What to Expect from the ESB Reform: Analysis of Draft Laws

Ukraine is in a “bad” balance where businesses trying to operate honestly (meaning paying all taxes) lose out to companies that have been able to “bargain” and use “gray” or “black” schemes for their operations. There are many reasons for this situation, from history to institutional weaknesses (a detailed analysis of the reasons goes beyond the scope of this article). However, it is clear that such a situation reduces budget revenues, “deters” honest businesses (including foreign ones), and ultimately negatively affects people’s well-being, as the competitive struggle is won not by those enterprises that can offer the best product (in terms of price-quality ratio), but by those with corrupt connections.

Since 2014, Ukraine has embarked on building a system of independent anti-corruption institutions, ultimately aiming to bring our country out of this “bad” balance. It cannot be said that this process has been easy – the NACP had to be “rebooted,” the High Anti-Corruption Court started functioning almost a year behind schedule, and a new head of the SAPO was appointed over two years after the end of the competition. Therefore, if the Economic Security Bureau had been successfully created on the first attempt, it would have been an exception to the rule. Unfortunately, this did not happen. We hope that its “reboot” will be successful. However, it is worth remembering that each day of sabotage of anti-corruption reforms means lost money for the economy.

When and why was the Economic Security Bureau (ESB) created?

Before the creation of the ESB, the authority to combat economic crimes was divided among various law enforcement agencies:

• Tax police (a unit of the Fiscal Service)
• Main Department of Counterintelligence Protection of the State’s Interests in the Sphere of Economic Security (a unit within the Security Service of Ukraine)
• Department of Economic Protection and the Main Directorate for Combating Organized Crime (National Police)

The dispersion of authority created additional corruption risks. These mentioned structures often exerted pressure on enterprises, which negatively affected the business environment in the country.

The solution to this problem involved the creation of a single central executive authority that would accumulate all powers related to the detection and pre-trial investigation of economic crimes. The first attempt to create such an agency occurred back in 2013 with the draft law “On the Financial Investigations Service of Ukraine (financial police).” However, due to the understandable reluctance of other structures to delegate authority, the lack of political will, and the lengthy preparation and development of the legislative framework, steps to implement these projects were only taken in 2021. On January 28, the Verkhovna Rada adopted the law “On the Economic Security Bureau of Ukraine.” On May 12 of the same year, the government approved the resolution “On the Establishment of the Economic Security Bureau of Ukraine.” As a result of adopting these documents, the Fiscal Service and the tax police were liquidated. Shortly before that, the economic department was abolished within the Ukraine Security Service. The Economic Security Bureau began its work.

However, it failed to fully function according to its original intent as an analytical and investigative body aimed at identifying economic crime “schemes” and facilitating their closure. From the very beginning, the ESB was dependent on the Office of the President and soon became a tool for sabotaging the actions of other, more independent anti-corruption institutions. The key reason for such institutional weakness of the ESB was the lack of qualified personnel. For example, six months ago, the head of the Public Control Council at the Bureau, Taras Kotov, stated that out of the 4,000 employees envisaged by law, only 800 were working in the Bureau, emphasizing the need to introduce competition for positions within the Bureau at the legislative level.

Draft laws on reforming the ESB: main changes

In the fall of 2023, people’s deputies submitted two draft laws (No. 10088 and No. 10088-1) to Parliament to reform the ESB. However, these bills were not considered in the session hall due to the coalition’s refusal to bring them to a vote. In January 2024, the government submitted another draft law ( No. 10439), to which MPs submitted several alternatives: No. 10439-1 and No. 10439-2 (re-registered as 10088, which was later re-registered again as 10439-4). Both the business community and Ukraine’s international partners reacted negatively to the government’s draft law (despite the pressure of being threatened with a ban on foreign trips, MPs did not approve it either on February 23 or on March 4).

In a collective letter from the G7 ambassadors, it is stated that the draft law must include the following provisions:

1. An open, competitive, and transparent competition for the new ESB Director position, including integrity checks.
2. Conducting an independent audit of the ESB’s activities one and three years after the appointment of the new Director.
3. Excluding the possibility of dismissing the head of the ESB by the Cabinet of Ministers, instead leaving such possibility based on the findings of an independent assessment.
4. Re-certification of all ESB employees and the appointment of new ones through a transparent and legally regulated procedure.

The IMF memorandum (para. 25) outlines similar provisions that should be included in the new law on the ESB: ensuring an open, transparent, and competitive process for the selection of leadership and personnel, strengthening requirements for the selection committee, implementing a contractual system for employees, and defining a mechanism for personnel certification. It is also essential to maintain a clear delineation of responsibilities between the ESB and the NABU.

The European Business Association has supported draft law No. 10439-2 (now 10439-4), which proposes re-certifying all ESB employees, not just new ones as proposed by the government, within one and a half years rather than after martial law is lifted. It also suggests that international experts should have a predominant voice in the selection committee for appointing the ESB head (by one vote).

According to the Anti-Corruption Action Center, if the government’s draft law on the ESB were adopted, it would effectively continue to be subordinate to the Deputy Head of the President’s Office, Andrii Yermak’s advisor Oleh Tatarov. After the Verkhovna Rada failed to adopt the government’s bill on the ESB on February 23 (partly due to public outrage and pressure from international organizations), all draft laws on this topic were withdrawn from consideration. Therefore, deputies were forced to re-register their draft law. A comparison of the government’s and MPs’ draft laws is contained in Table 1 below.

Do the proposed bills address the issues with the ESB?

The ESB is the sole institution in the country with the authority to investigate financial, economic, and tax crimes. Therefore, it is crucial that it operate honestly and independently, thus helping to ensure a level playing field for businesses. However, we currently have a classic example of a “captured institution” that can be used to exert political pressure on companies.

Analyzing the provisions of the government’s draft law, one can conclude that its primary purpose is to avoid changes in the operation of the ESB. Specifically, it proposes to re-certify bureau employees only after the end of martial law, the duration of which is indefinite. It can be assumed that this is done to avoid re-certification and to retain current personnel in their positions. Furthermore, the government’s draft law proposes that the procedure for certification be determined by the Cabinet of Ministers rather than by a newly appointed director selected through a transparent competition, which raises doubts about the ESB’s independence. Additionally, having an equal number of representatives from the Cabinet of Ministers and international organizations on the director selection committee leaves room for the process to be sabotaged. Unsurprisingly, another attempt to simulate reform has caused widespread outrage.

Therefore, we hope that the parliamentary draft law on reforming the Bureau will be adopted, which introduces a full re-certification of its employees and the independence of the Director and also meets the wishes of international institutions upon which Ukraine’s external financial assistance depends (however, these wishes should not be perceived as blackmail since the reforms insisted upon by Ukraine’s international partners are aimed at increasing the resilience of our economy and budget revenues).