$70B missing from Ukraine; a whopping failure of global anti-money laundering & corruption laws

By Christine Duhaime | February 28th, 2014

Ukrainian Crisis

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Late last week, the Swiss announced investigations into funds allegedly held in their banks by former President  Viktor Yanukovych (Ві́ктор Фе́дорович Януко́вич) and his son Oleksandr Yanukovych, and have frozen those assets while they determine if any of the assets are proceeds of crime derived from corruption, misappropriated state assets, or derived from other predicate offenses pursuant to anti-money laundering laws.

Viktor Yanukovych came from an impoverished family and held several low-level government administrative positions for decades, earning no more than $2,000 per month before entering politics in 2009. From 2009 to 2014 (a mere 5 years), by conservative estimates he reportedly amassed a personal fortune of $12 billion.

$70 Billion Moved Offshore in 3 years

Government authorities in the Ukraine estimated that the Yanukovych government officials removed approximately $70 billion to offshore bank accounts from 2011-2014.

Yanukovych’s son, Oleksandr, is a former dentist and is reported to have become one of the richest men in the Ukraine during the time his father was President, with a reported personal fortune of $500 million.

$70 billion allegedly left the Ukraine in less than three years in the hands of politically exposed persons when anti-money laundering laws should have prevented that from happening at numerous points along the financial transactional transfer chain as a result of monitoring and reporting required in Europe and Asia by, inter alia, correspondent banks, private equity funds and asset managers, brokers, trust advisors, notaries and money services businesses in the Ukraine, intermediary countries and destination countries.

From a Salary of $2,000 per Month to $200 Million per Month

If the estimates in respect of the sums removed from the Ukraine are accurate, it appears to demonstrate both that international anti-money laundering controls in place may be having little preventative effect, and that there were huge financial institution compliance failures on the Yanukovych file.

The anti-money laundering and politically exposed person rules are designed to detect and prevent the illegal removal of state assets to foreign jurisdictions. Assuming the estimates are accurate, a financial institution dealing with a high profile politically exposed person such as Yanukovych would have had to reconcile the change in his income from $2,000 per month to $200 million per month, document the source of funds and the investigations undertaken in 2009 in respect thereof, and that the financial institution was satisfied as to the legitimacy of the funds and approved continuing to maintain his account.

Politically Exposes Persons

At the moment, the biggest risk regarding the Ukraine for financial institutions is that other politically exposed persons (“PEP“), or military and other government officials in the Ukraine will also export proceeds of crime and in the process, launder funds. There is also the risk that the receipt of funds or property will be prohibited by international economic sanctions.

PEP definitions vary from country to country but generally, a PEP is a head of state, a head of government, member of the Parliament, deputy minister, ambassador and attaché, high-ranking military officer, president of government agency, judge, leader of political party in Parliament and the spouses, children, parents, in-laws and siblings of any of those persons.

3 Types of PEPs

The Financial Action Task Force (the “FATF“) in its Recommendations 2012 now has three types of PEPs – a foreign PEP, a domestic PEP and a person who is a senior member of an international organization. The only distinction between foreign and domestic PEPs is that foreign PEPs are foreign to your country. With respect to international organizations, while the organization does not need to be prominent, the function held by the senior person must be a prominent function for the person to qualify as a PEP. The organization is not, by definition, a state-controlled or owned agency (since those are subsumed in the definitions of a PEP (domestic and foreign)).

There is an obvious artificiality with maintaining a distinction between a foreign and domestic PEP because a person can be a foreign PEP everywhere in the world except in their own country. In order to address this, however, the FATF Guidance says that if a person is a foreign PEP, that de facto makes them a domestic PEP in their own country. Logically, this makes sense for crime prevention purposes because in order to export proceeds of crime, the PEP must first use their own domestic financial system and thus, more importance should be placed on domestic, and not foreign, PEPs.

PEP rules flow from national proceeds of crime legislation and are often included in several other laws, including anti-corruption, sanctions, anti-terrorism and other relevant criminal laws and treaties implemented at the national level that must be read together.

PEP Risk Factors 

According the FATF, the risk factors for PEPs include a person who:

  • Is involved in public procurement (as a government official or as company that obtains procurement contracts as part of their business, such as P3 (public-private partnerships).
  • Is in energy (oil, gas, wind energy, hydro) construction, mining, defense, sports or gambling/gaming sectors.
  • Has ties to a Minister of Finance to exert pressure on implementation or enforcement of anti-money laundering laws, ether personally or through economic councils or other bodies.
  • Is involved in large infrastructure projects.
  • Is involved in finance, particularly to government agencies or for government projects.

Many financial institutions have determined that it is too costly, as a matter of compliance, to monitor for PEPs simply because monitoring is both labour and resource intensive. Some banks are closing PEP accounts or refusing to open them.

The ability of PEPs to have removed $70 billion from the Ukraine without any banks stopping them is a whopping failure of our global anti-money laundering laws. To put it into perspective, the Ukrainian President’s businesses would have had to have been worth more than Facebook or Microsoft and in 2009, neither Bill Gates or Mark Zuckerberg earned $200 million per month.

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