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Business and Law-Enforcement, Trend Remains Negative
The economic unit of the Security Service of Ukraine is particularly active and audacious. All business associations have talked about eliminating it. I have in mind the tax police, which remain from the old system and has no legal basis for functioning, but remains a player in the system and constantly tries to carry out searches and interfere with business activities.
As for key trends, your attention please to the following:
1) The Cabinet of Ministers initiated and ensured adoption of the “Masks Show Stop” Law. In order to reduce the extent of pressure on business, the second part of this package — “Masks Show Stop — 2” Law was adopted. In general, implementation of these changes has had a positive impact on the business climate. Lawyers have obtained access to premises where searches are in progress. Moreover, investigators have become more disciplined after the introduction of video search records.
However, despite a direct prohibition on the seizing of IT systems, servers and equipment by law-enforcement officers, they continue to take place. Although their number has significantly decreased.
In addition, safety installation does not function at the stage of consideration by courts of the investigators’ motions for access to documents and searches of business entities. Judges do not always provide proper judicial control when considering such motions. Investigators have invented ways of circumventing obligatory video/audio recording of motions and, accordingly, the necessity to thoroughly prove the need for investigative actions against business. They do not appear at court hearings and courts allow such a motion in their absence.
2) Law-enforcement officers have begun to take an interest in and investigate classical business transactions, which were previously beyond their remit. The world-recognized business practice of hiring staff (outstaffing) has become the subject of criminal investigations. According to the tax police, hired personnel are actually employed by the client company, and the service itself is a tax evasion scheme (personal income tax, unified social tax (UST), formation of fictitious tax credit and expenses).
Over the course of last year, investigators received access to the documents of a number of providers of such services, which allowed them to initiate investigative actions against outstaffing consumer companies (access to confidential bank documents, searches, etc.). The risks of such activity are interrogation, additional tax payments and prosecution for violation of labor laws.
The next area of attention is private entrepreneurs who are payers of the single tax. A number of companies (especially in IT sphere) have changed their business models and have provided their employees with an opportunity to become entrepreneurs. The tax police initiated hundreds of investigations on this issue. We note that this model is legal, but the key condition is that the entrepreneur should neither perform a labor function nor obey internal regulations. It is desirable that such an individual entrepreneur should not only have one single (previous employer) client, but several clients.
Anti-corruption Fight. NABU Activity and Expectations from the High Anti-Corruption Court
Cancellation of Liability for Illegal Enrichment
A reminder that this Article of the Criminal Code provided for responsibility for subjects of declaration (officials of all levels, judges and law-enforcement officers, etc.), if they are unable to confirm their assets via official sources of income. It was declared unconstitutional by a decision adopted by the Constitutional Court. Such a decision caused a flurry of criticism both from civil society and international partners of Ukraine.
In total, the National Anti-Corruption Bureau of Ukraine (NABU) investigated 104 proceedings under the abovementioned Article. Four cases were submitted to court.
Since the decision was taken by the Constitutional Court, NABU has automatically lost the right to investigate cases under this Article, and proceedings should be closed.
Meanwhile, any investigation into illegal enrichment has always been accompanied by another Article of the Criminal Code — “Declaration of Inaccurate Information” (Introduction of Inaccurate Data into an Electronic Declaration). Therefore, NABU and the Specialized Anti-corruption Prosecutor’s Office (SAPO) have an opportunity to continue an investigation under this Article, and they actively enjoy this opportunity. Second, evidence gathered during an illegal enrichment investigation may be used to prove non-declaration of inaccurate information.
The High Anti-Corruption Court will begin its work on 5 September.
This Court will consider cases of corruption and related crimes which fall within the competence of NABU, in particular cases of corruption and embezzlement with the involvement of such top officials as the President, MPs, ministers, heads of state authorities, governors, prosecutors, judges, heads of state companies.
From 5 September all cases investigated by NABU, regardless of the stage and place of consideration, will be automatically submitted to the High Anti-Corruption Court. There are currently a total of 140 such cases in courts around the country. The forecast for September is about 200 cases.
The Court consists of 38 judges: 11 of them — Appeals Chamber (considering appeals against decisions taken by courts of first instance), 21 judges — first instance, 6 — investigating judges. The latter are judges who will consider the motions of detectives during an investigation (search permits, access to items and documents, precautionary measures, seizure of property and funds). It will depend on them where suspected offenders will be held — in a pre-trial detention centre or under house arrest. They will also determine the amount of bonds.
All candidates underwent unprecedented public tests, which lasted six months. 343 candidates submitted documents for participation in the competition. 270 candidates were admitted to the competition (their documents comply with formal requirements), of whom — 156 people have successfully passed the test, and 113 people have successfully performed practical tasks.
Regarding 49 candidates of these 113, questions arose as to their fairness and reputation. According to the results of analysis and interviews: 39 persons halted their participation in the competition, 3 applied for termination of participation at their own initiative and 7 proved their fairness.
Thus, 71 candidates qualified for the final. They were ranked according to the points scored during all stages of the competition. The first 38 on the list became judges (22 of whom had earlier worked as judges, 13 were atttorneys-at-law, and 3 scientists).
New Law-Enforcement Agencies: Asset Recovery and Management Agency and State Bureau of Investigations
ARMA, the National Agency of Ukraine for finding, tracing and managing assets derived from corruption and other crimes, began operating in October 2017. The Agency performs two functions: (1) gives assistance to law-enforcement officers in search/detection and management of assets; (2) management of such property during investigations.
At present, ARMA is demonstrating a high pace and openness.
To search assets abroad, ARMA uses international networks: САRIN, StAR, Interpol, Europol, as well as regional ones like a network of countries of the Caribbean region.
In 2018, ARMA processed more than 1,000 requests for searching and tracing property and sent 81 requests to other countries and responded to 15 requests from abroad.
Activity related to property management is much higher. As of January 1, 2019 ARMA received 646 objects (cash, real estate, transport, corporate rights, etc.). Decisions on transfer of assets in management shall be taken by a court at the investigator’s request.
It is worth clarifying that the seizure and transfer of property in management has created the possibility for abuse. Investigators recognize property as evidence and apply to the court to seize property from the owner and transfer it into management by ARMA. Sometimes, investigators use this tool regarding property, which in no way relates to a crime, for the purpose of blackmail and extortion.
The State Bureau of Investigations (SBI) has nothing in common with its analogue in the United States, the FBI, except for the consonance of name. According to the SBI’s Director, at the end of March, 624 indictments had been sent to court. The figure itself is not small, but we do not hear about any significant investigations. Perhaps this is because this institution has only just begun to work.
Criminal Offense is No Crime, but More than an Administrative Offense
In November 2018, the Criminal Offense Law was adopted. It should be clarified that from January 2020 petty crimes will be transformed into a new category — a criminal offense. The law provides for a simplified procedure for investigating such offenses.
Implementation of this approach is in line with world practice. Innovation has to reduce pressure on police investigation units and stop criminalization of actions which are not actually crimes.
From 2020 tax evasion running into small amounts, false entrepreneurship, petty fraud, unauthorized land grabbing, negligence will move from the crime category into the minor offense category.
We have given a positive evaluation of the potential impact of the above Law on the business climate. This Law reduces such a corruption lever as the possibility of law-enforcement agencies putting pressure on businesses. In addition, the Law enables the closing of actual criminal proceedings which have been prosecuted for years but have no prospects. Such proceedings were used by the police as small-scale blackmail against small and medium-sized businesses.