War creates tough questions over critical Ukraine payments as de-risking threats loom
Rapid and effective international payments are critical to the welfare of externally and internally displaced Ukrainian refugees and NGOs, with some financial institutions announcing policy changes to better accommodate Ukrainians. However, some banks are increasing scrutiny on Ukraine-related transactions, compliance officers inform Financial Crime Digest. Meanwhile, others may be de-risking from Ukraine entirely, raising new sets of concerns over financial exclusion recently highlighted by the European Banking Authority (EBA).
Adjacent to a city park in the southern Ukrainian city of Ivano-Frankivsk teeming with uniformed soldiers, and mere blocks away from sandbagged buildings and streets blocked off with anti-tank barricades, two dozen volunteers rush in and out of the entrance to an abandoned Soviet dormitory. Amid the drone of electric drills and hammering sounds up and down the four story building, the volunteers carry wooden beams, buckets of paint, and new appliances donated from Germany and Poland. The building is now being brought back to life as Co-haty, a collaborative urban housing project run by a female-led team of architects at the NGO MetaLab and affiliated groups, and will soon be home to more than 200 refugees from eastern Ukraine as the war enters its third month.
Tania Pashynska, a Site Manager at Co-haty, gave?Financial Crime Digest?a tour of the building, which already includes several finished rooms, fully renovated showers, and functioning kitchens. Bounding up a flight of stairs past a team of volunteers repainting the dormitory corridors, Pashynska said that a crucial component of the group’s operations is donated equipment from EU countries, such as sink basins, heating systems, and mattresses, as well as international donations used to purchase locally sourced hardware.?
Anastasya Ponomaryova, an MIT-educated architect from Kyiv responsible for Co-haty’s finance, said that the biggest challenges to receiving international transfers are delays in fund arrival and accessibility. Nevertheless, she reports that all international donor funds sent via direct bank transfer to the NGO account and from service providers such as PayPal have successfully arrived, supporting the influx of refugees from the eastern front.?Personally, however, Ponomaryova has already encountered challenges transferring funds sent from Germany to her private account at Ukrainian Bank Universal. The bank blocked her funds and requested additional documentation she did not have. The bank said that her Ukrainian passport listed her address as her former residential address in Makiivka, while she is currently registered in Ivano-Frankivsk.
The war has created difficulties for Ukrainians like Ponomaryova who are making critical payments into?and out of the country. Despite the challenges she has faced, Ponomaryova said banks should be suspicious of transactions that raise red flags, as such warning signs could be indicative of crimes harming Ukrainians.?This underscores a central dilemma facing compliance officers - on the one hand, they are acutely aware of the importance of facilitating payments to Ukrainian refugees in Europe and Ukrainian nationals and NGOs such as MetaLab carrying out crucial humanitarian work. On the other, banks are increasingly wary of aiding and abetting the flow of illicit proceeds from organised crime and illicit actors seeking to benefit from the war.?
War heightens existing money laundering risks
Organised crime in Ukraine is far from a new phenomenon, although the war is likely to strengthen regional criminal networks, experts say. Keith Ditcham, an organised crime researcher and Senior Fellow at the Royal United Services Institute told?Financial Crime Digest?that some of the challenges European banks may face in onboarding new Ukrainian customers predate the war. Ukraine was already a significant source of human trafficking as well as a major trafficking transit and destination country, Ditcham said.?Russian’s invasion has resulted in an "increased risk of people being exploited for trafficking purposes, whether women in the sex trade, or children, or men being used as mules for money and drugs, and this all fits the crime profile of Ukraine" prior to the latest eruption of the war, Ditcham said.?
"Those risks are amplified because there are people who are vulnerable and willing to do anything to protect themselves and their families", Ditcham added, noting that neighbouring countries on the receiving end or acting as a major throughway for millions of Ukrainian refugees also take on these risks, particularly Poland, Moldova, and Romania.?According to a criminality index produced by the Global Initiative Against Transnational Organized Crime, Ukraine ranked 3rd out of 44 countries in Europe, and 41st out of 44 for resiliency against crime. "Corruption pervades throughout law enforcement and some of the government institutions and it is thought that mafia type organisations control and have controlled the organised crime in Ukraine for years", Ditcham said.?Despite these challenges, many EU financial institutions have responded robustly to the crisis by directly supporting Ukraine and Ukrainian refugees.
Lithuania payment service provider PaySera, a company that has turned a floor of its Vilnius headquarters into a refugee shelter, has taken a firm political stance on the war by offering customers the option to donate directly to the Ukrainian military through their own payment applications.?PaySera told?Financial Crime Digest?that the "full scale of the impact of the war in Ukraine on organised crime, human trafficking and other crimes will be evaluated adequately only when analysing in retrospective". The company adds that, in the meantime, "staying diligent when approaching any situation, including those that previously had no grounds for suspicion, is the only right option. Otherwise, the potential consequences could be devastating".
Paired with such examples of direct support for Ukraine are official policy changes by European banks to accommodate refugees. London-headquartered neobank Revolut announced on 14 March that it would lower its onboarding requirements for Ukrainian refugees by accepting even those Ukrainian?customers who lack the documentation previously required to open a Revolut account.?Brian McDonnell, founder of financial services law firm McDonnell Ellis, told?Financial Crime Digest?that regulators such as the UK's Financial Conduct Authority are likely to accommodate banks?onboarding clients from Ukraine with reduced due diligence and know-your-customer (KYC) standards.?The EU has taken a similar approach.?On 27 April the European Banking Authority (EBA) announced new?guidelines for how financial institutions and supervisors can apply existing antimoney laundering and countering the financing of terrorism (AML/CFT) guidelines to apply more leniency when it comes to new Ukrainian customers in order to ensure access by Ukrainian refugees to the European financial system. Recommendations include delaying some onboarding KYC measures to ensure rapid refugee access to financial services. The EBA's announcement follows the 4 March Temporary Protection Directive (2001/55/EC), which granted temporary EU residency to Ukrainian refugees and, with it, increased legal rights to access basic banking services.?"You can see the difficulty that someone fleeing Ukraine would have", McDonnell said. "They have a Ukrainian bank account, but those Ukrainian banks presumably don't have correspondent relationships with the EU or the relevant country that person is in, and actually it is going to be quite difficult for that person to access their funds".
A compliance officer at a European neobank told?Financial Crime Digest?that banks face difficult decisions when it comes to processing transactions involving Ukraine.?"There are a lot of individuals that are collecting money for the purchase of medicine, bullet proof vests, and military-grade equipment, and then either shipping these funds to Ukraine, spending at merchants offering military-grade equipment, or cashing out", he said. "If you are a MLRO, you have some difficult moral decisions to make".?
A Ukrainian senior compliance officer at a European bank told?Financial Crime Digest?that being a Ukrainian citizen overseeing compliance efforts reinforced the internal conflict between maintaining stringent AML compliance and using one’s own position of relative authority to assist those in need.?"For me, because I am Ukrainian, I know what is happening in the country, I know how important it is for us to support people and our army", she said. "We are not sure how the funds will be used. In some cases even if it's not really unusual, but the authorities are asking for us to be vigilant, we need to report it as a suspicious transaction". McDonnell said that if a bank faced legal consequences for inadvertently facilitating financial crime when it had reason to believe it was assisting a Ukrainian refugee, it could point to Joint Money Laundering Steering Group (JMLSG) guidance on refugees and financial inclusion as legitimate legal justification.?He added that banks such as Revolut presumably will encounter fewer compliance issues when processing relatively small payments for Ukrainian refugees which do not give rise to red flags. However, he added that if they extract all of their money from the Ukrainian account to a Revolut account, depending on the quantity of money, "a red flag might arise as to whether Revolut needs to do more enhanced due diligence as to the source of funds. I imagine that is quite likely".
The Ukrainian compliance officer said that regulators have previously pointed to perceived weaknesses in the compliance frameworks of neobanks because customers do not have to be physically present to meet KYC requirements, can?open an account within minutes, and transactions are performed quickly and fully online.?"As such, there are more threats for the abuse of these institutions by criminal groups and in the context of?human trafficking", she said.?For European banks concerned about Ukrainian correspondent banks, Ditcham points to a cohort of roughly three dozen criminal bosses known colloquially as "thieves in law" who ran organised crime groups in the country for years prior, and who may still be active. "When it comes to know-your customer and due diligence, there’s an ability of [Ukrainian] banks to make those checks if they wish",?Ditcham stated. "The question is to what extent they do, and we shouldn’t assume they are applying the amount of scrutiny that should be applied".
Although guidance is provided by financial intelligence units (FIUs) about the need for enhanced diligence in the context of the war, particularly in the?context of Russian sanctions evasion, one?compliance officer told the?Financial Crime Digest?that such guidance is already?being well heeded by his bank.?"If you are a financial crime expert working for a financial institution, you don't really need to be made aware by FIU guidance that additional due diligence measures should be applied during wartime", he explains. Nevertheless, as his institution continues to process?donations to Ukrainians and Ukrainian NGOs, he acknowledges the quandary facing FIs across Europe: "Is supporting this creating a ripe?environment for?the facilitation of illicit activity?under the guise of?the same activity?"
Industry experts warn that some FIs may de-risk from Ukraine, speculate that some already are
Some financial institutions have increased scrutiny on Ukraine-related transactions and have de-risked entirely from Donetsk and Luhansk, even in those parts of the regions that remain under the control of Ukrainian forces, according to a senior compliance officer at a major European online bank.?For the transparency organisation OpenDemocracy, which reportedly uses MetroBank, additional scrutiny on transactions involving Ukraine has resulted in what may be an early example of a major bank de-risking from the country. Several journalists from the organisation reported on Twitter that the bank was blocking payments to its Ukraine-based journalists. This relatively early example in Ukraine of de-risking, when financial institutions opt out of processing transactions involving a country or region, may become increasingly commonplace, according to several industry experts.??
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"I doubt that large multinational banks will de-risk Ukraine-related transactions, as they have the?capacity to deal with the investigations required",?one compliance expert told Financial Crime Digest. "However, de-risking may occur in smaller banks and fintech service providers as they may not be able to deal with the complexities arising from sanctions?and ML risks all together".
From a public relations standpoint, the compliance officer said that such an action will be difficult, particularly in western Europe, where the overwhelming majority of citizens support the defence of Ukraine. FIs entirely blocking Ukraine, he told?Financial Crime Digest, run the risk of being discovered and alienating their customers.?"It comes down to who does this and then how they deal with the potential ensuing PR crisis when they are accused of supporting Russia", the compliance officer said. "Some of the FIs will be de-risking, and they will?do it quietly and then offer vague responses to customers about why they are blocking certain transactions and hope that the public doesn't catch on".
Beyond public relations concerns, Senior Researcher at the Graduate Institute, Geneva Erica Moret said that financial sector de-risking can contribute to a situation of financial exclusion in some parts of the world, which in turn can serve as a driver for conflict and human rights abuses such as human trafficking.?"As such, it is important for de-risking to be tackled in order for it not to serve as a vicious circle - fueling the very problems that sanctions are intended to address", she said.?Moret said that proposed solutions to this de-risking dilemma ought to start at the beginning of the policy?design chain, such as the use of broader standing exemptions across all sanctions regimes, a proposal advocated by the International Committee of the Red Cross. Also essential to these efforts are improved guidance, capacity building, industry training,?protected humanitarian banking channels, and improved digital payment solutions, Moret said.
The compliance officer at a major online bank in Europe states that his institution relies heavily on machine learning models which take a range of inputs that the bank regularly updates so that it can effectively rely on data to determine whether or not there are significant suspicious transactions coming in and out of Ukraine. He noted that prior to the war,?Ukraine and Russia were the major destinations for stolen funds in Europe, and said that his bank has continually utilised machine learning to remove the burden from employees monitoring transactions.?"We knew that Ukraine was a country of increased?risk with money laundering especially", he said. "We not only have machine learning models, we have regular scenarios for transaction monitoring that we can find?here. At some stage we realised that it's almost unmanageable to create tens if not hundreds?of transaction monitoring scenarios to be able to capture all typologies of transfers where we detect increased risk of illicit funds".
As an example, he said that if the bank submitted three times more suspicious activity reports involving Ukraine in Q1 2022, the machine learning tool would recognise that Ukraine is a country of increased risk. He said that roughly 200 other features of transactions?and customer behaviour are factored into his bank’s programme to offer effective machine learning-based risk management.?"There’s no simple answer", the compliance officer added. "We could in theory look at every transaction in Ukraine or every transaction above a certain threshold, but this would involve thousands of people looking at transactions to determine whether we should inform the FIU or not".
Eastern European hawala system to emerge?
Compliance officers told?Financial Crime Digest?that de-risking by banks on Ukraine-related transactions may be generating conditions for hawala-like systems to emerge.?The traditional hawala system operates as an alternative to regular banking, in which hawala operators or dealers arrange payments and receipts of payments between numerous senders and receivers on each side of a national border without any funds ever crossing the border. Instead, hawala dealers cancel out debts to one another through the repayment of senders and receivers on each side.
One compliance officer at a major European bank told Financial Crime Digest?that a black market may be emerging in Ukraine’s neighbouring countries in which Ukrainians?with large sums of legitimate money who lack documentation to justify their source of funds are increasingly turning to intermediaries to inject these funds into the traditional financial sector on their behalf.?Another compliance officer confirmed that he was aware of the same situation in Poland. He said that prior to the war, millions of Ukrainian migrant workers in Poland regularly send money across the border to support their families. Now, there are three million?additional Ukrainians in Poland, many of whom have found work and are also sending funds back to family members and friends who remain in Ukraine. The natural consequence of wealthy Ukrainians seeking to move their wealth into Poland while millions more?Ukrainians in Poland seek to support Ukrainians still in Ukraine, he asserts, is the development of a hawala system.?"The situation now in Ukraine is the perfect grounds for the growth of hawala-like payment services", he?said. "You have demand on both sides of the border to transfer money. All it takes is to set up a hawala system for people in Poland and Ukraine to net these transactions without any money crossing the border".
"Working in the industry already for some time, I would assume that the criminals are smarter than the industry people", he added. "If I've already recognised?that here in Poland there is the perfect grounds for this system to operate on a large scale, these guys already know that. It's just a matter of time before a financial institution discovers that they are facilitating a hawala operation".?Moret said that hawala serves an important role in the Middle East, including in contexts where access to the formal banking system is limited. Several technical solutions currently exist that are utilised in the context of aid delivery to Syria, Iraq, and Afghanistan. Moret offered the example of AmanaCard, a self-described "secure payment gateway designed especially for unbanked crisis zones", as one such solution, widely?used by European governments to disperse humanitarian funds in financially excluded countries where conflict is taking place in a manner deemed to be compliant by regulators and banks.?"There are a number of European countries that openly recognise that hawala is necessary and?legitimate and legal", Moret told?Financial Crime Digest. "It's increasingly the sole method of dispersing?funds for certain major European governments in some of these countries", adding that "others are a bit more reluctant due to perceived challenges with documentation and transparency. But they are not insurmountable".?
David Shoup,?Associate Editor
Roger Hamilton-Martin,?Financial Services Journalist
This article was first published in April's issue of the Financial Crime Digest. Read the edition in full here.