How can Ukraine fix its cus­toms ser­vice?

Kyiv Post Legal Quarterly - - News - By koven­sky@kyiv­post.com

The Ukrainian cus­toms ser­vice is de­crepit and cor­rupt, ob­struct­ing business and suck­ing rev­enue out of the govern­ment.

Ac­count­ing for Hr 263.6 bil­lion ($10 bil­lion) of in­come for the 2017 bud­get, which an­tic­i­pates $27 bil­lion in rev­enue, the govern­ment es­ti­mates that cor­rup­tion in cus­toms de­prives the govern­ment of nearly $2 bil­lion per year. The coun­try made Hr 202.3 bil­lion ($7.78 bil­lion) off of cus­toms rev­enue in 2015, ac­cord­ing to the Fi­nance Min­istry.

Ukraine’s cus­toms ser­vice does not only col­lect im­port and ex­port tar­iffs – the agency, which falls un­der the State Fis­cal Ser­vice, is also tasked with col­lect­ing value-added tax and ex­cise pay­ments on im­ported goods.

Now, with the govern­ment of Prime Min­is­ter Volodymyr Groys­man set­tled in af­ter 150 days in of­fice, many are clam­or­ing for re­form in the area.

In­ter­na­tional Mone­tary Fund chief Christine La­garde sug­gested that pass­ing new leg­is­la­tion in the area would be key for the coun­try’s “medium-term sus­tain­abil­ity,” and per­haps for re­ceiv­ing the next in­stall­ment of IMF loans – which now stand at roughly $7 bil­lion out of a po­ten­tial $17 bil­lion un­til the start of 2019.

“The fo­cus should be on im­prov­ing tax and cus­toms ad­min­is­tra­tions,” La­garde said.

due to smug­gling and cor­rup­tion in the tax ser­vice is im­pos­si­ble to es­ti­mate.

“Many goods go to­tally around the sys­tem, so it’s im­pos­si­ble to say pre­cisely,” said Niko­lai Larin, project man­ager at the As­so­ci­a­tion of Im­porters and Ex­porters. Larin added that the amount of money the cus­toms ser­vice sub­mits to the state bud­get is only about half of the rev­enues that would be col­lected if all goods passed through cus­toms.

Groys­man said in April that the govern­ment loses up to Hr 50 bil­lion ($1.9 bil­lion) due to cor­rup­tion and smug­gling in cus­toms, cit­ing un­named ex­perts.

Other prob­lems in cus­toms are sim­i­lar to those that af­flict the rest of the civil ser­vice. Cus­toms of­fi­cers are paid salaries as low as $150 each month, for ex­am­ple.

“When your daily earn­ings could out­strip your monthly le­gal earn­ings, then the temp­ta­tion is great,” said Te­tiana Ostrikova, a Samopomich Party mem­ber of par­lia­ment on the tax and cus­toms pol­icy com­mit­tee. Ostrikova added that one “hoof” (cus­toms of­fi­cials’ slang for money earned off the books) would reg­u­larly add up to $150 or $200.

Another is­sue stems from the abil­ity of im­porters to de­clare their goods at any cus­toms point they de­sire, and not the point at which the goods phys­i­cally en­ter the coun­try - a sys­tem that al­lows peo­ple to deal with cus­toms of­fi­cials with whom they may have de­vel­oped a fa­vor­able re­la­tion­ship. Since re­gional cus­toms of­fices often do not share data, it also means that cus­toms of­fi­cials will not nec­es­sar­ily know which goods have phys­i­cally passed through their port.

Lack of in­for­ma­tion about cus­toms per­vades the govern­ment due to a quirk in Ukrainian law that re­stricts all cus­toms in­for­ma­tion to within the State Fis­cal Ser­vice.

Ostrikova said that even the deputy fi­nance min­is­ter in charge of cus­toms, Yevhen Kap­i­nus, does not have un­fet­tered ac­cess to cus­toms data be­cause of this leg­is­la­tion.

“This al­lows the cus­toms ser­vice to keep all of this in a black box,” Ostrikova said.

Yuriy Dra­ganchuk, an ad­viser to Fi­nance Min­is­ter Olek­sandr Danyliuk, con­firmed that his min­istry lacks ac­cess to in­for­ma­tion from the en­tire State Fis­cal Ser­vice.

“The in­for­ma­tion we re­ceive [from the SFS] is im­per­sonal, we don’t re­ceive in­for­ma­tion about con­crete en­ter­prises and peo­ple,” he said. “We plan to make a com­pletely sep­a­rate IT struc­ture that com­bines in­for­ma­tion from the SFS, trea­sury and our min­istry.”

Groys­man’s govern­ment has cre­ated a sys­tem of “mo­bile groups” to at­tempt to solve cor­rup­tion in the cus­toms ser­vice where it ap­pears, in what has been touted as an ag­gres­sive ef­fort to halt smug­gling.

There are 20 groups, whose teams are formed by em­ploy­ees from the Na­tional Anti-cor­rup­tion Bu­reau of Ukraine, the Na­tional Po­lice and the State Fis­cal Ser­vice. The teams are sup­posed to travel from cus­toms point to cus­toms point, root­ing out smug­gling rack­ets.

But Ostrikova has been dis­ap­pointed with the ini­tia­tive’s progress so far, say­ing that smug­glers were often in­formed of the group’s ar­rival in ad­vance.

“They don’t wait up for the mo­bile groups,” she said of the smug­glers.

An­drew Zablot­skyi, a cus­toms at­tor­ney at law firm Sayenko Kharenko, said that Ukraine’s as­so­ci­a­tion agree­ment with the Euro­pean Union­man­dated cer­tain le­gal changes, in­clud­ing in­tro­duc­ing a re­quire­ment that im­porters need to de­clare goods at the bor­der points at which the goods en­ter.

“The EU says that if you signed the EU as­so­ci­a­tion agree­ment, you need to com­ply with the rules... and place the state con­trol in fron­tier of­fices,” Zablot­skyi said.

He added that a se­ri­ous prob­lem with adopt­ing this law was a lack of money in the state bud­get to fund the changes, and the fact that the govern­ment would need to con­sol­i­date its san­i­tary and health con­trol sys­tems at the bor­der points, and not in the main cities, where they are cur­rently lo­cated.

One pro­posal to mod­ern­ize the cus­toms ser­vice would have seen part of the in­sti­tu­tion’s func­tion­al­ity out­sourced to Bri­tish aid or­ga­ni­za­tion Crown Agents. But Ostrikova said that find­ing the right peo­ple was not the prob­lem. “We have the peo­ple,” Ostrikova said. “Our cus­toms over the past 25 years turned into a means for liv­ing. Ev­ery­one wants to earn more off of cus­toms.”

Achiev­ing in­de­pen­dence Ostrikova is propos­ing that Ukraine run a Nabu-style con­test for new cus­toms of­fi­cials, by which they would be vet­ted as not hav­ing par­tic­i­pated in cor­rupt ac­tiv­i­ties.

“There should be new peo­ple,” Ostrikova said. “It should be peo­ple with a dif­fer­ent con­scious­ness.”

The deputy went on to say that in­for­ma­tion shar­ing both

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