Improving beneficial ownership transparency in Ukraine: Review and recommendations

Introduction and scope

In recent years, society has come to understand the importance of corporate transparency. The Panama and Paradise Papers and other high-profle corruption scandals have caused a radical shift in the narrative around anonymous companies and trusts. Ukraine has been deeply affected by corruption since it gained independence in the early 1990s, with former government officials accused of misappropriating state assets through the use of anonymous shell companies registered in Ukraine and abroad. It is clearer than ever that these anonymous corporate structures are often a cloak for corrupt and criminal activities such as embezzlement, contract fraud, organised crime and money laundering. The resulting capital fight deprives the citizens of Ukraine of much-needed revenue, degrades the business environment, and entrenches corruption and poverty at the expense of the many for the benefit of the few.

Increasingly, far-sighted governments, law enforcement and socially responsible businesses agree that making useful information about who owns companies available to the public is critical to tracking illicit financial flows and tackling corruption. At the 2016 Anti-Corruption Summit organised by the government of the United Kingdom, 12 countries committed to establishing central beneficial ownership registers. 15 countries have committed to establishing or exploring registers as part of their Open Government Partnership (OGP) National Action Plans, and 20 countries have committed to establishing central public registers of beneficial ownership in their Extractive Industries Transparency Initiative (EITI) beneficial ownership road maps.[2]

According to provisions of the State Anticorruption Policy of Ukraine for 2014-2017, tackling corruption, including through the abuse of anonymous corporate vehicles, is a priority for Ukrainian society. The President of Ukraine, Petro Poroshenko, signed the Law of Ukraine “On Amending Certain Laws of Ukraine Relating to the Identification of Ultimate Beneficiaries of Legal Entities and Public Figures” on 23 October, 2014, one of five anti-corruption laws passed by the Ukrainian Parliament that month.[3] Although the original timeline envisaged that the law would come into effect in 2014, this was extended to spring 2016 due to difficulties with implementation. The policy ensures free access via the internet to the data in Ukraine’s companies register. The Unified State Register (USR) details information on legal entities and individual entrepreneurs, which allows both law enforcement and the wider general public to find information on the ultimate beneficiaries of Ukrainian corporate entities. The Ukrainian Ministry of Justice has been designated as the body responsible for establishing, maintaining and providing technical support to the USR, and for issuing fines for non-compliance.

Ukraine is also a member of the EITI, having joined in 2013. As stated above, the EITI will require all companies that hold extractive licenses in EITI implementing countries to disclose their beneficial ownership from 2020. Ukraine’s 2014 EITI Report notes that 66 of the 120 extractive companies covered by the EITI Report have disclosed their beneficial owners in the public register held by the Ministry of Justice (compared to an average of 2% compliance across EITI countries involved in the initial pilot scheme). Ukraine’s incorporation of a beneficial ownership register as part of its company database goes hand in hand with this EITI requirement.

To date, approximately 253,000 Ukrainian companies have reported their beneficial ownership through the companies register. This information can be accessed via the electronic services portal.[4] Since then, Ukraine has undertaken multiple efforts to improve both the quality of this data, and access to it. In 2016, Ukraine committed to improve “the mechanism for verifying information about ultimate beneficial owners” and implement “mechanisms to search and display the relations between legal entities and their founders (participants)” as part of its Open Government Partnership (OGP) National Action Plan.[5] Since June 2017, the Ministry of Justice has made beneficial ownership data available as an open data set for bulk download, along with other company data.[6]

In May 2017, the government of Ukraine went one step further by signing a Memorandum of Understanding with Open Ownership and Transparency International Ukraine to become the first country in the world to commit to integrating with the Open Ownership Register.[7] Integration with Open Ownership means that Ukrainian beneficial ownership data will update automatically to the Open Ownership Register, linking this data with other data from around the world and allowing anyone to search for information on Ukrainian companies and their beneficial owners. At the time, the Minister of Justice of Ukraine, Pavlo Petrenko, said: “We set the ambitious goal to ensure transparency and openness of all processes of our country…Creating [a global] register is a true breakthrough in transparency and the fight against corruption in business.”

These important steps put the Ukraine ahead of countries that have not yet turned their commitments to beneficial ownership transparency into action. Continued leadership in this field will require Ukraine to demonstrate that it is diligently working to meet the global “gold standard” on beneficial ownership transparency. As we will discuss in the body of this report, this means making improvements to the quality of their beneficial ownership data, and ensuring compliance with reporting requirements. The ultimate aims of an open beneficial register - the reduction of corruption, and the creation of a better business environment - depend on the use, and thus the usefulness, of the data it holds.

As the first step toward integration with Open Ownership, our team conducted a technical scoping review of the Ukrainian company register and Ukraine’s current beneficial ownership data in order to assess the the usability of the data and provide recommendations for improving it. At Open Ownership we have worked to develop a global standard for collecting and publishing beneficial ownership data alongside dozens of experts from around the world - the Beneficial Ownership Data Standard (BODS). We also have expertise in the domain of company data in general. Members of Open Ownership’s steering group, including Transparency International, Global Witness, the B Team, the ONE Campaign, OpenCorporates, and Open Contracting Partnership, have conducted research on best practice research that serves as the basis for many of our recommendations.

The Open Ownership team’s first technical scoping review was of Ghana’s companies register (as yet unpublished). The observations from this report and others will form the basis for technical assistance packages and implementation guidelines for countries setting up central beneficial ownership registers. More directly, they will inform technical assistance we will provide to the Ukrainian Ministry of Justice as they begin the project of updating their companies register.

The content of this report was reviewed by staff at the Ukraine Ministry of Justice in October 2017 for accuracy. We addressed their comments by email and during a follow-up phone conference. We have indicated in the text where our findings and their comments could not be reconciled. Transparency International Ukraine (an Open Ownership partner) also provided feedback and advice on our findings and recommendations.

Our recommendations do not prescribe processes but set a direction for future conversations. We begin by explaining why publicly available data that gives complete, accurate and up-to-date beneficial ownership information is needed to stem corruption and improve good governance. Then we briefly review the methodology we followed in generating the observations in this report. We follow that by discussing our findings, which we assess and analyse against our knowledge of international best practice and our own expertise. Finally, we outline our key recommendations.

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