The recent arrest of top executives in one of Ukraine's most successful banks raised concern in banking circles that tax authorities' sweeping powers over the banking sector may lead them to launch a large-scale crackdown on the banking sector in a bid to boost revenue collection.
Earlier this month, tax police arrested and charged five top managers in the Zaporizhia-based Sloviansky bank with abuse of office and tax evasion.
Among those arrested were the bank’s chairman, Olena Yakymenko, vice president Borys Feldman, and chief accountant Yury Vinnytsky.
The Association of Ukrainian Banks criticized tax police’s actions against Sloviansky, which is the fifth largest bank among AUB members, with Hr 556.1 million in net assets as of Jan. 1.
"Most unsettling have been the methods employed by tax authorities, who were not justified in scandalizing such a stable financial institution. Their actions contradict existing legislation and exceed their authority," said AUB chairman Oleksandr Suhoniako.
"No one objects to legal disputes, but the approach taken vis-a-vis Sloviansky sets a dangerous precedent," said Suhoniako, whose association unites most of Ukraine’s 165 commercial banks.
Sloviansky posted Hr 83.34 million in profits last year, the highest result among AUB’s 130 banks.
Following the arrests that took place on March 13 to March 21, Ukrainian tax police chief Viktor Zhvaliuk said his office was thoroughly examining the banking system. He accused banks of massive tax evasion, in particular, by inflating their operational expenses in order to minimize declared profits.
In Sloviansky’s case, Zhvaliuk said the bank paid up to 400 percent interest on dollar deposits and 1,600 percent on hryvna deposits, which he said was "economically unjustified."
"I do not see any war [with banks]," Zhvaliuk told a press conference on March 15. "We have to support the banking system and clean it up."
Zhvaliuk said his agency was also checking several other banks on suspicions of tax evasion, which included Brokbiznesbank, Zevs, and Khreshchatyk, all Kyiv-registered.
Sloviansky officials denied tax police’s charges and said the arrests were a reprisal by tax inspectors, who earlier failed to prove their allegations in court. Last year, tax police lost a similar dispute with Sloviansky, when Ukraine’s High Arbitration Court ruled in the bank’s favor.
"It’s the bank’s board of directors – not tax police – who establish interest rates, according to a corresponding resolution of the National Bank," said Sloviansky’s deputy chairman, Volodymyr Daneliuk.
Daneliuk said Sloviansky’s revenues in 1999 totaled Hr 243 million, of which 54 million was paid out in interest on personal accounts.
Viktor Zinchenko, chief of the National Bank’s oversight department, also spoke in Sloviansky’s defense, citing a recent audit of the bank, conducted at the request of tax authorities, which uncovered no evidence of financial improprieties.
"Sloviansky didn’t worry us. The bank is profitable and, judging by its financial indicators, its affairs are in order," Zinchenko said.
Tax police officials declined further comment on the matter, citing the continuing investigation against Sloviansky.
"I don’t think the trial will take place soon, because the criminal case is fairly large," said Oleksandr Spyrydonov, who leads the Sloviansky investigation. Spiridonov said that it would be preferable for the bank managers to remain in custody until their cases came to court.
Meanwhile, Ukraine’s leading business media were alarmed over the Sloviansky affair, expressing fear that tax officials’ present authority in cracking down on tax evaders could cost many other banks dear.
"It’s not only about Sloviansky. The problem is that now the chairman of any Ukrainian bank can be arrested, only because he has a "very competent team of lawyers" and is not willing to pay taxes he can avoid paying by legal means," the influential business weekly Biznes wrote on March 27.
Western experts say the banks’ recent problems with tax authorities is only one example of unfriendly relations between Ukrainian tax inspectors and businessmen, who have increasingly complained of the present tax system as pushing them toward bankruptcy.
"Many serious problems continue to hamstring Ukrainian banks’ ability to realize their full potential," said Khwaja Sultan of the Kyiv office of the Harvard Institute for International Development.
HIID is a principal contractor of a 10-year fiscal reform program, funded by the U.S. Agency for International Development (USAID), which aims to help Ukraine design by 2004 a more efficient tax system, among other goals.
But as the new tax system is only being created, there seems to be sufficient reason for banks to worry.
"Not a single businessman can be confident any longer about the fact that his current partner bank won’t find its documents confiscated, its accounts frozen, and its managers thrown behind the bars tomorrow," Biznes said.
