Ukraine debates creating a single business inspection body

Last week, the Ukrainian government approved a bill that would fully resume business inspections from October.  

Before that, in June, the Verkhovna Rada—the Ukrainian parliament—passed a law providing for the resumption of business inspections in the so-called risky areas—finance, excisable goods, and gambling.

However, even without full-scale inspections, businesses in Ukraine are already complaining about tax and law enforcement officers’ increased pressure and the return to the ‘criminalisation’ of their cases.

Those complaints reached Ukrainian president Volodymyr Zelenskyy, who in turn proposed that a single body be entitled to carry out inspections. Will that help—and what do businesses think about it?

And then there will be one

In late August, Mr Zelenskyy proposed to limit business inspections to one state body in order to "strike a balance between European legislation and their [businesses’] request".

The very next day, Danylo Hetmantsev, the chair of the parliamentary committee on finance, tax and customs policy, said the solution would be reform of the Bureau of Economic Security (BEB).

"It is the BEB that is supposed to be the body to replace all the bodies that carry out criminal prosecution in the economic field," Mr Hetmantsev told Interfax-Ukraine news agency.

The BEB was created to replace the scandal-plagued tax police and rely more on information analysis rather than law enforcement—at least that has been constantly promised since the bureau’s becoming operational in 2021.

However, the BEB’s activities are still ambiguous. It is understaffed and no longer has a permanent head.

The European Business Association (EBA) says that there are a number of questions about the effectiveness of the Bureau—in particular, in terms of the current staff.

"About 60 percent of the bureau’s employees are former employees of the tax police. And the time the structure has been operating shows that the old staff still cannot work according to new approaches," the EBA said in a statement to LIGA.net.

"Therefore, business stands for a reboot of the bureau. In particular, it is necessary to conduct a transparent, fair and impartial competition for the position of the new head of the BEB—as, in the end, for all positions, even for the rank and file of this Bureau."

Numerous data show that tax issues are the most painful for Ukrainian businesses.

They account for the vast majority of business complaints to the Ukrainian business ombudsman council—almost 70 percent of complaints in the last reporting quarter.

In addition, the BEB is not the only government agency that can inspect businesses in tax matters.

The Ukrainian state tax service (DPSU) can also cause problems for entrepreneurs regarding the correctness of tax payments—although not of a criminal nature. Even before that, it had already been allowed to conduct any desk, factual, and separate documentary unscheduled inspections.

Even before the moratorium on inspections was lifted, the DPSU had published a schedule of business inspections for 2023, which included almost 2,100 legal entities, 1,500 individual entrepreneurs, financial institutions, permanent establishments and representative offices of non-residents, and more than 300 legal entities for payroll tax-related issues.

Businesses complain about law enforcement searches, again

However, business inspections are not limited to tax payments.

This year, there has already been an increase in the number of other complaints about law enforcement, accounting for nine percent of all the complaints received by the business ombudsman council, it told LIGA.net.

"In April-June, entrepreneurs most often complained about procedural abuses and inaction of the national police and the prosecutor's office," the business ombudsman council said.

Those, in particular, concerned the failure of law enforcement agencies to return temporarily seized property or funds after searches. Moreover, the council also received complaints about unreasonably opened criminal proceedings used by law enforcement as a tool of pressure on business. There are also complaints about ineffective actions of law enforcement agencies in cases where business is the injured party.

The EBA speaks of similar cases.

"Today, we hear from companies that there are increasing cases of interference in the work of transparent business by some authorities, in particular, representatives of the National Police by conducting inspections directly in the offices of companies

"At the same time, it is worth noting that with the creation of the bureau of economic security, law enforcement agencies were supposed to be stripped off of the function of overseeing economic security," the association told LIGA.net.

The business ombudsman says that Ukraine still has excessive ‘criminalisation’ of cases that could be logically and less destructively resolved in administrative or commercial court.

"Despite all the legislative reforms of the past few years, investigators and prosecutors still have a Soviet mindset: For the former, it is the state to which everyone owes, and for the latter, the shadow of 'general supervision over the rule of law'," it stressed.

"As long as such approaches are rewarded according to the hierarchy—formally and informally—they, and not ‘Europeanised’ laws, will determine their behaviour."

Currently, 95 percent of criminal proceedings opened by the BEB, and about 90 percent from other bodies, such as the police or the security service, do not reach court.

Mostly, the very fact and procedure of opening criminal proceedings is a means of pressure and ‘punishment’ for the company in question. At the same time, the business ombudsman council points out, Ukrainian law enforcement agencies often duplicate functions and compete for jurisdiction.

"It seems that the increase in the number of inspections and additional charges is a kind of tool to show activity. Because while fines are being cancelled in courts, inspections are taking place and other fines are being charged. In the meantime, you can constantly report on your work," Volodymyr Kutsenko, an inspector at the business ombudsman council, told LIGA.net.

In order to avoid this in the future, Mr Kutsenko says law enforcement and tax authorities need to apply risk-oriented approaches, giving preference to scheduled inspections, taking into account the existing court practice. This would avoid the need for businessmen to constantly defend themselves in court.

Who else can inspect entrepreneurs in Ukraine?

Depending on the type of business activity, entrepreneurs can be inspected not only by tax authorities or law enforcement. Such power rests with several watchdogs, including the National Bank of Ukraine, the national energy and utilities regulatory commission (NKREKP), and the antimonopoly committee (AMCU).

In addition, various Ukrainian ministries may conduct inspections—for instance, with regard to combating money laundering.

• The finance ministry may inspects auditors, accountants, tax consultants, consultants and intermediaries in real estate transactions, sellers of precious metals and stones, gambling companies, lottery operators, and sellers of cultural property
• The justice ministry could inspect lawyers and lawyer organisations, notaries, and legal service providers
• The digital transformation ministry inspects service providers related to the circulation of virtual assets

Industrial and mining enterprises, enterprises in the field of activities related to high-risk facilities are inspected by the Ukrainian state labour service.

Construction companies are inspected by the state inspectorate of architecture and urban development.

And this is not an exhaustive list.