What changes have occurred with the renewal of the Financial Monitoring Law?

In September 2001, Ukraine was put on the FATF's blacklist and spent almost two and a half years there. The reason for blacklisting was the lack of effective mechanisms to combat money laundering and financing terrorism. Since then, mechanisms aimed to amend the situation started being developed at the legislative and regulatory levels, but not quickly enough. Re-analysis of risks from FATF in 2016 showed that Ukraine's financial system was still vulnerable and its weak link is an ineffective system for primary detection of suspicious financial transactions.

Therefore, the entry into force of Law № 361-IX in April 2020 and the introduction of Law 79-IX on June 1, 2020, was an attempt to meet the requirements of European legislation at the legislative level. Without these changes, Ukraine would risk being blacklisted or graylisted again, barring Ukrainian companies from international markets.

The main task of these laws is to regulate the procedure of financial monitoring. The entities covered by this legislation are now required to conduct primary monitoring of financial transactions, namely:

1. Identify and verify clients.
2. Document transactions that fall within the risk criteria.
3. Collect information about the parties in such transactions.
   

How has financial monitoring changed?

Changes in the legislation relate to clarifying the criteria for financial transactions, increasing the list of entities subject to financial monitoring, and introducing a risk-based approach.

Update of the criteria for financial transactions subject to financial monitoring

Under the new law, 400 thousand hryvnias is the threshold amount for financial transactions that are subject to financial monitoring.

Additionally, financial transactions are subject to mandatory financial monitoring if they meet at least one of four criteria:

• transactions involving offshore companies;
• operations involving politically exposed persons (or their family members);
• transfer of funds abroad;
• cash transactions.

Extending the list of entities subject to financial monitoring

This list includes virtually all business entities that deal with financial transactions. In particular:

1. Banks, insurers (reinsurers), insurance (reinsurance) brokers, credit unions, pawnshops, and other financial institutions.

2. Payment organizations, participants, or members of payment systems.

3. Commodity and other exchanges conducting financial transactions with goods.

4. Professional participants of the stock market (securities market), except for persons engaged in trading organization activities on the stock market.

5. Postal operators and other institutions that provide services of funds transfer (postal transfer) and performance of currency transactions.

6. Branches or representative offices of foreign business entities providing financial services in Ukraine.

7. Separately defined entities subject to financial monitoring (except for persons providing services under labor relations):

• Subjects to auditing activities;

• Accountants, business entities providing accounting services;

• Business entities that provide tax advice;

• Lawyers practicing independently, lawyers' bureaus, and bar associations;

• Notaries;

• Business entities that provide legal services;

• Persons providing services for the creation, operation, or management of legal entities;

• Business entities that provide intermediary services in the execution of transactions for the sale of real estate, as well as entities that provide consulting services related to the purchase and sale of real estate for a fee;

• Businesses that trade precious metals, precious stones, and articles thereof for cash;

• Business entities conducting lotteries and/or gambling;

8. Provider of services related to the circulation of virtual assets.

9. Other legal entities that provide financial services separately, but which are not financial institutions by law.

If your company's activities are on this list, you must perform primary financial monitoring activities.

Implementation of a risk-based approach and due diligence in financial monitoring

Risk-based approaches should be applied by entities subject to primary financial monitoring in order to act according to the level of risk associated with each client. Clients who are registered in offshore zones or on sanctions lists, for instance, are automatically assigned a high risk rating.

In order to properly assess risk, entities must conduct proper due diligence even before starting a business relationship. It should include:

1. Identification and verification of the client (their representative).
2. Establishing the ultimate beneficial owner of the client, or lack thereof. This includes establishing an ownership structure.
3. Establishing the purpose and nature of a future business relationship or financial transaction.
4. Constant monitoring of business relationships and financial transactions of the client.
5. Maintain up-to-date data and documents.