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What is verification for financial and banking markets and what it will it work in Urraine?
In general, this term has its own distinct purpose for each area of activity, but it has a single purpose, i.e. to reveal and establish the truth or, to put it simply, to confirm the authenticity of data. In Ukraine’s financial and banking market, this concept first appeared in the Law of Ukraine On Prevention of and Counteraction to Money Laundering, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction (Law on counteraction to legalization / 2014) adopted in 2014. Before this law was adopted, the bodies of primary financial monitoring, in accordance with the Law on Prevention and Counteraction to Legalization (Laundering) of the Proceeds from Crime or the Financing of Terrorism (2002) (the Law on Combating Legalization / 2002) had an obligation only to identify the clients. According to the Law on counteraction to legalization/2002, identification was carried out based on official documents provided by clients or copies certified in accordance with the established procedure. Additional information could be obtained from clients, as well as from other sources, if such information was public (open). The new Law on counteraction to legalization/2014 has provided a definition for verification and provides for the establishment (confirmation) by the body of primary financial monitoring of a client’s identity (a client’s representative) in his presence from the identification data received from a client. That is, the new law distinguished the notion of identification and verification by establishing that identity, in essence, is identity, and verification is the confirmation of the authenticity of identifying data. The basic difference in the identification / verification process in the context of the two laws was that the first law gave the opportunity to identify and by default verify the client receiving information from the client and from other public sources. On the contrary, according to the Law on counteraction to legalization/2014, the bodies of financial monitoring received an obligation to confirm the identification data only in the presence of the client. Thus, the legislator has created serious obstacles for the development of online lending and other products that aim to meet the needs of customers in remote financial services. The Law on counteraction to legalization/2014 was adopted very quickly, i.e. it took only four months to pass it. The draft was amended nine times and even after that, during the second reading, with substantial remarks from the main legal department of the Parliament that drew attention to the fact that “the mechanisms for the implementation of international requirements in this area are excessive and disproportionate, do not take into account the constitutional model of the organization authorities in Ukraine and, to a certain extent, go beyond the scope of international legal obligations of Ukraine.” At the time when the Law on counteraction to legalization / 2014 was adopted, the Directive 2005/60/EC of the European Parliament and of the Council and EU Commission Directive 2006/70/ЕС had been in force. They were cancelled by the Directive 2015/849 (EU) on the prevention of use of financial system for the purpose of money laundering and terrorist financing, that as well amended the Regulation N 648/2012 (EU) of the European Parliament and Council and the FATF Recommendation dated 16 February 2012. Significantly, the FATF’s recommendations suggest that we should check the clients in the following cases: When establishing business relations; When carrying out transactions amounting to 15,000 EUR or USD; When suspecting money laundering and / or financing of terrorism; When there are doubts about the authenticity and completeness of identifying data. In addition, in its recommendations, the FATF gives a number of follow-up on due diligence of clients: a) Identification of clients and verification of clients’ identity using reliable documents, data or information obtained from independent sources; (b) Identification of beneficiaries and verification of their identity in such a way that the financial institution is convinced that it knows who the beneficiary is. For legal entities and organizations, this should include identifying the owner and client’s management structure; (c) Identification and, if necessary, obtaining information on the purpose and expected nature of business relationships; (d) Permanent measures for the proper verification of business relations and monitoring of operations that are carried out in the course of such relationships in order to ensure the conformity of operations. The Directive 2015/849 (EU) of the European Parliament and of the Council of 20 May 2015 stipulates that identity of clients and beneficial owners has to be verified before the establishment of business relationships or a transaction. However, it does not contain a separate definition for verification. The only precaution contained in the aforementioned Directive is the requirement not to misuse threshold amounts when determining the accessing the degree of risk of transactions. It as well and prohibits the use as sources any third parties created and operating in high-risk third world countries. As of 2016, the following countries were included in the black list of the European Commission of high risk countries (reference number C (2016)4180/F1): Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Laos, Syria, Uganda, Vanuatu, Yemen, North Korea and Iran. That is, having analysed the directives of the European Commission and the FATF recommendations, we may conclude that they give no direct instructions to verify the client’s identity only in the presence of this client. In addition, Ukraine is fortunate enough not to be included in the list of high risk countries. Besides, when working on the draft Law on counteraction to legalization/2014, the members of Parliament had everything necessary to make the verification process as flexible and ready to adapt to the needs of the market as is possible. Consequently, the question is, why the legislators immobilised the online lending market and other potential financial instruments that provide remote services to clients, when they could comply with the above-mentioned directives by increasing the thresholds and allowing the possibility to request information from third parties (public registers, credit history bureau, plastic cards issuers, etc.) After the Law on counteraction to legalization/2014 had come into and the market had worked with it, all its drawbacks became obvious. The market reacted by making a few attempts to propose the following legislative initiatives, which eventually failed. The Ministry of Finance worked out the Draft Law On Amendments to Some Legislative Acts of Ukraine in the Field of Prevention of and Counteraction to the Legalization (Laundering) of Proceeds from Crime, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction. It was published on the website of the State Committee for Financial Monitoring of Ukraine of 10 August 2017. According to this draft law: Verification means establishing (confirming) by the body of primary financial monitoring of the identity of the entity received by the body of primary financial monitoring of identification data and/or data allowing to establish final beneficial owners (controllers); identification is the receipt by the body of primary financial monitoring of identification data from a client (a client’s representative). This law draft as well suggested to introduce the so-called threshold financial transactions. Financial transactions shall be defined as threshold transactions, provided that their amount is equal to or exceeds UAH 300,000 (for business entities conducting lotteries and gambling, including electronic (virtual) gambling – UAH 30,000). Thus, according to the suggested definitions, the law should not require client’s presence for verification. The said draft law is in fact a new edition of the Law On Prevention and Counteraction of the Legalization (Laundering) of Proceeds from Crime, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction. Currently, the financial services market has another opportunity to somehow influence the given issue, since this draft law has been recently published on the website of the State Financial Monitor and one can address suggestions as to this draft to competent authorities.