VZCZCXRO2443
RR RUEHDBU RUEHLN RUEHSK RUEHVK RUEHYG
DE RUEHKV #2122/01 3441058
ZNR UUUUU ZZH
R 101058Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8942
RHMFIUU/DEPT OF JUSTICE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 05 KYIV 002122 
 
SIPDIS 
 
JUSTICE FOR AFMLS, OIA, AND OPDAT 
TREASURY FOR FINCEN 
STATE FOR EUR/UMB, EEB, INL, AND SCT 
 
E.O. 12958: N/A 
TAGS: EFIN KCRM KTFN SNAR UP
SUBJECT: UKRAINE: 2009 INTERNATIONAL NARCOTICS CONTROL STRATEGY 
REPORT 
 
¶1.  (U) Corruption, organized crime, prostitution, smuggling, tax 
evasion, and trafficking in persons, drugs and arms continue to be 
sources of laundered funds in Ukraine. As of November 1, 2009, 
Ukraine has 185 licensed banks, five of which are state-owned. There 
are no offshore financial centers or facilities under Ukraine's 
jurisdiction. 
 
¶2. (U) In January 2001, the Government of Ukraine (GOU) enacted the 
"Act on Banks and Banking Activities," which introduced some 
anti-money laundering (AML) requirements for banking institutions. 
The Act prohibits banks from opening accounts for anonymous persons, 
requires the reporting of large transactions and suspicious 
transactions to state authorities, and provides for the lifting of 
bank secrecy pursuant to an order of a court, prosecutor, or 
specific state body. In August 2001, the President signed the "Law 
on Financial Services and State Regulation of the Market of 
Financial Services." This law establishes regulatory control over 
nonbank financial institutions that manage insurance, pension 
accounts, financial loans, or "any other financial services 
involving savings and money from individuals." The law provides 
definitions for "financial institutions" and "services," imposes 
record keeping requirements on obligated entities, and identifies 
the responsibilities of regulatory agencies. The law establishes the 
State Commission on Regulation of Financial Services Markets (SCFM), 
which, along with the National Bank of Ukraine (NBU) and the State 
Commission on Securities and the Stock Exchange, has responsibility 
for regulating financial services markets. 
 
¶3. (U) Ukraine's AML and anti-financing of terrorism (AFT) regime 
has long been the subject of international scrutiny and criticism. 
The Financial Action Task Force (FATF) placed Ukraine on the list of 
non-cooperating countries and territories (NCCT) in September 2001. 
Following substantial Ukrainian efforts to adopt appropriate 
legislation and institute an enforcement regime, FATF removed 
Ukraine from all monitoring in 2006. Since that time, however, 
Ukraine has remained subject to review by the Council of Europe's 
Select Committee of Experts on the Evaluation of Anti-Money 
Laundering Measures and the Financing of Terrorism (MONEYVAL), a 
FATF-style regional body (FSRB). 
 
¶4. (U) In March 2009, MONEYVAL issued a Mutual Evaluation Report, 
based on its Round III Evaluation of Ukraine's AML and AFT regime. 
That Report was not favorable. It scrutinized Ukraine's level of 
compliance as to each of the forty plus nine FATF recommendations, 
and found partial or no compliance as to 33 of them. Also in 2009, 
FATF's International Cooperation and Review Group (ICRG) included 
Ukraine among 39 countries worldwide, and 12 countries in Europe, 
whose AML and AFT regimes would be subjected to "prima facie" review 
by the ICRG. In October 2009, the ICRG concluded that, because of 
continuing deficiencies, Ukraine would be one of 25 countries whose 
AML and AFT regimes would be subjected to additional "targeted 
review" by the ICRG. That targeted review is expected to continue at 
least through the spring of 2010, and should provide substantial 
impetus toward continued improvement. 
 
¶5. (U) The Criminal Code of Ukraine has separate provisions 
criminalizing drug-related and nondrug-related money laundering. 
Amendments to the Code adopted in January 2003 include willful 
blindness provisions and expand the scope of predicate crimes for 
money laundering to include any action punishable under the Criminal 
Code with imprisonment of three years or more, excluding certain 
specified actions. Amendments added in 2008 criminalized insider 
trading, although the text of those amendments still needs 
improvement. Additional draft amendments to the Criminal Code and 
Criminal Procedure Codes remain under review in Parliament. 
 
¶6. (U) In November 2002, Ukraine enacted an AML package entitled "On 
Prevention and Counteraction of the Legalization (Laundering) of the 
Proceeds of Crime" (the Basic AML Law). The Basic AML Law 
establishes a two-tier system of financial monitoring, consisting of 
initial financial monitoring (i.e., obligated entities that carry 
out financial transactions) and state financial monitoring (i.e., 
government agencies charged with regulation and supervision of the 
financial institutions). Overall regulatory authority is vested in 
the SCFM. 
 
¶7. (U) To correct deficiencies in the Basic AML Law, legislation 
enacted in February 2003 requires banks and other financial service 
providers to implement AML compliance programs, conduct due 
diligence to identify beneficial account owners prior to opening an 
account or conducting certain transactions, report suspicious 
transactions to the SCFM and maintain records on suspicious 
transactions and the people carrying them out for a period of five 
years. The legislation includes a "safe harbor" provision that 
protects reporting institutions from liability for cooperating with 
 
KYIV 00002122  002 OF 005 
 
 
law enforcement agencies. In August 2003 the SCFM established the 
State Register of financial institutions, and by January 2009 the 
State Register contained information on 2,016 nonbank financial 
institutions. 
 
¶8. (U) On November 6, 2009, Parliament passed significant amendments 
to the Basic AML law, aimed at bringing Ukraine's regime into 
compliance with FATF's revised Forty plus Nine recommendations. 
However, the President vetoed the bill on December 8 in response to 
pressure from the financial community, which complained of onerous 
additional reporting requirements.  The veto is a disappointment, as 
the passage of these amendments would have represented a significant 
step forward for Ukraine, particularly since different forms of the 
legislation had been pending in Parliament since 2003.  It is 
possible that the Parliament will override the veto before the end 
of 2009; alternatively, the amendments may be reintroduced in the 
Parliament some time after Ukraine's January Presidential 
elections. 
 
¶9. (U) The main thrust of the new amendments was to broaden 
substantially the types of entities and professionals that are 
subject to financial monitoring, adding lawyers and law firms, real 
estate firms, auditors, notaries, traders in precious metals, post 
offices (for money transfers), lottery companies, consulting 
companies and other professionals.  An additional important 
innovation in the vetoed law was that it provided that Politically 
Exposed Persons (PEPs) would be subject to financial monitoring, and 
that PEPs include not only foreign but also Ukrainian officials. 
PEPs would include the president, prime minister, ministers, members 
of Parliament, public officials, law enforcement officials and 
others. There were also new mechanisms empowering the FIU to 
temporarily suspend suspicious transactions that appear potentially 
tied to money laundering. 
 
¶10. (U) In sum, the law would take some significant steps toward 
bringing Ukraine's AML and AFT regime into compliance with the FATF 
forty plus nine recommendations.  However, substantial deficiencies 
would still remain in Ukraine's regime.  Some such deficiencies are 
legislative such as gaps in laws pertaining to asset forfeiture, 
corporate criminal liability and insider trading. Other deficiencies 
include the continued failure of the Prosecutor General's Office 
(PGO) and the investigative agencies to cooperate effectively, thus 
undermining the effective use of criminal prosecutions. 
 
¶11. (U) In 2004, authorities reduced the monetary threshold for 
compulsory financial monitoring from Ukrainian hryvnias (UAH) 
300,000 (approximately $40,000) for cashless payments and UAH 
100,000 (approximately $13,333) for cash payments, to UAH 80,000 
(approximately $10,666) for payments using either method. The 
compulsory reporting threshold exists only if the transaction also 
meets one or more suspicious activity indicators as set forth by 
law. Any transaction suspected of being connected to AFT must be 
reported to appropriate authorities immediately. 
 
¶12. (U) Beginning in May 2008, as a result of amendments to the 
"Resolution on the Adoption of Instructions Regarding Movement of 
Currency, Precious Metals, Payment Documents, and Other Banking 
Documents over the Customs Border of Ukraine," travelers must 
declare cross-border transportation of cash sums exceeding Euro 
10,000, and name the origin of such funds. Cash smuggling is 
substantial in Ukraine, although it is reportedly more related to 
unauthorized capital flight than to criminal proceeds or terrorist 
funding. 
 
¶13. (U) In 2005, the GOU sought to combat smuggling and corruption 
by reducing import duties, introducing new procedures for the 
Customs Service, and implementing transparent procedures for the 
privatization of state enterprises. Ukraine's 2005 budget eliminated 
the tax and customs duty privileges available in 11 Special Economic 
Zones (SEZs) and nine Priority Development Territories (PDTs) that 
operated within Ukraine, which had been associated with rampant 
evasion of customs duties and taxes. Several draft laws have been 
registered with Parliament to restore the tax and customs privileges 
in the SEZs; however, none of them was given serious consideration. 
 
¶14. (U) Under a January 2006 amendment (Law 3163-V) to Ukraine's AML 
laws, the entities obligated to conduct initial financial monitoring 
must be able to provide proof they are fulfilling all Know Your 
Customer (KYC) identification requirements. The law also grants 
state agencies enhanced authority to exchange information 
internationally, improves rules on bank organization, and implements 
a screening requirement at the level of financial institutions. On 
September 14, 2006, Ukraine enacted amendments to the "Law on Banks 
and Banking" that require all banks to be formed as open joint-stock 
companies or as cooperatives. This measure strengthens disclosure 
 
KYIV 00002122  003 OF 005 
 
 
requirements on the identity of the beneficial owners of banks. 
These amendments apply to all newly formed banks and provide a 
three-year period for existing banks to comply. 173 of Ukraine's 185 
licensed banks are joint stock companies. 
 
¶15. (U) The SCFM, Ukraine's FIU, was established in December 2001 by 
the Presidential Decree "Concerning the Establishment of a Financial 
Monitoring Department." The SCFM became operational in June 2003. At 
that time, the SCFM was an independent authority administratively 
subordinate to the Ministry of Finance and the sole agency 
authorized to receive and analyze financial information from 
financial institutions. Effective January 1, 2005, Ukraine's 
Parliament granted the SCFM the status of a central executive 
agency, subordinate to the Cabinet of Ministers rather than to the 
Ministry of Finance. The Basic AML Law specifically states the SCFM 
is to operate free from political influences. The director of the 
SCFM was replaced in February 2008, shortly after a new government 
came to power, but observers in Ukraine did not conclude that step 
was primarily politically motivated. 
 
¶16. (U) As of December 1, 2009, the SCFM has 22 local branches in 
Ukraine's regions. The SCFM is an administrative agency with no 
investigative or arrest authority. It is authorized to collect 
suspicious transaction reports (STRs) and analyze suspicious 
transactions, including those related to terrorist financing, and to 
transfer financial intelligence information to competent law 
enforcement authorities for investigation. The SCFM identifies 
possible cases for investigation by the Ministry of Interior, Tax 
Agency, State Security Agency and PGO. The SCFM processes, analyzes, 
and develops cases reportedly to the point of establishing the 
equivalent of probable cause prior to referral to law enforcement. 
The SCFM also has the authority to approve interagency agreements 
and exchange intelligence on financial transactions involving money 
laundering or terrorist financing with other FIUs. As of December 
2009, the SCFM has signed memoranda of understanding (MOUs) with the 
FIUs of 46 countries. It has become a regional leader with regard to 
the volume of case information exchanged with counterpart FIUs. In 
July, 2009, Ukraine amended the law on Banks and Banking to permit 
international exchange of information between the National Bank and 
respective regulators of other countries for purposes of combating 
money laundering. 
 
¶17. (U) In 2008, the SCFM received 1,083,461 transaction reports, 
which include STRs and automatic threshold reports. Ninety-seven 
percent of the transaction reports were submitted by banks, and all 
came in an electronic format. The SCFM designated approximately 14 
percent of these for "active research" and sent 641 separate cases 
to law enforcement agencies. Of these cases, the SCFM referred 30 to 
the PGO, 207 to the State Tax Administration, 175 to the Ministry 
for Internal Affairs, and 229 to the State Security Service of 
Ukraine. The volume of funds implicated in the cases is UAH 28.8 
billion (USD 3.7 billion).  As a result of subsequent investigation 
of these cases, law enforcement agencies initiated 354 formal 
criminal investigations, and submitted indictments in 117 of those 
cases (the number tripled over 2007). Between 2003 and 2008, 950 
formal criminal investigations were opened, and indictments 
submitted in 176 of these cases. Convictions have been obtained in 
104 of these cases. Although the reporting system is effective and 
the SCFM has generated a substantial number of cases, it did not 
lead to a significant number of convictions until 2007. From 
2003-2006 there were convictions in only three cases, while in 2007, 
the number of convictions jumped to 25, followed by 76 convictions 
in 2008. 
 
¶18. (U) Many observers believe the low prosecution and conviction 
rates are caused by reluctance at the PGO to follow up on the cases 
referred by the SCFM and by a lack of prosecutorial specialization. 
Local prosecutors may close money laundering investigations and 
cases prematurely or arbitrarily, possibly because of lack of 
sufficient manpower or resources, corruption, a weak understanding 
of money laundering crimes, or a belief that other types of crimes 
should take priority over money laundering. 
 
¶19. (U) Ukraine has been working with the European Commission and 
Council of Europe to increase its capacity to fight money laundering 
and terrorist financing since 2003. A long-term Council of Europe 
project, which ran through April 2009, focused on three areas: 
getting Ukraine's legislative framework up to international 
standards; enhancing the human capacities of key institutions and 
agencies; and developing the organizational and technical 
infrastructure of the system. 
 
¶20. (U) Ukraine has a general asset forfeiture regime, but this is 
largely an inappropriate and ineffective relic of Soviet-era 
legislation. Article 59 of the Ukrainian Criminal Code provides for 
 
KYIV 00002122  004 OF 005 
 
 
the mandatory seizure of all or a part of the property of any person 
convicted for grave or particularly grave offenses, as defined in 
the code, regardless of whether this property bore any relation to 
the crime of conviction. With respect to money laundering, Article 
209 allows for the forfeiture of criminally obtained money and other 
property. However, Ukraine lacks any functional regime for locating 
or seizing forfeitable assets. In particular, Ukraine lacks 
legislation allowing in ram forfeiture or the seizure of corporate 
assets, has no specialized asset forfeiture prosecutors or 
officials, and lacks any entity to administer forfeited assets. The 
GOU has drafted legislation aimed at improving the asset forfeiture 
regime and bringing it into compliance with international standards. 
That legislation was submitted to Parliament in January 2009 but has 
not yet been acted upon. 
 
¶21. (U) In December 2003, the Cabinet of Ministers issued Decree No. 
1896, establishing a Unified State Information System of Prevention 
and Counteraction of Money Laundering and Terrorism Financing. The 
system provides the SCFM with unobstructed access to the databases 
of 12 ministries and agencies, including the Ministry of Internal 
Affairs, Ministry of Economy, Ministry of Finance, State Tax 
Administration, State Security Service, State Customs 
Administration, State Property Fund, State Statistics 
Administration, Border Guard Service, Securities Commission, 
Financial Services Commission, and Control and Revision Department. 
The system became fully operational in December 2006. The SCFM 
leadership states it has unfettered access to all relevant 
information in the data bases of the aforementioned agencies. 
 
¶22. (U) The SCFM acknowledges the existence and use of alternative 
remittance systems in Ukraine, and SCFM personnel have attended 
seminars and exchanged information about such systems. In 2007, the 
Security Service of Ukraine published a report signaling that hawala 
might be on the rise in Ukraine due to a large number of Ukrainians 
working abroad and the growth of foreign communities in Ukraine. The 
SCFM and security agencies monitor charitable organizations and 
other nonprofit entities that might be used to finance terrorism. 
 
¶23. (U) Law 3163-IV, which entered into force on January 1, 2006, 
enhances Ukraine's ability to exchange information internationally 
and places greater obligations on banks to combat terrorist 
financing. This law requires banks to adopt procedures to screen 
parties to all transactions using a SCFM-issued list of 
beneficiaries of, or parties to, terrorist financing. Banks must 
freeze assets for two days and immediately inform the FIU and law 
enforcement bodies whenever a party to a transaction appears on the 
list. The FIU can extend the freeze to five days. Banks developed 
their screening capabilities subsequent to implementation of the 
law. In October 2006, the Cabinet of Ministers approved the SCFM's 
list, drawn from three sources: the United Nations 1267 Sanctions 
Committee's consolidated list; information from the Ukrainian 
Security Service on individuals and entities suspected of violating 
article 258 of the Ukrainian Criminal Code concerning terrorism; and 
the lists compiled by those countries that have bilateral agreements 
with Ukraine on mutual recognition of terrorist designations. In 
September 2006, Parliament enacted revisions to Article 258 of the 
Criminal Code, adding Article 258-4 which explicitly criminalizes 
terrorist financing. The revised text mandates imprisonment from 
three to eight years for financing, material provision, or provision 
of arms with the aim of supporting terrorism. The revisions also 
amend the criminal procedure code to empower the State Security 
Service (U) with primary responsibility for investigating terrorist 
financing. 
 
¶24. (U) The GOU has cooperated with U.S. efforts to track and freeze 
the financial assets of terrorists and terrorist organizations. The 
NBU, the SCFM, the Securities Exchange Commission, the State Tax 
Administration, the U, and the Ministries of Finance, Internal 
Affairs, and Foreign Affairs are informed about the U.S. designation 
of suspected terrorists and terrorist organizations under Executive 
Order 13224 and other U.S. authorities. Through their regulatory 
agencies, banks and nonbank financial services also receive these 
U.S. designations and are instructed to report any transactions 
involving designated individuals or entities. 
 
¶25. (U) The U.S.-Ukraine Treaty on Mutual Legal Assistance in 
Criminal Matters was signed in 1998 and entered into force in 
February 2001. A bilateral Convention for the Avoidance of Double 
Taxation and the Prevention of Fiscal Evasion with Respect to Taxes 
on Income and Capital, which provides for the exchange of 
information in administrative, civil, and criminal matters, is also 
in force. 
 
¶26. (U) Ukraine is a party to the 1988 UN Drug Convention, the UN 
Convention for the Suppression of the Financing of Terrorism, and 
 
KYIV 00002122  005 OF 005 
 
 
the UN Convention against Transnational Organized Crime. Ukraine has 
signed, but not yet ratified, the UN Convention against Corruption. 
Ukraine is a member of MONEYVAL and also an observer and technical 
assistance donor to the Eurasian Group on Combating Money Laundering 
and the Financing of Terrorism (EAG), another FSRB. The SCFM is a 
member of the Egmont Group. It hosted working level meetings of the 
Egmont Group in Ukraine in October 2007. 
 
¶27. (U) Over the years, Ukraine has strengthened and clarified its 
legislation and, with the SCFM, the NBU, and other actors in the 
financial and legal sectors, the GOU has also established a 
comprehensive AML monitoring regime. However, Ukraine's ability to 
implement this regime through consistent successful criminal 
prosecutions has yet to be proven. Ukraine should adopt draft 
legislation to bring its AML/AFT regime into closer accordance with 
both the language and the intent of FATF and international 
standards. The recent veto of amendments that would do just this is 
unfortunate, but still may be overcome in the near future.  The GOU 
also should consider carefully the consequences of reestablishing 
tax and customs privileges that have been abused in the past. The 
GOU should also take steps to improve implementation of its AML/AFT 
regime. The PGO should address the deficiencies of that office, such 
as a lack of specialization and limited professional experience with 
money laundering. Law enforcement agencies should give higher 
priority to investigating and prosecuting money laundering cases. 
Both law enforcement officers and the judiciary need a better 
understanding of the theoretical and practical aspects of 
investigating and prosecuting money laundering cases. Ukraine also 
should ratify the UN Convention against Corruption, and more 
aggressively address public corruption by investigating, prosecuting 
and convicting corrupt public officials. 
TEFFT