In our rapidly digitalizing society, the risks with regard to money laundering and terrorist financing become increasingly bigger. For organizations it is important to be aware of these risks. Organizations have to be very accurate with compliance. In the Netherlands, this especially applies to institutions which are subject to obligations which derive from the Dutch Law on prevention of money laundering and terrorist financing (Wwft). These obligations are installed in order to detect and combat money laundering and terrorist financing. For more information about the obligations deriving from this law, we refer to our previous article ‘Compliance in the Dutch legal sector’. When financial institutions do not comply with these obligations, this can have severe consequences. Proof of this is shown in a recent judgement of the Dutch Commission for Appeal for business and industry (17 January 2018, ECLI:NL:CBB:2018:6).
Judgement of the Dutch Commission for Appeal for business and industry
This case is about a trust company which provides trust services to natural persons and legal entities. The trust company provided her services to a natural person who owned real estate in Ukraine (person A). The real estate was worth USD 10,000,000. Person A issued certificates of the real estate portfolio to a legal entity (entity B). The shares of entity B were held by a nominee shareholder of Ukrainian nationality (person C). Therefore, person C was the ultimate beneficiary owner of the real estate portfolio. At a certain moment, person C transferred his shares to another person (person D). Person C did not receive anything in return for these shares, they were transferred to person D free of charge. Person A informed the trust company about the transfer of shares and the trust company appointed person D as the new ultimate beneficiary owner of the real estate. A few months later, the trust company informed the Dutch Financial Investigation Unit of several transactions, including the transfer of shares mentioned before. This is when the problems arose. After being informed of the transfer of shares from person C to person D, the Dutch National Bank imposed a fine of EUR 40,000 on the trust company. Reason for this was failure to comply with the Wwft. According to the Dutch National Bank, the trust company should have suspected that the transfer of shares could be related to money laundering or terrorist financing, since the shares were transferred free of charge while the real estate portfolio was worth a lot of money. Therefore, the trust company should have reported this transaction within fourteen days, which derives from the Wwft. This offence is usually punished with a fine of EUR 500,000. However, the Dutch National Bank has moderated this fine to an amount of EUR 40,000 because of the extent of the offence and the track record of the trust company.
The trust company took the case to court because she believed the fine was imposed unlawfully. The trust company argued that the transaction was not a transaction as described in the Wwft, since the transaction was supposedly not a transaction on behalf of person A. However, the Commission thinks otherwise. The formation between person A, entity B and person C was constructed in order to avoid a possible tax collection from the Ukrainian government. Person A played a key role in this construction. Furthermore, the ultimate beneficial owner of the real estate changed by transferring the shares from person C to person D. This also involved a change in the position of person A, since person A no longer held the real estate for person C but for person D. Person A was closely involved with the transaction and therefore the transaction was on behalf of person A. Since person A is a client of the trust company, the trust company should have reported the transaction. Furthermore, the Commission stated that the transfer of the shares is an unusual transaction. This lies in the fact that the shares were transferred free of charge, while the worth of the real estate represented USD 10,000,000. Also, the worth of the real estate was remarkable in combination with the other assets of person C. Lastly, one of the directors of the trust office pointed out that the transaction was ‘highly unusual’, which acknowledges the strangeness of the transaction. The transaction therefore arises suspicion of money laundering or terrorist financing and should have been reported without delay. The fine was therefore imposed lawfully.
Anti-money laundering and counter-terrorist financing measures in Ukraine
The case mentioned above shows that a Dutch trust company can be fined for transactions which took place in Ukraine. The Dutch law can therefore also apply to organizations that operate in other countries, as long as there is a link with the Netherlands. The Netherlands has implemented quite some measures in order to detect and combat money laundering and terrorist financing. For Ukrainian organizations that want to operate within the Netherlands or for Ukrainian entrepreneurs that want to start a business in the Netherlands, compliance with the Dutch law may be difficult. This is partially due to the fact that Ukraine has different ways of dealing with money laundering and terrorist financing and has not yet implemented such extensive measures as the Netherlands has. However, combating anti-money laundering and terrorist financing has become an increasingly important topic in Ukraine. It has even become such an actual topic, that the Council of Europe decided to start an investigation on money laundering and terrorist financing in Ukraine.
In 2017, the Council of Europe has conducted an investigation on the anti-money laundering and counter-terrorist financing measures in Ukraine. This investigation has been performed by a specially appointed committee, namely the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). The committee has presented the report of its findings in December 2017. This report provides a summary of the anti-money laundering and counter-terrorist financing measures in place in Ukraine. It analyses the level of compliance with the Financial Action Task Force 40 Recommendations and the level of effectiveness of Ukraine’s anti-money laundering and counter-terrorist financing system. The report also provides recommendations on how the system could be strengthened.
Key findings of the investigation
The Committee has described several key findings that came forward in the investigation, which are summarized below:
- Corruption poses a central risk with regard to money laundering in Ukraine. Corruption generates great amounts of criminal activities and undermines the functioning of state institutions and the criminal justice system. The authorities are aware of the risks deriving from corruption and are implementing measures to diminish these risks. However, law enforcement focus to target corruption-related money laundering has only just started.
- Ukraine has a reasonably good understanding of money laundering and terrorist financing risks. However, understanding of these risks could be enhanced in certain areas, such as cross-border risks, the non-profit sector and legal persons. Ukraine has widespread national coordination and policy-making mechanisms to address these risks, which have a positive effect. Fictitious entrepreneurship, the shadow economy and use of cash still need to be addressed, since they pose a major money laundering risk.
- The Ukrainian Finance Intelligence Unit (UFIU) generates financial intelligence of a high order. This regularly triggers investigations. Law enforcement agencies also seek intelligence from the UFIU to support their investigative efforts. However, the IT system of the UFIU is becoming outdated and staffing levels are not able to cope with the big workload. Nevertheless, Ukraine has taken steps to further improve the quality of the reporting.
- Money laundering in Ukraine is still essentially seen as an extension to other criminal activities. It was assumed that money laundering could only be taken to court after a prior conviction for a predicate offense. The sentences for money laundering are also less than for underlying offenses. The Ukrainian authorities have recently started taking measures in order to confiscate certain funds. However, these measures do not appear to be applied consistently.
- Since 2014 Ukraine has concentrated on the consequences of international terrorism. This was mainly because of the threat of Islamic State (IS). Financial investigations are conducted parallel to all terrorism related investigations. Though aspects of an effective system are demonstrated, the legal framework is still not entirely in line with international standards.
- The National Bank of Ukraine (NBU) has a good understanding of the risks and applies an adequate risk-based approach to the supervision of banks. Major efforts have been made in order to ensure transparency and in removing criminals from control of banks. The NBU has applied a wide range of sanctions to banks. This resulted in effective application of preventive measures. However, other authorities require significant improvement in discharging their functions and applying preventive measures.
- The majority of the private sector in Ukraine relies on the Unified State Register to verify the beneficial owner of their client. However, the Registrar does not ensure that the information provided to it by legal persons is accurate or current. This is considered a material issue.
- Ukraine has been generally proactive in providing and seeking mutual legal assistance. However, issues such as cash deposits have an impact on the effectiveness of the provided mutual legal assistance. Ukraine’s capacity to provide assistance is also negatively impacted by the limited transparency of legal persons.
Conclusions of the report
Based on the report, it can be concluded that Ukraine faces significant money laundering risks. Corruption and illegal economic activities are the major money laundering threats. Cash circulation in Ukraine is high and increases the shadow economy in Ukraine. This shadow economy poses a significant threat to the financial system and economic security of the country. Concerning the risk of terrorist financing, Ukraine is used as a transit country for those seeking to join IS fighters in Syria. The non-profit sector is vulnerable to terrorist financing. This sector has been misused to channel funds to terrorists and terrorist organizations.
However, Ukraine has taken steps in order to combat money laundering and terrorist financing. A new anti-money laundering/counter-terrorist financing law was adopted in 2014. This law requires authorities to perform a risk assessment in order to identify risks and defines measures to prevent or mitigate these risks. Amendments were also carried out in the Code of Criminal Procedure and the Criminal Code. Furthermore, the Ukrainian authorities have substantial understanding of the risks and are effective in domestic co-ordination to combat money laundering and terrorist financing.
Ukraine has already taken big steps in order to combat money laundering and terrorist financing. Still, there is room for improvement. Some flaws and uncertainties remain in Ukraine’s technical compliance framework. This framework also needs to be brought in line with international standards. Furthermore, money laundering has to be viewed as a separate offence, not only as an extension of an underlying criminal activity. This will result in more prosecutions and convictions. Financial investigations should be routinely taken and the analysis and written articulation of money laundering and terrorist financing risks should be enhanced. These actions are considered to be the priority actions for Ukraine with regard to money laundering and terrorist financing.
Money laundering and terrorist financing pose a great risk towards our society. Therefore, these topics are addressed worldwide. The Netherlands has already implemented quite some measures in order to detect and combat money laundering and terrorist financing. These measures are not only of importance to Dutch organizations, but may also apply to companies with cross-border operations. The Wwft applies when there is a link to the Netherlands, as is show in the judgement mentioned above. For institutions which fall under the scope of the Wwft, it is important to know who their customers are, in order to comply with the Dutch law. This obligation may also apply to Ukrainian entities. This may turn out to be difficult, since Ukraine has not yet implemented such extensive anti-money laundering and counter-terrorist financing measures as the Netherlands has.
However, the report of MONEYVAL shows that Ukraine is taking steps in order to combat money laundering and terrorist financing. Ukraine has extensive understanding of money laundering and terrorist financing risks, which is an important first step. Yet, the legal framework still contains some flaws and uncertainties that need to be addressed. The widespread use of cash in Ukraine and the accompanying large shadow economy pose the biggest threat to the Ukrainian society. Ukraine has certainly booked progress in its anti-money laundering and counter-terrorist financing policy, but there is still room for improvement. The legal frameworks of the Netherlands and Ukraine slowly grow closer to each other, which will eventually make it easier for Dutch and Ukrainian parties to cooperate. Until then, it is important for such parties to be aware of the Dutch and Ukrainian legal frameworks and realities, in order to comply with anti-money laundering and counter-terrorist financing measures.