Leonid Kuchma said some time ago in his annual address to Parliament that an attempt will be soon made to legalize shadow capital: “It was impossible yesterday, is necessary today, and will be too late tomorrow.” We can notice two signs showing that the rules of amnesty are being drawn up: a National Security and Defense Council meeting is being prepared such an agenda and, as The Day has learned, a presidential decree to this effect is imminent.
The problem of legalizing shadow capital sooner or later had to emerge in this country in which at least half the domestic product is being produced in the so-called shadow sector, from which capital is then smuggled out at the beginning of economic transformations, to which substantial foreign investment never came, and which is on the eve of the privatization of lucrative strategic facilities. It would be wrong to say that Ukraine never took measures to bring back the funds which had fled to the shadows or abroad. But, against the gigantic backdrop of such flight, the instruments called upon to return the funds to the legal sector looked like a witch doctor against a neurosurgeon. Encoded (anonymous until recently) settlement accounts are in fact the only legal channel for such illegitimate capital, but bankers say the former shows no great movement of funds. The unreasonable hopes originally pinned on such accounts are clearly inconsistent with the modest results their introduction has wrought. This is a good reminder that legalizing capital requires an integrated approach: guarantees of the anonymous origin of money should go hand in hand with real economic changes. The one from whom they left and hid should now prove its own attractiveness, predictability, and the seriousness of its intentions.
Can the process of legalization be made effective and what problems should be solved to do so? What social problems can legalization exacerbate or alleviate? For our society will have to go through the process of reconciliation with what the overwhelming majority of citizens consider ill-gotten gains. Will those who have been mistrusting the state for years suddenly put their trust in it? These are only the first questions the answers to which are still to be found.
Today, we offer you the viewpoint of The Day’s first interlocutors and leave our pages open for a debate on this issue.
Stanislav ARZHEVITIN, chairman of the board, Azhio Bank:
“I am convinced that the problem of the legalization of capital should be solved by creating an attractive economic environment, rather than by administrative means. The authors of the legalization campaign should fight not the consequences but the causes which force the money to flee into the shadows.
“Some of these factors are still having a detrimental effect, and for this reason they must be done away with. The banker, like a doctor, can see all economic ailments from the example of individual customers, and my personal research in the real economic sector shows that the shadowization of capital has been caused by the following factors.
“First of all, by taxes. It has been proved that if taxes exceed a certain level, the enterprise must either flee to the shadows or perish. Our state has always been expensive and unable to manage its finances. Even today, direct and indirect taxes reach 60-80%.
“Barter is a unique way of payment we in Ukraine invented so that nobody knows who, when, how much, and at what price goods sell. I am aware of examples when no payments were made against the customers’ bank accounts for a whole year, but still the enterprise keeps working. In other words, the economy seems to be alive and kicking, but the danger of barterization is in that the state has stopped making payments by money.
“In 1992-1993 we observed a situation when the export of Ukrainian goods was based on dumping, while imports were often more expensive than world prices. When fair privatization begins, the money earned on the disproportion in price policy will come to the surface as the money of joint ventures disguised as foreign entities.
“Money also went into the shadows because of the instability of the national currency and because today enterprises find it more profitable to show losses than their true balance sheets. The current situation is that there is no closed circle of cash circulation: the money does not return completely to the banks because it is used to service the economy’s illegal sector. Up to 60% of cash flees to the shadows and accumulates there. And since this money was provided with a bridge to the shadows, it must also be offered a similar bridge back.
“Trust in the state and the banking system is the object of a special conversation. I find it difficult to say why, on the eve of legalization, which requires entrepreneurs to place their trust in the state, the latter is undermining this trust with every step it takes. This year alone, the authorities have made several decisions that continue to push businesses toward the illegal market. Take, for instance, the NBU resolution instructing banks to submit, on demand, to the tax authorities all information about their clients’ money movements. Earlier, such demands were only valid in case of legal case. A part of clients reacted automatically — I do not think I have to explain how — to the toughened controls.
“Another example: a law is in the making, which will help distinguish between clean and so-called dirty money. The bill reaches absurdity: it turns out that it is the bank that must identify whether its customers’ accounts receive clean or tainted money and whether the activity which produced this money complies with the law. When we calculated all this, we found that 90% of our clients’ settlements are subject to supervision and scrutiny, and we, the bank, are supposed to inform somebody about it. As bankers, we always stand our ground: if we do not keep commercial secrets, people will not come to us.
“In my opinion, the funds in illegal circulation can only be recovered through small and medium business. But, again, one must create the conditions for this, what is perhaps needed is a law granting an individual the right not to explain where he took this or that amount of current assets from.
“Large-scale capital will not, of course, play in business on this scale. But how then can we return millions from abroad? By all accounts, only through privatization. Thus, the foreign investor has to also be guaranteed the right of property as well as the promise that nobody will try to identify what kind of investor he is: really foreign or of Ukrainian origin disguised as foreign.
“It is vital not only to create an attractive economic environment but also offer state guarantees of the inviolability of property, which one can, if necessary, defend in an international court. This can bring capital back. But, in general, one should understand: what motivation can their be in an individual who has illegal capital, which he wants to take out of the shadows? Only to earn money. We should not flatter ourselves that capital will come out of the shadows for any different motive.”
Ivan SIKORA, chief of the Center for Forecasting Social, Economic, and Political Processes :
“The term shadow capital implies both criminal and non-criminal money. The line between these notions has been blurred a great deal. In principle, both varieties of capital have been accumulated by breaking the law: shadow capital suggests by its name that it is nonofficial. Yet, there is a distinction between the shadow capital amassed through tax evasion by people without any criminal record or ties and the criminal capital behind which criminal bosses stand.
“Perhaps, the first question is how we will distinguish between shadow and criminal capital. In other words, how will we determine which capital can be legalized and which cannot? What matters here is who will assess and classify the capital.
“Is it worthwhile in general to legalize shadow capital? It is not necessary to legalize domestic shadow capital if the country receives a torrential flow of investment, including from abroad, sufficient for economic development. But, in any case, I adhere to the opinion that capital is simply money: the fundamental question is what this money brings to society and the economy. That is, if the money invested in the economy promotes industrial development and contributes to upgrading our level of technology, the origin of this money makes no big difference to many people. But if the money comes to the economy to exploit production capacity to the maximum and effectively guard the profits from taxation, then the question arises: does the nation need this kind of capital?
“I would not say there is no aroma of money, but, in my opinion, this raises two problems: on the one hand, the problem of the economic effectiveness of such capital: it must be invested precisely where it is needed now and work effectively there. But, on the other hand, what corporate culture and what culture of interest lobbying will this money bring along? If this is criminal money, it becomes impossible in many cases to speak of any corporate codes of honor or business ethics. This could result in a worsened criminal situation.
“Businessmen will immediately face the question of trust: to what extent is the state fulfilling its obligations? Of course, businessmen who take capital out of the shadow will in any case run a risk. And, given the current culture concerning obeying the law in Ukraine, I think the risk will be quite high.
“But business is also impossible without risk, so whoever will be the first to believe and legalize will be able to reap more dividends. Whoever will do this later will, in all probability, reach a lower level of cost effectiveness.
“No doubt, high on the agenda will be the level of preparedness of a considerable part of society to reconcile themselves to the fact that somebody’s capital amassed, in their opinion, as a result of robbing and impoverishing them will be legalized. This will be a strongly traumatic experience for many representatives of the older generation: they are unlikely to believe that this capital will work to increase economic efficiency and their well-being.
“For this reason, in my opinion, what is needed is a balance between economic efficiency and the moral aspects of such a step. Should any imbalance emerge, the whole sense of the planned action will be lost.
