Amendments to the legislation on politically exposed persons (PEP)

In order to bring Ukrainian legislation into conformity with the provisions of Directive (EU) 2015/849 and the FATF Recommendations, the implementation of which is envisaged by the Association Agreement between Ukraine and the EU, on 17 October 2023 the Verkhovna Rada of Ukraine adopted draft law No. 9269-d, which amended the legislation of Ukraine on financial monitoring (AML legislation). Among the key changes is the renewal of lifelong status for politically exposed persons (PEP).

Modern AML legislation in Ukraine As a quick note, the modern approach to financial monitoring in Ukraine was formed with the adoption on 6 December 2019 of the Law of Ukraine “On Prevention and Counteraction of Legalization (Laundering) of Criminal Proceeds, Terrorist Financing, Financing of Proliferation of Weapons of Mass Destruction” (the “Law”).

The Law established, among other things, a risk-oriented approach by subjects of primary financial monitoring (the “SPFM”) in in the course of due diligence of their clients, strengthened requirements for disclosure of ultimate beneficial owners, and also introduced lifelong status for politically exposed persons.

Later, in November 2022, by amending the Law, the status duration of a politically exposed person was limited to the last three years of tenure. Consequently, upon the expiration of the three-year term from the cessation of performing prominent public functions, politically exposed persons would lose this status.

However, increased caution in establishing business relations with PEPs has led to excessive requests for documents for the purpose of conducting financial transactions and numerous unjustified refusals in financial services to political figures, their immediate relatives and related individuals.

Recent updates In the revised version of the Law, the lifelong status of politically exposed persons is reinstated. Simultaneously, mechanisms are introduced to prevent abuse by entities conducting primary financial monitoring through a formalized approach to servicing clients with the status of politically exposed persons, in particular:

• There are criteria for ceasing additional verification measures, such as permanent enhanced monitoring of business relations, establishing sources of wealth and sources of funds for the politically exposed persons (including their family members, persons related to them) under the following circumstances:
• More than 12 months have passed since the cessation of performing prominent public functions; and
• Financial operations of such individual during this period, pose a low risk; and
• The SPFM identified no signs that such an individual poses a risk typical of a politically exposed person.
• The SPFM bears responsibility for the improper application of a risk-oriented approach (e.g., establishing an unjustified risk level, implementing disproportionate measures based on the risk category), unreasonable refusal to conduct financial transactions and/or establishing (prolonging) business relations with PEPs in the form of a fine in the amount up to UAH 1.7 million (100,000 untaxed minimum incomes for citizens). For banks, the fine may constitute up to UAH 10 million for each violation.

Thus, alongside the renewal of the lifelong status for PEPs, mechanisms have beenintroduced to prevent a formalized approach by banks and other entities of primary financial monitoring when servicing clients with such status. The introduced amendments align with the best international practices and recommendations.

For additional information, please contact Vasyl Andrusyak, Partner, Head of Tax Practice, v.andrusyak@moris.law