GEORGIA'S FINANCIAL POLICE: THE IRS WITH GUNS?

UNCLAS SECTION 01 OF 02 TBILISI 003200

SIPDIS

E.O. 12958: N/A
TAGS: ETRD EFIN EINV KCRM GG
SUBJECT: GEORGIA'S FINANCIAL POLICE: THE IRS WITH GUNS?


1. Summary. Recent business establishment closings by the
Financial Police (FP) have prompted a renewed effort by local
business and NGO leaders to encourage the Georgian Government
to be transparent in their tax collection and enforcement
efforts. Many in the business and NGO communities contend
that the closings are a method of revenue generation to meet
monthly revenue targets. The American Chamber of Commerce in
Georgia (AmCham) is preparing a letter to the head of the
financial police, David Kezurashvili, for co-signature by
ambassadors, business, and NGO leaders in Georgia. AmCham
will request immediate action by the GoG to cease closing
businesses prior to finding derogatory information in an
audit. End Summary.


Financial Police Jurisdiction
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2. The FP calls itself a "special law enforcement unit" in
the Ministry of Finance, mandated under Georgian legislation
to investigate economic crimes. The FP started its
operations on March 15, 2004 and has 525 staff members.
Since the day of its formation, the FP says some 8,500 crimes
have been detected and prevented, and the amount paid to the
budget has exceeded GEL 129 million. Many business leaders
complain that the FP operates outside its scope, ignores the
rule of law, and is not transparent. However, the
Parliamentary law which established the FP is broad and
vague, and the group's mandate and jurisdiction are still
unclear.


3. Press reports indicate that the FP have closed at least 60
prominent restaurants in recent weeks. To date, the FP has
targeted food service, retail grocery outlets, and food
import/export companies, including Nestle Georgia.
Interestingly, these groups share a common thread of selling
or buying imported food products. In a few notable cases,
the FP have arrived at businesses in black hoods, wielding
automatic weapons and have forced the establishments' closure
by confiscating records and computers necessary to day-to-day
operations. The Parliamentary law entitles the FP to "keep,
carry and use official and other guns permitted under the
relevant law." It also authorizes the FP to use "physical
coercion, special means and official and military arms when
fulfilling job duties."

AmCham: Keep businesses open during an audit
--------------


4. On December 5, Econoff attended an AmCham meeting
dedicated to discussing the recent actions by the FP.
Representatives from Transparency International, the European
Union (EU),European Bank for Reconstruction and Development
(EBRD) and local business leaders also attended the meeting.
Many present expressed frustration at what they see as a
pattern of abuse of power by those who should uphold the law.
All present acknowledge the need for all businesses to pay
their share of taxes, and any dialogue with the GoG should
emphasize that AmCham wants to work with the GoG to help
businesses comply with the law. But everyone also agreed
that a tax evasion investigation should not begin with the
closure of the business without evidence arising from a
transparent audit. The AmCham president, whose business the
FP targeted last month and repeatedly investigated over the
past 12 months, recommended that AmCham draft a letter to the
head of the FP requesting that the FP immediately cease
closing businesses prior to a tax evasion audit. The letter
will clearly support the GoG's desire to have all businesses
pay fair taxes. AmCham members said that the GoG touts
Georgia's improving business and investment climate, but the
current behavior of the FP makes it difficult for AmCham to
market Georgia as an attractive place for investment.

Challenges
--------------


5. At the AmCham meeting, members expressed frustration with
what they see as a bias by the GoG and the majority of
Georgians to view businesses as corrupt "cash cows" for the
purpose of meeting revenue targets. Georgia's cash-based
economy makes it difficult to monitor corporate tax
assessments. It is unclear how the Ministry of Finance
currently assesses corporate tax, but AmCham members
expressed a willingness to work with the GoG to develop
alternate methods. According to a US Treasury advisor to the
Minister of Finance, the Ministry's tax department focuses on
about 400 leading companies and squeezes them to meet the
revenue targets. Anecdotal information from local business
leaders suggests that in several instances, following the
complete closure by the FP, businesses and tax authorities
reach arbitrary deals and compromises about the required tax
based on a subjective evaluation of business activity. This
creates a fertile ground for bribe-taking.

What we are doing
--------------


6. The Embassy's Treasury, Customs, law enforcement and
economic officers are also meeting with appropriate Ministry
of Finance officials--including both the FP and Georgian
Customs--to explore possible opportunities for technical
assistance to the FP in how to better carry out their mandate
and to underscore the need for fair and transparent
implementation of Georgian law. The Ambassador is seeking a
meeting with the Minister of Finance, Alex Alexishvili, to
hold a follow-on discussion of our concerns. The Ambassador
decided to meet with Alexishvili to discuss this after he
received a letter from Kezurashvili requesting assistance.
TEFFT