New anti-money laundering rules in Ukraine substantially increase transparency

21/ 04/ 2020

On 28 April 2020, the Law of Ukraine “On Prevention and Counteraction to Legalisation (Money Laundering) of the Proceeds from Crime or Terrorism Financing, as well as Financing of the Proliferation of Weapons of Mass Destruction” (New AML Law) will come into force, significantly improving current regulation and implementing Ukraine’s national legislation based on the latest EU anti-money laundering standards established by the Fouth Anti-Money Laundering Directive, FATF and IMF recommendations. The New AML Law enhances the ability of legal instruments to detect and prevent financial crimes, and is a significant step forward towards greater transparency in the Ukrainian financial sector and the ongoing process of financial cooperation with Europe. The following article is a summary of the most significant amendments contained in the New AML Law and our assessment of how these regulations will impact financial market participants. New members. The New AML Law sets a two-tier system of financial monitoring at the initial and the state levels. Representatives at both levels have been revised in the new law, including in particular: the list of institutions making up the initial financial monitoring level (Initial Monitoring Institutions) has been expanded to include individuals rendering services on the incorporation and performance of the management of legal entities, individuals or companies rendering tax consultancy services and providers of services related to virtual assets. Before the New AML law enters into force, individuals and legal entities at the Initial Monitoring Institutions level must register with the State Service of Financial Monitoring of Ukraine (SSFMU). They must develop and introduce internal rules for financial monitoring and appoint a responsible employee and deputy to ensure that all financial monitoring obligations are duly performed. The list of state level financial monitoring institutions (State Monitoring Institutions) has also been changed. The National Commission on the Regulation of Financial Services Markets, the Ministry of Infrastructure of Ukraine and the Ministry of Economic Development and Trade of Ukraine were excluded from the list while the newly established Ministry of Digital Transformation of Ukraine was added. This reduction in the list of supervising authorities for anti-money laundering activities can be considered a positive development, which should make financial monitoring at the state level more consolidated and effective. Asset freezing. The New AML Law obliges Initial Monitoring Institutions to immediately freeze assets related to terrorism, based on resolutions of the UN Security Council and court decisions in foreign states. It also establishes a definition of assets that may be related to terrorism, conditions when such assets must be frozen or released, rules on communication with other governmental authorities and with the owners of assets related to terrorism. We expect that in practice, this new development will require Initial Monitoring Institutions to allocate additional resources for carrying out examinations. Also, due to the absence of practice, an asset-freezing instrument may potentially inconvenience those clients of the Initial Monitoring Institutions whose assets may be frozen by mistake. Re-assessment of risks. The New AML Law introduces a risk-oriented approach, which must be applied by the Initial Monitoring Institutions in their activities. Particularly, the Initial Monitoring Institutions should identify clients in the risk criteria by considering factors such as geographical location and place of registration. They should evaluate the servicing institutions involved in any transaction in compliance with AML rules, including the type of services rendered and other factors the Initial Monitoring Institution considers proportionate and necessary. An Initial Monitoring Institution should develop risk criteria itself, taking into account the national risk assessment practice, typological research and recommendations prepared by the SSFMU and other State Monitoring Institutions. According to the NBU, such recommendations should be expected in mid-2020. Imminent changes to assessment procedures will require Initial Monitoring Institutions to perform a large amount of work, including revision and approval of internal risk assessment procedures and re-assessment of existing clients. Over the long term, the introduction of a new risk-oriented approach is expected to make financial monitoring more business-oriented. We perceive fewer troubles and bureaucratic procedures for ordinary customers and at the same time an increase in the effectiveness of the fight against illegal activity in the financial market. New rules for politically exposed persons. The most significant amendment regarding politically exposed persons (PEPs) relates to their status. Earlier, PEP status was temporary (i.e. up to three years). Starting from April 2020, however, this status will be applicable for the lifetime of an individual. Among other amendments, the New AML Law contains changes in the approach to the financial monitoring of relatives of PEPs, members of their immediate families and associated parties. As the rules for dealing with PEPs and their related parties become stricter, the general approach remains the same in that Initial Monitoring Institutions must work carefully with these clients. Correspondent relations extended. The New AML Law will allow for the establishing of correspondent relations between banks and financial institutions. At the same time, examinations of financial institutions during this procedure will become more complicated. Among other actions aimed at creating an ability to conduct an appropriate assessment of financial institutions, the New AML Law requires that monitoring institutions be able to collect information from official and reliable public sources and to determine whether a financial institution is a shell bank. This concept was transferred from Article 64 of the Law of Ukraine “On Banks and Banking Activity” No. 2121-III dated 7 December 2000, which directly prohibits the establishment of correspondent relations with shell banks. Exchange of information now available. Upon the entry into force of the New AML Law, Initial Monitoring Institutions will be allowed to request, receive and use information and documents available to other members of the institutions group. This access should be regulated by internal procedures and rules approved by the parent company and must comply with the New AML Law and data protection laws. In addition, the New AML Law introduces the principle of “reliance”, meaning that one Initial Monitoring Institution possesses the right to rely on the results of identification and verification of a client made by another Initial Monitoring Institution. Each Initial Monitoring Institution, however, bears the responsibility of examining its clients, regardless of the identification and verification procedures performed by another institution. These new regulations are expected to increase both the cost and efficiency of identification and verification procedures, while at the same time will make cooperation among Initial Monitoring Institutions more effective. Information for payments. The New AML Law changes the requirements for the information that must be provided for payments. Roughly speaking, the type and quantity of information will depend on whether the payment transaction is lower or higher than the threshold equal to UAH 30,000 (approximately EUR 1,000). This rule, however, does not apply to suspicious operations, which would become subject to financial monitoring irrespective of the amount. For example, a transaction lower than the threshold must contain information on the payer’s and recipient’s account, e-wallet or card number. In most cases, these transactions do not require the verification of the parties. In contrast, transactions exceeding the threshold must contain an extended list of information regarding the parties and will usually require Initial Monitoring Institutions to verify with the parties. These developments are in line with the requirements of EU Regulation 2015/847 dated 20 May 2015 and are expected to increase the transparency of payment transactions. Over the long term, these procedures will increase the quality of client profiles and improve the precision of risk-assessment procedures. Remote verification. The New AML Law implements long-awaited changes to the verification procedure. Since April 2020, Ukrainian legislation has allowed Initial Monitoring Institutions to perform remote verification procedures. As of today, there are no insights on how such remote verification procedures should be performed in the future. It is expected that detailed instructions will be described in by-laws. These respective amendments should substantially simplify KYC procedures, decrease the Initial Monitoring Institutions expenditures for the operation of outlets and staff, and will bring Ukraine one step closer a neo banking system. New approach to sanctions. The significantly increased fines contained in the New AML Law should motivate Initial Financial Institutions to comply with the new requirements. For example, current fines for Initial Financial Institutions that fail to identify financial operations subject to financial monitoring do not exceed UAH 13,600 (EUR 459). The new regulation, however, increases the fine limit to UAH 340,000 (EUR 11,472). At the same time, the New AML law introduces a rule prohibiting more than one sanction for each breach and a new influence measure called “settlement agreement”. Settlement agreement is expected to be a great instrument for those Initial Financial Institutions, which may have violated financial monitoring rules, but would like to cooperate and mitigate the consequences of these violations. By successfully performing a settlement agreement, an Initial Financial Institution in this situation would be rewarded with a reduced sanction. When imposing sanctions against an Initial Financial Institution, the State Monitoring Institution must consider, among other things, the circumstances of the violation, its nature and duration, losses and benefits obtained as a result of the violation, the degree of responsibility of the institution and its willingness to cooperate. In our view, the nontransparent calculation algorithm and a wide range of fines, which may be applied for any particular violation, could lead to manipulation and corruption by the State Monitoring Institutions. Conclusions. The New AML Law is a positive development enhancing the ability of legal instruments to detect and prevent financial crimes. It goes without saying that the New AML Law has deficiencies. Some of the provisions have a high degree of uncertainty and their performance substantially depends on their adoption, implementation and the quality of any subsequent by-laws. Nevertheless, Ukraine has made a significant step forward towards the transparency of its financial sector, which should facilitate the process of European integration and the ability to raise future financing from international financial institutions and other international partners. For more information on the New AML Law in Ukraine, please contact your regular CMS advisor or local experts: Ihor Olekhov Partner, Head of Finance practice, CMS Cameron McKenna Nabarro Olswang Ukraine Glib Bukharin Associate, Finance, CMS Cameron McKenna Nabarro Olswang Ukraine

The following article is a summary of the most significant amendments contained in the New AML Law and our assessment of how these regulations will impact financial market participants.

New members

The New AML Law sets a two-tier system of financial monitoring at the initial and the state levels. Representatives at both levels have been revised in the new law, including in particular:

the list of institutions making up the initial financial monitoring level (Initial Monitoring Institutions) has been expanded to include individuals rendering services on the incorporation and performance of the management of legal entities, individuals or companies rendering tax consultancy services and providers of services related to virtual assets.
Before the New AML law enters into force, individuals and legal entities at the Initial Monitoring Institutions level must register with the State Service of Financial Monitoring of Ukraine (SSFMU). They must develop and introduce internal rules for financial monitoring and appoint a responsible employee and deputy to ensure that all financial monitoring obligations are duly performed.
The list of state level financial monitoring institutions (State Monitoring Institutions) has also been changed. The National Commission on the Regulation of Financial Services Markets, the Ministry of Infrastructure of Ukraine and the Ministry of Economic Development and Trade of Ukraine were excluded from the list while the newly established Ministry of Digital Transformation of Ukraine was added.

This reduction in the list of supervising authorities for anti-money laundering activities can be considered a positive development, which should make financial monitoring at the state level more consolidated and effective.

Asset freezing

The New AML Law obliges Initial Monitoring Institutions to immediately freeze assets related to terrorism, based on resolutions of the UN Security Council and court decisions in foreign states. It also establishes a definition of assets that may be related to terrorism, conditions when such assets must be frozen or released, rules on communication with other governmental authorities and with the owners of assets related to terrorism.

We expect that in practice, this new development will require Initial Monitoring Institutions to allocate additional resources for carrying out examinations. Also, due to the absence of practice, an asset-freezing instrument may potentially inconvenience those clients of the Initial Monitoring Institutions whose assets may be frozen by mistake.

Re-assessment of risks

The New AML Law introduces a risk-oriented approach, which must be applied by the Initial Monitoring Institutions in their activities. Particularly, the Initial Monitoring Institutions should identify clients in the risk criteria by considering factors such as geographical location and place of registration. They should evaluate the servicing institutions involved in any transaction in compliance with AML rules, including the type of services rendered and other factors the Initial Monitoring Institution considers proportionate and necessary.

An Initial Monitoring Institution should develop risk criteria itself, taking into account the national risk assessment practice, typological research and recommendations prepared by the SSFMU and other State Monitoring Institutions. According to the NBU, such recommendations should be expected in mid-2020.

Imminent changes to assessment procedures will require Initial Monitoring Institutions to perform a large amount of work, including revision and approval of internal risk assessment procedures and re-assessment of existing clients. Over the long term, the introduction of a new risk-oriented approach is expected to make financial monitoring more business-oriented. We perceive fewer troubles and bureaucratic procedures for ordinary customers and at the same time an increase in the effectiveness of the fight against illegal activity in the financial market.

New rules for politically exposed persons

The most significant amendment regarding politically exposed persons (PEPs) relates to their status. Earlier, PEP status was temporary (i.e. up to three years). Starting from April 2020, however, this status will be applicable for the lifetime of an individual. Among other amendments, the New AML Law contains changes in the approach to the financial monitoring of relatives of PEPs, members of their immediate families and associated parties.

As the rules for dealing with PEPs and their related parties become stricter, the general approach remains the same in that Initial Monitoring Institutions must work carefully with these clients.

Correspondent relations extended

The New AML Law will allow for the establishing of correspondent relations between banks and financial institutions. At the same time, examinations of financial institutions during this procedure will become more complicated. Among other actions aimed at creating an ability to conduct an appropriate assessment of financial institutions, the New AML Law requires that monitoring institutions be able to collect information from official and reliable public sources and to determine whether a financial institution is a shell bank.

This concept was transferred from Article 64 of the Law of Ukraine “On Banks and Banking Activity” No. 2121-III dated 7 December 2000, which directly prohibits the establishment of correspondent relations with shell banks.

Exchange of information now available

Upon the entry into force of the New AML Law, Initial Monitoring Institutions will be allowed to request, receive and use information and documents available to other members of the institution’s group. This access should be regulated by internal procedures and rules approved by the parent company and must comply with the New AML Law and data protection laws.

In addition, the New AML Law introduces the principle of “reliance”, meaning that one Initial Monitoring Institution possesses the right to rely on the results of identification and verification of a client made by another Initial Monitoring Institution. Each Initial Monitoring Institution, however, bears the responsibility of examining its clients, regardless of the identification and verification procedures performed by another institution.

These new regulations are expected to increase both the cost and efficiency of identification and verification procedures, while at the same time will make cooperation among Initial Monitoring Institutions more effective.

Information for payments

The New AML Law changes the requirements for the information that must be provided for payments. Roughly speaking, the type and quantity of information will depend on whether the payment transaction is lower or higher than the threshold equal to UAH 30,000 (approximately EUR 1,000). This rule, however, does not apply to suspicious operations, which would become subject to financial monitoring irrespective of the amount.

For example, a transaction lower than the threshold must contain information on the payer’s and recipient’s account, e-wallet or card number. In most cases, these transactions do not require the verification of the parties. In contrast, transactions exceeding the threshold must contain an extended list of information regarding the parties and will usually require Initial Monitoring Institutions to verify with the parties.

These developments are in line with the requirements of EU Regulation 2015/847 dated 20 May 2015 and are expected to increase the transparency of payment transactions. Over the long term, these procedures will increase the quality of client profiles and improve the precision of risk-assessment procedures.

Remote verification

The New AML Law implements long-awaited changes to the verification procedure. Since April 2020, Ukrainian legislation has allowed Initial Monitoring Institutions to perform remote verification procedures. As of today, there are no insights on how such remote verification procedures should be performed in the future. It is expected that detailed instructions will be described in by-laws.

These respective amendments should substantially simplify KYC procedures, decrease the Initial Monitoring Institution’s expenditures for the operation of outlets and staff, and will bring Ukraine one step closer a neo banking system.

New approach to sanctions

The significantly increased fines contained in the New AML Law should motivate Initial Financial Institutions to comply with the new requirements. For example, current fines for Initial Financial Institutions that fail to identify financial operations subject to financial monitoring do not exceed UAH 13,600 (EUR 459). The new regulation, however, increases the fine limit to UAH 340,000 (EUR 11,472). At the same time, the New AML law introduces a rule prohibiting more than one sanction for each breach and a new influence measure called “settlement agreement”.

Settlement agreement is expected to be a great instrument for those Initial Financial Institutions, which may have violated financial monitoring rules, but would like to cooperate and mitigate the consequences of these violations. By successfully performing a settlement agreement, an Initial Financial Institution in this situation would be rewarded with a reduced sanction.

When imposing sanctions against an Initial Financial Institution, the State Monitoring Institution must consider, among other things, the circumstances of the violation, its nature and duration, losses and benefits obtained as a result of the violation, the degree of responsibility of the institution and its willingness to cooperate. In our view, the nontransparent calculation algorithm and a wide range of fines, which may be applied for any particular violation, could lead to manipulation and corruption by the State Monitoring Institutions.

Conclusions

The New AML Law is a positive development enhancing the ability of legal instruments to detect and prevent financial crimes. It goes without saying that the New AML Law has deficiencies. Some of the provisions have a high degree of uncertainty and their performance substantially depends on their adoption, implementation and the quality of any subsequent by-laws. Nevertheless, Ukraine has made a significant step forward towards the transparency of its financial sector, which should facilitate the process of European integration and the ability to raise future financing from international financial institutions and other international partners.

For more information on the New AML Law in Ukraine, please contact your regular CMS advisor or local experts:

Ihor Olekhov

Partner, Head of Finance practice, CMS Cameron McKenna Nabarro Olswang Ukraine

Glib Bukharin

Associate, Finance, CMS Cameron McKenna Nabarro Olswang Ukraine