Improving beneficial ownership transparency in Ukraine: Review and recommendations

Use cases for beneficial ownership data

Before setting out our findings, we feel it is necessary to clarify in detail the various uses for beneficial ownership data, tailored as much as possible to the Ukrainian context. These use cases are informed by those we developed as the basis for the Beneficial Ownership Data Standard.[13] The below does not claim to be a comprehensive survey of all use cases, but can certainly be used as groundwork for further investigation of use cases unique to the Ukrainian context.

Public sector users

Public sector users may include law enforcement or tax authorities such as:

• The National Anti-Corruption Bureau of Ukraine (NABU), a law enforcement body established in 2014 specialising in investigating and solving corruption-related offences committed by high officials authorised to perform functions of the state or local governments;
• The Specialised Anti-Corruption Prosecutor’s Office (SAPO), an independent subdivision of the Prosecutor General’s Office of Ukraine, which assists NABU in investigations, by supervising compliance with the law during operational and search activities of pre-trial investigations;
• The National Agency for Prevention of Corruption (NAPC), a central executive body with a special status ensuring development and implementation of the state anti-corruption policy. The NAPC develops projects in line with Ukraine’s anti-corruption strategy and state program and verifies declarations of state officials regarding their income and business affiliations;
• The State Financial Monitoring Service of Ukraine, a central executive body which implements the state anti-money laundering and countering financing of terrorism policy;
• The National Agency for the Tracing of Assets Derived from Corruption and Other Crimes, a central executive body ensuring development and implementation of the state policy in tracing assets that can be seized during criminal proceedings and/or managing assets that were seized or confiscated in the criminal proceeding;
• The State Bureau of Investigations (SBI), a central executive body carrying out law enforcement activities aiming at preventing, identifying, stopping, solving and investigating crimes committed by officials of NABU and SAPO;
• The State Fiscal Service of Ukraine, subordinated to the Ministry of Finance, which collects taxes and helps fight against tax and customs crimes.

All of these agencies could use structured, high quality beneficial ownership data by combining it with their existing datasets (suspicious activity reports, land registries, etc.), or performing individual searches on a database, to find reinforcing pieces of information or unseen connections.

Another key user group is public contracting bodies. Ukraine is a trailblazer on open contracting as well, having in recent years launched ProZorro, a public e-procurement system that allows the public to see the deals that are being made. The project was the result of a collaboration between the Ukrainian government, the country’s business sector, and its civil society, including Transparency International Ukraine and other local NGOs. ProZorro already collects some beneficial ownership data in order to shine a light on who stands behind the entities who win contracts with the government, but indicated in discussions with us that it would benefit greatly from reliable access to high quality data. This would not only allow the general public to assess whether a deal is fair, but would also allow those in the private sector to research markets, and size up the competition.

Licensing bodies such as the State Service of Geology and Mineral Resources, and the Ministry of Energy and Coal of Ukraine may already be collecting some ownership information as part of the licensing process, but they will also benefit from access to higher quality data. In particular, access to historical data about companies will allow such agencies to find out information on whether company owners have been involved in successful projects, or mismanaged, corrupt dealings. This will allow the licensing regime to become more transparent by giving the government full transparency over the background of company owners, avoiding the type of scandal that has affected Ukraine in the past.

For example, a 2012 shale gas contract was controversially awarded to a joint venture, 10 percent of which was owned by a previously unknown Ukrainian company which possessed unclear beneficial ownership, leading to allegations that it was a possible front for Ukrainian government officials.[14] The company’s shares were officially owned by three geologists, but questions were raised as to why they were allowed a share in the company (worth potentially hundreds of millions of dollars if the project was successful) and not simply paid a salary as employees.[15]

By implementing a public beneficial ownership register in addition to other innovations in contracting transparency, the new Ukrainian authorities may escape the legacy of opaque contracting and ensure that lucrative government contracts are given to the companies that are best suited for the job at hand.

Private sector users

Investors, compliance officers in the private sector, and third party agencies that have been hired to do due diligence on a Ukrainian company all require access to beneficial ownership data to ensure they are not exposing themselves to financial and reputational risk, sanctions under the US Foreign Corrupt Practices Act (FCPA) and UK Bribery Act, sanctions breaches, or other types of risk.

Certain private sector users, such as credit reference agencies, benefit in particular from having beneficial ownership data that can be downloaded in bulk and combined with their existing datasets. A cost-benefit analysis conducted in the UK calculated that this functionality would bring over £50 million back into the economy, mostly due to reduced rates of fraud and other types of financial misconduct.[16] Other private sector users, such as banks, may use the information in the Ukrainian register to compare against and verify data they have received bilaterally as part of their due diligence processes. A discrepancy between the two data sets could automatically trigger further scrutiny.

Civil society users

Civil society and investigative journalism played a key role in Ukraine’s revolutions of 2004 and 2014, with researchers attempting to uncover the beneficial owners hidden behind layers of corporate entities in companies that received government concessions and contracts. For example, after President Yanukovych fed his luxury compound Mezhihyria in February 2014, volunteer divers found nearly 200 folders of documents dumped in a lake at the residence by members of the former regime who were looking to destroy evidence of financial misdealings, including the laundering of state assets and other financial crimes. The recovered documents were painstakingly dried, copied, analysed and uploaded to a dedicated website in order to cast light on the crimes of the previous regime.[17]

Documents recovered included important records on real estate transactions related to former President Yanukovych, and information on companies registered offshore which later were accused of trading in oil products using a tax evasion scheme that cost Ukraine’s government an estimated US$1 billion in lost revenues.[18] Both of these case studies involved the use of anonymous companies, highlighting how these structures are the “getaway cars” for the criminal and corrupt.[19]

Ukraine’s adoption of a public beneficial ownership register will allow investigators and journalists to use beneficial ownership data to conduct investigations into individual companies, or use data analysis to uncover patterns or trends. The result is often a complementary relationship between civil society and law enforcement, wherein civil society (including journalists) conducts preliminary investigations, prompting law enforcement to open criminal cases.

Ukraine also recently required public asset disclosures on the part of politicians. The clause – related to ‘politically exposed people’ – requires anyone who has held a senior government post (including ministers and deputy ministers, heads and deputies of central executive bodies, Members of Parliament of Ukraine, heads and judges of the Constitutional and Supreme Courts) to declare any business they have been involved in within the last three years. Beneficial ownership is a critical dataset for civil society investigators seeking to confirm the accuracy of these disclosures.

It is worth reviewing the unique policy outcomes each of these user groups brings. If it is easy for law enforcement to use the data, and if they trust it, this will lead to greater asset recovery and a deterrent effect for using company structures to facilitate criminal activity in Ukraine. Greater transparency in public contracting means a level playing field for corporates and ensuring good value for money in licensing and public services. If corporates can easily use the data, this creates a more stable market in Ukraine, as well as attracting greater foreign direct investment when investors know where their money is going. When criminality does occur, civil society can assist law enforcement in identifying leads, thus deterring would-be criminals, both in Ukraine and abroad. Overall, as we have stated above, more users means higher quality data, which reinforces these benefits and strengthens them over time.

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