Financial monitoring is an integral part of banking. Due to requirements of the Law of Ukraine “On Banks and Banking”, banks are prohibited from carrying out risky activities that threaten the interests of depositors or other creditors of the bank. In this regard, banks are required, as reporting entities, to identify, verify a client (client’s representative), study and update information about a client, and analyze his/her financial transactions.

The National Bank of Ukraine (NBU) regularly raises requirements to identification by banks of transactions subject to financial monitoring. In 2017, a number of changes were introduced in the Regulation on Financial Monitoring by Banks approved by NBU Board Resolution No. 417 of June 26, 2015 (hereinafter – “Regulation No. 417”), which tightened control over the conduct of transactions.

One of the key innovations is the risk-oriented approach of banks when analyzing financial transactions of clients (clause 72 of Regulation No. 417).

The risk-oriented approach is:

  • EU common practice;
  • compliance with international standards on preventing and counteracting money legalization (laundering);
  • bank-defined system for managing the risks of legalization of proceeds from crime/financing terrorism;
  • application of appropriate measures to ensure efficient minimization of risk.

A bank independently determines the relevant indicators as well as a list of clients to which the risk-oriented approach should or should not apply.

Money laundering and tax avoidance have become a permanent phenomenon, which resulted in more stringent settlement by the NBU and greater controls over transactions being carried out.

Banks now ask clients more questions about the origin of their funds, and should documents evidencing the origin and/or sources of funds even be provided, this may sometimes not be enough. Unless the targeted use of funds is confirmed, banks may block a transaction or refuse to release funds.

The provisions of NBU Board Resolution No. 42 of May 25, 2017 vest responsibility for the implementation of methods for money laundering and terrorism financing in banks. The goal is to reduce financial risks and control cash flows, even those funds which investors try to return through an agent bank that has concluded an agreement with the state-run Deposit Guarantee Fund.

The NBU’s most recent innovations – new requirements to those responsible for financial monitoring in banks, came into force on March 8, 2018. Resolution No. 20 of March 1, 2018 specifies that such a responsible employee:

  • shall be a member of a bank’s board;
  • shall be a head of the intrabank system for preventing legalization of proceeds from crime/ financing of terrorism;
  • shall be approved by the NBU;
  • shall have at least 3 years experience of working in activities on preventing legalization of proceeds from crime/financing of terrorism in the banking system, or shall be a bank manager for at least 1 year;
  • may not be the chairman of a bank’s board/head of a foreign bank’s branch, chief accountant of a bank/foreign bank’s branch and his/her deputy, head of a structural unit of a bank/foreign bank’s branch.

What are the banks looking for?

 Articles 15, 16 of the Law of Ukraine “On Prevention and Counteraction to Legalization (Laundering) of Proceeds from Crime or Financing of Terrorism as well as Financing Proliferation of Weapons of Mass Destruction” (hereinafter – the “Law”) provide for a list of transactions subject to mandatory financial monitoring. This includes cash transactions for an amount equal to or exceeding UAH 150,000.00 on:

  • crediting an anonymous account abroad or receiving funds from such an account from abroad should one of the parties participating in a financial transaction be registered in an offshore state or a state that fails to comply with the recommendations of international anti-terrorism organizations;
  • crediting and transfer to an account of a legal entity or individual entrepreneur whose period of activity does not exceed 3 months from the date of registration;
  • crediting and transfer under foreign economic agreements abroad;
  • exchange of banknotes for banknotes of different face value;
  • purchase and sale of checks, cash checks for cash;
  • financial transactions with cash;
  • transactions with bills of exchange, bearer securities, non-profit organizations, transactions where no method of payment is defined;
  • insurance payments, payouts, fees for the right to participate in a gambling game;
  • high risk financial transactions;

A bank is obliged to inform law-enforcement agencies on the day of identification of financial transactions for which there is reason to suspect that they are connected with, related to and designated for the financing of terrorism, and has the right to stop a financial transaction on a client’s account.

Just keep calm

A client shall provide documentary evidence of the origin of the funds and his/her sources of income. Such sources can include: salary, income received from the sale of products, services rendered, sale of property, inheritance, receiving an insurance payment under an insurance contract, prizes, other payments under civil law contracts. If an individual has not filed a tax return for previous years pursuant to tax legislation, then a bank may use information received from the relevant state authority on incomes and taxes paid from them to confirm the sources of funds.

Should a client that a bank unlawfully refuses to give funds to, the issue of account unlocking can often be resolved through negotiations with representatives of the bank. Additional explanations and/or documents on a blocked transaction may be required and the issue can, therefore, be resolved in pre-trial order.

However, it should be taken into account that the restriction of a client’s right to dispose of funds in his/her account is prohibited, unless it is restricted by a court decision or encumbrance conditions (Article 1074 of the Civil Code of Ukraine). If the negotiations did not have the desired result, a claim can be filed with a court on restricting a client’s right to dispose of funds. When withdrawing funds from a deposit/current account (in cash), a client is not obliged to explain the reason for such withdrawal.

It is true that transactions on an account can be suspended, but in this case a bank must find grounds in the Law to do this.

With regard to transactions involving a deposit account, the origin of funds and sources of income must be analyzed by a bank prior to a deposit being established and a bank has no right to refuse a client return of the deposit (Article 1060 of the Civil Code of Ukraine).

Conclusion

Since the obligation to prove that there are no signs of risky activities taking place in a client’s actions is vested in a bank, and given that the violation of provisions of financial monitoring may result in loss of license for violating financial monitoring standards, banks will hide behind liability and sanctions from the regulator. However, as a rule, the tightening of requirements does have an impact on a client. This means that should there be the slightest doubt, a bank will require additional documents from a client to confirm a transaction and (or) the sources of funds.

Kateryna Breduliak, senior associate, banking and finance practice

exclusively for  “Jurist & zakon” №13, 06.04.2018 – 12.04.2018