What is financial monitoring and how does it work?

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The concept of “financial monitoring” is not new for business and citizens. But they started talking about him especially actively in April 2020, when the new Law “On Prevention and Counteraction to Legalization (Laundering) of Criminally Obtained Incomes, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction” came into force. He is also the Law “On Financial Monitoring”.

From the name of the Law it might seem that financial monitoring concerns only those who are engaged in something illegal. But in fact, any company or individual can face a financial monetary, for example, when it receives a large amount of money in the account or buys expensive real estate.

So, for your own peace of mind, it is better to understand how financial monitoring is organized and according to what rules it works. We will talk about this further.

What is financial monitoring, and why is it needed​

Financial monitoring is the control and verification of financial transactions. Such measures are needed to identify and prevent illegal transactions that are potentially related to the financing of terrorism and money laundering.

The financial monitoring system operates at the state and primary level. At the state level, the National Bank, the State Service for Financial Monitoring, the Ministry of Justice, the National Commission for Securities and the Stock Market, and the Ministry of Finance are involved in this. And at the primary level, financial monitors are carried out by the subjects of primary financial monitoring (SPFM) - organizations and persons who are somehow connected with monetary transactions.

SPFM constantly monitor the financial transactions of the client - individuals, businesses, non-profit organizations. If the SPFM detects risky or suspicious payments, then an additional check is carried out. And they transfer information about such transactions to authorized state bodies.

What operations are subject to financial monitoring​

The financial system is based on a risk-based approach. This is the main difference between the new Law and its predecessor. In practice, this means that there will be questions to the financial operation and its participants only if it meets certain criteria. Let's analyze which one.

Threshold Amount Transactions
Finmon covers payments in the amount of UAH 400,000 and more. For a business that deals with gambling and lotteries, the transaction threshold is much lower - UAH 55,000.

Threshold operations are considered high-risk and are subject to mandatory verification if they meet at least one of these criteria:

• A transaction involving publicly significant persons or people associated with them. For example, not only the transaction of the MP, but also his wife or children is monitored.
• Money transfer abroad, including to offshore zones.
• Financial transaction with cash.
• The state in which the recipient / sender or his bank is located does not comply with international recommendations on combating money laundering and terrorist financing.

Suspicious transactions
An operation worth less than UAH 400,000 can also be monitored if the SPFM sees signs of risk in it. Customer behavior, characteristics of an individual transaction, or financial activity in general can become a reason for verification.

Here are some situations that can lead to additional checks:

• the entrepreneur or company representative cannot clearly explain what the company is doing;
• uncharacteristic activity on the account, for example, the volume of transactions has unreasonably increased;
• a company or individual regularly receives or transfers money abroad for no apparent purpose;
• the business receives money from counterparties with whom it has no confirmed business cooperation;
• suspicious cash transactions: for example, a lot of small cash transfers arrive in a business account within a short time, and then the legal entity withdraws the total amount to a third party's account.

This is just a small part of the signs by which a financial transaction may raise questions from the SPFM. In general, there are more than 70 such criteria, all of them are described in a separate resolution of the NBU.

What transactions are not submitted for financial monitoring​

Although the new Law has introduced stricter verification rules for the sender and recipient of funds, this has little or no effect on day-to-day monetary transactions.

The following transactions are not subject to verification:

• payment of fines, taxes, fees, utility bills;
• loan payments up to 30,000 thous.
• cashless payment for goods and services by card / from an electronic wallet;
• withdrawing cash from your account;
• all cash transfers within Ukraine, if they do not exceed UAH 5,000. If the amount is greater, then the SPFM must identify the payer. To do this, they will most likely simply ask for a copy of the passport.

Who conducts financial monitoring: subjects of primary financial monitoring and their responsibilities​

All SPFMs can be divided into two groups.

The first group is the subjects who must fully comply with all the procedures and requirements of the finmon. These include:

• banks, pawnshops, insurance companies, credit associations and other financial institutions;
• payment system operators: the requirements for them, as for SPFM, will take effect from August 2022;
• exchanges;
• stock market participants;
• postal operators that provide financial services or conduct foreign exchange transactions;
• service providers that are associated with virtual assets;
• legal entities that are not financial institutions, but have the right to provide individual financial services.

Specifically defined SPFMs:

• accountants, tax consultants - both sole proprietorship and legal entities who provide such services;
• persons who are engaged in audit activities;
• attorneys, law firms and associations;
• notaries;
• intermediaries in real estate purchase and sale transactions, as well as persons who provide consulting services in this area;
• business entities who sell and buy precious metals, precious stones and products from them for cash;
• organizers of lotteries / gambling.

For this category of SPFM, the legislation provides for simplified options for conducting financial monitoring.

Responsibilities of the SPFM​

First of all, the organization must register as an SPFM with the State Financial Monitoring Service and appoint a special employee who will be responsible for the financial monetary system.

What SPFM should do

• Conduct due diligence.

In practice, this means:

1. Identify (know your customer procedure) and verify the client. These stages can take place both in person and remotely: it depends on the volume of financial transactions.
2. Determine the ultimate beneficial owner in the case of corporate clients. To do this, use the data provided by the client himself, as well as information from other sources.
3. Establish the purpose of the financial transaction.
4. Constantly monitor the financial activity of the client.
5. Always have up-to-date information about the client: documents, contact and personal data.

• Register transactions that are subject to financial monitoring, and transfer information about them to authorized state bodies.
• Store data on the results of financial monitoring and due diligence in case the information is needed by government agencies. The data must be retained for 5 years after the termination of the business relationship with the client or the completion of a one-time financial transaction.

As we wrote above, specially authorized SPFMs can carry out simplified financial monitoring. They do not need to keep a register of transactions, store data archives and monitor client activities on an ongoing basis. In addition, lawyers, lawyers and notaries have the right not to share information about a client with the State Financial Monitoring Service if they act as defenders or representatives in court or in pre-trial settlements.

List of documents: what exactly SPFM requests from clients​

The data about the client is needed by the subjects of financial monitoring in order to carry out identification, verification, and also to understand who the final beneficiary is.

Identification and verification is carried out before the start of cooperation. To do this, individuals are usually asked for passport data, TIN, contacts, information about where the person lives / is registered. Individual entrepreneurs must also provide a registration number and date of registration in the State Register and bank account details.

In order to pass the KYC check, legal entities need to be informed: company name, location, registration number in the State Register and the date of registration, bank details, an extract from the State Register (USR), ownership structure. In addition, in order to identify the ultimate beneficiary, the SPFM can use not only data from the Register and the structure, but also information from other documents, official and unofficial sources.

As for the ultimate beneficiaries, by July 11, 2022, the business must submit data on the ownership structure and beneficial owners to the state registrar. After the registrar is convinced that the data is reliable, the information will be entered into the USR. If the SPFM during the client check notices that the data provided does not match the information in the State Register, then the SPFM will have to report this to the State Financial Monitoring Service.

Financial monitoring when connecting online payments​

Service providers for accepting online payments are also SPFMs with their own internal financial monitoring service. When a business decides to connect to such a payment service, then a mandatory step is to go through the financial monetary system. To do this, the provider requests a package of documents from the future client.

Individual entrepreneur has a copy of the passport / ID and TIN, a certificate of opening an account, an extract from the USR.

A legal entity needs to collect the following documents:

• Copies of passport / ID-card and TIN of all officials with the right to sign.
• Help on opening a bank account.
• Extract from the USR or certificate of state registration of a legal entity.
• A copy of the statute, minutes and order on the appointment of the head.
• Ownership structure.

Also, any merchant must fill out a financial monitoring questionnaire, undergo video verification and describe what the company or he does as an individual entrepreneur.

Let's summarize all of the above.

Financial monitoring affects both citizens and businesses. The ordinary payer is faced with financial monetary measures on rare occasions. Basically, when he makes large purchases or conducts cash transactions that exceed UAH 5,000. And everyday transactions, like payments in stores, paying for communal services or transfers from card to card, do not raise questions for SPFM.

Business, on the other hand, has to deal with this procedure more often. In addition to the fact that a legal entity can fall under financial monitoring, it can also act as a checking party - SPFM. In this case, the company needs to establish an internal financial monitoring service, check its clients, track risky and suspicious transactions, and report them to the State Financial Monitoring Service.

Finmon can sometimes cause inconvenience to both businesses and citizens. But at the same time, you need to understand that financial monitoring of legal entities, individuals and non-profit organizations is a necessary control tool that is used throughout the civilized world. It assists in the fight against corruption and money laundering, which generally protects the financial system and makes it more transparent.