First Deputy Chief of Ukraine’s State Fiscal Service (SFS) Serhii Bilan: "Unrecovered hard currency proceeds and unpaid taxes on foreign economic operations earnings exceed greatly the taxes collected inside the country"

Author: Tetiana Bodnia

It’s been a year now since the Finance Ministry officials have been discussing closing-down of the tax police and the drive to establish a new body to investigate financial wrongdoing. Meanwhile, the revenue bodies continue being state funded and, in turn, recover damages caused to the state by corrupt practices and tax dodging.

Top taxman’s first deputy told in an interview with Censor.NET how the work of the tax police had changed along with tax-avoidance schemes and what innovations need to be introduced to make the fight against financial crimes more efficient.

 First Deputy Chief of Ukraine’s State Fiscal Service (SFS) Serhii Bilan: Unrecovered hard currency proceeds and unpaid taxes on foreign economic operations earnings exceed greatly the taxes collected inside the country 01


- Why are you still running a non-existent agency given that the tax police have long been winded up? 

- Let me explain what is actually going on and how the masterminds of the corrupt practices and certain officials and lawmakers covering them up are trying to engage in populist manipulations. The bill amending the Tax Code provides for the deletion of the section concerning the tax police only following the adoption of the relevant law on a new body that will investigate financial wrongdoing. While adopting amendments to the Tax Code in late 2016, the MPs made a clerical error by indicating the section correctly, but having lost the numbering of the paragraphs of the section, which does not alter the substance and logic of the legal act. 

Moreover, there are a number of other laws - the Criminal Code, the Criminal Procedure Code, etc. – under which the criminal proceedings into offenses related to tax evasion can be initiated by no other agency except the tax police. 

- And what was the staff’s response to the "error"? Did many agency members left for other law enforcement bodies? 

- Yes, unfortunately, we lost a number of professionals and not only due to this technical error. In most cases, the people left to get better-paid jobs in other law enforcement agencies: NABU, National Police, and Prosecutor’s Office. More than 700 persons, which are about 20 percent of the total tax police personnel, quit in the last year alone. And one can see their point given their salary of 2,500-3,500 hryvnia (about $96-135). As a result of painstaking work, we managed to persuade the Cabinet to take measures which made it possible to increase salaries up to a sustainable level in the last months of 2017 and the human resource pool drain stopped. 

- 20 percent of the personnel resigned, and how many fresh employees were hired last year? 

- 159 persons joined the tax police in 2017. Most of them came within the last 3 months following increase in salaries. However, our agency is still seriously understaffed at all levels. The reason is the old stereotypes that one must allegedly pay a bribe or have good connections to get a job in the tax police and that all of its members are grafters. But the things have actually changed. In fact, people quit because salary is their main source of income while there is a lot of work amidst heavy responsibility. Therefore, they gain experience in our agency, get connections and then get a better-paid jobs. 

The reform is much overdue. We need an agency where the experts will be sought after, will be well-paid, will have a clear career development path and opportunity to investigate major crimes alone. 

- Prime Minister Hroisman and Finance Minister Danyliuk repeatedly named tax police close-down as one of the key prerequisites for the creation of a financial investigation agency. When will this be done? What body will the new agency be subordinate to? 

- We drafted several bills on reforming the tax police and submitted them to the Finance Ministry back in 2015 right after I was appointed to this post. Everyone understands that the tax police was created as part of the economic governance system in order to wheedle the payments out of the taxpayers in line with the handed down plan, to put it in crude terms. All its functions were based upon this principle and this was the way it worked for many years. 

But we must build a competitive free economy which requires reshaping the fiscal authorities. It is clear that at least 40 percent of Ukraine’s economy is in the shadow despite the efforts of the State Fiscal Service, Interior Ministry, and the Security Service. 

To date, there are several bills on the creation of a new agency drafted by the Finance Ministry and the [parliament’s] Committee on Tax and Customs Policy. The SFS has no powers to initiate legislation while the parliament is the one in charge of the laws adoption. In any case, it is necessary to remove overlaps in the government system and reduce the number of monitoring and supervisory authorities. It makes no sense when one and the same alleged offense committed by a company is being investigated by the Economic Security Department of the National Police, then by the Economy Counterintelligence Support Department of the Security Service, and after that by the tax police. 

Frankly speaking, addressing systemic problems is way more critical than the issue of subordination. I am convinced that even a simple reduction in the number of monitoring agencies is essential reform for the Ukrainian business that would stop endless inspections. This is the top priority for the state. And the economy, president, prime minister, the whole government, Interior Ministry, Security Service, State Fiscal Service and tax police would benefit greatly from such a move. 


- Would masked enforcers of supervisory authorities continue raiding enterprises in the meantime? 

- When was the last time you heard about such raids held by the tax police? When did the tax police block the work of a private firm? Could you recall at least some rumors? Does someone tell about such cases in forums? Do businessmen complain to journalists about it at least informally? Regrettably, some other agencies still hold such raids, but the people certainly cannot identify which particular agency’s masked members are raiding their offices. Alas, this stains the image of all government agencies with no exception. 

You know that the law dubbed "maski-shou stop" (stop masked raids – Ed.) providing for mandatory filming of the raids came into force late last year. The tax police have already been doing so for more than a year. We film and minute all the searches that we conduct to avoid conflict situations. This really helps and imposes discipline on both parties. This also allows us to clearly state our case regarding all the conflict situations in the prosecutor's office and courts. 

For example, the tax police were last year accused of exceeding authority during a search at a Cherkasy region-based walnut-processing enterprise. The edited footage that allegedly proved lawlessness of the tax police was demonstrated at a meeting of the relevant committee of the Verkhovna Rada. In turn, we were able to show the lawmakers what had actually happened by demonstrating them uncut video of our employees being stoned, our investigator being hit in the face by a search warrant by the persons who had been often spotted at rent-a-rallies and who had long been on notice with the law enforcement agencies. Therefore, that so-called "controversy" was exhausted while our position was recognized as legal and justified. 

We always substantiate our requests for search warrants and our employees carry out searches authorized by court rulings. 

- How do you work without conducting masked raids after all? 

- The entrepreneurs now willingly make out of court more than a half of tax payments they have previously dodged after the tax police identify such facts and initiate pre-trial investigations into them. That is, we do not punish or ruin the companies operating "in the shadow" thanks to the long lasting anarchy in the country - we give them an opportunity to step out of the shadow. In 2016, 390 cases were referred to the court under plea agreements, and in 2017, there were 408 of them. The state budget received 1.3 billion hryvnia in 2017 thanks to the efforts of the tax police. I’m not talking about some offsets, papers, empty words, but real money that was not foreseen by any plans. 

- Didn’t they previously make payments under plea agreements?" 

- Previously, they waited for the verdict of the court and appealed against it. If these entrepreneurs lost an action, they were still dragging out payments as long as they could making us initiate enforcement proceedings, chase them for a long time trying to establish their whereabouts and force them make these payments by selling the property at auctions. In fact, filing a lawsuit by the tax police prompted extortion of bribe from an entrepreneur, so the longer the trial lasted, the longer the sword of Damocles was hung over a businessman’s head, and the greater number of officials helped to "solve their problems" for a reward. 

When the fact of tax evasion is revealed there are two options: to litigate for three years at three levels of courts or enter into a plea agreement - when a person pleads guilty and transfers money to the budget. The second option is more beneficial for both the taxpayer's reputation and the budget. 

- What new practices need to be introduced in the fight against financial crime in Ukraine and what changes have you managed to make? 

- First of all, we need a close interaction with similar foreign agencies. We must get knowledge at every level which means not just sitting at a desk but working together. We stay in touch with the foreign law enforcement agencies; we learn from their experience; we conduct joint operations. As an example, the recent seizure of a large batch of cigarettes in Odesa together with our British colleagues. 

We closely cooperate with the State Financial Monitoring Committee, the National Bank, and the Securities Commission. Having changed the approaches, we try to rely on analysis. And we start operating in the fields we earlier were unable to since the tax policemen lacked the relevant expertise. It is hard to document crimes if you do not understand its essence. 

We created a separate department for the financial and loan activities in the banking system and staffed it with the brainiest young employees from all over Ukraine and gave them prospects for advancement. They show a very good result. 

Finally, we did our best to make the small business and those taxpayers operating within a legal framework completely forget about our existence. We consider this as the tax police’s contribution to the promotion of a favorable business climate in Ukraine. 

- Can you name the major cracks in taxation, the most widespread tax evasion practices? 

- Unfortunately, unrecovered hard currency proceeds and unpaid taxes on foreign economic operations earnings exceed greatly the taxes collected inside the country. This is why cooperation with our foreign partners is so critical for us. Unfortunately our law enforcers and many tax policemen are too much focused on investigation of corrupt practices within the country. 

Now the main schemes of tax evasion at the level of major financial industrial groups are pursued in the insurance and securities sectors. They also use chains of foreign companies to siphon off their incomes. The analysts who investigate financial wrongdoing should be fluent in English, undergo training abroad, and have a good understanding of offshore legislation. We have never had all of this before and now a powerful industry has been created to evade taxes, to siphon off funds from Ukraine. And the state has almost zero influence on this situation. 

We need the freedom of capital outflow from the country but we must not allow the capital pouring out without being taxed. The schemes are more profitable than the payment of taxes precisely because we do not have the capital outflow freedom. You see, we lose tens of billions every year being withdrawn by the major financial and industrial groups for many years from the country through various schemes without being taxed. This money is not returned as an investment. And of course, many moneymakers are concerned that the tax police have started digging into these schemes. They put politicians on payroll to lobby the agency closedown just to make sure that no one touches them. 

- Is there any chance to create the Financial Investigation Agency or the National Bureau before the elections? Or will our political leaders make empty talks for another two years and it will be the new government and the new parliament that will tackle this issue? 

-If we act quickly, there is a good chance to have a new agency or a financial investigation bureau operational as early as in 2019. It is vital that all political forces put creation of a new agency on agenda in order to achieve this. It should also be clear that quite a long period of time is required after the adoption of the law to appoint the leadership and employees, to address organizational issues, etc. We can witness similar situation with new agencies, namely with the State Bureau of Investigations. That is, we must understand that it can take six months, a year, or even more before the new agency actually start fighting against financial crimes. 

- What the difference between the new agency and the existing ones including the tax police should be? 

- It is necessary to clearly and unequivocally codify its powers, responsibilities, tasks and functions. (…) The new agency must be smart and have "teeth." It must have strong analytical capacity, competent financial experts, who will learn to understand foreign transactions. It must definitely be authorized to conduct search and surveillance operations including covert ones (wiretapping, field surveillance and other tools necessary to document the crime). In order for the new body to gain public trust, our versions of draft laws provide for the Western practices to be used as a basis to have a clear example and logic. 

- That means that enforcers are still needed? 

- We need protective services during pretrial investigation. We don’t need an army type Spetsnaz with armored vehicles, automatic weapons, but small squads providing protection during operations in offices and at enterprises. In those places which we expect to be guarded by armed persons. For example, the offices of companies engaged in money-laundering usually have armed security guards. That is, in specific situations. 

- There are currently two concepts of reform: the first one authored by Finance Minister Oleksandr Danyliuk, the second one – by the Committee on Tax and Customs Policy headed by Nina Yuzhanina. Which one do you like more? 

- The concept proposed by the Finance Ministry is good but it lacks many specifics and mechanisms. Consequently, the concept proposed by the tax committee of the Verkhovna Rada on the creation of the National Bureau for Financial Security is better developed and more sustainable. 

It is clear that both bills still need to be discussed and finalized. Most importantly, the National Bureau should investigate only large-scale tax evasion schemes rather than control minor things and replace the essence of its work by this. The top priority in its work is security of public funds – control over their implementation efficiency.

 First Deputy Chief of Ukraine’s State Fiscal Service (SFS) Serhii Bilan: Unrecovered hard currency proceeds and unpaid taxes on foreign economic operations earnings exceed greatly the taxes collected inside the country 02


- They say that the money spent on the tax police exceeds their budget. What are the figures? 

- Firstly, the tax police is not a self-supporting enterprise, but a law enforcement agency whose task is not to earn money but to fight crime. And our country has not only honest businessmen. There are also dishonest ones, who want to pay no taxes at all. Who will deal with these crimes? Just imagine how much the legal economy will suffer if the illegal businessmen understand that there is no control. 

Secondly, although it is wrong to make such assessments, the tax police bring much more money than spent on their wages. For example, the criminal proceedings initiated in 2017 alone resulted in compensation of damage caused to the budget worth about 500 million hryvnia ($19.1 million). This sum alone exceeds the tax police budget. And here are the figures that are easy to verify. 2.8 billion ($107.16 million) - property and funds seized under criminal proceedings. 2.6 billion ($99.5 million) - amount of VAT that has been suspended under pre-trial investigations. 848 million ($32.4 million) - amount of fictitious VAT that we prevented from being refunded. 520 million ($19.9 million) has been returned to the state budget following the checks in public procurement. 765 million ($29.2 million) has been collected from the beneficiaries of money-laundering centers. 1.7 billion ($65.06 million) has been withdrawn from the illegal circulation of excise goods. 232 million ($8.8 million) has been paid by business entities after the the tax police revealed that the customs value of the goods they declared had been understated. 1.6 billion ($61.2 million) has been compensated under all criminal proceedings. 

These are not virtual sums, but the real result confirmed by the prosecutor's office. The annual performance report is freely available, including on the SFS website. 

- Can you name your personal achievements given that you have mentioned vast shadow economy that you are unable to overcome? 

- The results are really there. Many multi-billion tax evasion schemes no longer exist. Of course, in order to eliminate the scheme the joint efforts of state bodies are required. For example, more than 120 criminal proceedings involving almost 2 billion hryvnia ($76.5 million) in terms of the misuse of the special taxation regime have been initiated over the past two years. This scheme has actually ceased to exist since early last year after the Tax Code was amended. 

Another scheme, which we have managed to deal with, involves the import of fuel under the guise of components for its production (platformate, reformate), which have not been previously included in the list of excisable goods.

In 2016, the scheme ceased to exist after the Tax Code was amended, and the said components became excisable. All of this was done based on our motions and criminal proceedings into certain offenses. 

All these changes, including in the Tax Code, became possible only after we achieved concrete results, instituted criminal proceedings and submitted proposals to the Verkhovna Rada and the Cabinet to suppress certain criminal schemes.

 First Deputy Chief of Ukraine’s State Fiscal Service (SFS) Serhii Bilan: Unrecovered hard currency proceeds and unpaid taxes on foreign economic operations earnings exceed greatly the taxes collected inside the country 03


- The media occasionally report about this or that money-laundering center being closed down. But such firms are still operating despite these efforts. 

- There are no more widely-known undisguised money-laundering centers where the tax police used to push the firms into during Yanukovych tenure. Even if the shell firms involved in money laundering try to work, their turnover is way smaller and they work during a short period. The companies are no longer forced to work with such centers while the increasing number of firms refuses to deal with them choosing to pay their taxes in a fair way. 

Another indicator clear for a common person is the cost of laundering in the shadow market. If it amounted to about 6.5 percent in 2015, now it is 12-14 percent while our agency takes most of the credit for itself. We try to make such transactions as risky as possible. If the cost of such services rises to at least 18 percent, it will be more profitable for the enterprises of the real economy to pay taxes in the legal framework. 

(…) If you look at the real budget revenues, it will become clear that the taxable base is growing along with the tax deductions. And this is actually the ultimate goal of our efforts. We observe monthly increase in declaring and budget revenues. 

- MP Zhurzhyi claims that the cash seized during the raids slips through fingers of the state budget while you are the only one who is aware of what happens to it. How much cash was seized last year? 

- We are very grateful to the lawmakers for their attention to the tax police, including to Andrii Valeriovych [Zhurzhyi] for his concern and active position. Although this is a questionable indicator, but the amount of confiscated funds increases every year. For reference: more than 79 million hryvnia, $8.3 million, 786,000 euros and 1.1 million Russian rubles was seized during the searches last year. I want to note that any actions with these funds from the moment of their seizure are made in line with the existing legislation. 

- What do you do with this money? Why these funds do not end up in the budget? 

- Of cause they do but only after the court ruling. It's not we who decide what to do with the money after we refer the case to the court. For instance, the State Fiscal Service currently has 57 million hryvnia in its deposit pending investigations. 

- Judging by the figures, they were partially returned. How often the legal origin of the money is being proved and they have to be handed back? 

- The courts do make such decisions and abide by them. 

- And who and how should prove it? 

- We are not the ones to be provided with such proves. The evidence of the legitimacy of the money origin and ownership is being provided to the court. It includes sale/purchase contracts, bailment agreements, income statements, and notarized debt receipts, etc. Nor should it be forgotten that there is a presumption of innocence in Ukraine. Thus, until the court establishes the unlawfulness of the property a person does not really have to prove its legal origin. 

In European countries, a citizen is obliged to prove the lawful origin of cash or other values while in our country we need to prove that the origin is unlawful. This is the job of the law enforcement agencies. As long as this system is inconsistent with the European ones, the fight against illegal funds will not be efficient enough. There are always a lot of loopholes. One can always say that the money belongs to a private actor, or it is a gift, or it was borrowed. Once we have a comprehensive expenses and incomes declaration by civil servants, the same declaration must be applied to all citizens without exception. Therefore, if the state finds untaxed money or assets, then they will be immediately recognized as illegal. 

- I remember that the prime minister lambasted tax checks at walnut-exporting companies almost in his first speech. What is going on with this issue now? 

- Nothing has been done to resolve this problem in terms of legislation. This applies not only to walnuts but also fruits, berries, mushrooms. Walnuts are just the most expensive product which is why they are so popular and allow building separate schemes. The first one is dodging taxes when purchasing [this product]. There is insignificant number of officially registered walnut gardens in Ukraine. It is ten times less than the quantity of exported products. Therefore, the circulation of certificates of origin of this product is common among the black marketeers. 

The second scheme is fictitious export of goods aimed at minimizing taxes or refunding VAT. 

The third one is non-return of hard currency proceeds. Here is how it works: a Ukraine-based company concludes a contract with a foreign enterprise to supply products worth a certain, fairly large amount. The payment for the merchandise is to be made following its delivery. And if there are a number of batches, if a 120-day deferred payment codified in law is applied, then the goods are exported and no currency returns to Ukraine. 

- How is it possible? 

- The consignees appeal to the arbitration tribunal and get a certificate on force majeure or come up with something else.

First Deputy Chief of Ukraine’s State Fiscal Service (SFS) Serhii Bilan: Unrecovered hard currency proceeds and unpaid taxes on foreign economic operations earnings exceed greatly the taxes collected inside the country 04

- And there is nothing you can do about it? 

- We can. We take action, but our efforts are not enough without relevant legislation. Thanks to our efforts the return of currency proceeds from such products has doubled last year compared to 2016. 

- What pressing issues of the tax police are you going to address until the Financial Investigation Agency or the National Bureau is created? 

- First of all, I’d like to note that the tax police does not look forward for creation of a new specialized agency. We diligently do our routine work to ensure the country’s financial security. 

We continue carrying out Aktsyz and Rubizh special operations in 2018, taking action to close down money-laundering centers on a daily basis. We have also intensified joint efforts with our foreign partners to shut down schemes allowing withdrawal of the capital without payment of taxes. 

We also place great focus on documenting the facts of payment of wages "under the table." 

And now some word about our priorities. Almost all participants, experts and developers of the concept of the new agency designed for ensuring financial security agree that an analytical component should be the backbone of its work. I can definitely say that today's tax police use precisely this principle in its work. 

I'll give you a concrete example. [Let’s take] insurance companies’ operations. The profits of insurance companies increased by about 30 percent while the amount of taxable income disproportionately increased by 12 percent, which indirectly allows us to talk about the use of corrupt practices. In the European insurance market, up to 70 percent of contributions are made in life insurance. For some reason we have an opposite situation. 67 percent of premiums, which is over 14 billion hryvnia, come from legal entities while the share of reinsurance of individual companies exceeds 60 percent. I think that any sane person should raise suspicions about such a strange statistics. 

Therefore, in 2018, we focus our efforts on financial and credit relations, insurance market, stock exchanges, schemes using "junk" securities. 

A few words about banks. Nonperforming, unsecured or doubtful loans are among the most significant elements of the tax deduction basis. The annual report of the National Bank refers to a significant portion of such loans in financial institution portfolios as the key threat to the banking system. Ukraine has even established a world anti-record in this field. Most of the troubled loans are associated with construction, mining, and chemical industries. Interest on such loans has been unreasonably included into the gross expenses of the income tax payers for many years. A comprehensive solution to this issue is also our priority. 

As a follow-up to the construction topic, the pace of construction in 2017 increased by 1.4 times. A total of 53 billion hryvnia has been spent on it. Along with the increase in construction, we observe anticipated growth in tax evasion, embezzlement of public funds, and fraud. The illegal use and misappropriation of investors' funds by the developers also became increasingly frequent. We do not stay aloof. This year we have launched Stroitel (developer – Ed.) operation. 

When choosing our priorities, aside of the expected economic gain, we necessarily take into account the social aspect of planned measures and their public convenience. In particular, when planning measures in the pharmaceutical industry, we took into account that the drugs price growth rate overpassed all other goods, including basic necessities. The cost of imported medicines in pharmacies increased by more than 70 percent last year alone. But the corresponding increase in tax payments has never happened for some reason. Given the market capacity (about 90 billion hryvnia), the estimated damage to the budget caused by non-payment of taxes is up to 3 billion hryvnia. (…) Therefore, the current situation in the pharmaceutical market is a subject for close attention. 

The National Coordinating Center for Cyber Security was tasked with creating a work group to address the issue of the crypto currency and the process of its operation in Ukraine. This is also one of our priorities. 

Tetiana Bodnia, Censor.NET

Follow the link to read the full interview in Ukrainian.

Источник: https://censor.net.ua/en/r3054494