The Issue of Criminalizing Commodity Smuggling in Ukraine
Summary
The policy brief by Andriy Butin focuses on the ongoing debate in Ukraine regarding the criminalization of commodity smuggling since its decriminalization in 2012. Highlighting the European Union’s support for reinstating criminal responsibility to combat the negative economic impacts of smuggling, the brief discusses a specific draft law (№5420) aimed at criminalizing commodity smuggling and false declaration of goods. This law proposes classifying certain customs violations as criminal offenses and transferring jurisdiction of related criminal cases to the Bureau of Economic Security. However, the effectiveness of these stricter sanctions is questioned due to potential abuses by law enforcement, increased corruption risks, and concerns about the actual deterrence of smuggling. The brief concludes that effective measures against smuggling require a functioning legal system and a comprehensive set of customs tools, along with the inevitability of punishment.
Since the decriminalization of commodity smuggling in Ukraine in 2012, there have been ongoing debates about the correctness of this move. Considering the negative impact of commodity smuggling on Ukraine’s economy, there are constant calls for the reinstatement of criminal liability for such actions. In recent years, these discussions have not only intensified but also received support from the European Union, which demands the return of criminal responsibility for commodity smuggling.
According to the current legislation (prior to the amendments voted on December 9, 2023), criminal liability is envisaged for the illegal movement across the customs border of Ukraine of cultural values, poisonous, potent, explosive substances, radioactive materials, weapons or ammunition (except for smoothbore hunting weapons or combat supplies for them), timber or sawn timber of valuable and rare species of trees, unprocessed timber, which was considered smuggling in the legal sense.
These ideas are reflected in the draft Law of Ukraine, reg. number №5420, “On Amendments to the Criminal Code of Ukraine and the Criminal Procedure Code of Ukraine regarding the Criminalization of Smuggling of Goods and Excisable Goods, as well as False Declaration of Goods,”[1] which was submitted to the Parliament by the President of Ukraine V. Zelensky in 2021 and was then deemed urgent.
The bill, among other things, introduced:
- Reclassifying customs rule violations, which currently fall under the norms of the Customs Code of Ukraine as administrative offenses in significant and large amounts, as a criminal offense – smuggling;
- Separate allocation of excise goods smuggling with stricter sanctions;
- Equating inaccurate declaration of goods to the movement across the customs border of Ukraine of contraband items with concealment from customs control;
- Transferring jurisdiction of criminal cases related to smuggling and false declaration to the Bureau of Economic Security.
Given the ambiguity of the proposed changes, the bill was only passed on December 9, 2023 (see Insert 2 at the end of the work).
It is worth noting that the trend towards strengthening liability for commodity smuggling is relevant not only for Ukraine. In 2017, the European Union intensified its requirements for EU member states in terms of liability for commodity smuggling. Specifically, Directive № 2017/1371 of the European Parliament and Council of the EU dated July 5, 2017, required EU member states to establish minimum criminal penalties for crimes committed by individuals that harm the EU’s financial interests by July 2019.
For example, in Poland, the Criminal-Financial Code provides for punishment for smuggling in the form of a fine or imprisonment. The threshold after which an administrative offense becomes criminal is 18,000 zlotys (5 minimum wages). The fine can reach 34,560,000 zlotys (about 7.9 million euros) (Articles 53 and 86).
Over the past few years, Ukraine’s European partners have repeatedly expressed demands for Ukraine to take measures to criminalize offenses related to goods smuggling. In particular, according to Article 22 of the Association Agreement between Ukraine, on the one hand[2], and the European Union, the European Atomic Energy Community, and their member states, on the other hand, “The Parties cooperate in combating criminal and illegal organized or other activities, as well as for the purpose of their prevention. Such cooperation is aimed at addressing, inter alia, such issues: a) illegal transfer across the state border of illegal migrants, human trafficking, and firearms and illegal drug trafficking; b) smuggling of goods; c) economic crimes, including tax-related crimes.” And according to Article 352 of the mentioned Agreement, “The Parties develop cooperation and harmonize policies to counteract and combat fraud and smuggling of excisable goods…”.
In the European Commission’s report published on November 8, 2023, on assessing Ukraine’s progress in preparation for EU membership, it was noted that in 2024 Ukraine must, among other things, “adopt and start implementing legislation on criminal liability for the smuggling of goods in large sizes, including effective imprisonment for damages to the state budget over a certain threshold.” This requirement is mentioned in several sections of the said report.
Finally, the demand for the criminalization of goods smuggling is one of the structural benchmarks for receiving EU macro-financial assistance in 2023[3].
Thus, the criminalization of liability for goods smuggling in Ukraine has become inevitable.
The logic and arguments of the proponents of criminalizing commodity smuggling, including Ukraine’s European partners, are entirely understandable. Ukraine, as a state geographically located on the eastern borders of the EU, poses significant risks to the European community in terms of the entry into the EU territory not only of smuggled goods for widespread use but also certain sensitive goods, such as cigarettes, alcoholic products, and roundwood. European producers of relevant products can incur losses due to the presence of Ukrainian goods in the EU market, which are imported through smuggling. This is not only a matter of filling the EU budget or the cost of Ukrainian products compared to European goods, but also a matter of safety and compliance with standards. All this requires measures to prevent the likely increase in the volume of goods supplied through smuggling. In addition, there are obvious losses to the Ukrainian budget due to under-receipt of customs payments from imports or, for example, the issue of protecting national interests in the case of exporting roundwood under the guise of firewood, which harms not only Ukrainian producers but also the ecological situation in the respective regions of Ukraine due to significant deforestation.
At the same time, certain provisions of the draft law raise serious concerns from entrepreneurs, the professional community, and experts. Specifically, these include:
- Equating false declaration with the smuggling of items across Ukraine’s customs border with concealment from customs control.[4]
Concerns: This innovation causes the most worries among participants in foreign economic operations, as disputes often arise in practice between the customs authority and the declarant regarding customs value, product code, country of origin, weight, etc. Additionally, ordinary errors in filling customs declarations can be classified as false declaration. Particular difficulties may arise in establishing guilt, which is an important component for the proper qualification of a crime.
- Classifying violations of customs rules, currently considered administrative offenses, as criminal offenses if committed in significant or large amounts.
Concerns: The actual establishment of certain minimum volumes of smuggling, which will not be considered a criminal offense, may lead to abuses by law enforcement agencies in assessing such volumes, increased bribes at all stages of investigating such cases, and fragmentation of consignments by potential smugglers to avoid punishment.
The main question regarding the proposed changes is their effectiveness. After all, the existence of harsher punishment for a crime does not always ensure its effective application. Therefore, the punishment ceases to fulfill its function. Also important is not so much the severity of the punishment, but its inevitability.
Proponents of criminalizing commodity smuggling believe that increasing responsibility for such actions will reduce the number of violations of rules for moving goods across Ukraine’s customs border, create conditions for more customs payments to the state budget, and positively impact the development of the national economy.
However, in the Ukrainian reality, the issue of the effectiveness of the application of harsher (criminal) sanctions remains open, as successful combat against smuggling is impossible without an effectively functioning law enforcement and judicial system. As long as the general justice system is unable to cope with its function, strengthening sanctions is more likely to lead to an increase in the risk of corruption, rather than a reduction in violations.
In addition, it is important to distinguish between the smuggling of imports and exports of goods. If the necessity of combating smuggled imports of goods for Ukraine is obvious, as it results in losses not only to the state budget but also to domestic producers of similar goods, the situation with smuggled exports of goods for Ukraine is not so clear. After all, every country is interested in exporting its own products. But here arise other problems: such as, for example, in the export of timber, illegal export of cigarettes, alcoholic products, etc.
The mechanisms to combat goods smuggling intersect, but they may differ in import and export. In the case of smuggled imports, it is important to ensure the impossibility of selling smuggled goods within the country, including by enhancing the effectiveness of post-customs audit or fiscalization of transactions with certain types of products. In the case of combating smuggled exports, it is important to effectively apply a risk-oriented approach, customs audit, as well as financial guarantees during transit, exchange of customs statistics with partner countries.
Conclusions.
- The criminalization of liability for goods smuggling in Ukraine has become a fact (with the adoption of Bill No. 5420).
- The criminalization of commodity smuggling in the proposed form, considering Ukrainian realities, carries significant corruption risks.
- Strengthening responsibility for commodity smuggling itself does not ensure its effective application. It is important to ensure the inevitability of punishment within current legislation.
- Effective combat against commodity smuggling is impossible without an effectively functioning law enforcement and judicial system, and the application of a comprehensive set of customs tools.
Recommendations.
- Further reform of the law enforcement and judicial systems to increase their effectiveness and capability.
- Ensuring the inevitability of punishment within the framework of current legislation.
- Comprehensive combat against goods smuggling including the application of the entire range of customs instruments, in particular a risk-oriented approach, effective post-customs audit, as well as financial guarantees during transit, exchange of customs statistics with partner countries, etc.
- Removal of norms regarding false declaration.
On December 9, 2023, after the preparation of this work, the Verkhovna Rada of Ukraine adopted in full the draft Law of Ukraine registration number №5420 ‘On Amendments to the Criminal Code of Ukraine and the Criminal Procedural Code of Ukraine regarding the criminalization of smuggling of goods and excisable goods, as well as false declaration of goods’[5] in a different version than was proposed in September 2023 for the second reading. As of December 11, 2023, the updated version of the text of the bill is not available on the website of the Verkhovna Rada of Ukraine. But according to information provided in the media, the adopted bill has significant changes compared to the version proposed for the second reading in September, in particular:
- The value threshold for the criminalization of goods smuggling has been increased fivefold.
- The value threshold for the criminalization of smuggling of excisable goods has been doubled.
- The implementation of the criminalization of goods smuggling has been postponed until mid-2024.
- Numerous demands of the professional community regarding the specification of intentional guilt have been considered, only in the presence of which can actions be qualified as a criminal offense.
- Significantly limited the possible cases of liability in case of submission of documents with false information (so-called false declaration) – in the adopted version they must be the basis for the movement of goods, must be subject to mandatory declaration according to customs legislation, and also have an impact on determining the size of customs payments or compliance with non-tariff regulation measures.
Final conclusions about the content of the adopted changes can be made after the official publication of the text of the adopted law.