Analytics

Within 9 months of 2017 the tendencies regarding illegal initiation and low efficiency of investigation of criminal proceedings for tax evasion are still under way.

The activity of tax police investigators in view of initiation of criminal proceedings doesn’t decrease, despite the absence of powers according to the legislation, whereof the President of Ukraine and courts emphasized repeatedly. For more details please see our newsletter “What is to be done with “ghosts” (or if the financial investigations department as a part of the tax authority is addressing you now)”.

Thus, according to official statistics data, which is available on web-site of the General Prosecutor’s Office of Ukraine 769 criminal proceedings on tax evasion were registered in 3 quarters of 2017 (see the Table for convenience). That means that 254 new criminal proceedings¹ were registered during the third quarter, notwithstanding the fact that tax police do not have relevant powers from the beginning of this year.

Whereby it is interesting to compare information on number of opened criminal proceedings with its number in preceding periods in the context of increase/decrease of pressure on business. Compared with the third quarter of 2016 one can see that the number of opened criminal proceedings has been decreased by 29 %² (official statistics over 3 quarters of 2016 is available on web-site of the General Prosecutor’s Office of Ukraine by the link as well as in the Table for convenience). In the meantime, the tax police authorities have become more active in comparison with preceding periods of the current year, namely the number of opened criminal proceeding in comparison with I and II quarter of the current year (mid-point)³ has increased by almost 5 %.

Herewith the significant number of new opened criminal proceedings suggests that there are grounds for initiation of such criminal proceedings. In the view of its number we doubt that relevant reconciliated tax liabilities are present in all opened criminal proceedings (for more details on necessity of reconciliated tax liabilities see our newsletter “The steps to decrease the number of criminal proceedings upon the results of tax audits”). Herewith, in practice, sometimes the question lies not at the moment (whether relevant tax liabilities have become reconciliated or not), but in the existence of defined tax liabilities. As it appears from the Unified state register of court decision, sometimes in practice the ground for initiation of criminal proceedings may be not the results of audits, but the results of “researches”⁴ undetermined by the law. The illegality of such approach was considered by us in more detail on the National Bar Association VII Winter Forum of on Criminal Law and Process. The materials of presentation of Alexander Minin, Senior Partner at KM Partners, are available by the link.

After analysis of statistics on closure of criminal proceedings one may see that the rate of closed criminal proceedings predictably remain on the fairly low level. Thus, according to official statistics data the rate is 107 criminal proceedings in 9 months, and 70 criminal proceedings in the third quarter of the current year. In comparison, with preceding quarters of 2017 this rate is decent enough, insofar as only 7 criminal proceedings were closed in the first quarter and 30 ones in the second quarter of 2017. It means that about 65 % from the all closed criminal proceedings within 9 months is accounted for by the third quarter of 2017. But more than likely it is the tendency of work of pretrial investigation authorities, because the increase of the number of closed proceedings was present in the third quarter of 2016⁵. As for comparison of the number of closed proceedings by and large, 242 criminal proceedings were closed during 9 months of 2016, which constitutes more than 8 %⁶ of proceedings closed in the current year. Thus, the number of criminal proceedings closed during 9 months of the current year is less than during same period of 2016.

Herewith, other rates of effectiveness of work of pretrial investigation bodies still remain on the low level. Thus, 23 criminal proceedings with indictments were forwarded to the court in three quarters of 2017, therefore the number of criminal proceedings forwarded to the court has slightly increased from 2 to 3 %⁷ in comparison with the similar period of 2016.

That means that it is rather complicated to talk about effective pretrial investigations – the speed of pretrial investigations and its results remain on the rather low level, especially when it is estimated in the view of facts afterwards confirmed in courts⁸.

The significant place in judicial consideration of criminal proceedings on tax evasion take plea agreements, where evidence collection by the parties of criminal proceedings and its assessment by the court is absent. Thus, 43 verdicts were delivered within three quarters of 2017: 20 verdicts resulted in approval of plea agreements (for comparison only 11 verdicts of acquittal and 12 guilty verdicts were delivered by the courts within three quarters of 2017, that is the number of approved plea agreements constitutes approximately the number of cases, considered by courts on the merits). Herewith, the actual amount of tax evasion in all verdicts is UAH 4 210 025 368.23, and UAH 4 167 228 883.50 in cases, resulted in plea agreements. That means that 99 % of total is actual amounts of tax evasion under plea agreements.

It is interesting to note, that according to the texts of court decisions, delivered under the results of consideration of criminal proceedings, the approach of prosecution regarding the assessment of corpus delicti with so called «void transactions» by investigating authorities has been changed.

Thus, if «void transactions» were previously considered only as tax evasion, then now the prosecution also assesses conducted documents on the fact of existence of forgery and use of the forged documents when filing tax returns.

Accordingly, from the analysis of verdicts it appears that the prosecution more often (in 5 verdicts of the total amount 5 guilty verdicts and 2 verdicts resulted in plea agreement) «looks ahead» and also forms accusation in the part of official forgery in connection with filling of documents based on void transactions, that is the prosecution incriminates not only tax evasion (Article 212 of the Criminal Code of Ukraine) but official forgery too (Article 366 of the Criminal Code of Ukraine)⁹.

Furthermore, the prosecution additionally to the tax evasion and official forgery incriminates the use of deliberately forged documents (Article 358 of the Criminal Code of Ukraine), as one can see from cases, considered by the courts within the third quarter of 2017 (as it follows from 2 of 4 verdicts of acquittal).

For the purpose of analysis we turn our attention to the most interesting decisions.

Verdict in case No. 332/2858/14-к¹⁰ is especially noteworthy one among the verdicts of acquittal. The criminal proceeding regarding the person was opened under the fact of tax evasion due to the conduction of allegedly void transactions. It is interesting that accusation was grounded on the verdict regarding the director of the company’s contractor, who was found guilty in the crime provided by Article 205 of the Criminal Code of Ukraine. But the court rejected the reference of the prosecution to the verdict regarding the contractor’s director and stated that the existence of such verdict doesn’t lead to nullity of all agreements, concluded by the counterpart. Therefore, even for criminal cases the existence of the verdict under Article 205 of the Criminal Code of Ukraine regarding the contractor’s director has no prevailing meaning in the consideration of the case. Probably administrative courts should also take into account the mentioned position while considering the tax disputes.

Concerning guilty verdicts and plea agreements we suggest considering the decision, which has been completed two related cases: No. 523/8045/17¹¹ and 510/328/17-к¹², described in our newsletter “Criminal proceedings for tax evasion in the first half of 2017: “ghost” of tax police and “efficiency” of the court”. As we may remember, criminal proceedings were related to illegal use of the customs regime of processing, according to which oil products were imported to the territory of Ukraine allegedly with the purpose of processing, but actually were sold to the business entities. As we remember processing factory officials and companies, that provided expeditionary services on transshipment of nonexistent oil processing products in the port, were brought to responsibility in the second quarter of 2017. In the third quarter of 2017 the contractor’s director who acted as an accomplice¹³ in the mentioned scheme was brought to responsibility, as he had information on oil products market of Ukraine and assisted in the sale of smuggled oil products.

Special attention should be paid to the Verdict in case No. 522/17432/17¹⁴ which demonstrates the interesting practice on types of aiding and abetting in tax evasion. The matter of consideration in this case was aiding in tax evasion by the person who wasn’t employed but actually executed the functions of a lawyer. The person drafted statutory documents, necessary for registration and/or reregistration of sham businesses and further processing and opening of bank accounts for such businesses. Thus, the person was determined guilty (in accordance with plea agreement) in commitment of crimes provided by Article 205 (sham business) and Article 212 (tax evasion) of the Criminal Code of Ukraine.

Brief description of all verdicts, delivered by the courts in 3 quarters of 2017 are provided in Annex 1 to this newsletter.

Therefore, the tendency of consideration and results of criminal proceedings shows that there is much needed to be done in order to achieve proclaimed aim regarding decrease of pressure and change of work algorithms of the law enforcement authorities.

The above commentary present the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Footnotes:

¹According to official statistics data, which is available on web-site of the General Prosecutor’s Office of Ukraine, 515 criminal proceedings, where the decision wasn’t delivered, were registered in June 2017 as of the end of the reported period.

²According to official statistics data, which is available on web-site of the General Prosecutor’s Office of Ukraine, 1082 criminal proceedings under Article 212 of the Criminal Code of Ukraine were registered within 3 quarters of 2016, and 769 criminal proceedings – within 3 quarters of 2017. Meaning that the difference constituted 313 proceedings, which is 29 % of the total number of proceedings in three quarters of 2016.

³According to official statistics data, which is available on web-site of the General Prosecutor’s Office of Ukraine, 302 criminal proceedings were opened in the first quarter of 2017, while in the second quarter of 2017 255 criminal proceedings were opened.

⁴The Court ruling as of September 29, 2017 in case No. 761/34462/17 is available in the Unified State Register of Court Decisions by the link.

⁵The rate of number of closed criminal proceedings in similar periods of 2016, namely 27 closed criminal proceedings in the first quarter, 88 in the second one and 127 in the third quarter of 2016.

⁶Given that in 9 months of 2017 about 14 % from all registered criminal proceedings were closed, in similar period of 2016 the part of closed criminal proceedings constituted about 22,4%.

⁷Thus, according to official statistics data, which is available on web-site of the General Prosecutor’s Office of Ukraine, 23 of 769 registered criminal proceedings, that constitutes 3 % of the total number of proceedings were forwarded to the court with indictment in 3 quarters of 2017; in similar period of 2016 21 of 1082 registered criminal proceedings, that constitutes 2 % of the total number of proceedings were forwarded to the court with indictment.

⁸Thus, the courts delivered 12 guilty verdicts in three quarters of 2017, which constitutes only 1,6 % of the total number of criminal proceedings registered by the law enforcement authorities in current period.

⁹In the first quarter of 2017 there were only 3 verdicts from 13 ones concerning cumulative crimes committed (which amounts to 25 %), in the second quarter this amount was almost doubled and persons were accused of tax evasion and sham business in 7 cases of 13 (54 %), while in the third quarter of 2017 the persons were accused in all 7 cases (100 %) for tax evasion and for use of deliberately forged documents (in 5 cases) or sham business (in 2 cases).

¹⁰The verdict of Zavodskyi district court of the city of Zaporizhia in case No. 332/2858/14-к as of 17.07.2017 is available by the link.

¹¹The verdict of Suvorovskyi district court of the city of Odessa in case No. 523/8045/17 as of 19.06.2017 is available by the link.

¹²The verdict of Reniyskyi district court of the city of Odessa in case No. 510/328/17-к as of 05.04.2017 is available by the link.

¹³The verdict of Suvorovskyi district court of the city of Odessa in case No. 523/11081/17 as of 30.08.2017 is available by the link.

¹⁴The verdict of Prymorskyi district court of the city of Odessa in case No. 522/17432/17 as of 26.09.2017 is available by the link.

Kind regards,

© WTS Consulting LLC, 2017

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