Report

Culture of Corruption

Culture of Corruption

In December, the Illinois-based agriculture and food multinational Archer Daniels Midland (ADM) paid an eye-opening $54 million fine for allegedly giving corrupt Ukrainian officials $22 million over six years. The bribes weren’t an attempt to get special treatment for its products or to win lucrative government contracts. According to U.S. authorities, ADM was instead trying to grease the wheels of the country’s notoriously corrupt tax system by bribing officials to help the company get the $100 million tax rebate it was owed under Ukrainian law.

The case of Archer Daniels Midland in Ukraine illustrates how difficult it may be to change the country’s long-standing corruption problem. Transparency International ranks Ukraine 144 out of 177 countries on its Corruption Perceptions Index. That puts it even lower than current rival Russia, which comes in at 127. Meanwhile, the IMF is insisting that Kiev crack down on theft and fraud by government officials in order to get a much-needed $18 billion bailout. But ADM’s experience shows how much graft pervades even routine business in Ukraine.

"It is a fight every year." That’s how one ADM executive described the process of getting the Ukrainian government to hand over the company’s annual tax rebate, according to the company’s settlement agreement with the U.S. Justice Department. ADM is a huge commodities trader that processes and exports corn, wheat, vegetable oil, and other agricultural products from Ukraine, nicknamed Europe’s "bread basket" because it’s one of the world’s biggest grain exporters. When foreign companies buy wheat and corn from Ukrainian farmers, they have to pay a value-added tax (VAT), which is supposed to be refunded if the company exports the grain.

U.S. businesses, including agricultural and steel companies, have at times been owed a total of more than $1 billion, according to Morgan Williams, the president of the U.S.-Ukraine Business Council. "Basically the government was just taking the money and using it and not paying it back," said Williams.

Executives in ADM’s Ukraine subsidiary, Alfred C. Toepfer International, concluded that bribery was the only way to get the money back, according to the settlement. In one scheme, employees disguised the payments as insurance premiums to a separate company that funneled the money to government officials from 2002 to 2008. People who worked for the subsidiary in Ukraine told headquarters that the company needed to make a "donation" of 30 percent of the total amount owed in order to get the tax refund, according to the settlement papers. But the payments weren’t going to "local charities"; they were lining the pockets of Ukrainian officials, according to the settlement, in which the U.S. government agreed not to prosecute ADM in exchange for a $54 million fine. At one point, a company executive in charge of its tax compliance asked an outside organization about the purported charity arrangement. "Is this common practice in the Ukraine? Is it legal?" the unnamed executive asked in an email.

It definitely wasn’t legal, but it may indeed have been a routine way of doing business in Ukraine. The Office of the U.S. Trade Representative said in a 2013 report that Ukrainian tax authorities "distribute VAT refunds in an arbitrary fashion that appears to favor companies connected to the government or those that pay bribes."

"Companies report that Ukraine’s taxation system is a major obstacle for U.S. investors doing business in Ukraine," the report said.

The IMF specifically singled out the country’s system of tax rebates last week as something Ukraine’s new leaders need to fix in order to get the loans that the country now desperately needs to keep from going bankrupt.

Ukraine’s new leaders have said they’re going to root out corruption and make hard economic changes like cutting energy subsidies and reining in government spending. Prime Minister Arseniy Yatsenyuk blames ousted former President Viktor Yanukovych for leaving the country’s coffers empty.

"The state treasury is empty. And due to unbelievable and unlimited corruption in my country we cannot collect revenues in order to execute our social obligations, but despite this we have a clear-cut action plan [for] how to tackle economic problems," Yatsenyuk said last month in an interview with the Associated Press.

The only problem is that Ukraine has said it would fix the problem before. In 2010, the last time Ukraine was seeking a big loan from the IMF, Ukrainian officials said they would "eliminate delays in refunding legitimate VAT refund claims." But the government reneged on its promises and the IMF froze the loan in 2011.

"Changing the culture of corruption in Ukraine has to be viewed realistically, as a long-term, perhaps even generational, endeavor," said Jimmy Gurule, a professor at the University of Notre Dame’s law school and a former Treasury Department enforcement chief.

The IMF — which says it is ready to loan Ukraine money again if it pledges to change — concluded last week that the country needs $27 billion in loans from the fund and individual countries over the next two years. But former IMF chief economist Simon Johnson says he doesn’t think money alone will fix Ukraine’s long-term growth problems, which are a result of mismanagement more than anything else.

"This is a corrupt society," he said. "The people with political and economic power have proven themselves corrupt and they’ve stolen everything they can get their hands on and now we’re giving them more money. That doesn’t make a lot of sense."

Archer Daniels Midland, for its part, remains doing business in Ukraine. The company employs nearly 200 people and makes donations to "local charities" like the Illichivsk city hospital, according to the company’s website. It declined to comment for this article.