“First you need to pass compliance procedure”, “Compliance officers didn’t approve our project”. We often hear these phrases from financial experts and bankers. But it would be a big mistake to assume that the term “compliance” is unique to financial and banking industry.
To pass compliance means to pass the test for compliance. And at this point, we encounter a lot of options, what we have to comply with? What are these benchmarks and standards? Who establishes them and what are the criteria measures? And most importantly, for what purpose? You can, of course, believe in the world conspiracy theory, but actually, everything is much more prosaic.
Banks and financial institutions are the first to carry out compliance procedures. No wonder, because they work with other people’s money. On the first stage of bank compliance procedure managers and private bankers evaluate a customer: whether he corresponds to the image of an ideal customer of the bank or not. If the target audience of the bank consists of wealthy individuals whose monthly income ranges from $100 000, it is unlikely to accept a client who has annual income of up to $100 000. Such a customer will not pass a primary compliance. And this may be a possible reason you will be denied in servicing. It should be noted that the selection of customers in accordance with the Bank’s established profile is a prerogative of, first of all, Swiss, Austrian, Cypriot and other “overseas” banks. Though at present days Ukrainian banks also impose an informal procedure and evaluation criteria of a customer’s profile.
Nothing ventured, nothing gained… but only in coordination with AML legislation
After pre-compliance procedures on the part of private banker, the customer’s file is transferred to the Department of Financial Monitoring for AML / KYC-compliance. Here begins the customer’s identification process, his verification, inspection of his documents and sources of income. If the customer, his activities or his income are associated with the violation of law, the bank, excluding the non-cooperation, must inform law enforcement agencies about this customer.
A letter for you!
Suspected violation of law is not the only reason for transmission of the information to the law enforcement agencies. AML directive assigns to the banks determination of risk and taking appropriate actions. Thus, the German Bank may ask you to close your account and will issue your funds in cash (e.g., in the absence of another account), and then will notify the police about completed transaction. Later, the police will forward this information to the Office of Internal Investigations, which in turn will inform the law enforcement and tax authorities of the country of your residence. As a result, you will receive “chain letters” from the tax inspectors.
I can account for every million earned by me, except the first one (John Rockefeller)
Assessment of the source of funds, in my opinion, is the most important aspect of working with foreign banks. Does it meet the stated activity? Is it possible to confirm the fact of tax payment? Was the tax declaration filed? The answers to these questions are important not only for opening an account and depositing funds but also for further work with funds in your account. What is a million in your bank account worth of, if you cannot spend it?!
Are you PEP to me or not PEP?
Special attention in compliance procedures is paid to persons who are related to politics or to public sector enterprises, the so-called Politically Exposed Persons. It does not mean that banks will refuse servicing such a client, but the verification procedure will be more thorough. “Once PEP – PEP forever”, as they say in the United States. And many European countries adhere to the same principle. The Ukrainian legislation distinguishes national and foreign public persons, while in Switzerland the concept of a “national public figure” does not exist. The position of the Swiss is simple: if the money is illegally withdrawn from the budget of Switzerland, then why keep it in Switzerland? In most countries, belonging to the “higher ranks” means higher fares and attention of the Compliance Department.
Sanctions! Sanctions! Fresh sanctions!
While the Ukrainian business is only beginning to become involved in compliance procedures, the international corporations and global companies carefully monitor their customers and counterparties. The new package of American sanctions against companies and individuals from the Russian Federation only confirms the belief in the need to introduce compliance procedures into business processes. Nowadays, these sanctions seem to be something distant and vague, like something we have experienced before: just look — LUKOIL has changed its name to Amic, TNK to Glusco, and they’re still working. However, another package of sanctions, scheduled for November of this year, can cast doubt on not only direct transfers from the USA to Russia but also on any other transactions with Russian trace in. “Other people’s money does not exist”, as they say in America. This means that the ban on financial transactions may relate not only to U.S. companies and banks but also to other companies making transactions in USD.
In the Ukrainian legal framework, anti-corruption compliance has just been conceived: The law on prevention of corruption was adopted in 2014, the National Anti-corruption Court was established in 2018. In order to meet international requirements, the companies should increasingly rely on the English Bribery Act 2010 and the US Foreign Corrupt Practices Act (FCPA) of 1977. It is the American legislation today that is the measure of the purity of assets origin and business activities. Liquidation of banks, freezing of bank accounts, limits on dollar transfers are the result of American laws and government agencies activity, FCPA and FinCEN (Financial Crimes Enforcement Network) – a special Department (Bureau) of the Department of the U.S. Treasury that collects and analyzes information about financial transactions to combat money laundering and financing of terrorism. And, as practice shows, in particular, the case of Lazarenko, FBME, ABLV banks, there are neither boundaries nor “other people’s” money for financial intelligence in the USA.
Compliance today is the key to the existence of your business tomorrow
Ukrainian businesses are seeking to enter international markets – European, Asian, American, but historically it has close ties with Russia as well. The experience of recent years proves that it is not ready so far to completely abandon the Russian market and break economic relations with Russia, because it has no economic incentive. But in terms of the next stage of sanctions against citizens and companies of the Russian Federation, it strongly needs to carry out verification and conduct compliance of internal processes. Compliance policies and procedures can be implemented regardless of the type and size of business. The main thing is to determine what are the business risks and how to deal with them. Compliance is the tool of risk management and business protection. It should be used and not be afraid of.
Lana Gulyan, Juscutum’s partner of the International Business Administration Practice.