Article 12.
Private sector

Article provisions:

1. Each State Party shall take measures, in accordance with the fundamental principles of its domestic law, to prevent corruption involving the private sector, enhance accounting and auditing standards in the private sector and, where appropriate, provide effective, proportionate and dissuasive civil, administrative or criminal penalties for failure to comply with such measures.
2. Measures to achieve these ends may include, inter alia:
(a) Promoting cooperation between law enforcement agencies and relevant private entities;
(b) Promoting the development of standards and procedures designed to safeguard the integrity of relevant private entities, including codes of conduct for the correct, honourable and proper performance of the activities of business and all relevant professions and the prevention of conflicts of interest, and for the promotion of the use of good commercial practices among businesses and in the contractual relations of businesses with the State;
(c) Promoting transparency among private entities, including, where appropriate, measures regarding the identity of legal and natural persons involved in the establishment and management of corporate entities;
(d) Preventing the misuse of procedures regulating private entities, including procedures regarding subsidies and licences granted by public authorities for commercial activities;
(e) Preventing conflicts of interest by imposing restrictions, as appropriate and for a reasonable period of time, on the professional activities of former public officials or on the employment of public officials by the private sector after their resignation or retirement, where such activities or employment relate directly to the functions held or supervised by those public officials during their tenure;
(f) Ensuring that private enterprises, taking into account their structure and size, have sufficient internal auditing controls to assist in preventing and detecting acts of corruption and that the accounts and required financial statements of such private enterprises are subject to appropriate auditing and certification procedures.
3. In order to prevent corruption, each State Party shall take such measures as may be necessary, in accordance with its domestic laws and regulations regarding the maintenance of books and records, financial statement disclosures and accounting and auditing standards, to prohibit the following acts carried out for the purpose of committing any of the offences established in accordance with this Convention:
(a) The establishment of off-the-books accounts;
(b) The making of off-the-books or inadequately identified transactions;
(c) The recording of non-existent expenditure;
(d) The entry of liabilities with incorrect identification of their objects;
(e) The use of false documents; and
(f) The intentional destruction of bookkeeping documents earlier than foreseen by the law.
4. Each State Party shall disallow the tax deductibility of expenses that constitute bribes, the latter being one of the constituent elements of the offences established in accordance with articles 15 and 16 of this Convention and, where appropriate, other expenses incurred in furtherance of corrupt conduct.

State evaluation

Public evaluation

National legislation of Ukraine complies with Article 12 of the UNCAC. Anti-corruption programs for legal entities are provided for by law. The unified state register containing information on legal entities is constantly functioning. Notification of any changes in the ultimate beneficiary ownership is mandatory by law.

Anti-corruption programmes and compliance systems are developing slowly and have not yet become an effective mechanism for combating corruption in legal entities. The information in the unified state register needs to be checked for relevance and accuracy. Liability for violations is not fully effective and does not prevent breaches in the private sector. As one of the safeguards against undue influence of the state on business, the Business Ombudsman Council is actively working.

In short

State of implementation

Within the analysis of the implementation of this Article, we focus on the launch of anti-corruption programmes in public sector legal entities, functioning of the state register of legal entities, and entering data on ultimate beneficiary owners. We also analyze accounting practices of legal entities and the deductibility of expenses that constitute bribes.

Ukrainian legislation establishes a number of mandatory and recommended anti-corruption preventive instruments in respect for private sector legal entities. Section 10 of the Law of Ukraine “On Prevention of Corruption” establishes provisions on the prevention of corruption in the activity of legal entities. It is a right for some legal entities, while it is an obligation for others. Detailed analysis of this issue has been provided in the discussion of Article 5.

In general, the development of internal anti-corruption programme is obligatory for all legal entities participating in tenders for procurement of goods, works, or services with a price of, or exceeding, EUR 625000 (Art. 17, Public Procurement Law of Ukraine).

State regulators can additionally provide for the creation of compliance systems in specific spheres. E.g. National Commission on Securities and Stock Market approved the Basic Corporate Governance Code in 2020. Ukrainian legislation does not require companies to comply with the Code. As in many other cases, this is a soft law tool, i.e., it provides recommendations. Its application is strongly recommended for companies that act in the capital market. Although, it can also be applied by other companies.

In contrast, the banking sphere of Ukraine has its mandatory compliance rules which cover any bank’s activities in Ukraine. They are Resolution of the Board of the National Bank of Ukraine No. 64 approving the Regulation on the Organization of Risk Management System in Ukrainian Banks and Banking Groups, and the Resolution of the Board of the National Bank of Ukraine approving the Regulation on the Organization of Internal Control System in Ukrainian Banks and Banking Groups.

The protection of the interests of private individuals from undue influence of public bodies is also an important aspect of anti-corruption. Therefore, necessary legal mechanisms should be established. The Business Ombudsman Council has been operating in Ukraine since 2014. Its activities are aimed to protect business interests from the unfair administration of public authorities.

To ensure proper identification of all entities acting in Ukraine the Law of Ukraine “On State Registration of Legal Entities and Individual Entrepreneurs and Public Organisations” (“the Law”) has been adopted. It regulates any relations in the field of state registration relating to legal entities and individual entrepreneurs. The Law provides for the creation of the Unified State Register which gathers, accumulates, processes, protects, records, and supplies the information on legal entities and individual entrepreneurs. The Law provides for criminal and administrative liability for violations. Administrative liability is established for violation of the procedure for state registration of a legal entity, individual entrepreneur, the procedure for storing registration files of legal entities and individual entrepreneurs, as well as for failure to provide information about the ultimate beneficial owner. The sanction for these violations is a fine of EUR 5 to EUR 1,500 (approximately). Criminal liability is provided for by the Criminal Code of Ukraine for falsification of documents submitted for state registration. This crime is punishable by a fine or imprisonment for up to five years. There is also liability for legal entities for bribing an official of a private law legal entity. The sanction ranges from a fine to imprisonment.

The term “ultimate beneficiary owner” has been defined by the Law “On Money Laundering.” It is an individual having an ultimate/final decisive impact (control) on activities and/or individuals on whose behalf the financial transaction is conducted. A sign of a direct decisive impact on activities is direct ownership by an individual of a share of at least 25 % of the authorized (compound) capital or voting rights of a legal entity.

Since 2014, legal entities are obliged to disclose information about their ultimate beneficiary owner through the Unified State Register, inter alia, to provide information necessary for her or his identification (full name, passport details, place of residence, etc.). The latest version of the Law on Prevention and Counteraction of Laundering of Proceeds Derived from Crime, Financing Terrorism and Financing Proliferation of Weapons of Mass Destruction obliges legal entities to provide the latest information about their ultimate beneficiary owners and ownership structure. Because of the full-scale invasion of Ukraine by the Russian Federation, legal persons must submit this information no earlier than 90 days after the date of cancellation of martial law in Ukraine.

System for the Prevention of Corruption in respect of Legal Entities in Ukraine
Ukraine is gradually introducing anti-corruption policies, a compliance system and risk-based approaches to doing local business. We believe that it is necessary to move forward legal requirements for compliance systems, as well as practical implementation and enforcement of these requirements. There are specific cases to review.

Legal entities implement anti-corruption programmes as a formality in most cases. Although the NACP approved the typical anti-corruption programme of a legal entity for the formation of a 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 Ukrainian Network of Integrity and Compliance (UNIC) has been operating in Ukraine since 2017. As of September 2023, it included 45 companies. UNIC promotes responsible business standards and the development of compliance programmes. For example, it developed the methodical guide for the authorized persons in terms of drafting and implementation of anti-corruption programmes of a legal entity.

In the banking sector, 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 market participants created these systems including compliance departments, conflict of interest policies and codes of ethics. Such systems are in place at PrivatBank, Crédit Agricole Ukraine, Oschadbank etc. The interviewed experts state that these systems 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.

Experts also speak about the lack of functional systems when it comes to legal entities, including the companies of public interest and state companies where their implementation is extremely important. The adoption of risk-management systems is not obligatory for 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 and can provide recommendations based on the results of complaints against state bodies. In 2022, the Business Ombudsman Council reviewed 521 complaints, and 247 cases were closed as a result. Most of the complaints (360) dealt with the State Fiscal Service of Ukraine. Since the Business Ombudsman Council started its activities, 18 comprehensive reports have been issued highlighting different spheres where Ukrainian businesses face problems. The experts recognize the good performance of the Business Ombudsman Council, and the quality of its examinations and reports.

To sum it up, compliance systems in Ukraine are going through a development stage. Understanding the global trend, Ukrainian legal entities implement them into their activities step by step. The experts encourage the role of the state in this process, taking particular actions. For example, ensuring liability in case of absence of a compliance system in a legal entity, introducing incentives, training compliance officers, and continuously raising awareness in order to develop compliance systems in Ukraine.

Maintenance of the Unified State Register
The Unified State Register is administered by the Ministry of Justice. The Register provides information about a legal entity, including its name and individual number; the amount of the authorized capital; ultimate beneficiary owner; the date of commencement of enforcement proceedings, etc. Information is delivered both free of charge and as a paid service. Free requests include the above information. The search function utilizes individual numbers or the name of a legal entity / natural person. Paid requests (approximately EUR 3) provide the same amount of information, but are more user-friendly. In particular, they enable information mining by using data on the founders/heads/authorized signatories. Also, paid requests 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. Access to the register is available even during martial law.

Information on Beneficiary Owners
Ukraine has become the first country to submit information on legal entities to the Global OpenOwnership Register. 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. The launch 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 avoid disclosure of information about beneficiary owners are as follows: using offshore companies in the company ownership structure; indicating absent ultimate beneficiary owners in the submitted information; claiming that the legal entity head is its ultimate beneficiary owner; indicating a nominee owner as 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. 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.

Finally, 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., misspelling of 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-mentioned shortcomings prevent the proper check of information about ultimate beneficiary owners. Due to the Russian full-scale invasion, the update of information has been postponed indefinitely, which negatively affects the beneficial ownership disclosure. As of September 2023, there is insufficient information to conclude on the effectiveness of sanctions for violations of the requirements for submitting information on beneficial owners. Due to the postponement of the submission deadlines in 2021 and then due to the war in Ukraine, it is too early to determine the impact of the increased penalties on administrative liability.

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 analysing enterprises. It helps businesses to avoid financial risks and journalists and civil society activists to investigate important public cases. Additionally, 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. In 2023, Youcontrol boasts 5,000,000 files. The paid subscription costs approximately EUR 1,300 a year.

Practices

positive

negative

The open Unified State Register of Legal Entities, containing information that is accessible for everyone.

Private services that allow to form a complete dossier on a legal entity, and contain various data analysis tools.

Performance of the Business Ombudsman Council to protect business interests.

Lack of an effective compliance system in most state-owned enterprises, and companies of public interest. Formality approach to the adoption and approval of anti-corruption programmes in private legal entities.

Lack of adequate liability for failure to provide information on the ultimate beneficiary owner.

Lack of mechanisms to verify the completeness and accuracy of information about the ultimate beneficiary owners. The Unified State Register contains outdated information on the ultimate beneficiary owners.