Algirdas Šemeta: "I have never seen in my extensive experience the criminal law being so widely applied to the businesses"

Ex-Minister of Finance of Lithuania and former EU Commissioner Algirdas Šemeta, who is now the Ukrainian business ombudsman, explained in an interview with UNIAN, what problems the businesses in Ukraine face, what deters foreign investors and what changes are needed to improve the business environment.

The idea of opening an Office of a Business Ombudsman as the government-authorized representative of business interests was announced in the spring of 2014, and in a year, in May 2015, the Office began its work headed by Algirdas Šemeta, who was twice Minister of Finance of Lithuania and the European Commissioner. According to the Šemeta, over the first year of work, the Office has helped the Ukrainian businesses save $3.5 billion. At the same time, its staff amounts to just 15 people, while its annual budget is EUR 1.5 million.

Perhaps it would be possible to achieve greater success if the relevant legislation were introduced in Ukraine. But the core draft law on the establishment of a business ombudsman has for more than a year been back-shelved in the Verkhovna Rada.

However, Algirdas Šemeta says he is more concerned with the unprecedentedly widespread application of criminal law to the businesses, which actually deters foreign investors. Although, he notices the first shoots of the improvement of the business environment.

Šemeta: Foreign investors in Ukraine are deterred by criminal prosecution of businesses / Photo from UNIAN

The Office of a Business Ombudsman has been operating in Ukraine for over a year. What key results have you achieved?

First of all, a platform has been created in Ukraine, where the businesses can protect their legal rights, without getting involved into all sorts of corrupt practices. This period – a little more than a year – has shown that businesses actively use this opportunity. We have received 862 complaints from businesses on various issues. We were able to complete 375 inquiries. The direct financial effect alone of our activities related to VAT refund or cancellation of the results of inspections and penalties for this period amounted to $3.5 billion. I think this is a significant help to the businesses. But our work is not limited to financial performance – we were able to make the authorities close a number of criminal proceedings against the businesses, issue licenses, permits, and even lay off certain government officials who had violated the rights of businesses. I think the business felt the assistance that the Council of Business Ombudsman provides.

You said that 70% of the recommendations of the Business Ombudsman are taken into account. This is a very high percentage, considering the specifics of the Ukrainian state authorities. Do they fear you or respect you?

This is international practice. Ombudsmen’s work in Europe and other developed countries is based, inter alia, on personal authority. It really helps to achieve results. The main thing is for this tradition to be preserved. Being a Lithuania native, I will not be working in Ukraine for the rest of my life. When an Ombudsman is being appointed, it is important that this person have the proper reputation. Authority is part of success. Another part of this success is a professional team. Professionalism is key to the implementation of our recommendations.

Will the adoption of the bill on the establishment of a business ombudsman, which has passed first reading in Parliament, ehnance the effectiveness of your work?

At the moment, we are not able to request confidential documents, documents for official use, and classified documents. In some areas, it limits us. In particular, when considering complaints about the requirements related to the defense or security issues. The law will allow us to gain access to such information. In addition, the law will oblige state bodies and officials to cooperate with the Council of Business Ombudsman and to give a reasoned response to our recommendations – either to fulfill them or, if the state agency disagrees, to present arguments. In practice, we often encounter "formal replies" – the reply to our recommendation is not to the point. The law provides for administrative liability in respect of those who send such replies. The law also provides for the protection of our actions. We are investigating not only the cases related to the fiscal service. A lot of complaints come related to the actions of the Prosecutor's Office, the National Police, and the Security Service. The law provides clear guarantees that these structures could not act against us when we launch probes. This is the most important provision of today’s version of the bill.

The Office was created at the times of the previous government. Has the work of a Business Ombudsman changed with the new composition of the Cabinet headed by Volodymyr Groysman?

The main assessment of my relations with any government is the result achieved. The current government has made a very strong declaration on the implementation of systemic recommendations we had provided. Soon, there will be a meeting at the level of the prime minister on the acutest problems faced by the businesses. Of course, all recommendations must be implemented. When the end result is achieved, then we can say for sure about the relations. I see positive aspects in the government’s perception of what we offer and in the work on what we offer.

Most complaints of the businesses are against the State Fiscal Service. Is your cooperation successful?

In terms of implementation of our recommendations, the result speaks for itself. It’s 72%. But this does not mean that the SFS has no problems. In our systemic report, we have spelled out specific suggestions on changing the tax administration system to solve many problems. Some of our recommendations were taken into consideration during the adoption of amendments to the Tax Code at the end of last year. For example, if there are some minor blots in the declaration or in other documents, the fines and other sanctions shall not be imposed. But the most important of our offers are currently under development. They are related to the creation of a taxpayer’s electronic office. In addition, it is necessary to change the appeals procedure. If everything goes as we expect, independent experts will be involved in consideration of appeals, including representatives of our organization. Also, my staff are involved in the development of amendments to tax legislation related to the opening by tax authorities of criminal proceedings against the businesses. We suggested that criminal proceedings should only be initiated after the appeals process is over. It shouldn’t be, as it is happening now, when criminal investigation is often launched right after the inspection. It so happens that the businesses win appeals, win lawsuits, but the criminal proceedings against him are still “hanging.”

Our proposals also include a change in a threshold for criminal responsibility in cases of tax evasion. When the Tax Code was being adopted, this threshold was at UAH 609,000, or $59,000. Due to the devaluation of the hryvnia, it dropped to $27,000.

A significant part of the relations between tax authorities and businesses is subject to possible criminal investigations. I have to be honest, I have never seen in my extensive experience the criminal law being so widely applied to the businesses. Of course, we can’t say that everything is alright with the businesses. There is a shadow economy, there are also illegal encashment centers, which really must be fought against. But we often witness criminal proceedings launched against the most transparent businesses. This is due to certain competitive actions, abuse of power by law enforcement agencies, tax police. We are preparing amendments to the legislation, to reduce to a minimum the level of abuse of power. Draft laws are being discussed in parliament. And if they are adopted, it will significantly improve the situation in this area.

You also developed systemic recommendations for cooperation of security agencies and businesses. Which of them have been taken into account?

You probably know that very often, the criminal proceedings against businesses are launched upon some fact. And until someone is charged, the process participants have virtually no procedural rights. This is very often misused, so we have offered to settle this issue so that the parties, from the beginning of the investigation, could use their procedural rights. In addition, we propose to introduce mandatory filming of searches, because very often, the businesses complain about a significant excess of power – documents are being confiscated, which are not subject to seizure, people are being interrogated, who shouldn’t be interviewed, and the like. Such a simple tool as mandatory filming will help avoid such situations. I am very pleased that the OECD (Organization for Economic Cooperation and Development) engaged in this work and is now ready to provide us with assistance in implementing the recommendations.

Criminal law is very sensitive, so we need a positive perception of changes to it by all the parties to the criminal law. For example, I believe that many foreign investors are discouraged by such a broad application of the criminal law. Large companies can still defend themselves, but if we are talking about the average businesses, this situation simply stops them from considering investment opportunities.

Could you tell us about the most representative cases from your practice?

One of the first of our investigations is related to a big international company, where the search was conducted in the course of criminal proceedings, with a significant breach of procedures. As a result of our actions, the Interior Ministry apologized to the foreign investor. My people say that it was the first public apology of law enforcers to a business. Today, I approved the results of investigation of a complaint of a small business in Kyiv, which for one and a half years could not get an emissions permit. An examination was needed with the following prolongation of a previous permit. For a long time, Kyiv city state administration delayed the extension. I personally met with Mayor Klitschko on this issue. In the end, a positive decision was taken. Protecting small business is always very inspiring.

We have had cases when criminal proceedings were launched upon the fact of a lay-off of an employee by a company. It is weird, by the way, that this could be subject of a general criminal law. Can you imagine that in one of these cases, 45 computers were seized and the company was completely paralyzed? After our intervention, half of the computers was given back, and in some time, the other half, too.

There was a case with Nibulon. The company won an international arbitration, but for a long period of time, the ruling of the arbitration court has not been implemented by the Ukrainian legal system, under various pretexts, and court hearings were delayed. We do not interfere in court proceedings, but there is a reasonable amount of time to address these issues. After our intervention, a court hearing was held and the ruling was issued in favor of Nibulon. This is very important from the perspective of the country’s international reputation.

There were also some high-profile investigations. In particular, on that complaint of a distributor of alcoholic beverages over the seizure of its assets by one of the MPs. Could you tell us about this?

We’ve done all we could within our competence. We have conducted the investigation. At first glance, what happened was the sale in auctions of factories, which cost millions, for a few hundred thousand hryvnias. There has been bankruptcy and subsequent sale of property. But everything was organized the way that only specific individuals attended the auctions. I think this is an outrageous situation. We have transferred the case to the National Anti-Corruption Bureau. I talked with Mr. Sytnik [NABU chief]; they have launched their own investigation.

Do your employees attend court hearings? Does this make the judges adhere to due process?

I think it disciplines them. Of course, we have no right to interfere with the court rulings. But we have conducted an extensive investigation and made our own conclusion on the situation. Complainants have the right to use the results of our investigations, defending themselves in court. If the judge allows, we express our opinion, which came to in the course of the investigation. This serves as an additional argument for objective consideration of the case.

If we look at the statistics of complaints submitted, that the vast majority comes from Kyiv. Are you planning to expand your presence in Ukraine’s regions?

We are fully funded by international donors, we have a clear budget of EUR 1.5 million per year. Finance available to us will be exhausted in March next year. We are currently negotiating the funding until 2020. International donors would like to see the gradual inclusion of the Ukrainian state and the Ukrainian business in the financing of the Council of a Business Ombudsman. It is totally a Ukrainian structure, and, of course, donors cannot fund the organization indefinitely. The gradual inclusion of the state and businesses would be reasonable.

In view of today’s budget, we have no physical capacity to expand to the regions. Donors allowed us some extension of the Office itself, so we are now in a process of interviewing additional staff. We will be able to employ another seven people. This will help us distribute the cases more evenly. Just to make it clear, each of our investigators today is working on 30 cases simultaneously.

As for the future, the European Bank for Reconstruction and Development has agreed that the Business Ombudsman Council should be increased slightly. It depends on the decision of the donors, because it is related to a slight increase in budget. Regarding our promotion, I have already visited 15 regions, from the contact line in the east two kilometers from the Donetsk airport to Lviv, Rivne, and Lutsk. For example, after my visit to Zhytomyr the number of complaints from this region almost doubled. I doubt the possibility of having regional offices if the Ukrainian state and the Ukrainian business don’t participate in the financing of the organization. On the other hand, with today's technology, we can communicate well with the businesses from different regions.

As an advocate of business in Ukraine, how do you assess the dynamics of the country’s business climate over the past year?

I think that the business climate has improved. We can see it the structure of the incoming complaints. At the beginning of our work, we have received quite a few complaints over business registration procedures. Now we virtually have none of those complaints. Such an important issue as starting a business and registering property rights has practically been settled. A significant number of complaints were related to VAT refund. But now we are also seeing less of those. There remains a problem of the debts from the previous years, so the complaints keep coming, but the situation in this area is improving. At a recent meeting between the prime minister and the businesses, I proposed the prime minister to finally resolve this debt issue. Another point is the implementation of our recommendations. When I started to work in Ukraine, I did not think that we can achieve such a result – an average of 70% of our recommendations is being fulfilled by public authorities. The State Fiscal Service, which accounts for the highest number of complaints, implements 72%. The best result has the Ministry of Justice with 76%. Cooperation with public authorities has been established rather effectively. Of course, there are exceptions, such as the prosecutor's office, which has fulfilled only 18% of our recommendations. We are preparing a meeting with the new leadership of the prosecutor's office to discuss our further cooperation and improve the situation. In general, I’m in a constant contact with the businesses and I see the first shoots that give me a reason for a moderate optimism.

Maksym Shevchenko (UNIAN)

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