Mirror-weekly: A Recommended blockade0 Ukraine has become the third country (after Nauru and Nigeria) to be subjected to FATF sanctions. Last week, almost a dozen nations followed the recommendations issued on December 19 by the FATF (Financial Action Task Force on Money Laundering). On Monday, the British and German authorities announced the introduction of “close monitoring of financial transactions with Ukraine”. On Tuesday, the same was announced by Denmark, Turkey and Japan. Finland and Austria are about to follow suit. The USA and Canada tightened control over Ukrainian transactions even earlier - right after the FATF passed its decision a month ago. Interestingly, these are only general recommendations. They do not specify procedures to counter dirty money laundering. Such procedures are supposed to be worked out and carried out by the banks of the countries that impose financial sanctions. The banks bear their share of responsibility, should “dirty” accounts be detected. As we can see, all the problems that many Ukrainian banks, traders and ordinary people ran into last week should not be blamed on the FATF. They come from the “overcautious” banks that followed the FATF’s recommendations.
The FATF’s recommendations can hardly be called sanctions. It never compelled banks or controlling bodies to close Ukrainian accounts, to block transactions or charge cards. It only advised measures of additional control over the movement of money in which Ukrainian residents are involved. Such control is primarily the detailed identification of owners of Ukrainian accounts, both nominal and those who actually own the money (they may be hidden behind a chain of offshore holders). Subject to control are also money transfers and their legality (compliance with the terms of the contracts by which the money is transferred and the availability of such contracts). The UK Treasury recommends British financial institutions to report to the National Criminal Investigation Service about all financial transactions in which Ukraine is involved, except for cases, in which there is no doubt. German banks have been ordered, “under the changed circumstances”, to “check correspondent relations with Ukrainian banks and decide to either continue or discontinue them”. Canada’s Analytical Center for Financial Transactions recommends Canadian banks and companies to “refrain from ungrounded financial transactions between Canada and Ukraine”. All financial authorities insist on special control over transactions with Ukrainian covenantors whose names, addresses and account numbers are unknown, and over all transactions worth over ˆ15,000.
In other words, it’s up to banks and their “corporate culture”, as one banker put it, to decide which procedure to apply. The National Bank of Ukraine has circulated a telegram among Ukrainian banks, advising them to urgently send inquiries to their foreign (first of all, US) correspondent banks about their “counter-laundering” procedures. The National Bank has also advised commercial banks to report all cases of application of such procedures. However, commercial banks are in no hurry to report about sanctions against their correspondent accounts. Obviously, they are afraid to leak confidential information and thus have their own image tarnished. Hence - official statements that “concrete sanctions against Ukraine have not been applied so far”.
But, as ZN learned from reliable sources with numerous big companies and banks, problems do exist, and very serious ones, too, although almost all those who told us about the problems asked us not to disclose their names and the names of their companies. According to the FATF recommendations, banks are supposed to perform controlling functions, which are more appropriate to the finance police. Of course, banks in developed economies have so-called compliance officers who are charged with such control. But it takes a long time, heavy expenses and even intelligence services to scrupulously check transactions, identify real account holders and establish the origin of money. So, as it has become known lately, many Western banks found it cheaper to simply block suspicious transactions indefinitely: as a German bank representative said, “until the FATF sends us a concrete checkup procedure”. And it’s even cheaper to refuse to service Ukrainian clients and correspondent accounts, which some banks actually did. Thus, without using “brute force”, the FATF has been able to block the external operations of a number of Ukrainian companies. According to some estimates, nearly $300M worth of transactions under surveillance have been suspended. The transferors are not small and mid-sized banks which, according to Ukrainian experts’ forecasts, ought to have suffered. This is the money of big companies. Individuals are having problems as well - in some European ATM networks it is difficult to receive cash with cards from a number of Ukrainian banks. Some Ukrainian transferees receive money from abroad in the national currency. Evidently, the banks have to use their own money, because hard currency entries are blocked abroad. The Western banks can be understood: a quality checkup of a transfer in line with FATF recommendations is a complex job, but not making it may well cost them a lot more. Because if anything criminal in such transfers is detected sooner or later by financial police, the losses may be too heavy. In other words, despite the fact that the FATF issued only recommendations, their damaging effect is quite comparable to that of regular restrictive sanctions.
Moreover, the FATF dealt a painful blow to Ukraine’s image as a business partner. The imposition of sanctions, an almost unprecedented fact in international practice, has been covered extensively by the mass media across the glove. Nearly all negotiations between Ukrainian companies and their foreign partners have been stalled. Many foreign partners are contemplating the winding up of cooperation. The indirect damage caused by the very fact of sanctions is incalculable.
Now the traditional questions “What to do?” and “Who’s to blame?” may arise. Let’s begin with the second, it is especially topical because the FATF’s step looks like “exceeding the acceptable bounds of defense”. Ukraine’s legislation on banking and financial activities may be imperfect, but it provides the necessary mechanisms for control over the origin and movement of assets. Besides, the new law on preventing and counteracting dirty money laundering (although it was passed after the FATF made its decision) has been supplemented with all the necessary (recommended by the FATF) provisions. The Ukrainian tax police have the experience and means to uncover shady transactions. Ukraine is not the United States, which introduced an almost totalitarian control over financial flows in the wake of September 11, 2001, and yet has been unable to defeat the drug mafia. But Ukraine is not Nauru, the world’s biggest “laundry” that doesn’t give a damn about the international community, enjoying its huge per capita offshore income. Nor is it Nigeria, which is head and shoulders above Ukraine in terms of corruption, but which has already been relieved of sanctions. Nor is it Russia, where shadow capital turnover is estimated even by its own experts at 40% - 50% of GDP: Russia has not only avoided sanctions, it has not only been deleted from the FATF’s “black list” - it is about to be granted an observer status in the organization. So the question is “what for?”
There are different versions. One was offered by MP Vitaliy Maiko at a round table in Kyiv on January 23, organized by the Ukrainian Union of Industrialists and Entrepreneurs (UUIE) and titled “Bringing the National Economy out of the Shadows and Countering Dirty Money Laundering”. In his opinion, which was shared by the majority of participants, the sanctions were imposed because “neither Europe, nor Russia need a strong Ukraine”. That is, we’ve been treated like a potential economic and political competitor. Ukraine’s competitiveness may be questioned, but this version is not altogether groundless: the world has been fed up with dumped Ukrainian rolled steel and pipes (the proceeds from their sale are often processed through offshore banks). By making life difficult for Ukrainian exporters, one could have them ousted from the international markets.
The UUIE adopted an appeal to the Ukrainian government, parliament and political leaders, in which the blame for the sanctions was unambiguously laid on the parliamentary opposition forces that “actually blocked the Parliament’s work” for three months, and so the required bills were not passed in time. The scenario presented by the UUIE looks like this: the opposition, in its desire to sack Leonid Kuchma, stalls the bills and, using its connections in the West, “pushes through” the FATF’s unprecedented decision. Kuchma’s reputation, already undermined by the “tape” and “Kolchuga” scandals, is completely ruined, the disgraced old man breaks down and steps down.
The picture presented by the opposition is even simpler: it is Kuchma’s alleged involvement in clandestine supplies of weapons to Iraq, the prime conniver with international terrorists, that was to Americans like a red rag to a bull and, in fact, the last straw for their patience. The sanctions were the FATF’s own initiative, a step in the “fight against the corrupt Kuchma regime”. And they are surely a perfect opportunity to absolutely legally trace all offshore chains and channels up to big businessmen and politicians from Kuchma’s close circlewho manage and use them. And with a bit of luck - to Kuchma himself (as happened four years ago, when financial investigations in Yugoslavia uncovered bank accounts controlled by Milosevic). But this version may be feasible only if the West really wants systemic changes in Ukraine, which is rather dubious.
There is one more version - striking but quite possible. It is connected with the forthcoming [January 28-29] CIS summit in Kyiv. According to unnamed sources, the assets of several large Ukrainian holding companies that actively cooperate with Russian capital, are stalled in Western banks. Taking advantage of their Ukrainian partners’ inability to pay, the Russians are going to beef up their parcels of stocks in these companies. According to unofficial information, the leaders of the CIS nations are going to discuss redistribution of the property which belongs to the Ukrainian “victim companies”. Also, there may be attempts to make this country, weakened by this blow, concede in other areas - gas debts, gas transportation and others. Russia’s representatives, who are now in close contact with the FATF leadership, may well have lobbied for such a hard move against their “sister-republic”.
Most probably, this move suited everyone - Americans, Russians and many political forces here in Ukraine, and its effect is already being felt.
Unlike the previous question, the answer to the question “What to do?” is clear. The legislation has been amended, as the FATF demanded. The Financial Monitoring Department has been established, its competence and functions have been determined. Its acting chief is Valeriy Diesporov, the ex-chief of the Kyiv tax police. When the sanctions were imposed, there were discrepancies on three positions that remained unsettled. Number one, provision of information on and criminal prosecution for activities related to dirty money laundering (the relevant legislative amendments were ready, but the document had only passed the first hearing by the day the sanctions were imposed). Number two, identification of account holders (the problem of balance between transparency of financial transactions and bank secrecy hasn’t been solved completely in the West). Number three, the size of the minimal sum subject to monitoring: in Ukrainian legislation it was ˆ50,000 (ˆ20,000 for cash transactions), while European legislation set the ceiling at ˆ15,000. Now all these issues have been agreed upon, and when the Parliament reconvenes on February 6, they will be put to the vote. If the lawmakers failed to get the sanctions lifted, they would look too unpatriotic in the eyes of the public.
And yet, more and more experts are inclined to believe that even if Ukraine produces fully FATF-compatible legislation by February 12, the sanctions are very unlikely to be lifted. The FATF might as well point to the absence of real results in the fight against dirty money laundering in Ukraine and say that the newly-baked laws don’t work. Then this country may be kept waiting at least till the fall.
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