Research Article: 2020 Vol: 21 Issue: 1
Ihor Mytrofanov, Kremenchuk Mykhailo Ostrohradskyi National University (Kremehchuk, Ukraine)
Anatolii Prytula, International Humanitarian University (Odesa, Ukraine)
Natalia Neledva, International Humanitarian University (Odesa, Ukraine)
Igor Kalimbet, International Humanitarian University (Odesa, Ukraine)
Anatolii Medentsev, International Humanitarian University (Odesa, Ukraine)
Crime, Economic Crime, Economy, Shadow Economy, Criminal Impact on the Economy.
In the course of the study of shadow economy (a sector of economy hidden from taxation), both economic offenses and their impact on competitive relations, distortions in the economy, and official statistics of the state are considered. However, the lack of information on shadow economy in the official statistics remains a major obstacle to the accurate determination of the country's gross domestic product (hereinafter – GDP) and other main macroeconomic indicators of development of the economic system. The share of the shadow sector in the total GDP is one of the indicators to determine the circumstances that have a negative effect on the economic security of Ukraine.
According to the estimates of the Ministry for Development of Economy and Trade of Ukraine (the calculations were carried out in accordance with the Methodological Recommendations for the calculation of the level of shadow economy, approved by the order of the Ministry of Economy No. 123 dated February 18, 2009) the level of shadow economy in Ukraine amounted to 40% of gross domestic product in 2015, 35% – in 2016, 32% – in 2017, 30% – in 2018. The assessment of the integrated level of shadow economy in Ukraine in 2017 was specified as follows: estimation of the level of shadow economy by the method of enterprise losses was recalculated on the basis of published statistics on financial results of operations before taxation of large, medium, small businesses, and microenterprises (except for the banks), excluding temporarily occupied territory of the Autonomous Republic of Crimea, the city of Sevastopol and a part of temporarily occupied territories in the Donetsk and Luhansk regions1.
The scientific basis for further study of economic crime was laid in the works of E. Sutherland (1939), M. Polianskyi, S. Holunskyi and I. Shaver. Subsequently, these problems came under the attention of such well-known domestic and foreign scholars as O. Bandurka, B. Holovkin, S. Husarov, A. Boiko, A. Volobuiev, O. Horodyskyi, S. Denysiuk, V. Eminov, O. Kalman, M. Korniienko, O. Kostenko, N. Lopashenko, V. Lunieiev, M. Melnyk, V. Navrotskyi, M. Panov, V. Popovych, V. Stashys, Y. Streltsov, V. Tatsii, V. Shakun, N. Yarmysh and others.
At the same time, we have observed certain one-sidedness in the crime problems studies, as they usually do not consider destructive processes in the economic sphere itself. In fact, the relationship between economic crime and the economy is much more complex and characterized by reciprocal influences, when the spheres of legal economic activity are destroyed and replaced by criminal business, organized mostly by semi-criminal or fully criminalized government. In the latter, it refers not only to the destruction of the economic sphere, but also the loss of control of the entire system of public administration.
The purpose of this article is to establish the conceptual basis for the study of reciprocal influences of economic processes in the country and the level of economic and conventional crime, making it possible to formulate science-based approach for overcoming the negative interconnection of the analyzed spheres of social life.
In order to study the problems of interconnection and reciprocal influences between a state’s economy and economic crime, literary (scientific) sources on the considered issues, normative acts establishing the procedure and methods of calculation of specific economic indicators, as well as statistics on the level of shadow economy were examined; the universal scientific research methods of analysis and synthesis were used.
Economic sector not covered by the State Statistics Service of Ukraine (hereinafter – Statistics Service) and the State Fiscal Service of Ukraine, consists of three lines of activity: the informal (the "white economy" segment), the hidden (the "gray economy" sector) and the illegal (openly criminal, constituting the so-called "black economy"). Of the activities listed above the illegal one is recognized as the most dangerous not only in legal sense but also in economic sense.
Illegal economic activities, consisting in the production and trade of weapons, drugs, counterfeit drugs, smuggling, and other prohibited activities, as well as economic crime significantly increase the withdrawal from the (distortion of) the economy of Ukraine. Contemporary scientific literature contains a sufficient number of different definitions of the concept of economic crime. The most important contribution in this field was made by the American scholar Edwin Sutherland by introduction the term "white-collar crime" into scientific terminology. According to the scientist, the dominant subjects of economic crime are persons with high social status committing crimes in the course of their professional activity on behalf of legal entities or in their own interests through fraud and breach of trust. The adherents of E. Sutherland (Kaiser & Terstegen) elaborated a more precise and specific definition of the concept of white collar crime as “asocial and enrichment aimed behavior of persons occupying a socially prestigious place in society, who act in the course of their professional activity in such a way that, while simultaneously obeying the behavior of other persons, they breach the social trust enjoyed by their group” (Nevmezhensky, 2005).
The informal vector of activity of business entities operating legally (according to legal requirements) for the purpose of employment and profitability is characterized by the non-accounting of their income by the system of state statistics and fiscal authorities, since such entities do not enter into formal agreements between an employer and employees, and therefore do not pay official salary. This problem is of particular importance for the economy of Ukraine due to the fact that the informal component of economic activity comprises a large array of production related to farming in the agricultural sector. And, despite the fact that the analyzed component of the shadow economy is characterized by a particular competitiveness, it is harmful to the legal economic sector due to reduce the overall production indicators in the country. Under this circumstances more active business entities operating legally are forced to "adjust" to the laws of the game, created in the informal direction of activity. This is due to the fact that entities operating legally have higher unit cost of production than the same costs in the informal segment of economic activity, which leads the former to suffer inevitable losses and bankruptcy (due to unequal conditions of competitive struggle). Eventually, only those business entities illegally obtaining (purchasing) raw materials and evading paying taxes, fees, a single contribution to mandatory state social insurance and insurance contributions to a mandatory state pension remain in the market.
It is no coincidence that the Methodological Recommendations for the calculation of the level of shadow economy, approved by the order of the Ministry of Economy No. 123 dated February 18, 2009, defines the shadow economy as the economic activity of an business entity not registered in accordance with the established procedure, characterized by minimization of costs for production of goods, execution of works and services, evasion tax and fees (compulsory payments) evasion, statistical questionnaires and the submission of statistical reports that is resulted in violation of statutory standards (the level of the minimum salary, working hours, working conditions and safety, etc.)2.
Although the hidden vector of economic activity is recognized by the current legislation as permissible, it has a significant effect on reducing the amounts of collected taxes which constitute the major part of the state budget revenues. Business entities that fully or partially conceal tax revenues. With tax avoidance, economic agents maximize their profits and minimize costs. In the future such a situation may lead to a deficit of the national and local budgets, and subsequently may provoke additional emission of the hryvnia. The latter makes it possible for public authorities and administrations to meet the needs of the society in the required monetary supply. An increase in inflation process indicators is the consequence of such a financial policy. Given that tax, fees, a single contribution to compulsory state social insurance, and insurance contributions to compulsory state pension insurance evasion allows business entities to earn significant income, the mentioned entities violate their obligations to pay taxes, fees (compulsory payments), calculating their benefits with account of possible fines and financial penalties.
The abovementioned activities in the sector of shadow economy characterize the negative effects of the economy, causing significant damage to it and to the country. However, only in the late 1970s did serious studies of the shadow economy emerge. One of the works in this area was the one of P. Guttmann (USA), "The Subterranean Economy" (1977), drawing attention to the inadmissibility of ignoring its scale and role (Gutmann, 1977). Hans Sennholz considered that the shadow economy springs from human nature that makes man choose between given alternatives: in the ancient world, rulers established laws and rules, and enforced them with arbitrary power and terror, people either suffered degrading submission or sought escape in countless ways, often tending to hide economic activity from control (Sennholz, 1984). P. Smith defines the shadow economy as "market-based production of goods and services, whether legal or illegal, that escapes detec-tion in the official estimates of GDP" (Smith, 1994). The most widely accepted definition in academic community was provided by J. Thomas: "...those economic activities and the income derived from them that circumvent or otherwise avoid government regulation, taxation or observation" (Thomas, 1999).
At the same time, there are alternative opinions regarding the issue under the consideration, related to a positive assessment of the functioning of the shadow economy under the certain circumstances. Some scholars point out such positive functions of the shadow economy such as its ability to act as: 1) "economic lubricant", counterbalancing economic fluctuations by shifting resources between the official and shadow sectors of the economy; 2) "social absorber", which allow reduction of social expenditures that are undesirable for the state through informal employment, which make it possible for the poor population to earn income, reducing the social burden on the state; 3) "integrated stabilizer" providing the necessary funds to the sector of legal economy through the use of income generated in the shadow sector to purchase goods and services in the legal sector (Cassel, 1986).
However, currently there is a fluctuation of valuation indicators towards the growing share of the shadow economy in all countries of the world, and its negative effects outweigh the positive effects. Thus, V. Lunyev points out that the shadow economy is present in all countries of the world with features only in terms of its size, forms of implementation and the level of social and legal control over it. He also emphasizes the actual infinity of forms of its implementation in the country’s economic, and determines the criminal privatization, pushed a large part of production into the shadows, and the lack of a minimal rule of law in the economy as the main reasons for its scale. However, in his opinion, it is advisable to characterize its two features, namely destructiveness and wrongfulness, which have criminological significance (Luneyev, 2004).
Domestic scholars point out that the shadow economy, on the one hand, has led to the emergence of powerful organized crime in Ukraine and, on the other hand, it also constitutes organized crime on its own, threatening economic security of Ukraine (Bilous, 2002). V. Uschapovsky considers organized crime as the factor of destabilization of public relations and the growth of the shadow economy (Ushchapovskyy, 2001). O. Kondratyeva also believes that the shadow economy, as an inevitable element of any socio-economic system, inversely influences on its causes, creating the effect of self-determination. In other words, the shadow economy reproduces the conditions of its own development (Kondratyeva, 2011).
We consider that a significant mistake was made in the late 1980s and early 1990s, when spontaneous processes of legalization of the criminal and semi-criminal economic sectors, which were in the shadow due to a failed, virtually unregulated private enterprise program, were multiplied. This created the conditions for getting into the economy of dishonest business, which spread the laws of the criminal environment to the economic system of Ukraine. The law of the USSR "On individual labor activity", adopted in 1986, virtually legalized existed at that time varieties of the shadow economy, which was not resulted in reduce of the number of economic crimes and other offenses, and on the contrary created a favorable ground for their increase. The consequence of such economic policy was the simultaneous existence of an illegal private property and a legal economic system, as if in its "shadow", which contributed to the further criminalization of the economic sphere of the country. That is, the shadow economy should be considered as a consequence (result) of the process of shadowing, namely, activity in the economic segment with a violation (Tylchyk, 2016) of the current legislation and well-established rules of business communication in the economy of the country. G. Becker believed that the main reason for shadowing was directly related to the purpose of an individual's economic behavior, namely satisfaction of economic interest (gain benefit) (Becker, 1968). This enabled considering acquisitive crime as the cause of the shadow economy (whether its existence, or its spread, or development). The factors behind the activity that will shade the economy are those related to the consequence - the appearance of a tangible result, which will be characterized by a violation of a legal rule (prescription) and not reflected in the GDP (Tylchyk, 2018) of the country.
In general, it is difficult to objectively assess the degree of shadowing of the current economy. There is no the only method in the scientific practice allowing to make an objective assessment of the share of the shadow economy in a particular country of the world. The shadow economy indicators are calculated by the Ministry for Development of Economy and Trade of Ukraine. All macroeconomic indicators are corrected in respect to informal and illegal vectors of economic activities. Adjustments for shadow economic activity are made during GDP calculations, using data from the State Statistics Service and the State Fiscal Service of Ukraine, additional economic surveys, expert estimates. Hidden salaries are determined when calculating GDP by the method of "expenses of population - retail turnover", by which income and household expenditure is compared, while expenses also include savings. In such calculations expenses are always higher than revenues, and the difference is recognized as hidden income. However, according to the Methodological Recommendations for the calculation of the level of shadow economy, the activities of households to produce goods for their own needs or the needs of their family members (the natural subsistence sector) are not considered as shadow economy. Information regarding household expenses is collected through a selective survey of household living conditions on a voluntary basis, and data on total sales of goods to population by all business enterprises is obtained by statistical reporting (mandatory data).
The mentioned Methodological Recommendations for the calculation of the level of shadow economy provides also calculations based on financial, monetary and electrical methods, as well as by the method of loss of enterprises. Besides, an integral indicator of the level of the shadow economy in the national economy as a whole (Tintt) is calculated by summarizing the estimates by the methods of "expenses of population - retail turnover", financial, monetary, and electrical into a generalized indicator using the coefficients used to estimate the level of shadow economy by each method in the period under review, taking into account the stability of estimates by the corresponding method over the previous years (coefficients (akt).
World practice recognizes the following methods: the index of five macroeconomic indicators (is used by the International Monetary Fund); monetary method (generally used by central banks of the states); the method of mirror statistics (used by the relevant authorities of particular countries). The most trusted in the world is the information published by the German professor F. Schneider, a recognized expert on the level of shadowing in the world (Schneider, 1997; Schneider, 2012). The group of scholars headed by F. Schneider reached the conclusion regarding the shadowing of the economy, the essence of which is that gradually, despite the level of economic development and literacy of a society, its level inevitably increases (Schneider et al., 2008).
In modern Ukraine, we observe the unconsciousness by the management of the state the nature and the catastrophic consequences of expanding the share of the shadow economic sector, which stimulates the systematic inhibition of the economic growth and creates new systemic challenges in the field of state regulation of the unshadowing of economic processes, which, by causation, produce a cascade of deeper shadow relationships according to the following algorithms:
- shadowing of the economy causes deformation processes in all spheres of the economy, which poses a powerful threat to the economic and, accordingly, the national security of the state;
- the shadowing of the economy is primarily related to the non-payment of taxes, which is resulted in instability of filling the state budget with such devastating consequences as: 1) degradation of the economic potential of the country; 2) the destruction of social production; 3) phasing-out of social programs; 4) non-payment of salaries to employees of the budget sector, pensions and various types of social aid; 5) insolvency of individuals and business entities; 6) slowdown of capital turnover; 7) increase in unemployment, loss of human resources and decrease in the efficiency of its training system; 8) demoralization of society (Baranov, 2018).
Thus, all activities in the shadow economy lead to some kind of withdrawal from the economy. In conjunction with the shadowing of the economy and in connection with it, there are processes of corruption and legalization (laundering) of proceeds of crime. Nowadays, corruption has grown to such an extent that it forced creation of such new structures in Ukraine, as the National Anti-Corruption Bureau of Ukraine (NABU), the National Agency on Corruption Prevention (NACP), the Specialized Anti-Corruption Prosecutor's Office (SAPO), the National Agency of Ukraine for Finding, Tracing and Management of Assets Derived from Corruption and Other Crimes, the State Bureau of Investigation (SBI). In 2018 the Supreme Anticorruption Court of Ukraine was established, which commenced its work in the fall of 2019. The Office of the President of Ukraine, which includes the National Council on Anti-Corruption Policy (without investigating and prosecuting corrupt officials) preparing and submitting to the President proposals on anti-corruption strategy and analysis of the state of fight against corruption, also take measures to eliminate corruption.
In Ukraine, in 2017, the Corruption Perceptions Index (CPI) was 30, which is an evidence of a high level of corruption in the country, as indicators of 0-30 mean a high level of corruption and indicators of 31-60 witness that the state is trying to fight corruption. In 2018, the Corruption Perceptions Index reached 32 points, meaning Ukraine gained 2 more points and raised 10 places (the 120th out of 180 countries, and in 2017 it was the130th place). The IMF assessed that corruption costs Ukraine 2 percent of economic growth annually. This situation is the result of the creation of unjustified procedures for conducting auctions (public sale), the loyal attitude of civil servants towards specific business entities, the use of imperfect legislative acts and legal terms by officials for corrupt purposes. The financial market functions in such a way that the interests of investors are the objects of corruption, including property rights. The corruption component deprives the investors’ interests from the security as investment risks increase, investments decrease and the financial market becomes inefficient. As a result, competitive conditions are being leveled and economic growth is slowing down. According to expert estimates, the lack of an efficient financial market in Ukraine annually leads to a loss of at least 2-3 percent of the GDP growth. The International Organization of Securities Commissions (IOSCO) does not recognize Ukraine as a country with a regulated financial market. The National Securities and Stock Market Commission of Ukraine (hereinafter – NSSMC) has not yet acceded to the IOSCO Memorandum as the legislation has not been amended to regulate the securities market of Ukraine, which negatively affects the effectiveness of cooperation within this organization and the international image of Ukraine (Shovkoplyas, 2017)..
The weakness of the legislation and the spread of corruption make it possible for national regulators of different countries to set limits on the basis of the IOSCO assessment of the level of regulation of the financial market of Ukraine. Practically, foreign investors are afraid to invest in the economy of Ukraine, and national investors suffer losses in the objects of investment due to the corrupted mechanisms. The mentioned leads to inefficiency not only of the financial market, but also negatively affects the economic and financial systems of Ukraine.
There is a need to take urgent state response measures in all areas of spread of corruption, including the financial market (first of all, the measures related to the establishment of legislative restrictions for employees of financial structures on personal transactions in the financial market; restrictions on combining different types of activities in the financial market; increasing the requirements for auditors' independence and objectivity; raising liability for violations of current financial law).
We recognize the departure of part of the economic sector in the offshore areas as a particularly significant problem in the economic segment. As is known, Ukraine is a member of the Financial Action Task Force (FATF), an international intergovernmental body aiming to combat the legalization (laundering) of proceeds of crime and terrorist financing, which includes more than 30 countries. The vast majority of Ukrainian large (by volume of production) enterprises are mainly engaged in export-import offshore operations. Cyprus is the main offshore area for Ukrainian businessmen. According to the data provided by the State Statistics Service, Cyprus residents are the largest investors in Ukraine. Thus, as for 2017, the following countries are the largest investors in the Ukrainian economy: Cyprus (25.5 percent in the structure of foreign investments), the Netherlands (16.2 percent), Russia (11.4 percent), and the United Kingdom (5.5 percent). One more reason for the use of offshore zones by national entities is the execution of foreign trade activities with rapid turnover. Moreover, an essential "weakening" condition for business activity is the absence of red tape.
It is necessary to reduce losses from monetary operations on the national market and attract foreign capital to offshore centers in Ukraine. The shadow sector of economy began to develop at an alarming rate due to particular market reforms associated with the rapid destruction of USSR structures. There is no opportunity to adopt laws on time, moreover, not all of them are implemented, and the judicial system was also ineffective during the transition to a market economy. Small and medium enterprises still need state support.
Another problem is the corruption activities of government representatives and other officials carrying out professional duties in the light of their own economic interests, so that the interests of entrepreneurs are not properly protected. Licensing of economic activities should also be attributed to the sources of income of officials from the shadow economy, since the entities depend on their decisions. The preservation of state monopolies, the formation of state corporations in the most significant sectors of the economy cause shadow activity in them because these organizations are actually private, but sue to the law they perform the functions of the state, enabling them to hide their activities and revenues from public control and completely occupy separate sectors of economy such as public utilities providing relevant services to the population. We recognize the most dangerous in the conditions of systemic manifestations of criminalization of economic activity is that it can turn into a process that determines the perspective of the entire socio-economic system, which creates the conditions for its reproduction.
Therefore: 1. Academics are convinced today that the shadow economy (though in various forms) is present everywhere - in the South and the North, in the West and in the East. It is also present in all types of economic systems: market, planned, and transitional. Its history is by no means limited to the present era: the shadow economy’s structures existed in pre-industrial societies and are unlikely to disappear in the future. 2. The link between economics and economic crime is reverse and in fact affects the size of the shadow economy. 3. Money in the shadow economy forms a financial base for the prospects of organized crime, the growth of criminogenic potential in the country to the level of self-regulatory extended reproduction, the emergence of new ways of tax evasion, the spread of massive corruption and other socially dangerous processes. 4. In some developing countries, such as Nigeria, the level of the shadow economy exceeds the size of the official one, while in some developed countries (the USA and Japan) it is less than 10% of GDP. The experience of these countries can be useful in developing measures to counteract the shadow economy, which poses a significant threat to the economic security of any country. The need for further study of specific types of economic crime and their destructive impact on the Ukrainian economy is highlighted.
1. Trends in the shadow economy 2018.
Retrieved from https://issuu.com/mineconomdev/docs/shadow_2018_04.07.2019__1_.
2. Pro zatverdzhennya Metodychnykh rekomendatsiy rozrakhunku rivnya tin?ovoyi ekonomiky: Nakaz Ministerstva ekonomiky Ukrayiny vid 18.02.2009 ? 123, from http://zakon.rada.gov.ua/rada/show/v0123665-09.
Baranov C. (2018) Derzhavne rehulyuvannya detinizatsiyi natsional’noyi ekonomiky: orhanizatsiyno-pravovyy aspekt. Dysertatsiya kandydata nauk z derzhavnoho upravlinnya. National Academy of Public Administration under the President of Ukraine.
Shovkoplyas N. (2017) Realizatsiya pryntsypiv rehulyuvannya rynku tsinnykh paperiv Mizhnarodnoyi orhanizatsiyi komisiy ztsinnykhpaperiv (IOSCO) tazaprovadzhennyatakykhpryntsypivvUkrayini. Teoriyaipraktykapravoznavstva: elektron. nauk. fakhovevyd. 2 (12). Retrieved from http://tlaw.nlu.edu.ua/article/view/101322/99329.