Anastasia Krasnosilska: With no rule of law, Ukraine cannot hope for investors or EU membership

Corruption and lack of trust in the judiciary are still affecting the investment climate in Ukraine more than the conflict with Russia. This conclusion was given by the study of obstacles to foreign investments to Ukraine in early September. To improve the business climate, investors expect Ukraine to concentrate on fighting corruption, including bringing to justice allegedly corrupt top officials and judges, ensuring the independence of the judiciary and timely implementation of the International Monetary Fund program.

Expectations of investors coincide with those of international partners of Ukraine, who conditioned financial support of their taxpayers to reform in the country. And the financial support is considerable: only by the end of this year Ukraine hopes to receive 600 million euros of macro-financial assistance from the European Union and $1 billion from the next IMF loan.

Although Ukraine reported of successful implementation of all the conditionalities, as of the Nov. 21 fourth anniversary of the EuroMaidan Revolution that drove President Viktor Yanukovych from power in 2014, actual anti-corruption results leave much to be desired.

As Ukraine approaches presidential and parliamentary electoral campaigns, reforms are stalling. However, the upcoming elections also serve as leverage for international partners to prevent rollbacks in anti-corruption reforms, as politicians become even more sensitive to negative statements from abroad than to the absence of money.

Threat to visa-free regime?

Affluent lifestyles of Ukrainian politicians and public servants have long been the first signal of widespread corruption for potential foreign investors. E.U.-conditioned anti-corruption reform intended to disclose and verify assets declarations of public servants and to bring to justice for illicit enrichment those whose assets are not justified.

The launch of electronic assets disclosure system for all public officials was the key accomplishment of the visa liberalization action plan. The system functions and a special registry now contains more than 1 million asset declarations. However, the declaration campaign puts the registry (with all the declarations in it) on the verge of disappearance, due to severe technical problems. The registry is controlled by a state company under the influence of the Security Service of Ukraine, or SBU.

Instead of regaining control over the registry, the National Agency for Corruption Prevention allowed officials of the SBU to avoid public asset disclosure and to submit declarations into their own parallel secret system. As a result, SBU officials are immune against liability for illicit enrichment, because even the National Anti-Corruption Bureau of Ukraine has no access to these declarations.
Disclosure of assets is not yet followed with verification not only for SBU officials. Of more than 1 million declarations, only up to 100 have been verified after one year of efforts by the NACP. The condition — enactment of a system of automatic verification of e-declarations — needs to be done as one of the conditions of 600 million euros worth of assistance. Ukrainian authorities try to excuse the absence of automatic verification of e-declarations either with legislative gaps or absence of problems with certificates of data protection for the system (it’s the same issue with which the authorities attempted to disrupt the launch of an e-declarations system).

However, none of these excuses look persuasive after whistleblowers from NACP revealed the political dependence of the agency.

Hanna Solomatina, head of NACP financial control department, blew the whistle on NACP leadership, who were giving her illegal orders to issue positive or negative results of asset declarations verification on certain officials. In addition, Solomatina claims she was asked by the Presidential Administration to approve with them every single result of such a verification. Moreover, the whistleblower argues that she suggested to NACP leadership a solution for a quick launch of the automatic system of e-declarations verification, however, Natalia Korchak refused to accept it, because allegedly it is easier to intervene into the manual system of verifications.

Failure to launch verification of e-declarations may cost Ukraine not only loss of investment and financial assistance. The decision on visa-free travel to EU came in a package with a monitoring mechanism through which the EU follows up on the sustainability of Ukrainian reforms. Rollbacks in reforms way lead to suspension of visa-free regime. Although politically probability of this may seem vague, legal procedures for suspension are already adopted and first monitoring report on Ukrainian reforms will be published in December 2017.

Anti-corruption law enforcement

Now that new independent institutions are established to investigate and prosecute grand corruption, the EU and IMF expect Ukrainian authorities to restrain from any pressure on NABU and the Specialized Anti-Corruption Prosecutor’s Office, or SAPO, and to secure the independent powers of these bodies. Ukraine frequently fails to meet these expectations.
The powers of NABU and SAPO are challenged with recent amendments to the criminal procedure code, known as the “Lozovy amendments,” after the member of parliament, Andriy Lozovy, who proposed them. According to the amendments, the decision to either continue or terminate NABU investigations will depend on the decision of an investigative judge, instead of a prosecutor. We have witnessed many instances how investigative judges from unreformed courts are blocking and delaying NABU investigations, and here comes a new tool for them to do this. The new draft laws restricting NABU powers frequently appear in parliament and might be passed any moment.

Authorities demonstrate no commitment to preserve independence of NABU.

For months, E.U. leaders are making statements of deep concern regarding attempts to take NABU external audit under political control.

Still, after the NABU announced suspected crime by the son of Interior Minister Arsen Avakov and a deputy minister of defense with investors from the Trade Commodities company linked to close associates of President Petro Poroshenko,  the attacks against NABU intensified. The Prosecutor General’s Office opened a criminal case against NABU executive director Artem Sytnyk. Moreover, the NACP initiated administrative proceedings against Sytnyk, probing him for alleged “conflict of interests,” initiated an administrative one.
Justice is still unfair
Zero verdicts in cases of grand corruption and 35 percent of NABU cases pending in courts without consideration convinced the E.U. and the IMF that Ukraine needs an anticorruption court.
The E.U. is expecting to see the draft law on the anti-corruption court to be submitted by the president without further postponement or unnecessary working groups, as the E.U. Ambassador to Ukraine Hugues Mingarelli recently confirmed.
The IMF conditioned establishment of the anti-corruption court as a prior action before the next loan disbursements. The Council of Europe’s Venice Commission, formally known as the European Commission for Democracy through Law, issued its opinion in early October, making it clear that the draft law on the separate High Anti-Corruption Court has to be introduced by the president. The commission emphasized the importance of engaging foreign donors and experts in the selection of anti-corruption judges.

However, instead of expeditions drafting the law based on the Venice Commission opinion, the president is spending a second month on a “table tennis” game with the parliament in an attempt shift responsibility for the development of the bill.

Fake asset recovery

Ukraine was rather successful in implementing asset recovery conditionalities: information on public spending is available online, registries of real estate property, land cadaster, and beneficial ownership are also public. A special agency for asset recovery was created and already manages assets, arrested in the case against former Tax Minister Oleksandr Klymenko.
However, the actual work of prosecutors on recovering assets raises concerns.

In spring, prosecutors reported recovering $1.5 billion of so-called “Viktor Yanukovych’s money.” Assets were recovered upon the guilty verdict for the nominal director of one of the companies affiliated with Sergei Kurchenko, but the verdict itself is classified as a state secret. The same scheme has been applied three times already to recover huge amounts of money for strategic enterprises. Prosecutors in these confiscations are relying on laws adopted by parliament back in February 2016 within the visa liberalization action plan. However, the implementation of these asset recovery laws seems to be against European standards.

This unprecedented approach creates strong grounds for third parties –  formal owners of confiscated assets  – to regain the money through the European Court of Human Rights.
Disclosure of beneficial ownership

Following the obligation before the E.U., Ukraine introduced mandatory disclosure and publication of information on beneficial owners of all companies.

Still, one important element is lacking – verification of information on beneficial owners. Without verification, companies with false beneficiaries, such Aganemnon Anonymous, legally win millions of public bids and leave behind European companies interested in providing services to Ukraine.

In the meantime, Prime Minister Volodymyr Groysman needs additional funds for increasing social welfare and keeping energy prices under control before the election. The Cabinet hopes to be able to raise funds on international borrowing market instead of implementing anti-corruption conditionalities and receiving cheaper loans from the E.U. and IMF.

However, the president strives for a new euro-integration perspective for Ukraine and aspires it to become a key message of his campaign for the second term in office.

No such perspective may be given to Ukraine without full implementation of reforms, especially in the rule of law sector.

No real E.U. investors will come to Ukraine without guarantees they could protect themselves in non-corrupt courts. Tiny Cyprus will remain the key source of foreign direct investment to Ukraine, which in fact are not real foreign investments creating jobs, but the return of suspicious, often ill-gotten capital, siphoned from Ukrainian taxpayers by oligarchs tied to corrupt politicians.