Report

Culture of Corruption

How an American agribusiness giant's alleged bribes illustrate Ukraine's endemic graft problem.

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.

Specer Platt/ GETTY

Report

Energizing Europe

Secretary of State Kerry pledges U.S. help in weaning Ukraine, and Europe, off Russian energy.

Taking time out from the saga of Jonathan Pollard and the collapsing Mideast peace talks, U.S. Secretary of State John Kerry on Wednesday, April 2, waded into Europe's energy battle with Russia, promising U.S. assistance to help Europe find alternative sources of energy beyond Moscow's control.            

Ever since the confrontation between Kiev and Moscow heated up late last year, and especially since Russia's forcible annexation of the Crimean peninsula in February, European leaders have been fretting about their energy security and heavy reliance on supplies of Russian natural gas. Ukraine, in particular, has been hammered by Russia's use of the energy weapon; on Tuesday, Russia jacked up by about 40 percent the price it charges for natural gas exported to Ukraine, and raised the specter of further price hikes that will put more stress on an already wobbly economy.

Kerry, speaking at a U.S.-European Union Energy Council summit in Brussels, said that the U.S. wants to help ensure that Europe is able to accelerate its long-overdue energy diversification.

"It really boils down to this: No nation should use energy to stymie a people's aspirations. It should not be used as a weapon," Kerry said.

He stressed two big measures that could help Ukraine, in particular, get out from under Moscow's thumb: Bringing new sources of gas from Central Asia and sending gas from Eastern Europe back into Ukraine to undercut Russian dominance. He also nodded to the role that future exports of natural gas from the United States could play in diversifying global energy markets.

Those overtures were backed up in a joint statement by a coterie of energy and foreign-policy heavyweights, including EU foreign affairs chief Catherine Ashton, EU Energy Commissioner Gunther Oettinger, and Daniel Poneman, the U.S. deputy secretary of energy, who often serves as the Energy Department's point man on international energy issues.

Both Kerry and the joint statement also applauded Ukraine's efforts to undertake painful domestic energy reforms, including raising the domestic price of gas by about 50 percent, in order to improve its finances and reduce dependence on Russia. Kerry called the measures "critical."

In the short term, getting alternative supplies of natural gas to Europe will be difficult. One key step Europe can take is to improve the physical energy links between countries, which often act as "energy islands" despite their membership in the 28-nation economic bloc.

"Everybody agrees we are much better off than in 2009 [the last time Russia shut off gas supplies to Europe], but we are still short of having the infrastructure for a truly integrated energy market in Europe," one Central European diplomat said in an interview.

Kerry said that the United States and the EU were working in "lock step" to speed up a reverse pipeline connection that could carry gas from Central Europe into Ukraine, especially from Slovakia. While much of the gas that could be sent from Europe back to Ukraine is still ultimately sourced in Russia, prevailing prices in Europe are cheaper than the new, punitive rates that Moscow charges Kiev.

The Central European diplomat said that achieving reverse flows on pipelines between Slovakia and Ukraine would be the biggest step, because existing pipelines from Poland and Hungary to Ukraine supply only small amounts of gas. Slovakia, in contrast, could pipe significant volumes of gas to Ukraine, or the equivalent of about 40 percent of Ukraine's gas consumption. Technically, the pipelines appear ready, but political obstacles have thus far prevented full operation of the Slovak pipeline.

In the longer term, both the United States and the EU want to accelerate the development of alternative sources of gas. Kerry stressed the importance of the Southern Corridor, a collection of pipelines meant to bring gas from Central Asia, especially Azerbaijan, to southern Europe. One such conduit, the Trans-Adriatic Pipeline, is already under construction and could bring modest amounts of Azeri gas to Europe by 2018. Another big project, the Trans-Anatolian pipeline, could eventually bring significant amounts of Azeri and Turkmen gas to southern Europe by way of Turkey.

Ultimately, the United States and Europe are also interested in tapping the new bounty of U.S. natural-gas production, which can be liquefied and shipped to customers overseas. European diplomats from countries in Central and Eastern Europe have blitzed Washington in recent months pleading for the United States to fast-track plans to export gas.

"Our new capacities as a gas producer and the approval of seven export licenses is going to help supply gas to global markets, and we look forward to doing that starting in 2015," Kerry said. However, it will take years, and billions of dollars in investment, before the U.S. can ship meaningful amounts of natural gas overseas. Even then, higher prices in Asia would likely limit the amount of gas that lands in Europe.

Oddly, he erroneously said, echoing comments last week from President Barack Obama, that the United States could export more gas than Europe currently consumes.

"That simply cannot be right. Somebody has clearly made a mistake in arithmetic," said Andrew Holland, senior fellow for energy and climate at the American Security Project.

Even if the entirety of proposed U.S. LNG export terminals were approved and built, the United States could only supply about two-thirds of current European gas consumption.

Georges Gobet - AFP - Getty