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15Sep

Secrecy Blankets Corruption In Ukraine’s Defense Sector

15 September, 2017

SECRECY BLANKETS CORRUPTION IN UKRAINE’S DEFENSE SECTOR
(By Illia Ponomarenko, Published Sept. 15, 2017, https://www.kyivpost.com/ukraine-politics/secrecy-blankets-corruption-uk...).

 

Since Russia’s war started in 2014, Ukraine has been spending much more money on its defense sector than ever. But how much of it is well-spent is an open question.

Almost all defense purchases are still conducted in secrecy, a dangerous practice for the nation with a long history of corruption in state procurement.

In 2017, the country’s security and defense spending reached a record Hr 129 billion, or $4.9 billion, which is roughly 5 percent of the nation’s gross domestic product of $100 billion. For comparison, most of NATO’s 29 members don’t meet the alliance’s spending goal of 2 percent of GDP.

The ramp-up came quickly. Ukraine spent very little on its defense before Russia’s invasion of Crimea and the Kremlin’s instigation of war in the eastern Donbas in 2014, which has killed more than 10,000 people with no end in sight.

With this massive investment, Ukraine is seeking to defend itself, while overhauling a long-neglected and underfunded military, with the ambitious goal of meeting NATO standards by 2020.

But to do so, the country needs to reduce corruption in the sector. Many critics say it is far from doing so. Graft watchdog Transparency International’s Government Defense Anti-Corruption Index in 2015 rated the level of corruption in Ukraine’s military sector as high. The situation looks unchanged today.

Even assessing how much money is being stolen or misspent in the defense sector is nearly impossible due to the rigid secrecy of most contracts. Ukraine’s legislation gives the Defense Ministry and its subsidiaries freedom to decide which purchases to make public and which to keep secret.

A few controversial purchases that were discovered by journalists show the Defense Ministry’s enterprises buying overpriced equipment, overpaying by tens of thousands of dollars to firms that appear to be linked to defense officials or top political leaders, including President Petro Poroshenko.

Poroshenko’s press service issued a statement on Sept. 14 said the allegations “are unfounded, not confirmed by any facts, and appear to be an improper political tactic that is being used against the president by his opponents within the country and his enemies in the aggressor state.”

 

SOCKS MADE SECRET

Ukrainian media, activists and top officials point fingers at Ukroboronprom, the state arms agency with 80,000 employees and 130 enterprises. Its activities are cloaked in secrecy, justified on national security grounds.

One of those ringing alarms is Finance Minister Oleksandr Danyliuk. He called for greater accountability.
Defense spending is “fully non-transparent,” Danyliuk said during a conference sponsored by Chatham House on July 5 in London. “Even for me, as a minister who finances a lot of purchases, I’m not fully aware of what actually is happening, how effectively money is used. This is wrong.”

Danyliuk said that he saw contracts for purchasing items like socks and buckets marked as top secret. When he asked defense officials why such trivial purchases were made secret, he was told that the number of socks can help the enemy figure out how many troops that Ukraine is deploying.

“This is the last area being reformed We need to speed it up. If you want to build a strong, competitive army, we need to put more money in building or buying new weaponry,” Danyliuk said. “In order to do it, there needs to be some transparency, some accountability for money put in, because then there will be trust.”

The secrecy covers more than just socks and buckets.

In February, Poroshenko signed a decree on the state defense procurement plan for 2017–2019. However, the plan is classified as secret. Ukrainians won’t learn what will be purchased and how much spent.

One reason for the high level of secrecy, defense watchdogs allege, is that Poroshenko is financially benefiting from defense spending.

That is the conclusion of Oksana Syroyid, an opposition member of parliament with the Samopomich Party who serves as deputy speaker of the Verkhovna Rada.

“The president is one of the main beneficiaries of the defense budget,” Syroyid told the Kyiv Post. “This is a conflict of interest, first of all, for the president of the country at war.”

She wouldn’t begrudge the president’s success in making money from the war so much, she said, if she could be assured that the money is being spent wisely. But she cannot say that, she said, because of secrecy surrounding the defense budget.She didn’t want to go into too much detail, however, saying she could be prosecuted for divulging state secrets.

“Because of the state secrecy law, all the information regarding defense procurement is classified,” Syroyid said. “If you look at how it is procured and who supplies those services, you would be shocked. I can get access to this information, but I can’t leak it to you. I would be punished for leaking, not those using state funds.”

She called the situation disgusting, “especially when I get to the front line and talk to soldiers and see how they are equipped, when they sell those new tanks for export and when they provide those old weapons to Ukrainian soldiers; when I know that Ukroboronprom didn’t provide almost anything to the army during the war.”

The published defense budget, she said, amounts to 20 vague lines on a spreadsheet, in contrast to the wealth of information that the U.S. government publishes about the world’s biggest defense budget of some $500 billion annually. Ukraine’s budget will include such items as “four billion hryvnia for increasing defense capacity, so you just have to guess” what the money is for, Syroyid said.

Another person with insider knowledge of how defense procurement works also pins the blame on Poroshenko.

Viktor Plakhuta quit last year as head of the defense department of the Ministry of Economy and Trade. Oddly, the ministry approves defense purchases, even though Plakhuta said it amounts to rubber-stamping requests from the Ukraine’s Security and Defense Council or Defense Ministry.

Plakhuta is now the chief executive officer at the Ukrainian Freedom Fund, a think tank seeking to introduce transparency and competition into the defense sector.

He told the Kyiv Post that Poroshenko has vast, unchecked powers over the sector, which gets the largest share of the $40 billion in state spending.

“I think Poroshenko regards Ukroboronprom as one of his instruments to retain power,” Plakhuta said. “The whole defense and security sector is under him. We have such a proverb: When the war lasts more than a year, it becomes a good business. Unfortunately, our president is not a reformer.”

Two people identified as key Poroshenko figures in defense spending are former business partners, Roman Romanov, the head of Ukroboronprom, and Oleh Gladkovskiy, first deputy secretary of Ukraine’s National Security and Defense Council, which makes decisions about defense spending and armaments procurement.

 

SCHEMES UNCOVERED

The defense purchases that were leaked or uncovered in journalist investigations show examples of corruption in the sector.
In one controversial contract, which was leaked to Ukrainian journalist Oleksandr Dubinskiy in May, state-owned defense company SpecTechnoEksport bought four used armored Toyota Land Cruiser V8 cars from a Cyprus-registered company HUDC Holding Limited, paying $428,000.

Dubinsky claimed that the beneficial owner of the offshore seller is Gladkovskiy, the first deputy secretary of Ukraine’s National Security and Defense Council, appointed in 2015 by Poroshenko, his longtime business partner.
Gladkovskiy’s office confirmed in a comment emailed to the Kyiv Post that Gladkovskiy, formerly known as Oleh Svynarchuk, “used to have a connection to HUDC Holding Limited” through a different offshore company that he owns, Teckford Investments Financial Corporation, registered in the British Virgin Islands.

Before entering the public service, Gladkovskiy authorized an independent management company to manage his offshore firm, according to the emailed response. “He doesn’t make any decisions and isn’t familiar with the current business processes,” it read.

Still, it means that the company linked to deputy head of the highest defense coordination agency in Ukraine supplied vehicles to a state company through a secret, non-competitive purchase.

Each of the four cars cost the Ukrainian state-owned company $107,000. Months earlier, the same Cyprus-based seller linked to Gladkovsky sold vehicles of the same features to Dozor Avto, a Ukrainian firm also formerly owned by Gladkovsky, at a cheaper price of $93,000, according to a contract published by journalist Dubinskiy.

The acting director of SpecTechnoEksport who signed the purchased of overpriced Toyotas from an offshore company, Vladyslav Belbas, is a former director of Dozor Avto.

The deal was never looked into by authorities. And they can’t. The investigative agencies have no access to classified defense deals.

 

DIFFICULT TO CONTROL

The National Anti-Corruption Bureau of Ukraine and the Military Prosecutor’s Office could investigate and prosecute graft in the defense sector, but even they have their hands tied.

The defense agency must launch an internal investigation first before any other agencies can be legally involved. In other words, the defense companies have no outside control and audits whatsoever.

Recently, the NABU carried out its first high-profile investigation of the country’s defense sector since the bureau was created in 2015.

On July 14, four officials from Ukraine’s defense industry sector and an alleged shell company owner were arrested on suspicion of running a fraud scheme to buy old outdated engines for T‑72 tanks instead of new motors.

The NABU suspects the officials of embezzling up to Hr 28.5 million ($1.1 million) in 2015 alone.
Following the arrests, the Lviv Armor Plant director Roman Tymkiv, one of the suspects, was suspended by Ukroboronprom.

The holding company said that, over the past three years, it has informed law enforcers of 158 incidences of fraud by its employees costing the state a total of $36 million, and that 41 criminal cases were being investigated.

Still, because of secrecy, this might only be a small fraction of the true size of the problem.

 

SEEKING TRANSPARENCY

Ukrainian legislation enables state defense bodies, such as the Defense Ministry, the Interior Ministry and the Security Service of Ukraine, to decide themselves whether a contract must be classified — no matter what it is, from the purchase of an advanced weapon or buying soldiers’ rations.

Another problem is that the classified procurement deals are closed in a noncompetitive way, allowing officials to choose contractors regardless of their price offers, according to Plakhuta, the former head of the economy ministry’s defense department who is now the chief executive officer at the Ukrainian Freedom Fund.

In 2016, Plakhuta resigned Ministry of Economy and Trade because he didn’t want to approve classified procurement contracts that he did not have enough information to evaluate.

“The problem is overclassification of budget, spending, contracting. Our problem is single-source contracts, when we don’t have tenders, who knows if it’s good for the country or not?” Plakhuta said. “We don’t have a proper system of procurement for the Ministry of Defense. If we go inside what happens with armament and military equipment, I think it’s terrible things. Also, there is no clear criteria for determining which defense procurement and purchase data must be classified.”
To stop corruption, Ukraine’s defense sector needs to be opened up to public scrutiny, he said. “First of all, data on state defense procurement and production must be revealed in open sources, at least partially,” Plakhuta said. “In the U.S., at least 75 percent of such information is publicly available.”

He added that the government must be obliged to publish semi-annual and annual reports on security expenditures, as well as reveal much more detailed defense budget items, providing a distinguishable understanding of how much of the taxpayers’ money will be spent on specific needs.

To implement such changes, the Ukrainian Freedom Fund has offered the country’s government a number of draft laws, but it has little hope they will be passed, Plakhuta said.

 

ARCHAIC SYSTEM

Denys Gurak, Ukroboronprom’s deputy director general, admits that the current situation in Ukraine’s defense sector is disturbing. A partial decrease in secrecy in defense procurement would not harm the nation’s security, he says.

“The really sensitive data is not information on supplies, terms, transaction values or item categories, but rather on the actual type of technologies provided,” the official said. “In the modern world, data on how many vehicles a country has is anything but secret.”

Meanwhile, among NATO-member nations, defense procurement contracts concerning highly sensitive data are made not at the discretion of officials, but via restricted tenders among companies approved for participation. Confidentiality remains within the competence of a special independent government agency, rather than the security services.

Ukroboronprom would support this model, since lack of transparency in Ukraine’s defense sector also undermines Ukroboronprom’s image. Ukraine’s NATO partners back away from non-transparent conditions, Gurak said.

“Since 1991, some things have been changing in Ukraine — for the better, or for the worse. But in the defense industry and in the ministry, nothing has really changed. Our 1991 started in 2014,” the official said.

One foreign partner who has noticed the problems of Ukroboronprom is former deputy U. S. Defense Secretary Michael Carpenter.

“Ukroboronprom is too opaque, too convoluted. It’s essentially a middleman’s organization, which is always vulnerable to corruption in every sector of the economy, particularly in the defense sector,” Carpenter told the Kyiv Post. “It needs a wholesale root and branch overhaul — a new board of directors, a management strategy and then an audit of the whole conglomerate to figure out how you can break it down in the most business-friendly way. It’s a recipe for corruption, the way it’s structured.” It “prevents a lot of Western investment from flowing in,” he said.

 

ENCOUNTERING RESISTANCE

Syroyid said lawmakers are debating measures to make defense spending more transparent, along the lines of what Plakhuta and Carpenter advocate, but she expects resistance from Poroshenko and others.

“The only approach is to change the situation,” Syroyid said. “You have to declassify procurement in the defense sector; except the procurement of innovative products, which have to be classed not as state secrets but as commercial secrets.”

Ukroboronprom and other defense concerns should be audited not by the state, but by one of the major private auditors, she said.

And Ukroboronprom needs to be reorganized and its vast holdings of 130 enterprises “turned into normal corporate enterprises” to attract investment into the sector.
“It’s very simple, but this would interfere with the plans of the president,” she said.

The consequences for Ukraine’s army can be severe, but have not been fully tested since Russia’s biggest military offensives in 2014 and 2015, in which Ukraine’s military suffered losses that led to the unfavorable terms of the two peace agreements reached in Minsk, Belarus.

“Compared with 2014, yes, (Ukrainian soldiers are) doing much better,” Plakhuta said. “Compared with the U.S. army, sorry. Imagine tomorrow if the Russian army goes on the offensive. It will take it one day to get to the left bank of the Dnipro River.”

Kyiv Post editors Brian Bonner and Olga Rudenko contributed to this report.