Tackling Tax Crimes: Why Ukraine Should Create a Whistleblower Protection Program Targeting Tax Fraud and Evasion Commentary
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Tackling Tax Crimes: Why Ukraine Should Create a Whistleblower Protection Program Targeting Tax Fraud and Evasion

On October 2, 2023, Ukraine’s High Anti-Corruption Court granted a $360,000 reward to a whistleblower in a corruption case involving an attempted $6 million bribe—the biggest reported bribe attempt in Ukraine’s history. This reward marks the first payment to a whistleblower under the Law of Ukraine on the Prevention of Corruption, a major piece of anti-corruption legislation passed in 2020, which created the country’s first whistleblower protection program.

This remarkable milestone highlights the powerful role whistleblowers can play in rooting out corruption. However, under current law, the only whistleblowers who enjoy protection are those reporting corruption. The Ukrainian government should expand whistleblower protections to address other pressing societal issues such as tax fraud and evasion. Doing so will bolster Ukraine’s revenue collection, strengthen the rule of law, improve the functioning of its markets, assist its efforts to revitalize the agency charged with investigating economic crimes, and even arguably work in the country’s national security interest. Finally, as the country gears itself up for accession to the EU, it will have to expand such protections anyway, at least in the domain of corporate taxation.

Tax Fraud and Evasion in Ukraine

Tax fraud and evasion are serious problems in Ukraine. In 2017 alone, the State Tax Service of Ukraine completed around 2,000 criminal cases, resulting in UAH 700 million ($26.32 million at 2017 exchange rate) of damages paid out to the state.

Yet a 2018 study analyzing the efficiency of the government’s collection of taxes found “low efficiency” for most of the analyzed payments, highlighting customs duties as being “most widely used in schemes of shadow income and tax evasion.” This suggests that $26.32 million does not even approximate the true scale of lost revenue.

Indeed, in just the domain of export taxes, studies by the Tax Justice Network released in 2018 and 2019 have estimated that underpricing schemes by Ukrainian corporations cost the national budget around $600 million a year in lost tax revenue. Due to a lack of transparency in the export industry it is unclear how much of this lost revenue is the result of illegal underpricing schemes versus inadequate export-pricing rules, but even a fraction of the total would represent a significant loss of revenue.

The deleterious effects of tax evasion and fraud are manifold. Most obviously, these crimes reduce government revenues, thereby degrading the fiscal health of the nation and its ability to address societal problems (or, in Ukraine’s case, fight an existential war). But on a deeper level, widespread tax fraud and evasion frays the social contract of the polity and hampers competitive market forces by unfairly burdening those following the rules.

Combating tax crimes should thus be a core focus for Ukraine as it seeks to reinforce and further develop well-functioning administrative capabilities for its democratic society.

Ukraine’s Existing Anticorruption Whistleblower Program

A whistleblower is someone who informs on a person or entity engaged in wrongdoing. Presently, the sole Ukrainian law providing protection for whistleblowers is the 2020 Law of Ukraine on the Prevention of Corruption. Under this program, whistleblowers who report evidence of corruption are entitled to receive up to 10% of either any eventual judgment or of the assessed value of the damage to the state so long as the value of the corrupt transaction or damage to the state is above a certain size. In addition, the law provides whistleblowers with a bevy of legal rights and protections designed to support them through the whistleblowing process and shield them from employer retaliation and liability for the disclosure of private information. Taken together, these provisions make individuals privy to information about corrupt practices with the incentive to report this information and assurances that doing so will not jeopardize their career or safety.

Modeled on international best practices, the whistleblower program has enjoyed some modest success. As of September 2022, Vira Mykhaylenko, judge of the High Anti-Corruption Court, reported that there had been around 200 verdicts in Ukrainian corruption cases referencing the impact of whistleblowers on the case. This success is unsurprising as whistleblower programs have long been recognized as a highly efficient mechanism for rooting out corruption, fraud, and wrongdoing. Indeed, a 2007 study of over 5,400 companies across 40 countries by PricewaterhouseCoopers found that while law enforcement officials and corporate controls were collectively responsible for detecting 37% of fraudulent activity at private corporations, whistleblowers detected and exposed 43%.

With its first whistleblower program beginning to bear fruit, the Verkhovna Rada should capitalize on this success by creating an additional program focused on the reporting of tax fraud and evasion by corporations and individuals.

A Whistleblower Program Will Help Revitalize the Economic Security Bureau of Ukraine

The track record of the agencies responsible for enforcing the tax laws in the country has been poor, and much attention has justifiably been paid to the contribution of corruption to this poor performance. In recognition of the need to revamp this system, the government centralized authority over economic crimes in 2021 by creating the Economic Security Bureau of Ukraine (ESBU), which today is the primary agency responsible for investigating economic crimes not linked to corruption.

Since its launch in 2021, however, the ESBU has struggled. Between 2020 and 2022, the number of cases of economic crimes being investigated decreased from 5,400 to 3,400. This lackluster performance led the Ukrainian Parliament to fire the head of the Bureau in April and launch an effort to revitalize the agency.

There is little public information regarding the precise reason for this decrease in cases. The ESBU has blamed a lack of adequate staffing—the agency was only 18% staffed as of April—while an investigation by the Ukrainian Parliament gestured toward a hiring process ridden with favoritism that resulted in the hiring of many of the same problematic officials present in the prior enforcement system.

The creation of a whistleblower program covering tax crimes would help to improve the ESBU’s capacity by addressing both of these issues. First, by incentivizing insiders to assist in uncovering fraudulent tax schemes within the private sector, the program will improve the detection of such crimes and free up government resources to focus on investigations and prosecutions.

Second, such a program could help to lessen the effect of any lingering corruption on the bureau’s enforcement of the tax code. While in the present system bureau officials can be encouraged to refrain from investigating certain companies and individuals in the absence of any evidence of fraud, the provision of direct evidence by insiders would likely assert a gravitational pull toward an investigation.

More broadly, implementing such a program would likely provide a strong deterrence effect against tax fraud and evasion, thereby helping to generate a deeper cultural respect for the rule of law within the private sector and Ukrainian society more broadly. A business environment in which malfeasors have to be concerned that any employee could reveal evidence of their wrongdoing is likely to deter more fraud and evasion schemes than the current status quo, in which they only have to worry about official investigations by the fledgling ESBU.

Ukraine Will Have to Create a Program for Corporate Tax Fraud to Join the EU

While these benefits are normatively desirable in and of themselves, strengthening the rule of law in this domain will also benefit the country by easing its ascension into the European Union.

At the level of principles, accession into the EU requires an applicant state to adhere to the Copenhagen Criteria, a list of general requirements which include that the “candidate country has achieved stability of institutions guaranteeing democracy, the rule of law…the existence of a well functioning market economy as well as the capacity to cope with competitive pressures and market forces within the Union.” As discussed above, strengthening Ukraine’s tax collection system through the creation of a whistleblower program could improve the country’s compliance with all of these factors.

More specifically, Ukraine will likely be required to implement a whistleblower program for reports of corporate tax fraud and evasion as part of its efforts to join the EU.

In 2019, the EU issued Directive 2019/1937 on the Protection of Persons Who Report Breaches of Union Law, which outlined a complex set of rules and procedures designed to protect whistleblowers reporting “breaches of EU laws in key policy areas.” Breaches of national corporate tax law are included in Article 2(1)(c) of this directive.

EU directives are legal acts adopted by the Union which require member states to implement national laws to achieve a stated aim. Member states are given some flexibility to craft this national legislation within the framework provided by the directive. Thus, as part of its ascension into the EU, Ukraine will likely be required to implement a whistleblower program within the domain of corporate tax. Given the benefits detailed above, the government should not limit this program to the corporate sphere but rather include the provision of information about individual tax crimes as well.

The National Security Benefit

Some might argue that the exigencies of the war mean that now isn’t the right time to create a new program targeting tax crimes. But such arguments misunderstand the import of this issue. In fact, improving Ukraine’s tax system is arguably in its national security interest.

As the costs of supporting Ukraine continue, populists in some western countries have questioned the wisdom of sending money to support Ukraine’s fight against Russia. Some of these questions have centered around concerns about sending money to fund what is viewed as a corrupt and inefficient system. While the creation of a whistleblower program targeting corruption has yielded benefits in President Volodymyr Zelenskyy’s campaign against corruption, the government should expand the scope of these programs to targeting fraud in the private sector as part of its efforts to transform the country.

Doing so will help to strengthen the Ukrainian state, economy, and polity, aid in its effort to join the EU, and help to maintain the flow of funds for the war against Russia. At a moment when every dollar in state revenue and foreign aid contributes to Ukraine’s struggle against Russian tyranny, the stakes are too high for Ukraine to delay in addressing tax crimes.

Jack Hipkins is an American lawyer who previously volunteered as an International Legal Fellow at the office of the Ukrainian Parliament Commissioner for Human Rights. All views expressed are his own and do not represent the opinion of the office.

Opinions expressed in JURIST Commentary are the sole responsibility of the author and do not necessarily reflect the views of JURIST's editors, staff, donors or the University of Pittsburgh.