2.1. System for the Prevention of Corruption in respect of Legal Entities in Ukraine
Anti-corruption policies, the compliance system, and risk-oriented approaches to business are being introduced gradatim in Ukraine. We take the view that it is necessary to move forward law requirements for compliance systems, and practical realization and implementation of these requirements. There are particular cases to review.
Legal entities in most cases take anti-corruption programmes as the formality. Although the NACP approved the Typical anti-corruption programme of a legal entity for the formation of common understanding among legal entities of such kinds of programmes, many entities just copy the wording. It is a common practice especially for companies for which an anti-corruption programme is an obligatory requirement for participation in public procurement.
Legal entities lack understanding of any positive aspects which arise when an anti-corruption programme is approved and influences their practice.
The codes of corporate management have just started being adopted in Ukraine. In January 2021 the Ministry of Finances of Ukraine approved the corporate management code for the National Power Company Ukrenergo which has become the first of its kind to be adopted on the basis of the corporate management code approved by the National Commission on Securities and Stock Market.
Besides, since 2017, the Ukrainian Network of Integrity and Compliance (UNIC) has been in operation in Ukraine. As of September 2021, it included 48 companies. UNIC promotes responsible business standards and the development of compliance programmes. For example, it developed the methodical recommendations for the authorized persons in terms of drafting and implementation of anti-corruption programmes of a legal entity.
The international standards ISO 37001:2016, and ISO 37001:2018 “Anti-Bribery Management Systems” have been adopted in Ukraine. The certificates of its implementation have been issued to the National Anti-Corruption Bureau of Ukraine and Crédit Agricole Ukraine.
In the banking sphere, the National Bank of Ukraine facilitated the creation of risk management systems in banks and banking groups. A clear timeframe for their creation was established. All participants of the market created these systems including compliance departments, policies to discover conflicts of interests and ethics codes. Such systems function in PrivatBank, Crédit Agricole Ukraine, Oschadbank etc. The experts who were inquired claim that the system created in banks is a fully-functional tool and the respective policies are actively used by banks in their activity. UNIC engages representatives of the bank sector to exchange experience in risk management systems. But, even bank compliance procedures need improving. The recent case of the attack of the chairman of the board of the “Ukreximbank” on journalists shows that even compliance procedures are in place it is possible to breach them.
Experts also speak about an insufficient number of functional systems when legal entities are discussed, including the companies of public interest and state companies where their implementation is of utmost importance. The adoption of risk-management systems is not obligatory with most businesses; there is no monitoring and control of the systems which have been already implemented. So, it means that this sphere is in dire need of improvement.
The Business Ombudsman Council protects the interests of businesses in their relations with state bodies; it can provide recommendations based on the results of consideration of the complaints against state bodies. The Business Ombudsman Council considered 1,737 complaints in 2020 and ensured that 1,159 of them were closed. Most of the complaints dealt with the State Fiscal Service of Ukraine. The index of the recommendations taken by public authorities is 82 %. Since the Business Ombudsman Council started its activities 17 comprehensive reports have been issued highlighting different spheres where problems are occurred by Ukrainian businesses. The experts recognize the good performance of the Business Ombudsman Council, and the quality of the conducted expertiseа and drafted reports.
One of the problems accentuated by the Business Ombudsman Council in its reports and statements is the absence of the special Law on the Business Ombudsman Council, which leads to less efficient mechanisms for the legal entities’ interest protection. As of September 1, 2021, the relevant draft law has been prepared for its consideration by the Parliament.
To sum it up, compliance systems in Ukraine are going through their development stage. Understanding the global trend, Ukrainian legal entities step by step implement them into their activity. The experts encourage the role of the state in this process, taking particular moves. For example, to ensure responsibility in case a compliance system is not in place in a legal entity, the introduction of stimulus, compliance-officers training, constant awareness-raising to cultivate compliance systems in Ukraine.
2.2. Maintenance of the Unified State Register
The Unified State Register is administered by the Ministry of Justice. The Register provides possibilities to get information on legal entities, including:
- its name and individual number;
- the amount of the authorized capital stock;
- ultimate beneficiary owner;
- the date when enforcement procedures were executed etc.
Information is delivered both free of charge and as a paid service.
Free inquiries include the aforementioned information. The search function utilizes individual numbers or the name of a legal entity / natural person.
Paid inquiries (approximately EUR 3) provide the same amount of information, but it is more user-friendly. It particularly enables information mining by using data on the founders/heads/authorized signatories. Also, paid inquiries provide an option to choose the date as to which information is given or save it in a selected format.
The service is simple and easy to use. It allows prompt data mining for civil society representatives to get and follow the information on the beneficiary ownership of public officers and other public figures.
In 2019, there were 682,300 paid inquiries; in 2020, there were 587,678 paid inquiries, and in eight months of 2021, there were 383,800 paid inquiries. The Ministry of Justice does not have any information on the number of free inquiries performed.
2.3. Information on Beneficiary Owners
Ukraine has become the first country to share information on legal entities with the Global Registry. The necessary legal acts were adopted by the Cabinet of Ministers of Ukraine in May 2017.
In August 2020, the Unified State Register software was updated to hold structured information on ultimate beneficiary owners or their absence. Here is the data:
Timeframe Aug 11, 2020 – Dec 31, 2020
Registered legal entities 24,087
Entries of information on an ultimate beneficiary owner 17,208
Entries of information on the absence of an ultimate beneficiary owner 6,879
Timeframe Jan 01, 2021 – Aug 31, 2021
Registered legal entities 38,595
Entries of information on an ultimate beneficiary owner 29,843
Entries of information on the absence of an ultimate beneficiary owner 8,752
The commencement of the Unified State Registry faces three main obstacles. First, some legal entities do not provide information on their ultimate beneficiary owners. Among the most spread methods to evade disclosure of information about beneficiary owners are as follows:
using offshore companies in the company ownership structure;
giving absent ultimate beneficiary owners in the submitted information;
claiming that the legal entity head is its ultimate beneficiary owner;
giving its nominal owner as of the ultimate beneficiary owner.
Secondly, the relevance of information on beneficiary owners is seen as a serious obstacle, due to the fact that a great deal of data is not being updated, thus, can be outdated. As of June 2019, only 21.6 % (360,660) legal entities out of 1,672,576 registered ones have provided information on their ultimate beneficiary owners. Some 51.2 % (856,413) of them enjoy the right to abstain from providing information on their ultimate beneficiary owners. Almost 27 % (455,503) of legal entities did not meet the requirement. In 2020 the State Financial Monitoring Service of Ukraine issued its analytical research “The Guideline to the Disclosing of Information on Ultimate Beneficiary Owners”. This publication includes the analysis of the international standards and foreign experiences in this matter as well as the analysis of the national legislation and description of the issues related to the identification of ultimate beneficiary owners, including:
- formal approach to define “ultimate beneficiary owner” by the information disclosing agent;
- the period established by the current legislation to perform registration of ultimate beneficiary owners and the lack of its prolongation to verify the submitted information if necessary;
- lack of sufficient capacity to properly verify relevance and validity of the submitted information in respect of imposed control.
Thirdly, when regulatory bodies have no capacity to verify the validity of information their check-ups get purely formal. It is also one of the reasons why the Unified State Register provides some out-of-date and incomplete information.
The experts are concerned about data not being validated (e.g., mistakes in spelling names, addresses, codes). Moreover, constant information exchange between state bodies is not ensured, there is a lack of training on how to identify ultimate beneficiary owners. All the above-said shortcomings impede the proper check of information about ultimate beneficiary owners.
In October 2021, according to the Minister of Justice of Ukraine, on the day of expiry of the term for submission of updated information, only one-sixth of the required number of legal entities provided updated information. Consequently, the expiry date was prolonged for 9 months on the grounds that there was not enough time to provide the updated information, a few legal entities submitted needed information, and the mechanism for submission of such information is complicated.
At the same time, some amendments to the draft law were attempted to cancel the requirement of the ultimate beneficiary owner information submitting if legal entities’ founders are exclusively natural persons who are the ultimate beneficiary owners of such legal entities. This provision was denied, particularly due to the pressure of the civil society and the State Financial Monitoring Service of Ukraine’s stand. Some negative consequences were overtly projected if the amendment was to be approved compromising transparency, credibility, and urgency of the Unified State Register data. Besides, such changes could influence MONEYVAL’s assessment of the financial monitoring system (its report of 2017 highlighted the risks of such provisions).
At present, there is not enough evidence to make any judgments about the efficiency of sanctions applied for violation of the requirements to provide information about ultimate beneficiary owners. Given the prolonged expiry date of submission of such information in 2021, it is early to assess the efficiency of increased fines as administrative responsibility. The Prosecutor General’s Office of Ukraine reported that 367 criminal cases of Article 2051 of the Criminal Code of Ukraine violation were sent to the court in 2020, 221 of them were provided with the indictment. However, this statistical data cannot be considered representative of the matter as Article 2051 of the Criminal Code of Ukraine covers considerably more objects of offense than some final beneficial owner documents forgery.
In Ukraine, there are also private services in place, simplifying the search of information by using open data, inter alia, about ultimate beneficiary owners. For example, Youcontrol service allows analyzing enterprises. By their means businesses avoid financial risks and journalists with civil activists investigate important public cases. Besides, the Youcontrol experts provide state bodies systematic support to advance the quality of obtained information, elimination of errors in the system, and ensure the development and operation of effective mechanisms for verifying information about ultimate beneficiary owners. Now Youcontrol boasts 5,000,000 files. The paid subscription costs approximately EUR 1,300 a year. Another service is Vkursi.pro which allows wide-ranging checks of contracting parties to avoid potential risks. Its paid subscription cost ranges from EUR 200 to EUR 10,000 a year.
2.4. Accounting bookkeeping and financial reporting
In Ukraine, there is a shortcoming in publishing financial reporting information of legal entities. In 2021, the State Tax Service for the first time published financial reports of legal entities in open data format. Experts observe that only 27.2% of legal entities that are obliged to make their financial reports public (402486 out of 1481442), actually did it. Besides, the information is provided only for the year 2020.
Making reporting information public allows integrating it with available services of open data on legal entities. Such information is used to a comprehensive understanding of the performance of legal entities.
There is also a shortcoming in the quality of financial reporting. Experts believe that financial reporting misrepresentation can occur due to the following reasons:
- insufficient competencies of the performing staff;
- negligent reporting procedures;
- purposeful corrections of financial indicators.
The first two of these reasons could be occasional; the last one is done intentionally.
Summing up, Ukraine is striving to make financial reports public. In prospect, it will allow obtaining more information about legal entities. Experts stress that financial reporting is a component of compliance systems in general. In entities with developed compliance systems, financial reporting information is published and updated at every turn.