Financial monitoring in the activities of lawyers, advocates and accountants: legal requirements and practical consequences for business

When cooperating with lawyers, advocates or accountants businesses are increasingly faced with requirements to provide information on the ownership structure, ultimate beneficial owners, business purpose of transactions or origin of funds. Such requirements are often perceived as excessive, but they are a direct obligation of the subjects of primary financial monitoring established by the legislation of Ukraine.

Legal regulation of financial monitoring

The basic regulatory act is the Law of Ukraine “On Prevention and Counteraction to the Legalization (Laundering) of Proceeds of Crime, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction” (hereinafter referred to as the Law).

According to paragraph 14 of part one of Article 1 of the Law financial monitoring is a set of measures taken to prevent and counteract the legalization (laundering) of proceeds from crime, the financing of terrorism and the financing of the proliferation of weapons of mass destruction.

The Law is built taking into account FATF international standards and provides for obligations not only for banks, but also for individual professional participants in the services market.

Who are the subjects of primary financial monitoring

According to part one of Article 6 of the Law the subjects of primary financial monitoring include, in particular:

• advocates, advocates' bureaus and advocates' associations;

• business entities providing legal services;

• auditors and audit firms;

• accountants and entities providing accounting services;

• tax consultants (in certain cases).

The obligation to conduct financial monitoring arises when these entities participate in or assist clients in transactions specified by law.

Types of activities in which financial monitoring is applied

According to paragraph 7 of part one of Article 6 of the Law, lawyers, advocates and accountants conduct financial monitoring if they participate in or assist clients in:

• purchase and sale of real estate or corporate rights;

• management of client assets;

• opening or management of bank accounts or securities accounts;

• formation, support of activities or management of legal entities;

• formation of authorized capital, trusts or similar legal entities.

In such cases the specialist is obliged to apply customer due diligence (KYC) measures.

Customer due diligence: what exactly is checked

The content of customer due diligence is determined by Article 11 of the Law and includes:

• identification of the client;

• verification of the received data;

• establishment of the ultimate beneficial owner (UBO);

• clarification of the business purpose and nature of the business relationship;

• risk assessment.

In this case a risk-based approach is applied (Article 7 of the Law): the scope of the inspection depends on the level of risk associated with the client or transaction.

Sources of information used by the subjects of financial monitoring

In the course of performing their duties the subjects of financial monitoring use:

Official state registers, in particular:

• Unified State Register of Legal Entities and Individual Entrepreneurs;

• information on ultimate beneficial owners;

• Unified State Register of Court Decisions;

• Unified Register of Debtors;

• sanctions lists put into effect by decisions of the National Security and Defense Council.

International and specialized sources:

• international sanctions lists;

• lists of politically exposed persons (PEP);

• foreign commercial registers (if there is a foreign element).

Open sources:

• official websites of companies;

• publications in the media;

• publicly available business resources.

Documents usually requested from clients

In order to fulfill the requirements of Articles 11 and 14 of the Law lawyers and accountants may request:

Regarding a legal entity:

• extract from the Unified State Register;

• constituent documents;

• ownership structure;

• information about the UBO.

Regarding officials and owners:

• passport data;

• registration number of the taxpayer's registration card;

• documents confirming the authority of the director or representative.

Regarding transactions:

• contracts;

• information about the business purpose of the transaction;

• documents confirming the origin of funds (if necessary).

Consequences of the impossibility of conducting financial monitoring

According to Part Six of Article 11 of the Law, if the subject of primary financial monitoring cannot conduct a proper check of the client, he is obliged to:

• refuse to establish or maintain business relations;

• refuse to conduct the relevant transaction;

• in cases provided for by law submit information to the State Financial Monitoring Service of Ukraine.

Violation of the requirements of the Law entails financial and administrative liability (Article 32 of the Law).

Specifics of financial monitoring for advocates and attorney-client privilege

A special regime is established for advocates.

According to Part Five of Article 6 of the Law advocates are not obliged to notify the State Financial Monitoring Service of Ukraine of suspicious transactions, if the relevant information became known to them:

• while defending a client;

• within the framework of representing the client's interests in court;

• in connection with the provision of legal assistance for defense or representation.

This corresponds to the provisions of the Law of Ukraine "On the Bar and Advocacy", in particular Article 22, which guarantees attorney-client privilege.

At the same time advocates are obliged to carry out financial monitoring in terms of identifying and assessing a client in cases directly provided for by the Law (for example, when supporting corporate or property transactions).

Thus, financial monitoring in the activities of lawyers, advocates and accountants is a legally established obligation that has clear boundaries, procedures and exceptions. For business understanding these rules means:

• predictable and safe cooperation with consultants;

• reducing the risks of refusals to provide services;

• minimizing regulatory and reputational risks.

Transparency of the corporate structure and readiness for due diligence are key conditions for effective work in the modern legal environment.