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