PEP Law: facts and speculation

Why the new rules of financial monitoring of politically exposed persons caused a flurry of criticism and rejection

Last week, the Verkhovna Rada supported in the second reading and in general the draft law No. 9296-d, which strengthened financial monitoring of politically exposed persons (PEPs). MPs returned the indefinite status of PEPs (previously, it was only retained for three years after dismissal from a politically exposed position). At the same time, they retained enhanced financial monitoring for a year from the date of dismissal from such a position.

It is worth noting that the adoption of this law was one of the requirements on the way to European integration, as well as a prerequisite for receiving financial assistance from the IMF. The partners expected Ukraine to implement effective tools to combat grand corruption, including strengthening financial monitoring of PEPs in accordance with European rules, with the indefinite status of such persons and reasonable monitoring of their financial transactions in accordance with the level of risks. Domestic practice is far from this ideal, which is why there has been quite a stir in the PEP circles. What was so frightening?

FINANCIAL MONITORING IS NOT VERY PLEASANT, BUT IN A DECENT WORLD, IT IS INDISPENSABLE

The biggest hype with the adoption of amendments to the financial monitoring rules was not so much because of the new requirements for PEP as because of distrust in the implementation of these requirements in practice. After all, since financial monitoring has been in place in Ukraine for more than two decades, people have accumulated a lot of complaints against the state and banks as subjects of financial control. Especially in wartime, when Western partners have become more demanding of the fight against corruption in Ukraine, demanding real results. This category of citizens has long been accustomed to the status of a PEP and the consequences for its holders. The Law on Prevention and Counteraction to Legalization (Laundering) of Proceeds of Crime, Terrorist Financing and Financing of Proliferation of Weapons of Mass Destruction [also called the Law on Financial Monitoring, adopted in the early 2000s and updated in 2019] stipulates that officials and their immediate family members must undergo more thorough checks in financial institutions and submit documents on the sources of their wealth.

It is believed that with such control, illicit enrichment makes it impossible to spend the funds obtained in this way. However, whenever the issue of finding more effective anti-corruption mechanisms arises, any step in this direction is met with resistance and manipulation. This is the case today, when civic leaders, progressive politicians and managers are "split" on the issue of the law on the PEPs.

According to estimates by MP Yaroslav Yurchyshyn, there are about 10-15,000 PEPs in Ukraine today. According to the law, these are only top officials: The head of state, head of government, ministers and their deputies; members of parliament; members of the Supreme Court, the Constitutional Court or other high-level judicial bodies whose decisions are not subject to appeal; members of the boards of central banks; ambassadors extraordinary and plenipotentiary, chargés d'affaires and high-ranking officials of the Armed Forces; members of administrative, management or supervisory bodies of state-owned enterprises of strategic importance, Yurchyshyn lists.

But relatives who run a common household with these people will also be monitored. And even business partners. And this significantly expands the circle of people subject to additional financial control. In fact, a lot of criticism has been directed at the issue of financial control of relatives and partners, because family (except for parent-child) or business ties can change dynamically throughout life.

FATF REQUIREMENTS AND UKRAINIAN REALITIES

Ukrainian legislators claim that the law on the PEP meets all the requirements of the FATF (the international group that develops financial measures to combat money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction and other threats to the integrity of the global financial system).

According to Oleksandra Betliy, an expert at the Institute for Economic Research and Policy Consulting, Ukraine has adopted almost the most stringent version of the FATF recommendations. In fact, it is proposed to grant the PEP a lifetime status and to continue enhanced financial monitoring for 12 months from the date of termination of the government's authority.

At the same time, the FATF emphasizes several important points: it is necessary to define clear criteria and implement a risk-based approach to financial control of public officials. This is when control measures are proportionate to the level of risks posed by the public functions of a person authorized by the authorities.

In Ukraine, as practice shows, risk-oriented approaches still do not work, although the National Bank has developed appropriate requirements for banks. The biggest outpouring of dissatisfaction today is with the banking system and unnecessarily strict financial monitoring by banks. They say that now all civil servants will have to confirm each of their banking transactions for life. Because often, instead of understanding the level of financial risk inherent in a particular public official (while he or she is in office or afterwards) and his or her relatives, financial institutions are overly scrupulous "just in case." Social networks are full of stories about "evil" bankers who unreasonably block customer transactions or even refuse to serve them.

MONEY LOVES SILENCE, AND BANKERS LOVE PEACE OF MIND

"Ukraine already has experience of a very formal approach by a number of banks to servicing PEPs, including setting unreasonably high risk levels for all, without exception, which is one of the reasons for the rejection of the new law," acknowledges Andriy Pyshnyi, the head of the National Bank.

He reminded that financial monitoring is currently carried out for all bank customers, depending on the amounts they handle. "This is a standard that must be met. In addition, PEPs (as well as other clients) can be assigned a low, medium, or high risk level. A priori, only foreign PEPs are assigned a high risk level," the NBU governor said.

At the same time, he emphasizes that even if enhanced financial monitoring procedures are applied to a person, this does not mean that they are indefinite.

"What does the law say? 12 months after the PEP has ceased to perform significant public functions and the bank has made sure that there are no risks inherent in the PEP (level of influence, scope of powers in the past, connection between past and current powers), its operations are clear, and the usual financial monitoring procedures will be applied, just like to any other client. No one is going to punish the PEP with some kind of lifelong enhanced checks."

Andriy Pyshnyi also dismisses another accusation that banks will refuse to serve PEPs and block transactions indiscriminately.

"I understand perfectly well where such expectations come from. We have not had the best experience of a very formal approach by a number of banks to servicing PEPs, including setting unreasonably high risk levels for all of them, without exception. However, we are changing the situation," the NBU chief banker said.

According to him, the NBU will no longer tolerate an approach where the best way to avoid hassle with the PEP is to refuse to service them at all. Therefore, banks that do not apply a risk-oriented approach to clients in practice will receive substantial fines. We are talking about UAH 1.7 million for non-banks and up to UAH 10 million for banks.

He urges bank customers to be active in defending their rights and, in case of illegal actions of banks, asks them to send official complaints to the NBU hotline. He even promises to set up a separate line for servicing the PEP, as he foresees that the implementation of European financial monitoring standards will still add to the troubles and require additional interpretations.

In one of her Facebook comments, MP Tetiana Ostrikova, for example, draws attention to the lack of a verified register of PEPs and the secrecy of such information during wartime.

"How is a bank supposed to establish that a person is a PEP or a relative of a PEP? The NBU does not give commercial banks access to its resources on PEPs. This has led to the following: a) a formal approach of "was in office" = PEP, no risk scale, no clear algorithm for banks to follow, which they should definitely not be responsible for and pay exorbitant fines; b) strict monitoring of all PEPs and their family members just to avoid negative consequences from the NBU," Ostrikova comments. Therefore, in her opinion, the issue of establishing the correspondence of a person's status by the bank remains relevant.

IS IT POSSIBLE TO AVOID STRESS?

It is clear that the directive underlying the law on PEP [EU Directive 2015/849] needs to be implemented. However, its implementation should be accompanied by a number of bylaws, explanations and recommendations, experts say. "It should be recognized that in the context of our administrative culture, in particular in the banking sector, the unprepared implementation of the Directive will create additional unjustified and disproportionate burdens for PEPs and their families. There are opportunities to minimize this risk through a bylaw. In particular, we should emphasize the "12-month rule", which, according to the Directive, replaces our "3-year rule" and which can significantly ease the situation for PEPs who left their positions more than a year ago. Banks should be given the clearest possible instructions on how to apply this rule," says Oleksandr Sushko, Executive Director of the International Renaissance Foundation.

He is confident that experts will add other measures to the list in the course of this public discussion that can prevent unnecessary additional stress on the part of honest managers and their families. "European integration should be a full-fledged public policy, with proper transparency, information and involvement of stakeholders (business and the public) in the discussion. Just like in the case of PEP legislation," emphasizes Sushko.

Obviously, strengthening financial monitoring in Ukraine is not just another whim of our partners, but the rules by which the European Union lives, so if we want to join it, we must follow them wisely. "Ukraine has a clear course to join the EU, has obligations to its international partners, so it must act within the framework of internationally recognized rules. The adopted law is part of the anti-corruption transformation of the state. And no matter what anyone says, its provisions on PEP comply with FATF standards, EU Directive 2015/849, and IMF requirements for macro-financial assistance," the NBU governor said.

According to him, the changes may be unpleasant because they affect the usual reality, although such norms existed from 2020 to 2022. But there will be no progress without changes. "Right now we are fundamentally changing the attitude to the category of PEPs in the country. After all, the requirements for them are of a preventive rather than criminal nature, and they should not be interpreted (although, unfortunately, this attitude is becoming the rule) as somehow stigmatizing politically exposed persons for participating in some illegal activity. This is exactly what contradicts both the letter and the spirit of the EU directives and FATF standards," summarizes Andriy Pyshnyi.

So let's discuss and move on...

Halyna Tybin, Kyiv