Maxim Sheverdin, Partner, Head of Criminal Practice, LCF Legal Group

 

 

According to the results of the Small Business Attitudes Index, Ukrainian business is going through hard times. This study is conducted annually by the European Business Association. In 2020, the indicator has fallen to a minimum since the first measurements in 2017, to 2.38 points out of 5 possible. Entrepreneurs described the greatest problems as the low purchasing power of the population and the economic consequences of the coronavirus pandemic. Further, an imperfect tax system, corruption and pressure from fiscal and law enforcement officers are in the ‘top’. No government has been able to stop it for almost 30 years of independence of Ukraine!

The statistics of the Prosecutor General’s Office demonstrates the relevance and extent of the problem. Last year, 910 criminal proceedings for tax evasion were registered. At the same time, a particular person was suspected only 52 times, i.e., less than 10% of cases. 123 cases were closed for various reasons, including the lack of evidence of crime or elements of crime.

Such facts lead to obvious conclusions: the pre-trial investigation bodies are working inefficiently. The president and the government promise to put an end to this in the near future. The key role in their plan is assigned to the Bureau of Economic Security (BES), which is due to open on 25 September.

Today, several bodies: the SSU, the National Police and the Tax Police are investigating economic crimes in Ukraine. This leads to duplication of authority, which reduces the speed and quality of the work of investigators. According to the lawmakers, the BES shall become the only body of financial investigations with a new philosophy: more professional and without a trail of shameful practices of its predecessors. However, there are well-founded fears that, contrary to the expectations of the government and business, the old schemes will work under the new sign.

(not) A new idea

The establishment of special financial crime investigation bodies is a common practice in developed countries. For example, in the United States, such activities are carried out by a separate section of the FCS, the FinCEN and the IRS. The FCS is responsible for detecting and preventing various types of economic fraud (corporate, mortgage, commodity and others). The FinCEN focuses on collecting and analysing financial transactions data in general. The purpose of the agency is to combat money laundering and protect the US financial system from criminal use. The IRS’s area of responsibility is the punishment of violators of tax law as well as a number of other crimes (fictitious bankruptcy, illegal gambling, etc.).

As for European countries, the United Kingdom, France, Italy, Austria, Sweden, Portugal and many other countries have their own ‘financial’ investigative bodies. It has recently become known that the EU has also considered creating a separate anti-money-laundering agency.

Risk approach

So far, the only formal difference in the approach to the work of old and new bodies, which could be found in the Law on the BES, is the application of the so-called risk-oriented approach. The idea is simple: the higher the risks in the activities of an entity (taking into account the assessment of the offender’s identity, the nature and type of unlawful act, potential losses for the state and other factors), the tougher should be measures aimed at avoiding, minimizing and controlling them. Given this concept, the Bureau shall become more analytical than a law enforcement body. However, the devil is always in the details.

The BES employees shall independently determine the criteria for assessing the threat and the procedure for applying the risk-oriented approach. This creates a risk that the interested persons could always justify the need to apply any control measure based on the artificially high risk.

In addition, the law does not contain any restrictions on discovery of any information from its owners or managers by detectives of the Bureau. Upon receiving such data, it is possible without any problems to ‘bring’ the information under the necessary level of threat in order to open criminal proceedings and paralyse the business: to start searches, interrogations, seizure of documents or other investigative actions.

Between the devil and deep blue sea

Entrepreneurs’ expectations from the launch of the Bureau of Economic Security are simple and predictable. After all, they have been demanding the termination of law enforcement arbitrariness for almost three decades: illegal searches, blocking of accounts, arrests and other illegal practices. Business seeks transparent and understandable relations with the state. But whether these wishes coincide with the primary intentions of the current government is still an open question.

If the Ukrainian government seeks to reset relations with business with the help of the BES, then it has to rethink the concept of economic security of the country. It should be based on protecting entrepreneurs from excessive interference by inspection and law enforcement agencies, abuses in the public sector of the economy and demonopolization of resources concentrated in the hands of oligarchs. The Bureau of Economic Security shall protect businesses and investors from unfair competition, pressure from government agencies, embezzlement and abuse in state-owned enterprises.

The BES could be an essential breath of fresh air for Ukrainian business, which has been wallowing in filth of law enforcement arbitrariness and corruption for three decades. Will a miracle happen? We will see in the Doing Business rating.