PEP for life, but in-depth monitoring is not: how the NBU will protect the rights of politically exposed persons in case of unjustified pressure from banks

Politically exposed persons (or PEP) are natural persons who are national or foreign public figures and figures who perform public functions in international organisations. They are subject to financial monitoring, as well as persons related to them and members of their families.

In October 2023, the new Law of Ukraine No. 3419-IX entered into force, which introduced changes to the legislation on the prevention and combating of money laundering against politically exposed persons. In particular, Ukrainian society was shaken by the adopted norm on the lifelong status of PEPs, which in practice means problems, in particular, with opening and maintaining bank accounts for PEPs and their family members.

Ukraine is on the list of countries with increased corruption risks. Accordingly, the financial monitoring of Ukrainian REPs should be effective, especially in light of the provision of international financial aid for the recovery of Ukraine, because often it is REPs that are mentioned in corruption scandals involving the use of budget funds. However, such financial monitoring should not create pressure on existing and potential PEPs, and should not prevent participation in political life.

On February 6, the National Bank of Ukraine published clarifications on financial monitoring issues. These clarifications, as well as the question of how to improve the process of monitoring politically significant persons, were discussed during the public session organised by the Better Regulation Delivery Office together with the Center for Financial Crime and Security Studies (CFCS) at the Royal United Services Institute (RUSI) as part of the project “Supervising and monitoring Ukraine’s reconstruction funds” (SMURF).

According to the SMURF study, Ukraine is not unique in its desire to build effective financial monitoring of politically exposed persons. According to the Financial Action Task Force (on Money Laundering) (FATF) State of Performance and Compliance Report (April 2022), only 31% of jurisdictions assessed for compliance with the FATF recommendations on public figures fully met the requirements.

Global trends are that banks are increasingly terminating business relations with clients perceived as more risky, in particular with PEPs. Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) standards are often used as justifications, when the real motives may actually be ethical, reputational and commercial.

According to Yulia Yudina, Chief Economist of the Department of Regulation and Methodology of the Department of Financial Monitoring of the National Bank of Ukraine, the approach to financial monitoring of PEPs should be balanced.

Thus, the NBU emphasises on the obligation to use a risk-oriented approach during the financial monitoring of PEPs. In particular, from now on, a high-level risk is established for those PEPs that are foreign public figures, as well as for persons related to them, members of their families and clients, the ultimate beneficial owners of which are the specified persons. Such risk is not automatically established for national PEPs and their related persons, unless such risk has been established based on the results of monitoring business relations of national PEPs (it can be high, medium or low).

During the financial monitoring of PEPs, the monitoring subjects (both banks and non-financial institutions) should carry out the following measures:

  1. have an appropriate risk management system in order to identify the fact that the client or its ultimate beneficial owner belongs to the specified category;
  2. obtain the permission of the head of the financial monitoring entity to establish (continue) business relations, conduct (without establishing business relations) financial transactions for an amount equal to or greater than the amount determined by the first part of Article 20 of the Law on AML/FT;
  3. take sufficient measures in order to establish the source of wealth and the source of funds with which business relations or transactions with such persons are connected;
  4. to carry out in-depth monitoring of business relations on an ongoing basis.

It is important that paragraphs 2-4 may not be used in relation to PEPs that have ceased to perform significant public functions. That is, from now on, banks are obliged to review risks and remove from enhanced monitoring those PEPs that have ceased their activities and do not pose high corruption risks, but on the condition that 12 months have passed since the termination of the performance of public functions and if the subject of financial monitoring is convinced that there are no risks.

At the same time, the subject of financial monitoring is obliged to prevent unjustified refusals to provide banking services to REP. The new law introduces a mechanism for responding to such refusals: in the event that such a refusal took place, the subject of financial monitoring is obliged to provide a justified explanation of the reason for the refusal within 5 working days.

Among the key recommendations of the NBU for financial monitoring entities regarding work with PEPs are the following:

  • review / update the policy and develop (update) internal documents on PMC/FT issues, which will contain a clear, understandable methodology for identifying whether a client belongs to the PEP category, assessing the risk of business relations with PEP during the establishment of business relations and in the process of further servicing or carrying out a financial transaction without establishing business relations;
  • improve the existing scoring risk model for assessing the risk of business relations with clients, including PEP, which will additionally contain risk criteria developed by a monitoring entity independently, related to:
    • the types of services that PEP uses / intends to use;
    • categories of positions and the period of their occupation;
    • the scope of powers during the performance of important public functions;
    • the level of influence after the termination of important public functions;
  • pay special attention to the criteria characterised by a high risk of corruption (contained in Appendix 19 to Regulation No. 65 and Appendix 18 to Regulation No. 107), and take them into account when assessing the risk of business relations with PEP;
  • provide checks, including automatic ones, with the aim of identifying persons who can be classified as PEP, before establishing business relations with the client / carrying out a financial transaction without establishing business relations, as well as periodic screenings of the existing client base;
  • improve the automation system in order to promptly identify risk criteria.

The main emphasis of the NBU’s recommendations is that the risk assessment of PEPs by the financial monitoring entity should be dynamic and take into account all the existing circumstances that may affect the risk of money laundering and terrorist financing. To do this, financial monitoring entities should promptly identify and analyse PEPs in order to reassess the level of risks.

In order for this to become possible, the NBU will check compliance by financial monitoring subjects with the requirements for monitoring public persons, in particular from the point of view of compliance with the rights of politically significant persons. The NBU will take into account information on violations held by financial monitoring entities, as well as information received directly by the NBU from market participants, including from the most politically significant persons, but supervision is carried out periodically and there is currently no effective mechanism for the prompt consideration of individual complaints.

The project “Supervising and monitoring Ukraine’s reconstruction funds” (SMURF) invites PEPs to participate in a survey on the problems and obstacles encountered when receiving banking services and undergoing financial monitoring “The Status of PEP as a Catalyst of Bank Rejections”. This survey will allow the project experts to analyse the trends of refusals and the most common reasons for receiving negative responses from banks in order to outline the vector of work with banks to improve PEP monitoring.

In addition, the search for a researcher in the SMURF project is ongoing. The job envisages participation in the formation of new policies that will help solve problems of integrity during the financing of the reconstruction of Ukraine, and the development of a strategy that will guarantee the further implementation of these policies in practice by the government, entrepreneurs and public organisations. Successful candidate will also work on issues of financial monitoring of PEP. Working conditions, responsibilities, a list of skills and competencies required by the candidate – at the link: