Wartime finmonitoring: Whose payments do banks block most often?

The State Financial Monitoring Service (Derzhfinmonitoring) has released data on its work for the Q1 of 2023. According to the agency, in January – March, transactions were detected that may be associated with the illegal legalisation of funds amounting to UAH 22.6 billion. Among them, the total amount of financial transactions stopped by Derzhfinmonitoring and blocked funds was equivalent to UAH 1.3 billion.

"In turn, as part of operational activities for the Q1 of 2023, Derzhfinmonitoring sent 307 materials to law enforcement agencies," the Service specifies in its statement.

Compared with the first quarter of 2022, the volume of payments with signs of legalisation and money laundering, as well as the amount of blocked funds, have doubled.

Derzhfinmonitoring carefully tracks operations that may be related to the financing of terrorism/separatism and military aggression against Ukraine. In addition, banks have become more selective. They prefer to play it safe and block suspicious transactions rather than have problems with the National Bank later on.

Mind analysed which operations banks are particularly closely monitoring and how this affects their clients.

What is prescribed in legislation? The main regulatory act that defines the rules of financial monitoring in Ukraine is Law №361-IX. In addition, in March 2022, the National Bank adopted Resolution №60, which sets higher requirements for controlling client transactions by banks.

Banks are prohibited from approving expenditure transactions if the amount involved in each of them is equal to or exceeds UAH 400,000. In other words, if a client wants to send a larger sum from their account, they will be required to provide documents confirming the origin of these funds. Otherwise, the money can only be directed to support the Armed Forces of Ukraine (by transferring to a special account) or to purchase war bonds.

"Banks are obliged, if possible, to analyse the basis and purpose of all private financial transactions if they meet at least one of the following characteristics: they are complex financial transactions, unusually large financial transactions (compared to previous ones), processed in an unusual way, or the ones that do not have an obvious economic or legal purpose," explains Nataliya Buta, chief accountant of the GLS law firm.

In addition, banks monitor operations:

• In which one of the participants has registration or residence in a jurisdiction that does not properly implement FATF recommendations;
• In which one of the participants is a politically exposed person;
• In which there is no clear business or economic purpose (for example, transfers between two bank cards without a specific purpose of payment);
• Regarding the transfer of funds abroad or cash transactions (for example, depositing money through a bank's cashier);
• With virtual assets (cryptocurrency) amounting to or exceeding UAH 30,000.

"Overall, non-cash payments of UAH 30,000 or more (if there are no signs of splitting the operation) and cash transfers from UAH 5,000 are subject to monitoring," Nataliya Buta clarifies.

What does financial monitoring look like in real life? Legislation establishes, so to speak, basic requirements for financial monitoring. In reality, banks study the profile of an individual client, their solvency, and base their transaction control on this information.

For example, the National Bank of Ukraine's press service responded to Mind's request as follows: "Banks are obliged to use a risk-based approach to detect suspicious financial transactions and transactions that do not correspond to the information about the client held by the bank. The bank continuously monitors the client's business relationships and financial transactions for compliance with the information about the client, their activities, and risks held by the bank, including, if necessary, the source of funds."

"The bank may request documents when making a transfer for any amount, depending on the number/frequency/volume of transactions, if there is suspicion about the client's financial ability to conduct the respective operation," explains Maksym Boyarchukov, Executive Partner at Maksym Boyarchukov and Partners.

So, the amount of UAH 400,000 is a certain conditional limit that not everyone will fit into. Only if the client has a good reputation, a long history of relations with the bank, a stable turnover on their card/account that does not raise suspicion, will the bank demand justification for the operation only upon exceeding the mentioned limit.

Why have banks become more stringent in controlling clients? In 2023, the National Bank began to fully restore supervision of the banking market and more frequently fined banks, particularly for violations of financial monitoring requirements.

The total amount of fines the National Bank of Ukraine issued to banks in the first quarter of 2023 was nearly UAH 226 million. This is 1.3 times more than the whole of 2022. The vast majority of fines relate specifically to financial monitoring.

The largest penalties since the beginning of 2023 were received by Ukrgasbank (a fine of UAH 65 million) and Sens Bank (a fine of UAH 48 million).

"The National Bank was clearly underperforming in terms of financial monitoring. However, after the miscoding scandal, it drew the right conclusions, control over risky operations was strengthened, and banks received appropriate explanations," commented Danylo Hetmantsev, Chairmanof the parliamentary Committee on Finance, Tax and Customs Policy, to Mind.

It is logical that banks have strengthened monitoring of transactions on individuals' accounts. This, in turn, leads to seemingly harmless payments getting stuck – and the bank not letting them through.

"Each bank builds filters to track operations. And amounts (any amount) can be blocked both on the way in and out," says financial analyst Vasyl Nevmerzhytsky.

How will financial monitoring change for bank clients? Prepare for financial monitoring to become increasingly persistent. Among other things, this is dictated by Ukraine joining the international exchange of tax information. Recall: Law No. 2970-IX (effective from April 28) obliges virtually all financial market player without exception to implement comprehensive customer verification procedures to identify individuals involved in this data exchange. Such verification is to begin soon – from July 1, 2023.

What are the risks?

When opening an account, the bank will require even more information. In addition to standard questions about the place of work, business activities and overall financial situation, this may include questions about the client's relationships with foreign counterparties, the existence of accounts outside Ukraine, and so on.

Banks will refuse to deal with a client if they cannot determine the applicant's financial situation and ability to carry out relevant operations. They can turn clients away today, but such cases will increase due to fears of receiving a fine from the National Bank. The NBU, in particular, explains: when a bank cannot obtain the necessary documents for client identification, it is obliged to refuse the client to open an account or close existing accounts.

Any manipulation with cryptocurrency, primarily P2P payments related to the exchange of crypto assets, will remain one of the priority control zones. "Operations related to the purchase/sale of crypto assets and the use of P2P operations are in the focus of banks when analysing the financial transactions of clients," the NBU press service reported. Therefore, individuals who actively use P2P payments, including for earnings, will increasingly face card blocking.

Transactions that raised suspicion in the bank will be frozen until the circumstances are clarified. Moreover, redirecting the stuck amount to another bank without consequences will not work. "If the client cannot confirm the origin of the funds, the money hangs for some time on a transit account and is then sent back to the sender. And as a result, it can all end up in a complete blocking of the account," says Vasyl Nevmerzhytsky.

Bank clients will increasingly become subjects of scrutiny by the State Financial Monitoring Service. The NBU clarifies that banks pass on to this agency data on transactions in which the client was denied. Everything may end up with the client ultimately communicating with the State Tax Service or law enforcement agencies. "If an attempt is made to carry out operations that have signs of relatedness (this is one of the 'markers' of money laundering – Mind), the responsible person of the bank for financial monitoring has the right to inform law enforcement agencies," warns Maksym Boyarchukov.

Therefore, the rules of financial monitoring are changing, and not in favour of clients. Particular caution should be exercised by those who prefer to engage in business without registering as an individual entrepreneur, as well as crypto enthusiasts. The less transparent an operation is from the bank's perspective, the higher the likelihood that its legality and the origin of the funds will have to be proven. Otherwise, the payment will be blocked (and in the worst case – the account), and the bank will pass the client's data to the State Financial Monitoring Service.