Banks will be forced to expose the "business crushing" schemes of FOP

On November 1, 2024, the National Bank of Ukraine issued an explanatory letter regarding recommendations on financial monitoring issues.

This concerns the prevention of money laundering of proceeds earned by companies from entrepreneurial activities.

What financial monitoring mechanisms will be implemented, and what checks should legal entities and sole proprietors expect?

National Bank Recommendations

According to the letter from the National Bank, all Ukrainian banks and non-banking financial institutions must implement mechanisms to help identify so-called "business fragmentation." This decision was driven by the fact that tax authorities, along with law enforcement agencies, constantly face fraudulent schemes where a legal entity fragments its business, for instance, through sole proprietors under simplified tax regimes. In this way, entrepreneurs avoid paying taxes and violate the law.

Therefore, to detect such schemes, the National Bank provided recommendations to banks and non-banking financial institutions on monitoring suspicious financial activities.

Such institutions should recognize certain indicators of such schemes, which may indicate connections between a legal entity and sole proprietors. If the analysis of financial operations reveals that bank clients are linked to certain sole proprietors, the institution must report this to the State Financial Monitoring Service. Then, based on suspicions of tax evasion, the state agency will audit the company's activities and analyze all its financial transactions.

Thus, the main purpose of the NBU’s recommendations is to involve banks and non-banking financial institutions in measures to prevent the laundering of proceeds obtained by criminal means.

What Information Will Be Prioritized in Financial Monitoring?

Financial institutions and banks will carefully monitor the following indicators of fraudulent schemes:

• submission of documents proving the establishment of business relationships between the company and sole proprietors;

• shared registration address of the company and sole proprietors;

• common place of sale of goods or provision of services;

• shared owners, accountants, or representatives, etc.;

• lack of resources necessary for sole proprietors to conduct business with the company;

• significant funds credited to sole proprietors' accounts from a single legal entity;

• payment by the company for services rendered by sole proprietors, where exact valuation is not feasible (such as information or marketing services, advertising, etc.);

• receipt of financial assistance by a sole proprietor from the company;

• substantial volume of financial transactions across all accounts of a recently registered sole proprietor;

• activity conducted by a sole proprietor that results in a total amount exceeding the annual income threshold within 2-3 months;

• financial transactions conducted through a single payment terminal, etc.

In other words, all business operations, their frequency, purpose, and volume are subject to financial monitoring.

Additionally, a financial operation may raise suspicion if:

• the bank client cannot explain the nature of their business activities;

• the financial transaction benefits another party or person not registered with the institution;

• one individual manages the accounts of several clients with unexplained connections between them;

• inconsistency between the actual transaction amounts and the amounts declared by the client, etc.

The above list is not exhaustive. This means that financial institutions may, at their discretion, determine other indicators of such schemes that help identify relevant links between a legal entity and a sole proprietor.

Thus, all banks and other financial institutions are required to thoroughly review each client’s activities, establish their connections with other companies or sole proprietors, and analyze information about the nature of their business relationships, the means of providing goods or services, the existence of trading platforms, online stores, and so on.

The results of the analysis are documented by the banks. All identified information is provided to the state financial monitoring service for further investigation.