1 mln UAH fines instead of 400,000 UAH ones and withdrawal from the market: How the National Bank of Ukraine is tightening requirements for banks to monitor clients' financial activity
The reason is that international donors require reporting on financial assistance
The National Bank of Ukraine (NBU) continues to strengthen its oversight of financial monitoring. Market players are facing increased responsibility for violations. Currently, this is being implemented through higher fines and the reintroduction of on-site inspections. The first violators of the new rules are already being withdrawn from the market.
Mind investigated the potential impact of stricter conditions in the field of financial monitoring on the Ukrainian economy.
As Mind has learned, the banking market is attempting to adapt to the new requirements set by the NBU regarding financial monitoring. This involves raising the maximum fines for violations of financial monitoring laws, reintroducing on-site inspections etc. NBU Resolution No. 80 approved changes to Resolution No. 346 regarding financial monitoring.
The regulations with the new fine amounts came into effect at the end of June 2023, but the first month of their application in practice raised many questions in the market.
A reminder: in July, the NBU recommended the banks rectify deficiencies in their financial monitoring systems and internal control mechanisms against money laundering and terrorist financing. The regulator deemed the banks' overall approach to the problem as "formal", as previously reported by Mind.
What now threatens banks? The fines imposed on banks for violations have significantly increased. For instance, the penalty for breaching requirements related to "refusal to establish (maintain) business relations, conduct financial transactions" has been revised.
This pertains to situations where a bank was supposed to deny service to a client but failed to do so. For example, when a client was not properly identified. The maximum fine for such a violation has been raised from 400,000 UAH to 1 million UAH. Similarly, fines have been increased for "failure to detect, timely detection, and/or violation of the procedure for conducting analysis, detecting, and registering financial transactions," as well as for "violations of requirements regarding the development, implementation, updating of financial monitoring rules, the program for initial financial monitoring, and other internal documents related to financial monitoring."
What can bankers now be fined for, and for what amounts? A fine of up to 50 million UAH has been introduced for "violations of requirements for implementing proper checking measures, including enhanced due checking measures," as well as for "improper fulfilment by a bank of its obligation to manage risks." The latter point includes risk management related to the introduction or use of information products, business practices, and technologies, including those that facilitate "conducting financial transactions without direct client contact."
The maximum fine for violating legislation related to combating money laundering and terrorist financing concerning payment operations and fund transfers has been raised to 10 million UAH. The amount of the maximum fine for improper application of a risk-based approach to PEP (Politically Exposed Persons) clients, in particular, setting unreasonable risk levels, is similar.
"However, we draw attention to the fact that according to paragraph 7 of the first part of Article 73 of the Law of Ukraine On Banks and Banking Activity, the maximum fine amount for violating legislation in the sphere of prevention and counteraction of legalisation (money laundering) of proceeds from criminal activity, financing terrorism, and financing the proliferation of weapons of mass destruction cannot exceed 7,950,000 untaxed minimum incomes of citizens," clarified the NBU press service in response to Mind's inquiry.
Therefore, the current maximum fine amount is 135.15 million UAH. It can be imposed for "failure to ensure proper organisation of the internal bank system for the prevention and counteraction of the legalisation (money laundering) of proceeds obtained through criminal means, financing terrorism, and financing the proliferation of weapons of mass destruction, as well as for conducting initial financial monitoring and lack of a proper risk management system (improper risk management system)."
Does the National Bank actually impose such large fines in practice? Yes. For instance, in the spring 2023, the state-owned Ukrgasbank was fined 64.6 million UAH for failure to ensure proper organisation of the internal bank system for prevention and counteraction, as well as for conducting initial financial monitoring, as evidenced by the violations of requirements. According to the NBU's announcement, "the violation consists of improper execution by the bank of its duty to develop, implement, and update internal documents related to financial monitoring, as well as the absence of procedures in them sufficient to ensure effective risk management."
On 1 August, ConcordBank was withdrawn from the market. The reason was a violation in the field of financial monitoring. Additionally, a fine of 400,000 UAH was imposed on the bank.
What caused the increase in fines? Since February 2022, Ukraine has received over $150 billion in international assistance. NATO Secretary-General Jens Stoltenberg mentioned this in the spring. According to various sources, a portion of these funds has been 'appropriated' by corrupt Ukrainian officials. Evidently, international donors want to ensure transparency in how their funds are being used.
That is why it makes sense for international organisations to conduct audits of aid distribution. It starts with a heightened focus on the operations of the National Bank itself and other government structures responsible for overseeing financial transactions. However, international donors did not explicitly demand an increase in fines for banks.
The NBU explains that the increase in fines was carried out in accordance with EU legislation. "According to Article 58(1) of the Directive of the European Parliament and of the Council (EU) No. 2015/849 of May 20, 2015, on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No. 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC, Member States must ensure that accountable persons are held responsible for breaches of provisions of national law transposing this Directive, in accordance with this Article and Articles 59 to 61. Any appropriate sanction or measure must be effective, proportionate, and dissuasive," the NBU states.
According to the regulator's explanation, it is for this reason that on June 21, 2023, the NBU Board adopted Resolution No. 80 "On Approval of Amendments to the Regulation on the Application of Measures of Influence by the National Bank of Ukraine." This resolution comprehensively revises and updates the approaches to imposing fines on banks for key violations in the sphere of preventing and counteracting the legalisation (money laundering) of proceeds obtained through criminal means, financing terrorism, and financing the proliferation of weapons of mass destruction.
The NBU hopes that these new requirements will assist the country in combating the shadow economy, which constitutes at least half of the real sector.
What questions arise for banks regarding the new rules? Firstly, bankers complain that there isn't a transparent system of justifying fines in the market. The immediate decision to impose the maximum fine is currently made by employees of the NBU based on the regulator's internal documents. Therefore, it's unclear why some banks receive a substantial fine for the same violations while others receive a minor one. Banks are concerned that this justification is not currently public.
Secondly, banks note the impossibility of conducting sufficient customer verification due to the fact that most government registries were closed at the beginning of the war.
"As of today, banks use information from the Unified State Register of Legal Entities and Entrepreneurs, access to which is provided through an application programming interface, to carry out proper customer verification. The National Bank explains that no requests from banks regarding difficulties accessing state registries have been received," clarified the NBU.
However, this has not added clarity to the overall process. "Banks are asking Visa and MasterCard to teach them how to work with P2P, casinos, and e-commerce. It's not clear how to monitor all of this through financial monitoring. To which the latter said that you need to buy software costing millions of US dollars first," banker Vasyl Nevmerzhytsky recently wrote on his Facebook page. In response to a query from Mind, Visa stated that they cannot disclose information on such requests.
Do the banks agree with the new fines? According to Mind, The Independent Association of the Banks of Ukraine (IABU) has prepared a letter to the head of the National Bank of Ukraine requesting clarification on the implementation of financial monitoring in light of the new maximum fine amounts. However, the letter was not sent, as not all banks within the association agreed on its necessity. As reported to the outlet, two banks – a state-owned bank and a bank with foreign capital – declined to support the collective appeal of the market.
What will be the consequences for the banking market from the new fines? Experts believe that the NBU is preparing to phase out a certain number of small players from the market. State-owned banks and other large financial institutions stand to benefit partially from this. "The new requirements on financial monitoring could pose problems for small banks, as it's more challenging for them to control financial monitoring issues, which requires increasing the number of relevant staff, among other things. I can suppose that these requirements will ultimately lead to a reduction in the number of small players in the market," says financial analyst Anatoliy Drobyazko.
Financial expert Olena Domuz agrees with him. "Strengthening control and implementing strict regulations have never led to market development or overall economic growth. In the difficult conditions that have emerged in the Ukrainian economy, it is necessary to, on the contrary, allow businesses, including banks, to develop and grow," she concludes.
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