Forming a System of Prevention and Counteraction of the Legalization of Bank Clients’ Proceeds. – Qualification scientific work on the rights of a manuscript

The thesis is devoted to theoretical justification, theoretic foundations’ and methodological approaches’ improvement, scientific-practical recommendations’ development in creating a system for preventing and counteracting the legalization of bank clients' proceeds. In the thesis, theoretical approaches to the concept of “legalization of proceeds” are systematized, its essential characteristics are summarized, and its content-analysis is made. The results of content-analysis in combination with a normative definition of “a bank’s client” provided an opportunity to substantiate that the legalization of bank clients' proceeds should be understood as any criminal activities with money and other financial illegally obtained funds being committed by a legal or neutral person aiming at hiding their origins and turning them into legal assets through using bank services or attempting to do so. The formulated definition indicates that the person attempting to legalize criminal money is a bank’s client according to the current legislation. It emphasizes that any actions with illegally obtained proceeds are considered to be money laundering, taking into account the morphological base and keywords accepted in a majority of official documents.

In this work, it was established that the main difference between prevention and counteraction of money laundering is that counteraction arises only when there is an action aiming at money laundering. It was also substantiated that prevention of money laundering through banks should be understood as a set of made beforehand bank’s actions aiming at precluding any criminal activities with money and other financial illegally obtained funds being committed by a legal or neutral person aiming at hiding their origins and turning them into legal assets through using bank services or attempting to do so. Counteraction of the legalization of bank clients' money is a set of bank’s actions directly impeding any criminal activities with money and other financial illegally obtained funds being committed by a legal or neutral person aiming at hiding their origins and turning them into legal assets through using bank services or attempting to do so.

The analysis of current legislation in the sphere of the prevention and counteraction of money laundering through banks showed that a set of functional components of the prevention is identified, whereas a set of the counteraction components is not. Based on generalization and analysis of regulatory legal acts and leading scientists practices, it was determined the feasibility of including into the structure of a system for preventing and counteracting the legalization of bank clients' money the following functional elements: identification, verification, and scrutiny of a client; detecting, registration, monitoring, analyzing, and reporting the financial transactions; risk management; staff competencies and training; documents and information storage; internal control, internal and external auditing; compliance; information systems management; corporate governance and role of a bank’s management bodies. The clients’ information and documents, customers’ financial transactions, clients’ risks, and their financial transactions’ risks were defined as the objects of a system. Into the generalized scheme of a system for preventing and counteracting the legalization of bank clients' money were also included the common external factors affecting a bank’s activity in general and its systems’ creating and functioning (at a system’s input); a set of internal factors incorporating staff competencies and training; compliance; information system management; documents and information storage; internal control, auditing and a corporate governance of a bank; a functional-process core of the prevention of money laundering including identification, verification, and scrutiny of a client; detecting, registration, monitoring, analyzing, and reporting the financial transactions; risk management (assessment, analysis, control, monitoring of a clients’ risks and their financial transactions’ risks ); a functional-process core of the counteraction of money laundering consisting of: refusing to establish business relationships and severance of them; refusing to financial transactions and their stopping.  At the output of a system for preventing and counteracting the legalization of bank clients' money, its goal is expected to be achieved, that can be seen in decreasing and minimizing the risk of money laundering, reducing the number of attempts and incidents of money laundering through bank institutions, satisfying the clients’ needs and strengthening the bank’s competitive advantages at the market of financial services.

In this work, the sequence of steps in creating a system for preventing and counteracting the legalization of bank clients' money is established, which includes not only the well-known stages of a system’s building and a current system’s evaluation but also unannounced audits, a planned staff training, and planned audits. 

In the second section of the work, money-laundering factors are structured into three groups: geographical, client and operational. The geographical factors incorporate economic factors subgroup (population’s income level; the hidden economy existence and its volumes; results of a system for preventing and counteracting the legalization of money), the political subgroup (quality of a state administration), and the subgroup of legislative factors (liberal state regulation, financial monitoring system’ incompleteness). The client factors display a kind of activity, beneficial owners, and the aim of opening accounts. The operational factors in the context of the legal economy allow estimating the cash volume in a state, the cash transaction volume of banks, the presence of anonymous transactions in banks, and transactions with cryptocurrencies. For each subgroup of money-laundering factors is offered a set of indicators allowing: to analyze fully the conditions in which economic entities are operating, and identify the level of their perception of corruption, the level of a country’s instability, and sufficiency in the rule of law; to take into account a list of quantitative and qualitative characteristics of bank’s clients and their transactions. Using the established set of indicators, the external factors towards banks were analyzed in this work.

          Internal factors of the legalization of bank clients' money are estimated with the help of developed tools including questionnaires for assessment of staff competencies and their training, compliance, information system management, documents and information storage, internal control, auditing, and corporate governance; possible replies’ scale. Assessing the indicated factors of seven Ukrainian banks identified that for three of them the least relevant to the most favorable conditions factor was compliance, for two of them they were staff competencies and their training, for other banks they were internal control, auditing, corporate governance, and role of its bodies.

The analysis of financial activity of 32 Ukrainian banks aiming at identifying the money-laundering risks, showed that banks, where National Bank of Ukraine revealed suspicious transactions with money-laundering features (16 operating banks), had much higher coefficients of variation in cash flow volume, in cash flow for on-demand accounts of economic entities, in cash flow of on-demand accounts for individuals, compared with the banks where the violations of legislation in the field of financial monitoring were disclosed (8 banks), and with the banks where violations were not found (8 banks). This proves that sudden changes in clients’ transaction volume can be the signs of money-laundering risk.

          In the third section of the work, the methodological supply to estimate the risk of using bank services for money laundering is offered. It includes: calculation of partial indicators for risk assessment (presence of suspicious transactions,  number of violations found by NBU, volume of fines being imposed due to violations, growth rate in cash flow volume, growth rate in cash flow for on-demand accounts of economic entities, growth rate in cash flow for on-demand accounts of individuals); calculation of an integral indicator to estimate a risk level of using bank services for money laundering; five-tiered scale for an integral indicator’s value allowing to interpret a risk level qualitatively and identify the banks increasingly predisposed to be involved into money laundering. According to results of the assessment for 32 banks having been analyzed in April 2019, the highest risk level of using bank services for money laundering had Citibank (the risk at the level of 49,08%), Misto Bank (the risk at the level of 40,83%), MTB Bank (the risk at the level of 39,27%), that was relevant to the medium level of risk.

          The developed methodical approach to estimating a system for preventing and counteracting the legalization of bank clients' money consists of six stages. Their implementation helps to estimate the system’s elements integrally, compare them, and find its vulnerable and weak elements; to assess the whole system integrally with the help of incorporating all the integral elements’ estimates into the one indicator taking into account their coefficients of significance; to interpret the results using the developed scale. Through the use of the formulated approach, the seven operating Ukrainian banks’ systems for preventing and counteracting the legalization of bank clients' money were assessed. In response to results, and taking into consideration the in-depth analysis of the most challenging elements’, the relevant improvement recommendations were developed.