On May 12, 2021, the Cabinet of Ministers adopted Resolution No. 3959-1 to establish the Bureau of Economic Security of Ukraine (BES). Among other things, it will investigate criminal offenses of economic nature, for which it will receive the appropriate powers of the Security Service of Ukraine (SSU). The editorial staff of AIN.UA explains what the BES is in layman’s terms. We also learned how the Bureau’s establishment could affect the IT business in Ukraine. Usually, establishing a new inspection authority is just the emergence of yet another authority that can harass the business, no matter how many ‘Stop-Masked-Police-Raids’ laws are adopted. We explain what market players think about it.
What is BES
According to the explanatory note to the bill, the Bureau of Economic Security was established to detect, combat, investigate, and solve criminal offenses in the economic sphere.
According to its authors, the BES will deprive law enforcement agencies, namely the tax police, the Security Service of Ukraine, and the National Police, of the need to perform functions unusual for them. Thus, with the bill’s adoption, the SSU lost its powers to investigate corruption crimes and organized criminal activity in the economic sphere.
As Prime Minister Denys Shmyhal noted, the Bureau will receive the status of a central executive body and will deal with all crimes in the economic sector:
“This is one of the final steps towards the elimination of the tax police; this is the end of the times of squeeze on business, this is the final end of the ‘masked-police-raids,’
Denys Shmyhal, Prime Minister of Ukraine
Some of the key tasks of the BES:
- Identification of risk areas in the economy by analyzing structured and unstructured data;
- Assessment of risks and threats to the economic security of the state, development of ways to minimize and eliminate them;
- Submission of proposals regarding amendments to statutes and regulations on the elimination of prerequisites for the creation of schemes of illegal activities in the economic sphere;
- Ensuring the economic security of the state by preventing, detecting, terminating, investigating criminal proceedings that infringe on the functioning of the state’s economy;
- Collection and analysis of information about offenses that affect the economic security of the state, and determination of ways to prevent their occurrence in the future;
- Planning of measures in the field of counteraction to criminal proceedings referred by the law to its jurisdiction;
- Identification and investigation of offenses related to the receipt and use of international technical assistance;
- Drawing up analytical conclusions and recommendations for state bodies to increase the efficiency of their management decisions regarding the regulation of relations in the economic sphere.
In plain language
Yuri Sukhov, a business partner of the criminal law and business protection practice at Juscutum, told AIN.UA how the BES would work:
“The course of integration into the EU chosen by Ukraine dictates the requirement to ensure the state’s economic security and minimize tax pressure on business from the SFS bodies. It is a positive decision, the purpose of which is to protect the business from countless visits by various law enforcement agencies whose activities are duplicated. Therefore, creating a single body, the Bureau of Economic Security of Ukraine is desirable. Despite this, Ukrainian businesses will still face the problem of pressure from the old law enforcement agencies, but under new pretexts (SSU, for example, under the guise of financing terrorism).
BES is an investigative body authorized to initiate and carry out a pre-trial investigation, conduct investigative and covert actions, and carry out criminal intelligence operations. That is a full-fledged investigation with the detention of persons, searches, interrogations, reporting of suspicion, and the like. In fact, they created not an analytical body, as they declared, but another law enforcement body with limitless opportunities to put pressure on the business.
IT business, as a specific segment of the Ukrainian economy, will not be an exception. IT companies should beware of the work of BES detectives in the direction of investigating the following offenses:
- falsification of documents for the state registration of a legal entity and individual entrepreneur;
- evasion of taxes, fees, and payments;
- evasion of payment of single social security tax and insurance premiums for compulsory state insurance;
- fraud with financial resources, etc.
BES will look into the “tax burden optimization” tools of IT companies, in which, rest assured, law enforcement officers will see the corpus delicti in the form of tax evasion, and if they are criminalized, then VAT fraud. Under such conditions, the scenario of the BES’s work in the IT segment is obvious: the collection of information, intelligence using temporary accesses and searches, the seizure of financial documents and equipment that the IT company uses in its work to paralyze or slow down its work, as well as the subsequent arrest and interrogation of all employees.
In addition, the IT business should take into account the draft Law No. 3959-1 dated August 25, 2020, which introduces criminal liability for VAT fraud, which will fall within the authority of the BES. Detectives will work tirelessly on embezzlement or misappropriation of public funds in the form of VAT.”
What do IT representatives think
Dmitry Ovcharenko, Vice President for Financial and Legal Affairs of the “IT Ukraine” Association:
The IT Ukraine Association sees the creation of the Bureau of Economic Security of Ukraine cautiously positively. The fact is that now there are economic security units in the tax service, the SSU and the National Police. Now they want to take away the “economic” functions from the tax authorities and the police, so now two authorities instead of three will come to “harass” the business (BES and SSU). In addition, the pool of detectives and investigators is reduced from 9,000 to 4,000, which should also lead to a decrease in pressure on the business. We are talking about caution in assessing that “the devil is in the details” – it is necessary to understand the mechanics of implementation and other details.
Olga Kunichak, manager of the IT committee of the European Business Association (EBA):
It is not a secret that one of the main sore points to the IT industry now is the constant threat to the security of doing business in Ukraine, which emerges due to periodic interference and even outright pressure from law enforcement agencies. Ultimately, this creates an unfavorable economic environment for the Ukrainian IT industry and hinders the arrival of investment-attractive foreign companies. In turn, this not only interferes with doing business in Ukraine but predetermines, which is a shame, the withdrawal of domestic labor resources and capital abroad.
Although, according to the BES law, the Security Service of Ukraine loses its authority to investigate economic crimes six months after creating a new body, the very fact that the Economic Security Bureau will have same powers as the tax police stirs considerable concern in business circles. If we really have a goal to improve the position of IT in the international arena, it is necessary to adopt as soon as possible the draft Law No. 2740 dated January 15, 2020 “On the Amendments to the Criminal Procedure Code of Ukraine and the Criminal Code of Ukraine (regarding the improvement of the procedure for the application of certain measures to ensure criminal proceedings).” It provides for amendments to the Criminal Code of Ukraine to protect IT businesses from abuse by law enforcement agencies. In particular, from unreasonable searches, seizure of servers, and other equipment belonging to entrepreneurs.
Otherwise, the law-abiding IT business is forced to work in conditions of an increase in the number of regulatory bodies and the expansion of their powers, while, at the same time, with virtually no responsibility for their illegal actions, which in no way will stimulate the country’s economy.
In addition, the business will observe the establishment of a new body – the selection process of its director, recruitment, etc. If it has proposals or complaints, it will undoubtedly voice them.
When will BES come into being
- According to the plans of the Cabinet of Ministers, the BES will become fully operational in September 2021.
- The government has already allocated ₴587 million ($21.4M) for this purpose.
- The director of the Bureau of Economic Security of Ukraine will be appointed for 5 years according to the decision of the competition commission, which will include representatives of the Cabinet of Ministers, the National Security and Defense Council, and the Verkhovna Rada.
- It also became known about the creation of the State Supervision Council, which will monitor the activities of the BES.
