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 is consistent with Article 12 of the UNCAC. However, its enforcement is not always at an adequate level. In particular, due to the lack of anti-corruption culture, compliance systems develop slowly and have not yet become an effective and popular mechanism of combating corruption in the activities of legal entities. Their adoption is mainly conditioned by the requirements of national legislation (for participation in public procurement) and foreign regulation (FCPA, UK Bribery Act, etc.). The introduction of the mandatory requirement to disclose information about the ultimate beneficial owners also deserves high marks. Despite the introduction of an open Unified State Register containing information about all legal entities in Ukraine, the information contained therein is not always relevant and reliable. The ineffective mechanism of liability is also a challenge, which does not prevent violations in the private sector.
Despite this, we can positively assess the work of the Business Ombudsman Council as one of the preventive measures against the improper influence of the state on business.

In short:

State of implementation

Legal framework

Within the analysis of the implementation of this Article, we highlight commencement 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 carried out by legal entities and tax-deductibility of expenses that constitute bribes.
1.1. Prevention of Corruption in the Activity of Legal Entities
Legislation of Ukraine sets forth several obligatory, and recommended anti-corruption preventive instruments in respect of legal entities of the private sector. 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, but for others, it is an obligation. Detailed analysis of this issue has been provided for the discussion of Article 5.
An anti-corruption programme is obligatory for legal entities bidding 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 Core Code of Corporate Governance in 2020. Among other things, it requires that a control system and ethical standards shall be created, including:
- internal control;
- compliance;
- policy for corruption prevention;
- policy for conflict of interests etc.
Ukrainian legislation does not require that companies follow the norms of this 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 market of capital. 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. 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 private persons’ interests from the inappropriate influence of public bodies is also an important aspect of anti-corruption. So, necessary legal mechanisms have to be created. The Business Ombudsman Council has been active in Ukraine since 2014. Its activities are aimed to protect business interests from the mal-administration of public authorities.
1.2. Unified State Register of Legal Entities, Natural Persons-Entrepreneurs, and Citizens’ Associations (hereinafter referred to as “the Unified State Register”)
For the sake of proper identification of all entities acting in Ukraine the Law of Ukraine “On State Registration of Legal Entities and Sole Proprietors, and Civil Entities” (hereinafter “the Law”) has been adopted. It regulates any relations of the state registration sphere which deals with legal entities and sole proprietors. 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 sole proprietors.
The violations of the Law make for criminal and administrative liability. Administrative liability covers cases regarding the violation of the state registration procedure by legal entities and sole proprietors, of file storage procedure, and failure to submit the information on the ultimate beneficiary owner. Such violations are punishable by fines ranging from EUR 5 to EUR 1,500 (approximately). Criminal liability covers the cases provided for by the Criminal Code of Ukraine which is the forgery of the documents submitted to the state registrar. The respective punishments range from fines to imprisonment up to a five-year term. Also, legal entities shall be held liable for the bribery of private legal entity officers. The sanctions provide for punishments ranging from fines to imprisonment.
1.3. Information on Ultimate Beneficiary Owner
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 in the amount not less than 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, 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 benificiary owners and ownership structure. According to the degree of the Ministry of Finance of Ukraine, legal entities are obliged to submit, by the 10th of October, 2021, documents to the state registrar to update information.
In 2014, a special law was adopted to establish mandatory disclosure of the information on the ultimate beneficiary owners for the legal entities by means of the Unified State Registry which is particularly designed to hold all the necessary information to identify them (full name, passport details, residence, etc.).
Besides, according to the most recent version of the law “On Money Laundering,” legal entities shall be obliged to update the information on the ultimate beneficiary owners and the ownership structure. In 2021, the Ministry of Finance of Ukraine ordered that the documents necessary for the information update shall be submitted to the state registrar by legal entities.
1.4. Accounting and Financial Reporting
Legal foundations of the accounting regulation, organization, record-holding, and financial reporting are provided by the Law of Ukraine “On Accounting and Financial Reporting in Ukraine”.
Business transactions are accounted for by primary documents that establish the real facts of business transactions performed. All enterprises perform accounting procedures in accordance with national and international standards of financial reporting. Ukraine has approved 30 national regulations (standards) of accounting reports.
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.
Regulation on Accounting Documentary Recording prescribes the rules of procedure for accounting bookkeeping and rules of procedure for storing primary documents and other reporting recordings. Financial and accounting documents shall be stored for at least three years. The failure to meet this requirement of storage term is punishable by the fine of EUR 30. The person in charge of the enterprise shall be held liable in such a case.
Besides, administrative and criminal liabilities are provided for the violation of reporting procedure violation in accounting.
Code of Ukraine on Administrative Offenses
Concealment of income in foreign currencies or other ones, wasteful expenditures and losses in reports; missing accounting reports etc. sanctions range from EUR 4 to EUR 8 (approximately)
Criminal Code of Ukraine
Forgery of documents, seals, stamps or letterheads, and sale or use of forged documents, seals, stamps, giving a bribe to any private legal officer regardless of the enterprise legal or organizational form etc. Sanctions range from fines to imprisonment.
1.5. Taxation of Funds Obtained as a Bribe
According to the Tax Code of Ukraine, the total monthly (yearly) taxable income shall include funds or property (intangible assets), obtained by a taxpayer as a bribe, stolen or found as a treasure not delivered to the state according to the law, in the amount established by the guilty verdict of the court regardless of the imposed penalty.
Implementation in practice

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.

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.
Existence of the state standards (ISO 37001: 2016, ISO 37001: 2018 “Anti-corruption management systems”).
Performance of the Business Ombudsman Council.
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.
Outdated information on the ultimate beneficiary owners is contained in the Unified State Register.
Actual research and materials
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State evaluation will be published soon

In short:

State of implementation

Legal framework

Legal framework after State evaluation
Implementation in practice

Implementation in practice after State evaluation

Practices

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negative

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Example of negative practice
Example of negative practice
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Actual research and materials
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08.11.2020
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