ENHANCED FINANCIAL MONITORING

On April 28, the Law of Ukraine “On Prevention and Counteraction to Legalization (Laundering) of Proceeds from Crime, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction” (hereinafter - “the Law 361-IX”) enters into force in Ukraine.

The Law 361-IX provides for such a definition as a "risk-based approach" and the procedure for its application. According to Article 7 of the Law 361-IX, the primary financial monitoring entity is obliged to apply a risk-based approach in its activities, taking into account the relevant risk criteria, in particular, related to its clients, geographical location of the country of registration of the client or agency through which it transfers (receives) assets, type of goods and services that the client receives from the primary financial monitoring entity, the method of providing (obtaining) services. The risk-based approach should be proportionate to the nature and scale of activity of the primary financial monitoring entity.

The high level of risk of business relations (financial transaction without business relations) shall be assigned to the following clients:

- clients whose place of residence (stay, registration) is a state (jurisdiction) that does not follow or improperly implements the recommendations of international, intergovernmental organizations involved in combating legalization (laundering) of proceeds from criminal actions, terrorism financing or financing of the proliferation of weapons of mass destruction.

- clients included in the list of persons, clients who are representatives of persons included in the list of persons, clients who are directly or indirectly owned or ultimate beneficial owners of which are persons included in the list of persons;

- foreign financial institutions (except for financial institutions registered in the member states of the European Union, member states of Financial Action Task Force on Money Laundering (FATF), except for states carrying out armed aggression against Ukraine within the meaning of Article 1 of the Law of Ukraine "On the Defense of Ukraine"), with which correspondent relations are established;

- foreign public officials, members of their families and related persons, as well as clients, the ultimate beneficial owners of which are such persons;

- clients in respect of whom (whose ultimate beneficial owners) special economic and other restrictive measures (sanctions) have been applied in accordance with Article 5 of the Law of Ukraine “On Sanctions”;

- clients whose place of residence (stay, registration) is a state, included by the Cabinet of Ministers of Ukraine in the list of offshore zones.

Unacceptably high level of risk of business relations (financial transaction without business relations) shall be assigned to the following clients in case of:

- inability to perform the obligations specified by this Law or to minimize the identified risks associated with such client or financial transaction;

- reasonable suspicion based on the results of study of the client‘s suspicious activity that such activity may be fictitious.

According to Part 1 of Article 6 of the Law 361-IX the financial monitoring system consists of primary and state levels.

The primary financial monitoring entity (except for specially designated primary financial monitoring entities carrying out their activities individually, without the establishment of a legal entity) shall, taking into account the legislation requirements, develop, implement and update the financial monitoring rules, primary financial monitoring programs and other financial monitoring internal documents and appoint an employee responsible for its conduction.

The responsible employee shall have an excellent business reputation and shall meet the qualification standards established by the state financial monitoring entity. Persons having an outstanding or unexpunged by the law conviction for mercenary criminal offenses or terrorism, as well as their participators in such criminal offenses are not allowed to leadership positions and membership in the governing bodies.

The powers of the responsible employee are defined by Article 9 of the Law 361-IX.

Article 8 of the Law 361-IX defines tasks, responsibilities and rights of the primary financial monitoring entity, in particular, according to Part 2 of this article the primary financial monitoring entity shall:

- be registered with a specially authorized body as a primary financial monitoring entity;

- carry out proper verification of new clients, as well as existing clients;

- ensure monitoring of the client's financial transactions (including those conducted in the interests of the client) for consistency of such financial transactions with primary financial monitoring entity information about the client, its activity and risks, including, if necessary, information about sources of funds related to the financial transaction(s);

- ensure detection, in particular with the use of automation facilities, of financial transactions subject to financial monitoring, before, in the process, on the day of suspicion, after conduction or during attempted financial transactions or after the client refuses to conduct financial transaction;

- ensure registration of financial transactions subject to financial monitoring, in particular with the use of automation facilities;

- notify the specially authorized body of:

a) threshold financial transaction that meet the criteria specified in the second and third paragraphs of part 1 of Article 20 of this Law - within five working days as of the date of financial transactions (or attempted transactions);

b) threshold financial transactions that meet the criteria specified in the fourth and fifth paragraphs of part 1 of Article 20 of this Law - no later than the fifth business day of the month following the month when the financial transactions were conducted;

c) suspicious financial transactions (activities) or attempted transactions, regardless of their amount - immediately after the suspicion or sufficient grounds for suspicion, as well as provide reasonable conclusions, copies of documents and other information on the basis of which the suspicion arose, and additional information at the request of the specially authorized body;

d) discrepancies between the information about the ultimate beneficial owners of the client, contained in the Unified State Register of Legal Entities, Individuals - Entrepreneurs and Public Organizations, and the information about the ultimate beneficial owners obtained by primary financial monitoring entity as a result of proper verification of the client - not later than the tenth working day of the month following the month when such discrepancies were found.

Article 11 of the Law 361-IX obliges the primary financial monitoring entity to carry out due diligence measures. According to the Law due diligence means an extremely wide range of measures, which include:

1) identification (clause 27 of Article 1) and verification of the client (its representative) (clause 6 of Article 1 );

2) reveal of the ultimate beneficial owner of the client (clause 30 of Article 1) or its absence, including obtaining the ownership structure in order to understand it, and data allowing to reveal the ultimate beneficial owner, and taking measures to verify its identity (if any);

3) establishing (understanding) the purpose and nature of future business relations (clause 19 of Article 1) or conducting a financial transaction (clause 65 of Article 1);

4) monitoring on a regular basis of business relations and financial transactions of the client, carried out in the process of such relations, as to compliance of such financial transactions with the information of the primary financial monitoring entity about the client, its activities and risks (including, if necessary, about the source of funds related to financial transactions);

5) ensuring the relevance of received and existing documents, data and information about the client.

Proper verification is carried out in case of:

- establishment of business relations (except for business relations established on the basis of insurance contracts by types of insurance, which do not provide for insurance payment in the event of the insured person’s survival until the expiry of the insurance contract and/or reaching a certain age specified in such contract where the client is an individual and the total insurance payment does not exceed UAH 27 000 or its amount is equivalent to the specified amount, including in foreign currency; as well as except for business relations arising on the basis of agreements on participation in a lottery, provided that the player's bet amount does not exceed UAH 5 000);

- suspicion;

- payment transaction (including international) without opening an account for an amount equal to or exceeding UAH 30 000 or an amount equivalent to the specified amount, including in foreign currency, bank metals, other assets, cost units, but less than the amount, provided for in part one of Article 20 of this Law;

- conducting a financial transaction with virtual assets in the amount that is equal to or exceeds UAH 30 000;

- doubts about the authenticity or completeness of identity details previously obtained from the client;

- conducting a one-time financial transaction without establishing business relations with clients, if the amount of the financial transaction is equal to or exceeds the amount specified in part 1 of Article 20 of this Law.

According to the Law the financial transactions that are subject to financial monitoring include threshold financial transactions (Article 20) and suspicious financial transactions or activity (Article 21).

According to Article 20 of the Law 361-IX financial transactions shall be deemed threshold if the amount of each financial transaction is equal to or exceeds UAH 400 000 (for business entities providing services in the field of lotteries and/or gambling - UAH 30 000) or equal to or exceeds the amount in foreign currency, bank metals, other assets, equivalent to UAH 400 000 at the official exchange rate of UAH to foreign currencies and bank metals  at the time of financial transaction (for business entities providing services in the field of lotteries and/or gambling - UAH 30 000) if one or more of the following evidence occur:

- crediting or transferring funds, granting or obtaining a credit (loan), carrying out other financial transactions if at least one of the parties - participants in a financial transaction has the registration, place of residence or location in a state (jurisdiction) that does not follow or improperly implements the recommendations of international, intergovernmental organizations involved in combating legalization (laundering) of proceeds from criminal actions, terrorism financing or financing of the proliferation of weapons of mass destruction (including a diplomatic representation, embassy, ??consulate of such foreign state), or one of the parties - participants in a financial transaction is a person who has an account in a bank registered in the said state (jurisdiction);

- financial transactions of politically significant persons, members of their families and/or related persons;

- financial operations involving transfer of funds abroad (including to the states referred by the Cabinet of Ministers of Ukraine to offshore zones);

- financial transactions with cash (deposit, transfer, receipt of funds).

According to Article 21 of the Law financial transactions or attempted transactions, regardless of the amount, shall be considered suspicious if the primary financial monitoring entity suspects or has sufficient grounds to suspect that they are proceeds of crime, connected with or related to terrorism financing or financing of the proliferation of weapons of mass destruction.

The new Law is supplemented with the procedure for financial monitoring of transactions.  The detailed information about the payer and the recipient of funds transfer shall be given during all transfer of funds.

The financial monitoring entity that provides services for funds transferring shall verify the payer's operation with respect to the specified data, on the basis of official documents or information obtained from official sources. The entity shall not transfer funds in the absence of information that shall be given during the financial transaction.

Kyrylo Kazak

Partner

KPD Consulting

Should you have any questions with respect to above or require any additional information, please do not hesitate to contact Mr. Kyrylo Kazak (k.kazak@kpdconsulting.com.ua). We will be pleased to assist You. The information contained in this overview is not intended to provide legal advice and should not be relied on or treated as a substitute for specific advice concerning individual situations.