Government of Ukraine Report on Diagnostic Studyof Governance Issues Pertaining to Corruption,
the Business Climate and the Effectiveness of the Judiciary
Prepared with the Assistance of the Legal Department of the International
Monetary Fund

July 11, 2014

1
Contents

Page

I. Background .............................................................................................................................2
A. General Observations ................................................................................................3
II. Corruption .............................................................................................................................5
A. Overview of Existing Literature ...............................................................................5
B. Reform Proposals in the Literature ...........................................................................6
C. Discussions During the Diagnostic Study .................................................................9
D. Conclusions on Corruption .....................................................................................14
III. Business Climate ................................................................................................................18
A. Overview of Existing Literature .............................................................................18
B. Reform Proposals in the Literature .........................................................................21
C. Discussions During the Diagnostic Study ...............................................................22
D. Conclusions on Business Climate ...........................................................................28
IV. Effectiveness of the Judiciary ............................................................................................31
A. Overview of Existing Literature .............................................................................31
B. Discussions During the Diagnostic Study ...............................................................33
C. Conclusions on the Judiciary and Post-Court Enforcement ....................................42
V. Overall Conclusion .............................................................................................................45
Annexes....................................................................................................................................47
A. List of Government Agencies Participating in the Diagnostic Study and Other
Entities Consulted ........................................................................................................47
B. List of References....................................................................................................49

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I. BACKGROUND
1.
Under Ukraine’s Stand-By Arrangement (SBA) with the International
Monetary Fund (IMF), improving governance and transparency is one of the key
objectives of the program along with restoring macroeconomic stability and laying
the foundation for robust and balanced growth. (See Ukraine’s Letter of Intent (LOI)
addressed to the Managing Director of the IMF, dated April 22, 2014, at paragraph 2).
Under Ukraine’s Memorandum of Economic and Financial Policies (MEFP) that is
attached to the LOI, Ukraine committed to a comprehensive diagnostic study on certain
governance issues to be completed in close consultation with IMF staff by July 15, 2014(see paragraphs 24-25). The completion of the diagnostic study by the government of
Ukraine is a structural benchmark under the program, whose implementation will be
discussed by the IMF Executive Board as part of the First Review of the SBA. The
government committed to following up on recommendations of the study. IMF staff
assisting with the study visited Kiev from May 28 to June 11 and from June 24 to July
4.1
2.
Consistent with the objectives of the SBA for Ukraine, the diagnostic study
focused on three key governance areas:Corruption, especially high-level corruption—including corruption associatedwith public procurement, tax evasion and money laundering—that can have asignificant negative macroeconomic impact;Assessing the impact on the business climate arising from the general design andimplementation of the legislative and regulatory regime governing economic
activity in Ukraine; andThe effectiveness of the judiciary, in particular with respect to resolving
commercial disputes. The concern is that if commercial disputes are not resolvedin a consistent, timely, and transparent manner, this can result in a serious dragon economic activity and innovation.

3.
In order to assess the pertinent areas of focus, the study encompassed
discussions with a wide variety of stakeholders. Meetings were held with government
ministers and agencies, the National Bank of Ukraine, judges and court administrators, aselection of parliamentary deputies, and representatives of civil society and the businesssector. The study was coordinated by the Ministry of Finance and the National Bank of
1

The Legal Department of the IMF was responsible for providing the assistance. IMF staff assisting in the study
included Ceda Ogada, Kyung Kwak, Emmanuel Mathias, Sebastiaan Pompe, Natalia Stetsenko and Jonathan
Pampolina, all of the IMF Legal Department. Jerome Vacher, the IMF Resident Representative in Ukraine, and his
office also provided valuable assistance.

3
Ukraine. Other key agencies participating in the study were the Ministry of Justice, theFiscal Revenue Administration, the Financial Intelligence Unit, the Anti-Corruption
Commissioner, and the working group on corruption of the Presidential administration(corruption issues); the Ministry of Economy (business climate issues); and the Supreme
Court, the High Council of Justice, the State Judicial Administration and the State
Enforcement Service (judiciary issues). The Ministry of the Cabinet of Ministers also
participated. Discussions were also held to hear the views of international organizations
and bilateral agencies involved in providing assistance to Ukraine in the areas of focus.
(See Annex A) This report sets forth the study’s main findings and conclusions.
A. General Observations
4.
Throughout the study, it became clear that there is widespread agreement inUkraine that corruption is pervasive and oppressive, that the business climate isseverely hampered by an over-bearing and opaque regulatory framework, and thatthe judiciary is ineffective in resolving commercial disputes in a consistent, timely
and transparent manner. Several over-arching causes for this state of affairs wereadvanced by stakeholders. With respect to the executive branch of government, thefollowing were highlighted as problematic:

A bloated, inefficient and politically-controlled public service sector,
characterized by lack of transparency in its processes and decisions, low pay, an
insufficient skills base and duplication of responsibilities among agencies;

The lack of a proper general administrative procedure to guide the relationshipbetween citizens and the state with regard to public rights and benefits; andOver-regulation of business activities.

With regard to the legislative branch, stakeholders stated that some members of
Parliament also contributed in a major way to the governance issues under study
because:

The financing of political parties and the nominations of candidates to
Parliament by the various parties are fraught with corruption;

Laws are passed that are narrowly tailored to advance specific personal or
business agendas rather than the public good. In so doing, laws are also
repeatedly amended—even after just having been passed—thus contributing tolack of legal certainty;Parliamentarians interfere in the appointments of judges in ways that undermine
judicial independence;

4

The problems stemming from Parliament are driven in part by the immunity ofparliamentarians from criminal investigations; andSome interlocutors summarized Parliament’s role as engaging in “legalizing
corruption”.

With regard to the judiciary, the key problems causing its ineffectiveness were noted aslack of judicial independence, pervasive corruption, and a complex and unwieldy
judicial structure and court process. While the problems affect the judiciary in all
domains, commercial disputes are said to be particularly affected.
5.
A recurring phrase used to summarize the overall situation was “state
capture” by blocks of powerful political and economic elites that are pyramidal instructure and entrenched throughout public institutions and the economy. Thesepyramids have typically taken the form of powerful well-known elites at the top, headsof agencies in the middle and agency staff at the base. They are perceived to control
appointments in the public sector, to ensure the application of regulations in a mannerthat entrenches their oligopolistic control of the economy and keeps a tight lid on publicaccess to information. These elite power structures are viewed as predatory, with an
overarching objective of self-enrichment, and purposely pervert the constitution and thelegislative and regulatory framework as well as institutions to that end. The pervasive
mid- and low-level institutional corruption is viewed as a product of that predatory
structure, and many observers believe that it cannot be tackled without first addressing
the predatory structures. The tax administration, the police, the Prosecutor General’s
Office, the State Enforcement Service, and the judiciary were noted as having
traditionally been viewed as among the most corrupt public institutions. Officials inthese powerful agencies are believed to have formed corrupt networks that abuse theirformidable powers over investigation, prosecution and conviction to intimidate, obtain
bribes, raid and harass corporate and business interests for the benefit of the powerfulpolitical and economic blocks referred to above.
6.
At the same time, there is a keen appetite and energy for reform in Ukraine
to address the issues of corruption, the unfavorable business climate, and an
ineffective judiciary. In this regard, the study found a strong belief that there is a real
window of opportunity for change in Ukraine following the recent politicaldevelopments. Stakeholders in the civil and business community recognized that, under
the new government, some reforms have begun to take place and others are in various
stages of consideration and planning. It is also apparent that there is close scrutiny ofpublic officials from the public at large, civil society and the business sector, who
believe this is the time for sustained pressure for reform. Furthermore, there is increased
demand for public consultation in the legislative and regulatory process. Other
international organizations and bilateral partners of Ukraine are also increasing their
engagement in the country, emphasizing that they want to take advantage of the window
for reform. Nonetheless, it is acknowledged that the necessary reforms have just started
and very much more remains to be done. Some of the suggestions for reform are very
far-reaching. For example, many interlocutors called for a comprehensive restructuring

5of the public sector to re-distribute in a more efficient and effective manner thecompetencies of government among the three branches of government. Others called fora massive retrenching of the public sector followed by substantial salary increases,
benefits and training for the remaining complement. Many called for reform of politicalparty financing, the nominations and distribution process for parliamentary seats, and an
overhaul of procedure for initiating and adopting legislation. Others favored dismissal of
all judges and recruiting an entirely new set through an elective process.
7.
The challenges to the current momentum for reform are sobering and wellrecognized. They include a public impatient for reform; an uncertain politicalenvironment in which the make-up of parliament and perhaps of the government may
change following possible early parliamentary elections; conflicting views on the way
forward within the civil society reform movement on some issues; obstructionism frompowerful vested interests; need for more structure within the government to drive andcoordinate the reform effort; and the pressure caused by events in eastern Ukraine. In
particular, it was constantly emphasized in discussions that, without sustained political
will at the highest levels of government and politics, progress will be very difficult. Civil
society and business sector representatives also stressed the importance of adequate
coordination among international organizations and Ukraine’s bilateral partners if thereform program is not to be over-burdened by being pulled into several directions. In
this regard, some interlocutors stressed that assistance from international organizations
and bilateral partners had sometimes been perceived as simply engaged in “ticking theboxes” as opposed to facilitating deep, well-thought out, systematic and ultimately
sustainable and effective reforms.
8.
For each of the three areas of the study’s focus, the main findings andconclusions are set forth in the subsequent sections. As already mentioned above, thecauses of the governance challenges are viewed as wide-ranging. As such, tackling theidentified issues will require a similarly broad range of strategies. While the government
is keen on using Ukraine’s IMF-supported program as a vehicle for addressing many ofthese issues, it also recognizes that some of the proposed solutions heard during thestudy cannot be addressed under an IMF-supported program. For example, the IMF, as a
specialized technical agency dealing with economic matters has no mandate to engage inpolitical matters such as the proper relationship between citizens and the state, theappropriate distribution of competencies among the branches of government, politicalparty reform or the apportionment of seats in parliament. It must thus be emphasizedthat the potential areas that may be discussed by the government and the IMF staff forpossible inclusion under Ukraine’s IMF-supported program are focused on measuresthat are judged to have a direct economic impact.
II. CORRUPTION
A. Overview of Existing Literature9.
As part of the diagnostic study, a wide range of already existing reports on
corruption in Ukraine prepared by the business community, civil society groups,

6international organizations and bilateral partners of Ukraine was reviewed. The
literature points to a general consensus that corruption is pervasive and entrenched in
Ukraine. In particular, Ukraine is perceived as one of the most corrupt countries, ranking
144 out of 177 countries in the Transparency International index in 2013.2 Collusive ties
between political and economic elites are seen as contributing to and facilitating
corruption in all spheres of public life—from huge procurement contracts, to tax
collection, to licenses and permits for small and medium-sized enterprises (SME). The
political elites are said to have rapaciously used the state to enhance their wealth,especially during the period of mass privatization of state-owned enterprises, while theeconomic elites are seen as having used their wealth to enhance their political power.3 In
this regard, the merger of political and business interests has led to the emergence ofmajor financial and industrial structures in which political and economic elites
apparently used their wealth and their influence over the government to fortify theircontrol in pyramid-like structures throughout the public service and the economy.4
Under this widespread view, personal material interests of these political and economic
elites have become a major determinant of public policies (amounting to “state
capture”).5 This economic situation hinders fair competition, encourages under-the-tabledeals, and promotes corruption.6 There is little public confidence in either current
preventive or enforcement measures regarding corruption. On the occasions where
enforcement takes place, such enforcement is viewed as aimed at lower-level state
employees or used for retribution in political vendettas.7 Proceeds of corruption are notproperly detected, investigated, prosecuted or recovered.
B. Reform Proposals in the Literature
10.
The literature recognizes that a number of anti-corruption initiatives havebeen developed, including over the recent months, by the authorities and civilsociety. The government announced a new general anti-corruption strategy which had
been called for by the civil society and in particular non-governmental organizations(NGO), experts and journalists that developed the “reanimation package of reforms”.8
2

Transparency International, Corruption Perceptions Index: Ukraine, 2013.

3
See generally TORO Creative Union - Transparency International National Contact in Ukraine, National Integrity
System Assessment: Ukraine, 2011.
4

See generally World Bank, Ukraine - Building Foundations for Sustainable Growth: A Country Economic
Memorandum, 2004.
5

See generally USAID, Anti-Corruption Assessment Handbook: Final Report, February 28, 2009.

6

See generally World Bank, Ukraine—Building Foundations for Sustainable Growth.

7

US Department of State, Investment Climate Statement, February 2013.

8

Reanimation Package of Reforms, Newsletter No. 1, May 2014.

7This group proposed a set of measures to fight against corruption along five priorities:(i) strengthening the integrity and accountability of the public sector; (ii) ensuringtransparency of political party finances; (iii) guaranteeing access to publicly-important
information; (iv) reducing corruption risks in the public procurement process; and (v)increasing capacity for detection and criminal prosecution of acts of corruption. NGOs
involved in anti-corruption efforts, including in relation to the reanimation package ofreforms include Transparency International Ukraine, the Anti-Corruption Action Center,
the Center for Political and Legal Reforms, and the Association of Ukrainian Monitors
on Law Enforcement.
11.
Several international organizations and bilateral agencies have long been
involved in institutional reforms to reduce corruption in Ukraine. Institutional
reforms and reduction of endemic corruption are one of the key priorities of theEuropean Bank for Reconstruction and Development (EBRD) in Ukraine, covering thestrengthening of non-state institutions and advocacy for fair treatment of businesses,
including through the establishment of an independent Business Ombudsperson.9 The
European Commission has been recommending further improvements to Ukraine’s anticorruption legislation, including the strengthening of mechanisms for independent
oversight on asset disclosure and the reform of rules on the immunity of members ofparliament from criminal proceedings.10 The Organization for Economic Cooperation
and Development (OECD) is mostly involved through the Istanbul action plan. While
this action plan is a voluntary process and reports are only published with theauthorities’ consent, it offers a comprehensive source of information on progress made.
Progress is being encouraged particularly with regard to anti-corruption bodies, politicalparty finances, procurement and the judiciary.11 The Council of Europe Anti-Corruption
Group (GRECO) recommended further developments to the composition of Ukraine’s
National Anti-Corruption Committee created in 2010 to analyze the corruption situationin Ukraine, to develop strategies against this phenomenon and to monitor theirimplementation. It underscored the importance of its independence, which should bebroad-based and representative of society.12 The Council of Europe Anti-Money

9

EBRD, Transition Report: Stuck In Transition – Ukraine Country Assessment, 2013.

10
European Commission, Implementation of the European Neighbourhood Policy in Ukraine, Progress in 2013 andRecommendations for Action, March 27, 2014, p. 8.
11OECD, Istanbul Anti-Corruption Action Plan for Ukraine: Second Monitoring Round (Progress Update), April
2014.
12

GRECO, Joint First and Second Evaluation Round: Compliance Report on Ukraine (4th Addendum), March 28,
2014, pp. 3-4. It should be noted that the National Anti-corruption Committee only met once during the last three
years.

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Laundering Group (MONEYVAL) has also recommended various improvements in the
AML/CFT regime.13
12.
As a part of the anti-corruption efforts, the World Bank has included
conditionality on assets disclosure in the context of its development policy loans(DPL).14 While assets disclosure has been required since 1993, enforcement andverification have not been taking place, and the World Bank’s recent DPL1 included aprior action for the submission to Parliament of “legislation to establish centralized
external verification of financial disclosures by elected and senior public officials anddisciplinary and administrative accountability for those who fail to comply withfinancial disclosure requirements or misrepresent financial information”. The authorities
went further and Parliament has already enacted amendments to the anti-corruption law
delegating the verification to the tax authority and including administrative sanctions for
failure to properly comply with disclosure requirements. As a trigger for DPL2, theauthorities are required to “enact legislation to establish centralized external verificationof financial disclosures by elected and senior public officials and disciplinary andadministrative accountability for those who fail to comply with financial disclosure
requirements or misrepresent financial information and establish an independent anticorruption preventive agency responsible for the verification of asset declarations”. The
World Bank contemplates that 100 percent of the financial disclosures for elected andsenior public officials would be subject to external verification by 2015.
13.
A wide range of anti-corruption conditionality has also been included inrecent EU initiatives. The EU State Building Contract (SBC) financing conditions
require that by the second quarter of 2015, there will be: (i) a fully operational law
enforcement anti-corruption agency targeted at high level officials; (ii) alignment of thecriminal code with GRECO and OECD standards; (iii) alignment of the criminalizationof illicit enrichment with UNCAC; (iv) entry into force of a law on reform of theProsecutor’s General’s Office; (v) entry into force of constitutional amendments on the
independence of judges; (vi) entry into force of a reform of the High Council of Justice,
the justice system and the status of judges; (vii) implementation of an effective systemfor verification of declarations of assets, income and expenses of public officials; (viii)
reformed system of prevention and resolution of conflict of interests of civil servants;(ix) implementation of an access to public information law; (x) civil service andadministrative procedure reforms; and (xi) access to public registers, including
beneficial owners of companies and immovable properties.15 The EU-Ukraine Visa
13
MONEYVAL, Mutual Evaluation Report: Ukraine, March 19, 2009; First Progress Report, September 27, 2010;
and Second Progress Report, December 6, 2012.
14

World Bank, First Development Policy Loan: Program Document, May 9, 2014.

15
See Ukraine, Ministry of Economy, Information on the State Building Contract between Ukraine and the European
Commission.

9
Liberalization Action Plan also includes measures aiming at improving the fight againstorganized crime, terrorism and corruption.16
C. Discussions During the Diagnostic Study
General Observations
14.
Discussions during the diagnostic study confirmed the widespread view inthe literature that corruption in Ukraine is pervasive and entrenched. While recent
positive developments are broadly recognized, it was stressed by the full range ofstakeholders that much more needs to be done and that strong vested interests continue
to resist change.
Issues Raised
15.
Interlocutors acknowledged that there have been some positive changes
since the current government came into office. A number of laws have been enacted,
in particular regarding the anti-corruption framework, procurement, access to public
information, and the reduction of the number of permits and licenses. (See Section III ofthis report.) Civil society input is being included in the preparation and review of draft
laws prepared by the government, including through the creation of the “Reforms
Support Center” operating directly under the Cabinet of Ministers. Civil society input isalso being sought by some parliamentarians. There is also a perception of a decrease incorrupt behaviors. However, meetings with the private sector and NGOs mentioned
cases of strong resistance to change, particularly within the Parliament, including underpressure of some powerful oligarchs. In addition, there is broad agreement that thereform process requires a more centrally-coordinated process. Some stakeholders
consider that the political momentum should enable international organizations todevelop more robust conditionality, noting that past conditionality on anti-corruption has
often been weak on substance.
16.
While views on the adequacy of the current anti-corruption legal framework
vary, there is a general agreement that the key issue relates to implementation of
the framework. Some stakeholders consider that the criminalization of corruption, asset
disclosure mechanisms and the anti-money laundering (AML) regime are broadlyaligned with international standards, while others consider that key changes to theframework are necessary. However, there was clear convergence that effective
implementation—which requires top-level political will— is the key issue and should bedone by independent institutions. It is broadly recognized that the civil society has been

16

See EU-Ukraine, Visa Dialogue— Action Plan on Visa Liberalization, December 14, 2013.

10
instrumental in recent progress, and that it should play a proactive role going forward inorder to ensure effective implementation of the anti-corruption framework.
17.
With regard to the structure of corruption, there is a strong view that
corrupt public officials often work in concert across public agencies to intimidate,harass to conduct corporate raiding and to extract bribes. Among the agencies
perceived as the most corrupt are the tax administration, the police, the Prosecutor
General’s Office, the State Enforcement Service and the judiciary. Within the courts,
commercial courts were mentioned as the most corrupt. (See Section IV of this report.)
A number of stakeholders indicated that appointments to public positions are nottransparent and are often subject to payment that can range from a few thousand dollars
for teachers, to hundreds of thousands of dollars for judges, and millions of dollars fornomination for a parliamentary seat. The purchase of public positions is seen as aninvestment that needs to be recouped and explains a pyramidal organization of thebribery with the lower levels feeding the upper levels.
18.
Stakeholders stated that the corrupt practices of public officials are often
facilitated by intermediaries. In particular, some lawyers, notaries, tax advisors, andconsulting firms are apparently known to be embedded in corrupt schemes. Theirintermediation gives an appearance of legality to the process. Proceeds are allegedly
often placed in the domestic financial sector and laundered using opaque legal entities
and foreign financial centers. In addition, some meetings indicated the involvement ofsome members of the medias and NGOs in corrupt schemes.
19.
The AML regime is generally judged to have failed to prevent thelaundering of massive proceeds of corruption due to ineffective implementation. It
is well-known that leaders under the previous government transferred large amounts offunds abroad, including through commercial banks they controlled. Some stakeholders
noted as a problem the lack of independent AML institutions, pointing out that the
Financial Intelligence Unit, for example, is not in their view sufficiently independent.
Other problems mentioned include the difficulty of accessing information on thebeneficial ownership of property and companies, often hidden through offshore
corporate vehicles, the low level of sanctions for non-compliance with AML
requirements, the fact that tax evasion is not a predicate offence to money laundering,and the poor drafting and implementation of double taxation agreements with offshore
financial centers, facilitating justification of illegitimate capital outflows.
Proposals for Reform20.
During the study, differing views were expressed between those who feelthat corruption issues could only be addressed by the far-reaching measures
mentioned in paragraph 6 above and those who believe that significant progress
could be achieved short of such far-reaching measures by focusing on identified

11
specific measures. For those who believed in a more fundamental re-organization of
government, key issues include a reform involving a re-thinking of the distribution of
responsibilities among the executive, legislative and judicial powers.
In particular, a number of stakeholders consider that government responsibilities
should be rationalized and ministries should have more well defined
responsibilities and that, government services should generally be decentralized.
At the same time, it was emphasized that the number of public officials should
be drastically reduced, their pay substantially increased and their skills upgraded.
In addition, appointment to positions should be transparent and done on acompetitive basis. Several NGOs emphasized that a proper generaladministrative procedure needs to be established to regulate the interactions
between citizens and the state concerning public rights and benefits.

With regard to Parliament, some stakeholders felt that the right of individual
members to initiate legislation should be substantially curbed since this right isviewed as having been abused to advance narrow personal and business interests.
They further consider that the immunity of parliamentarians from criminal
investigations should be reviewed and that Parliament should not be directly
involved in the nominations, dismissal and investigations of judges. (See Section
IV of this report.) Further, it was felt that public financing of political parties
could also reduce incentives for corruption.

Many called for reform of political party financing, the nominations anddistribution process for parliamentary seats, and an overhaul of procedures for
initiating and adopting legislation.

On the judiciary, some made calls for dismissing all judges and recruiting a newset, possibly through election, that could include vetting of existing judges. (See
Section IV of this report.)

In contrast to those calling for an immediate radically fundamental restructuring ofgovernment, others were of the view that such restructuring would necessarily take time
and that there are more specific measures that can be taken more quickly that would
have a positive impact against corruption. These specific proposals are discussed in theensuing paragraphs.
21. Of the more specific proposals, a number aim at improving the criminal law
framework for anti-corruption, including in line with international standards.
Further improvements of compliance with international standards relevant for corruption(Council of Europe, UN, OECD, FATF) are currently being discussed at ministerial
level with input from civil society. Measures considered include the criminalization ofillicit enrichment, the definition of conflict of interest, the definition of undue

12
advantages and gifts, sanctions for public officials who fail to provide income and asset
disclosures, the inclusion of tax crimes as a predicate offense to money laundering, atransparent framework for the funding of political parties and candidatures for electedpublic offices, and increased transparency on the beneficial owners of legal persons andarrangements. Limiting the general powers of the Prosecutor General’s Office, judicial
reforms, review of the anti-monopoly regime and simplifying the framework forbusiness licenses and permits were also viewed as avenues for limiting corruption. (Seealso Sections III and IV of this report.)
22.
There is broad support for the creation of an independent anti-corruption
agency with investigative powers. However, there are diverging views on the specificstructure it should take and the functions it should exercise. At least two main draft laws
are being discussed within government and in the legislature. The following key
elements are among issues currently being considered: the independence of the agency’s
director and who would be responsible for his nomination and appointment; the officials
subject to its investigations (e.g., all or only top-level public officials); and the type ofoffenses to be investigated (e.g., from corruption acts to a broader approach of financial
crimes and abuse of powers). In addition, some stakeholders are of the view that the
proposed agency should be limited to investigative functions, while others think that itshould be also in charge of the verification of income and assets disclosure, andpreventive measures for combating corruption. Others believe prevention aspects should
be handled separately.
23.
Given widespread concerns about corruption in the Prosecutor General’s
Office and in the courts, views are mixed among stakeholders regarding how cases
investigated by the independent investigative agency should be prosecuted andwhether a specialized anti-corruption court should handle such cases. One proposal
is that such prosecution should be assigned to special prosecutors with requisite
experience and appropriate screening, who would report directly to the Prosecutor
General. Another view is that some kind of independent prosecution service should beestablished outside the Prosecutor General’s Office to deal with such cases. However,there was a concern that this option might be difficult as it may require a constitutional
amendment. Regarding court jurisdiction for such cases, some interlocutors called for aseparate and independent anti-corruption court, which might also be difficult as it would
probably also require a constitutional amendment. Others favored specialized judges andchambers within the existing court system.
24.
The establishment of a second independent anti-corruption agency
dedicated to prevention activities is also being discussed. While there is concern that
this could be costly and might lead to lack of coordination or unhealthy competition
between the two proposed agencies, the proponents of such an option emphasize thatpreventive functions are critical and could be sidelined by the more high-profile work ofinvestigations if both functions are placed in one agency. Views on the competencies of13such preventive agency vary, but include functions such as publication of assets reports,
verification of assets disclosures, background check on applicants to public positions,prevention of conflict of interests, issuance of codes of conducts, analysis of newlegislation and regulations from an anti-corruption perspective, design of anti-corruption
strategies and programs, coordination with the civil society, and general public
education.
25.
Calls for strengthening and verifying the income and asset disclosure
requirements for public officials are widespread but vary regarding scope andsubstance. On scope, while some favor disclosure and verification requirements that
apply to all public officials, others prefer a focus on those officials at higher risk of
grand corruption. Others still suggest a broad disclosure requirement but a targetedverification mechanism. On substance, the issue is whether disclosure should be limited
to income and assets going forward, or also encompass expenses.17 There is generalagreement that one independent agency should be in charge of collecting, verifying andpublishing disclosures. However, different views were expressed on the specifics ofwhether such a function should be vested in an anti-corruption preventive body, in an
agency that is also in charge of anti-corruption investigations, or within the tax
administration.
26.
A number of reform suggestions aim at improving the AML framework andthe ability to recover the proceeds of corruption. They include the revision of the
AML law to ensure enhanced due diligence requirements for domestic politicallyexposed persons, the inclusion of tax crimes as a predicate offence to money laundering,
the strengthening of risk-based supervision and the strengthening of administrative andcriminal sanctions. Other concerns encompass the improvement of fit and proper
requirements for banks, the strengthening of the independence of the financial
intelligence unit (FIU), and the requirement of the inclusion of information on beneficial
owners in public registries of companies and immovable property. Another issue relates
to the mandatory reporting of information to the FIU. While supported by the FIU, it isseen as costly and ineffective by some reporting entities, which recommend focusing
instead on the reporting of suspicious transactions, in line with international standards.
Other matters under discussion involve reversing the burden of proof in moneylaundering investigations, the introduction of non-conviction based asset forfeiture andthe lowering of the maximum amount for transactions allowed in cash (currently

17

Since 2011, there is a mandatory disclosure of expenses of all officials subject to disclosure requirements, with athreshold currently of UAH 80,000. Some NGOs call for a lower threshold, for example, one month’s salary of theofficial.

14
UAH 150,000) so as to reduce cash transactions—which are more vulnerable tolaundering.18
27.
Tax evasion and public financial management more generally are also areasin which some reforms are being discussed. Issues include the reduction of thenumber of taxes and fees, the automatization and simplification of tax and customs
processes (including for VAT refund), better rules for transfer pricing, and the analysisof double taxation agreements with offshore financial centers. With regard to revenue
administration, the measures considered include further strengthening of internal
investigations, streamlining the number of staff and of tax offices while increasingsalaries, improving access to information covered by secrecy rules (e.g., banking
secrecy) and improving cooperation with foreign jurisdictions with regard to valuation.
With regard to public financial management, independent oversight was cited as animportant element to curb corruption. The Accounting Chamber of Ukraine, agovernmental body responsible for conducting control over the use of the state budget
and state special purpose funds, has stated that its functions and mandates are quite
limited and should be expanded. The Accounting Chamber noted that, in line with
relevant international standards, it should be guaranteed full independence so as toremain protected against external influences and its control functions should be further
expanded.19
D. Conclusions on Corruption
28.
There is no question that society at large—the public, civil society, thebusiness sector and public officials—believe that corruption is pervasive,
oppressive and harmful to the economy of Ukraine in macro-economic terms. Many
Ukrainians rank corruption as the biggest current problem in Ukraine. Considering thewidespread nature of corruption and its deleterious effect at the macro-economic level,
the government is committed to addressing the problem, particularly high-level
corruption. Due to the pyramidal organization of corruption, anti-corruption measures
should be concentrated at the top levels of public institutions. It is important toemphasize that the design of this effort will take time and its effective implementationeven more so.
29.
While recognizing the long-term nature of efforts to tackle corruption, thepervasiveness of corruption does call for strong immediate specific measures,
18

A draft resolution of the Board of the National Bank of Ukraine providing for a reduction in the amount of cash
settlements by individuals to UAH 100,000, was posted on the official Internet page of the National Bank of Ukraine
for submission of comments by July 1, 2014.
19

In particular, the Accounting Chamber noted that its mandates should be expanded to cover inspections over bothrevenues and expenditures of (i) funds from the state budget, (ii) funds from local budgets, and (iii) funds from state
owned enterprises and their subsidiaries.

15
which will produce measurable results. Such specific measures are needed inparticular to bolster the reform initiatives of the current government and support
economic recovery and growth. While a number of reform suggestions such as
constitutional reforms related to the structure of government, the distribution of powers
within it, and the funding of political parties are beyond the scope of an IMF-supported
program, there are specific measures that can and should be supported under Ukraine’s
SBA. Due to the pyramidal organization of corruption, these measures could beconcentrated at the top levels of public institutions.
30.
In addition to adequately investigating and punishing acts of corruption,building robust preventive measures is also key. Such an effort should include thestreamlining of anti-corruption preventive efforts at the governmental level; an effective
income and asset declaration framework and the risk-based implementation of AML
preventive measures with a focus on the proceeds of corruption and tax evasion.
31.
The anti-corruption preventive and investigative efforts should be
supported by initiatives to improve the business climate and credible judicial andpost-court enforcement systems. (See Sections III and IV of this report.)
Potential Areas for IMF Program Discussions
32.
Preventive Measures: Key anti-corruption preventive measures are largely
absent and, where they do exist, should be streamlined and consolidated. There is aclear need to establish an effective and robust basis for preventive anti-corruption
measures at the executive level. These initiatives should include (i) developing anational anti-corruption strategy and following-up on its implementation (the elaborationof which the government has just announced on July 2, 2014); (ii) reviewing draft laws
from an anti-corruption perspective before their enactment; (iii) advising agencies on
corruption prevention (including through assessments of corruption risks and integrity
plans); (iv) establishing and promoting codes of conducts; (v) conducting backgroundchecks of applicants to positions in the civil service with sufficient powers, resources
and ability to veto applications, including in case of conflicts of interests; (vi) educating
the public (about ways to prevent and expose corruption and how to obtain redress);(vii) reporting annually on anti-corruption efforts; and (viii) representing Ukraine ininternational cooperation efforts at policy level. The existing Government Commissioner
for anti-corruption policy and the civil service agency already perform some of thesefunctions, but a more robust system is called for, taking into account GRECO
recommendations regarding preventive anti-corruption functions. It is proposed thatfurther discussion on these issues be discussed with IMF staff following the First
Review of the SBA.
33.
Enforcement Measures: A credible framework to investigate corruption
should be developed. An independent anti-corruption agency with broad

16
investigative powers should be established to ensure credibility in the enforcementof the legal framework. The agency would be in charge of investigation of acts ofcorruption and of laundering the proceeds of corruption related to high-level officials,
including those reflecting allegations received through a public hotline and relevant
reports received from the FIU. The agency would prepare semi-annual public reports of
its activities, including summary and anonymous data on its investigations and theiroutcomes. It would also have powers of asset recovery (freezing, seizing and executing
confiscation orders of assets related to its own investigations). The agency should be (i)operationally independent from executive, legislative or other external influence; (ii)accountable and transparent; (iii) adequately resourced in terms of budget, staffing andexpertise; and (iv) able to obtain all relevant information domestically and to engage ininternational cooperation with regard to its area of competency. Operational
independence will be realized, in particular, through appropriate procedures forappointment, term limits and dismissal of the head of the agency; the power to recruitand dismiss its own staff; special procedures for budgetary allocations; competitive
remuneration for the head and staff of the agency, and an annual external review.20 Cases
investigated by this agency would be prosecuted by prosecutors nominated throughcareful screening by, and reporting directly to, the Prosecutor General. Somestakeholders are of the view that the establishment of an independent anti-corruption
court and an independent prosecutorial function for corruption cases should beconsidered. In summary, while there are competing views as to how exactly to do so,there is strong support among stakeholders for establishing an independent anticorruption investigative agency. It is therefore possible that First Review discussions
could lead to conditionality on enabling legislation for establishing such an agency by
the time of the Second Review. Subsequent discussions could then take place regarding
the actual effective operation of the agency.
34.
Income and Asset Declarations: An effective income and assets declaration
mechanism should be put in place. It would particularly aim at preventing illicit
enrichment and would include adequate verification powers and sanctions for noncompliance and fraudulent information. In order to be effective, the disclosure
framework should focus on persons who are high-level public officials as well as thosemost at risk of high-level corruption. The FATF definition of domestic politically
exposed persons (PEPs) is relevant in this respect.21 The declaration form should clearly
20This could be performed by internationally recognized anti-corruption experts that would be granted access torelevant information to assess the effectiveness of the agency and would publicly report key findings.

21

Pursuant to the FATF Recommendations’ glossary, “domestic PEPs are individuals who are or have been entrusted
domestically with prominent public functions, for example Heads of State or of government, senior politicians, senior
government, judicial or military officials, senior executives of state owned corporations, important political party
officials”. In the context of Ukraine it would be important to make sure that the following persons are specifically
included: members of parliament; ministers and deputy ministers; directors and deputy directors of departments,
agencies and state-owned enterprises; directors and deputy directors of law enforcement agencies; all judges; advisers(continued)

17
capture all relevant information, including information on beneficial ownership andcontrol of assets, and information from family members and close associates. These
PEPs should submit their disclosures before taking office, and annually until the thirdyear after the end of their public functions.22 Disclosures should be filed electronicallyand available to the public on a single website shortly after the deadline for submission
and stay accessible during the period of disclosure requirement. Verification should be
an independent process, and rely on sufficient powers to obtain, without court order orprosecutor’s approval, any relevant public or private information related to persons
subject to declaration, their family members and close associates and to consider
information received from the public.23 If declarations are inconsistent, false or missing,relevant information should be communicated to anti-corruption investigative officers.
Proportionate, enforceable and transparent sanctions should be introduced, including
dismissal from office and criminal sanctions for fraudulent disclosure or failure or delay
in submitting declarations.24 The World Bank and the EU have general conditionality
requiring an effective system for verification of declaration of assets. The EU requiresthat such a system be in place by the second quarter of 2015,25 which gives a reference
period within which Fund staff can work with the authorities to develop specificmeasures (which are not outlined in the EU conditionality).
35.
AML Framework: The AML framework should support anti-corruption
efforts. The AML law and other relevant laws should be amended to include key
elements of the FATF standard and best practices. The authorities have alreadycommitted to ensure that, by end-September 2014, banks are required to conductenhanced due diligence on business relationships with domestic PEPs; and thelaundering of the proceeds of tax crimes is criminalized and made a predicate offence tomoney laundering.26 Additional legal amendments should ensure that: (i) illicit
to the President, Prime Minister and ministers; regional governors, mayors of major cities, and certain functions most
exposed to corruption risks such in the prosecution service, the tax agency, customs, police and other law
enforcement.
22

Extending the disclosure requirements for a reasonable period after leaving office would contribute to prevent
abusive revolving doors situations, and ex-post income related to decisions taken while in office.
23

Sufficient safeguards should be in place to prevent abuse of powers by verification officers (e.g., traceability of
information requests, administrative and criminal sanctions for improper use of information).
24

Asset disclosures from the authority in charge of verifying asset disclosures would be accessible by the Financial
Intelligence Unit (FIU) to allow for cross-checking of information.

25

See above, paragraph 13.

26

Pursuant to Article 209 criminal code, predicate crimes to money laundering are all crimes (except tax crimes as ofnow) punished by the criminal code by “imprisonment or a fine of more than three thousand income tax exemption”.
In order to ensure effective use of the AML framework to address tax evasion and corruption, it would not only benecessary to modify Article 209 criminal code (to delete the exemption of tax crimes from the scope of the ML
offence) but also Articles 212 and 212-1 to ensure that the type of tax crimes that are considered predicate offenses tomoney laundering is broad enough.

(continued)

18
enrichment is criminalized in line with the UNCAC and made a predicate offense tomoney laundering; (ii) financial institutions are allowed to end a business relationshipwith a customer when unable to perform customer due diligence requirements; and (iii)
pecuniary administrative sanctions for non-compliance with AML requirements are
effective, proportionate and dissuasive. In addition, mechanisms should be implemented
to ensure that (i) information on the beneficial owners of financial institutions, domestic
companies and immovable property is accurate, up-to-date, and available to relevant
authorities and reporting entities in a timely manner; (ii) financial institutions’
AML/CFT reporting requirements are focused on suspicions rather than on mandatory
criteria; (iii) the FIU, AML supervisors, law enforcement and prosecutorial authorities
involved in AML issues are adequately resourced, skilled and operationallyindependent; and (iv) risk-based AML/CFT supervision of financial institutions andother relevant business and professions is developed, with a focus on the risks oflaundering of the proceeds of corruption and tax evasion. As a first step, some of therevisions to the legal framework mentioned above can be discussed with IMF staff
during the First Review discussions, and included as structural benchmarks for theSecond Review. Additional discussions could then be held to address other elements of
the AML/CFT framework, in light of the implementation in the domestic framework of
the 2012 FATF standards.
36.
Asset Recovery: Adequate mechanisms should be developed to recoverproceeds of corruption. In this respect, and in line with international standards and bestpractices, legislative reforms should be introduced to allow for substitute or equivalentvalue restraint and confiscation of legitimate assets of the same value as the stolen
assets; provide a sound legal basis for a wide range of types of international mutual legal
assistance; and allow for the rapid tracing, temporary freezing or seizing of assets.27 In
addition, provided sufficient safeguards are in place, the burden of proof for confiscation
should be shifted to the alleged offender and relatives to show that the assets stem froma legitimate source, when the prosecution has provided credible evidence that assets
cannot stem from a legitimate source. Detailed recommendations could be prepared at alater time, taking into account the action plan on asset recovery prepared by theauthorities with the support of the World Bank/UNODC’s StAR initiative. (Seeparagraph 26(c) of the MEFP.)
III. BUSINESS CLIMATEA. Overview of Existing Literature
General Observations

27

See also paragraph 33 and recommendations on asset recovery powers of the anti-corruption agency.

19

37.
The diagnostic study encompassed a review of already existing reports on
Ukraine’s business climate prepared by the business community, civil society
groups and multilateral and bilateral partners of Ukraine. The literature reveals ageneral consensus that the business climate in Ukraine is adversely impacted by two
main problems—the complexity of the design of the legal framework regulating
business activity and the attendant negative incentives that are manifested in theimplementation of such a complex framework. Much of this work has been done by theInternational Finance Corporation, the World Bank, the OECD and U.S. government
agencies and some of that work is referenced in this study.28
38.
There is a sense that the general design of the legal framework regulating
business activity in Ukraine is unnecessarily complex.29 First, there are too many laws
and regulations addressing the same matters and too many agencies with overlapping
jurisdiction. Second, the provisions of these various laws and regulations are often
drafted ambiguously and in some cases even in a contradictory manner. Third, theselaws and regulations are subject to frequent and unnecessary changes.
39.
The complexity of the legal framework has led to serious shortcomings in its
implementation ranging from lack of accountability (because so many laws,
regulations and agencies are involved in regulating the same issues), to lack of legal
certainty (arising from ambiguous and contradictory provisions), to opportunities
for abuse, harassment and extortion of bribes. The net effect is the significant
imposition of costs and burdens on businesses. The lack of legal certainty hampers
business and investment planning activities. Businesses are also less able to innovate orsustain growth because they have to spend considerable time, energy and financial
resources dealing with bureaucracy, excessive paperwork and rent-seeking behavior.30
Two problem areas that have been much highlighted are business licenses and permits,
and inspections and audits of businesses.
Business permits are certificates authorizing business entities to establish
businesses. The amount of time and the costs incurred to apply for them,28

See in general World Bank- IFC, Ukraine—Opportunities and Challenges for Private Sector Development, 2014;
German Advisory Group, Institute for Economic Research and Policy Consulting, Economic Reform Agenda for
Ukraine, March 2014; Baker & McKenzie, Conducting Business in Ukraine, 2014; World Bank, Doing Business 2014
– Ukraine, 2013; PricewaterhouseCoopers, Doing Business and Investing in Ukraine, 2013; Chadbourne and Parke,
General Legal Considerations for Doing Business in Ukraine, May 2013; US Department of State, Investment
Climate Statement, February 2013; KPMG, Your Business in Ukraine, 2012; OECD, Attracting Investment inRenewable Energy in Ukraine, November 2012; and World Bank-IFC, Investment Climate in Ukraine as Seen by
Private Business, 2011.

29

See generally World Bank-IFC, Ukraine—Opportunities and Challenges, US Department of State, Investment
Climate Statement, and World Bank-IFC, Investment Climate in Ukraine.
30

World Bank-IFC, Investment Climate in Ukraine.

20
including the preparation of supporting documentation are considered to beburdensome.31 Business licensing, which is required for certain businessactivities under Ukrainian law, is also considered to be burdensome.32
Intrusive regulatory inspections and audits are reported to have forced businesses
in Ukraine to spend a substantial amount of time in dealing with non-productive
activities and in some cases to have to close down. The current regime iscriticized for not discriminating on a risk-based approach between large andsmall firms and among risks posed by various types of business. As such, theinspection regime is viewed as placing a disproportionate burden on small andmedium sized firms. Large firms tend to benefit from economies of scale indealing with the bureaucratic red tape, while smaller firms do not have suchmeans and often end up having to resort to bribing public officials.33

40.
The complexity of the legal framework is also reported to have contributed
to the low level of competition in Ukraine’s domestic market. Certain groups andindividuals manipulate the legal framework to create unfair barriers to market entry,
which entrenches oligopolistic market structures and anticompetitive behavior. Low
levels of competition are further perceived to be driven, inter alia, by weaknesses in thenational competition policy framework and the often ineffective application ofcompetition policies.34
41.
A further aspect of complexity has been the apparent harassment ofbusinesses by the Prosecutor General’s Office, which has prosecutorial powers that
go well beyond the criminal justice system. The Prosecutor General’s Office can
exercise “general supervisory authority” over many regulatory issues, and may intervenein pending court cases to assert a state interest which judges seldom contradict. The
apparent abuse of prosecutorial power has traditionally manifested itself in, for instance,
corporate raiding. Corporate raiding is generally described as an attempt to illegally takevaluable business assets from their legitimate owner, typically involving some improper
coercive role of state authorities. It has been reported that the Prosecutor General’s
Office together with the judiciary have played a significant role in facilitating corporate
raiding.35

31

OECD, Attracting Investment.

32

US Department of State, Investment Climate Statement.

33

World Bank-IFC, Ukraine—Opportunities and Challenges.

34

World Bank-IFC, Ukraine—Opportunities and Challenges.

35
M. Rojansky, Corporate Raiding in Ukraine, International Research & Exchanges Board, Scholar Research Brief,
July 2013.

(continued)

21
B. Reform Proposals in the Literature
42.
Many recommendations have been made in existing reports to improve andstreamline the legal framework and to reduce the scope for uncertainty or exercise
of discretionary power by regulatory bodies. These recommendations generally cover
the harmonization of the legal framework with existing international standards such as
those prevailing in the EU, the streamlining of the existing framework to remove
overlaps amongst various primary and secondary legal instruments, the development ofclear implementing regulations and interpretative norms, and the improvement oftransparency in the legislative process.
43.
One of the possible reforms suggested as a way to mitigate the complexity of
the legal framework is the regulatory guillotine. The regulatory guillotine is a processof evaluating the entire stock of regulations that leads to an automatic repeal by a set
deadline of all regulations, which do not continue to provide social value. The regulatory
guillotine has been considered by some organizations as the best solution for rapid
review of a large number of procedures or regulations, eliminating those that are nolonger needed without lengthy and costly legal action on each regulation.36 37
44.
Self-certification mechanisms and transparency in the legislative process
have also been advocated as important elements to improve the legal framework. In
business permits, the “silent consent” principle or “self-certification” principle waspromoted as a way to improve the ease of starting up businesses. This principle allows
permit applicants to start business operations without an official response from permit
agencies after the expiry of the legally stipulated permit issue turn-around time.38 It has
also been recommended that the legislative process should be fully transparent for all
new laws and regulations, thus expanding the involvement of the business sector, tradeunions, nongovernmental organizations and society in the legislative process andstrengthening the value and credibility of regulatory impact assessments.39

36

World Bank-IFC, Ukraine—Opportunities and Challenges.

37

In practice, however, reform efforts through accelerated reviews of regulations (i.e., regulatory guillotine) have had
limited impact on the economic situation in Ukraine primarily because such reviews are non-legislative in nature andare limited to assessing the conformity of regulations to requirements under current legislative acts. In order for the
regulatory guillotine to bear concrete results, a review needs to be done with respect to the entirety of the regulatory
framework established at the legislative level, and a new economic model needs to be created for Ukraine so that the
non-legislative regulatory framework is brought into conformity with the newly created economic model.
38

World Bank-IFC, Investment Climate.

39

World Bank-IFC, Ukraine—Opportunities and Challenges.

22
45.
Reform measures to reduce the complexity in the legal framework have also
featured as part of conditionality in development projects for Ukraine. The WorldBank’s DPL approved in May 2014 includes measures to ease regulatory requirements
on business operations.40 Specifically, the DPL included a prior action on enactment of a
package of regulatory reforms to ease business and property registration, and to reduce
the number of permits. Ukraine met this prior action through the adoption of laws to
reduce the number of permit documents41 and to simplify the procedure of setting up
business. (See paragraph 55 for Ukraine’s recent legislative efforts on businessregulations.)42 The DPL also called for, inter alia, enactment of legislation to continue tooverhaul selected priority area regulations, establish regulatory impact assessments,
rationalize construction permits, and ease licensing requirements (Trigger 6).
46.
Finally, the relationship between improving the business climate andaddressing public corruption and the effectiveness of the judiciary is wellrecognized in Ukraine. In particular, recommendations have been made to set up
frameworks to both prevent and combat corruption in the public sector and reforms to
the prosecutorial, judicial and post-enforcement systems have been widely discussed asa way to prevent predatory behaviors against businesses.43 (See Sections II and IV ofthis report.)
C. Discussions During the Diagnostic Study
General Observations
47.
There is widespread agreement that the business climate in Ukraine is very
negatively impacted by an overbearing legal framework. Many of the issues
discussed in the existing literature outlined above were confirmed in the discussions
during the diagnostic study.
Issues Raised
48.
With regard to the complexity and design of the legal framework,
stakeholders’ perceptions are that there is over-regulation of economic activity.
This is perceived to take the form of too many laws and regulations. Over-duplication
40

World Bank, First Development Policy Loan.

41

Law of April 9, 2014, No. 1193, on amendments to several legislative acts of Ukraine on reducing the number of
permit documents.
42

Law of April 15, 2014, No. 1206, on amendments to several legislative acts of Ukraine on simplifying theprocedure of setting up business.

43

See, for example, Rojansky, Corporate Raiding in Ukraine.

23
was identified in that different pieces of legislation and regulation often address thesame matter and several different agencies may have overlapping jurisdiction, leading toa lack of clear accountability for any one agency. Several underlying reasons aresuggested for this over-regulation. Too many legislative bills are submitted by bothgovernment agencies and members of the parliament at the same time, and there is nocentral mechanism to monitor and coordinate such legislative developments. While theState Service of Ukraine for Regulatory Policy and Entrepreneurship Development (nowrenamed the State Regulatory Service) reviews draft legislation prepared by government
agencies, this governmental body has no powers to enforce coordination andstreamlining within the government of legislative bills and regulations at thedevelopment stage, although it devotes special attention to expert evaluations oflegislative bills since such bills have a decisive regulatory effect on the development of
economic processes in Ukraine.44
49.
Frustration was expressed by interlocutors regarding laws and regulations
that are apparently deliberately drafted in an ambiguous and contradictorymanner, so as to leave room for various interpretations that would then give rise toregulatory uncertainties to be exploited for illegitimate gain. Stakeholders generally
confirmed that there is large scope for improvement in streamlining legal instruments toremove ambiguities and contradictions. In particular, it was felt by some that, while as amatter of principle, legal instruments should be interpreted to resolve any ambiguities infavor of business entities, the general perception is that enforcement authorities tend to44

Pursuant to the Law of Ukraine “On the Principles of State Regulatory Policy in the Area of Economic Activity”,
the State Service of Ukraine for Regulatory Policy and Entrepreneurship Development evaluates draft regulations
specifically for their consistency with the principles of state regulatory policy defined in that Law. The fact that theRules of Procedure of the Parliament of Ukraine fail to make allowance for the Law of Ukraine “On the Principles ofState Regulatory Policy in the Area of Economic Activity” opens the doors to the adoption of legislative acts of aregulatory nature that are not based on weighted predictive results of an analysis of their regulatory impact, which inturn makes it impossible in future to trace the effectiveness of acts adopted by the state’s principal regulatory body.
Pursuant to the Law of Ukraine “On the Principles of State Regulatory Policy in the Area of Economic Activity”, theParliament of Ukraine is a regulatory body. Under Article 15 of that Law, procedures for the Parliament’s
implementation of state regulatory policy must be defined in the Law on the Rules of Procedure of the Parliament of
Ukraine, with allowance for requirements established in that Law. At the same time, no such amendments have been
introduced, either in the Parliament’s previous Rules or in its current Rules.
The inconsistency of the Rules of Procedure of the Parliament of Ukraine with the requirements of the above Law
opens the doors to legislative acts that regulate economic and administrative relationships in the area of economic
activity without allowance for legislation on state regulatory policy – in particular, without performing an analysis of
the regulatory impact of adopted regulations and without tracking the effectiveness of their actions. This isparticularly critical with bills submitted by Parliamentarians, since nearly one half of all regulatory bills are submitted
as legislative initiatives by members of the Ukrainian Parliament and, accordingly, remain outside the realm of
mandatory regulatory procedures. At the same time, implementation of regulatory policy relative only to nonlegislative regulation makes it impossible to achieve an objectively possible positive stimulating effect on economic
activity in the country, since the real economic model of a society is based on laws themselves, while non-legislativeacts merely reproduce legislatively defined mechanisms.

24interpret such ambiguities in favor of governmental entities. Matters are further
compounded by what many regard as unjustifiably frequent amendments to laws andregulations, often seen as engineered to advance narrow commercial interests ofparticular parties instead of the public good.
50.
Unduly burdensome and unnecessary licensing and permits requirements
were particularly highlighted as a problematic area for both domestic and foreignbusinesses. It was noted that, while the “silent consent” principle may be used, forinstance, in permits (see paragraph 44 above), it is often not easy for business entities torely on this principle because the application of the principle in practice still leads to a
judgment rendered ex post facto by regulating entities, thus creating the very uncertainty
that the principle was designed to remove.
51.
With regard to implementation of the legal framework, interlocutors of thestudy were clear that the complexity in the design of the framework allows inpractice for the regulatory system in Ukraine to be used in an abusive manner,producing negative economic effects on the business climate in Ukraine in general.
The lack of transparency and excessive exercise of discretion in the implementation of
the legal framework is cited as one of the primary concerns, reflected in discretionary
application of laws and regulations. The business community in particular complained
about excessive and unjustified regulatory inspections and audits. Several agencies
routinely inspect and audit businesses at will without any clear justifications and each ofthese agencies may have the independent authority to shut down a particular type ofbusiness. Business owners are never sure of when any one of these agencies may appear
for an audit or inspection and threaten closure. Misuse of such perceived broad powers
continually force businesses in Ukraine to spend substantial amounts of time dealing
with audits and inspections and to pay bribes to avoid closure or some other threatenedsanction, or to opt to escape the regulatory burdens and corrupt behavior by operating inthe shadow economy.
52.
Powerful business and political cartels which are perceived effectively tocontrol public institutions are said to engage in abuse by manipulating thecomplexity of the regulatory system to advance private interests in the name of
public policy and to defeat fair competition by erecting barriers to market entry (aspart of “state capture”). Stakeholders stated that, while the underlying legal
framework governing market competition is generally sound, its implementation has
been challenging marred with inconsistencies and the lack of transparency. Many
expressed concerns about the lack of a level playing field and barriers to market entry
for small and medium-sized enterprises, which are often driven by abuse of dominantpositions and collusion or anticompetitive cooperation by a small number of large-sized
firms. It was also emphasized that state-owned enterprises are often misused as vehicles
to promote interests of certain groups, thus further contributing to the monopolistic andanticompetitive market structure in key industries.

25
53.
A particular complaint repeated in many of the meetings was the view that
the Prosecutor General’s Office is endowed with over-arching power, which go wellbeyond prosecutorial powers in the criminal justice system. The powers of this officeconcerning oversight of civil and regulatory matters in the “public interest” wereassessed by many stakeholders as so broad that they could be used to justify intervention
by that office in the review of large areas of economic activity. This was explained as alegacy of the old procuracy system under the Soviet regime. These powers are viewed ashaving been often misused to advance corruption and state capture. (See Sections II and
IV of this report.)
Proposals for Reform
54.
The general consensus among stakeholders is that the legal framework
should be simplified and streamlined and that more discipline should be introduced
into the process of preparing draft laws and regulations within the government.
Following recent political developments, it is recognized that some reforms have alreadybegun to take place and others are well under way in various stages of consideration anddevelopment. These efforts include: (i) streamlining various laws and regulations on
economic activities to limit the possibility of legal uncertainties and discretionary
regulatory power, and aligning them with internationally accepted standards, EU
standards in particular; and (ii) introducing greater coherence and discipline in theprocesses within the government that leads to the making of laws and regulations
governing economic activity.
55.
Efforts are ongoing to streamline legislative and regulatory instruments
governing economic activities and to clarify overlapping jurisdictions in regulatory
agencies.


Reform Measures Already Taken: Laws have recently been adopted or are in theprocess of being developed to facilitate the conduct of businesses. Amendments
to several laws have been adopted with the aim of simplifying permit proceduresand procedures of setting up businesses and protecting investors’ rights.45
Amendments to laws to simplify the termination of businesses and to improve
licensing procedures have been already signed by the President, and are ready to
be adopted.46

45

See (i) Law of April 9, 2014, No. 1193; (ii) Law of April 15, 2014, No. 1206; and (iii) Law of May 13, 2014, No.
1255, on amendments to several legislative acts of Ukraine on protection of investors’ rights.

46

See (i) Law of May 13, 2014, No. 1252, on amendments to the Law of Ukraine “On licensing system in the sphereof economic activity” on improvement of procedure of issuing licensing documents executed by the central executive
authorities; and (ii) Law of May 13, 2014, No. 1258, on amendments to several legislative acts of Ukraine on
simplifying the procedure of state registration of termination of entrepreneurial activity of individual entrepreneurs
according to declarative principle.

(continued)

26


Reform Measures Being Considered: There are also a number of draft laws at
various stages of development, including: (i) standardization (which envisages
the creation of a single national standardization agency, and the compliance ofthe national standards with the relevant EU standards); (ii) joint-stock companies(which envisages enhancement of activity of joint-stock companies and toincrease of shareholders’ protection); (iii) amendments to the Tax Code of
Ukraine to simplify the state registration of termination of private individuals’
business activities; (iv) licensing of certain types of economic activity (the list ofadministrative services and related fees); and (v) technical regulations andconformity assessment. On taxation, a concept paper to reform the current tax
regime is being developed under the auspices of the Ministry of Finance, whichseeks to further improve the tax system by reducing types of taxes and tax
benefits for certain privileged sectors. The Fiscal Revenue Service also referredto their ongoing work to improve the system of tax audits and collections. (See
Section II of this report.)

A draft law is being developed under the initiative of the State Service of
Ukraine for Regulatory Policy and Entrepreneurship Development, which
proposes to, inter alia, establish a central regulatory mechanism for inspections
and audits. Business inspection has traditionally been vulnerable to regulatory
abuses in particular due to overlaps in jurisdictions of inspection authorities. The
draft law would provide for uniform procedures applicable to all inspecting
agencies, and define specific responsibilities for such agencies. The draft law
also proposes the prohibition of inspections and audits initiated by law
enforcement agencies such as the Prosecutor General’s Office that are perceived
to have traditionally abused the inspection regime.

56.
Notwithstanding recent reform efforts, representatives of the business
community and the civil society were vocal in their support for sustained andaccelerated deregulation efforts in business regulations. Some members of thebusiness community referred to the “2013 National Action Plan” as a possible platform
to further advance reforms; while this Action Plan was developed under the previous
regime, it was based on the consensus of the business community and could provide
useful guidance in providing a more systematic approach to streamlining relevant rules
and procedures affecting business operations such as permits and licensing. The 2013
National Action Plan provided for various measures aimed at improving the businessclimate, which included measures targeted at deregulating and reforming administrative
services, such as simplification of the procedures for starting business, improvement ofpermit procedures and simplification of customs documents.

27
57.
With regard to greater discipline and coherence of the rule-making
processes within the government, there was a strong view that there is a need forboth internal controls (through quality controls over and coordination of draft
legislative and regulatory instruments) and external monitoring (though open andtransparent public consultations).
Internal Controls: Stakeholders emphasized that a central coordination
mechanism should be established to provide oversight and coordination
functions over the rule-making process within government.47 There are also calls
for incorporating and implementing regulatory impact assessments.

External Monitoring: It was acknowledged by stakeholders that the level of
public participation in the legislative process has increased in recent months. The
establishment of the Reforms Support Center housed in the Ministry for the
Cabinet of Ministers is one such example; the center has been set up as a liaison
between the civil society and the government to provide feedback to legislative
proposals and decisions adopted by the government. Representatives of the civilsociety and the business community, however, called for further progress inpublic engagement in the legislative process through open and timely access to
information, which will afford opportunities for interested members of the public
to provide timely and informed feedback on the ongoing legislative andregulatory developments.

58.
Recommendations to improve the implementation of the legal framework
included the establishment of a new Business Ombudsman and the strengthening of
public financial administration.
Many stakeholders expressed support for the establishment of an independent
body to combat the abuse of regulatory power. The recently-established BusinessOmbudsman initiative was suggested as a useful initiative to address systemic
issues faced by the business community, in particular corruption and unfair
business practices aided by public officials. This initiative which has principally
been supported by the European Bank for Reconstruction and Development
brings together representatives of the Ukrainian government, businessassociations and international financial institutions. The Business Ombudsman
Institution, once fully established, will: (i) receive, examine, and facilitate theresolution of complaints by business of unfair treatment including corruption;and (ii) ascertain the systemic cause of the unfair treatment of business and47
While, currently, there are internal control mechanisms provided by the State Service of Ukraine for Regulatory
Policy and Entrepreneurship Development, which has mandates to review draft legislative and regulatory instruments
for the presence of any “corruption risks” resulting from ambiguities in such instruments, such functions appear to belimited in scope.

28
corruption and share its findings with the public and the appropriate publicauthorities.


Independent oversight functions over public financial management were also
cited as an important element to curb the abuse of regulatory power. The
Accounting Chamber of Ukraine, a governmental body responsible for
conducting control over the use of the state budget and state special purpose
funds, has stated that its functions and mandates are quite limited and should be
expanded. (See Section II of this report.)

59.
Recommendations to improve the competition regulatory framework to
encourage market entry and to protect small and medium-size firms againstmonopolistic behaviors of large firms were also made. Some reform efforts are
already under way. The Anti-Monopoly Committee (AMC) is working on the fullharmonization of Ukrainian competition legislation with EU standards as well as theplanning of the National Competition Program 2014-2024 in order, inter alia, toenhance the competitive business environment and to boost the AMC’s investigative
power. The AMC emphasizes that enhanced competition would require judges withadequate qualifications and training to adjudicate competition cases, transparency in theprovision of state aid, and the AMC’s independence in its investigative functions.
60.
More generally, broader reform of the public administration system wasalso suggested as a solution to improve the accountability of the public
administration system. Given the widespread perception that the public service isbloated and inefficient, the reduction of redundant government services and government
employees was mentioned as an urgent priority. In this regard, many stakeholders alsomentioned that the decentralization of the public administration system is important for
introducing efficiency into the system. At the same time, efforts to improve the qualityof public services should include the introduction of rigorous professional standards, theenhancement of training and the increase in salaries of public officials. Improvements insalaries and professional standards of conduct in the public sector are expected to makethe public service more attractive as an employer and reduce rent-seeking activities. It
was also noted that the current hiring system should be reformed to separate nominating
functions from appointment functions. (See Sections I, II and IV of this report.)
61.
Finally, anti-corruption and judicial reforms have been generally suggested
as ways to also improve the general business climate. (See Section II and IV of thisreport.)D. Conclusions on Business Climate
62.
In light of the foregoing, it is clear that stakeholders perceive the legislativeand regulatory framework pertaining to economic activity as overbearing and that29
it impacts negatively on the business climate in Ukraine. The study revealed thatstakeholders do acknowledge that the current government, in consultation withstakeholders, has already started to pursue several reform initiatives. However, there
remains substantial scope for further efforts to eliminate, streamline, simplify and clarify
the legal framework. In particular, the mission heard that a key priority for many
stakeholders is to ensure that reform efforts are driven from an authoritative central
point so as to ensure adequate coordination (both within the government and among thegovernment, civil society and business community) and so as also to ensure effective
monitoring and reporting of reform progress. The government is committed toaddressing the pertinent issues, including in the context of Ukraine’s IMF-supported
program.
Potential Areas for IMF Program Discussions
63.
Reform Coordination Mechanism. A central coordinating mechanism shouldbe established with authority to ensure adequate high-level coordination (both within thegovernment and among the government, civil society and business) and so as also toensure high-level effective monitoring and reporting of progress. One possibility forsuch a mechanism is that it be placed at the level of the Office of the Prime Minister toensure that all ministries and agencies are bound to the coordination, monitoring andreporting process established under the mechanism. Another possibility could be for thePrime Minister to empower an inter-ministerial team headed by a relevant minister toperform the government-wide coordination function. A formal decision by the Cabinetof Ministers to establish such a mechanism should be done relatively quickly, perhaps inthe context of discussions with IMF staff under the First Review of the SBA.
64.
Reform Action Plan. The coordinating mechanism discussed in the above bullet
point should establish an action plan to eliminate, streamline, simplify and clarify thelegislative and regulatory framework affecting economic activity in Ukraine. Individual
ministries and agencies would be required to provide their input to the action plan basedon their areas of competency. A public consultative process involving the business
community and civil society should also be provided for in the coordinating mechanism.
Key elements of this action plan would include a census of existing legislative andregulatory requirements detailing those that are to be eliminated, streamlined, simplified
or clarified, with appropriate prioritization in terms of substantive impact and timelines.
The development of the action plan should be carried out in consultation with IMF staff
and those of other relevant international organizations. In preparing the action plan, thefollowing questions should provide guidance:

30




In terms of the legislative and regulatory process:How can transparency and public involvement be increased in the designof the legislative and regulatory framework in order to prevent its captureby special interests?

Is there a need to streamline the legislative and regulatory process toensure effective coordination on legislative bills and regulations amongst
authoring agencies/ministries and parliamentarians so as to reduce thepotential for problematic conflicts/overlaps in the adopted laws andregulations?

Is there a need to incorporate and implement regulatory impact
assessments in the legislative and regulatory process?

In sectoral areas:Is there need to simplify and reduce licensing and permits – what is theright balance?

Is there also a case for limiting the frequency of inspections and audits by
various control agencies?

Is there a case for decentralizing regulatory services to local levels so as
to enhance efficiency?

This measure could be a structural benchmark (proposed timeline of end-October 2014)
to be discussed at time of the First Review discussions.
65.
Monitoring and Reporting on Action Plan. The coordinating mechanism
should continuously monitor progress made by ministries and agencies on the action
plan and publish quarterly reports on such progress. This measure could be further
discussed at subsequent reviews possibly to be implemented on an ongoing quarterly
basis following the adoption of the action plan discussed above and lasting for theduration of the SBA.
66.
Limiting Powers of the Prosecutor General’s Office to Interfere with
Business in Non-Criminal Contexts. There could be a possible measure to limit thepower of the Prosecutor General’s Office regarding the office’s broad powers ofsupervision over civil and regulatory measures that go well beyond criminal matters.
This is an issue also of concern to the Council of Europe, which promotes the prompt
reform of the legal framework on the Prosecutor General’s Office with a view totransforming this institution into a body compliant with European standards. This matter
could be taken up for discussion at subsequent reviews.

31
IV. EFFECTIVENESS OF THE JUDICIARY
A. Overview of Existing Literature
67.
The diagnostic study engaged in a review of already existing reports on the
judiciary and the post-court enforcement framework in Ukraine. The literature
uniformly shows that there are very major challenges in the enforcement of civil andcommercial claims through the courts and post-court enforcement service in Ukraine.
The existing body of reports and literature, both from within Ukraine48 and beyond,49 isrich and reaches back many years. These reports also document detailed tracking and indepth commentary by international agencies, including notably the Council of Europe(CoE) through its Venice Commission and the Commissioner of Human Rights. Also
among these agencies are the European Union (EU) and the European Bank for
Reconstruction and Development (EBRD).50 What stands out in these numerous sources,
despite their varied origins and nature, is the consensus on the challenges for the legal
enforcement regime of civil and commercial claims in Ukraine.
68.
The existing literature covers the full range of issues confronting the judicial
and post-court enforcement systems, including the following key issues:State capture and external influencing of the judiciary, particularly through thejudicial appointments process, which has been criticized as a vehicle for corrupt

48

See, inter alia, M. Mylnek, Keeping the judicial system as it is now is beneficial to the government (Razumkov
Centre), November 1, 2013; Centre for Judicial Studies, Monitoring of Judicial Independence 2011 Report and 2012
Report; I. Koliushko and R. Kuybida, Constitutional Amendments: How to Avert the Threat to Judicial Independence(Centre for Political and Legal Reforms), September 17, 2013; Radio Svoboda, Judicial Reform by Most Other Names(Kharkiv Human Rights Protection Group), August 22, 2013;. See also, inter alia, O. Hruba, Judicial Independence
in Ukraine, Poland and Romania – Compliance with Copenhagen Criteria (Central European University), March 29,
2013, and M. Popova, Politicized Justice in Emerging Democracies: A Study of Courts in Russia and Ukraine (NewYork: Cambridge University Press), 2012.
49

See, e.g., M. Natorski, “Reforms in the judiciary of Ukraine: domestic practices and the EU’s policy instruments,”
East European Politics, Vol. 29, Issue 3, May 13, 2013, and W. Tiede and O. Rennals, “Recent Developments in the
Ukrainian Judicial System and the Impact of International and European Law,” Eastern European Politics andSocieties, Vol. 26, Issue 1, February 2012.

50
See Opinions of the European Commission for Democracy through Law (Venice Commission), 2011 – 2013. Also
Reports of the Commissioner for Human Rights of the CoE on Ukraine visits (November 2011 and December 2006).
Special reports of the CoE on Ukraine, including Comments on the “Consolidated draft law” on the restoration oftrust in the Judiciary of Ukraine, March 31, 2014, and Non-enforcement of domestic judicial decisions in Ukraine:
general measures to comply with the European Court’s judgments, June 13, 2007. See also EBRD, Commercial Laws
of Ukraine: An assessment by the EBRD, 2011; Z. Mylovanova, F. Rackwitz, and O. Volynets, “Debt Enforcement
and Insolvency in Ukraine,” EBRD Law in transition: Debt enforcement in times of uncertainty, 2010; EBRD,
Insolvency Law Assessment Report (2009 & 2002); and F. Dahan, E. Kutenicova, J. Simpson, “Enforcing securedtransactions in central and eastern Europe: An Empirical Study,” EBRD Law in Transition. See also V. Simonenko,
Judicial ethics and problems of its implementation in Ukraine (UNODC-OECD), 2012. See also several justice sector
technical assistance reports by the EU, USAID and other agencies.

32
and inappropriate political influence.51 Reports have also criticized thedisciplinary oversight and the initial five-year appointment period of judges(described as ‘probationary’ in the international reports) as tools for external
influence.52
Weak judicial organization as manifested in a proliferation of court levels thatlead to serious problems concerning both over-lapping jurisdiction and lack ofclarity on which court has jurisdiction on certain issues. The four-tier court
system, with multiple courts of cassation and a weak Supreme Court, has beenheavily criticized in the literature, both domestically and internationally.53 The
Venice Commission has questioned the motivation for the multiple levels,
referring to it as going “far beyond the desire to create a more efficient judicial
system”.54

Procedural shortcomings that are subject to abuse by litigants and that lead tocase overloads and backlogs.



Weak post-court enforcement of civil and commercial claims. The general viewis that the key challenges do not lie primarily in the statutory framework, but inthe lack of its effective implementation by the relevant agencies, including theState Enforcement Service (SES).55

51

See Plenary Assembly of the Supreme Court of Ukraine, Resolution No. 1, April 11, 2014; Venice Commission,
Opinion No. 722/2013, June 15, 2013 (CDL-AD(2013)014), paras. 28 and 29; and Venice Commission, Opinion No.
403/2006, June 22, 2007 (CDL-AD (2007)028).

52

See, for example, Consultative Council of European Judges, Opinion No. 1, on the standards concerning theindependence of the judiciary and irremovability of judges, 2001 (para 48) requires that Ukraine abolishes the fiveyear probation for judges. This view is forcefully affirmed by the Plenary Assembly of the Supreme Court in its
Resolution No. 1, April 11, 2014. On the abuse of disciplinary oversight, see decision of the European Court of
Human Rights in Oleksandr Volkov v. Ukraine, 27 May 2013. (Application No. 21722/11).

53

See Plenary Assembly of the Supreme Court, Resolution No. 1, April 11, 2014, Venice Commission, Opinion No.
722/2013, and Venice Commission, Opinion No. 588/2010, October 18, 2010 (CDL-AD (2010)029).

54

Venice Commission Opinion 588/2010, p. 9. Also, Venice Commission, Opinion No. 722/2013, paras. 45 and 63.
The quote on the collision of jurisdictions originates from the Directorate General of Human Rights and Legal Affairsof the Council of Europe (Venice Commission, Opinion No. 588/2010). There are reports that the setting up of a
distinct Supreme Court for Civil and Criminal Cases was purposely introduced to side step the then-Supreme Court(chaired by a Chief Justice opposed to then President Yanukovitch) to ensure that politically sensitive appeal cases
were handled by loyalists parachuted in. See Popova, Politicized Justice (2012:12).
55

Carsten Mahnke and Jos Uitdehaag, Enforcement Matters: Enforcement in the Ukraine, (European Union and
WYG International led Consortium); EBRD, Law in Transition: Debt Enforcement in Times of Uncertainty, 2010;
EBRD, Law in Transition: Towards Better Courts, 2010; Leigh Turner (former British Ambassador to Ukraine),“Why Ukraine needs judicial reform”, Kyiv Post, June 23, 2010. See also CoE, Non-enforcement of Domestic Judicial
Decisions in Ukraine (on non-compliance by state agencies regarding post-court enforcement).

33


Weak professional standards and integrity as manifested in the recruitment anddisciplinary processes and in institutionalized corruption.
B. Discussions During the Diagnostic Study

General Observations
69.
The challenges in the enforcement of civil and commercial claims in Ukrainethat were recognized in the existing literature were confirmed in the discussions
during the diagnostic study. There is a clear view that the courts and the post-court
enforcement regime are largely ineffective and are marked by an almost universal
perception of pervasive corruption. These institutions enjoy little public or market trust
as being independent, consistent, timely or transparent in the resolution and enforcementof disputes, in particular civil and commercial disputes. Interlocutors repeatedly
mentioned established routines of inappropriate influencing of the courts and of the SES
by outside parties, operating through public officials in the government and inparliament. Such influencing is understood to be directed at gaining unfair market
advantages for powerful networks of political and economic elites. Important politicaland market players have made the court and enforcement agencies instruments tomanipulate the market, by squeezing out competitors, building monopolies, legitimizing
fraudulent and unlawful expropriations or facilitating extortionist transactions. Use of
the courts to legitimize corporate raiding is a frequent occurrence. Underlying the extent
of external influencing, there are persistent and authoritative reports that to become ajudge or prosecutor requires payment to key political agents. In addition to corruption
challenges and the lack of independence, the complex structure of the judiciary,inefficient court procedures and a dysfunctional post-court enforcement system wereemphasized by stakeholders as serious challenges in the enforcement of civil andcommercial claims.
70.
It is apparent that the challenges faced in the resolution and enforcement ofcivil and commercial cases have an adverse impact on economic activity. For
example, one meeting flagged the constriction of the rental market in the face of theimpossibility to evict non-paying tenants. Another meeting pointed at the prevalentsystem of pre-payments of services to minimize defaults, resulting in increasedtransaction costs and restricted market development. Banks pointed at the depleted
mortgage market, with some prominent banks having moved out of the mortgage
market, in part because of their inability to enforce security. The SME sector in Ukraine
is recognized as strikingly weak, which has been linked in part to the inability of small
business to enforce claims.
71.
Overall, in discussing the challenges identified, the following five categories
can be distinguished: (i) State capture and external influencing; (ii) judicial

34
organization; (iii) court procedure; (iv) post-court enforcement; and (v) professional
integrity.
Issues RaisedState Capture and External Influencing
72.
Stakeholders emphasized that the major factor fuelling the ineffectiveness ofthe judiciary is lack of independence. While the independence of the courts in Ukraine
is enshrined in the Constitution, authoritative international agencies and national
observers question whether it is adequately secured in statutory law and in practice.
They argue that the Constitution itself is applied in a way that violates its own wording
and intent.56 Various statutory provisions on the judiciary are regarded as violating
constitutional provisions. They are also seen as violating Ukraine’s treaty obligations,notably the European Convention of Human Rights (ECHR).57 The EU-Ukraine
Association Agreement signed on June 27, 2014, also has relevant provisions.58
73.
The appointment of judges is viewed as a key instrument that is used toundermine independence. This control originates initially from the membership of thecentral management body of the judiciary, the High Council of Justice, most of whose
members are appointed by non-judicial agencies. The High Council is an important
agency in charge of, among other things, the appointment and discipline of judges.59 The
control is further exercised through the reported upfront payments required to be madeto parliamentarians and others in order to secure a judicial appointment, thus creating asituation where judges are compromised from the point of recruitment. Judges recruitedin this manner are said to be in a difficult position to address corruption issues or, moregenerally, to maintain an independent mind on issues that come before them or the56
The appointment of judges by Parliament and the 5-year probationary period (Article 128, Constitution of Ukraine)and the method of composition of the High Council of Justice (the management body of the judiciary – Article 131)are viewed as being in disaccord with Article 126. Article 126 provides: The independence and immunity of judges
are guaranteed. External influencing of judges is prohibited.
57
Article 6 of the European Convention on Human Rights upholds the right of citizens to be tried before an‘independent and impartial’ court.
58

In the EU-Ukraine Association Agreement, whose political provisions were signed on March 21, 2014, Article 14
provides “…Parties shall attach particular importance to the consolidation of the rule of law and the reinforcement ofinstitutions at all levels in the areas of administration in general and law enforcement and the administration of justicein particular. Cooperation will, in particular, aim at strengthening the judiciary, improving its efficiency, safeguarding
its independence and impartiality, and combating corruption. Respect for human rights and fundamental freedoms will
guide all cooperation on justice, freedom and security.”59

The High Council forwards submissions to the President and Parliament (for the probationary period or permanent
appointment respectively) for the appointment and dismissal of judges, and hence is the critical sieve in that process.
(Article 131, Constitution of Ukraine).

35
challenges that the judiciary faces. An additional tool to muzzle independence is that theConstitution and the Law on the Judiciary and the Status of Judges establish that theinitial term of appointment of judges is for a probationary period of five years. After that
period, a definitive appointment may be made by the Parliament. There is a widespread
perception that this is a discretionary authority, which has been used to ensure theloyalty and compliance of judges.
Judicial Organization
74.
Discussions during the study identified that another major source of the
judiciary’s ineffectiveness is its unnecessarily complex and unwieldy structure.
More specifically, the statute on the organization of the judiciary introduced by theprevious government (President and Parliament) in 2010 is perceived as having been
purposely designed to permit and facilitate state capture and external influence. The
statute created an additional superior court, serving as a court of cassation, on top of thecivil and criminal courts (next to the superior courts for the administrative andcommercial courts, which already existed). At the top of this very large number ofsuperior cassation courts sits the Supreme Court, whose actual authority iscorrespondingly restricted.
75.
The complex structure of the judiciary creates problems of prolonged caseduration, jurisdictional conflicts, legal uncertainty, litigious behavior andbudgetary escalation. In most countries, the judicial system consists of three tiers. A
fourth tier necessarily invites longer case process. Additionally, in an environment
where one case can be filed in more than one court at the same time, this over-lapping
jurisdiction creates internal institutional conflict. Further, since which court has
jurisdiction is not always clear, cases have sometimes been filed in one court, only forthe litigant to find in the final instance that it should have been filed in another court andmust start the case anew in that other court. This contributes to legal uncertainty. Legal
uncertainty is further promoted by situations in which no court is willing to accept
jurisdiction of particular cases arguing that jurisdiction properly lies in another court.
Moreover, the jurisdictional problems apparently allow litigants to file objections in one
court against a case filed in another court. This encourages litigious behavior that further
clogs the courts. Finally, since each court stream has its own infrastructure and support
systems, the cost for the judicial system as a whole in public expenditure and efficiency
are said to be high.
76.
Interlocutors pointed out that the complexity of the judiciary extends
beyond the four-tier system and is also manifested in the overall management of
the system. In this regard, at the highest levels, the judiciary is managed by a number ofcouncils and the role of the Chief Justice and the Supreme Court is diluted. Two key
agencies are the High Council of Justice and the High Qualification Commission. Their36
powers are to initiate the selection and recruitment of judges, their promotion,
disciplinary proceedings and dismissal. With the exception of promotion (which is the
exclusive jurisdiction of the High Qualification Commission of Judges of Ukraine) there
is significant overlap of the powers of these agencies. In this regard, the Council ofEurope has noted that the distinct roles of each cannot be identified.60 Also, the HighCouncil is constituted by non-judicial agencies, which has raised fundamental questions
on its independence and impartiality. This is flagged as a problem by the Supreme Court
and the European Court for Human Rights has found it to be in violation of Ukraine’s
treaty obligations.61 Finally, the Chief Justice stated that his office does not have aformal position of authority or effective influence in the management of the courts.
Case Procedure77.
The study found that weaknesses in procedural rules create incentives that
discourage contract compliance—including the payment of debts—and are
instrumental to the weak payment culture in Ukraine. Debtors are aware that legal
shortcomings, either in the design of the legal framework or in its implementation, makeenforcement difficult principally because:No summary enforcement procedure exists. Any state agency—or private party
with an enforceable title, such as a mortgage or pledge—must first secure a court
order to proceed with enforcement. This includes even the post-court
enforcement service, the SES. It also includes the Tax Administration withregard to enforcing unpaid tax claims. The tax authorities cannot seize a bankaccount, but must first secure a court order. Non-payment of a claim, even when
uncontested, requires state and private creditors to refer a case to court always.
This encourages debtors to contest payment of claims, even when they did not
originally contest these, with the sole purpose of delaying payment.

Interim measures are rarely applied. Ukrainian law has a system of interim
measures (seizures, attachments, garnishments, etc.). However, interlocutors
complained that even while creditors routinely apply for such interim measures,
courts are reluctant to impose them. This means that debtors continue to enjoy
the use of their assets pending the outcome of a court case, which impacts on

60

Venice Commission, Opinion No. 588/2010, para. 50. Also, Venice Commission, Opinion No. 401/2006, on the
Draft Law on the Judiciary and the Draft Law on the Status of Judges of Ukraine, March 20, 2007
(CDLAD(2007)003), para 22 ff.
61
ECHR, Case of Oleksandr Volkov v. Ukraine. In this case the court found that the High Council of Justice did notmeet the test of Article 6 of the European Convention of Human Rights, notably in regard to independence andimpartiality. The court also found that this applied equally to the situation existing prior to 2010, in which the majorityof High Council members consisted of non-judges, as it did after 2010 in which the majority of High Council
members were judges, on grounds that the agencies appointing these members were non-judicial bodies.

37
debtor compliance incentives and significantly increases the risk of asset
dissipation.
No regime or tradition of imposing punitive damages or loss of profits exists.
Interlocutors further complained that Ukrainian courts have a restrictive traditionof applying damages for breach of contract, whether punitive damages ordamages for loss of profits.



The debtor evidentiary burden is light. In tax cases, for example, it suffices forthe debtor to state his disagreement with the claim, which then shifts the burden
to the tax authorities to justify it.62

78.
Debtors take advantage of the procedural rules to prolong cases and thus
delay enforcement of contracts because:No effective appeal barriers exist. There is little to stop cases from going toappeal. This clogs up the appeal and superior courts and causes significant
delays, which for tax cases in the Supreme Administrative Court can go up to 3
years. These delays favor non-compliant debtors.



Litigation is cheap and often free. Despite the elaborate system of court fees on
paper, civil and tax litigation continue to be largely subsidized by the taxpayer.63
Extensive exemptions apply. There are 24 exempt groups, including a large
number of state agencies. Also, a regime of reimbursement of court fees (such as
for cases dismissed only on procedural grounds) exists for certain procedures.
Also, court fees are applied uniformly: thus in tax cases litigants have to pay thesame fee regardless of the size of the claim or assessment, and regardless ofwhether the claimant is a private individual or a company. Moreover, court fees
decrease for appeals, with the fees of the appeal courts being half those of the
district courts. This invites extended litigation through use of appeals.

62
The law allows for taxpayers to file an objection to a tax assessment or the attendant penalty in case of latepayment. This objection does not need to be motivated. It is then incumbent on the tax authorities to advance thearguments on which basis the assessment, or the attendant penalty, can be justified. Judges identified this regime asproblematic: The absence of the need to substantiate objections has the dual effect of (i) boosting objections from
taxpayers (at least some of which may be spurious), and (ii) imposing the need of a broad-based and scattershot
defense by the tax authorities. As the tax authorities must cover all possible eventualities, it is very burdensome forthem and for the courts.
63

The share of court fees in contributing to court revenues in Ukraine is the second lowest among 47 countries
reviewed. The smaller the share of court fees, the higher the share for the taxpayer, who effectively subsidizes
litigation. With a share of 3.5%, Ukraine is an outlier even within countries in the region. (Cf., e.g., Bulgaria 52% andSerbia 76.7%). See CEPEJ, European judicial systems. Efficiency and quality of Justice, 2012 Edition, Chapter 3.5,
The revenues of the judicial system, pp. 76-81.

38


There is no statutory interest. Given high inflation, prolonging litigation is
profitable since the absence of statutory interest reduces the real value of debt.

79.
While the procedural weaknesses discussed above contribute to court
congestion, there are no effective out-of-court alternatives.


There are no effective alternative dispute resolution (ADR) systems. Mediationis nearly unknown, even though permitted under Ukrainian law. There is anarbitration practice, but it is modest and has no real market impact.64 Thiscondition is the natural consequence of the incentives outlined above: there is noreal financial or procedural incentive for debtors to seek out ADR.

There is no distinct regime for standard and small claims, which is burdensome
both to the market and the enforcement agencies. Ukrainian law does allow for
the summary enforcement if the debt is notarized, but this is little used.

80.
Contract compliance and payment of debts is further obstructed byinstruments available to debtors, which effectively block the legal process.


A much-used instrument is fraudulent insolvency. This serves as a subterfuge toescape debt payments since the application for insolvency creates a moratorium,
even if insolvency itself is not declared. Debtors apparently engineer applications
for insolvency and then have these lifted when convenient.

Civil claims cannot be enforced against state agencies or state-owned enterprises.
Ukrainian law provides for an effective moratorium on the enforcement of civil
claims against such agencies or such enterprises in which the state holds morethan a 25 percent stake.65

81.
Finally, Ukraine lacks a register for bad debtors. Consequently, it is hard forcompanies to determine the credit history of new customers. This invites opportunistic
debtor behavior, as some debtors move from one company to the next in a constantstring of defaults.
Post-Court Enforcement
82.
There is broad agreement that civil and commercial claims are notsystematically enforced following court decisions. Stakeholders consider that the post64

The State Service of Ukraine for Regulatory Policy and Entrepreneurship Development has a mediation function
for conflicts between businesses and public authority. However, its jurisdiction is limited to disputes with regard to
the issuance of licenses. It stated that it handles roughly 400 cases on an annual basis and that about 60% of thedecisions are made in favor of businesses as opposed to the state.
65

Law of November 29, 2001, No. 2864, on the Introduction of Moratorium on Coercive Sale of Property.

39
court enforcement service, the SES, has failed in applying all of the enforcement
measures available to it. There are complaints that, even when these measures areapplied, they are typically applied on a selective basis and usually in violation of theclear statutory deadlines. External interference, institutional corruption and complex
legal process were identified as among the key factors contributing to the ineffectivenessof the SES.
External Interference. Interlocutors stated that there is interference by outside
agencies in the work of the SES, notably by the Prosecutor General’s Officeusing its broad powers of oversight that go well beyond the criminal justicesystem. Interference is also manifested in what is viewed as a culture ofdeliberate non-compliance by state agencies to court decisions.

Complex Legal Process. Under Ukrainian law, a court decision does notconstitute enforcement title in its own right. The SES must secure an additional
document to proceed towards enforcement. This requirement is viewed as
unnecessarily complicating the enforcement process.

83.
Other issues pertain to the challenges faced by litigants in terms of cost andof holding the SES accountable for its performance.


Cost. The cost structure for post-court enforcement may sometimes dissuade
litigants from going through with the process. This is because the cost consistsof both a statutory fee (determined in terms of a fixed percentage of the valueof the claim) and coverage of enforcement costs (without a cap). Consequently,
while enforcement costs can be small for small claims, for large claims, theenforcement costs can be quite large.



Accountability. Litigants have little recourse against an under-performing SES
agent. Although there are rules which allow litigants to apply for the
replacement of an agent, senior lawyers stated that in practice the SES
routinely denies such applications regardless of how deserving they may be.

84.

A final set of challenges are more internal to the SES.
Workload, Incentives and Budgetary Aspects. The SES recognizes many of
the challenges discussed above, but points out that they are due in part to anumber of significant operational challenges it faces. The first is a heavy
workload. The SES had 8 million cases in 2013, which translates into 20003000 enforcement cases per annum per enforcement agent. The second is avery poor salary structure, including the lack of any incentive pay.
Enforcement agents are paid the same no matter how effective they are in
recovery. Third, the SES lacks an adequate operational budget for its needs,
including for tracking down assets.

Professional Integrity

40

85.
There is a widespread perception in Ukrainian society and in the market
that the courts and the SES are characterized by pervasive corruption. As discussed
above, the buying of judicial positions by applicants compromises the integrity of judges
from the outset. It is said that these advance payments need to be recouped and so often
lock judges into the status quo of corruption. There are reports that payments are
required not only at the time of recruitment, but also on an ongoing basis.66 Anothermanifestation of weak professional integrity concerns case assignment. A system ofrandom computerized case assignment was introduced in recent years. The objective of
the system is to reduce the possibility of outside parties influencing the outcome of court
decisions by directing cases to certain judges. However, discussions revealed a concern
by several interlocutors that that the computerized system is subject to manipulation andthat external influencing of case assignment continues. As regards the SES, stakeholders
identified institutional corruption as a major problem. Payments are made to SES
officials either to speed up or delay enforcement or to influence certain steps in theenforcement process such as the appraisal of assets. There are also said to be schemes
within the SES that lead to the fraudulent capture of private or corporate assets by stateagents. Other more general matters concerning corruption are discussed in Section II ofthis report.
Proposals for Reform86.
In addition to calls from civil society, business and Ukraine’s international
partners, the need for serious reform in the judiciary and in the post-court
enforcement process is openly acknowledged by the new government and the
judiciary. There is already an active reform agenda in place but it is still far from being
realized in practice. A cornerstone of the reform agenda is the government’s engagementwith civil society through, in particular, the Reform Support Center, a joint
government/civil society working group. The Center has 17 Task Forces, each of whichis assigned specific areas. These areas include judicial reform and post-court
enforcement for which the reform agenda can be said to have four broad objectives as
further discussed below.
87.
The first objective is to address state capture and external influencing. As
discussed above, the new government has inherited a regime in which the politicalbranches of government effectively exert direct control over the judiciary. In this regard,
the reform agenda seeks to enhance constitutional provisions guaranteeing
independence, ensure statutory conformity with the Constitution and meet a number of66

Article (in Ukrainian) posted on Pravda website last November 30, 2011. Available via the Internet:
http://www.pravda.com.ua/news/2011/11/30/6800310

41
treaty obligations. One specific goal is to reform the appointments process to ensure that
it is driven by the judiciary itself. Another key proposal is to abolish the probationary
period for newly-appointed judges. To this end, the government tabled a Constitutional
Amendment Bill in April 2014. In the run-up to the presidential elections in May 2014,
this Amendment Bill was withdrawn. Following the elections (June-July 2014), thegovernment tabled a new Constitutional Amendment. This new Amendment Bill does
not, however, include the judicial reform component. Many interlocutors stated that theyregret this development and will seek to have it corrected.
88.
A second objective is to effect the necessary changes in the organization andprocedure of the courts to strengthen the efficient, consistent, timely and effective
enforcement of disputes. A key area of contemplation is a return to the three-tier court
structure that existed prior to 2010. Also under contemplation is the establishment ofout-of-court or expedited resolution of disputes.
89.
The third objective is to strengthen the post-court enforcement stage ofclaims. The enforcement framework is being reviewed by the Reforms Support Center,the joint government/civil society task force established by the government. The SES
supports an abolition of the civil oversight role of the Prosecutor General’s Office in linewith international recommendations and Ukrainian draft legislation currently in
Parliament.67 One of the outputs of the joint task force is a draft bill on the partial
privatization of the enforcement service. This draft bill is in line with priorrecommendations in this domain.68 In addition, the government has developed an eauction system, on which a pilot project is being progressively rolled out.69 This project
has been welcomed by stakeholders. The aim of the project is to maximize recovery by
reducing the potential for fraud at the point of asset liquidation.
90.
A fourth objective is to strengthen the anti-corruption framework toenhance professional integrity in the courts and the SES. In particular, thegovernment enacted a Law to Restore the Trust in the Judiciary, which suspended anddismissed the judicial management board (the High Council of Justice), all presidents
67

A Bill on the Prosecutor General’s Office passed the second reading in Parliament on June 4, 2014 by the relevant
Parliamentary Committee and was sent for consideration in the second reading. Its adoption in the second reading by
the Parliament is pending. The Bill takes out the civil oversight role, but includes a number of other clauses that are
seen by some observers as unsatisfactory.

68
69

See, e.g., Mahnke & Uitdehaag, Enforcement Matters.

As a result of Directive of the Cabinet of Ministers of Ukraine No. 332-4 (April 1, 2014) a new system of e-auctions
became operative in Kiev and the Vinnytsia, Dnipropetrovsk, and Lviv oblasts. By Directive of the Cabinet of
Ministers of Ukraine No. 575-r (June 11, 2014), this system was also introduced in the Zaporizhia, Ivano-Frankiv,
Odesa, Kharkiv, and Chernihiv oblasts. The SES reports that 1506 movable and immovable seized assets have logged
into the database at a consolidated assessed value of UAH 346.3 million, of which assets at a value of over UAH 9
million have been auctioned.

42
and vice-presidents of the district courts and other senior officials.70 The Law also
envisages a special committee to verify the integrity of sitting judges. The study foundthat various steps have been undertaken in recent years to strengthen professional
integrity of the judiciary. These steps merit further support and strengthening. They
include greater professionalization of the recruitment system with the introduction of
objective standards and anonymous testing procedures, a Code of Ethics adopted by the
judiciary in 2012, and the Judicial Misconduct Complaints Form and process introducedby the Ministry of Justice in 2008.71 With regard to the SES, as noted above, the joint
government/civil society is working on a broad review of the post-court enforcement
regime. (See also, more generally, Section II of this report.)
C. Conclusions on the Judiciary and Post-Court Enforcement91.
On the basis of the conditions described above, the diagnostic study
concludes that substantial reform of the judiciary and the post-court enforcement
regime is required to ensure the effective, consistent, timely and transparent
resolution of disputes. In this regard, the government and the judiciary are committed
to ensuring the necessary reforms, including in the context of Ukraine’s IMF-supported
program.

Potential Areas for Program Discussions
92.
State Capture and External Influencing. To address the problem of state
capture and external influencing, the following should be considered for review anddiscussion:The role of external factors, including of Parliament in the recruitment anddismissal of judges.

The five-year initial period of judicial appointments (‘probationary’ period).



The composition of the central management agencies of the judiciary involved in
the appointment and dismissal process.

70

The law provides that the members of the High Council of Justice (other than the ex officio members) and the High
Qualifications Commission of Judges of Ukraine are suspended, while the presidents and vice presidents of higher
specialized courts, appeals courts, and local courts, as well as the clerks of the clerks of the higher specialized courts
and their deputies and the clerks of appeals court divisions are dismissed from their administrative function.
71
Council of Judges of Ukraine and State Judicial Administration of Ukraine, Strategic Plan for the Ukrainian
Judiciary for 2013-2015 (FAIR-USAID), December 2012. The Code of Ethics was adopted by the XI Conference ofJudges of Ukraine on February 22, 2013. The oversight over the judiciary no longer resides with the Ministry ofJustice.

43


The role of the Prosecutor General’s Office beyond the criminal domain, notably
its supervisory role over the courts and SES.

Work is already underway in these areas and other international organizations such as
the European Commission and Council of Europe, which have a broader mandate thanthe IMF on these issues, are actively following the reform discussion. In this regard, thegovernment understands that whether and how external influencing into the judiciary
should be included as part of the IMF-supported program requires further consultationand consideration within the IMF.
93.
Judicial Organization. To address the challenges raised by judicialorganization, the following should be considered for review and discussion:In close consultation with the Supreme Court, the High Council of Justice,further agencies as necessary (such as, possibly, the Supreme Administrative
Court) and civil society, develop an action plan, including draft legislation, on
the following topics:A return to a three-tier court structure and a simplification of thejurisdictions, with the overall objective to ensure an efficient, consistent,
timely and effective court process.



Consolidation of the number of management agencies, notably the HighCouncil of Justice and the High Qualification Commission and review of
their composition, with the overall objective of simplifying andprofessionalizing judicial management, with clear accountability structures.

To assist in accountability, the publication of regular reports with core
performance data of the judiciary, including inflow and outflow of cases,
clearance rate and disposition time, and the number of pending cases, should
be discussed.

94.
Some of these measures for consideration may be closely linked to the issues
raised in paragraph 92 above. Accordingly, the government understands that whether
and how such measures should be included as part of the IMF-supported program
requires further consultation and consideration within the IMF.
95.
Court Procedures. The following measures should be considered for review anddiscussion:Case Backlogs. A comprehensive review of the procedure before the civil,
commercial and administrative courts, touching on strengthening of out-of-court
disputes settlement; the enforcement regime for uncontested claims to ensurecompliance with the European Payment Order; the procedure for small and44standard claims; interim measures (such as seizures, garnishments and otherconservatory measures); executory deeds with the objective to broaden thenumber of deeds permitting prompt enforcement and by-passing the courts;
appeal procedures, particularly by introducing effective appeal barriers; theapplication of statutory interest; provisions on damages for contractual default;
provisions on mortgage enforcement. As regards cases pending in the superior
courts, the following measures should be considered, develop targeted measures
to reduce the large number of pending cases in the superior courts; strengthen
filters to pre-select cases coming to the superior courts.


Tax cases. In addition to the above measures concerning case backlog,
consideration should be given to imposing the obligation on taxpayers who
object to their assessment or to penalties attached to the assessment to give thegrounds for their objection; the mandatory court referral for tax enforcementcases should be reviewed.



Court Fees. The court fee system for civil, commercial and tax cases with anaim of transferring costs to litigants, distinguishing between private andcorporate entities and between case types. Any reform must uphold the principleof access to justice.



Bad Debtors. Develop a bad debtor register.



Expenditure Review. Consider a public expenditure review for the judiciary,
which examines the system as a whole, including the personnel allocations, thewage structure, and the efficiency of the work process, the organizational
fragmentation and the court fees/revenues. The expenditure review could include
targeted recommendations for (i) a more realistic and equitable salary structure
for both judges and court staff; (ii) an efficient judicial organization allowing for
economies of scale; (iii) increased efficiency in work processes; (iv) efficiency
gains in personnel allocations; and (v) court fee adjustments. These
recommendations should be in line with international standards, best practices
and recent developments throughout Europe.

96.
Post-Court Enforcement. The following should be considered for review anddiscussion:Enforcement Procedures. A review should be effected which critically assesses
the current enforcement regime, including the following issues: ending theoversight role of the Prosecutor General’s Office; abolishing the interim
enforcement title required for enforcement by the SES (see above); establishingliability of civil servants, bankruptcy and liquidation administrators and trustees
for failure to comply with court decisions; allowing for enforcement of civil
claims against the state, state agencies and state-owned enterprises, and forced

45
sale of assets; providing for effective compensation for delays; imposing
statutory interest for defaults; and giving due consideration to requests that an
enforcement agent be replaced.
Improving Efficiency. Actively pursue e-auction by (i) proceeding with anation-wide roll-out of e-auctions; (ii) ensuring all assets are logged onto the eauction system; (iii) giving e-auctions a more solid statutory basis. Consider asystem of private enforcement agents for certain categories of claims based oncomparative models.



Performance Accountability. Publication of regular reports with core
performance data of the SES, including inflow and outflow of cases, clearance
rates and disposition times, and the number of pending cases; regular publicationof the number of complaints filed against enforcement agents and the sanctions
applied.



Budgetary Aspects. An independent external review, with civil society
participation, of the budgetary constraints and performance incentives for
enforcement. The results would be published.

97.
Professional Integrity. To begin tackling the problem of professional integrityin the judiciary and in the SES, the measures set forth below should be considered forreview and discussion. (See also Section II of this report.)

Entrenching professionalism of recruitment by forcefully and consistently
implementing the Code of Ethics and following-up on cases received under the
judicial complaints process.



Regular publication of the number of complaints filed against judges and thesanctions applied.



An independent audit of the automatized case assignment system could be
conducted with civil society participation. The audit would identify problems
and make concrete recommendations on improvement. The audit report would be
published.

Analysis, perhaps by civil society, of asset declarations and performance of thecourts and of the SES.
V. OVERALL CONCLUSION

98.
This diagnostic study, which was called for by the government, represents
an important and useful tool for assessing a number of inter-related issues thathave an impact on improving governance and transparency of public sector
processes and decision-making in Ukraine. The government recognizes the

46
importance of following-up on the issues raised and recommendations suggested in thisreport and commits to doing so, including in the context of meeting the objectives of
Ukraine’s IMF-supported program. The government appreciates the assistance of theLegal Department and other staff of the International Monetary Fund in the conduct of
the study as well as all of the various stakeholders and interlocutors who provided theirvaluable time and frank views.

47
ANNEXES
A. List of Government Agencies Participating in the Diagnostic Study and Other
Entities Consulted
Ministries and Agencies
The Minister, Cabinet of Ministers
The Minister, Ministry of Finance
The Minister, Ministry of Economic Development and Trade
The Governor, National Bank of Ukraine
The Deputy Minister, Ministry of JusticeState Investment Agency
State Enforcement Service
Accounting Chamber
Antimonopoly CommitteeState Service of Ukraine for Regulatory Policy and Entrepreneurship Development (nowrenamed the State Regulatory Service)
State Committee on Entrepreneurship
Fiscal Revenue Administration
National Agency for Civil Service
Government Anticorruption Commissioner
Organized Crime and Anti-corruption Service, Ministry of Interior
Financial Intelligence Unit
Reforms Support Center
Working Group on Corruption – Administration of the President of Ukraine
Prosecutor General’s Office

Parliament
Viktor CHUMAK, Member of Parliament & Chairman of the Committee on Fighting
Organized Crime and Corruption
Viktor PYNZENIK, Member of Parliament & Former Minister of Finance

Judiciary
Supreme Court
Supreme Administrative Court
High Council of JusticeState Judicial Administration

48

International Organizations
European Union Delegation
Council of Europe
European Bank for Reconstruction and Development

Foreign Governments
Embassy of USA (USAID, US Department of Justice and US Embassy Moscow)
Embassy of France
Embassy of Canada
Embassy of UK
Embassy of Germany

Nongovernmental Organizations
American Chamber of CommerceCenter for Political and Legal Reform
Center of Judicial Studies
Anti-Corruption Action CenterTransparency International
Commercial Law Center
Notary Chamber of Ukraine and licensed private notaries
Ukrainian League of Industrialists and Entrepreneurs
European Business Association
Anti Lustration Committee
Ukrainian Bar Association
Reanimation Group
Ukrainian Legal Foundation

Business Sector
Ukrsibbank
Raiffaizen bank
Gide
Kyiv Star
Dragon Capital
Baker & McKenzie

49
B. List of References
Anti-Corruption and Anti-Money Laundering
Anti-Corruption and Anti-Money Laundering
Council of Europe – Committee of Experts on the Evaluation of Anti-Money
Laundering Measures and Financing of Terrorism (MONEYVAL)

Mutual Evaluation Report: Ukraine, March 19, 2009
(MONEYVAL(2009)4).

Ukraine: First Progress Report and Written Analysis by the Secretariat ofCore Recommendations, September 27, 2010 (MONEYVAL (2010)1 REV).



Ukraine: Second Progress Report and Written Analysis by the Secretariat ofCore Recommendations, December 6, 2012 (MONEYVAL (2012)31).

Council of Europe – Group of States against Corruption (GRECO), 2014, Joint Firstand Second Round: Fourth Addendum to the Compliance Report on Ukraine,
March 28 (Greco RC-I/II (2009) 1E 4th Addendum).
European Bank for Reconstruction and Development, 2013, Transition Report: Stuck inTransition – Ukraine Country Assessment. Available via the Internet:
http://tr.ebrd.com/tr13/en/country-assessments/3/ukraine.
European Commission, 2014, Implementation of the European Neighbourhood Policy in
Ukraine Progress in 2013 and Recommendations for Actions, March 27 (SWD
(2014) 96 final).
European Union-Ukraine, 2014, Visa Dialogue – Action Plan on Visa Liberalization,
December 14 (17883/10).
Organisation of Economic Co-operation and Development, 2014, Ukraine Progress
Update, Istanbul Anti-Corruption Action Plan, April.
Reanimation Package of Reforms, 2014, Newsletter No. 1, May. Available via theInternet: http://platforma-reform.org/wpcontent/uploads/2014/05/Euroinfo_RPR_01.pdf.
TORO Creative Union – Transparency International National Contact in Ukraine, 2011,
National Integrity System Assessment: Ukraine.
Transparency International, 2013, Corruption Perceptions Index: Ukraine. Available via
the Internet: http://www.transparency.org/country#UKR.

50
Ukraine, Ministry of Economy, Information on the State Building Contract between
Ukraine and the European Commission.
United States – Department of State, 2013, Investment Climate Statement, February.
Available via the Internet:
http://www.state.gov/e/eb/rls/othr/ics/2013/204754.htm.
United States Agency for International Development, 2009, Anti-Corruption Assessment
Handbook: Final Report, February 28.
World Bank, 2004, Ukraine - Building Foundations for Sustainable Growth: A Country
Economic Memorandum.
World Bank, 2014, First Development Policy Loan – Program Document, May 9(Report No. 86951-UA).
Business Climate_____, Ukraine Law of April 9, 2014, No. 1193, On Amendments to Several Legislative
Acts of Ukraine on Reducing the Number of Permit Documents.
_____, Ukraine Law of April 15, 2014, No. 1206, On Amendments to Several
Legislative Acts of Ukraine on Simplifying the Procedure of Setting Up Business.
_____, Ukraine Law of May 13, 2014, No. 1252, On Amendments to the Law of Ukraine“On licensing System in the Sphere of Economic Activity” on Improvement ofProcedure of Issuing Licensing Documents Executed by the Central Executive
Authorities.
_____, Ukraine Law of May 13, 2014, No. 1255, On Amendments to Several Legislative
Acts of Ukraine on Protection of Investors’ Rights.
_____, Ukraine Law of May 13, 2014, No. 1258, On Amendments to Several Legislative
Acts of Ukraine on Simplifying the Procedure of State Registration ofTermination of Entrepreneurial Activity of Individual Entrepreneurs According
to Declarative Principle.
Baker & McKenzie, 2014, Conducting Business in Ukraine.
Chadbourne & Parke LLP, 2013, General Legal Considerations for Doing Business in
Ukraine, May.
Guicci, Ricardo, Robert Kirchner, Georg Zachmann & Stephan von Cramon-Taubadel,
2014, Economic Reform Agenda for Ukraine, German Advisory Group –Institute for Economic Research and Policy Consulting, March.

51
KPMG, 2013, Your Business in Ukraine, January.
Organisation for Economic Co-operation and Development, 2012, Attracting Investment
in Renewable Energy in Ukraine, November.
PricewaterhouseCoopers, 2013, Doing Business and Investing in Ukraine.
Rojansky, Matthew, 2013, Corporate Raiding in Ukraine, International Research &Exchanges Board, Scholar Research Brief, July.
United States – Department of State, 2013, Investment Climate Statement, February.
World Bank, 2013, Doing Business 2014, Economic Profile: Ukraine (11th Edition).
World Bank, 2014, First Development Policy Loan – Program Document, May 9(Report No. 86951-UA).
World Bank – International Finance Corporation, 2011, Investment Climate in Ukraine
as Seen by Private Businesses, October.
World Bank - International Finance Corporation, 2014, Ukraine: Opportunities andChallenges for Private Sector Development.
Judicial Reform_____, Ukraine Law of November 29, 2001, No. 2864, On the Introduction ofMoratorium on Coercive Sale of Property.
_____, Ukraine, Council of Judges of Ukraine, and State Judicial Administration of
Ukraine, 2012, Strategic Plan for the Ukrainian Judiciary for 2013-2015,(FAIR-USAID) December. Available via the Internet:
http://pdf.usaid.gov/pdf_docs/PA00J4NC.pdf.
Baker & McKenzie, 2011, Dispute Resolution Around the World: Ukraine.
Blanchi, G., 2004, Academy of Judges of Ukraine: Needs, Capacity and Strategy
Assessment Report, European Union Program of Reform of Arbitration Courts
and Support to Court Administration of Ukraine.
Centre for Judicial Studies, 2011, Monitoring of Judicial Independence Report.
Available via the Internet: www.judges.org.ua/eng/article/Mon2011e.pdf.
Centre for Judicial Studies, 2012, Monitoring of Judicial Independence Report.
Available via the Internet: www.judges.org.ua/eng/article/Mon2012e.pdf.

52
Consultative Council of European Judges, 2001, Opinion No. 1, On Standards
Concerning the Independence of the Judiciary and Irremovability of Judges,
November 23 (CCJE (2001)OP No.1).
Council of Europe, 2014, Comments on the “Consolidated Draft Law” on the
Restoration of Trust in the Judiciary of Ukraine, March 31.
Council of Europe, 2007, Non-Enforcement of Domestic Judicial Decisions in Ukraine:
General Measures to Comply with the European Court’s Judgments, June 13(CM/Inf/DH(2007)30revE) Available via the Internet:
https://wcd.coe.int/ViewDoc.jsp?id=1150185&Site=CM.
Council of Europe, Commissioner for Human Rights (Thomas Hammarberg)Report Following his visit to Ukraine from 19 to 26 November 2011
dated February 23, 2012 (CommDH (2012)10).


Report Following his visit to Ukraine from 10 to 17 December 2006
dated September 26, 2007 (Commode (2007)15).

Council of Europe, European Commission for Democracy through Law (Venice
Commission)Opinion No. 747/2013 (December 10, 2013), On Proposals Amending theDraft Law on the Amendments to the Constitution to Strengthen
the Independence of Judges of Ukraine (CDL-AD (2013)034).


Opinion No. 747/2013 (November 14, 2013), On Proposals for Changes
to the Draft Law “On Amendments to the Constitution,
Strengthening the Independence of Judges” of Ukraine (CDLREF (2013)050).



Opinion No. 735/2013 (October 14, 2013), On the Draft Law on the
Public Prosecutor’s Office of Ukraine (CDL-AD (2013)025).



Opinion No. 722/2013 (June 15, 2013), On the Draft Law on the
Amendments to the Constitution to Strengthen the Independenceof Judges and on the Changes to the Constitution Proposed by theConstitutional Assembly of Ukraine (CDL-AD (2013)014).



Opinion No. 722/2013 (May 02, 2013), Changes to the Constitution of
Ukraine Proposed by the Constitutional Assembly and Draft Law
on the Amendments to the Constitution of Ukraine, Strengthening
the Independence of Judges (CDL-REF (2013)020).



Opinion No. 632/2011 (October 18, 2011), On the Draft Law on the Bar
and Practice of Law of Ukraine (CDL-AD (2011)039).

53
Opinion No. 639/2011 (October 18, 2011), On the Draft Law Amending
the Law on the Judiciary and the Status of Judges and Other
Legislative Acts of Ukraine (CDL-AD (2011)033).



Opinion No. 588/2010 (October 18, 2010), On the Law on the Judicial
System and the Status of Judges of Ukraine (CDL-AD(2010)026).



Opinion No. 403/2006 (June 22, 2007), Judicial Appointments (CDLAD(2007)028).

Opinion No. 401/2006 (March 20, 2007), On the Draft Law on the
Judiciary and the Draft Law on the Status of Judges of Ukraine(CDL-AD (2007)003).

Council of Europe, European Commission for the Efficiency of Justice (CEPEJ)
CEPEJ, 2012, European Judicial Systems: Efficiency and Quality ofJustice, CEPECJ Studies No. 18 (2010 data). Available via theInternet:
http://www.coe.int/t/dghl/cooperation/cepej/evaluation/2012/Rapp
ort_en.pdf.
Eastern Partnership Enhancing Judicial Reform in the Eastern PartnershipCountries, 2013, Working Group on “Efficient Judicial Systems”:
Project Report, March.



Eastern Partnership Enhancing Judicial Reform in the Eastern PartnershipCountries, 2013, Working Group on “Efficient Judicial Systems”:
Funding, Performance and Efficiency of Courts, March.



Eastern Partnership Enhancing Judicial Reform in the Eastern PartnershipCountries, 2012, Working Group on “Efficient Judicial Systems”:
Training of Judges, May.



Eastern Partnership Enhancing Judicial Reform in the Eastern PartnershipCountries, 2012, Working Group on “Efficient Judicial Systems”:
The Profession of Lawyers, May.



Eastern Partnership Enhancing Judicial Reform in the Eastern PartnershipCountries, 2013, Working Group on “Efficient Judicial Systems”:
Project Report, Judicial Self-Governing Bodies, Judges’ Career,
March.

Dahan, Frederique, Eliska Kutenicova & John Simpson, 2010, “Enforcing Secured
Transactions in Central and Eastern Europe: An Empirical Study,” EBRD Law inTransition, pp. 82-87.
European Bank for Reconstruction and Development, 2011, Commercial Laws of
Ukraine: An Assessment by the EBRD, March.

54
European Bank for Reconstruction and Development, 2009, Insolvency Law Assessment
Report.
European Bank for Reconstruction and Development, 2002, Insolvency Law Assessment
Report.
European Bank for Reconstruction and Development, 2011, Law in Transition: Towards
Better Courts.
European Bank for Reconstruction and Development, 2010, Law in Transition: Debt
Enforcement in Times of Uncertainty.
European Court of Human Rights, 2013, Case of Oleksandr Volkov v. Ukraine, May 27(Application No. 21722/11).
Hruba, Olha, 2013, Judicial independence in Ukraine, Poland and Romania –Compliance with Copenhagen Criteria (Central European University), March 29.
Koliushko, Ihor and Roman Kuybida, 2013, Constitutional Amendments: How to Avert
the Threat to Judicial Independence (Centre for Political and Legal Reforms),
September 17. Available via the Internet:
http://www.en.pravo.org.ua/index.php/150-constitutional-issues/553constitutional-amendments-how-to-avert-the-threat-to-judicial-independence.
Mahnke, Carsten & Jos Uitdehaag, Enforcement Matters: Enforcement in Ukraine,
Accountability and Effectiveness of Ukrainian Judiciary Functioning: Civil
Service Component (European Union and WYG International led Consortium)(EuropeAid/125611/C/SER/UA).
Mylnek, Mykola, 2013, Keeping the Judicial System as It is Now is Beneficial to theGovernment (Razumkov Centre), November 1. Available via the Internet:
http://www.razumkov.org.ua/eng/expert.php?news_id=4272.
Mylovanova, Zoya, Felix Rackwitz & Oksana Volynets, Debt Enforcement andInsolvency in Ukraine, Law in Transition: Debt Enforcement in Times ofUncertainty, 2010.
Natorski, Michal, 2013, “Reforms in the Judiciary of Ukraine: Domestic Practices andthe EU’s Policy instruments,” East European Politics, Vol. 29, Issue 3, May 13.
Pilkov, Konstantin, 2012, Ukraine. Arbitration-Friendly Jurisdiction: Statistical Report
2011-2012 (Cai & Lenard Law Firm).
Plenary Assembly of the Supreme Court of Ukraine, 2014, Resolution No. 1.

55Popova, Maria, 2012, Politicized Justice in Emerging Democracies: A Study of Courts in
Russia and Ukraine (New York - Cambridge UP).
Radio Svoboda, 2013, Judicial Reform by Most Other Names (Kharkiv Human Rights
Protection Group), August 23. Available via the Internet:
http://khpg.org/en/index.php?id=1376731507.
Simonenko, Valentyna, 2012, Judicial Ethics and Problems of its Implementation in
Ukraine (UNODC-OECD).
Tiede, Wolfgang & Oscar Rennals, 2012, “Recent Developments in the Ukrainian
Judicial System and the Impact of International and European Law,” Eastern
European Politics and Societies, Vol. 26, Issue 1, February.
TORO Creative Union – Transparency International National Contact in Ukraine, 2011,
National Integrity System Assessment: Ukraine.
Turner, Leigh, 2010, “Why Ukraine needs judicial reform,” Kyiv Post, June 23.
Available via the Internet: http://www.kyivpost.com/opinion/op-ed/why-ukraineneeds-judicial-reform-70756.html.
Urban, Andrew, 2008, An Analysis of the State Judicial Administration of Ukraine Court
Case Management Procedures, USAID-MCC Ukraine Rule of Law Project, June
30.
World Bank - International Finance Corporation, 2006, Ukraine Commercial Dispute
Resolution Study: Researching Commercial Disputes Among UkrainianCompanies.
World Economic Forum, 2012, “ Weak Institutions Restrain the Country’s
Competitiveness (Chapter 2),” Ukrainian National Competitiveness Report.
Activities – Technical AssistanceRound table about discussion of the draft laws on the Restoration of Trustin the Judiciary of Ukraine (March 2014).


Capacity building activity addressed to Ukrainian judges (June 2012).

Country visit to Ukraine organized under the Joint Programme between
the European Union and the Council of Europe “Enhancing
Judicial Reform in Eastern Partnership Countries” (June 2012).



Study visit to Poland for the representatives of the Ukrainian institutions(October 2011).

56

First anniversary of the High Qualification Commission of Judges of
Ukraine (October 2011).



The TEJSU Project and the Venice Commission urge Ukraine to takeaction on judicial reform (October 2011).



Study visit for judges from Ukraine to the Council of Europe (October2011).

New legal review available in Ukraine (October 2011).



Eastern Partnership: first meeting on professional judicial systems
Strasbourg (September 2011).

Training session specialized on IT issues (September 2011).



Working Group meeting on innovations (August 2011).



Anti-corruption training sessions (August 2011).



Alternative Dispute Resolution in criminal matters in Ukraine (July
2011).



Eastern Partnership: second meeting on independent judicial systems(July 2011).

Conference on the application of the case law of the European Court of
Human Rights in the legal system of Ukraine (July 2011).



TEJSU Project Steering Committee Meeting (July 2011).

Enhancing judicial reform in the Eastern Partnership countries Project :Working Group on Independent Judicial Systems (June 2011).

Enhancing judicial reform in the Eastern Partnership countries Project(May 2011).



A delegation from Ukraine on a study visit to Spain (May 2011).



Ukraine: strengthening co-operation with national authorities (April2011).



Seminars on the application of the legislation against corruption (April2011).

57


Seminars on the application of the legislation against corruption to beheld in Kyiv (April 2011).

Conference on Constitutional Aspects of the Judicial Reform in Ukraine(March 2011).

Training-of-trainers on the Methodology of the Interpretation of Legal
Acts (March 2011).



Alternative Dispute Resolution training (March 2011).

Training on legislative drafting for the Ministry of Justice of Ukraine,other government institutions and Verkhovna Rada of Ukraine(March 2011).

Round table about discussion of the draft laws on the Restoration of Trustin the Judiciary of Ukraine (March 2011).