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Ukraine Civil Society Pinpoints Obstacles to Beneficial Ownership Clarity

In June 2017, the government of Ukraine took an important step toward greater transparency by integrating Ukraine’s information on the individuals who ultimately control or profit from a company into the OpenOwnership global register.

This means Ukraine’s national beneficial ownership data will be automatically linked to data from other countries and made available for free to the global public.

Extractive Industries Transparency Initiative-implementing countries are not yet required to address beneficial ownership, but they are encouraged to do so. Ukraine has made important progress on disclosing information on who ultimately owns and controls companies and is one of the world’s first countries to establish a legal framework for disclosure of the beneficiaries of business entities.

Despite these gains, civil society has identified a number of concrete obstacles to real clarity on beneficial ownership in Ukraine’s extractives sector.

Just 66 of the 120 extractive companies covered by Ukraine’s 2014-2015 EITI report have disclosed beneficial owners in Ministry of Justice’s public register as of October 2016.

According to civil society organizations, the main weakness of the repository is its information is not in open data format. This makes the data cumbersome for analysis. It cannot be linked with information from other databases and registries. Lack of access to extractives pacts such as joint activity agreements—a kind of joint venture—hinders a complete understanding of beneficiaries of oil, gas and mining projects.

Another concern is verification of the identities of reported beneficial owners in the register, according to the Anti-Corruption Action Centre (AntAC), a civil society organization in Ukraine. With the support of NRGI and the International Renaissance Foundation, AntAC made some attempts to verify beneficial owners of special permit-holders in Ukraine. According to Antac findings, Ukraine issued 474 special permits for the use of oil and gas subsoil areas as of February 2018.

The AntAC report notes many owners of oil and gas production permits are reluctant to reveal their identities. Permit-holding companies often submit false information. Out of 87 companies that reported their beneficial owners in 2017, only 37 submitted accurate records, the report indicates. The main problem: there isn’t an effective verification mechanism when permits are issued, at the exploration stage or during the field’s development. Companies use this loophole to avoid disclosing beneficial ownership information.

There are weaknesses, also, in Ukraine’s current beneficial ownership law. Companies face insufficiently stiff fines for not reporting their ultimate beneficial owners. The law also states that only owners of stakes of 25 percent or more of a project must disclose their beneficial owners—this threshold is widely considered to be too high to capture many relevant beneficial owners. For large extractives projects, even a 1 or 5 percent interest can be quite lucrative, generating millions of dollars in rents.

AntAC advocates adding a clause to an existing money laundering law that would mandate lenders identify beneficial owners as part of regular due diligence, which would utilize information from the state registry and apply independent verification procedures. The law was submitted to the Cabinet of Ministers of Ukraine for approval earlier this year. Once it clears this hurdle, it will be submitted to parliament for a reading this summer.

AntAC also advocates this proposed amended law be part of the Ukraine government’s anticorruption agenda, which will be made public in September, prior to next March’s presidential elections. It would be another positive step for beneficial ownership transparency in Ukraine.

Nasima Nazrieva is a consultant with the Natural Resource Governance Institute (NRGI) in Ukraine.