Lifetime Financial Monitoring of Politically Exposed Persons

Dmytro Lazebnyi, Attorney at Law

Source: NV Business

Ukraine’s Verkhovna Rada has recently passed draft law No. 9269-d on Politically Exposed Persons. Why these amendments are important for Ukraine?

According to the Ministry of Finance of Ukraine, the adoption of the draft law is a condition for Ukraine’s accession to the European Union and receiving financial assistance from the International Monetary Fund.

Thus, in addition to the fact that receiving financial assistance from the IMF is conditional on the adoption of the specified draft law, voting for the relevant amendments is a necessary step in harmonizing Ukrainian legislation with European Union legislation.

What Was Unacceptable for the European Community?

On 19 November 2022, amendments to the Law of Ukraine on Prevention and Counteraction to Legalization (Laundering) of Criminal Proceeds, Terrorist Financing and Financing of Proliferation of Weapons of Mass Destruction (hereinafter referred to as the Law on Financial Monitoring) came into force.

According to these amendments, the status of “Foreign and Domestic Politically Exposed Persons” is limited to three years. As a result, before the specified amendments, Politically Exposed Persons (PEPs) had the corresponding status for three years after their dismissal, after which monitoring of their lives ceased.

Such norms are inconsistent with international standards for anti-money laundering, in particular:

• Recommendations of the Financial Action Task Force (FATF);
• The anti-money laundering and countering the financing of terrorism Directives, which have already been implemented in all EU member states and are mandatory for countries intending to join.

Therefore, both EU and FATF standards do not establish a period after which a person should be automatically deprived of PEP status.

The EU law requires constant monitoring of a person who has held a political position, unlike Ukrainian law. In the first place, the voted draft law aims to resolve disagreements.

What Does Draft Law No. 9269-d Provide For?

Draft Law No. 9269-d was adopted by the Verkhovna Rada of Ukraine on 17 October 2023, and is currently submitted to the President of Ukraine for signature.

Since the text of draft law No. 9269-d has not yet been published, we can only work with the draft law that has been prepared for the second reading.

The main innovations of the draft law No. 9269-d for the second reading:

• Proposes abolition of the three-year term limiting the PEP status.
• Introduces the need to apply a risk-oriented approach to PEPs when determining the scope and duration of financial monitoring measures that must be taken in relation to such persons.
• PEP during the performance and twelve months after the termination of his performance of prominent public functions, is obliged to notify the primary financial monitoring entity, at his request, about the performance (termination of performance) of prominent public functions by such a domestic politically exposed person.
• Establishes a provision according to which, if more than twelve months have passed since the termination of the performance of prominent public functions by the PEP and the financial transactions carried out by such a person during this time constituted a low risk, and the primary financial monitoring entity does not identify any signs that such a person bears a risk inherent to politically exposed persons, such primary financial monitoring entity shall not take (cease to take) measures against him, his family members and persons associated with him, as defined in paragraphs 2–4 of this part, and shall notify the designated authority of this.
• Establishes a fine for the primary financial monitoring entity in the amount of up to 100,000 non-taxable minimums (UAH 1,700,000.00) for improper application of the risk-oriented approach to PEP, i.e., for abuse of strict financial monitoring in relation to PEP – assigning an unreasonable level of risk, groundless refusal to conduct financial transactions.

Will the corresponding draft law complicate the life of Ukraine’s political elite? Probably yes. After all, in fact, the PEP status for top officials will be retained for life.

Is the specified draft law aimed at strengthening control over financial transactions of Ukraine’s political elite? Yes, it is. After the said amendments come into force, the corresponding monitoring will be carried out continuously.

There is no need to worry that these amendments will complicate the lives of ordinary people, since they concern only a small group, namely, the political elite. However, these legal changes may complicate the work of banks, since financial monitoring requires considerable resources.

Positively, we are one step closer to Europe.