Why is capital running away from Ukraine? Is it because big business is displeased by something or is afraid of somebody or something here? In our country people reflect on these matters after the fact, but first and foremost they try to “bar access.” The State Financial Service Market Regulatory Commission (Derzhfinposluh) is already reporting that it has stopped the exodus of capital from Ukraine through reinsurance. “Commercial structures and important people, who are laundering money under the guise of propriety have suffered losses to the tune of 400 million dollars,” reported the chairman of Derzhfinposluh, Viktor Suslov.
According to Suslov, two years of work have resulted in the opening of nine criminal cases against insurance companies, involving billions. “Since January we and the National Bank of Ukraine have instituted control over reinsurance contracts abroad. After this, any agreements pertaining to the transfer of money abroad have become impossible. None have been concluded this year,” Suslov announced with satisfaction. He said that in 2003 fake reinsurers took 3.07 billion hryvnias out of Ukraine; in 2004 it was 1.9 billion. This year reinsurance contracts amounted to a mere 201 million. The chief regulator of the financial market says that this is absolutely genuine insurance.
At present, according to Suslov, attention will be totally focused on putting the domestic financial service market in order. In particular, the commission proposes to update pertinent legislation, reduce the number of compulsory insurance policies, and introduce reinsurance licensing. The commission went as far as to suggest that it take over cabinet’s regulatory insurance authority. The move to international bookkeeping standards by this sector and other non-banking institutions is regarded as an important means of improving the insurance market.
“The latter condition is crucial to the arrival of foreign investors in Ukraine,” notes Suslov. Although judging by what is happening in this market, our current standards of accountability are not stopping foreign insurers. Lately, a number of very prestigious Western companies (in Poland and Austria) have been actively absorbing Ukrainian ones. Suslov predicts that if these trends continue, domestic insurance companies may start closing en masse. Suslov does not take any responsibility for this and assures that this was not caused by the suspension of scheme operations (i.e., not owing to our efforts, but as a result of market concentration, the emergence of large companies and the crowding out of small companies).
“I’m getting the impression that foreign investors in our market will not be enough,” predicts Suslov. “That’s a plus. It shows that Derzhfinposluh is doing a good job and that investors appreciate the regulatory system. It suits them.”
But let’s get back to the international accounting standards. The Derzhfinposluh chairman told The Day that they have worked out principles for evaluating assets. If Ukrainian insurers “shift to a common economic language with the entire world,” all the commission’s cunning with respect to forming demands of assets will not come in handy. According to Suslov, low quality assets and reserves are a deeply rooted disease of the insurance market. At present, insurers have a great many assets that have no real value as part of their reserves. Although their nominal value gives them some significance, the Derzhfinposluh chairman points out: “This is especially true of securities, and so we are instituting mandatory securities quotations.”
If these are quotations in the PFTS [First Stock Trade System], there has to be a first and second listing level (i.e., they must be included in a standardized list of stock exchange commodities — Auth.). Before 2009 the regulator is allowing the use of a third-level securities listing. Everything that does not pertain to securities will not be accepted when computing reserves. This means that a number of companies with no reserves whatsoever will instantly appear in Ukraine. Accordingly, they will not be able to honor their commitments to the insurers. “Either they find real assets by 2006 or they will withdraw from the market,” notes Suslov. It turns out that slightly more than 140 companies are capable of complying or have already implemented these norms. According to Tetiana Mosiychuk, the deputy chairman of Derzhfinposluh, approximately 50 percent of insurance company portfolios consist of securities.
Therefore, in order for insurers to straighten out their reserves on time, Derzhfinposluh has allowed them to increase investments in real estate by 30 percent. Keeping up to 10 percent of assets on a drawing account is now permitted. The level of life insurance deposits to reserves has increased from 50 to 60 percent.
Nevertheless, the chief regulator noted regretfully that, contrary to all of the commission’s efforts, insurance companies continue being used to optimize insurance, and billions of hryvnias from the revenues of large enterprises never reach the budget.
According to half-year statistics, compared to the first half of 2004, the amount of insurance premiums has dropped by almost two billion. This is usually the way to evade taxes. Here is a simple example. If two billion have not been included in gross expenditures, we have the right to regard this as an increase in the taxation base. Of this two billion, 25 percent — 500 million hryvnias — were supposed to go to the budget. Yet businesses can include insurance expenses in their gross expenditures and thus reduce the base and underpay income tax. From this one may conclude that there will be new schemes.
“Today we are witnesses to a sharp increase in operations with securities,” notes Suslov. “That same outflow of capital is starting to trickle into this sphere. A problem is emerging, which is linked to fictitious payments of accumulated money in order to legalize it. The basis of financial schemes in insurance has not been eliminated.” What makes this scheme so attractive, according to Suslov, is that it is perfectly legal. You can avoid paying billions of hryvnias in taxes on lawful grounds. Therefore, the laws must be changed, primarily the income tax law.
Much would change with the introduction of a tax on insurance companies’ revenues. In the first place, the schemes would become ineffective where insurance is used in order to evade taxes. The principle is simple. If a business carries out a fictitious insurance operation that does not produce payments, all the collected premiums are turned into the insurer’s income. From this, 25 percent will have to be paid anyway, be it a business or an insurance company. Whichever way you look at it, the scheme doesn’t work.
Insurers, meanwhile, take a dim view of any interference in their financial activities, any attempts to change taxation. They continue to insist on the existence of a civilized insurance market in this country.
As for schemes, who told Mr. Suslov that the people who invented the method for evading taxes one time will not do so again? Unless conditions for business are provided in Ukraine, new schemes will keep cropping up.
