Imprisonment for Authorized Persons due to Inefficient Use of Budget Funds: Analysis of New Deputy Initiatives

We analyze draft laws No. 10149, No. 10150, and No. 10151 to explain their potential risks

This year, the issue of inappropriate procurement and inefficient budget planning is extremely urgent. Ukrainians take to pickets, demanding to allocate budget funds to provide for the army instead of shifting paving stones or shooting movies. In turn, MPs register draft laws with ideas on how to improve state financial control. They mostly suggest reviewing what is considered procurement violations, how to guarantee compliance with the requirements of state auditors, and retouching monitoring shortcomings.

Sometimes there are also radical suggestions. For example, the package of draft laws No. 10149 through No. 10151 focuses on the responsibility for inefficient use of budget funds. For this, lawmakers propose to introduce imprisonment for authorized persons. In this article, we analyze what exactly MPs consider inefficient use of budget funds, what motivates this bold initiative, and why these draft laws confuse DOZORRO.

Which spending is effective, and which is not

Draft law No. 10150 proposes to define in the Budget Code that “efficient use of budget funds” means:

actions by participants in the budget process, aligned with their authority, to achieve goals based on national values and innovative economic development tasks. This includes adhering to approved methods and rules, ensuring maximum results within budgetary calculations, and utilizing allocated funds appropriately.

The draft law does not answer what the goals planned on the basis of the national system of values and tasks of innovative economic development are. In fact, the description of the effective use of budget funds corresponds to the principle of efficiency and effectiveness in the Budget Code. However, references to the system of values and tasks are more commonly found in scientific articles, comments, and manuals than in legislation.

But the draft law proposes to add inefficient use of budget funds and its description to the list of violations in Articles 116 and 119 of the Budget Code. According to the text of the draft law, this is a set of actions by participants in the budget process, aligned with their authority, which led to:

• failure of the participant in the budget process to achieve the goals planned on the basis of the national system of values and tasks of innovative economic development in the implementation of budgets,
• failure to ensure high-quality provision of public services when attracting the minimum amount of budget funds,
• failure to get the maximum result in accordance with the methods and rules approved by the legislation, when using the amount of funds determined by the budget.

In Article 119, the description of inefficient use of funds is proposed to be combined with the norm on inappropriate use, and collectively referred to as abuse of budget funds.

As we can see, both definitions are based on whether the participant in the budget process adhered to the principle of efficiency and effectiveness. As a consequence, the proposed norms are full of references to abstract categories and concepts which will obviously be difficult to measure in practice: achieving goals, a national value system, high-quality service delivery, maximum results, and so on. And this would not be so confusing if the other laws in this package did not offer imprisonment as a result of such inefficiency.

What will happen if someone does not achieve “the goals planned on the basis of the national system of values and tasks of innovative economic development”

Draft law No. 10151 proposes amendments to Article 210 of the Criminal Code of Ukraine, which now provides for liability for misuse of budget funds on a large scale. They want to add new elements of crimes to it:

• inefficient use of budget funds by authorized official of a procuring entity when making a public procurement,
• and/or conclusion of contracts that provide for payment by a procuring entity for goods, works, and services before/without conducting procurement procedures/simplified procurement.

It should be noted that the conclusion of these contracts is now an administrative offense, for which Article 164-14 of the Administrative Code sets a fine from UAH 3,4000 to UAH 170,000. Now MPs propose to criminalize this violation.

For criminal liability to apply, the misuse must involve large-scale budget funds. In 2023, under Article 210 of the Code, this threshold is set at a minimum of UAH 1,342,000.

Punishments for these crimes may be:

• fine from UAH 17,000 to UAH 68,000, or
• correctional labor for up to two years, or
• restriction of liberty for up to three years,
• with or without deprivation of the right to hold certain positions or engage in certain activities for up to three years.

If these crimes are committed during times of martial law or a state of emergency, the punishment may include restriction of liberty for a term of two to five years or imprisonment for a term of two to six years, along with deprivation of the right to hold certain positions or engage in certain activities for up to three years. So, during times of war, these sanctions are applicable.

What is the result? If authorized persons inefficiently use budget funds in procurement during martial law, namely:

—

fail to achieve planned goals based on the national system of values and tasks of innovative economic development in the implementation of the budget when performing actions within their authority resulting in goal failure, or fail to ensure the quality of public services despite minimal budget allocation, or fail to obtain maximum results determined by budget expenditure calculations in accordance with approved legal methods and rules, thereby utilizing budget funds inadequately,

—

then they will commit a crime, for which, under martial law, they can receive a sentence of two to six years in prison and/or other punishments.

In our opinion, the description of the crime in the draft laws is extremely vague and unclear. It provides a wide range of arbitrary interpretations, abuses, pressure on authorized persons and corruption manifestations.

For example, to qualify misuse of budget funds, we can compare the amount of expenditures with the allocated budget and assess the nature of expenditures against the list of authorized expenses. However, there is no clear guidelines for determining inefficient use.

Draft law No. 10150 instructs the Ministry of Finance of Ukraine to develop a mechanism for assessing the efficiency and inefficient use of budget funds and to approve relevant regulatory legal acts within three months from the date of entry into force of this law. However, this does not guarantee proper specification of the concept of inefficient use, that is extremely necessary in case of bringing persons to criminal responsibility.

As repeatedly noted by the Constitutional Court of Ukraine, the constitutional principles of equality and justice necessitate legal norms to be clear, certain, and unambiguous. Otherwise, ensuring its uniform application becomes impossible, inevitably leading to arbitrariness. The Court’s opinion emphasizes that the principle of legal certainty necessitates clarity and unambiguity of legal norms, ensuring predictability and stability, in particular. In our opinion, the description of the concept of inefficient use of budget funds does not meet these requirements.

In addition, it raises questions of differentiation of this corpus delicti with “embezzlement or taking possession of someone else’s property by abusing an official’s official position” (Article 191 of the Criminal Code). After all, budget funds are also considered property, and in cases of embezzlement, individuals misuse their powers to divert this property in favor of others. Also, because of this, the goals mentioned in the draft law may not be achieved.

Since the draft laws do not propose changing jurisdiction, as a general rule, such crimes will be investigated by detectives of the Bureau of Economic Security of Ukraine, except for cases falling under the jurisdiction of the State Bureau of Investigation or the National Anti-Corruption Bureau of Ukraine.

These bodies will be responsible for determining whether the actions of the authorized official have achieved the goals planned based on the national system of values and tasks of innovative economic development in budget implementation.

Motives of MPs

Looking for an answer to how the MPs came up with such ideas, we analyzed the explanatory notes. Their authors refer to the following, among other things:

“…Analysis of State Audit Service of Ukraine reports on public procurement monitoring from 2019 to 2023 reveals that out of 40.7 thousand procurement monitoring operations conducted, violations of current legislation in public procurement occurred in approximately 82% of cases. This amounted to about UAH 47.5 billion of state and local budget funds lost due to inefficient, and most often criminal, activities of authorized persons within procuring entities.”

According to BI Prozorro, during the period indicated in the explanatory note, auditors started 48.6 thousand procurement monitoring sessions with a total expected cost of UAH 884 billion. Violations were detected in lots for a total expected value of UAH 537 billion. It is unclear which criteria the MPs used to select tenders, determining the activities of authorized persons as ineffective or criminal.

In the explanatory note to draft law No. 10151, legislators list characteristic violations identified by state auditors, concluding that approximately 65-70% of them are related to overestimation of the expected value of procurement items. The explanatory note sometimes contains strange wording, for example, identifies the amount of tender security with the expected value (!).

The initiators of the draft law also describe in detail the problem that arises when a detailed technical specification is not published in the procurement contract. However, for some reason, the draft laws do not contain norms that could directly solve this problem.

Therefore, explanatory notes raise more questions than they give answers.

Rationale on the expected value

There is a glimpse of the rationale in draft law No. 10149, suggesting that the procuring entity determined the expected value of the procurement item in accordance with the procedure established by the Ministry of Economy. This mandatory procedure is intended to change the approximate methodology, which is valid now and is voluntary. The Ministry of Economy must develop and approve the procedure for determining the expected value of a procurement item within 3 months from the date of entry into force of the law.

It seems logical that alongside the duty, they plan to introduce responsibility for its non-fulfillment, specifically by adding it to the list of administrative violations regarding the procedure for determining the expected value for procurements. The fine for this violation will reach UAH 8,500, and the cases will be considered by the State Audit Service.

In addition, MPs revised the sanctions of certain provisions of Article 164-14 of the Administrative Code, proposing fines of UAH 8,500 for violations outlined in the first part of the article, and UAH 17,000 for individuals who have already received an administrative penalty for the same violations within the year.

However, the authors of the draft do not propose changes to the list of violations, meaning that even the least significant ones will still incur a fine of UAH 8,500 (previously UAH 1,700).

The proposed addition of the definition of expected value of procurement items to the Law of Ukraine “On Public Procurement” also appears to be debatable. MPs propose to define the expected value of a procurement item as the estimated cost of the procurement item under specific delivery conditions, based on the average market price on the day of calculation. This definition would include information regarding the inclusion or exclusion of Value-Added Tax (VAT) and other taxes and fees in the expected value.

An immediate drawback is that this definition is not applicable to services and works; it is only suitable for goods. Furthermore, proposing that the expected value be based on indicators of the average market price effectively directs our attention to the need for information about average market prices.

However, establishing a mandatory procedure for determining the expected value, along with associated responsibilities for non-compliance, is a positive step. If implemented effectively, it could serve as a robust safeguard against the inflation of procurement prices.

Conclusions

The main idea behind draft laws No. 10149-10151 is to introduce criminal liability for authorized persons in cases of inefficient use of budget funds during procurement. To achieve this, the authors attempt to define what constitutes effective and inefficient use, but their definitions turn out to be rather abstract. The Ministry of Finance will have to develop a more specific assessment mechanism if the draft laws are adopted.

In addition, the MPs propose to introduce mandatory procedure for determining the expected value of a procurement item. The Ministry of Economy should establish it, and the State Audit Service should impose a fine of UAH 8,500 for non-compliance. They want to establish this amount of fine for other violations under Article 164-14, Part 1 of the Administrative Code of Ukraine. At the same time, lawmakers propose to define the expected value of the procurement item. But this definition applies only to goods and bears the imprint of draft law No. 9172 on the average price level in the market, which we did not support.

TI Ukraine does not support the proposal of draft laws No. 10149, No. 10150 and No. 10151. We urge people’s deputies to adhere to the principle of legal certainty when developing new norms. Even the slightest uncertainty creates risks of corruption, subjective and erroneous interpretations, pressure on procuring entity employees, and selective law enforcement.

We suggest considering the idea of establishing a mandatory procedure for determining the expected value of procurement items. Violations of this procedure would be clearly recorded and taken into account when qualifying actions as embezzlement of budget funds. However, this issue requires broad discussion and careful study with stakeholders.