Head of the Board of the Human Rights Center ZMINA
Tetiana Pechonchyk, Head of the Board of the Human Rights Center ZMINA, an organization that protects freedom of expression, freedom of assembly and association, countering discrimination, preventing torture and ill-treatment, fighting impunity, supporting human rights defenders and social activists in Ukraine, including occupied Crimea, as well as protecting persons affected by the armed conflict in Ukraine. In May 2022, ZMINA received the OSCE Democracy Defender Award “for outstanding contribution to promoting and protecting fundamental freedoms and human rights in both non-government and government-controlled territories in Ukraine”.
Testimonial of Tetiana Pechonchyk:
- In Ukraine, the implementation of the FATF Recommendations negatively affects the operations of the NGOs and has led to financial exclusion of NGOs. For example, in November-December 2021, banks blocked the accounts of two reputable Ukrainian civil society organisations: the Institute of Mass Information and the Civil Network OPORA. However, two months later, the full-scale invasion of Ukraine by the Russian Federation began, and the requirement to submit the ultimate beneficial owners for civil society organisations was postponed until the end of martial law in the country. In other words, the problem was postponed but not solved, as this trend will resume after the war ends. In addition, inspections can be applied during martial law to those NGOs that have managed to submit their ultimate beneficial owners data.
- The regulatory measures introduced in Ukraine, ostensibly aimed at preventing money laundering and terrorist financing, have inadvertently led to unnecessary overregulation and operational impediments for NGOs. While the intention to align with international standards and protect against financial crimes is commendable, the hurried and unclear implementation of these regulations has created significant challenges. The lack of precise definitions for ultimate beneficial owner (UBOs) in NGOs and the absence of accessible guidance and practical submission options have hindered compliance efforts, rendering them virtually impossible for many entities.
- The postponement of deadlines and ongoing debate over the Methodology for determining UBOs underscores the flaws in the regulatory framework. These issues, compounded by the impact of external events such as the Russian invasion, further demonstrate the need for a more balanced and effective approach to AML/CFT regulations that genuinely serves their intended purpose without placingundue burdens on civil society.
- Our key recommendation to FATF is to involve civil society in the regulatory process to avoid such consequences and financial exclusion. We advocate that NGOs should be removed from the list of entities obliged to report UBOs, both in the Law and in the Methodology. Should NGOs remain on the list, a proper communication mechanism must be established among the National Bank of Ukraine, other banks, and NGOs to prevent the blocking of banking services for NGOs.
In December 2019, Ukraine adopted a new Law of Ukraine “On Preventing and Combating Money Laundering, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction” (hereinafter – the Law).
This Law was adopted to align with the recommendations of the Financial Action Task Force (FATF), as well as Directive 2015/849/EC of the European Parliament and of the Council “On preventing the use of the financial system for money laundering and terrorist financing,” which was issued on 20 May 2015. The law is aimed at protecting the rights and legitimate interests of citizens, society and the state, ensuring national security by defining the legal mechanism for preventing and combating money laundering, financing of terrorism and proliferation of weapons of mass destruction.
The new law requires most legal entities, including public organisations and charitable associations, to register information about their ultimate beneficial owner (UBO) and ownership structure in the Unified State Register of Legal Entities, Physical Entrepreneurs and Public Formations (Unified State Register).
The vagueness of the Law in defining what is a UBO of non-governmental organisations (NGOs) has caused difficulty. At the same time, the relevant authorities did not provide an official clarification on how to fill out relevant forms and submit documents, which in practice led to refusals to enter information on NGOs or incorrect information being entered into the Unified State Register.
The situation was further aggravated with extremely short deadlines for submitting information on UBOs, the inability to submit such information online or by mail, long queues at Administrative Services Centers and state registrars, and the impossibility to make an appointment to submit the relevant documents.
At the same time, the failure to submit or late submission of information on UBOs or its absence or documents to confirm information on UBOs of a legal entity is subject to a fine of UAH 17,000 to 51,000, which, according to Article 166-11 of the Code of Administrative Offences, must be paid by the managers of the legal entity.
In fact, NGOs and other legal entities were put in a situation, in which the fulfilment of legal requirements was obviously impossible and blocked by the state.
The situation was further complicated by an insufficient information campaign and the fact that most NGOs were unaware of the need to submit data on UBOs.
Given these problems and the practical absence of UBOs for public organisations, more than 200 NGOs issued a statement calling on the Verkhovna Rada of Ukraine to exclude public associations with legal entity status and charitable organisations from the list of legal entities that have to submit information on UBOs.
However, on 8 October 2021, the Verkhovna Rada passed Bill No. 5807 and postponed only for 9 months (until July 2022) the deadline for Ukrainian companies and NGOs to submit information on UBO.
The full-scale Russian invasion of Ukraine that began on 24 February 2022, suspended for some time the process of submission of UBOs information by legal entities [At the same time, political parties, trade unions, employers’ organisations and their associations, creative unions, lawyers’ associations, condominiums, chambers of commerce and industry, religious organisations, state and local self-government bodies, state and communal enterprises, institutions and organisations were exempted from submitting information on UBO. A three-month deadline was set for the submission of information on UBO, which began on July 11 and expired on 11 October 2021], in particular NGOs.
It was only in June 2023 that the Ministry of Finance of Ukraine started to develop a methodology for determining a UBO of a legal entity (hereinafter – the Methodology), which should establish clearer criteria as to which legal entities have a UBO and who should be considered a UBO. After reading a draft Methodology, NGO experts criticised most of its provisions, and some have been continuing to oppose the definition of NGO managers as UBOs for NGOs and advocating for their exclusion from the Law.
On 3 October 2023, Government Resolution No. 1011 came into force, approving the Methodology for determining UBOs. Paragraphs 33-39 contain criteria for determining UBOs of a non-profit organisation – legal entity. The Methodology contains mostly all the shortcomings mentioned by members of civil society in their criticism of the criticism of UBOs for NGOs and charitable organisations, in particular:
– The requirement to file information on UBOs for NGOs and charitable organisations is an unwarranted interference with freedom of association,
– NGOs work for public rather than private interests; their benefit is directed to the public,
– NGOs generally do not aim to make a profit,
– the most important decisions (on election of governing bodies, disposition of property, approval of amendments to the charter) in NGOs and charitable organisations are made jointly – by the general meeting of all members of the organisation. Each of these members has influence on the decisions andit is impossible to speak about the belonging of property to one or several persons, as the property belongs to the organisation.
On 6 September 2022, the Law was supplemented by paragraph 4 of the transitional provisions. According to the Law, legal entities that have not reported their UBOs must provide the information to the Government within three months after the termination or lifting of martial law.
According to the same paragraph on transitional provisions, organisations that submitted such information earlier must analyse their charters, determine whether there are individuals in the organisation who can dispose of the organisation’s property and finances or their shares, form governing bodies and determine the organisation’s activities. Thereafter, NGOs that have previously reported UBO information must update the data in accordance with the new Methodology within six months, until 3 April 2024.
NGOs that reported UBOs earlier may face problems in their operations. The Ministry of Justice of Ukraine approved Order No. 2542/5, according to which from 1 December 2023 banks, as primary financial monitoring entities, are obliged to verify information on UBOs and ownership structure of the NGOs in the Unified State Register and compare the information with actual financial operations of the NGO. If banks identify discrepancies, they are obliged to notify the Ministry of Justice.
Since the Methodology provides a broad framework for determining of UBOs in NGOs and charitable organisations, it will allow banks to broadly interpret what constitutes “discrepancies” in determining of UBO and the ownership structure of organisations and their financial transactions. The Ministry of Justice will be able to require NGOs to make changes to their UBOs and ownership structure in the Unified State Register, and banks will be able to block transactions on accounts of the NGOs until the “elimination of discrepancies” in accordance with the law and the National Bank of Ukraine Board Resolution No. 65 of 19 May 2020.
NGO representatives argue that from 1 December 2023, problems in banking services and banks’ reporting to the Ministry of Justice of allegedly false information in the Unified State Register could begin even for NGOs that have not yet reported their UBOs.
The regulatory measures introduced in Ukraine, ostensibly aimed at preventing money laundering and terrorist financing, have inadvertently led to unnecessary overregulation and operational impediments for NGOs. While the intention to align with international standards and protect against financial crimes is commendable, the hurried and unclear implementation of these regulations has created significant challenges. The lack of precise definitions for UBOs in NGOs and the absence of accessible guidance and practical submission options have hindered compliance efforts, rendering it virtually impossible for many entities. The postponement of deadlines and ongoing debate over the Methodology for determining UBOs underscore the flaws in the regulatory framework. These issues, compounded by the impact of external events such as the Russian invasion, further demonstrate the need for a more balanced and effective approach to AML/CFT regulations that genuinely serves their intended purpose without placing undue burdens on civil society organisations.
Our organisation, ZMINA Human Rights Center, believes that the current version of the Law results in undue overregulation that negatively affects the operations of the NGOs. We advocate that NGOs should be removed from the list of entities obliged to report UBOs, both in the Law and in the Methodology.