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Transparency on beneficial ownership is essential for good governance and reforms

La transparencia en los beneficiarios reales es fundamental para la gobernanza y las reformas

Olena Pavlenko |

Ukraine is one of the largest producers of gas in Europe – in 2016, we produced more than 20 billion cubic meters (BCM) of gas. The biggest share of this production belongs to the state, through the state gas production company Ukrgazvydobuvannia. In 2016, they produced more than 14 bcm of gas.

However, for years, these types of businesses in Ukraine have been a good source of unlawful enrichment. Some private companies, usually related in some way to politicians, have signed cooperation agreements with Ukrgazvydobuvannia and used its gas production equipment for free, or have taken some of the gas produced. Some companies have benefited from unfair business by selling licenses that they had obtained through the state for a low price. These activities meant the state was losing revenue and a substantial amount of gas, and it had a developed a shortage of equipment. When journalists began to investigate, what they usually found were small companies, registered either in Ukraine or offshore, with no information about who exactly stood to benefit from the revenue they generated. Efforts to communicate with such companies proved fruitless.

Driven by the need to promote real competition and fair rules, civil society in Ukraine launched an initiative to make information about beneficial ownership a legal requirement, with the support of the Renaissance Foundation. Lawyers from civil society organisations worked on a robust draft law together, and passed it on to Ukraine’s parliament.

In the aftermath of the Ukrainian Revolution of Dignity, there was a very strong willingness for change and, in the spirit of reform, the parliament voted in favour of a law which made disclosure of beneficial owners mandatory in October 2014. The new law stipulated that all beneficiaries of companies have to fill out a special form and send it to the Ministry of Justice, which then makes the information public by adding it to a public registry. The law can be found here (in Ukrainian).

When the law came into force, it showed some gaps, and it was possible for interested stakeholders to ignore it. For example, there was no serious punishment for not providing such information, and for some companies it was a sign that the law was not being properly implemented. As a result, while big oligarchs with legitimate businesses provided information about their beneficiaries, other less honest businesses and those connected to politicians chose to ignore the law. Some civil society organisations and experts started to advocate changes to the law, but each next year that followed the Revolution has made such reforms increasingly difficult – so the process in parliament is still ongoing.

In 2015, Shell started the process of exiting its agreement on gas production with Ukraine. The Ukrainian government opened a competition for a new investor to replace Shell with the same production sharing agreement’s conditions, which are quite favourable for the company. In 2016, an unknown company won the competition, which immediately raised hundreds of questions concerning its beneficial ownership. Under public pressure, the government made the decision to turn down the winner.

With the EITI Reports publication, Ukraine became more transparent and open tor reforms of its extractive sector. The EITI has been helpful for the PWYP coalition in Ukraine – known as Energotransparency. Thanks to the EITI, every new year, more information is made available to regional communities. Last year, although the EITI wasn’t as comprehensive as needed, we were able to especially focus our efforts on making more information available to local communities, which was quite helpful in encouraging civil society engagement. In 2017, we expect a more detailed report, which will be even more useful for making local communities aware of budgeting and planning activities. This will hopefully lead to better governance of the extractive sector, which is precisely the goal of the EITI.

But without information about the real owners of such companies, and as such, those who could be considered as having beneficial ownership, it is impossible to identify whether there is a clear separation between politics and business in the extractive sector. This makes it hard to talk about real reforms, transparency, and improving business climate, which Ukraine is in great need of now. That is why opening of beneficial ownership information is a step not only to improve the governance of the extractive sector, but also towards the development of the country in general – both at national level and sub-regional level.

As set out in the EITI, we have made the demand for open information on beneficial ownership an integral part of the new draft law on transparency in the extractive sector. In addition to the previous law on transparency, which was adopted in 2015, this version is more comprehensive and will be a challenge to pass through parliament. But we are thinking positive, and expect that it will come into effect by the end of 2017.