Smugglers Beware: Ukraine Passes Customs Reform
On Tuesday, the Ukrainian parliament passed landmark reform legislation, launching the cleanup of a notorious cash cow that has long served as the source of as much as half of the bribe money that flows through Ukraine’s political system: customs smuggling.
On the Ukrainian border, a vast and complicated ecosystem of private smugglers and complicit officials import and export goods without paying customs taxes. Smuggled goods represent a shadow economy that results in two to four billion dollars per year in lost tax payments at a time when state revenue is vital for Ukraine’s very survival. The State Customs Service (SCS) is ranked in polls as Ukraine’s most corrupt and least trusted (2%) institution.
A broad coalition of reformers across the Ukrainian parliament, civil society, the business community, and G7 partners spent this summer preparing legislation that would reboot the SCS using a uniquely Ukrainian reform innovation: inviting international partners to vet key personnel decisions.
Most of Ukraine’s specialized anti-corruption agencies are well-run, thanks to Ukrainian legislation stipulating that candidates who apply to run these institutions must be vetted for integrity by commissions of reputable foreign experts nominated by official international donors such as the European Union and multilateral development banks. Over the past two years, Ukraine has been extending that reform strategy to judicial governance bodies and key economic institutions such as the Economic Security Bureau of Ukraine (ESBU).
Now the Ukrainian parliament has initiated a similar reform drive for the SCS, which will soon be run by a leader selected in a competitive process with international partners playing a decisive vetting role. As with ESBU reform, foreign experts will also sit on the commission that decides which of the 10,000 SCS staff members to retain. SCS staff will receive higher compensation, SCS leadership will be protected against dismissal by political authorities without an independent external audit, and the selection of senior SCS officials need not be approved by anyone other than the head of the SCS. Reformers in Kyiv collaborated with international partners to achieve this strong policy outcome over the objections of the finance minister.
Ukraine’s international partners—the G7, major donor projects, and the like—must understand that this is only the beginning of a long and difficult reform process. Without sustained international political attention, Kyiv will probably not dedicate enough wartime political capital to see through such a protracted and painful reform process. That means promptly sending exceptional foreign experts to serve on the leadership selection commission, initiating foreign aid programs that surge technical assistance and pay for staff training and equipment, helping to protect customs reform from sabotage perpetrated by enforcement agencies such as the SBU, and convincing businesses to remodel supply chains that involve smuggling instead of hoping that the reformist SCS leadership will be fired. For example, G7 ambassadors must be ready to push back hard when they receive phone calls from international CEOs or the President’s Office complaining about new SCS “red tape” blocking economic activity. Businesses and officials must know that the time has come to get with the program on customs reform.