Written by Konstantin Pishchik
On 21 November 2014 in Kiev, United States Vice President Joe Biden announced that, pending approval from Congress, the United States would commit a further US$20 million to support comprehensive reform in Ukraine’s law-enforcement and justice sectors. This would include prosecutorial and anti-corruption reforms.
The financial assistance was included in a fact sheet summary, released by the White House on the same day, which documented the support given to Ukraine by the United States Government in 2014. Together with an additional US$3 million to the United Nations World Food Program for food rations and assistance for people displaced by the conflict with Russian-backed separatists, the United States’ support now amounts to nearly US$320 million.
And this is in addition to May 2014’s US$1 billion sovereign bond, issued by Ukraine but fully guaranteed by the United States, which was part of a coordinated international effort to ensure that Ukraine has the resources it needs to implement its International Monetary Fund (IMF) programme.
To date, Ukraine has been heavily reliant on funding from international lenders, and this has included a US$17 billion funding programme from the IMF. The country has also appealed to the European Union (EU) for €2 billion in additional financing and, as the ceasefire with separatists is fragile at best (at the time of going to press), there are real fears that even more funding will be needed.
Credit-ratings agency Moody’s has suggested that if Ukraine’s economy contracts by more than a further seven percent in 2014, as expected, it could cause the country to default on its international debt. (Its debt to GDP ratio would be above 60 percent, which would trigger an early repayment clause on a US$3 billion credit facility provided by Russia.)
Defaulting on the IMF funding programme would contravene the terms and conditions of the Fund’s credit facility agreed under the 2014 EU–Ukraine Association Agreement. Also included under these terms and conditions, as a means to help attract international investment, was a demand for Ukraine to carry out some urgently-needed reforms.
Bribery and corruption has been widespread within the Ukrainian Government since its independence from the Soviet Union in 1991, and reportedly got worse under former president Yanukovych. As a result, and in direct response to the demands of the Ukrainian people, on 14 October 2014 the Ukrainian Parliament (Verkhovna Rada) adopted the 2014 Anti-Corruption Package. This was the first significant anti-corruption reform passed in Ukraine since 1991.
Despite public scepticism that proposed anti-corruption reforms were simply an insincere electioneering ploy on the part of Prime Minister Arseniy Yatsenyuk, the Ukrainian Government has developed laws and regulations to tackle top-level government corruption. This includes establishing anti-corruption institutions that will enable authorities to combat corruption more effectively, and supporting expanded e-governance and procurement reform to limit the opportunities for corruption.
With the support of the United States, the Ukrainian authorities are also working with the Organization for Economic Cooperation and Development and the European Bank for Reconstruction and Development to recover stolen assets.
A strong focus on transparency is one of the key features of the Anti-Corruption Package, with the new laws warranting senior government officials to declare details of their assets and finances as well as those of their families. Officials in the judiciary and in law enforcement will also be subject to such obligations.
The Package includes the following laws and measures:
High-level officials in government, law enforcement and the military who held their posts for more than one year during the rule of ousted president Viktor Yanukovych will be banned from government service for up to ten years under the new lustration law. The law also imposes a ban on former members of the Soviet Communist Party or the KGB. According to Prime Minister Yatsenyuk, the law will affect approximately one million individuals.
Law on the Prosecutor’s Office
This law curbs the powers of prosecutors and strips them of investigative functions and powers of arrest. It also sets new standards for prosecutors, with the aim of reducing corruption.
A separate body established in 2014, the Anti-Corruption Bureau was founded to prevent and fight corruption. The Bureau’s main aim is tackling corrupt behaviour involving high-profile officials.
The Law ‘On Introduction of Changes to Certain Legal Acts of Ukraine Related to Determination of Ultimate Beneficiaries of Legal Entities and Public Figures’ obliges disclosure of beneficial ownership of shares in Ukrainian companies and properties. The Beneficiaries Law also dictates creation of open access to information regarding the ownership of real estate.
The new Anti-Corruption Strategy consolidates the 2014 to 2017 anti-corruption initiatives of the president, the government and parliament.
Path of reform
United States financial assistance and support to Ukraine in 2014 has included:
- provision of military equipment and training
- financial support for civil society and humanitarian organisations
- investment in the development of an independent media
- technical and strategic assistance in obtaining energy security
- trade diversification and promotion
- most importantly, assistance with planning and implementing anti-corruption initiatives.
The roots of corruption
Ukraine was the first former Soviet country to peacefully transform into a democratic regime when it introduced elections in 1994. A decade later, pro-Russian candidate Viktor Yanukovych won the country’s presidential election. However, evidence of fraud ignited a mass protest known as the ‘Orange Revolution’, which led to a re-election that Yanukovych subsequently lost. This was only a minor setback though for Yanukovych who, in 2006, found his way back into the Ukrainian Government as prime minister and leader of the largest party in the coalition. In 2009, a period of unrest and uncertainty in the country was followed by Russia cutting off gas supplies to Ukraine over a debt dispute, disrupting deliveries to many European Union (EU) states. In 2010, Yanukovych finally seized the coveted presidential post and set the country on a Russian-friendly course. This involved jailing leaders of the opposition and taking a very lenient approach towards corruption.
From 2010 to 2013, corruption thrived in Ukraine and was focused on channelling government funds into private pockets, primarily through governmental tenders. Many changes were made to the laws on government procurement, eliminating transparency of the bidding process and making corruption less detectable. It has been estimated that approximately US$11 billion was extracted annually through abuse of public tenders during these years.
Frustration among Ukrainian citizens grew and, in November 2013, tensions exploded when Yanukovych retreated from signing an association agreement with the EU. A massive protest movement was formed and, after a series of violent events, Yanukovych fled the capital Kiev. He was subsequently impeached by parliament in February 2014.
In the following weeks, while Ukraine was in transition towards a pro-Western coalition, Russia sent troops in unmarked uniforms into the Crimean peninsula to support local separatists. Russia annexed Crimea in March 2014, and is now supporting the separatist states of Donetsk and Luhansk in East Ukraine. Although Russia has been heavily sanctioned for its actions, President Vladimir Putin shows no signs of backing off.
Despite these hurdles, in May 2014 successful businessman and former minister of foreign affairs Petro Poroshenko was elected as Ukraine’s new president. Poroshenko promised to tackle corruption and strengthen ties with the EU. He pledged to ‘turn the page’ and transform the country and its economy into one that is more transparent and better managed.
Ukraine will need to remain on a path of reform if it is to continue to rely on United States support and avoid contravening the terms and conditions of the 2014 EU–Ukraine Association Agreement. Both are pivotal for attracting foreign investment, and all companies – from energy companies to media producers – will now have to enforce rigorous anti-corruption policies while working in Ukraine.
More specifically, compliance professionals should consider the following:
- Companies working closely with Ukrainian Government officials should be prepared for some of these officials losing their positions as a consequence of the lustration law. Routine due diligence checks should be conducted on third parties working with governmental entities.
- Third parties in Ukraine need to be trained and briefed, as many Ukrainian businesses will be put under greater scrutiny as part of the war on corruption.
- Some Ukrainian citizens and companies were included in sanctions imposed on Russia for its interference in Ukraine. The sanctions lists are often updated and some of the sanctioned Russian citizens are still involved in businesses operating in Ukraine. Continuous monitoring is needed to ensure that Ukrainian business partners are not directly under sanctions themselves or owned by Russian citizens who are included in sanctions lists.
- Due to frequent changes in anti-corruption legislation and regulations, compliance programmes must be updated frequently.
- Enhanced due diligence must be conducted on those third parties that have given rise to suspicions in the past, but who were not prosecuted by the previous regime. It is better for businesses operating in Ukraine to proactively identify possible future issues in an effort to avoid future media scandals.