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Ukraine’s enhanced anti-money laundering rules

Bate TomsSvitlana Petrenko

The enactment, in August 2010, of the new version of the Law On the Prevention of and Counteraction against the Legalisation (Laundering) of the Proceeds of Crime and Terrorism Financing, No.249-IV (the AML Law) resulted in certain important amendments to other Ukrainian laws.

To begin with, the list of documents required for submission to state registrars in order to obtain the registration of a new legal entity, as provided for by the Law of Ukraine On the State Registration of Legal Entities and Individual Entrepreneurs, No.755-IV, (the Registration Law), dated May 15 2003, was supplemented to include documents and information confirming the ownership structure of the founders of such new legal entity.

Although the Registration Law amendments actually only ask for information with respect to substantial participation ownership in the actual founders of companies, the intention behind these amendments to the Registration Law, as interpreted by the authorities involved in their implementation, is to require the individuals ultimately beneficially owning substantial participations in or through the founders of new legal entities to be identified, a radical new step for Ukraine.

The Registration Law does not, however, specify that ultimate beneficial ownership must be disclosed, list the particular documents or information that must be disclosed or provide a definition of what "substantial participation" means for the purposes of the amended Registration Law.

The State Committee of Ukraine for Regulatory Policy and Entrepreneurship Issues, which has some administrative responsibility for this area, has used the definitions provided in the AML Law to explain what "substantial participation" would mean for the purposes of these new requirements of the Registration Law. On this basis, substantial participation would mean direct or indirect ownership of shares or a participation share representing at least 10% of the charter capital or voting rights in a legal entity or any other circumstances giving rise to direct or indirect "influence" over the entity.

Odd as it may seem, some state registrars in Ukraine presently refuse, on purely formalistic grounds, to register a new legal entity founded by another legal entity that does not have an individual directly or indirectly owning a substantial participation in it (for example, if the founder is founded by a foreign state-owned enterprise or a foreign foundation) and is therefore unable to provide any information or documents allowing a determination of which individuals own substantial participations in the newly established legal entity.

Other significant amendments introduced by the AML Law have resulted in the establishment in other laws of additional bases for a bank to suspend the transfer of moneys from its client bank accounts. For this purpose, the AML Law amended the corresponding provisions of the Civil Code and the Law of Ukraine On Banks and Banking Activity, No. 2121-III, dated December 7 2000 (the Banking Law).

Before these amendments were made, the suspension of money transfers from a client's bank account was only possible on the basis of an arrest of the client's moneys in its bank account pursuant to a court decision. The Civil Code and the Banking Law now allow money transfers to be suspended on the bases provided for by the AML Law.

According to the AML Law, a bank, acting as a subject of financial monitoring, has the right to suspend a financial operation that is subject to financial monitoring and has an obligation to suspend a financial operation involving a participant or beneficiary of a person named on the special list of persons involved in terrorist activities or exposed to international sanctions.

Such suspension of financial operations is possible for a term of up to two working days, which may be prolonged by the State Committee of Financial Monitoring of Ukraine (the Committee) for up to a further five working days, so that it may conduct an investigation related to suspicious financial operations, and for up to an additional seven working days if the Committee involves law enforcement authorities when conducting the further investigation. On this basis, the bank would not be subject to civil liability for such suspension for the violation of its agreement with its client.

A bank acting as a subject of financial monitoring is also obliged by the AML Law to follow the instructions of the Committee on the suspension of financial operations which may be related to the legalisation of the proceeds of crime, or terrorism financing, issued by the Committee in response to a request from an authorised foreign state agency to suspend a suspicious operation. The Committee is authorised to initiate such suspension for the term established by the request of such foreign state agency.

Finally, the AML Law also imposes for the first time "know the client" obligations on lawyers, law firms, accountants, auditors, audit firm and certain other market professionals (in addition to banks that were previously reached), obliging them to obtain information on their clients and to comply with certain reporting obligations. Dispite criminal fines and other liabilities, compliance with these rules is not yet the general practice in Ukraine. Foreign banks and law firms may therefore want to verify that their local Ukrainian lawyers and other market professionals engaged in transactions comply with the AML Law to avoid the risk of having their transactions being involved in criminal proceedings.

Bate C Toms and Svitlana Petrenko

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