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Cablegate: Ukraine: Customs Head Serious About Reform

VZCZCXYZ0362
RR RUEHWEB

DE RUEHKV #0632/01 0871235
ZNR UUUUU ZZH
R 271235Z MAR 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 5291
INFO RUCPDOC/USDOC WASHDC
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC
RUEHMO/AMEMBASSY MOSCOW 0324
RUEHCH/AMEMBASSY CHISINAU 0154
RUEHWR/AMEMBASSY WARSAW 0196
RUEHSK/AMEMBASSY MINSK 0168
RUEHBM/AMEMBASSY BUCHAREST 0015
RUEHSL/AMEMBASSY BRATISLAVA 0010
RUEHUP/AMEMBASSY BUDAPEST 0046
RUEHBJ/AMEMBASSY BEIJING 0016
RUEHAK/AMEMBASSY ANKARA 0023

UNCLAS KYIV 000632

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR/UMB, EUR/ACE, AND ISN/ECC (YWONG, BGOLDEN)
STATE PLEASE PASS TO USTR FOR PBURKHEAD
USDOC FOR 4231/ITA/OEENIS/NISD - CLUCYCK
DHS FOR CBP/INA - KCHAISSON

E.O. 12958: DECL: N/A
TAGS: ETRD ECON UP
SUBJECT: UKRAINE: CUSTOMS HEAD SERIOUS ABOUT REFORM

REF: KYIV 196

SENSITIVE BUT UNCLASSIFIED; NOT FOR INTERNET PUBLICATION.

1. (SBU) Summary: The head of Ukraine's Customs Service
Valeriy Khoroshkovskiy outlined his plan for Customs reform
during an introductory meeting with Ambassador on March 21.
Khoroshkovskiy boasted of the early success of his anti-
smuggling campaign, which was meant to increase customs
revenues and secure government support for broader reform
of the Customs Service. Ambassador outlined USG assistance
available to Customs and urged Khoroshkovskiy to move
toward modern principles like risk analysis and post-
clearance audits. Khoroshkovskiy agreed and expressed a
desire to follow up with USG project implementers.
Khoroshkovskiy described information sharing for obtaining
customs valuation information from other countries as a
priority; Ambassador encouraged him to leverage U.S.
assistance to gain access to Europe's New Computerized
Transit System (NCTS). Khoroshkovskiy was sensitive to
Ambassador's concerns that the anti-smuggling campaign not
hurt legitimate business, although he cautioned that some
disruptions were unavoidable. Overall, Khoroshkovskiy
appeared serious about Customs reform, and we will do what
we can to support this goal. End Summary.

2. (U) Ambassador met with Valeriy Khoroshkovskiy, Chairman
of Ukraine's State Customs Service, on March 21.
Khoroshkovskiy has been in office since December 24, 2007
and has received wide media attention for his plans to
reform the Customs Service. (Bio Note: Khoroshkovskiy is
one of Ukraine's most well-known businessmen, as he owns
substantial assets in the country's media sector. In
particular, he owns 61% of one of Inter, one of Ukraine's
leading TV channels, and 100% of TV channels K1, K2,
Megasports, Enter-music, and Enter-film. Khoroshkovskiy
also served as President of Evraz Group, a top Russian
steel and mining company, from 2004 until 2006. Focus
magazine recently rated Khoroshkovskiy as the 17th richest
Ukrainian, with his wealth estimated at $1.2 billion. He
previously held government positions as Minister of Economy
and European Integration (2002-2004) and Deputy Secretary
of the National Security and Defense Council (2006-2007).
End note.)

New Sheriff in Town
-------------------

3. (SBU) Khoroshkovskiy described how upon assuming his
position he was "shocked" by the poor performance of
Customs. He highlighted a lack of specialized personnel
and rampant corruption as particularly difficult problems.
Khoroshkovskiy described how the government's STOP Campaign
to halt smuggling was targeting both "black goods" -- those
smuggled across the border without being stopped -- and
"grey goods" -- those whose declared customs value is
intentionally lowered to avoid customs fees.

4. (SBU) His first goal, said Khoroshkovskiy, was to double
customs revenues in the first quarter of 2008, and data
showed the Customs crackdown had done just that. He
explained that this major push was only the first step in
his strategy, as the increased revenues would earn him the
support of the government to pursue more difficult,
structural reforms.

USG Ready to Help
-----------------

5. (U) Ambassador reviewed USG assistance available to
Customs through the State Department's Export Control and
Related Border Security Assistance (EXBS), the DoD Defense
Threat Reduction Agency (DTRA), and DoJ's International
Criminal Investigative Training Assistance Program
(ICITAP). Khoroshkovskiy expressed serious interest in
leveraging this assistance and offered to meet personally
with EXBS Advisor to follow up.

6. (SBU) Ambassador noted concerns that the GOU was not
making full use of two X-ray scanners provided by EXBS to
Customs, particularly at the Odessa port. Khoroshkovskiy
explained that the failure to properly use the equipment
was symptomatic of larger structural problems, as the
entire setup of the Odessa port was "broken."
Khoroshkovskiy said he planned to construct a new, inland
facility to alleviate crowding at the port itself and to
allow Customs to make use of more advanced equipment. EXBS
Advisor agreed on the need to develop such inland
facilities and encouraged Khoroshkovskiy to move away from
the practice of conducting such a high percentage of
customs examinations at the border.

7. (SBU) Ambassador and EXBS Advisor emphasized the
importance of using risk analysis and post-clearance audit
functions in reforming Customs to match European practice.
Khoroshkovskiy agreed but said such reform would only come
slowly, as the nature of commonly-used customs duty evasion
schemes involving assembly in Ukraine made the audit
process difficult. (Comment: In reality, a fully developed
post clearance audit capability is Customs' best offense
against such schemes. End Comment.)

Information Sharing a Priority
------------------------------

8. (SBU) Khoroshkovskiy described as a priority getting
access to Europe's New Computerized Transit System (NCTS)
and the creation of other customs valuation databases, as
he saw such information as key to combating valuation
fraud. He noted, however, that he was facing resistance
both internally and from other countries. Ambassador
encouraged Customs to work with ICITAP to pursue a pilot
project to link Ukraine to the NCTS, as Russia had already
done.

9. (SBU) Khoroshkovskiy said he planned to meet with the
Chinese and Turkish Ambassadors to request valuation
information and that, if they refused, he would seek to
limit imports from those countries in retaliation. (Note:
Khoroshkovskiy did not repeat his previous request for the
United States to provide customs valuation information
(reftel). Following Khoroshkovskiy's request, we had
informed the GOU that U.S. exporters were not permitted by
law to disclose information contained in the Shipper's
Export Declaration (SED). End Note.)

Damage to Legitimate Business
-----------------------------

10. (SBU) Ambassador also encouraged Khoroshkovskiy to be
sensitive to the negative impact on legitimate business of
the government's anti-smuggling campaign. Many companies
were facing export/import delays as a result of the
campaign, said the Ambassador, and he noted as an example
how Customs had recently caused delays for express delivery
operator DHL. Khoroshkovskiy recognized that some
legitimate trade had been affected -- he said he had
personally looked into the DHL case and would hold the
Customs officer involved "accountable" -- but argued that
some problems were inevitable given the need for such
radical reform of Customs' operations. Khoroshkovskiy said
he planned to create a separate division within Customs to
serve as a liaison with intermediaries, such as brokers and
transportation companies, because they played such an
important role in the customs clearance process.

Comment: A Breath of Fresh Air
------------------------------

11. (SBU) Khoroshkovskiy appeared genuinely interested in
reforming the Customs Service and said all the right things
in this introductory meeting. As a businessman, rather
than a career Customs official, Khoroshkovskiy might be
more inclined to tackle the systematic problems at Customs.
His initial prosecution of the anti-smuggling campaign,
while slowing some legitimate trade, has shown he can be
effective and has clout within the Tymoshenko government.
His openness to accepting USG advice is in stark contrast
to many of his predecessors. We will follow up with
Khoroshkovskiy and his staff to try to take advantage of
this opportunity for reform.

TAYLOR

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