Has Ukraine Fulfilled One of the Main EU Requirements?

Ukraine has fulfilled one more requirement on the way to the start of negotiations on membership in the European Union.

On Oct. 17, parliament supported an important law in the field of combating money laundering.

It’s called the law on PEPs – or “politically exposed persons.” In addition to the EU, the strengthening of financial monitoring of PEPs was also expected by the International Monetary Fund (IMF).

Despite Ukraine already having legislation on PEPs on the books, its update in accordance with EU requirements sparked discussion among the government officials who would fall under this status.

They were confused by what consequences the so-called “lifelong status” of PEPs would have on them and what possible difficulties might result for their relatives or future business partners.

That's why some representatives of the parliament suggested postponing the law's effect until Ukraine joins the European Union. But this provoked criticism from international partners and the lawmakers abandoned the idea.

What the law offers

The “PEP” status was introduced at the end of 2019.

It applies to people in government positions at increased risk of committing financial crimes like money laundering, illegal enrichment, or terrorist financing.

By the legislation, banks and financial institutions monitor the officials, their relatives (wife, husband, parents, children), and business partners. If suspicious financial transactions are detected, or if the person cannot explain the origin of the money, his accounts or the accounts of his relatives/partners may be blocked.

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Ukraine is not an innovator in this matter. Similar legislation has been implemented in many countries of the world, including EU member states. As the European Commission's website reads, “the measures provided for by the FATF (The Financial Action Task Force) are aimed at ensuring that the private sector covered by the FATF Recommendations treats public figures in accordance with the risk they represent and takes additional measures that are necessary to reduce this risk."

But with the beginning of the full-scale Russian invasion of Ukraine in February 2022, lawmakers decided to amend the law on PEPs, replacing the lifetime status with three years. That is, it was possible to carry out financial monitoring of the officials only for three years from the moment of dismissal. Deputy Hryhoriy Mamka from the banned pro-Russian party “Opposition Platform – For Life” proposed the change to the law.

The issue had to be corrected this year before the results of the European Commission's report on Ukraine's implementation of important reforms.

A significant part of the civil servants of Ukraine fall under the statute as a PEP: the president, the prime minister, the heads of ministries and their deputies, the head of the Office of the President and his deputies, lawmakers, heads and judges of the Constitutional Court of Ukraine, the Supreme Court, higher specialized courts, heads of law enforcement agencies, the Commander-in-Chief of the Armed Forces of Ukraine, members of the governing bodies of political parties and others. And this is just a short list of Ukraine’s PEPs.

Also, those persons who worked in these positions before the adoption of the law have this status.

Deputy speaker of the parliament Oleksandr Kornienko told Kyiv Post that there may be approximately 10,000 such people, possibly more.

But it is not entirely correct to say that these people received the “lifelong” status of PEP. The law proposes that after release from their positions, these people be under financial control for 12 months.

If during this time there are no questions regarding his/her operations in banks or other institutions, he/she will be served on the basis of those rules that apply to everyone else.

In addition, in September, the National Bank allowed carrying out financial operations without providing explanations of sources of wealth in one institution from UAH 200,000 (~$5,470) per quarter to UAH 400,000 (~$10,945) per month.

“If, over time, such a person has suspicious or large financial transactions, an in-depth analysis can be carried out in relation to him. And this does not mean that the bank will forbid a deputy of the first convocation of the parliament to transfer 100 hryvnias ($2.75) to his child for lunch,” Olha Vasylevska-Smagliuk, a deputy from the Servant of the People party, told Kyiv Post.

Oleksandr Kalitenko, legal adviser of Transparency International Ukraine, said that the law does not provide for increased control over old transactions that took place or will take place before the law came into force:

“Strengthened monitoring for those PEPs who left a politically significant position more than three years ago will apply only to transactions made after the law came into force. That is, there will be no appeals of already completed previous transactions. For example, no one will withdraw funds from previous transfers to the card of the new PEP.”

If the bank or financial institution refuses to provide service to the PEP, the National Bank will fine them up to UAH 1.7 million (~$46,500) or UAH 10 million (~$273,800), respectively.

Everything depends on the National Bank

But it should not be argued that the legislation on PEP will work without creating additional problems for the officials, the head of the National Bank, Andriy Pyshnyi, said.

Pyshnyi said that Ukrainian banks, especially state-owned banks, may not provide the best service for a PEP.

“We don’t have the best experience or a very formal approach on the part of a number of banks to the maintenance of PEPs, particularly, setting an unreasonably high level of risk to everyone without exception. However, we are changing the situation. And the situation is changing. And it is this law that fixes the mechanisms that eliminate such a formal approach, the adoption of disproportionate measures in relation to PEPs,” he said.

Ukrainian banks know how to work with a risk-oriented approach since the National Bank provided the first recommendations back in 2021, he said.

“In 2023, we have already made appropriate changes to our regulatory and legal acts, conducted extensive explanatory work with banks. Therefore, I can repeat once again what I told the banks – that, in the future, the National Bank will not tolerate an approach where the best way to avoid trouble with PEPs is to deny them service altogether,” said Pyshniy.

Kornienko said that it would be good to create a hotline for PEPs, who could contact the National Bank directly in case of problems with service in banks.

Personally, he says that as a PEP doesn’t face extra problems due to their status. His wife also had no problems, but the bank asks for additional clarifying information three to four times a year.

“But our accounts were not blocked,” he said.

What will the EU say?

Olha Stefanishyna, Deputy Prime Minister for European and Euro-Atlantic Integration of Ukraine, said that the return of regulation on the definition of “PEP” has been the subject of detailed discussions for the past few months – on government and parliamentary platforms with the participation of the European Commission and international experts.

“The result was obvious: there will be no changes to the FATF standards for Ukraine. Unfortunately, we have not yet become a country with such a level of rule of law that would allow us to convince the FATF countries to change their rules (I would like to remind you that 37 countries and two regional organizations, including the EU, are members of the FATF),” the minister said.

Now the Ukrainian government is waiting for a decision from the European Commission. According to a preliminary assessment, Ukraine has fulfilled all seven conditions set before it. But whether they are successful is an open question.

Kornienko said that the written report of the European Commission might arrive in November. Then it will be known whether the EU is ready to start membership negotiations with Ukraine.