On 2 August 2016, the National Bank of Ukraine approved Resolution No. 365 amending the definition of banks’ risky activities. This move has been prompted by the detection by the NBU of “sham” transactions that did not fit the current description banks’ risky activities.
In response to numerous requests for additional information regarding the recent amendments, the NBU has provided the following clarifications:
Question 1. The definition of risky activities does not specify the transaction amount. Does it mean that low-value transactions that fit the description of risky activities can be recognized as suspicious?
In accordance with Article 48 of the Law of Ukraine on Banks and Banking, banks shall be prohibited from risky activities that pose a threat to the interests of depositors or other bank’s creditors. As a matter of fact, only large-value transactions, not one-off low-value transactions that do not bear the essential characteristics of a sham transaction, have the potential to pose a threat to the interests of depositors.
In order to establish whether transactions fit the criteria of risk activities it is necessary to measure the volume of “suspicious” financial transactions, and determine the share of such financial transactions within total transactions performed during the same period.
Question 2. Could you give an example of inconsistencies between customers' financial transactions and information on the customer's financial standing and/or social status that provide sufficient grounds to conclude that these transactions can be qualified as risk activities?
Examples of such financial transactions include transactions worth millions of hryvnias that bear the essential characteristics of sham transactions and involve the crediting of incoming funds to accounts of individuals that are financially unable to perform such transactions judging from the information on their financial standing and/or social status. Such transactions end up with cash disbursements.
These persons may include pensioners, students, the unemployed and other persons whose income does not match the value of transactions performed through their accounts.
For example, in one of the banks six individuals employed as a guard, plumber, babysitter, shop assistant and an administrator have received financial assistance from a legal entity for a total amount of UAH 9.5 million, which was subsequently converted into cash.
It should be noted that in accordance with applicable legislative requirements for customer identification and verification procedures, banks are required to have documents and/or information on such persons, their financial standing and/or social status prior to allowing customers to perform financial transactions.
Question 3. How should a bank prove documentarily apparent economic feasibility(sense) of financial transactions?
We here refer to large-value transactions that can be qualified as “sham”. A bank is required to take measures to establish apparent economic feasibility (sense) of financial transactions.
Analysis of statements of cash flows, documents (information) related to the identification and verification of customers, information about counterparties, and contracts submitted to the bank can be taken as evidence that a bank implements such measures as long as they prove sufficient.
Example 1. A legal entity regularly receives cash transfers worth millions of hryvnias. In this case, a bank is required to establish economic feasibility (sense) of such transactions. If a legal entity submits a set of documents (that do not have signs of being fictitious) that will prove its engagement in grain trading operations and that the purpose of such transactions is to settle payments with sole proprietor farmers, this aforementioned requirement can be met.
Example 2. A customer has submitted to the bank documents confirming that cash is transferred to enable the recipient to purchase beetroots in one of the regions of Ukraine. However, the purchase volumes exceeded the output of beetroots in Ukraine. The availability of these documents cannot be sufficient to justify the feasibility of transactions.
Question 4. Which transactions can be linked to fictitious business operations?
We would like to emphasize once again that what is meant here are large-value transactions that can be qualified as “sham”.
Analysis of customers' transactions reveals that the actual purpose of customer’s business operations (in some cases the sole purpose) is redistribution of financial flows received from counterparties as payments for the purchase of one type of goods (services) to be subsequently used to settle bills for other goods supplied (services rendered), meaning that these transactions are used to hide the real sources of funding or distort information about them.
For instance, a company receives recurring payments qualified as “proceeds from the sale of securities” . These funds are subsequently used to “settle bills for agricultural products”. A company employs only one person However, no payments, including rental and tax payments, are made by this company.
These corrupt schemes carried out under the cover of ordinary business operations can be used to move “dirty money” abroad.
Question 5. Could you give an example of bank customers’ financial transactions involving the transfer of funds abroad as advance payments under foreign trade contracts regarding which a bank has or might have information (available from public sources or provided by other financial institutions) that counterparties have repeatedly defaulted on their obligations under foreign trade contracts.
Example 1. A foreign trade contract is drawn up in such a way that the non-fulfilment of the terms and conditions set forth therein leads a counterparty to default on its obligations to deliver goods and/or return advance payments.
Under the terms of the contract, goods shall be delivered to the resident against payment in the amount indicated in the Appendix to the contract. A legal entity – a bank customer – purchases and transfers foreign currency to meet the terms of the contract. However, this legal entity pays less than required under the contract, thus releasing the counterparty from its obligations (to deliver the goods). Despite this, a company continues to enter into such contracts and make incomplete payments. These transactions end up with the transfer of large amounts of funds, with a counterparty being discharged from its obligation to deliver the goods.
Example 2. A non-resident in default of its obligations to deliver the goods to the resident has substantial outstanding debt. Despite this, the resident continues to make payments, increasing the non-resident's outstanding debt.