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Preliminary comments/questions regarding the anti-money laundering law and its implementation


I. FIU


A. What supervision will be exercised by the Finance minister over the FMD ? (issues to be

addressed related to hiring, regulations, - budget (amount and spending authority) - separate

line item or through the Finance Ministry, dealing with NBU).

According to the Statute of the State Department of Financial Monitoring (Resolution of the Cabinet of

Ministers of Ukraine # 194 dated 18 February 2002), the Finance Minister submits to the Prime

Minister of Ukraine proposal regarding the nominee to be appointed the Head of the FMD; the Head

is appointed and dismissed by the President of Ukraine according to Prime Minister's proposal.

The Head of the FMD manages the Department; he is personally responsible to the Finance Minister

for performance of FMD functions.

The Finance minister of Ukraine:


Submits proposals to the Cabinet of Ministers of Ukraine regarding appointment of Deputy

Heads of the FMD with the consent of its Head;

Approves the composition of the Board of the FMD upon proposals of its Head;

Approves the maximum number of stuff and the structure of the FMD upon proposals of the

Head of the FMD, within the limits of the maximum number of staff of the Ministry of Finance

approved by the Cabinet of Ministers of Ukraine;

Approves the staff chart and the budget of the FMD, which then are approved by the Head of

the FMD;


According to the Statute of the FMD, other issues do not require approval of the Finance Minister of

Ukraine.

The FMD is a legal entity; it has an independent balance, accounts registered at the State Treasury and

a seal with the State Coat of Arms of Ukraine and its name.

The FMD is funded by the State budget within the funds allocated for the Finance Ministry. Draft

Budget of Ukraine for 2003, which has passed second reading by the Verkhovna Rada of Ukraine,

stipulates that the FMD is managing its funds independently.

What does "functioning" mean in Art. 4 ("state executive body functioning at the Ministry

of Finance")?

"Functioning" means that the FMD is organizationally subordinated to the Ministry of Finance of

Ukraine (within the context of previous answer); at the same time, it performs the tasks assigned to it

independently, as a governmental authority.


B. Will the FMD be given the appropriate functioning resources, including building, etc.?

Draft Budget of Ukraine for 2003 provides necessary resources for organization of state financial

monitoring to counteract legalization (laundering) of criminal proceeds, gradually create a reliable

software and hardware complex that will collect and process information on financial transactions

subject to obligatory financial monitoring, establish an integrated database regarding such transactions

and practically establish the system of information exchange among financial control and law

enforcement agencies of Ukraine and foreign competent authorities and international organizations in a

sphere of fighting laundering of criminal proceeds and financing of terrorism.

Provision of a separate building and ensuring full-scale operation of the FMD are being worked on.


II. The Legislation


A. What happened to the amendments to Art 198 and Art. 209 of the Criminal Code that the

Ukrainian delegation advised the ERG would be passed with the AML ?

At the time of drafting of the Law of Ukraine on Prevention and Counteraction to the Legalization

(Laundering) of the Proceeds from Crime, it was planned to simultaneously approve the Law of

Ukraine on Introduction of Amendments into the Criminal Code of Ukraine ("package approval").

However, the Finance and Banking Committee of the Verkhovna Rada decided not to consider those

drafts simultaneously, arguing that possible amendments might be introduced into the AML Law

regarding definitions.

As of today, the Finance Ministry of Ukraine has submitted proposals to the Cabinet of Ministers of

Ukraine regarding technical finalization of draft Law of Ukraine on Introduction of Amendments to the

Criminal Code of Ukraine, including the replacement of the term "predicate offence" with "socially

dangerous illicit act". The draft law is to be sent to the Administration of the President of Ukraine to be

submitted to the Verkhovna Rada on a priority basis.


B. The reporting thresholds are 1) UAH 100,000 ($18,474) for cash, and UAH 300,000

($55,422) for non-cash; and 2) one of a long list of suspicious indicators. The cash threshold is

about the same as Russia. Why are the thresholds different, why are they so high (with

specific elements related to both cash and non-cash) ?

In this context, it should be noted that in the draft Law of Ukraine on Prevention and Counteraction to

the Legalization (Laundering) of the Proceeds from Crime that was approved in the second reading by

the Verkhovna Rada, and which had been discussed with the Europe Review Group experts, the

amounts were €10,000 for cash and €50,000 for non-cash transactions. These sums were set by the

Law of Ukraine on Banks and Banking Activities as criteria for reporting to anti-organized crime

agencies about significant transactions. The approved text of the Law contained almost the same

amount for non-cash transactions; according to the proposals of members of the Parliament, the cash

threshold was raised to the amount established by the similar law of Russia.

Without exaggeration, such amounts may be called a result of long discussions and compromise

solutions. The proposals put forward by MPs during the discussion of the draft law ranged from UAH

100,000 for both cash and non-cash transactions (about $20,000) to fivefold increase of such

amounts.

We think that the thresholds and criteria contained in the Law will allow the FMD to operate at the

initial stage. Once relevant experience of practical application of the Law is obtained, the Law will be

amended as necessary.


C. Is the purported "general" STR requirement based on thresholds or is it truly an STR?

Does the "safe harbor" apply to it?

Relevant "general" STR requirement is based on the said criteria. It is based on reporting in case of any

suspicion of legalization attempt.

According to Article 8 of the Law, "If employees of the entity of initial financial monitoring engaged in

financial transaction have any reasonable doubts, arising as the result of the internal financial monitoring

conducted as per Article 5 and 12 of this Law that a certain financial transaction is carried out to

legalize (launder) the proceeds, this entity shall inform the Authorized Agency of such transaction.

If the entities of initial financial monitoring engaged in financial transactions suspect or should have

suspected that such financial transactions are related with or intended for financing of terrorist activity,

terrorist acts or terrorist organizations, they shall immediately inform the Authorized Agency and the

law-enforcement bodies defined by the laws about such financial transactions".

Besides, this Article establishes that "Submission of the information by the entities of initial financial

monitoring to the Authorized Agency shall not represent a violation of bank or commercial secret. The

entities of initial financial monitoring and their personnel shall not be liable for submission of such

information, if they acted pursuant to this Law."


D. What specific criminal penalties of imprisonment are there for unauthorized disclosure of

FIU or bank STR information? The bill referred to general Ukraine law for punishment. Is

there a general criminal penalty that provides imprisonment for the unauthorized disclosure

of bank or government information?

There's no such type of criminal penalty as "specific" in the Criminal Code of Ukraine.

Article 164-11 of the Administrative Code of Ukraine established penalty for illegal disclosure or

misuse of bank secret information by a person who knew such information in the course of his

professional or service duties; the penalty is a fine ranging from 100 to 200 minimal untaxed incomes

(€100-€200).

Article 232 of the Criminal Code of Ukraine establishes penalty for intentional disclosure or of

commercial secrets without consent of its owner by a person who knew such information in the course

of his professional or service duties, if such disclosure was made for personal benefit or other personal

ends and caused considerable damage to a business subject. The penalty is a fine ranging from 200 to

500 minimal untaxed incomes (€600-€1500) with deprivation of right to hold certain positions or

pursue certain activities up to three years, or by reformatory work up to two years or by imprisonment

up to two years.

Besides, officials who have disclosed commercial secrets due to abuse of authority or criminal

negligence (non-performance or improper performance of duties by an official due to negligence), if

considerable damage is caused to protected by laws rights, freedoms and interests of citizens, state or

public interests or interests of legal entities, may be penalized by imprisonment up to 8 years; the

penalty for abuse of authority (Article 364 of the Criminal Code of Ukraine) ranges from 2 years of

reformatory work to imprisonment up to 8 years; the penalty for exceeding authority (Article 365 of

the Criminal Code of Ukraine) ranges from 2 years of reformatory work to imprisonment up to 5

years; the penalty for service negligence (Article 367 of the Criminal Code of Ukraine) ranges from a

fine to imprisonment up to 5 years


E. What happened with the appointment of the Commission Members to write the regulations

for non-bank financial institutions under the law on Financial Services and State Regulation

of Financial Markets enacted in May 2001 ?

Presently, candidates for nomination as members of the State Commission on Regulation of Financial

Markets are undergoing relevant formal procedures. Relevant official documents are being considered

at the Administration of the President of Ukraine.

Draft Budget of Ukraine for 2003 provides for funding for the establishment and work of the Specially

Authorized Agency in the Sphere of Regulation of Financial Services.

The relationship between this group and the FIU are not addressed in the law: what is the

rationale ?

According to Article 10 of the Law, the Specially Authorized Agency in the Sphere of Regulation of

Financial Services is included into the list of entities of state financial monitoring. The Law directly

regulates the relations between the Specially Authorized Agency in the Sphere of Regulation of

Financial Services and the FMD (as well as for all entities of state financial monitoring) as regards the

obligation to inform the FMD on detected cases of violation of relevant legislation by the entities of

initial financial monitoring, to submit to the FMD information and documents essential for fulfilment of

its tasks and duties (with the exception of the information on private life of citizens) according to the

procedure prescribed by the laws, and to coordinate with the FMD all regulations relating to

implementation of the Law of Ukraine on Prevention and Counteraction to the Legalization

(Laundering) of the Proceeds from Crime.

The following should be noted if the question concerned the Law of Ukraine on Financial Services and

State Regulation of Financial Markets:


At the moment of adoption of the mentioned Law, there was no FMD and no Law of Ukraine

on Prevention and Counteraction to the Legalization (Laundering) of the Proceeds from Crime.

Due to adoption of the Law of Ukraine on Prevention and Counteraction to the Legalization

(Laundering) of the Proceeds from Crime, the Law of Ukraine on Financial Services and State

Regulation of Financial Markets will be brought into conformity with the AML Law as regards

fight against laundering of proceeds.


F. The law appears to apply only to transactions that occur through a financial institution per

the definition of a "financial transaction": could you clarify the exact scope?

According to the Law, entities of initial financial monitoring include not only financial institutions.

Examples of this are such entities of initial financial monitoring as gambling and pawn institutions and

other legal entities that process financial transactions according to law. Besides, the list of financial

transactions has been drafted on the basis of Annex to FATF Recommendation #9.

According to Article 1 of the Law, financial transaction means "any transaction involving the processing

or securing of any payment through an entity of initial financial monitoring, including" (a list of types of

financial transactions). In this case, the term "including" relates to 12 types of financial operations; at the

same time, it should be noted that the term "including" means that the list is not exhaustive, and judicial

practice will expand this list.


G. Art. 7, Par 3 and 4 appear to provide that any ambiguity about whether a transaction is

suspicious and should be submitted to the FIU should be resolved against submitting the

STR, unless the bank can prove it involves money laundering. Such a reading could be

understood as in practice not providing, except in "proved cases", ability for filing or not

making the transaction. Please explain what is intended.

In our view, the provisions of par 3 and 4 of Article 7 of the Law cannot be practically used to avoid

financial monitoring.

Par 3 of Article 7 of the Law connects (non)application of financial monitoring with ambiguous

interpretation of rights and obligations of legal entities and individuals in their relations with the entities

of initial financial monitoring.

However, such rights and obligations are aimed only at regulation of contractual relations between a

legal entity or individual (client) and entity of initial financial monitoring; they are not related to obligation

to perform initial financial monitoring and provide relevant information to the Authorized Agency

because this is established by the Law and not by a contract, a party to which is an entity of financial

monitoring. Speaking about relations between a client and entity of state financial monitoring, it is hard

to discuss their mere existence, as far as the latter only indirectly monitors certain client's transactions.

Therefore, par 3 of Article 7 of the Law does not release from the obligation to perform initial financial

monitoring.

Par 4 of Article 7 of the Law may be considered as the one that obliges the entities of initial and state

financial monitoring to prove "indications of legalization of proceeds".

At that, the laws of Ukraine and this Law in particular do not establish the meaning of such institute,

and do not establish the obligation to prove.

At the same time, according to Articles 5, 8 and 12 of the Law, an entity of initial financial monitoring

must perform initial financial monitoring and detect transactions that have indications of legalization of

proceeds. An employee in charge of the monitoring is guided by the provisions of said Articles of the

Law; in case of motivated suspicion, he must notify the Authorized Agency about relevant financial

transaction under the treat of penalty.

Therefore, we think that the provisions of par 4 of Article 7 of the Law are related only to internal

assessment of information by entity of initial financial monitoring with regard to intended transaction;

they cannot obstruct financial monitoring, including limitation of possibility to provide information about

suspicious transaction or refusal of transaction.


H. Art. 8, last paragraph prohibits the FIU from disseminating bank information to law

enforcement. But Art. 13, Par.2, #4 allows the FIU to submit relevant materials to the law

enforcement agencies. Could you clarify the exact relationship between these seemingly

contradictory provisions ?

Provisions of Articles 8 and 13 of the Law concerning provision of information containing bank or

commercial secrets by the Authorized Agency are related as general and special norm of law.

According to general principles of law, in cases when two or more legal norms are aimed at settlement

of a single type of social relations, a special norm is applied, which is aimed at regulating narrower and

more specific type of relations.

Therefore, these norms must be applied in unification: the Authorized Agency may not provide

information containing bank or commercial secrets to anyone, except the cases when such information

is provided to law enforcement if there are sufficient grounds to consider that the transaction may be

related to legalization (laundering) of proceeds or funding terrorism.


I. Art. 10, Par. 2, #7 appears to use the NBU as a filter. What can the banks submit directly

to the FIU, what goes through the NBU ?

According to paragraphs 4 and 6 of Article 5 of the Law, an entity of initial financial monitoring

(including banks) must submit to the Authorized Agency the information on a financial transaction

subject to compulsory financial monitoring within three working days from the moment of its

registration and provide, according to the legislation, additional information at the Authorized Agency's

request related to the financial transactions that have become the object of financial monitoring,

including the information that is classified as bank and commercial secret, not later than within three

working days from the moment of receiving the request.

In its turn, the NBU, which supervises and regulates banks under the laws, according to subparagraph

7 of paragraph 2 of Article 10 of the Law must submit to the Authorized Agency information and

documents essential for fulfilment of its tasks and duties (with the exception of the information on

private life of citizens) according to the procedure prescribed by the laws. Thus, there's no duplication

of the information provided to the Authorized Agency by bank as an entity of initial financial monitoring

and the information related to bank's activities sent to the Authorized Agency by the NBU.

It is planned that amendments will be introduced promptly into the Law of Ukraine on Financial

Services and State Regulation of Financial Markets and the Law of Ukraine on Banks and Banking

Activity in order to create a single mechanism of prevention and counteraction to legalization

(laundering) of criminal proceeds, thereby bringing them in compliance with the Law of Ukraine on

Prevention and Counteraction to the Legalization (Laundering) of the Proceeds from Crime.


J. Art. 11 and Art. 12 specify a list of indicators one of which must be met to trigger reporting

Why are they mandatory and not only illustrative ?

In the course of application of the Law, one should proceed from complex understanding of its

provisions. Indeed, Article 12 of the Law specifies a list of indicators, each of which will trigger internal

financial monitoring. At the same time, according to paragraph 6 of Article 8 of the Law, if employees

of the entity of initial financial monitoring have any reasonable doubts that a certain financial transaction

is carried out to legalize (launder) the proceeds, such entity of initial financial monitoring must inform the

Authorized Agency of such transaction.

Thus, an entity of initial financial monitoring must inform the Authorized Agency of transactions meeting

the indicators listed in Article 12, as well as about transactions, with regard to which there are

reasonable doubts that they are carried out to legalize the proceeds.

Besides, subparagraph 2 of paragraph 3 of Article 5 of the Law enables FMD to send to entities of

initial financial monitoring its normative documents containing the results of analysis of the patterns of

laundering-related offences and recommendations that must be taken into account by such entities in

the course of their internal financial monitoring.

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