,000 from two companies that were registered by one person a month before the transfer. The ruling party used a similar scheme. Experts note that there are cases when the amount of donation paid by a legal entity is equal to (or even less than) its total annual revenue. Due to the financing of political parties by legal entities, it is possible to evade the restrictions imposed on financing made by foreign citizens. For example, a foreign citizen can invest in a legal entity registered in Ukraine, and the latter, in turn, can legally finance the party.

Financing of Election Campaigns
There are also many ways for political parties to hide their income and expenditures during election campaigns. For example:

1) Use of public organizations with the same name as a political party. To implement this method, there must be an NGO registered with the same name as a political party. Then the NGO finances political advertising and pays salaries to employees, advertisers, and the political party's staff. The political party does not report on these expenses, as they were, de jure, carried out by a separate legal entity. For example, such a scheme was actively used during the local elections in 2020 and the parliamentary elections in 2019.

2) Concealment of expenses on social media advertising. The popularity of political advertising on social media is growing rapidly. According to civil society estimates, in the first half of 2020, politicians spent about USD 850000 on Facebook advertising, and USD 1.2 million for the same period in 2021. Despite such high expenses, political parties mostly did not report on it. As a result, a huge amount of money spent on election campaigns remains in the shadows. Experts interviewed for this report note that in practice there are several shortcomings in reporting the cost of advertising on social media, and among them are:

• Lack of a convenient way to pay for advertising from the election campaign fund account. It happens due to the inability of legal entities to pay for advertising on Facebook, and due to the lack of official representative office in Ukraine;
• Lack of a separate category of expenditures in the forms of final and interim reports approved by the CEC. Experts believe that the form of reports should be further detailed, as currently the “other expenses” column covers a significant number of possible transactions that need to be allocated separately.
• Shadow cash used by political parties during election campaigns is widespread. A large amount of money is spent on the salaries of political party observers and polling stations stuff, which is paid in envelopes (without declaration and taxation). One of the interviewed experts estimates that about half a million people are needed to organize the election campaign. Accordingly, one can only imagine the scale of this practice.

Liability for violation of requirements of the law
The widespread use of the described schemes is possible for several reasons, but the main one, in our opinion, is the avoidance of prosecution, and petty sanctions for violations of the law. In addition to the general problems of administrative liability that we described in Article 7.4, 8.1 and 8.4, the cases of violations of the requirements for financing a political party and election campaigns have certain peculiarities. The effectiveness of bringing to administrative liability for violation of political parties (election campaigns) funding and reporting (“cases of political parties”) is extremely poor. Courts dismiss most of the cases, impeding bringing to justice. According to information provided by the NACP, in 2020, courts dismissed 299 cases, that is 88% of all the cases heard in courts. Among them, 198 cases (66%) were dismissed on the grounds of the expiry of procedural deadlines, 81 cases (27%) because of the absence of the offense, and 8 cases (2,7%) due to minor insignificance. The tendency of closing cases goes up, particularly in 2018, courts closed 77% of cases, but, in 2019, they closed 82% of cases. Factually, administrative liability is enforced in 12% of cases, and even when it happens, the sanctions impede prevention because, in 2020, the average fine imposed by court resolution was EUR 144. Among the main shortcomings appearing in the consideration of this category of cases by courts (except for the general shortcomings that are inherent in all administrative cases), the interviewed experts note:

• A lack of a clearly defined subject of the administrative offense responsible for submitting the report of the political party, and the place of commission of such an offense, which affects the jurisdiction of such cases;
• An insufficient time limit (24 hours) set for drawing up a report, starting from the moment when the person who committed an offense was identified;
• Absence of a deadline during which the NACP representatives are obliged to send the report to the court after the report is drawn up;
• Ambiguity of court practice regarding the return of case materials in case of violation of jurisdiction, etc.

The situation with the effectiveness of criminal prosecution is even worse. In particular, in 2020, the NACP sent 22 notifications to the police about the detection of the facts of a criminal offense, as a result of which 11 proceedings were opened, but those cases did not reach the court. And for the whole time of existence of the article of the Criminal Code (since 2006), there was only 1 court case proceeding with a guilty verdict.

Implementation in practice after State evaluation.