The schemes haven't gone away—customs officers continue to create conditions where clients are forced to pay bribes, otherwise they can't work, while simultaneously "helping" those who import goods into Ukraine illegally or semi-legally. And we're not talking about petty extortion by ordinary employees, but rather about massive shady schemes that siphon billions of hryvnias from the state budget.
Last October, our country's current president, to everyone's surprise, including his own, discovered corruption at customs and promised to personally combat it. Less than a year later, Deputy Head of the Security Service of Ukraine (SBU), Yuriy Artyukhov, declared at a meeting of the Verkhovna Rada Committee on Preventing and Combating Corruption that there were no smuggling schemes or systemic corruption at Ukrainian customs, except perhaps a little at the everyday level. Just a couple of weeks later, a real battle for smuggling erupted in Mukachevo, with shootouts, chases, sieges, and, unfortunately, casualties. Thus fiercely did local feudal lords and racketeers divide up the shadow market, the very one Artyukhov had vanquished. And no matter how many times the president subsequently announced the discovery of a record number of Russian troops on the eastern border, public attention, including international attention, remained focused on the events on the western border, which clearly demonstrated the level of lawlessness and impunity in Ukraine.
The schemes haven't gone away—customs officers continue to create conditions where clients are forced to pay bribes, otherwise they can't work, while simultaneously "helping" those who import goods into Ukraine illegally or semi-legally. And we're not talking about petty extortion by ordinary employees, but rather about massive shady schemes that siphon billions of hryvnias from the state budget.
The new head of customs, Konstantin Likarchuk, doesn't strike me as someone capable of slashing at age-old schemes. He's confused about the deadlines for introducing the import tax (which is essential, at a minimum, to track revenue trends). He comes to the press to tell them about the tax's ineffectiveness, but without any figures to back it up. He's convinced that the limits for bringing in personal goods need to be lowered, because, in his opinion, this is precisely the method used by malicious smugglers, who cause enormous losses to the state. He explains that fees are declining because companies are curtailing production, citing as an example the largest tobacco factory in Pryluky, serving all of Eastern Europe, owned by British American Tobacco Ukraine, a longtime leader in tax revenues.
Of course, the JSC office considered this unfortunate misunderstanding nothing more than amusing and continued working as usual. But for everyone else, these and other statements by Mr. Likarchuk demonstrate how, to put it mildly, out of touch he is with the goings-on in the customs and tax spheres (or, at least, how little insight he has into the spheres he oversees). Even when Nasirov and his deputies were appointed, a logical question arose: why would Sergei Bilan, who was in charge of combating smuggling at the SBU, be responsible for the tax police, while customs was given to lawyer Likarchuk? At the time, Nasirov claimed that he was deliberately looking for someone outside the system and with an unblemished reputation. This is a particularly popular tactic of late—to find someone who has little understanding of what's going on and will not interfere with "well-established" processes.
After the Mukachevo incident, Likarchuk complained to the media that the dismissals of officials at the Zakarpattia customs office took place without his involvement. As the head of the department, he disagreed with some decisions, but was powerless to influence the situation. This, in fact, confirms his indirect influence on the process. Of course, after the "Mukachevo showdown," the official assured the press that the contraband did not enter Ukraine through the customs checkpoint and that border guards were solely responsible for its movement. However, he provided no compelling evidence, merely stating that with the arrival of a new head at the Zakarpattia customs office, smuggling had been completely stopped there a month earlier.
While it would be nice to believe it, experts say otherwise. There is no real fight against customs abuses and smuggling, replaced by occasional reports of arrests of rank-and-file customs officers, supposedly indicating a decline in corruption within the agency. Blaming law enforcement agencies for failing to catch bribe-takers is unsustainable. Experts have repeatedly noted that corruption is ingrained in the very mechanisms of customs operations. And instead of endlessly threatening corrupt officials with imprisonment, a single change in the rules of the game is sufficient.
"In order to talk about changes in customs practices, the very principles of their operation must be changed. Indicators of such changes should include changes in internal operating rules (subordination of employees, internal document flow procedures, criteria for employee decision-making, and criteria for assessing their performance). And changes in customs legislation (procedure for goods clearance, the freedom of customs in decision-making, the ability to send goods for additional inspection and the application of sanctions)," Yuriy Fedchyshyn, an expert from the Institute of Social and Economic Research, confirmed to ZN.UA. "Uncertainty for entrepreneurs creates incentives for corruption. Without changing the rules, corruption can only be combated through mobilization and strengthening of customs control, which in our country has not yet yielded results."
Collections are growing
An analysis of import duty revenues confirms this. Comparing hryvnia revenues from January to May shows a colossal increase—UAH 12,5 billion. For comparison, in 2013, customs collected only UAH 4,2 billion for the same period, and even less in 2014—UAH 3,8 billion. A significant role in this was played by the 5-10% import duty introduced in February of this year on all goods except critical imports; revenues from it amounted to almost UAH 7 billion. Of course, comparing this year's revenues with those of previous years, taking the import duty into account is incorrect. However, even after deducting these additional deductions, this year's revenues will total UAH 5,5 billion, significantly exceeding last year's. True, this is only in hryvnia. However, customs duties are settled in foreign currency, and if these amounts are converted into dollars at the average exchange rate prevailing at the time of payment, the picture is fundamentally different. In 2013, at a rate of 8 UAH/USD, customs duties for January-May totaled $532 million. In 2014, at a rate of 12 UAH/USD, they barely reached $322 million—a drop of almost 40% compared to the same period in 2013. In 2015, the situation repeated itself, albeit with a less depressing dynamic. At a rate of 21 UAH/USD, customs duties totaled $264 million. A drop of almost 20% compared to the previous year. This might seem unsurprising, given that both exports and imports have been steadily declining (including due to devaluation), but there are a couple of nuances.
The main reason for the low import figures was a significant decline in domestic consumer and investment demand, as well as the introduction of additional import duties. At the same time, the value of some energy imports, particularly coal and natural gas, increased by 18,3% and 15,7% year-on-year, respectively. While the increase in coal imports was solely due to an increase in physical volumes due to a shortage in the domestic market, the increase in natural gas imports was due to rising prices and volumes. For these and other imported goods, the significant devaluation not only offset the impact of the decline in imports of goods and services in dollar terms but actually led to their growth. According to NBU experts, although physical import volumes decreased by 30% year-on-year, prices for imported goods in dollar terms only decreased by 10%. Meanwhile, budget revenues fell by almost 20%. So, while the heads of customs and the SBU are telling us about their victories, billions of hryvnias intended for the budget continue to end up somewhere. And as the events in Mukachevo confirmed, they're mostly ending up in the pockets of customs officers, police, and the parliamentarians behind it all.
"The only remaining contraband is the one created and carried out by customs officials themselves. Finding and identifying this contraband is very difficult. Customs officials are experts at creating schemes and are always ready to adapt and re-implement them. The recent government squabbles this winter and spring regarding fuel smuggling at ports are a prime example. A tanker carrying 5 tons of fuel would approach Ochakov or Ust-Dunaisk, 300 tons would be cleared at customs, and the rest would be smuggled into the country. And this has happened many times... Smuggling exists in Kherson, where Ihor Kaletnik's protégé still 'rules,' and on the western border, it's 'flourishing and thriving.' We see many offers from local customs brokers, and we see that all the old schemes are actually working. "Because of these schemes, official payments have sharply decreased... And smuggled 'black cash' has increased dramatically," Alexander Zakharov, coordinator of the "No Corruption in Transport" movement, shared with ZN.UA. "Environmentalists and quarantine authorities are actively reinstating corruption schemes. They're even more brazen than customs now."
Extortions are not far behind
As usual, while some protect illegal flows, others, of lower rank, profit from perfectly legal ones. It's these "achievements" that typically make headlines as evidence of the fight against smuggling. As recently as July 3, Mykolaiv customs reported the detention of the tugboat "Jupiter" for smuggling. The situation is as follows. On June 23, the ship's captain declared 11 tons of diesel fuel on board and left Ukrainian waters. During an inspection on June 25, when the vessel returned to Ukraine, the captain declared 98 tons of fuel on board. He honestly stated that the vessel had refilled its fuel reserves in international waters, which, in fact, did not violate any laws. Customs officials didn't count this, and to add drama, they also caught the "Jupiter" smuggling 220 meters of polypropylene rope, which is considered ship equipment and an integral part of the vessel worldwide.
On June 27, Mykolaiv customs officers arrived at the Jupiter and attempted to hand the captain a pre-prepared report for violating customs regulations. While the captain tried to figure out what he was guilty of, the customs officers recorded in the report that the captain refused to sign and hastily departed. On July 3, the customs officers returned to "confiscate the object of the customs violation." As you can imagine, they weren't interested in the rope. They demanded that the captain release fuel, ostensibly for transfer to a customs warehouse. And then a surprise awaited them: the vessel, accused of smuggling diesel fuel, lacked the technical capacity to release fuel; it could be filled, but not drained. While the customs officers "fought smuggling" and sought ways to "squeeze" the diesel fuel from the vessel, the Jupiter remained in port, and its owner suffered losses that ultimately exceeded $30.
This isn't an isolated incident, and most customs officials' schemes are less brazen and absurd—ZN.UA has already described them—but they're also more effective. Today, the only way to cross the border with goods without problems is to use customs brokers, who know who's getting what, and how much—otherwise, there are no guarantees. Everyone involved in exporting and importing has to deal with various forms of extortion, one way or another. Except, of course, those who do so illegally and under the protection of customs officials and the police themselves. By suppressing legitimate businesses, customs ensures budget revenues, while by protecting illegal businesses, it secures its own income, albeit at a cost to the budget.
"Customs shouldn't be involved in filling the budget at all!" Alexander Zakharov is convinced. "Only in procedures and cargo clearance. All the work of calculating payments to 'reconcile discrepancies' at the border shouldn't be done. And penalties for deliberate tax violations need to be toughened. You bring cargo to the US, Georgia, even Moldova, and they let you through without any problem, quickly processing all the necessary documents for legal import. But a year later, they might come and demand you pay a penalty for a deliberate violation committed a year ago... Corruption at the borders is thus completely eliminated! A completely different paradigm for customs work has been established. As the saying goes, a country that collects most of its taxes at the border will always be poor. We need to change the paradigm, not the customs officials. And we need to change it now. But the government doesn't understand this at all."
And when customs officials bitterly talk about reducing imports and abolishing the import duty that reduces shipment volumes, it's clear they're not concerned with the state budget, but with their own pockets. One gets the distinct feeling that it's not the head of the customs agency who needs to be hired "outside the system," but rather all customs employees. The prime minister has voiced similar, if not radical, reform ideas. But now they're largely forgotten. Statistics on hryvnia revenues are pleasing to the eye, and the media periodically report on petty bribe-takers caught red-handed, creating the illusion of a fight. But the "showdown" in Mukachevo has revealed just how out of control the situation really is.
There are officials, members of parliament, and businessmen in this country who fear nothing and no one. Anyone who has followed the situation understands that this story had nothing to do with fighting for truth and justice. Nor was it a conspiracy. Both sides were criminals. Some were trying to squeeze out illegal businesses, while others fought for them to the bitter end. For both, the law is unenforceable in this country, just as it is for the third group, who shamelessly allowed contraband goods to pass through the border. Yes, the senior staff at the Zakarpattia Customs Office have been suspended pending an internal investigation. But these people will almost certainly return to work after a while, if not here, then in another region. Yes, the State Fiscal Service has spoken about consolidating efforts with the Ministry of Internal Affairs, the Security Service of Ukraine, and border guards to stem the flow of contraband. But did the customs service really only learn about these flows after the incident in Mukachevo? And if she tirelessly fights smuggling, surely she doesn’t do it in conjunction with the police and the SBU?
"The easiest way for senior officials to combat customs corruption is to hire an external company like Crown Agents (this initiative has already been discussed) and then follow all of its recommendations. A more complex approach is to change legislation and practices after analyzing the situation internally. But again, without changing the operating rules, it's extremely unlikely that HR policies alone will lead to change. As long as the ability to revalue or reclassify goods, detain them, send them for inspection or examination, or demand or not demand documents remains relatively unfounded, the temptation for corruption remains too great," Yuriy Fedchishin is convinced.
Incidentally, when the guarantor rolled up his sleeves and shook his fist at corrupt customs officials in October, he, among other things, promised to simplify customs clearance procedures for cargo and product registration, introduce an electronic declaration system, and minimize contact between customs officials and those importing goods into Ukraine. Where all these improvements will come from is anyone's guess. And when the new leadership of the State Fiscal Service was appointed on May 5, they were also given a three-month probationary period, two of which have already passed and the third is coming to an end. But there are no visible changes, and it's unlikely that any will occur in the remaining two weeks. It's also unlikely that anyone will actually be held accountable for inaction, extortion, and aiding and abetting smuggling.
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