Ukraine argues its case to ward off FATF sanctions
On December 15 in Paris the Ukrainian delegation will argue its case with the Financial Action Task Force (FATF), that this country is not Nauru and that it does not deserve sanctions on the part of more civilized countries (that may include refusal of financial transactions). If Ukraine has its way, not only will the financial sanctions be prevented, but it will also have cause to request deletion from the FATF blacklist of uncooperative countries in combating money laundering (the blacklist includes the Cook Island, Myanmar, Saint Vincent, the Grenadines, Grenada, Guatemala, the Philippines, Egypt, and Nigeria, which will also stand trial, so to speak, on December 15).
At the last FATF meeting in October, the Ukrainian delegation could not receive confirmation that Ukraine cooperates in combating money laundering, because of shortcomings in Ukrainian legislation, specifically the absence of the law On the Prevention of and Counteraction to the Legalization (Laundering) of Funds Generated by Illegal Means. Russia, also threatened by sanctions, was luckier in October. It had introduced changes and amendments to a federal law enacted on August, 7, 2001, which FATF experts liked so much that they agreed to strike Russia from the blacklist right immediately in Paris without further inspection and red tape, even though the said amendments were dated October 30, 2002.
Will Ukraine make such a favorable impression on FATF experts? The law mentioned was passed by the parliament the Thursday before last. This question can be partially answered by referring oneself to the law — in part because the experts have different views as to its implementation. Its advantages and shortcomings, with which the Ukrainian delegation will fly to France deserve a closer examination.
“ASSETS”
One of the reasons Ukraine could be considered lucky in October (the FATF did delay the sanctions for a month) was the task force’s lack of experience in dealing roughly with countries having a real rather than virtual sector of the economy. In this sense Ukraine and Nauru are very different, and not only geographically. Needless to say, the likelihood of such indulgence this time is very low, although it should still be considered. Let us add this to the Ukrainian delegation’s assets, thus increasing them by precisely the amount by which the FATF experts’ credit of trust is depleted with regard to Ukraine. In other words, maximum. Oleksandr Berezhnoi, head of the Finance Ministry’s financial monitoring department, told The Day that December 15 is the deadline, past which Ukraine will have nobody to blame but itself; the FATF will accept no further explanations and reservations.
It is safe to assume that Ukraine stands a fair chance of being spared FATF sanctions and getting off the blacklist. The Russian precedent is what warrants such optimism. The bill passed by Verkhovna Rada conforms with Russia’s amended law combating money laundering and financial terrorism in all its provisions. However, making a comparative analysis, however interesting, would take too much space, and we will have to make do with certain principal aspects.
Both the Russian and Ukrainian laws consider dirty money (economic benefit in the Ukrainian wording) that is received using illegal means. We will consider below whether tax evasion by business entities is subject to financial [fiscal] monitoring in Ukraine. Yet the FATF’s forty recommendations leave every country enough room for initiative. This means that the FATF experts are not likely to focus on this problem. By and large, the Ukrainian view on the criteria of dubious/suspicious financial transactions fits perfectly with European requirements and is practically identical to the Russian approach. Article 11 lists transactions subject to compulsory fiscal monitoring that can be summed up as follows:
u money transferred to anonymous (numbered) bank accounts abroad and vice versa, including offshore remittances; financial transactions involving residents of “uncooperative” countries; transactions involving loro accounts; monetary transfers abroad in the absence of “foreign economic contracts”;
u sale and purchase of checks, traveler’s checks, etc., for hard cash; hard cash transfers to bank accounts and remittances therefrom to a third party made that same or the following business day; settlements with legal entities within three months from the date of the registration thereof; opening of bank accounts and depositing sums for the benefit of a third party;
u changing foreign banknotes for different denominations; sale and purchase of securities for hard cash; payments of casino and lottery winnings, insurance indemnities, etc.
In Ukraine, any of the above transactions is subject to fiscal monitoring only if the amount involved is in excess of or equal to UAH 300,000 non-cash or UAH 100,000 in cash. This is an obviously liberal clause, compared to Russia’s (where all transactions worth 600,000 rubles or over are subject to monitoring, regardless of the manner of payment). However, considering the average European standard, 50,000 euros without cash, the FATF should not frown on Ukraine’s liberalism here.
Let us touch briefly on the monitoring system. As in Russia, Ukraine’s has two levels: national (a special authority within the Finance Ministry’s framework) and primary (almost every operator of the financial services market). Detailed information concerning such transactions (in keeping with the above criteria), including commercial secrets, is transferred to that special authority by “subjects of primary monitoring” within set time-limits. There it is processed and, depending on the findings, the law steps in. The primary level entities, whether or not law enforcement steps in, must store data relating to suspicious transactions for five years from the date of their registration.
In principle, FATF experts should be satisfied by this. In fact, they ought to be impressed by the list of suspicious hallmarks (e.g., “red alert” transactions) even more than Russia’s. Ukraine’s is far more detailed, providing for all contingencies.
“LIABILITIES”
Returning to tax evasion, a most painful issue in Ukraine, Articles 207 and 212 of the Criminal Code envision up to three years in prison for evading taxes involving sums lower by an order than in the money-laundering law. Logically, all those financial watchdogs should not be interested in tax evasion. However, in most European countries the law distinguishes between tax evasion and financial machinations. Actually, the former is not referred to as a crime. Russia, incidentally, was struck off the FATF blacklist without this delimitation and without tax evasion monitoring, thus leaving both notions outside the definition of money laundering. Time will tell whether or not our bureaucrats ought to have focused on this aspect.
Granted: Ukraine intends to both counteract and prevent money-laundering. To this end, Ukrainian law defines procedures preceding money laundering (Clause 2, Article 1): “acts punishable under the Criminal Code, specifically by a term of imprisonment of three and more years (except for acts envisaged by Articles 207 and 212 of the Criminal Code)...”
However, the Ukrainian law defines “legalization of illegal income” [i.e., money laundering] as “an act defined by Article 2 hereof, aimed at granting legal status to the possession or management of incomes (determined as “dirty” — Author), or an act aimed at concealing the sources of such incomes” (Clause 3, Article 1).
Article 2 reads: “Еacts aimed at concealing or camouflaging the illegal origin of money or other property...” Not a word here about tax evasion, regardless of Clause 2, Article 1. The legal frustration is aggravated by the fact that there are no further references to this clause (meant to keep citizens away from the official eye when, for example, buying an apartment in Kyiv) anywhere in the law. Thus, this is no mechanism to prevent money laundering. Once again, FATF experts are not likely to pay special attention to this, they are more concerned about combating money laundering. But what about the small and medium business in Ukraine?
Logically, an act preceding “legalization” excludes the monitoring of tax-evading incomes, yet we can see that there is no such monitoring. There is just the monitoring of “legalization.” We all know that our state has a fantastic gift for interpreting its laws, “upgrading” them and their implementation with the aid of recommendations.
About the system of supervising state fiscal monitoring, practical experience shows that there are different ways to abuse it: by pressuring banks, selling information, using it for the wrong purpose, political “contracts,” and the “selective” treatment of wrongdoers. The procedures of appointments/promotions in the “financial intelligence service” conform to the generally known principles of formation of central executive authorities. Theoretically this is clearly defined: the primary level entities can be monitored only by the Finance Ministry’s special authority, NBU, Securities and Stock Market State Commission, and another commission to be set up. The State Tax Administration and its inspectors have no such authority. Simultaneously, the “financial intelligence service” is accountable primarily to the Minister of Finance, in our case Mykola Azarov [until very recently head of the STA].
THEY MIGHT NOT UNDERSTAND
Everything stated above should not upset the FATF experts — unless Washington, playing anything but a minor role in the task force, it being an intergovernmental organization, remembers the Pavlo Lazarenko saga and the Kolchuga scandal. Naturally, arms trade is of special interest to FATF.
Here is an excerpt from Article 7 (concerning the right of the primary level entities to refuse to perform a financial transaction). It can leave one puzzled and with a lot of questions. Also, the reader will please forgive this author for the following quotation. The text is precisely the way it was adopted by the Verkhovna Rada.
“In case the norm of this Law or another normative-legal act, issued on the strength of this Law, or one that regulates or is connected with the regulation of legal relationships being subject to this Law, or when the norms of various normative-legal acts allow an equivocal (multiple) interpretation of the rights and obligations of legal and natural persons in relationships with subjects of primary and/or national monitoring, as a result of which there is a possibility to both apply and not to apply financial [fiscal] monitoring, an appropriate decision shall be made in favor of the said legal and natural persons. This clause shall also apply when deciding on the amenability of subjects of primary fiscal monitoring as a proper or improper application of this Law.
“Should subjects of primary and/or national fiscal monitoring have, as proof, signs that may corroborate the fact of legalization (laundering) of receipts [incomes], as well as proof of the absence of such signs or proof of improper reference to such financial transactions as ones that may corroborate the fact of legalization (laundering) of receipts not in the direct and unequivocal form do not refute the said opposite proof or such refutation requites additional proof [evidence], expert examinations, information, signs that can corroborate the fact of legalization are considered unproved, financial monitoring shall not be applied and the legal and natural persons, being subjects of primary and national fiscal monitoring, shall not be held responsible for the legalization (laundering) of [such] receipts.” Have you understood anything? Then read it again. This author believes that the banks are simply frightened of the all-seeing wrathful official eye, in case such fiscal monitoring turns out to be considered improper. For example, if such monitoring is done to the wrong person — or if an enterprise or business happens to escape their “proper” attention and they fail to notify the competent authorities. Be it as it may, businesses and banks are given the presumption of innocence, just in case they have to meet with the state in court. Well, it is a different subject, but will the FATF understand what the Ukrainian lawmakers had in mind? The more so that a deputy versed in the field says that the legislature’s legal department suggested that the above quote leaves nothing of the law. Perhaps they are wrong, but the big question is how will this text be translated into English, French, or German, so that FATF experts can understand it? Obviously the way it is, this passage cannot be translated in any readable way (and believe us, our translator tried — Ed. ). Incidentally, Russia was careful to avoid such overlong hither-and-yon compound sentences in its law. One can only hope that the FATF will not assume they understand the main thing: references to all the past, present, and future Ukrainian legislation in the first paragraph, and conclusion: “...shall not be held responsible” at the end of the second one. For if they do, Ukraine would have to assume this responsibility.
