The Bureau of Economic Security and the New Article on VAT Fraud: What Are Lawmakers Preparing for Businesses?

On September 3, 2020, the Verkhovna Rada of Ukraine adopted in the first reading Draft Law No. 3087-d “On the Bureau of Economic Security”, which proposes replacing the Tax Police with the Bureau of Economic Security of Ukraine—a new law enforcement agency with broader powers.

Of course, the final text of the law may differ significantly from the current draft, but if the main provisions remain unchanged, the Bureau of Economic Security of Ukraine will become a powerful tool for state influence over businesses. Given this, it is important to analyze the key aspects of the draft law to assess its potential impact, as the well-known saying is particularly relevant in our country: “Forewarned is forearmed.”

The primary task of the Bureau of Economic Security of Ukraine will be to prevent, detect, and investigate a range of business-related crimes, including:

• Tax evasion
• Crimes involving excise goods
• Obstruction of legitimate business activities
• Fraud involving financial resources
• Forgery of documents for state registration of legal entities and individual entrepreneurs
• Securities-related crimes
• Illegal privatization of state and municipal property
• Unauthorized use of trademarks and service marks
• Illegal collection and disclosure of commercial or banking secrets
• Intentional bankruptcy

Among the crimes that the Bureau will investigate is also the deliberate insolvency of banks. Given recent years’ developments, this raises concerns that the Bureau could be used as a tool to exert pressure on former owners of banks removed from the market by the Deposit Guarantee Fund.

Thus, the Bureau of Economic Security of Ukraine will, to some extent, combine the powers of the Tax Police, the Security Service of Ukraine (SBU), and the National Police.

The draft law also proposes adding a new article—Article 222-2 “VAT Fraud”—to the Criminal Code. This crime is defined as the misappropriation or embezzlement of budget funds through VAT refunds or the submission of false information to claim budgetary compensation. It is worth noting that the current version of Article 212 of the Criminal Code does not provide for imprisonment as a punishment for tax evasion, limiting liability to fines. However, the proposed Article 222-2 introduces imprisonment for VAT fraud for up to twelve years. Moreover, under current law, a person is released from criminal liability if they pay the owed taxes before being charged. However, the proposed new article does not include such a provision, meaning offenders may face severe consequences even if they attempt to rectify their violations voluntarily.

Thus, individuals committing tax-related crimes in the future may not only be forced to pay substantial fines but also face imprisonment, as stipulated by the criminal laws of several developed countries, including the United States and Germany.

There is also a significant risk that criminal proceedings related to VAT fraud will be used to increase pressure on businesses. Currently, such pressure from tax and law enforcement authorities is not weakening, and unfortunately, there are no grounds to believe that this situation will improve in the future.

As of now, cases involving illegal VAT refunds are often investigated not only by tax police investigators—whose legal status remains questionable—but also by the National Police under Article 191 of the Criminal Code (“Misappropriation, embezzlement, or seizure of property through abuse of office”). However, from a legal standpoint, this approach is quite questionable. Article 191 of the Criminal Code requires that the misappropriated property be entrusted to or under the management of the accused, which is not the case when it comes to unjustified VAT credit claims. This legal inconsistency allows for strong legal arguments to challenge the legitimacy of pre-trial investigations and, as a result, achieve exemption from criminal liability.

It is worth noting the significant number of employees proposed for the Bureau. Lawmakers currently suggest that the Bureau’s workforce could reach up to 4,000 employees.

Additionally, some Bureau employees will have access to automated information and reference systems, registers, and databases of the National Securities and Stock Market Commission, the Antimonopoly Committee of Ukraine, the State Property Fund of Ukraine, state financial control authorities, and other institutions.

Upon presenting an official ID, Bureau employees will have the right to freely enter government offices, local self-government bodies, and customs control zones.

Bureau employees will also have the right to send mandatory proposals and recommendations to government authorities and local self-government bodies regarding the elimination of causes and conditions that contribute to criminal offenses under the Bureau’s jurisdiction. These authorities will be required to review such proposals and provide a response within 30 days regarding their consideration.

In addition to the already existing National Anti-Corruption Bureau of Ukraine (NABU) and the State Bureau of Investigations (SBI), lawmakers are proposing to establish yet another law enforcement agency with a large staff and broad powers that could significantly impact businesses. Given this, we urge entrepreneurs to strictly comply with tax legislation, especially regarding VAT, to minimize the risk of facing scrutiny from the Bureau of Economic Security of Ukraine in the future.

This publication does not constitute legal advice and is provided for informational purposes only. If you are facing a specific issue related to this topic, we recommend seeking a full consultation from our legal specialists.

This article was written by Hryhorii Chumas, an attorney at WinnerLex Law Firm. The copyright for this material belongs to WinnerLex Law Firm.

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