Ihor Cherkasky, Head of the State Financial Monitoring Service of Ukraine
The financial system must comply with global standards, otherwise economic growth is impossible
01.03.2018 21:59

One of the most severe challenges for successful European development of Ukraine is corruption in the authorities and the spread of such crimes as money laundering and terrorist financing.

There has recently been more information in the media about the State Financial Monitoring Service of Ukraine and its participation in the fight against money laundering and terrorist financing.

First of all, this is related to the first National Risk Assessment, blocking of suspicious financial transactions of the former regime in the amount of about $1.5 billion, which had been confiscated to the state budget of Ukraine.

However, the last important news was the approval of the Mutual Evaluation Report of Ukraine within the 5th round of mutual evaluation by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL).

The Report was published at the end of January this year, and the coordination of the entire work on the evaluation has been provided by the State Financial Monitoring Service of Ukraine.

We decided to discuss these topics in more detail with Ihor Cherkasky, Head of the Financial Intelligence Service of Ukraine – the State Financial Monitoring Service of Ukraine.

Mr. Head, first of all, let’s speak about what caused the greatest interest, namely the effective completion of the case on confiscation of funds equivalent to $1.5 billion.

Yes, these funds have been detected and blocked by the State Financial Monitoring Service of Ukraine.

Could you tell more about the process of financial investigation?

It has been the largest financial investigation of money laundering, theft and misappropriation of state assets by Yanukovych and related persons for all times.

This investigation included processing of operational data from various information sources and databases, monitoring of cross-border and domestic money flows, identification of the IP addresses of participants of the schemes, and active cooperation with foreign counterparts.

We also took into account a strong legal lobby for money laundering schemes.

 As far as I know, the most liquid state financial instruments have been used to launder these funds…

 Exactly so. Bonds of domestic state loan were used. In order to legalize, a part of the misappropriated funds was used to purchase highly liquid bonds of domestic state loan issued in U.S. dollars, and the remaining funds were placed on bank deposit.

We have monitored the links between former officials and non-resident companies. It became clear that these “investments” were nothing else but funds which had been earlier withdrawn from Ukraine by the same former officials. They have been then introduced to Ukraine in order to obtain super-profitable and high-income revenue from the state.

During the financial investigation it has been confirmed that more than a thousand economic entities have been involved in this scheme.

Speaking about the financial professional environment, one of the top news for today is the results of the 5th round of mutual evaluation of Ukraine by MONEYVAL. What does such an international evaluation mean for our state?

I would like to start with the fact that today Ukraine has a quite long history of relations with MONEYVAL, the cooperation with which is an important component of European integration.

In fact, the main goal of MONEYVAL is carrying out mutual evaluations of countries in terms of technical implementation of FATF Standards as well as the effectiveness of operation of the national financial monitoring systems.

The legal, financial and law enforcement spheres are evaluated. In turn, a final goal is the ability of the Council of Europe member states to have the effective AML/CFT systems and their compliance with actual international standards.

Therefore, the results of such evaluations have fundamental implications for each state.

What is the work of Ukraine in MONEYVAL?

Experts from Ukraine, including the State Financial Monitoring Service of Ukraine experts, evaluate other countries, provide their conclusions, comments and proposals.

Mutual evaluation reports are considered at the MONEYVAL plenary meetings. Several times a year the delegation of Ukraine headed by the State Financial Monitoring Service of Ukraine takes part in these meetings.

Moreover, MONEYVAL is a member of FATF and this provides Ukraine with a possibility to participate in the work of FATF. And this is the most authoritative international organization in this sphere.

Due to this mechanism, Ukraine is aware of all global AML/CFT trends.   

Let’s speak about the evaluation of Ukraine in more detail. How can you comment on the situation with MONEYVAL’s evaluations as a whole and what did we expect from the 5th round of mutual evaluation?

 For all time of our cooperation with MONEYVAL, three rounds of mutual evaluation of Ukraine have been conducted.

The 4th round of mutual evaluation which had been scheduled for the beginning of 2014 was not conducted due to the Revolution of Dignity.

Hence, Ukraine was one of the first countries, which has been evaluated within the 5th round of mutual evaluation. This round mutual evaluation is unique. The preliminary evaluations had been focused solely on verification of technical compliance of the national legislation with FATF requirements, while the 5th round of mutual evaluation first of all provides for verification of the effectiveness of the AML/CFT system, as well as the evaluation of technical compliance.

In this regard, a priority was to pay enhanced attention to the effectiveness issues, since undervaluation could have negative consequences.

Please clarify what you mean.

The results of the evaluations affect the monitoring level of the evaluated country by MONEYVAL and FATF. And the risk of being included in the FATF “black” or “gray” list can never be ruled out, if the totality of ratings is negative.

Let me remind you that just under the results of the preliminary MONEYVAL’s evaluations, Ukraine has been repeatedly included in the FATF sanctions lists. In particular, it was included in the “black” list in 2001 (with further economic sanctions) and in the “gray” list in 2010.

Even after MONEYVAL’s 5th round of mutual evaluation, such member countries of the Council of Europe as Serbia, Hungary and the Isle of Man were included in the FATF list, but not Ukraine.

How exactly was this evaluation and what was your mission?

This round of evaluation started in August 2016, when Ukraine (and in fact it was the State Financial Monitoring Service of Ukraine) received so-called questionnaires with specific questions, examples, clarifications of statistical data from MONEYVAL.

It is a work on thousands and thousands of pages of not only analytical material, but also the translation into English and vice versa.

The State Financial Monitoring Service of Ukraine has organized about 40 interagency methodological meetings in order to assist all state authorities and the private sector to worthily present our achievements.

Please tell us about the on-site visit itself, how took it place in Ukraine.

The on-site visit of MONEYVAL’s evaluation team took place in Ukraine from March 23 to April 8, 2017 which lasted more than two weeks. Ukraine has been evaluated by a team of 11 evaluators from around the world.

The evaluation team was divided into two groups. One group worked with representatives of state authorities, law enforcement, regulatory authorities and others. The other group worked with representatives of the private sector and public organizations. They discussed the issues of the effective and practical implementation of FATF Recommendations.

What was the format of this inspection?

On the one hand, it looked like interviewing the Ukrainian authorities on combating money laundering, but in fact it was a full value international audit which included verification of the adequacy of the information provided, comparing different administrative and statistical data, cross-questioning, and other things that are inherent for this kind of evaluation. That is, it was really deep work.

What was after the on-site visit?

 After the on-site visit, the State Financial Monitoring Service of Ukraine has participated in preparation of the Mutual Evaluation Report. We have provided hundreds of comments to additional requests of the evaluation team. Subsequently, we have analyzed and provided detailed comments to three successively prepared draft Reports as well as prepared information to the requests of other countries regarding the draft Report. It was huge work.

And then the Report was approved?

Not at all. The approval of the Report was preceded by a preliminary upholding by Ukraine of its draft.

To this end, in October last year, the "face to face" meetings between the Ukrainian delegation and the evaluation team, as well as MONEYVAL Secretariat have been held at the Council of Europe office.

The evaluation team has been provided with additional information and statistics.

The draft Report has been discussed in detail and prior adjusting of Ukraine's ratings on 40 FATF Recommendations and the effectiveness has been carried out.

Already after this, the draft Report has firstly been submitted for consideration to the MONEYVAL Working Group on Evaluations, and then to the MONEYVAL plenary meeting.

From your point of view it looks like a very difficult and consistent process...

This is true. But the more valuable conclusions and recommendations we have received. MONEYVAL has approved a verified and impartial report, for which I am grateful to our international partners.

What was memorized during the MONEYVAL plenary week where the Report of Ukraine was approved?

It was December last year, the 55th MONEYVAL plenary meeting. The work of the Ukrainian delegation in Strasbourg was very busy.

We managed to join all into a single team, namely representatives of the National Anti-Corruption Bureau of Ukraine, the Prosecutor General's Office of Ukraine, the Security Service of Ukraine, the National Bank of Ukraine, the State Fiscal Service of Ukraine and others. For the first time for many years, the delegation included representatives of the Secretariat of the Cabinet of Ministers of Ukraine and the Ministry of Finance of Ukraine. All have worked together to achieve a result.

Discussions focused on the application of the mechanism of confiscation, the National Risk Assessment, international cooperation, measures to prevent the financing of weapons of mass destruction.

On December 7, 2017, the Report had been approved by MONEYVAL and on January 30, 2018 it was published on its website.

What priority tasks did you set for yourself in this process?

Our main task was to do everything in order to prevent Ukraine from being sanctioned by MONEYVAL, and later by FATF.

Because the inclusion of our country, which is actually in a state of war, in the so-called FATF “gray” list, would significantly undermine its reputation. The value of this issue was extremely high.

We were optimistic and purposefully vindicated every comment to every critical conclusion of MONEYVAL member countries in the draft Report.

Do you think that you have managed to achieve the required result?

We are satisfied with this result. The MONEYVAL plenary meeting implicitly confirmed that Ukraine is a reliable AML/CFT jurisdiction. Ukraine is recognized as a country that does not require special control measures or, in other words, “beacons” by MONEYVAL and FATF.

However, the approval of the Report is only the beginning of those structural changes that the State Financial Monitoring Service of Ukraine will propose to reform the national financial monitoring system, including taking into account the recommendations of MONEYVAL.

What does the State Financial Monitoring Service of Ukraine plan as a result of the evaluation?

First of all, we need to focus on areas which have been considered as ineffective. These include, in particular, the law enforcement and judicial system, where the improvement of the work on investigating and prosecuting money laundering and predicate offences is required. Attention should also be paid to the issue of arrest and confiscation of criminal proceeds, supervision of representatives of non-financial markets, and the establishment of a mechanism for verification of beneficial owners.

It is worth focusing on counteracting to terrorist financing, communicating of the private and non-profit sectors on the appropriate risks.

We plan to propose a concept for comprehensive and continuous administrative reporting in the financial monitoring sphere. This is very hard, but necessary work.

In general, the State Financial Monitoring Service of Ukraine began the preparation of an appropriate Action Plan as a result of the 5th round of mutual evaluation.

Could you outline the most dangerous challenges related to money laundering and terrorist financing?

The State Financial Monitoring Service of Ukraine is a national financial intelligence unit. We detect schemes of money laundering obtained from corruption and other crimes, as a result of shadow economic activity, and resources intended to finance terrorism. We investigate money laundering by former high-ranking officials, identify individuals (and their financial transactions) that may be related to the financing of terrorism or separatism. Our main goal is to disrupt money laundering schemes and, even more, to prevent them from being formed.

What are the most widespread methods for money laundering in our country?

There are a lot of methods which include embezzlement of budget funds and other state assets; activity of "conversion" centers and fictitious enterprises; illegal transfer and movement of funds abroad; transactions with securities and bonds; cybercrimes and more.

Was this information made public?

Annually we publish typologies that focus on actual schemes for money laundering and terrorist financing.

In 2016 we published a collection of typologies for 2014-2016, that is, since the Revolution of Dignity.

But there is secrecy of financial monitoring. Is there no contradiction?

Of course, almost all information with which the State Financial Monitoring Service of Ukraine works is restricted. We receive this information from the financial and non-financial sector, law enforcement and intelligence authorities, state regulators and other state authorities. Add here also the intelligence from foreign FIUs.

However, information on typical schemes and methods for money laundering should be available.

As a rule, what do financial investigations begin with?

Financial investigations begin with reports, which we receive. The initial processing of information is carried out automatically. A direct analysis is performed in the analytical segment of the Unified Information System of Financial Monitoring.

All the received reports are classified in terms of risk and subject to an analysis. As a result, dossiers are being created for financial investigations. Further - the formation of referrals.

The whole process is implemented on a risk-based approach, taking into account international experience.

Could you tell in brief on the performance of the State Financial Monitoring Service of Ukraine in recent years?

Firstly, I would like to start with the fact that in the State Financial Monitoring Service of Ukraine there has been a team of professional specialists who daily make the best efforts to achieve the joint target. This is a serious arsenal.

All of our analysts process more than 50 established dossiers, on the basis of which further financial investigations are carried out. In general, from 2014 till nowadays, the State Financial Monitoring Service of Ukraine has sent to law enforcement authorities more than 2,500 referrals that contain suspicions of money laundering, financing of terrorism or other crimes.

As you understand, this is a big working load.

Secondly, it is very important that the State Financial Monitoring Service of Ukraine managed to maintain its professional ability and independence in making professional decisions. This is an extremely important factor in the work of our organization.

Did this result in certain figures? Could you mention them?

Last year alone we prepared and sent to the law enforcement authorities 712 referrals on suspicion of money laundering and terrorist financing.

The total amount in these referrals is about UAH 60 billion.

These are enormous figures.

And what about investigations of money laundering by former high-ranking officials?

Last year alone we formed 211 referrals on such cases. In these referrals, the total amount of suspicious financial transactions is more than UAH 16 billion.

By the way, this is systematic continuation of work, which started in March 2014. It may be said that confiscation of funds equivalent to $1.5 billion which has earlier been mentioned is a key result of this work.

A few words about counteraction to terrorist financing...

Here we closely cooperate with the Security Service of Ukraine. Last year, almost 70 referrals were formed and sent to the Security Service of Ukraine. This work will be intensified. When we were conducting the first National Risk Assessment, we separately focused on terrorist financing issues and demonstrated its possible consequences.

By the way, with regard to the National Risk Assessment. It is known that this is a modern instrument in the anti-legalization area. How could you comment on the results of the first Risk Assessment?

Every country’s National Risk Assessment is an internal national audit that identifies the risks and threats of money laundering and terrorist financing. The purpose of such an assessment is to reduce and minimize the identified risks.

The first National Risk Assessment Report was prepared at the end of 2016, and then it was published. A lot of information has been processed including statistical information, questionnaires, and various reports. We have also involved international partners in this process. The OSCE took an active part in this process.

And what is the result?

As a result of the National Risk Assessment, 37 diverse risks have been identified. These are risks of corruption, organized crime, high cash flow, fictitious entrepreneurship, terrorism manifestation, ineffective sanction policies, and much more. Then, the government (upon the State Financial Monitoring Service of Ukraine initiative) approved the action plan for minimizing the risks identified.

It is no secret that the efficiency of counteraction to money laundering depends on the quality of interagency coordination and prompt information cooperation. How do you evaluate this cooperation?

The State Financial Monitoring Service of Ukraine is a national coordinator in this area. The AML/CFT Council operates in Ukraine. This is an advisory body of the Government and the State Financial Monitoring Service of Ukraine accompanies its operation.

Since the very beginning, more than a hundred meetings have already been held. We discuss the relevant information and try to solve problem issues promptly. Analytical referrals are required for the National Anti-Corruption Bureau of Ukraine, the Prosecutor General's Office of Ukraine, the Fiscal Service of Ukraine, the Security Service of Ukraine and certainly for the National Police of Ukraine.

By the way, last year alone we transferred more than 100 referrals to the NABU.

As a rule, operative cooperation with law enforcement authorities in fact, is carried out on-line, and working meetings and consultations are held almost daily.

The Cabinet of Ministers annually adopts annual anti-money laundering plans. What is the role of such government documents?

The similar plans have been approved in Ukraine annually since 2002. But we fundamentally changed the philosophy and approach to such planning after the National Risk Assessment.

Since the risk assessment will be updated every three years the decision was made to plan activities following such an assessment on a three-year basis.

The current plan envisages actions for 2017-2019.

In most cases, money laundering and terrorist financing are transnational. Could you tell us more about international cooperation in this area?

When I started to work in March 2014, I determined cooperation with international partners as one of the main priorities.

The detection of large-scale corruption among high-ranking officials, theft of public funds, and their withdrawal abroad after the Revolution of Dignity, required the strengthening of international cooperation.

Since then, we have started serious cooperation with foreign financial intelligence units in the vast majority of countries.

Could you tell us about the successful examples of such cooperation?

I will not go far. Let’s take the case about $1.5 billion, which we have already mentioned.

In this case, we cooperated with the financial intelligence units of the United States, Britain, Latvia, Estonia, Cyprus, Seychelles, Belize, the British Virgin Islands, Panama and other countries.

Especially we were active with the American side, in particular, with the financial intelligence unit (FinCen) and the Federal Bureau of Investigation (FBI). Simultaneously, we have communicated and currently we fruitfully cooperate with the U.S. Embassy in Ukraine. They helped us establish dollar-denominated transactions of non-residents.

The cooperation with the FIU of Latvia was effective, thanks to which the accounts of non-resident companies and the movement of their funds were identified.

In general, today the State Financial Monitoring Service of Ukraine cooperates with 135 foreign financial intelligence units.

Are there any obstacles to the effective functioning of the State Financial Monitoring Service of Ukraine?

It is of the extreme importance for us to maintain and increase skilled staff. However, there is always a risk that employees, first of all, analysts and IT workers can go to the private sector, or anti-corruption bodies that offer significantly higher salaries.

In this way, the proper remuneration of specialists who analyze multi-million transactions and forms referrals is required, otherwise it can affect the level of functioning of the Service.

Last year, this problem was partly solved by amending the state budget and we were able to raise the level of salaries.

Is it the only problem you face?

Not only. Recently, the issue of information provision, updating of the integrated IT solution has become very serious for us.

Please, agree with me that analysts should be provided with modern automated products to process information about financial transactions.

Is it also about the funds?

Unfortunately. In 2003-2008, we created a powerful and unique information system at that time. It provides collection, processing and analysis of information by the State Financial Monitoring Service of Ukraine.

This system has been in service for more than 13 years. However, from 2009 to the last year there have not been any allocations for technical support and upgrades.

The issue moved from place last year. We got serious funding for upgrades. Much has been introduced at the end of last year, but not everything yet implemented.

I hope that in this year, including the support of the EU Anti-Corruption Initiative in Ukraine, we will be able to complete the technical upgrade and move to training our analysts and IT workers of new software products.

A few words about strategic tasks for the future.

We have to think widely. The legislator has determined that the State Financial Monitoring Service of Ukraine is the AML/CFT coordinator. Therefore, I can’t confine myself only by issues of financial intelligence. We should propose ideas for the development of the entire system to the Ministry of Finance of Ukraine and the Government.

What are your plans?

Today, priority is given to the balanced development of all chains of the regulatory, law enforcement and judicial systems in the detection, investigation, sentencing and confiscation of criminal assets. For us, first of all, the issue concerns assets related to money laundering, terrorist financing and predicate offences.

Undoubtedly, the main objective of the financial intelligence unit is always to work to identify and block financial transactions aimed at money laundering or financing of terrorism.

Eventually, there is a strategy for the development of the system until 2020. We must follow it. Conceptually, everything is already defined, and our task is to realize and not to forget about new challenges and risks. MONEYVAL’s evaluation should be a roadmap in this issue. Within the framework of the strategy, we should do everything to comply with the recommendations of the Council of Europe.

To do so, perhaps, legislation needs to be changed? Is it foreseen in the strategy?

We started with the implementation of the EU 4th Directive, which is a priority for implementation in the legislation of Ukraine. We have now the results of MONEYVAL’s evaluation, which also indicate the need of certain changes in legislation.

We will do our best to improve the national legal framework in this direction. We have a concept of the updated AML/CFT Law. I wouldn’t like to characterize its provisions. Let’s wait for the final agreed text of this draft law.

Petro Serhiyenko. Kyiv

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