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 : : Legal Framework
2009-01-01 00:00:00  Print Version



APPROVED

APPROVED

By the Order of the SCFM of Ukraine

 

of July 04, 2008 .  157

 

Methodical recommendations

To the entities of initial financial monitoring Risks management as regards to laundering of proceeds from crime and terrorist financing

 

1. General provisions

Methodical recommendations Risks management as regards to laundering of proceeds from crime and terrorist financing were elaborated with the aim of assistance to the entities of initial financial monitoring (hereinafter referred to as EIFM) concerning definition of criteria of classification and types of persons, which are characterized by heightened level of probability of conducting by them of financial transactions for legalization of proceeds from crime and terrorist financingand criteria for risk assessment of conducting by client of such transactions.

Methodical recommendations were elaborated at execution of requirements of the Law of Ukraine On Prevention and Counteraction to Legalization (Laundering) of Proceeds from Crime, Order of the State Department for Financial Monitoring of the Ministry of Finance of Ukraine of April 24, 2003 40 On approval of requirements to organization of financial monitoring by the entities of initial financial monitoring in the area of prevention and counteraction to introduction into legal turnover of proceeds from crime and terrorist financing and taking into account modern standards of FATF, standards of Basel Committee on banking supervision and Directive 2005/60/ of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering terrorist financing.

 

In these recommendations the terms are used in the following meaning:

Risks   danger (threat, vulnerable places) in the activities of the EIFM, which can be used with the aim of laundering of proceeds from crime and terrorist financing.

Risks management  is purposeful influence of the EIFM on risks, which consists of their determinationassessment and elaboration and implementation of measures, directed on their diminution.

Risk assessment (level of risk) measures level of probability of laundering of proceeds from crime or terrorist financing (very high, high, medium, low).

Feature of risk constitutes indexes according to which risk can be assessed.

Category is a group of persons, products, countries, which has common features.

Criteria of risk are measures of risk assessment, which are based on features, which are included into classification of risks.

 

2. Advantages of risk-based approach concerning laundering of proceeds from crime and terrorist financing

With the aim of diminution of possible losses (worsening of image, business reputation, material losses) the EIFM has to ensure risks management concerning legalization of criminal proceeds and terrorist financing and to include relevant procedures to the rules of financial monitoring conduct and programs of its execution.

Risk-based approach doesnt change or mitigate requirements of current legislation in the AML/CTF area, but is directed on detection of those persons, which try to legalize criminal proceeds or finance terrorist through EIFM, and to prevent their activities.

The mentioned approach has the following advantages:

-         Permits to the EIFM to detect clients, whose risk of money laundering or terrorist financing is high, before them conduct financial transactions, and to refuse them in servicing, that is to prevent in the operative manner to laundering of criminal proceeds or terrorist financing;

-         Enlarges the list of features of legalization of criminal proceeds and terrorist financing and permits to supplement in the operative manner and to optimize this list on the basis of experience, obtained by the EIFM;

-         Permits to systemize the process of clients studying and research of their activities, in result of what all clients of the EIFM are subject to analysis in accordance with the level of their risk;

-         Ensures that the EIFM possesses great volume of information on activities of certain client, which can be related to laundering of criminal proceeds or terrorist financing;

-         Ensures avoiding provision of information to the EIFM, which is not related to money laundering or terrorist financing;

-         Can be used for counteraction to other crimes, including financial machinations, participant of which is the EIFM.

Applying of risk indexes ensures strategy of risks management, which obliges the EIFM to realize measures as regards to additional control and examination of client.

 

3. Classification of risk features according to categories

Risks of money laundering and terrorist financing can be detected with the help of different features, which can be classified according to categories. The most wide-spread categories of features of risk are the following: threats of countries, type of client, type of product (goods, financial transactions or services). The importance of these features of risk (separately or all together) in general risk assessment, can defer depending the sphere of activities of the EIFM and circumstances under which financial transactions are carried out. Thus, the IEFM has to take decisions independently concerning importance of this or that feature of risk.

Risk assessment shall be executes according to criteria, which is composed both of some features of categories or their aggregate.

The result of general risk assessment by the EIFM, (which is based on analysis according to determined criteria on the basis of features of risk under their categories), is definition of level of risk.

Definition of risk by EIFM shall be ensured both on the stage of establishment of business relations with client, and in the process of their development until their termination.

The EIFM shall elaborate accurate procedures of work with clients, including description of types of clients, which are characterized by heightened level of risk for the EIFM. During elaboration of procedures the following indexes shall be studied as: general profile of activities of client; country of origin and registration of him and products, which he proposes; social status or relations with agencies of state power; accounts, related to it, business activity and other indexes, which can be used for definition of features of risk.

  

 3.1 Threats of the countries

Features, which testify the fact that threats of country constitute heightened level of risk (very high, high), include countries (territories), which are known as the ones which:

-         Do not observe generally accepted standards in counteraction to legalization (laundering) of proceeds from crime;

-         Do not fulfill FATF Recommendations;

-         Are offshore zones;

-         Do not take part in international cooperation in the AML/CTF area;

-         Have sufficient level of corruption and crime;

-         Have legislation, which do not envisage disclosure or provision of information concerning financial transactions, including, to competent agencies;

-         Constitute countries, where military acts take place;

-         Are manufacturers and/or supplies of drag substances;

-         Are suppliers of weapons;

-         Are countries, as regards to which the UNO imposes sanctions or embargo;

-         Are producers, dealers or intermediaries in trade with weapons;

-         On the state level support terrorist (extremist) movements.

 

3.2.Type of client

 

The basis for classification of persons, which are characterized by heightened level of risk, can be presented by their types.

The clients, whose activities can constitute the heightened level of risk, shall include, in particular, the following types of persons, which:

1. are (were) politically exposed persons, or persons, related to them;

Politically exposed persons are senior officials of state, which provide forming and realization of state policy, in particular, heads of states and governments, heads of central agencies of state power, persons, who are heads of political parties, heads of state enterprises (organizations), which have strategic meaning for economy and security of state;

Persons, related to politically exposed persons, are members of families and close relatives of politically exposed persons:

a) husband or wife;

b) children or their husbands or wives;

c) parents;

d) brothers and sisters;

e) grandmothers and grandfathers;

f) grandchildren;

2. are clients nonresidents;

3. are clients, which work only through representatives;

4. are new clients, period of activities of which do not exceed three months from the day of their state registration;

5. are nonprofit organizations (except for the organizations, which act under the aegis of famous international organizations);

6. are non-financial organizations, but execute monetary transfers, transactions with payment of checks with cash, etc.;

7. are gambling institutions (casino, totalizators and other gambling institutions);

8.  legal persons, conducting any kinds of lotteries;

9. do not have big funds turnover, but operate with sufficient amount of cash in certain transactions;

10. execute intermediary and representative activities, acting on behalf of their clients;

11. have organization or relations, structure and nature of which is complicates the process of identification of the real owner or beneficiary;

12. are joint-stock ventures, which executed emission of bearer securities;

13. are manufacturers and/or sellers of weapons;

14. are included into the list of persons, related to terrorist activities, which is formed and approved by the SCFM of Ukraine;

15. conduct monetary transactions (for example, offices of funds transfer, foreign exchange offices, funds transfer agents, bank notes traders and other institutions, which provide money transfer services;

16. are natural persons, age and/or physical state of which can testify the impossibility of active business activity;

17. are clients as regards to which there are suspicions concerning reliability of documents, submitted by them or previously submitted identification data;

18. do not correspond to requirements of ratings of financial reliability (stability) of insurers and re-insurers-nonresidents, which is established by the State Commission for Financial Services Markets Regulation;

19. are counteragents of clients, which are residents of countries, which constitute heightened level of risk (very high, high);

20. are counteragents of clients, which are travel agencies and provide hotel services.

 

3.3. Type of products (goods, financial transactions and services)

General risk assessment shall as well include risk level assessment according to the type of products (goods, financial transactions and services), which are proposed by client. The process of risk assessment, related to products can include the following features:

-         International correspondent bank services, including such transactions, as commercial payments for indirect clients (for example, for bank-intermediary);

-         International commercial bank services;

-         Services, which include trading with and supply of bank notes and precious metals;

-         Services, which per se provide anonymity, or envisage passing of borders, (for example, bank services on-line, services with cards, international transfers and services to private investment companies and trusts);

-         complicated, unusually big transactions;

-         financial transactions, which do not correspond to activities of legal person, which are prescribed by its statutory documents;

-         financial transactions with unusual schemes of conducting;

-         transactions, which do not have obvious economic sense or obvious legal purpose;

-         transactions, the nature of which provides grounds for consideration that they are aimed at avoidance of procedures of obligatory financial monitoring or identification, envisaged by Law;

-         transfer of monetary funds at anonymous (numbered) account abroad and arrival of monetary funds from anonymous (numbered) account from abroad;

-         purchase (sale) of checks, travel checks or other similar payment measures for cash;

-         transfer of funds (or drawn out of funds from account), if it was preceded by adding at this account of cash funds at amount, which is equal or exceeds 80 000 UAH, during the same or previous operational day;

-         adding to account of funds in cash form with their further transfer during the same or the following operational day to another person;

-         opening of account with adding of funds for the benefit of third person;

-         transfer by the person, upon the absence of external economic contract, of funds abroad;

-         exchange of bank notes, especially of foreign currency, for bank notes of another face-value;

-         financial transactions with bearer securities, not allocated in depositaries;

-         occurrence of insured accident in short term after conclusion of agreement of insurance;

-         acquisition of the right of property on the securities holding, the aggregate fair value of which exceeds 80000 UAH, according to the agreements of donation of exchange.

-         Transactions with promissory notes, including with bearer endorsements or blank endorsements.

-         External economic transactions;

-         Receipt of financial assistance from nonresidents or provision of financial assistance to nonresidents;

-         Transactions with cash or measures, which are equivalents to cash;

-         Transaction with securities with cash settlements for huge amount;

-         Sale and purchase without participation of securities trader of securities holding, the aggregate value of which is equal or exceeds 80000 UAH;

-         Sale and purchase of weapons;

-         Transactions with drug substances and raw materials;

-         Carrying out of settlements under external economic contract, which doesnt envisage actual supply of goods, products and services for the customs territory of Ukraine;

-         Execution of transactions with assets, which are allocated (issued, registered, submitted, or used) or will be allocated (will be issued, registered, submitted, executed and used), in result of conducting transactions out of borders of the customs territory of Ukraine, in case, when external economic contract was not provided.

 

 

4. Additional preventive measures concerning clients with heightened risk level

Elaboration and execution by the EIFM of measures, directed on reduce of determined risks, envisages taking by the EIFM of additional preventive measures to the clients with heightened risk level, which can include the following:

-         Establishment of requirements for provision by the client of additional documents for his identification, other than those, which are prescribed for the clients with low risk level;

-         Definition of the aim and nature of business relations with client;

-         Examination of person of client and persons, which own, control or direct activities of these clients;

-         Collection of sufficient information about such clients, their reputation, as well as about the fact if decision was taken by court as regards to this client concerning the facts of counteraction to legalization (laundering) of proceeds from crime and terrorist financing;

-         Taking measures for determination of sources of origin of funds of client;

-         Assessment of effectiveness of control measures, which are taken by the client nonresident in the area of AML/CTF;

-         Monitoring and permanent updating of information on essence of clients activities and his financial state;

-         Monitoring of financial transactions of client during certain period of time;

-         Analysis of compliance of financial transactions, conducted by the client, with available information about essence of his activities and his financial state;

-         Provision of execution of first direct contact with the client;

-         Provision of written permission of leadership for establishment of business relations with clients with high risk level.

-         Studying of grounds and purpose of concluding agreements for conducting of financial transactions, which do not have obvious economic aim;

-         Suspension of conducting of financial transaction of client;

-         Refuse to establish or continue business relations with client.

Use by the EIFM of preventive measures can be executed as well in other cases, except for the abovementioned risk features.

Description and the list of preventive measures concerning clients with heightened risk level shall contain in the Rules for conducting of financial monitoring by EIFM.

 

5. Examples of risk assessment

Risk assessment can be executed by the EIFM with use of different methods (in particular, scenario, score methods, etc.).

Criteria of risk assessment shall be defined by the EIFM independently, taking into consideration peculiarities of conducting of his activities and certain conditions and circumstances of execution of certain financial transactions. Criteria can be based both on separate risk feature and on aggregate of features and on forecasts, which are based on analysis of activities of separate client.

Criteria of risk is condition, according to which EIFM defines the level of legalization of criminal proceeds or terrorist financing.

Scenario method of analyses is characterized by description or definition of conditions, according to which certain events are developed and assessed, thus scenario envisages description of consecution of certain events during certain period of time.

In case of risk assessment in the quality of scenario it is possible to use typologies of money laundering and terrorist financing, which are annually elaborated and issued by FATF and the SCFM of Ukraine, and detected by the EIFM independently.

In scenario the list of criteria shall be envisaged, as well as indexes, risk features and consequence of possible actions and their interrelations.

Examples of such scenarios are as follows.

 

Example 1  (with use of score method of risk assessment).

 

Nonresident  - natural person arrived to Ukraine from Bahrain and stays in hotel. The hotel insured his responsibility before the clients in insurance company for damage, which can be inflicted to their lives, health and property during their stay in hotel, executed payment to this insurance company of insurance premium at the account in bank . In three days insured accident occurred (property of citizen of Bahrain were stolen). The citizen of Bahrain didnt wait for payment of compensation by insurance company and returned to his motherland. In a month insurance company in a month insurance company transferred through bank insurance compensation at amount 500 thousand US dollars to Bahrain with the aim of payment to the citizen of Bahrain.

 

The entity of initial financial monitoring bank classified risk features under the following categories: types of threats of countries (territories), types of clients and types of products (goods, financial transactions and services), related to his activities, and defined criteria of risk assessment with use of score method.

Meaning of given scores for risk criteria the bank defined as follows:

-          low risk level 1 points;

-          medium risk level 2 points;

-          high risk level 3 points;

-          very high risk level 4 points.

 

Calculation of aggregate risk assessment in points, taking into account defined criteria

 

Type, types of risks features

Situation

Criterion

Assessment under criterion

1

country

Bahrain

 

Offshore zone

4

2

Type of client

 

Insurance company

Resident

1

3

Type of product

 

Insurance compensation

Occurrence of insured accident in short term after conclusion of agreement

4

 

Aggregate risk assessment is defined by the EIFM as weighted average: (4 + 1 + 4)/3 = 3

Risk assessment as 3 points within defined by bank meanings of criteria testifies about the high level of risk.

To reduce such risks bank envisaged conducting of the following preventive measures:

-         Prescribed requirements for provision by client of additional information in the form of questionnaire about the client and his founders;

-         Defined the aim and nature of business relations of client with beneficiary;

-         Examined persons, which own, control and direct activities of client;

-         Collected information about reputation of client;

-         Took measures for definition of sources of origin of funds of client;

-         Conducted monitoring of financial transactions of client during 3 months.

In result bank defined that in a month after payment of insurance compensation to the citizen of Bahrain, insurance company resident of Ukraine received investments from him.

 

Example 2 (with use of scenario method of risk assessment).

 

Securities trader according to the order of the client acquired from the seller bearer shares at the low price. In three months the client ordered to sell these shares to the securities trader at the price, which sufficiently exceeds the value of their purchase. Funds, received for these securities, were transferred at the account of securities trader in bank B.

The EIFM for risk assessment described the algorithm of consequence of the abovementioned events and defined the risk criterion, which is based on the following features:

-         Type of product (bearer shares);

-         Acquisition of securities fair and market value differ one from another greatly;

-         Short term (3 month) of sale and purchase of these shares.

 

 In the mentioned example the EIFM used in the quality of scenario typology of legalization of proceeds from crime, which was elaborated and issued by the SCFM of Ukraine (manual Combating money laundering: legal, organizational and practical aspects Sergiy Hurzhiy, O.L. Kopylenko, Yaroslav Yanushevych and others. .: Parliamentary publishing house, 2005. 216 p.)

Legalization of criminal proceeds is carried out by means of speculative transactions with securities (so called garbage shares).

 

Example 3 (with use of scenario method of risk assessment).

 

Bank ” provided credit with per cents to the natural person the entity of entrepreneurial activities. This person provided to the legal person the entity of external economic activities material assistance (without %). The mentioned legal person settled for provision of legal services with legal company. Natural person the entity of entrepreneurial activities returned his credit ahead of schedule.

 

Bank ”, having conducted monitoring of financial transactions, conducted by the client, detected that natural person the entity of entrepreneurial activities returned his credit ahead of schedule. Upon further analysis the bank defined that the founder of legal person the entity of external economic activities was citizen of Ukraine and politically exposed person. Natural person the entity of entrepreneurial activities is son of founder of legal person the entity of external economic activities, and in legal person the founder is the person, which was the wife of founder of legal person the entity of external economic activities.

In the mentioned example the EIFM in the quality of scenario used independently detected scheme.

The EIFM for risk assessment described the algorithm of consequence of the abovementioned events and defined criterion of risk, which is based on the following features:

-         Type of client (one of participants of financial transaction is the entity of external economic activities was the citizen of Ukraine and politically exposed person, the other two participants of transaction were linked with the mentioned person);

-         Ahead of schedule return of credit.

 

6. Necessity of studying and internal audit

All processes of risk management, including features, criteria and methods of risk assessment, shall be reflected in the rules and programs, elaborated and implemented in the EIFM.

For the entities to provide effective approach to the process of risk management, it shall be included into the program of internal audit of EIFM.

With the aim of professional development of employees of EIFM and appropriate use by them of procedure and tools of risks management, they have to pass regular studying. At that the EIFM shall use with certain periodicity different methods of studying as regards to risks management.

As well the EIFM shall with certain periodicity review approaches, methods and effectiveness of internal audit, established on risk assessment, and in case of necessity to change them.

 

 

Director of the Department

for interaction and methodical

provision of financial monitoring system                                      Anatoliy Podkorytov

 



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