Economic Crimes in Moldova

R E S E A R C H P A P E R

ECONOMIC CRIMES IN MOLDOVA

Moldova carries the burden of a painful past whose legacy is being felt every day by each of its citizens. As other transitional countries, Moldova has experienced a deep decline in its economy, a part of the blame being attributed to the economic and financial crimes that suppressed the economic development and had negatively affected the economic discipline and the stability of the country. Moldova is a country in transition, characterized by conflict, weak structures, lack of transparency, insufficient resources, low wages for state employees, high state debt, lack of competition, poverty. The economy is not developing according to the rules of the market, creating advantageous conditions for the development of the shadow economy. As a matter of fact, the underground economy expands continuously, tax evasion, illegal imports-exports, money laundering reaching substantial proportions. At the same time, the lack of control upon state employees' activity and low enforcement, as well as postponements in payment of wages, contribute to the extension of corruption and increased level of economic crime in Republic of Moldova. It is believed that the shadow economies soften the impact of economic shocks in countries of transition. On one hand, they cause losses to the state as taxes are not being paid, credibility in state institutions is lost, and, as a result, economic and political instability is formed. At the same time, "the shadow economy brings additional revenues for its operators and members of their families, being sometimes their only source of income, and diminishing unemployment rate". The shadow economy is believed to increase competition, as same good and services as in the formal economy are provided, the only difference being that the former are cheaper. Another of its advantages is that the shadow economy is more adjustable to new conditions, as no bureaucracy that would lengthen many processes exists. In 1997, Moldova experienced a period of economic growth since the collapse of the communism (GDP rose by 1.3%) . However, the small rate of growth did nothing to stop the further development of the shadow economy and corruption. Moldova is characterized by a large scale corruption that threats the security of the state. It also creates obstacles for local procedures, blocks reforms and rejects potential foreign investors. Evaluations show that the shadow economy of Moldova, in comparison to the official one, reached up to 60%. The table below depicts the prevalence of the shadow economy over the official one.

Centre for Strategic Studies and Reforms

Tax evasion is a negative aspect of the phenomenon. It is considered an underground activity that has developed as a result of the weak fiscal control institutions and heavy tax burden. Related to the latter, studies show that a reduction in the tax burden will not result in an increased amount of collected taxes. According to some studies performed by the "Centre of Strategic Studies and Reforms" in Moldova, the rise of the tax burden by 1% entails a rise of the tax evasion/ consolidated budget income ratio by 2.5%. According to the results provided by the same institution, during 1994-1997, the volume of tax evasion grew up very quickly – from 65 mln lei to 500 mln lei. And these are the estimates given by tax inspectors. The authors of the article now wonders about the honesty of the ones that had declared such figures, therefore the numbers can be much larger. The table below depicts the discrepancies between the detected and total tax evasion.

Centre for Strategic Studies and Reforms

The compensation of losses detected by the inspectors of the Main State Fiscal Inspection occurs very slowly. In 1996 the amount of the collected taxes was 19.09% from the total amount, in 1997- 13.7% and in 1998- 15.6%. As a result of the tax evasion, pensions and wages for the budget workers are not being paid and the state budget deficit and debt grow steadily. One thing that strikes me the most is the lack of interest from the local authorities to fight it, especially if taxes are considered an additional source of income to the state and help ease the budget deficit. Another economic crime characteristic to Moldova are the illegal import-export transactions that involve fake exports, smuggling, unproved modifications of prices and sharing benefits among partners, exceeding the export quotas. I will share with you several cases of illegal import-export transactions that happened on the territory of my country. Reports show that in 1997 the volume of the sugar exported from Moldova to Romania was 1.8 times higher than the actual amount of sugar produced on the territory of Moldova!! What happened was that a large part of the quantity of the exported sugar was from Ukraine, but the certificates of origin have been faked, stating that Moldova was the country of origin. Thus, Ukraine took advantage of the free trade agreement between Moldova and Romania at that time, and the Moldavian authorities agreed to be a part of this illegality. Same article acknowledges another example of illegal imports and exports involves the goods exported to Russia. What happened most of the time was that goods such as cigarettes and champagne that were registered in Moldova as exported were not registered in the destination country, in this case Russia. Therefore, large losses to Moldova were caused as a result of nonpayment of the VAT (value added tax). Another proof that Moldova bears substantial losses is an analysis done involving Moldova and Russia, and the exports and imports between them. Goods accounting for 47% of Moldova's imports and 54% of Moldova's exports show another picture after the analysis: same goods actually account for 55% for imports and 93% for exports. The reports show a budget loss of 35 million lei because no taxes were paid. Discrepancies in prices occur in import-export transactions as well. For example, the Moldavian reports show that the price of the vodka exported to Russia equals the price of vodka on Russian reports. In reality, vodka is being sold for a sum 3 times as big as reported by Moldovan authorities. The same thing happens with the wine exports. After passing the border, the prices of sparkling wines grow up 2.4 times. Excises are not paid entirely, and the one that suffers most is Moldova. Tobacco products are involved in the illegal transactions as well. To estimate the volume of shadow transitions, a method was proposed by the Norwegian Institute of Social Applied Sciences and was used by the Central Statistical Bureau of Latvia. Basically you take the amount of cigarettes produced and imported and the amount of cigarettes consumed and exported and you compare the 2 numbers you get. In Moldova in 1996, for example, there was a 3.16 billion cigarettes difference that must mean that there were either undeclared imports, or undeclared production. What was sure was that the budget of Moldova incurred looses of 110 million lei. If we look at the nowadays situation, we should mention that since May 2006, Russia imposed a restriction on imports of tobacco products from Moldova. Moldova then chose to export tobacco to Russia through third countries that would not show the origin of tobacco. According to a tobacco news and information agency, Moldova planned to supply illegally 6,300 tones of tobacco products. Smuggling can be defined as the import or export of goods secretly, in violation of the law, especially without payment of legal duty. The detected volume of smuggled goods grew from 2.7% of the total export-import in 1997 to 10.6% in 1998. But if we look at the criminal files of the court, they diminish as each year passes, and sometimes are closed without any further investigation. Smuggling is flourishing at Moldova's customs as preventive measures are not being taken: there is no appropriate inspection performed, an advanced checking system is missing. The prejudice caused by this phenomenon is partly due to the economic agents that support corruption at customs in order to avoid the payment of customs taxes. There is eminent need for a new effective customs reform and for experienced foreign specialists to change the customs' structure and provide training for the employees. A phenomenon associated with smuggling is that Moldova is characterized by two fiscal systems. We pay VAT, Transnistria does not. The latter is so because the legislation of Moldova does not work on their territory since it auto-called itself a "transnistrian republic" in 1992. To exemplify this: imported goods pass the customs of Transnistria without being declared, and therefore no taxes to the budget are paid, and then these same goods are being transferred to the right bank of the Nistru with the label "Made in Moldova". There is avoidance of VAT payment and unfair competition to local goods created. Transnistria is considered a "black hole", where different illegal activities are practiced and serves as a main subject of illegal imports of goods. One solution might be the creation of mixed customs points (for Moldova and Transnistria) on the border between Transnistria and Ukraine.

The power-energy complex in Moldova is over-indebted and experiencing growing electricity losses, partly because of the obsolete equipment within. However, embezzlement in the sector was also reported. Embezzlement can be generally defined as a fraudulent appropriation of property or of public funds by a person to whom it has been intrusted. Share of losses and embezzlement in the power-energy complex in Moldova increased to substantial proportions: from 10% of the total consumption in 1990 to 30% in 1997. In order to acknowledge how disastrous the numbers are, it would be appropriate to compare them to the international standards that inform us that the average losses account for 9-12% of the total consumption. A solution to this phenomenon seems to be the privatization of the enterprises of the energy complex. There are other activities that bring additional losses to the complex. For example, Moldova imports natural gas at prices much higher than international one. There are no gas counters at the border of Moldova, so nobody keeps track of the quantity of gas circulated on the territory. Also, the Moldavian authorities do not ask payment for the transit of natural gas throughout the country. Moldova has undergone several projects to fight corruption and decrease the level of economic instability. PACO MOLDOVA Project was launched in January 2005. It was funded by the European Commission, Council of Europe and Switzerland, with the purpose to help the Republic of Moldova prevent and eliminate corruption by implementing its Strategy and Action Plan. The EU MD Action Plan is a political document containing strategic objectives of the cooperation between the EU and Moldova. It talks about the need of a customs reform, and the implementation of customs' legislation according to EU standards to avoid counterfeited goods. "Republic of Moldova: Report on the Observance of Standards and Codes – Fiscal Transparency Module" is the name of a report prepared by a team from the International Monetary Fund in order to assess how efficient the fiscal transparency practices in Moldova were. There has been some progress, it says. Corruption "continues to be perceived by businesses, donors, and others as a key problem". Still, stronger enforcement efforts appear to have been successful in decreasing the level of corruption among tax and customs officials. Since 2000, the Moldavian economy has been growing steadily, even though it was faced with a decline in foreign direct investment. Still, with all the restrictions imposed nowadays (on wines' import of Russia for example), increases in gas prices, Moldova is demonstrating a commitment to stabilization and reform in the area of economic policies. Moldova is a country trapped somewhere between a painful past and a promising future. Along with many others, it struggles to reach the surface. No doubt that the economically oppressive political regime, the corruption and the absentmindedness of our leaders do not make it easier. Yet, in the end, it is the people that can make a change and Moldovan people have survival in their blood. In a time of great hopes for a better future, only optimist minds can take the right turn. I want to believe that the right time for that has come.