DRAFT PILLAR REPORT OF THE STUDY „NATIONAL INTEGRITY SYSTEM ASSESSMENT IN LATVIA”, OCTOBER 2011
Pillar XIII. Business
Table: Indicator Scores
BusinessOverall Pillar Score: 67 / 100
Indicator / Law / Practice
Capacity
81.25 / 100 / Resources / 75 / 75
Independence / 100 / 75
Governance
83.3 / 100 / Transparency / 100 / 75
Accountability / 100 / 75
Integrity Mechanism / 75 / 75
Role
37.5 / 100 / Anti-Corruption Policy Engagement / 50
Support for/Engagement with Civil Society / 25
Summary
Overall Latvia has a favorable legislative framework for the operation of business although complaints about administrative hurdles are quite common. All administrative acts of state agencies can be appealed. However, in practice one can expect lengthy proceedings in the court. While legal transparency requirements for the business sector are generally adequate, there is a general preponderance among Latvian companies to operate in a somewhat secretive manner. The dominant patterns of corruption are characteristic with a degree of collusion between some entrepreneurs and corrupt public officials rather than extorting and conflicting interaction (although cases of requesting bribes are known as well). All in all, while the business sector and associations are hardly on the forefront among anti-corruption policy champions, a certain degree of engagement has been seen continuously. Still it almost never amounts to what could be called a joint business-civil society initiative.
Structure and organization
Latvia is a functioning market economy and hence the private business plays a major role in the country. Most of Latvia’s gross domestic product (GDP) comes from services (74.4% est. for 2010), with industry following with 21.7% and agriculture – 4.0%.[1] There are various assessments of the share of the grey economy and the World Bank estimates it at 42% of GDP.[2] The company with limited liability is the most common form of enterprise in Latvia (112,811 registered as of 6 July 2011). Individual entrepreneurs come second (13,510), followed by joint stock companies (917).[3]
Assessment
Capacity
13.1.1. Resources (law)
To what extent does the legal framework offer an enabling environment for the formation and operations of individual businesses?
Score: 75
Overall Latvia has a favorable legislative framework for the operation of business. As of 2011, its ranking on the ease of doing business was 24 (out of 183 countries).[4] However, starting a business is ranked lower – just 53. The number of procedures in starting a business is five and the required time is 16 days.[5]
As far as insolvency is concerned, Latvia “introduced a new out-of-court procedure in 2009.”[6] The Doing Business 2011 report mentions Latvia among countries that have improved the most in closing business. However, the ranking for closing business still remains lower (80) than for starting a business.[7] The ranking for the enforcement of contracts is high (14) with 27 procedures and 309 days required.[8]
According to the interviewed experts the operation of business still suffers from excessive administrative burden. According to the Head of Economics Department of the Stockholm School of Economics in Riga Morten Hansen, one has to do a lot of reporting for the State Revenue Service. Even in a tiny business, there’s no chance to manage without a professional accountant.[9] The Corporate Social Responsibility and Communications Expert of the Latvian Confederation of Employers Agnese Alksne emphasized the problems of redundancy in state controls: “[For example] when we started looking at the state budget to see what we could stop doing, we found that three different agencies verify water in schools.”[10] To conclude, there is still a potential for further streamlining in the regulatory environment of the business.
13.1.2. Resources (practice)
To what extent are individual businesses able in practice to form and operate effectively?
Score: 75
In practice, state agencies generally adhere to the legally prescribed procedures. According to Agnese Alksne “Right now a business can be registered in a maximum of five days, minimum – two days.”[11] Morten Hansen corroborates the differences in the ease/ difficulty of starting a business and winding it up (already mentioned under 13.1.1 “Resources (law)”).[12]
However, objections are occasionally raised about approaches that the agencies use within the existing regulatory framework. Agnese Alksne talked about practical difficulties, which arise in interaction between businesses and the state. Even a micro enterprise has to employ an accountant because of the electronic declaration system, which should be made more user-friendly.[13] A problem is related also to the Enterprise Register and some other state agencies, which provide services, because they have no right to provide consultations. Elsewhere asking questions may result in more controls: “In the State Revenue Service, if you go and ask some questions, you know you’ll have an audit next week. All enterprises know it. Therefore they don’t ask questions.”[14]
All administrative acts of state agencies can be appealed within the hierarchy of the public administration and/or in the administrative court. However, in practice one can expect lengthy proceedings in the court.
13.1.2. Independence (law)
To what extent are there legal safeguards to prevent unwarranted external interference in activities of private businesses?
Score: 100
Occasional complaints about the excessive discretion of civil servants in relations with the business are heard in the public realm.[15] However, often enough they are not sufficiently specific to allow one to determine whether it is the law or its wrongful implementation where the problems are.
The Administrative Procedure Law provides for appeal procedures (Sections 76, 91 and others). They constitute the main mechanism for the business (as well as other individuals and organizations) to seek redress in cases of infringement on their rights in the course of registration, licensing and many other interactions with public officials. If a public agency has carried an illegal decision or action and thus caused a loss or damage to an individual or company, a claim for compensation can be made (Administrative Procedure Law: Chapter 8; Law on Compensation for Damages Caused by Agencies of the State Administration).
In case of suspected criminal activity of public officials, e.g. extortion of bribes, businesses are to use reporting possibilities open for any citizen, for example, in the Corruption Prevention and Combating Bureau.
Overall Latvia has all of the usual legal safeguards to prevent unwarranted external interference in activities of private businesses.
13.1.4. Independence (practice)
To what extent is the business sector free from unwarranted external interference in its work in practice?
Score: 75
Latvia lacks recent quantitative data about the abuse of office or other types of corruption of government officials. In a survey in the end of 2007, 13.8 % of respondents who dealt with obtaining permits or licenses (for commercial activity, building, reconstruction of apartments, etc.) indicated that they had to make unofficial payments in excess of LVL 5 (approx. EUR 7). This was more frequent than in relations with customs but less frequent than in relations with the Traffic Police.[16] Although recipients of permits and licenses are not only entrepreneurs, such data show that apparently, at least in some areas, the business can be expected to make unofficial payments.
Some criminal cases reveal anecdotal evidence of businesses expected to pay bribes to officials. For example, on several occasions bribes were requested and accepted in relation to several building projects in a case reviewed in March 2011 by the Riga Regional court. The case involved three former officials of the City Development Department of Riga Municipality.[17] A major bribery case in relation to public procurement by the Children’s University Hospital involving the board members of the hospital was detected in 2009.[18] The dominant patterns of corruption are characteristic with a degree of collusion between some entrepreneurs and corrupt public officials rather than extorting and conflicting interaction (although some cases of requesting bribes, e.g. by Financial Police officers are known as well).
It is common for the business sector to complain about the performance of the State Revenue Service. Most often these complaints do not blame officials for abuse of office or bribery but rather criticize their unfriendly procedures and manner of work. Agnese Alksne mentioned several issues of concern such as the unpreparedness of the State Revenue Service to negotiate with companies that face difficulties with making due payments and delayed return of VAT advance payments.[19]
The administrative courts system, which is the main avenue of redress against the public-sector irregularities, has become notorious with its excessive case burden and backlogs. “We cannot react effectively to some problems or mistakes in the public administration, especially in relation to matters at the State Revenue Service, actions by local governments. The individual has to wait very long for the court decision,” said the justice of the Administrative Department of the Senate of the Supreme Court Andris Guļāns.[20] Such length of court procedures makes this avenue of redress often completely unpractical for the business.
Governance
13.2.1. Transparency (law)
To what extent are there provisions to ensure transparency in the activities of the business sector?
Score: 100
All companies shall prepare and submit annual reports. An annual report shall include a financial report and management report. The financial report shall include a balance sheet, a profit or loss account, a cash flow statement, a statement of changes in equity and an annex (Annual Reports Law: Terminology). The management report shall provide clear information about the company’s development, financial condition and performance results, substantial risks and uncertainties, main non-financial indicators, etc. (Annual Reports Law: Section 55).
Annual reports of all businesses that exceed at least two of three criteria (balance sheet total — LVL 250,000 (approx. EUR 355,000), net turnover — LVL 500,000 (approx. EUR 710,000), average number of employees in the reporting year — 25) shall be verified by a sworn auditor (Annual Reports Law: Section 62, Paragraph 1). The Enterprise Register shall ensure public access to the annual reports and opinions by sworn auditors (Annual Reports Law: Section 66, Paragraph 4).
The Annual Reports Law, the Cabinet of Ministers 21 June 2011 Regulations No. 488 on the Application of the Annual Reports Law and other normative acts mandate the use of Latvian accounting standards, which are available inter alia on the website of the Ministry of Finance.[21]
Companies, whose transferable securities have been admitted to the regulated market, shall prepare consolidated financial reports in accordance with the Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards.
In July 2011, the Saeima amended the Commercial Law to strengthen requirements regarding the disclosure of physical persons who are the beneficial owners of companies. The primary purpose of the amendments was to achieve greater transparency of enterprises whose parent companies are registered in off-shore territories. However, this information shall be disclosed to controlling authorities only rather than the general public (Commercial Law: Section 17.1). The novelty of this amendment precludes any conclusions about the effectiveness of its implementation.
Overall the transparency standards for the business are in line with international standards and practice in Europe.
13.2.2. Transparency (practice)
To what extent is there transparency in the business sector in practice?
Score: 75
Names of company owners, officials and annual reports are available upon request in the Enterprise Register[22] and, at a higher cost, from the online database run by the Lursoft company.[23] However, it is not always possible to know the beneficial owners of a company if they are registered in some of the so called off-shore countries (the practical effects of the July amendments to the Commercial Law (see 13.2.1 “Transparency (law)”) are unclear yet). The State Revenue Service carries out selective audits of the accounts of enterprises as a part of its tax collection function.
Some (usually larger) corporations do report on their corporate social responsibility (CSR) and sustainability. See, for example, the relevant sections of the websites of companies participating to the UN Global Compact Cemex[24], Grindex[25] and also non-participating companies such as the state energy company Latvenergo[26], Swedbank[27] and Latvija Statoil[28] (mother companies of the latter two do participate in the UN Global Compact). However, it is rare that countering corruption is mentioned in any meaningful way as a part of a company’s CSR activities or that companies disclose anything about their integrity policies (a few exceptions are described under 13.2.5 “Integrity mechanisms (law)”).
Also the level of detail in reporting about CSR varies from highly informative reports to merely general phrases. Even some of the companies that participate to the UN Global Compact do so in a formalistic manner especially as far as anti-corruption is concerned.
To mention an initiative on the national level, in 2010 the Latvian Confederation of Employers and the Free Trade Union Confederation of Latvia launched the Sustainability Index. 70 Latvian enterprises participated in 2010 and 50 in 2011. They were evaluated according to a set of criteria, including many related to CSR.[29]
While transparency of the business sector is generally adequate, voluntary reporting about CSR activities and especially companies’ anti-corruption standards should be practiced more broadly. Apart from the observance of statutory requirements, both of the experts interviewed for this pillar Morten Hansen and Agnese Alksne talked about the general preponderance of Latvian companies to operate in a somewhat secretive manner.
13.2.3. Accountability (law)
To what extent are there rules and laws governing oversight of the business sector and governing corporate governance of individual companies?
Score: 100
Latvia has adequate rules governing the general oversight of the business sector and governance of privately-owned companies. The company with limited liability is the most common form of enterprise in Latvia. Individual entrepreneurs come second, followed by joint stock companies. [30]
Governance institutions of a company with limited liability are the participants’ assembly and executive board as well as supervisory board, which is optional (Commercial Law: Section 209). Only the participants’ assembly may elect and withdraw members of the supervisory and executive boards as well as elect and withdraw an auditor, controller of the enterprise and insolvency practitioner. The participants’ assembly may also decide on raising a claim against a member of the supervisory or executive board, founder or participant (Commercial Law: Section 210, Paragraph 1).