Commitments

09 Extractive Industries Transparency Initiative

Country: Ukraine
Action Plan: Ukraine Third National Action Plan 2016-2018
IRM Report: Ukraine Mid-Term Report 2016-2018 (Year 1)
Year Action Plan: 2016
Start Date: 2016  |  End Date: 2018

From the Action Plan

 
Implementation in Ukraine of the Extractive Industries Transparency Initiative

Event: Improvement of the mechanism for verifying information about ultimate beneficial owners.; Implementation timeframe: 2017-2018; Entities responsible: Ministry of Justice; Entities responsible: Transparency International Ukraine non-governmental organisation.; Partners: Implementation of mechanisms to search and display the relations between legal entities and their founders (participants), ultimate beneficial owners (controllers), including ultimate beneficial owners (controllers) of the founder, and heads of legal entities by updating the software for the Unified State Register of Legal Entities, Individual Entrepreneurs and Community Groups.

Event: Implementation in Ukraine of the Extractive Industries Transparency Initiative; Implementation timeframe: 2016-2018; Entities responsible: Ministry of Coal and Energy, Ministry of Economic Development, Ministry of Finance, Ministry of the Environment, State Geology and Subsoil Resources Service.; Partners: Renaissance International Fund, German Corporation for International Cooperation (GIZ), American Chamber of Commerce in Ukraine, non-governmental organisations Dixie Group, Analytical Centre for Regional Cooperation, Energy Transparency Association, the international initiative Publish What You Pay, other civil society institutions and international organisations (by consent).; Expected results: Ensuring the: Support in the Verkhovna Rada of Ukraine for the draft Law of Ukraine “On the disclosure of information in extractive industries” (until adoption). Publication of reports in Ukrainian and English based on the standards of the Extractive Industries Transparency Initiative (December 2016, December 2017).

Lead Institution: Ministry of Coal and Energy, Ministry of Economic Development, Ministry of Finance, Ministry of the Environment, State Geology and Subsoil Resources Service.


Support Institution: Renaissance International Fund, German Corporation for International Cooperation(GIZ), American Chamber of Commerce in Ukraine, non-governmental organisations Dixie Group, Analytical Centre for Regional Cooperation, Energy Transparency Association, the international initiative Publish What You Pay, other civil society institutions and international organisations (by consent).

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From the IRM Review

 

Year IRM Progress Report Published: 2018

5. Improve the ultimate beneficial owners’ verification system

Commitment Text:

Improvement of the mechanism for verifying information about ultimate beneficial owners.

Expected results: Implementation of mechanisms to search and display the relations between legal entities and their founders (participants), ultimate beneficial owners (controllers), including ultimate beneficial owners (controllers) of the founder, and heads of legal entities by updating the software for the Unified State Register of Legal Entities, Individual Entrepreneurs and Community Groups.

Responsible institution: Ministry of Justice.

Supporting institution: Transparency International Ukraine non-governmental organization.

Start date: December 2016                                          End date: July 2018

Commitment Overview

Specificity

OGP Value Relevance

Potential Impact

On Time?

Completion

None

Low

Medium

High

Access to Information

Civic Participation

Public Accountability

Tech. and Innov. for Transparency and Accountability

None

Minor

Moderate

Transformative

 

Not Started

Limited

Substantial

Complete

 

5. Improve the ultimate beneficial owners’ verification system

 

 

 

 

 

 

 

 

Yes

 

 

 

 

 

Context and Objectives

The law defines the ultimate beneficiary of a legal entity as the individual who has the ability to decisively influence, directly or through others, the operational management or business activities of that legal entity. Legally, the ultimate beneficiary has this ability irrespective of actual ownership of any interest in that legal entity.[Note188: Olyana Gordiyenko and Zoryana Matviychuk, “Ukraine: Upfront Disclosure of Beneficial Ownership Now Required,” Global Compliance News, 27 October 2014, https://globalcompliancenews.com/ukraine-upfront-disclosure-of-beneficial-ownership-now-required/.] Information related to ultimate beneficiaries was published in the United State Register of Legal Entities, Individual Entrepreneurs and Public Organizations of Ukraine (hereinafter the United State Register). Such information included the ultimate beneficiary’s full name, state of citizenship, and passport and tax identification data. The register is publicly accessible. Tax authorities can use such information to apply the concept of beneficial (ultimate) recipient (owner) of income established by the Tax Code of Ukraine and by treaties on effective double tax.[Note189: “Ukraine Enacts Law Requiring Mandatory Disclosure of Beneficial Owners of Companies,” Global Tax Alert, EY, 28 October 2014, http://www.ey.com/gl/en/services/tax/international-tax/alert--ukraine-enacts-law-requiring-mandatory-disclosure-of-beneficial-owners-of-companies.]

However, there are a number of challenges related to the functioning of the register and verification of its data. In the original metadata, a founder and a beneficial owner of a legal entity were coded as one entry. One address could host hundreds of enterprises. There were smaller fines for late provision of information, or responsibility was eliminated for incorrect provision of information. Currently, no state body holds responsibility for checking the information in the register.[Note190: Oleksiy Orlovsky (International Renaissance Foundation), interview by IRM researcher, 24 July 2017.] Data provided by the United State Register is not collected in a structured format. Registrars input the data as free text within a single field (“founders”) of an existing company registration form. As a result, the data is not available to users in machine-readable format nor can the ministry conduct verification and data cleaning in bulk. Thus, data quality is low, which, in turn, limits the data’s use. Currently, only 16 percent of Ukrainian companies submit any information on their beneficial owners. Beneficial ownership data is collected by default at the moment of company registration. However, there is no clear deadline to register. The register does not provide information about when the data was submitted. It requires no confirmation statement, so it is not possible to know if the data remains up to date. There is no online validation of beneficial ownership data at the point of collection.

This commitment aims to improve the mechanism for verifying information on ultimate beneficial owners. The update of the software for the United State Register would improve the quality of data and lead to better search and display features. This would make it possible to identify connections among legal entities and their founders (participants), and ultimate beneficial owners (controllers) of the founder, and heads of legal entities. The improvement of the verification mechanism will help advance public access to information on the true ownership of companies. Verification of beneficial owners ensures that the register contains accurate and reliable information. Such information can be used by responsible public agencies for detecting potential conflicts of interest, for instance in public tenders.[Note191: Victor Nestulia (Transparency International Ukraine), interview by IRM researcher, 27 July 2017.] Due to this commitment’s potential to improve the access to and the usability of beneficial ownership information, anti-corruption groups, such as Transparency International Ukraine, view this commitment as having a transformative potential impact.[Note192: Viktor Nestulia (Transparency International Ukraine), interview by IRM researcher, March 2018.]

Completion

The commitment has made limited progress. The verification mechanism would need to be legally mandated by Parliament, and technical details need to be outlined in a decree by the Cabinet of Ministers.[Note193: Oleksiy Orlovsky (International Renaissance Foundation), interview by IRM researcher, 24 July 2017.]

Before the digital verification mechanism is introduced, the government needs high-quality data that is in an open data format. To fulfill this precondition, in May 2017, the government adopted regulation #339.[Note194: “The Regulation of the Cabinet of Ministers of Ukraine on 18 May 2017 #339,” Legislation of Ukraine, the Verkhovna Rada of Ukraine: The Official Web-Portal, http://zakon2.rada.gov.ua/laws/show/339-2017-%D0%BF/paran2#n2.] The regulation supported the signing of a memorandum involving the State Agency for E-Governance, Transparency International Ukraine, and Open Ownership. The memorandum authorized the transfer of information on beneficial owners to the Global Beneficial Ownership Registry and publication of this information for the general public in open data format. The memorandum was signed soon after.[Note195: “The Interim Report on the Realization of the Action Plan for the Implementation of the Open Government Partnership Initiative in 2016–2018,” Civil Society and Authorities: Governmental Website, accessed 13 September 2017, (link no longer accessible as of 25 April 2018)  http://civic.kmu.gov.ua/consult_mvc_kmu/uploads/attach-3467-910681586.doc. ] The Ukrainian government has now opened access to information on beneficial owners in an open data format.[Note196: “Ukraine Has Disclosed Information on Beneficial Owners in Open Data Format,” Transparency International Ukraine, https://ti-ukraine.org/en/news/ukraine-has-disclosed-information-on-the-beneficial-owners-in-the-open-data-format/.] The IRM research confirmed this information.[Note197: “The Unified State Register of Legal Entities, Individual Entrepreneurs, and Community Groups,” Data.gov.ua, http://data.gov.ua/passport/73cfe78e-89ef-4f06-b3ab-eb5f16aea237.]

However, the transfer of the United State Register has not been completed. The Ministry of Justice has elaborated the draft technical specification of transferring the data on ultimate beneficial owners to the Global Beneficial Ownership Registry. It plans to develop the respective transferring algorithm.[Note198: Olha Saienko (Ministry of Justice of Ukraine), interview by IRM researcher, 4 August 2017.] Until then, ultimate beneficial owners can be found via two registries in an open data format: The United State Register and the Global Beneficial Ownership Registry (Ukrainian data currently unavailable). As of August 2017, the Ministry of Justice was still updating the software that would help distinguish the information on a founder and a beneficial owner of a legal entity in the United State Register.[Note199: Olha Saienko (Ministry of Justice of Ukraine), interview by IRM researcher, 4 August 2017.]

The next step involves an advanced online platform. The expert from Transparency International Ukraine explains that there is a vision, design, and technical description of the platform. The parties now have to code the IT solution for a software-enabled search for ultimate beneficial owners.[Note200: Victor Nestulia (Transparency International Ukraine), interview by IRM researcher, 27 July 2017.]

Next Steps

To fulfill the commitment on time, the government must recruit technical support for the development of the software for verifying information about ultimate beneficial owners. Crucially, the government must provide the Ministry of Justice with assistance in elaborating and introducing the software that will verify information about ultimate beneficial owners.

The IRM researcher recommends including the commitment in the next action plan. Based on the suggestions made by Open Ownership,[Note201: Zosia Sztykowski, Open Ownership, email correspondence with IRM researcher, 15 March 2018.

 

 

 

 

] the next commitment could include several changes to improve the access to and the usability of register data:

Collect structured data, improve quality of data, and allow for raising concerns.

The Ministry of Justice could adopt a system to collect data in a structured format. In such a system, company information could be submitted electronically, using in-line data entry points that allow for structured (i.e., machine-readable) information. The ministry could also explore generating unique identification numbers to differentiate individuals in the register. In addition, it could provide data about timeliness and access to historical data. These features would prevent corrupt or bankrupted individuals from hiding their past business history by simply dissolving a company and registering a new one. For example, the United Kingdom’s Companies House retains the data on defunct companies, plus historic information on a company’s directorships (though not yet on beneficial owners). This lets users see how a company’s officers have changed over time and the dates a person served.

The Ukraine system would also need to allow users to assess the trustworthiness of data and to raise red flags. For instance, if users spot a company that has not updated its beneficial ownership for several years, they could report it. This would help with verification of the data and enforcing regular updates to the register. Such a mechanism should be included in the register design.

Update regulation to close loopholes and ensure specificity.

The legislative changes and further guidance could be introduced to require a clear test of beneficial ownership for people reporting data to the register. Such guidance should outline all of the circumstances in which an individual would qualify as a beneficial owner and instruct registrants to select one of those circumstances or more. These selections must include specific details in regard to that data point. For instance, beneficial owners who control a company through a shareholding should be required to indicate the percentage of shares they own.

Moreover, once the register is launched, the IRM researcher advises establishing an evaluation to determine how successful it has been and to identify what further investigations and checks might be needed. Possible checks and investigations might include cooperation with other national authorities to gather more precise information about the chain of ownership.

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  Year 1 : Yes

Overview

Design

Specificity

Not Reviewed
None
Low
Medium
High

Relevant to OGP values

Potential Impact

Not Reviewed
None
Unclear
Minor
Moderate
Transformative

Implementation

Completion at Midterm

Not Reviewed
Unclear
Not Started
Limited
Substantial
Complete

Completion at End of Term

Not Reviewed
Unclear
Not Started
Limited
Substantial
Complete

Results

Did it Open Government?

Worsened
Did Not Change
Minor
Major
Outstanding


Starred as of Midterm: Yes

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