US embassy cable - 05TBILISI3200

UNCLAS SECTION 01 OF 02 TBILISI 003200 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ETRD, EFIN, EINV, KCRM, GG, Reform, Law Enforcement 
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 
----------------------------- 
 
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