ANALYSIS: Kyiv hit by international sanctions for being soft on money laundering (02/16/03)

ANALYSIS

Kyiv hit by international sanctions for being soft on money laundering

by Jan Maksymiuk
RFER/RL Poland, Belarus and Ukraine Report

In December 2002, a normally inconspicuous organization named the Financial Action Task Force on Money Laundering (FATF) hit the headlines of news agencies reporting on Ukraine. The FATF recommended that its members apply "countermeasures" to Ukraine in response to the country's failure "to enact anti-money-laundering legislation that meets international standards." This was yet another mighty blow to Ukraine's tarnished international image, following the much publicized and unsolved case of the killing of independent journalist Heorhii Gongadze (in 2000) and the U.S. allegations (in 2002) that Kyiv might have sold early-warning radar systems to Baghdad in contravention of United Nations sanctions.

The FATF is an independent international body with headquarters based in Paris. It has 29 member-countries and governments - including the United States, the United Kingdom, Australia, Canada, France, Germany, Hong Kong, China and Japan - and two international organizations, the European Commission and the Gulf Cooperation Council. South Africa and Russia have the status of observers in the FATF.

After reviewing Ukraine's anti-money-laundering regime in June 2001, the FATF placed Ukraine on its blacklist of "non-cooperative countries and territories" that fail to adopt and/or apply efficient legal measures to combat money laundering. Formerly, the FATF blacklisted only two other states - Nauru and Nigeria - for their failure to deal efficiently with money laundering.

The FATF also applied Recommendation 21 out of its set of 40 recommendations constituting the "basic framework for anti-money-laundering efforts." Recommendation 21 advises that financial institutions of the FATF members "give special attention to business relations and transactions" of persons and companies from blacklisted ("non-cooperative") countries. It also calls for the examination and recording of transactions that "have no apparent economic or visible lawful purpose" in order to make the findings available to auditing and law-enforcement bodies.

On December 20, 2002, the FATF recommended that its members apply additional "countermeasures" against Ukraine, finding the "Law of Ukraine on the Prevention and Counteraction of the Legalization (Laundering) of Proceeds from Crime" enacted on December 7, 2002, to be insufficient. In particular, these additional countermeasures call on FATF members to apply "stringent requirements" for identifying clients before establishing business relationships with individuals and companies from Ukraine; to enhance reporting mechanisms regarding financial transactions with Ukrainian clients; to be more considerate in establishing subsidiaries branches, and representative offices of Ukrainian banks in FATF countries; and to warn non-financial-sector businesses that transactions with Ukrainian entities may run the risk of money laundering.

According to media reports, the United States and Canada in mid-January were the first countries to heed the FATF recommendations with regard to Ukraine. Other FATF members reportedly followed suit.

It still remains to be seen what impact the FATF sanctions have on Ukraine's financial and business sector. According to an estimate by the Kyiv-based weekly Zerkalo Nedeli on January 25, foreign banks have suspended some $300 million worth of transactions with Ukrainian clients, while checking to see who is paying with what money.

However, apart from such immediate barriers erected by the FATF to Ukrainian businesses, it seems that the FATF recommendations will also have long-term consequences by gravely eroding the trustworthiness of world financial circles in Ukrainian financial and business partners even beyond the date when the FATF decides to strike Ukraine off its blacklist.

It is noteworthy that Kyiv, knowing for more than a year that it is considered internationally to be "non-cooperative" in combating money laundering, reacted to this disgraceful categorization only after the FATF called for harsher international sanctions. In January and February the Verkhovna Rada hastily passed a number of bills introducing amendments to the Criminal Code and banking laws intended to curb money laundering in line with FATF requirements.

In particular, the legislature reduced the minimum sum subject to financial monitoring to 80,000 hrv ($15,000). Another major legislative change prohibited banks from opening anonymous bank accounts and obliged them to identify customers who perform banking operations exceeding 50,000 hrv and not involving bank accounts. In addition, Interfax reported on February 7 that President Leonid Kuchma recently signed a decree on "strengthening the fight against organized crime and corruption."

According to some Ukrainian commentators, the international focus on financial transactions involving Ukrainian individuals and financial institutions may influence the presidential campaign in Ukraine in 2004 to the extent that it will be much more difficult to use election slush funds - which are purportedly used on an increasingly extensive scale in every election campaign - from offshore banks. Therefore, those observers argue, the role of covert funds from Russia will become dominant in the 2004 election. Some have even implied that the ruling regime may use the newly adopted anti-money-laundering legislation as a convenient tool to harass those businessmen who support a challenger to the presidential candidate proposed by the "party of power."

This week, the FATF is going to hold a conference where its experts are expected to discuss the compliance of Ukraine's fresh anti-money-laundering legislation with international standards. Although some Ukrainian government officials have declared that the country's legislature did everything necessary to meet the FATF requirements, it is rather unlikely that the organization will automatically withdraw its recommendations of a tougher course toward Ukraine by international financial institutions. Ukraine has repeatedly proved to the world community in the past that writing laws is one thing and obeying them is another.

Jan Maksymiuk is the Belarus, Ukraine and Poland specialist on the staff of RFE/RL Newsline.

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