INTERVIEW: Reformer pledges to transform Ukraine's notoriously corrupt State Customs Service

INTERVIEW: Reformer pledges to transform Ukraine's notoriously corrupt State Customs Service
Max Nefyodov left investment banking to reform Ukraine's public procurement system and has now taken on another notoriously corrupt institution, the State Customs Service.
By Sergei Kuznetsov in Kyiv September 27, 2019

Max Nefyodov does not look like your run-of-the-mill Ukrainian official. With his barber shop haircut and full beard, he would probably fit more naturally in a studio of IT developers or a trendy coffee shop than the old-fashioned corridors of Ukraine’s government buildings.

His recent track record is also uncommon. Four-and-a-half years ago, the Kyiv-born investment banker left an expensive office in Ukraine’s capital city and joined the economy ministry, aiming to reform the nation’s public procurement system, which was rife with corruption. Unexpectedly for many observers, he succeeded in this ambitious undertaking.

In July this year, Nefyodov embarked on a new endeavour, when the government approved his candidature for the post of head of the State Customs Service, another of the most corrupt institutions in the war-torn country.

This appointment followed Nefyodov’s victory in an open competition for this post, which was announced after the State Fiscal Service was split into two separate bodies in March: the State Customs Service and the State Tax Service. The reorganisation was the result of growing pressure from Western backers and donors, including the International Monetary Fund (IMF), which believed that such a division could bring more transparency to this sphere.

“I believe that if you have to get into a fight somewhere, then you should do it where it can bring you the greatest results,” Nefyodov says in an exclusive interview with bne IntelliNews.

‘Unique’ window of opportunity

In July, then-prime minister Volodymyr Groysman branded Nefyodov’s appointment “a ticket to a war with scammers”, hinting at a myriad of corruption schemes existing at customs points – from bribes to multi-million-dollar smuggling operations. Groysman added that legal businesses should be able to operate without obstacles created by customs officials, while all fraudulent schemes “must be eliminated” by the reformer.

According to Nefyodov, the state budget loses UAH100bn-UAH200bn ($4bn-$8bn) every year as a result of customs corruption.

“Furthermore, there are indirect losses from the decline in business activities, the deterioration of the business climate, tax evasion and illegal employment. Companies that operate in the shadows can’t attract loans and develop further,” he says.

Today, Nefyodov sees a “unique” window of opportunity to reform the State Customs Service. “There is a coincidence of attention [from the Ukrainian leadership] to this sphere and conducive personnel appointments.”

Indeed, the nation’s finance ministry and the State Tax Service – the two bodies with which the State Customs Service must cooperate in order for Nefyodov’s reforms to succeed – are headed by reform-minded officials. Moreover, the parliament is controlled by a single political force – the Servant of the People party created by President Volodymyr Zelenskiy – and this fact should facilitate the swift adoption of necessary reform legislation. 

“Weak, half-hearted attempts to reform the customs service were undertaken in the past. But if there was a will to change anything here, then there was no support from the finance ministry. And when the finance ministry showed some initiative, the customs service had no resources. Or the finance ministry tried to push some reforms through parliament, but parliament wasn’t ready to vote for reforms.

“I can’t teach people to be honest”

One of the main problems related to customs in Ukraine is corrupt personnel. “There are 10,000 customs officers with extremely low official salaries. This [the low salaries] is their self-justification. They say: ‘Look, we are forced to take bribes’,” Nefyodov says.

At the same time, the low level of pay makes it difficult for the state to attract and retain the best employees. “The best people go to private business or to other state institutions, like the central bank, where they get paid significantly more.”

Nefyodov adds that instantly quadrupling the salaries of customs officials is not a viable option. However, the authorities are planning for a staged increase of salaries to be factored into the state budget, because “this is one of the flagship reform policies”.

“But this would have to be linked with the optimisation of the work of the customs office. Fewer people have to be able to do the same amount of work,” Nefyodov says. “And if we aren’t able to recruit super-qualified regular inspectors, then their work needs to be substantially automatised. We need a kind of McDonald’s for taxes – the operations need to be as simple and as automated as possible, so that even a person without special training can deal with them successfully.”

The young reformer is planning to attract employees from the private sector and from businesses “with new approaches” to come and work for the State Customs Service. He will also “rely on the portion of capable and experienced employees” already in the service, who have been part of the organisation for decades. “The customs service has some very good professionals, so my task is to identify them and promote them.” 

“However, a significant number of employees will have to be removed from service, because they are simply corrupt. I can’t teach people to be honest,” Nefyodov says.

Reform agenda

He adds that in order for reforms to be successful, the existing problems “need to be tackled from all sides at the same time” – from the staff to the infrastructure, to the creation of a risk management system. 

“If we hire good people, but then we don’t cater for them materially and don’t create a risk management system, then they will leave in disappointment, or they will work under the old conditions, with queues at the borders and where people are always motivated to go and negotiate [a bribe] with the customs officers.”

“And if we invest money into the customs infrastructure, but don’t change [a large portion of] the personnel, then there will be a repeat of the situation with the scanners that the EU supplied to our customs service — officials rammed into them with trucks to take them out of service,” says Nefyodov.

According to Nefyodov, the creation of a new non-corrupt customs service requires maximum centralisation and automatisation of its functions, alongside the removal of individual discretion from the duties of customs officials, whereby they are free to choose how to act in specific situations.

The chief of the State Customs Service also believes that efforts should be concentrated on the development of infrastructure, which should be connected “to a single risk management system, which performs all operations except the most difficult, intellectual import-export operations”.

“My philosophy is the same as it was during the reform of the state procurement system,” Nefyodov says. “Ukraine can’t afford Western reform patterns, whereby institutions hire professionals with high salaries, who just do their job well, while any rogue elements are dealt with by a well-paid professional police force. These ideas sound utopian in the post-Soviet space.”

Integration with Europe

Ukraine’s integration into the European customs space is another of Nefyodov’s priorities. “For the customs service, European integration is a very practical idea,” he says. “If in the sphere of human rights, integration means something big and philosophical, an acceptance of common dogmas, here [in customs] it means that instead of two papers for the EU and Ukraine, you just need one.”

Among the most important priorities are the harmonisation of the Ukrainian Customs Code with European law, the harmonisation of customs tariffs, and the introduction of common principles for the protection of intellectual property.

In the longer term, Kyiv has its sights on a common customs checking mechanism at borders with EU countries. “We are striving to achieve a status similar to what was on the Polish-German border before Poland joined the EU. There was just one checkpoint,” says Nefyodov.

The reformer is convinced that many technical initiatives can be introduced within the next year or two. However, a common customs check is a reform that requires both juridical efforts and “work on trust” between Ukraine and EU member states. 

“If a country provides another with classified information, it has to be sure that this information will not be sold or misused,” says Nefyodov. 

Red lines

The ProZorro public procurement system, created by Nefyodov, became mandatory for all public contracts as of August 2016. Over the past three years, the system has saved around UAH54bn of state budget funds, according to the government.

Nefyodov is understandably proud of this success. However, with customs reforms, a successful outcome is less assured for now. The corrupt interests of various groups operating in this sphere are simply too great.

He warns that he will not work under conditions where he is forced  to work with employees he did not choose himself, or if his “hands are tied in decision-making situations. “Those are not conditions under which I am prepared to work,” he says. 

The young reformer is also unwilling to work if staff changes at liaising government institutions or a lack of desire on the part of parliament would stymie his efforts to bring about reform. 

“But I remain optimistic,” he says after a short pause. “I believe it’s not helpful to complain about circumstances. But I do need to pick my battles. My task is not to bang my head against every wall, but to build partnerships and find strategies for moving forwards”.