Criteria for Fictitiousness from the NBU
07.06.2017
A letter from the National Bank of Ukraine (NBU) dated 26.05.2017 No. 25-0008 / 37888 “On Criteria for Identifying Clients Whose Financial Transactions Show Signs of Fictitiousness” was recently published. In the letter, the NBU summarized the results of banking supervision and expressed its view on what signs banks should monitor in clients and, accordingly, what criteria may indicate the fictitiousness of client transactions.
The letter includes an appendix with 15 groups of criteria, some of which are rather questionable in terms of fictitiousness (for example, the main type of activity – non-specialized wholesale trade), and others are quite serious (such as forged documents and false information, e.g., registration of a client under a nominee):
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Criteria for “Fictitiousness” from the NBU |
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1. Main type of activity (Mediation, non-specialized wholesale trade) |
2. Period of existence (Very short, within the tax period) |
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3. Location (Mass registration address, non-presence at the registration address) |
4. Offshore status (The client’s founder is registered in an offshore jurisdiction) |
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5. Changes in activities (Frequent changes in the founding documents, changes in the type of activities, transfer of rights, change of servicing bank after a change of owner / director) |
6. Discrepancy between resources and volume of activities (The client has only a few employees, the director, founder, and accountant are the same person, minimal charter capital, turnover in millions of hryvnias) |
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7. “Schemes” in payments (Funds are quickly “transferred” to other business entities with different payment purposes after being credited, minimal or zero balances in accounts, conducting operations in millions of hryvnias within a few days) |
8. Shared connections (The client shares email addresses, IPs, postal addresses, phone numbers, and/or directors, trusted persons, and beneficial owners with other business entities) |
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9. Negative information (Criminal investigations of economic crimes related to the client, their directors, or representatives of the owners) |
10. Fake documents / negative information (Client registered under a shell person, with fake documents, at a non-existent address, false data in the charter about founders / directors) |
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11. “Artificial creation of charter capital” (Conducted “cyclic” financial operations with repeated gradual transfer of a certain sum of money from account to account of other legal entities with the payment purpose “capital replenishment”) |
12. Status of the director (The director of the client belongs to socially vulnerable groups (pensioners, students, on maternity leave), is under 20 or over 75 years old, registered in the ATO zone or Crimea) |
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13. Granting account management rights to another person (The client grants the right to manage the account to third parties under a power of attorney, not employees/officers) |
14. Significant cash operations (Client conducts operations involving millions of hryvnias not related to the main type of activity, or through card accounts) |
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15. Foreign economic transactions (A newly established company or short period of client activity, advance payments under foreign economic (import) contracts, with open-source information about the non-performance of obligations by the non-resident under other foreign economic contracts, conducting transactions under foreign economic (export-import) contracts on prepayment terms, where no goods were delivered within the deadlines specified in such contracts.) |
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For the sake of fairness, it should be noted that the presence of one or more criteria in a client, according to the NBU, does not indicate the unconditional fictitiousness of their transactions, but serves as a basis for conducting an analysis of the client to confirm or refute the relevant suspicions.
It should be noted that the NBU in the letter urged banks to actively check both new clients, especially at the stage of establishing business relationships, as well as existing ones.
To check and confirm or refute the occurrence of financial transactions containing signs of fictitiousness, banks are recommended to:
- establish cooperation between their structural divisions, involve the bank’s security service if necessary, and conduct checks at the client’s location;
- in case of insufficient information, send inquiries to other banks based on Article 64 of the Law of Ukraine “On Banks and Banking” dated 07.12.2000 No. 2121-III (hereinafter – the Banking Law). At the same time, the NBU emphasized that the exchange of information, as specified in paragraph 9 of Part 1 of Article 62 and Part 7 of Article 64 of the Banking Law, constituting banking secrecy, necessary for banks to fulfill their duties in preventing and counteracting money laundering, terrorist financing, and financing the proliferation of weapons of mass destruction, is carried out without sending an inquiry and/or obtaining client consent for information disclosure. In the case of the need to obtain data on transactions from a client’s account in another bank, the bank receiving such an inquiry may provide the relevant information, provided that written consent from the client is available or given.
If the bank confirms that the client has conducted transactions showing signs of fictitiousness, the NBU strongly recommends that banks:
- establish an unacceptably high risk for the client and refuse to establish business relationships or terminate business relationships with them;
- notify the State Financial Monitoring Service.
In our opinion, this letter from the NBU may have negative consequences for clients, who will likely bear the additional burden of proving that their banking operations are not fictitious, since banks, in order to check the criteria for “fictitiousness,” may request additional documents. If these are not provided (i.e., failure to refute suspicions regarding the “fictitiousness” of transactions), banks may sever ties with such clients.
Please note that this publication does not constitute legal advice and is provided for informational purposes only. If you have specific concerns regarding the publication, we recommend obtaining full legal consultation from our specialists.
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