Ukraine vies for top honor in crony cap­i­tal­ism in­dex

Kyiv Post Legal Quarterly - - Contents - BY JOSH KOVENSKY KOVENSKY@KYIVPOST.COM

It ’s progress of a sort, much the way that go­ing from an F grade to a D+ grade is an im­prove­ment for a stu­dent.

Ukraine has dropped from 3rd to 5th place among 22 na­tions ranked in The Econ­o­mist news­pa­per’s rank­ing of crony cap­i­tal­ist coun­tries.

The crony-cap­i­tal­ism in­dex, pub­lished in The Econ­o­mist’s May 5 is­sue, lists world economies by the wealth of bil­lion­aires in so-called “crony in­dus­tries” as a per­cent­age of the coun­try’s over­all gross do­mes­tic prod­uct.

In other words, out of the world’s econ- omies, Ukraine still ranks among the most af­flicted by crony­ism.

In 2014, in the mag­a­zine's pre­vi­ous rank­ing, only Malaysia and Rus­sia were worse than Ukraine.

Now, in the 2016 rank­ing, Rus­sia took the gold medal fol­lowed by Malaysia, the Philippines and Sin­ga­pore.

The power of crony­ism

Since the 2014 Euro­maidan Rev­o­lu­tion, crony­ism in Ukrainian politics has come to the fore­front of the coun­try’s fight for change.

News about more ac­tive tax co­op­er­a­tion, the pos­si­ble abol­ish­ment of bank se­crecy, and the rel­a­tively new con­cept of “de-off­shoriza­tion” has re­cently flooded in­ter­na­tional busi­ness me­dia. While this does not im­ply that global tax havens are on the way to ex­tinc­tion, busi­nesses should be pre­pared for the con­se­quences of this global ten­dency. Ivanna Py­lypyuk, a man­ag­ing part­ner at the In­ter­na­tional Con­sult­ing Group con­sul­tancy, de­fines de-off­shoriza­tion as a process of grad­u­ally de­creas­ing the use of off­shore com­pa­nies for tax op­ti­miza­tion, as­set pro­tec­tion, and other busi­ness pur­poses. De-off­shoriza­tion also stands for a set of in­ter­na­tional and in­ter­gov­ern­men­tal agree­ments, im­ple­mented via na­tional laws, in­tended to in­crease con­trol over com­pa­nies’ co­op­er­a­tion with off­shore and tax haven en­ter­prises. In­ter­gov­ern­men­tal or­ga­ni­za­tions will be able to place coun­tries vi­o­lat­ing in­ter­na­tional tax co­op­er­a­tion rules on “black” or “gray” lists, which may harm state's rep­u­ta­tion sig­nif­i­cantly, turn­ing a coun­try from a quiet haven into a bla­tant vi­o­la­tor of in­ter­na­tional law. So these ju­ris­dic­tions are now try­ing to strike a bal­ance be­tween main­tain­ing their rep­u­ta­tion and sup­port­ing their off­shore busi­ness. A trend spe­cific to 2016 is stricter Due Dili­gence re­quire­ments, which means es­sen­tially one thing — ben­e­fi­ciary iden­ti­fi­ca­tion. There will be no in­dul­gences this year — banks will de­mand ever more doc­u­ments about the ben­e­fi­ciary and other com­pany stake­hold­ers. Open ben­e­fi­ciary reg­is­ters are al­ready planned in some Euro­pean coun­tries. Global data ex­changes be­tween banks and tax au­thor­i­ties are be­ing in­ten­si­fied; the banks are grad­u­ally in­crease in­for­ma­tion re­quire­ments, ask­ing their clients to give their tax res­i­dence sta­tus and con­firm sums of money were legally ob­tained. Prov­ing the “sub­stance” of a com­pany, or its ac­tual ex­is­tence be­yond pa­per, is be­com­ing an­other de­mand. In the light of the re­cent global eco­nomic crises, such mea­sures aimed at com­bat­ing tax eva­sion and fill­ing state bud­gets are be­com­ing pop­u­lar, build­ing a new re­al­ity for in­ter­na­tional busi­ness — a re­al­ity of trans­parency and ac­count­abil­ity. In such cir­cum­stances, it is ever more im­por­tant to play ac­cord­ing to the rules, as tax and re­port­ing com­pli­ance is be­com­ing a cru­cial pre­req­ui­site for a suc­cess­ful busi­ness.

A worker at a Donetsk met­al­lur­gi­cal plant. (Ukrafoto)

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