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Cablegate: Ukraine: 2009 International Narcotics Control Strategy

Published: Thu 10 Dec 2009 10:58 AM
VZCZCXRO2443
RR RUEHDBU RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHKV #2122/01 3441058
ZNR UUUUU ZZH
R 101058Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8942
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
UNCLAS SECTION 01 OF 05 KYIV 002122
SIPDIS
JUSTICE FOR AFMLS, OIA, AND OPDAT
TREASURY FOR FINCEN
STATE FOR EUR/UMB, EEB, INL, AND SCT
E.O. 12958: N/A
TAGS: EFIN KCRM KTFN SNAR UP
SUBJECT: UKRAINE: 2009 INTERNATIONAL NARCOTICS CONTROL STRATEGY
REPORT
1. (U) Corruption, organized crime, prostitution, smuggling, tax
evasion, and trafficking in persons, drugs and arms continue to be
sources of laundered funds in Ukraine. As of November 1, 2009,
Ukraine has 185 licensed banks, five of which are state-owned. There
are no offshore financial centers or facilities under Ukraine's
jurisdiction.
2. (U) In January 2001, the Government of Ukraine (GOU) enacted the
"Act on Banks and Banking Activities," which introduced some
anti-money laundering (AML) requirements for banking institutions.
The Act prohibits banks from opening accounts for anonymous persons,
requires the reporting of large transactions and suspicious
transactions to state authorities, and provides for the lifting of
bank secrecy pursuant to an order of a court, prosecutor, or
specific state body. In August 2001, the President signed the "Law
on Financial Services and State Regulation of the Market of
Financial Services." This law establishes regulatory control over
nonbank financial institutions that manage insurance, pension
accounts, financial loans, or "any other financial services
involving savings and money from individuals." The law provides
definitions for "financial institutions" and "services," imposes
record keeping requirements on obligated entities, and identifies
the responsibilities of regulatory agencies. The law establishes the
State Commission on Regulation of Financial Services Markets (SCFM),
which, along with the National Bank of Ukraine (NBU) and the State
Commission on Securities and the Stock Exchange, has responsibility
for regulating financial services markets.
3. (U) Ukraine's AML and anti-financing of terrorism (AFT) regime
has long been the subject of international scrutiny and criticism.
The Financial Action Task Force (FATF) placed Ukraine on the list of
non-cooperating countries and territories (NCCT) in September 2001.
Following substantial Ukrainian efforts to adopt appropriate
legislation and institute an enforcement regime, FATF removed
Ukraine from all monitoring in 2006. Since that time, however,
Ukraine has remained subject to review by the Council of Europe's
Select Committee of Experts on the Evaluation of Anti-Money
Laundering Measures and the Financing of Terrorism (MONEYVAL), a
FATF-style regional body (FSRB).
4. (U) In March 2009, MONEYVAL issued a Mutual Evaluation Report,
based on its Round III Evaluation of Ukraine's AML and AFT regime.
That Report was not favorable. It scrutinized Ukraine's level of
compliance as to each of the forty plus nine FATF recommendations,
and found partial or no compliance as to 33 of them. Also in 2009,
FATF's International Cooperation and Review Group (ICRG) included
Ukraine among 39 countries worldwide, and 12 countries in Europe,
whose AML and AFT regimes would be subjected to "prima facie" review
by the ICRG. In October 2009, the ICRG concluded that, because of
continuing deficiencies, Ukraine would be one of 25 countries whose
AML and AFT regimes would be subjected to additional "targeted
review" by the ICRG. That targeted review is expected to continue at
least through the spring of 2010, and should provide substantial
impetus toward continued improvement.
5. (U) The Criminal Code of Ukraine has separate provisions
criminalizing drug-related and nondrug-related money laundering.
Amendments to the Code adopted in January 2003 include willful
blindness provisions and expand the scope of predicate crimes for
money laundering to include any action punishable under the Criminal
Code with imprisonment of three years or more, excluding certain
specified actions. Amendments added in 2008 criminalized insider
trading, although the text of those amendments still needs
improvement. Additional draft amendments to the Criminal Code and
Criminal Procedure Codes remain under review in Parliament.
6. (U) In November 2002, Ukraine enacted an AML package entitled "On
Prevention and Counteraction of the Legalization (Laundering) of the
Proceeds of Crime" (the Basic AML Law). The Basic AML Law
establishes a two-tier system of financial monitoring, consisting of
initial financial monitoring (i.e., obligated entities that carry
out financial transactions) and state financial monitoring (i.e.,
government agencies charged with regulation and supervision of the
financial institutions). Overall regulatory authority is vested in
the SCFM.
7. (U) To correct deficiencies in the Basic AML Law, legislation
enacted in February 2003 requires banks and other financial service
providers to implement AML compliance programs, conduct due
diligence to identify beneficial account owners prior to opening an
account or conducting certain transactions, report suspicious
transactions to the SCFM and maintain records on suspicious
transactions and the people carrying them out for a period of five
years. The legislation includes a "safe harbor" provision that
protects reporting institutions from liability for cooperating with
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law enforcement agencies. In August 2003 the SCFM established the
State Register of financial institutions, and by January 2009 the
State Register contained information on 2,016 nonbank financial
institutions.
8. (U) On November 6, 2009, Parliament passed significant amendments
to the Basic AML law, aimed at bringing Ukraine's regime into
compliance with FATF's revised Forty plus Nine recommendations.
However, the President vetoed the bill on December 8 in response to
pressure from the financial community, which complained of onerous
additional reporting requirements. The veto is a disappointment, as
the passage of these amendments would have represented a significant
step forward for Ukraine, particularly since different forms of the
legislation had been pending in Parliament since 2003. It is
possible that the Parliament will override the veto before the end
of 2009; alternatively, the amendments may be reintroduced in the
Parliament some time after Ukraine's January Presidential
elections.
9. (U) The main thrust of the new amendments was to broaden
substantially the types of entities and professionals that are
subject to financial monitoring, adding lawyers and law firms, real
estate firms, auditors, notaries, traders in precious metals, post
offices (for money transfers), lottery companies, consulting
companies and other professionals. An additional important
innovation in the vetoed law was that it provided that Politically
Exposed Persons (PEPs) would be subject to financial monitoring, and
that PEPs include not only foreign but also Ukrainian officials.
PEPs would include the president, prime minister, ministers, members
of Parliament, public officials, law enforcement officials and
others. There were also new mechanisms empowering the FIU to
temporarily suspend suspicious transactions that appear potentially
tied to money laundering.
10. (U) In sum, the law would take some significant steps toward
bringing Ukraine's AML and AFT regime into compliance with the FATF
forty plus nine recommendations. However, substantial deficiencies
would still remain in Ukraine's regime. Some such deficiencies are
legislative such as gaps in laws pertaining to asset forfeiture,
corporate criminal liability and insider trading. Other deficiencies
include the continued failure of the Prosecutor General's Office
(PGO) and the investigative agencies to cooperate effectively, thus
undermining the effective use of criminal prosecutions.
11. (U) In 2004, authorities reduced the monetary threshold for
compulsory financial monitoring from Ukrainian hryvnias (UAH)
300,000 (approximately $40,000) for cashless payments and UAH
100,000 (approximately $13,333) for cash payments, to UAH 80,000
(approximately $10,666) for payments using either method. The
compulsory reporting threshold exists only if the transaction also
meets one or more suspicious activity indicators as set forth by
law. Any transaction suspected of being connected to AFT must be
reported to appropriate authorities immediately.
12. (U) Beginning in May 2008, as a result of amendments to the
"Resolution on the Adoption of Instructions Regarding Movement of
Currency, Precious Metals, Payment Documents, and Other Banking
Documents over the Customs Border of Ukraine," travelers must
declare cross-border transportation of cash sums exceeding Euro
10,000, and name the origin of such funds. Cash smuggling is
substantial in Ukraine, although it is reportedly more related to
unauthorized capital flight than to criminal proceeds or terrorist
funding.
13. (U) In 2005, the GOU sought to combat smuggling and corruption
by reducing import duties, introducing new procedures for the
Customs Service, and implementing transparent procedures for the
privatization of state enterprises. Ukraine's 2005 budget eliminated
the tax and customs duty privileges available in 11 Special Economic
Zones (SEZs) and nine Priority Development Territories (PDTs) that
operated within Ukraine, which had been associated with rampant
evasion of customs duties and taxes. Several draft laws have been
registered with Parliament to restore the tax and customs privileges
in the SEZs; however, none of them was given serious consideration.
14. (U) Under a January 2006 amendment (Law 3163-V) to Ukraine's AML
laws, the entities obligated to conduct initial financial monitoring
must be able to provide proof they are fulfilling all Know Your
Customer (KYC) identification requirements. The law also grants
state agencies enhanced authority to exchange information
internationally, improves rules on bank organization, and implements
a screening requirement at the level of financial institutions. On
September 14, 2006, Ukraine enacted amendments to the "Law on Banks
and Banking" that require all banks to be formed as open joint-stock
companies or as cooperatives. This measure strengthens disclosure
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requirements on the identity of the beneficial owners of banks.
These amendments apply to all newly formed banks and provide a
three-year period for existing banks to comply. 173 of Ukraine's 185
licensed banks are joint stock companies.
15. (U) The SCFM, Ukraine's FIU, was established in December 2001 by
the Presidential Decree "Concerning the Establishment of a Financial
Monitoring Department." The SCFM became operational in June 2003. At
that time, the SCFM was an independent authority administratively
subordinate to the Ministry of Finance and the sole agency
authorized to receive and analyze financial information from
financial institutions. Effective January 1, 2005, Ukraine's
Parliament granted the SCFM the status of a central executive
agency, subordinate to the Cabinet of Ministers rather than to the
Ministry of Finance. The Basic AML Law specifically states the SCFM
is to operate free from political influences. The director of the
SCFM was replaced in February 2008, shortly after a new government
came to power, but observers in Ukraine did not conclude that step
was primarily politically motivated.
16. (U) As of December 1, 2009, the SCFM has 22 local branches in
Ukraine's regions. The SCFM is an administrative agency with no
investigative or arrest authority. It is authorized to collect
suspicious transaction reports (STRs) and analyze suspicious
transactions, including those related to terrorist financing, and to
transfer financial intelligence information to competent law
enforcement authorities for investigation. The SCFM identifies
possible cases for investigation by the Ministry of Interior, Tax
Agency, State Security Agency and PGO. The SCFM processes, analyzes,
and develops cases reportedly to the point of establishing the
equivalent of probable cause prior to referral to law enforcement.
The SCFM also has the authority to approve interagency agreements
and exchange intelligence on financial transactions involving money
laundering or terrorist financing with other FIUs. As of December
2009, the SCFM has signed memoranda of understanding (MOUs) with the
FIUs of 46 countries. It has become a regional leader with regard to
the volume of case information exchanged with counterpart FIUs. In
July, 2009, Ukraine amended the law on Banks and Banking to permit
international exchange of information between the National Bank and
respective regulators of other countries for purposes of combating
money laundering.
17. (U) In 2008, the SCFM received 1,083,461 transaction reports,
which include STRs and automatic threshold reports. Ninety-seven
percent of the transaction reports were submitted by banks, and all
came in an electronic format. The SCFM designated approximately 14
percent of these for "active research" and sent 641 separate cases
to law enforcement agencies. Of these cases, the SCFM referred 30 to
the PGO, 207 to the State Tax Administration, 175 to the Ministry
for Internal Affairs, and 229 to the State Security Service of
Ukraine. The volume of funds implicated in the cases is UAH 28.8
billion (USD 3.7 billion). As a result of subsequent investigation
of these cases, law enforcement agencies initiated 354 formal
criminal investigations, and submitted indictments in 117 of those
cases (the number tripled over 2007). Between 2003 and 2008, 950
formal criminal investigations were opened, and indictments
submitted in 176 of these cases. Convictions have been obtained in
104 of these cases. Although the reporting system is effective and
the SCFM has generated a substantial number of cases, it did not
lead to a significant number of convictions until 2007. From
2003-2006 there were convictions in only three cases, while in 2007,
the number of convictions jumped to 25, followed by 76 convictions
in 2008.
18. (U) Many observers believe the low prosecution and conviction
rates are caused by reluctance at the PGO to follow up on the cases
referred by the SCFM and by a lack of prosecutorial specialization.
Local prosecutors may close money laundering investigations and
cases prematurely or arbitrarily, possibly because of lack of
sufficient manpower or resources, corruption, a weak understanding
of money laundering crimes, or a belief that other types of crimes
should take priority over money laundering.
19. (U) Ukraine has been working with the European Commission and
Council of Europe to increase its capacity to fight money laundering
and terrorist financing since 2003. A long-term Council of Europe
project, which ran through April 2009, focused on three areas:
getting Ukraine's legislative framework up to international
standards; enhancing the human capacities of key institutions and
agencies; and developing the organizational and technical
infrastructure of the system.
20. (U) Ukraine has a general asset forfeiture regime, but this is
largely an inappropriate and ineffective relic of Soviet-era
legislation. Article 59 of the Ukrainian Criminal Code provides for
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the mandatory seizure of all or a part of the property of any person
convicted for grave or particularly grave offenses, as defined in
the code, regardless of whether this property bore any relation to
the crime of conviction. With respect to money laundering, Article
209 allows for the forfeiture of criminally obtained money and other
property. However, Ukraine lacks any functional regime for locating
or seizing forfeitable assets. In particular, Ukraine lacks
legislation allowing in ram forfeiture or the seizure of corporate
assets, has no specialized asset forfeiture prosecutors or
officials, and lacks any entity to administer forfeited assets. The
GOU has drafted legislation aimed at improving the asset forfeiture
regime and bringing it into compliance with international standards.
That legislation was submitted to Parliament in January 2009 but has
not yet been acted upon.
21. (U) In December 2003, the Cabinet of Ministers issued Decree No.
1896, establishing a Unified State Information System of Prevention
and Counteraction of Money Laundering and Terrorism Financing. The
system provides the SCFM with unobstructed access to the databases
of 12 ministries and agencies, including the Ministry of Internal
Affairs, Ministry of Economy, Ministry of Finance, State Tax
Administration, State Security Service, State Customs
Administration, State Property Fund, State Statistics
Administration, Border Guard Service, Securities Commission,
Financial Services Commission, and Control and Revision Department.
The system became fully operational in December 2006. The SCFM
leadership states it has unfettered access to all relevant
information in the data bases of the aforementioned agencies.
22. (U) The SCFM acknowledges the existence and use of alternative
remittance systems in Ukraine, and SCFM personnel have attended
seminars and exchanged information about such systems. In 2007, the
Security Service of Ukraine published a report signaling that hawala
might be on the rise in Ukraine due to a large number of Ukrainians
working abroad and the growth of foreign communities in Ukraine. The
SCFM and security agencies monitor charitable organizations and
other nonprofit entities that might be used to finance terrorism.
23. (U) Law 3163-IV, which entered into force on January 1, 2006,
enhances Ukraine's ability to exchange information internationally
and places greater obligations on banks to combat terrorist
financing. This law requires banks to adopt procedures to screen
parties to all transactions using a SCFM-issued list of
beneficiaries of, or parties to, terrorist financing. Banks must
freeze assets for two days and immediately inform the FIU and law
enforcement bodies whenever a party to a transaction appears on the
list. The FIU can extend the freeze to five days. Banks developed
their screening capabilities subsequent to implementation of the
law. In October 2006, the Cabinet of Ministers approved the SCFM's
list, drawn from three sources: the United Nations 1267 Sanctions
Committee's consolidated list; information from the Ukrainian
Security Service on individuals and entities suspected of violating
article 258 of the Ukrainian Criminal Code concerning terrorism; and
the lists compiled by those countries that have bilateral agreements
with Ukraine on mutual recognition of terrorist designations. In
September 2006, Parliament enacted revisions to Article 258 of the
Criminal Code, adding Article 258-4 which explicitly criminalizes
terrorist financing. The revised text mandates imprisonment from
three to eight years for financing, material provision, or provision
of arms with the aim of supporting terrorism. The revisions also
amend the criminal procedure code to empower the State Security
Service (U) with primary responsibility for investigating terrorist
financing.
24. (U) The GOU has cooperated with U.S. efforts to track and freeze
the financial assets of terrorists and terrorist organizations. The
NBU, the SCFM, the Securities Exchange Commission, the State Tax
Administration, the U, and the Ministries of Finance, Internal
Affairs, and Foreign Affairs are informed about the U.S. designation
of suspected terrorists and terrorist organizations under Executive
Order 13224 and other U.S. authorities. Through their regulatory
agencies, banks and nonbank financial services also receive these
U.S. designations and are instructed to report any transactions
involving designated individuals or entities.
25. (U) The U.S.-Ukraine Treaty on Mutual Legal Assistance in
Criminal Matters was signed in 1998 and entered into force in
February 2001. A bilateral Convention for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income and Capital, which provides for the exchange of
information in administrative, civil, and criminal matters, is also
in force.
26. (U) Ukraine is a party to the 1988 UN Drug Convention, the UN
Convention for the Suppression of the Financing of Terrorism, and
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the UN Convention against Transnational Organized Crime. Ukraine has
signed, but not yet ratified, the UN Convention against Corruption.
Ukraine is a member of MONEYVAL and also an observer and technical
assistance donor to the Eurasian Group on Combating Money Laundering
and the Financing of Terrorism (EAG), another FSRB. The SCFM is a
member of the Egmont Group. It hosted working level meetings of the
Egmont Group in Ukraine in October 2007.
27. (U) Over the years, Ukraine has strengthened and clarified its
legislation and, with the SCFM, the NBU, and other actors in the
financial and legal sectors, the GOU has also established a
comprehensive AML monitoring regime. However, Ukraine's ability to
implement this regime through consistent successful criminal
prosecutions has yet to be proven. Ukraine should adopt draft
legislation to bring its AML/AFT regime into closer accordance with
both the language and the intent of FATF and international
standards. The recent veto of amendments that would do just this is
unfortunate, but still may be overcome in the near future. The GOU
also should consider carefully the consequences of reestablishing
tax and customs privileges that have been abused in the past. The
GOU should also take steps to improve implementation of its AML/AFT
regime. The PGO should address the deficiencies of that office, such
as a lack of specialization and limited professional experience with
money laundering. Law enforcement agencies should give higher
priority to investigating and prosecuting money laundering cases.
Both law enforcement officers and the judiciary need a better
understanding of the theoretical and practical aspects of
investigating and prosecuting money laundering cases. Ukraine also
should ratify the UN Convention against Corruption, and more
aggressively address public corruption by investigating, prosecuting
and convicting corrupt public officials.
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