On 7 February 2019, a new system of risk-based currency supervision will go into effect under the Law of Ukraine On Currency and Currency Operations. The sweeping currency control over all transactions is being replaced with a fundamentally new approach that operates on the principle “fewer risks, less attention, more risks, more attention.”
The new approach to currency supervision removes a number of bureaucratic barriers faced by businesses and frees them from the need to report every currency transaction to banks. For the NBU as the currency supervision authority and for banks as currency supervision agents, the new approach reduces the workload of the departments that implement currency control and financial monitoring.
How the NBU will supervise banks
The risk-based approach forms the basis for identifying the list of issues for the NBU’s inspection of banks. For instance, the program of on-site inspections of banks will not cover all areas of regulation under the Law of Ukraine On Currency and Currency Operations (purchases, transfers, settlements, safeguard measures, etc.), but only those putting a particular bank at risk.
Only if NBU employees conducting the inspections have doubts about the transactions performed will the banks have to provide assurances, in particular in documentary form, that such transactions are transparent and clear and that they do not constitute failure to comply with the laws on currency, sanctions, AML/CFT, or with safeguard measures implemented by the NBU.
With risk-based supervision, the procedure for determining the corrective measures for violations revealed by the NBU during inspections will also become more flexible and transparent.
Up until now, under the Decree of the Cabinet of Ministers of Ukraine No. 15–93 On the System of Currency Regulation and Currency Control dated 19 February 1993, corrective measures for violations of the currency legislation have been applied to banks only in the form of revocation of the general license to conduct currency transactions or imposition of fines that did not depend on the level of significance of the violations and that ranged from 25% to 125% of transaction amount.
Effective 7 February 2019, a new procedure for imposition of corrective measures on banks will be implemented. Even though the NBU has the right to apply corrective measures such as a written warning, suspension of certain types of operations, and imposition of fines, the NBU will use the risk-based approach when choosing a specific corrective measure and the volume of sanctions. Under the new approach, the NBU will take into account both the significance of a violation and the respective bank’s actions that led to such violation.
A violation will be considered significant if it occurred during a separate transaction amounting to at least UAH 1 million or a series of transactions totaling at least UAH 10 million. Such violations will entail fines of up to UAH 400,000. The size of the fine will depend on criteria such as frequency, transaction amount, etc. Fines for insignificant violations will not exceed UAH 50,000.
A bank’s actions that prevent the NBU from discharging its functions will also be considered significant violations. In cases where a bank prevents NBU specialists from conducting an inspection or fails to provide documents, a maximum fine of up to UAH 1 million may apply.
The NBU will not impose fines for insignificant errors in banks’ reports. The maximum fine for insignificant violations of the reporting requirements will remain the same – UAH 17,000.
The largest fine under the new procedure is UAH 8 million (however, no fine will exceed 1% of a bank’s authorized capital). This fine will apply if a bank’s failure to create an effective system of currency supervision led to the violation of all or most (more than half) of the currency legislation requirements that the NBU inspects the bank for compliance with.
The decision to apply corrective measures to a bank will be made by an NBU collegiate body consisting of representatives of different departments, which will ensure that the decision is unbiased and appropriate for the violation. An adequate corrective measure will be based on the comprehensive analysis of, among other things, the amounts of the transactions and the frequency, causes, and consequences of the violation.
Compared to the procedure currently in effect, the NBU will take a more lenient approach to the imposition of fines:
- Example 1 At the request of a customer, a bank performs a USD 1.5 million transaction in violation of the procedure for the purchase of foreign currency and its further transfer beyond Ukraine. Under the current procedure, the fine is USD 1.875 million, or 125% of the transaction amount. That includes 100% for violating the procedure for the purchase of foreign currency and 25% for violating the procedure for its further transfer abroad. Under the new procedure, the fine will not exceed UAH 800,000. That includes no more than UAH 400,000 for the purchase, and no more than UAH 400,000 for the transfer.
- Example 2 At the request of a customer, a bank performs a transaction to invest EUR 2.5 million (or any other amount exceeding the e-limit introduced on 7 February) outside of Ukraine without acquiring an individual NBU license. The current procedure provides for a fine of EUR 2.5 million, or 100% of the transaction amount. The new fine will not exceed UAH 400,000.
Thus, the new system of corrective measures is fundamentally different from the current and will be more flexible, risk-based, and primarily focused on prevention of violations that have a significant negative effect. It clearly identifies areas that are important for banks and will allow them to identify suspect transactions and focus exclusively on such transactions.
How banks will supervise customer transactions
Banks also have to apply the fewer-risks-less-attention-more-risks-more-attention principle when supervising currency transactions of their customers. In particular, the new system of currency regulation provides for:
- simplified supervision of transactions of up to UAH 150,000 (except where splitting is involved)
- application of simplified, standardized, or enhanced requirements, depending on existing risks
- categorization of violations and application of significant corrective measures exclusively for significant violations.
All of the above lays the groundwork for banks to create a new risk-based system for supervision of customer transactions. The new system will ease the currency supervision of and minimize document requirements for most transactions that are conducted by the general public and real-sector businesses and that have no signs of being suspicious.
The AML/CFT legislation is a separate set of laws and will continue to be in effect after the introduction of the new risk-based currency supervision. Banks will have to pay more attention to transactions that have signs of being risky.
As a result, the risk-based supervision will, on the one hand, facilitate transparent currency transactions by individuals and businesses, reduce their time and administrative costs, and, on the other hand, enable banks to pay more attention to suspect transactions in order to prevent violations, capital outflows, and scam transactions.