State Financial Monitoring Service stems tides of “dirty” money

On Wednesday, November 5, President Petro Poroshenko signed the Law “On Prevention and Counteraction to Legalization (Laundering) of the Proceeds from Crime or Terrorism Financing, as well as Financing Proliferation of Weapons of Mass Destruction,” the president’s press service reports. This is the last law of the anticorruption package that was lobbied by the public and passed in parliament.

The law was passed in pursuance of  agreements with the International Monetary Fund and with due account of proposals to the national legislation from Financial Action Task Force (FATF) experts.

The document calls for the formation of a national analytical database to enable the law-enforcement bodies of Ukraine and foreign states to detect, check, and investigate the crimes that involve money laundering and other illegal financial operations.

Vitalii Shabunin, chairman of the Anticorruption Center, has noted that the public was looking forward for the president to affix his signature to this law. “This is the last bill from our package that we looked forward to being signed into law. Get ready, ‘guys,’” he wrote on his Facebook page.

For more details of the current law on countering money laundering and “dirty” financial flows, see below the exclusive column of Ihor Cherkasky, head of the State Financial Monitoring Service of Ukraine.
 

Recent elections to the Verkhovna Rada of Ukraine have demonstrated that Ukraine is experiencing unprecedented consolidation of its nation and current authority. This is due to both dramatic events in Donbas and to society’s urge to approach and assimilate in practice vital standards of the civilized Europe. As it is known, history of every individual country develops according to the challenge-response-challenge principle. In general context, the answer to the question what Ukraine will be like in the near future and in more distant perspective is included in the Strategy-2020. The document formulates model of the country’s socio-economic, military, and financial development in the coming five years.

Social significance of Strategy-2020 consists in substantiation of Ukraine’s real course towards European integration. The achievement by Ukraine of vital EU standards shall mean its actual vertical migration from the lower to the upper levels of civilization development. One of the crucial preconditions for such course is setting up country’s systemic and efficient counteraction to laundering of shadow funds and, first of all, criminal money.

At the current stage of civilization development, financial and economic crime has become transnational. Its consequences are international because today all countries are information dependent. In 1989 the international financial action task force FATF was established in accordance with the G7 decision to counteract money laundering. It is an intergovernmental body aiming at development and implementation at international level of anti money laundering measures and standards. FATF traces implementation of such measures, studies money laundering ways and methods, develops preventive and protective measures, facilitates worldwide implementation of anti money laundering standards.

In fulfilling these functions FATF cooperates productively with many international organizations where activities are also directed to counteraction to laundering of dirty money, and with national governments. In particular, this institution develops recommendations on introduction of the most efficient measures to combat illicit money turnover within countries, and countries willing to interact with the world market on civilized basis shall implement these recommendations. For this purpose the State Financial Monitoring Service (SFMS) operates as financial intelligence unit in Ukraine.

The SFMS is fighting for gradual yet inevitable approach of financial and economic relations to those principles on which the whole civilized world is based. Speaking more generally, it’s when money may only be earned but not stolen and when person managing in any way to avoid this principle shall eventually have no possibility to direct illicit proceeds to particularly criminal field, the terrorist financing. I would like to note, that in the most developed countries this principle is pursued quite highly.

According to current legislation the SFMS is a central executive authority playing the key role in the national anti money laundering and counter terrorist financing system. According to its international status this organization is finance intelligence (Financial Intelligence Unit) collecting, processing and analyzing information on financial transactions causing suspicions with regard to performing shadow transactions with the view to money laundering.

The SFMS operates in organic interconnection with financial institutions, state controlling bodies and law-enforcement agencies. Banks and financial institutions are primary sources of information on movement of financial assets. Controlling and law-enforcement agencies perform regulation and supervision over money turnover and respond to the identified violations.

In such case summarized information shall be forwarded to law-enforcement agencies. However, the SFMS does not directly interfere with the financial sector activities within the national economy. At the same time it collects and summarizes information on suspicious financial transactions performed by individuals and entities. In fact, our Service is a peculiar filter that unshadows and heals the Ukrainian financial system.

Every day the SFMS database receives at average 4-5 thousands of financial transaction reports which may be related to laundering of criminal proceeds and terrorist financing and 97 percent of these are reports from banking institutions, that is, from the field where the money turnover takes place.

Since the very start of creating the national anti money laundering system the stolen asset search and recovery process has become more active. I would like to note in particular that recent adoption by the Verkhovna Rada of Ukraine of the draft Law “On Prevention and Counteraction to Legalization (Laundering) of the Proceeds from Crime or Terrorism Financing, as well as Financing Proliferation of Weapons of Mass Destruction” shall enable reinforcing of the current tools for counteraction to financial crimes.

The supplements suggested by the Law have brought domestic legislation in the field into compliance with international requirements and standards. They provide complex settlement for the issues of conducting national risk assessment, access to data on beneficiary ownership; monitoring of financial transactions of politically exposed persons; application of sanction lists of transnational associations and foreign countries; increase efficiency of investigations in money laundering cases, as well as many other aspects of financial monitoring.

The government has set a task for the SFMS that consists in counteracting in any way to attempts to launder criminal proceeds and preventing recurrence of what was happening at the time of previous authority. This is the aim of current close cooperation and everyday coordination of our efforts with the Prosecutor General’s Office of Ukraine, State Security Service of Ukraine, Ministry of Internal Affairs of  Ukraine, and the State Fiscal Service of Ukraine. This is the cooperation which becomes guarantee of significant slowdown in laundering of financial assets.

In fact, starting from March the Service has implemented wide range of required reforms (which were to start already 2 years ago) in the field of combating laundering of criminal proceeds. These reforms clearly demonstrate Ukraine’s sustainable compliance with basic FATF principles and recommendations. Absolutely, at the same time this shows real steps being taken towards Ukraine’s integration into European community.

Modern economic crime including money laundering and corruption has increased so that now it is a serious threat not only to economic and social sustainability in many countries, but even to the democracy itself. This is why the latest G20 summit has focused attention of domestic governments on directing specific and efficient efforts towards identification and monitoring of processes in jurisdictions of countries with high risks of money laundering and shadowing of illicit financial assets.

The State Financial Monitoring Service investigates actively launderings of money obtained due to systemic corruption committed by former high-ranking officials. Today total amount of suspected legalization financial transactions exceeds UAH 151 billion while there was UAH 361 billion planned for the state budget revenues in 2013. I would like to note that in this case we are speaking about former country’s government officials and their close associates.

I would like to make a particular point of the SFMS being a transparent public authority. However, our incoming information on financial transactions is confidential and may not be subject to discussion. Besides, such limitations exist in all countries as required by FATF international standards. At the same time, the SFMS officers shall conduct rigorous analysis and prepare relevant conclusions and proposals for law-enforcement agencies with regard to every identified plundering of state finance.

Identification and recovery of hidden and stolen financial assets is an extremely topical issue for the country. Naturally this is a complicated, multistage, and long-term process. It requires concentration and consolidation of efforts of both the international community and national anti money laundering system. It is very important to be especially attentive both in identifying and blocking such assets and in organizing recovery of hidden financial resources to the state budget.

Specialists understand well that it is not easy to freeze detected shadow assets, but it is more important and difficult to recover them to legal turnover. International practice shows that procedural actions for recovery of stolen assets are carried out within framework of international legal assistance. Therefore, we are working on variable models to resolve this difficult problem. We must be prepared for litigation not only in Ukraine, but also in jurisdictions where stolen assets were detected.

For this purpose we had activated close and fruitful cooperation with our foreign counterparts. Thus, the SFMS of Ukraine had sent requests to 136 countries to detect and freeze assets of former high-ranking officials. As to date a number of foreign companies whose main beneficiaries are involved in criminal cases have been already revealed. Significant and regular assistance in search of stolen assets is provided by our colleagues from the US, the UK, Switzerland, Austria, Cyprus, Latvia, Liechtenstein, and other foreign states. In this context I would like to note as well that the SFMS of Ukraine has conducted a range of unprecedented complex investigations on financial dealings of former high-ranking officials and, as a result, we have revealed assets for the total amount of USD 1.6 billion. We’re talking about funds that are already in Ukraine and which cannot be already stolen from the banking system.

Blocking of the abovementioned accounts executed by the SFMS of Ukraine has been extended according to judicial decision by seizing them. Without any exaggeration, I would like to note that thanks to the operative work of financial intelligence we have managed to prevent the removal of these funds from the financial system of our country. I am convinced that neither threatening nor numerous changes in offshore jurisdictions, or even change of the names will help to avoid liability of former high-ranking officials and their associated persons.

Another extremely revealing and important thing is that at the end of April this year in London a special international forum on asset recovery to Ukraine and funds obtained by illegal means (Ukraine Forum on Asset Recovery, UFAR) was held. It was entirely dedicated to solving the problems that arise during the search, seizure, and recovery of illicit assets. During the Forum, we felt a real strong support from our foreign colleagues. An extremely important continuation of the abovementioned Forum was the recent meeting with the FIUs in Zurich during which we agreed to join our efforts in search and blocking of assets stolen by former high-ranking officials.

The SFMS of Ukraine shall further definitely fulfill Ukraine’s commitments to the international community in full; bring national financial system into compliance with international legal standards of transparency; enhance the ability of our country’s financial system to prevent money laundering and terrorist financing.

Shadowing of financial capital is facilitated by advancements in IT communication networks and the Internet. With the intensive development of the latter unprecedented opportunities arise for instant financial settlements. Owing to the development of Internet networks virtual currencies appear (e.g., Bitcoin). Whereas up to date no state is able to control monetary and financial transactions and settlements carried out in the Internet, such evidence raises the risk of a significant spread of shadow transactions, which in result can be carried out terrorist financing.

The kind of illegal turnover that is based on extremely widespread use of cash is quite common in Ukraine. We should admit that this is excessively high share of cash turnover which is the background for shadowing and legalization of financial resources. Damage from cash transactions is not limited to shortfall in the budget and social funds. The permanent need for cash forces business entities to seek ways to convert non-cash proceeds into cash. This is the source of corruption agreements and relationships.

Meanwhile, bribers have and regularly use the opposite need to convert constantly received bribes into real non-cash funds. Thus, conversion centers and shell companies appear that reproduce these processes. In modern economies there is another kind of shadow business transactions when legitimately earned funds are withdrawn from legitimate account in order to make them artificially illegal. Such transactions are carried out in particular through transfer pricing.

The point is that Ukrainian producers of export goods have associated companies abroad, what allows them to sell goods to these associated parties at reduced prices. Thus, Ukrainian producers understate their proceeds and pay no taxes. At the same time, foreign partners sell these goods at market prices and receive considerable incomes that remain on overseas accounts.

Certainly, the State Financial Monitoring Service of Ukraine enhances counteraction to the abovementioned transactions. It is important for Ukraine to draw a clear line, identify distinctions in potential for use of dirty and clean accumulation of funds and the whole world pays considerable attention to this. That’s why it is important to see the difference between laundering and legalization. While money laundering is just a judicial matter, legalization may, provided its proper organization (as it is demonstrated by worldwide experience), become quite significant source of investment.

I wish to emphasize that even correct and systemic measures against laundering of proceeds from crime do not enable final settlement of the problem. It is clear that the main tasks of economic policy consist in removal of the underlying causes of criminal and shadow turnover of money. These include political and social stability factors in the country, development of financial market mechanisms and institutions, perfection of currency circulation system, effectiveness of business infrastructure, taxation regulation mechanism, and conditions of property and identity safety. So, the better things go in our country, the more transparent and more advanced is the mechanism of our relations with other countries, the less possibilities will be for legalization of criminal funds.

The SFMS of Ukraine will make every possible effort for further approach the national financial system to international legal standards, enhance transparency of monetary transactions in every possible way and thus to enhance capability of the Ukrainian financial system of real resistance to shadowing of financial assets, money laundering, as well as of countering terrorist financing.

Ihor Cherkasky is the head of the State Financial Monitoring Service of Ukraine