legislation has caused considerable concern in the domestic and international law enforcement community, which over the last few years concluded that significant amounts of illicit funds from Ukraine were deposited into financial institutions in the Commonwealth of Independent States, the Middle East, the United States, Western, Central and Eastern Europe, and numerous off-shore zones. The lack of enforcement efforts by Ukrainian authorities to combat money-laundering compelled representatives from the world’s 12 largest banks in October 2000 to place Ukraine (and the Russian Federation) first among countries transferring dirty money abroad. More importantly, Ukraine may be ‘black-listed’ by the Financial Action Task Force on Money-laundering (FATF), an inter-governmental body that develops and promotes policies to combat money-laundering, in June 2001 for failing to implement money-laundering legislation that meets international standards. The designation of Ukraine as a “non-cooperative” jurisdiction by the FATF would result in immediate censure from international regulatory bodies, and curtail banking transactions with Western financial institutions.
The Ukrainian Ministry of Internal Affairs recently estimated that 60,000 criminal groups are involved in the smuggling of narcotics, women and arms, fraud schemes, and tax evasion. The Internal Affairs Ministry also concluded that these criminal groups have laundered over $100 billion through global financial institutions since Ukraine gained independence in late 1991. The two basic methods employed in Ukraine to launder money are anonymous bank accounts, which frequently mix legal and illegal proceeds, and ‘front’ companies, which are opened with stolen passports, and launder money through off-shore zones, such as Antigua, the Cayman Islands, and the Republic of Nauru. The laundered money may return to Ukraine for the purchase of real estate and state-owned firms, or the illicit monies are transferred through correspondent bank accounts and remains abroad.
The laundering of legal and illegal monies has been facilitated by the failure of Ukrainian regulators and law enforcement agencies to carefully monitor the financial sector. For instance, the decade-old banking system in Ukraine remains largely unregulated, and each bank enforces its own set of regulations. The enforcement of financial regulations has also been hampered by overlapping portfolios of law enforcement bodies that combat money-laundering, such as the Tax Police, the Ministry of Internal Affairs and the State Security Service. The agencies rarely share information, and view one another as competitors, rather than allies in the fight against money laundering. There is a coordination committee, headed by the General Prosecutors Office, which oversees the formation of inter-agency task forces, on a case-by-case basis, to investigate suspected acts of money laundering. The sporadic meetings of the coordination committee produce task forces that lack experience and training in cooperative ventures.
Ukraine also remains vulnerable to money-laundering schemes, because of significant deficiencies in the legal, financial, and law enforcement sectors. The legal deficiencies could be largely remedied by the passage of the draft of the comprehensive money-laundering legislation by the Rada. The draft legislation would establish a wide-range of predicate offenses related to money-laundering, clarify existing legislation, impose penalties, including fines and imprisonment, for individuals who violate money-laundering laws, and require financial institutions to enforce stringent customer identification provisions, and record-keeping requirements.
The proposed legislation would also limit banking confidentiality practices, sanction banks that fail to report unusual or suspicious transactions, and compel financial institutions to cooperate in investigations launched by the Ukrainian regulatory authorities. Finally, the legislation would bolster law enforcement efforts by mandating the formation of a financial intelligence unit to assist in the investigation of money-laundering offenses.
The Rada must quickly mandate the conversion of existing anonymous accounts into accounts subject to customer identification requirements, and require clear standards for verification of beneficial ownership when an account is opened. The passage of the proposed money-laundering legislation by the Rada would limit capital flight, and meet international standards for combating money-laundering. But the efforts of the enforcement agencies will be undermined without close co-operation from financial regulators. The financial sector, largely overseen by the National Bank of Ukraine, must pass regulations that would apply stricter controls on the licensing of banks, and exchange houses. The financial sector must also introduce a licensing regime for the thousands of unregulated casinos that exist throughout Ukraine, and eliminate the dozens of “conversion centers,” which have currency-exchange services, and transfer illicit funds that cannot be traced by regulators. Finally, regulatory bodies must introduce an internal reporting system that will identify financial institutions that eschew international banking and accounting practices.
Regrettably, recent economic difficulties, and political scandals have significantly reduced efforts calling for financial reform efforts in Ukraine. This lack of attention to money-laundering activities has permitted billions of dollars in income tax revenues to be sent to bank accounts outside of Ukraine.
The loss of tax revenue has limited the amount of money available for domestic spending and reduced funding for social welfare programs and government assistance to the agricultural and industrial sectors. The loss of tax revenues will only abate after officials establish a clear timetable for the passage and implementation of money-laundering legislation. The amendments to financial legislation must also be accompanied by broad political support from high-ranking officials.
The government can demonstrate political will to combat money-laundering by immediately passing legislation and adequately funding and staffing the financial intelligence unit that will investigate suspicious financial transactions. If compliance with international standards for combating money-laundering is not soon met by Ukraine, Western organizations, such as the FATF with a membership that includes the major financial center countries of Europe, North and South America, and Asia, will identify Ukraine as a “noncooperative jurisdiction,” and reduce or eliminate business transactions with Ukrainian financial institutions.
Trifin J. Roule, a research fellow at the Graduate School of Public and International Affairs at the University of Pittsburgh, is project manager for a three-year study analyzing money-laundering efforts in more than 60 countries.
