Article 14.
Money Laundering

Financial Intelligence Unit in Ukraine
In 2010, Ukraine ratified the Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime and on the Financing of Terrorism. Under paragraph 13 of Article 46 of this Convention, the body authorized by Ukraine to perform the functions of a financial intelligence unit (FIU) is the State Financial Monitoring Service of Ukraine (SFMS). Its activities are directed and coordinated by the CMU through the Minister of Finance.

The tasks, functions, and powers of the SFMS are established by the Law of Ukraine "On Prevention and Counteraction to Legalization (Laundering) of Proceeds of Crime, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction" (“Law on Money Laundering”) and the Regulation on this agency. Regarding internal and external cooperation, one of the tasks of the SFMS is to establish cooperation with government agencies, competent authorities of foreign countries, and international organizations in the field of prevention and response to money laundering.

Financial monitoring system
A financial monitoring system has been established and is operating in Ukraine. The financial monitoring system consists of primary and national levels. The subjects of state financial monitoring are the National Bank of Ukraine, the Ministry of Finance of Ukraine, the Ministry of Justice of Ukraine, the National Commission on Securities and Stock Market, the Ministry of Digital Transformation of Ukraine, and the SFMS itself. Each of them supervises individual subjects of primary financial monitoring.

In accordance with the Law on Money Laundering, the SFMS generates summary materials, i.e. information on financial transactions which were the object of financial monitoring and which the analysis found suspicious. The summarised materials are a source of circumstances that may indicate the commission of a criminal offense and give grounds for the investigator or the prosecutor to initiate a pre-trial investigation.

The subjects of primary financial monitoring (SPFM) are banks, insurers, credit unions, payment organizations, commodities and other exchanges, etc. The procedure for carrying out financial monitoring measures by these entities is regulated by a separate NBU resolution. SPFMs are required to apply a risk-based approach in their activities, taking into account the relevant risk criteria. If there is information about suspicious transactions, SPFM must immediately notify the SFMS.

State financial monitoring and its cooperation
The SFMS became a separate executive body in 2005. The independence of the SFMS is ensured due to the system of prevention and counteraction to money laundering built since 2005, the risk-based approach and software that enables quick tracking and blocking of all suspicious transactions, as well as to generate summary materials for submission to law enforcement agencies. According to experts, there is no political interference in the agency’s activities.

1) Cooperation at the national level
The SFMS actively works with various public agencies in Ukraine and internationally. In Ukraine, the SFMS has signed information exchange agreements with six state regulators, eight state law enforcement agencies (such as the MIA, the NABU, the ARMA, the SIB, the PGO, etc.), thirteen other state agencies (such as the SPFM, the AMCU) and one institution (the National Depository of Ukraine). Twenty-three Memorandums with state authorities, institutions and organisations and eleven joint orders of the SFMS with state regulators and other state authorities were also signed.

The SFMS staff indicate that access to databases of state bodies is open, permanent, and provided as required. Requested information is received on time and in full from the SFMS side. At the same time, information from public bodies at their own initiative (if they identify financial irregularities) does not come in full. One of the reasons is their frequent reorganization and, as a consequence, the need to renegotiate information exchange agreements.

At the domestic level, the SFMS constantly cooperates with SPFM. Thus, for the last five years, SPFMs have provided the following number of reports on financial transactions subject to financial monitoring. The decrease in the number of reports in 2020 - 2022 was due to the adoption in 2019 of a new version of the Law of Ukraine on Money Laundering, which raised the threshold for reporting financial transactions and introduced case reporting on suspicious transactions. This change was welcomed by experts, who noted that the new version of the Law meets the requirements of European directives, the requirements of MONEYVAL, and allows for increasing the level of competition in this area.

2) Cooperation at the international level
At the international level, the SFMS actively cooperates with:

• The Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). In 2017, Ukraine passed the 5th round of mutual evaluation of the national financial monitoring system by the MONEYVAL Committee, which resulted in the publication of the MONEYVAL Report on the Mutual Evaluation of Ukraine in January 2018;
• Financial Action Task Force (FATF);
• Egmont Group of Financial Intelligence Units. Since 2004, the SFMS has been a member of the Egmont Group. During 2003-2020, 81 Memoranda of Understanding were signed with FIUs of foreign countries. According to the information provided by the SFMS, in 2021 and in 2022, it can be concluded that the level of cooperation of the SFMS at the international level was high and stable.

Features of the new version of the Law on Money Laundering
There appeared to be some shortcomings in the realization of the latest version of the Law on Prevention and Counteraction. Banking institutions have an obligation to ensure the automatic exchange of information between them and the SFMS. While large banks have the financial resources and understanding of how to implement this, small banks do not.

To eliminate this problem, the Ministry of Finance is planning to create e-profiles of SPFM. E-profiles will allow simplified submission of SPFM reports to the SFMS. The relevant order of the Ministry of Finance was supposed to enter into force at the end of November 2021. However, in November 2021, the entry into force was postponed to May 1, 2022, and in May 2022 it was postponed to the first Monday of the fourth month after the termination or cancellation of martial law.

In general, this step speeds up the speed of providing information and saves IFM financial resources, which is absolutely a positive aspect. At the same time, one of the challenges at the current stage is to ensure the security of channels for the transmission of this information by the government. Furthermore, the new version of the Law on Money Laundering formalizes a risk-based approach to banking activities. In particular, they are obliged to determine the risk criteria on their own, taking into account information from state regulators. At the same time, according to the experts we interviewed, in practice, this leads to a different approach to risk formation. There may be a situation in which the same customer will be assigned to different risk categories in different banks, which will not contribute to a uniform practice of their application. Still, the employees of the SFMS see a positive aspect in this as well. In their opinion, such a varied approach allows for developing a variety of criteria, which will accelerate and improve the development of their application.

To address the issue of a risk-based approach, experts suggest either clearly establishing criteria at the NBU level and providing them to banks to ensure a unified approach, or establishing separate key criteria for assigning individuals to different risk groups, as well as additional criteria that banks can set independently. For its part, in 2020, the SFMS presented a Guide to a Risk-Oriented Approach for Specially Defined SPFM for a better understanding of risks and a risk-based approach. Also in 2021, the Methodology for the National Money Laundering and Terrorist Financing Risk Assessment in Ukraine was updated.

Assessment of the national financial monitoring system
In 2017, Ukraine passed the 5th round of mutual evaluation of the national financial monitoring system by the MONEYVAL Committee, which resulted in the MONEYVAL Committee publishing the Report on Mutual Evaluation of Ukraine in January 2018. The annex to the Report provides a detailed analysis of the Ukraine's implementation of the 40 FATF Recommendations. In the next two years (2019 and 2020), Ukraine’s progress in complying with these recommendations had to be re-evaluated. The results of the assessment are described below.

Over the next two years (2019 and 2020), Ukraine has raised its score on two recommendations — No. 5 “Terrorist financing offense” and No. 35 “Sanctions,” although the score dropped on two other recommendations, No. 15 “New technologies” and No. 21 “Tipping-off and confidentiality.” Thus, progress in improving the FATF recommendations is slow. However, the initial assessment is quite optimistic, which gives hope that the score on other FATF recommendations will be raised in the future.

In 2019, the 1st Enhanced Follow-up Report & Technical Compliance Re-Rating was received (conducted by the Isle of Man and Israel). In conclusion, limited measures have been taken to implement the new elements under Recommendations 2, 7, 18, and 21. In 2020, the 2nd Enhanced Follow-up Report & Technical Compliance Re-Rating was published (conducted by the Isle of Man and Cyprus). Overall, Ukraine has made progress in addressing the gaps in technical compliance identified in the Mutual Evaluation Report in the 5th round of mutual evaluations and has been reassessed on the implementation of the Recommendations. Recommendations No. 5 and No. 35, initially assessed as PC (partially compliant), were reassessed as LC (largely compliant). Recommendation No. 15, initially assessed as LC (largely compliant), was reassessed as PC (partially compliant).

Experts believe that Ukraine has implemented most of the FATF recommendations in its legislation. In addition, they note that Ukraine is one of those countries that has established and strict rules and recommendations of international organizations and adheres to them, and this should be emphasized constantly. In November 2022, the Law was passed that limited the period of monitoring of public officials (PEPs) to three years after leaving office. Such changes are not in line with FATF recommendations and may become an obstacle to Ukraine's accession to the EU. We hope that this will be corrected in the shortest possible time.

Performance indicators of the SFMS
One of the most important aspects of the SFMS’s activities is the formation and submission of summarised materials to law enforcement agencies, which serve as the basis for criminal proceedings. It should be noted that the following statistics are compiled on a regular basis. The investigation of certain cases can take years, and if the progress (referral to court, sentencing, etc.) occurred in a particular year, it is included in the statistical information for that year. The SFMS constantly monitors the movement of summary materials it provides. It should be noted that hundreds of summary materials are sent to law enforcement agencies every year. However, only some of them (15 in 2021, 9 in 2022) are used by law enforcement agencies during pre-trial investigation and formation of materials for referral to court.

The following statistical indicators characterize SFMS activity for 2021-2022:

1. Submitted materials by categories of financial transactions: Investigations of financial transactions suspicious of corruption offences Investigation of transactions related to budget assets.
2. The use of summary materials in criminal proceedings.

In general, it should be emphasized that the summarised material itself is not evidence in criminal proceedings. Law enforcement officers need to recollect all the information from banking institutions, taking into account the information already received from the SFMS. Therefore, it is necessary to obtain information on all accounts and transactions of the client. All this requires significant time and human resources. Experts note that this mechanism should be improved.

Implementation in practice after State evaluation.