Why the state needs to identify the ultimate beneficial owners of CSOs and FATF’s guidance on this

June 1, 2023

Ihor Koblikov

lawyer in the field of development and support of civil society organizations,
Ukraine Civil Society Sectoral Support Activity Project


On March 31, 2023, the National Bank of Ukraine (NBU) stated: “The Board of Executive Directors of the International Monetary Fund […] has approved a four-year program for Ukraine, The Extended Fund Facility (EFF) of 11.6 billion Special Drawing Rights […] which amounts to about USD 15.6 billion. This program is part of an overall USD 115 billion support package for Ukraine from international partners.”

On the same day, the International Monetary Fund (IMF) released on its website a report on Ukraine’s request for an Extended Arrangement under the Extended Fund Facility and a review of program monitoring with the Board.

The report summarizes that “the overarching goals of the authoritiesprogram are to sustain economic and financial stability at a time of exceptionally high uncertainty, restore debt sustainability on a forward-looking basis in both a baseline and downside scenario, and promote reforms that support Ukraines recovery on the path toward EU accession in the post-war period.”

Therefore, the IMF program is not only about supporting financial stability, but also about reforms on the path to EU accession. The measures to be implemented by Ukraine over the next two years include changes to the legislation on combating money laundering and terrorist financing.  

By September 2023, the state must bring the definition of beneficial owner in line with FATF standards, as well as introduce effective verification measures to ensure the accuracy, adequacy and relevance of information on the beneficial owners of legal entities. 

In addition, pursuant to Article 5-1 of the Law of Ukraine “On Prevention and Counteraction of the Legalization (Laundering) of the Proceeds from Crime, Financing of Terrorism and Financing of the Proliferation of Weapons of Mass Destruction”, which entered into force on December 29, 2022, the Ministry of Finance of Ukraine is obliged to develop the Methodology for Determining the Ultimate Beneficial Owner by a Legal Entity. It is approved by the Cabinet of Ministers of Ukraine and the National Bank of Ukraine.

The NBU, in turn, will conduct anti-money laundering and counter-terrorist financing supervision to ensure that banks and other financial institutions adhere to their obligations in accordance with the risks they have identified. This also requires the NBU to develop methodological guidelines harmonized with FATF standards.

Thus, the IMF program will pay considerable attention to the area of anti-money laundering and countering the financing of terrorism. The need for Ukraine to comply with the standards of the Financial Action Task Force on Money Laundering (FATF) was emphasized once again. The state undertook the obligation to implement them by ratifying the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism. It entered into force for Ukraine on 06/01/2011. 

FATF standards require, inter alia, transparency of the ownership structure of legal entities, and their implementation will require efforts not only on the part of the state, but also on the part of participants of the banking system.

On March 10, 2023, FATF released its Guidance on Beneficial Ownership of Legal Persons (hereinafter referred to as the Guidance). This document is developed on the basis of the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation of Weapons of Mass Destruction (the so-called FATF Recommendations) updated in February this year for proper implementation.

The guidance focuses primarily on Recommendation 24, i.e. transparency of beneficial owners of legal persons. 

Competent authorities in the member states should be able to obtain (or have timely access to) adequate, accurate and relevant information on beneficial owners of legal persons. Countries are free to choose the necessary and effective mechanisms to do so, but they should meet the minimum requirements set out in this Recommendation. Compliance with them will indicate that the objectives of cooperation with the FATF are being progressively achieved and that commitments to the IMF are being met on the path to further EU accession.

Let us therefore elaborate on Recommendation 24.

First, we want to note that Recommendation 24 establishes an explicit requirement to apply a multilateral approach. That is, countries should use a combination of different mechanisms to collect beneficial ownership information without limiting their options. 

The objective is quite obvious – to ensure that adequate, accurate and relevant information on the beneficial ownership of legal persons is available to competent authorities in a timely manner.

Second, countries have an obligation to analyze the money laundering and terrorist financing risks associated with legal persons. Obviously, the risks should be properly assessed for public associations and charitable organizations as well. 

Based on the level established based on risk analysis, countries determine measures to ensure timely access of competent authorities to adequate, accurate and up-to-date information on the beneficial owners of such legal entities.

In practice, there are quite common situations when it is impossible to determine the ultimate beneficial owners of legal entities for objective reasons. For example, in the case of civil society organizations, the purpose of which is not to make profit, but rather to promote social change. Therefore, their beneficiaries are all citizens of Ukraine. At the same time, neither the legislation of Ukraine, nor subordinate regulations and clarifications provide an answer to the below: How to act in such a situation.

The Regulation on Financial Monitoring by Banks, approved by the Resolution of the NBU Board of 05/19/2020 No. 65 (hereinafter referred to as the Regulation on Financial Monitoring), suggests that banks focus on the founders of the organization when performing a proper due diligence of a client – non-profit organization.

At the same time, it is obvious that the function of founders is limited in time and ceases after the state registration of a public association or charitable organization. The founders do not perform other functions, except for creation. Therefore, this approach cannot be considered fully justified.

At the same time, the NBU in its letter “On Measures of Due Diligence of NGOs” dated 11/29/2022 No. P/25-0005/82964 noted that “the requirements of the AML/CFT Law on identification of the ultimate beneficial owner (UBO) of the client or its absence should be fulfilled in relation to NGOs. For this purpose, we recommend that banks identify a natural person who has signs of exercising indirect decisive influence on the activity of this organization, defined in paragraph 30 of Part 1 of Article 1 of the AML/CFT Law”.

Therefore, banks should identify the ultimate beneficial owners of NGOs, defining them, in particular, as natural persons who have signs of exercising indirect decisive influence. 

We are talking about the right of decisive influence on the formation of composition, voting results of management bodies, adoption of binding decisions that have a decisive impact on the activities of a legal entity. In our opinion, a similar approach can be applied to charitable organizations.

Therefore, there is a situation indicating the existence of enhanced requirements to non-profit organizations. After all, the NBU in its legal acts, on the one hand, focuses banks’ attention on the need to study the founders of a non-profit organization (although the function of the latter ceases immediately after the state registration of the legal entity).

On the other hand, in explanatory materials, the National Bank already recommends that banks determine the ultimate beneficial owners of non-profit organizations as individuals who have an indirect decisive influence on the respective legal entity. 

At the same time, it is not possible to determine the ultimate beneficial owner of a non-profit organization (public association and charitable organization), given the specifics of their activities. In such cases, it is inappropriate to use the general approach of determining the threshold of ownership and/or voting rights.

However, FATF provides additional considerations that it believes may be relevant. Thus, control in legal entities can also be determined through positions. Individuals who exercise significant control over a legal entity and who are responsible for making strategic decisions that significantly affect the operations or overall area of activity of the legal entity may, in certain circumstances, be considered beneficial owners. Depending on the legal entity and the law of the country, directors may or may not play an active role in controlling the affairs of the legal entity (paragraph 45 of the Guidance).

Therefore, if it is not possible to identify the ultimate beneficial owner of a legal entity for certain objective reasons (as is the case with civil society organizations), it is appropriate to identify the person or persons exercising significant control and responsible for making strategic decisions in order to properly screen the client according to the FATF Recommendations. In our opinion, such persons could include, among others, the heads and members of collective governing bodies.

However, the current legal regulation of the mechanism of determining the ultimate beneficial owners for non-profit legal entities, as well as additional requirements for the non-profit organization checks, which are applied by the National Bank of Ukraine, focusing on the founders, are not consistent with the FATF requirements. 

Therefore, under Ukraine’s current obligations to the International Monetary Fund, it may also be a question of the need to properly regulate the mechanism of verification of the client of a non-profit organization. 

Thus, even in the absence of the actual ultimate beneficial owner of a non-profit legal entity (public association and charitable organization), the person or persons exercising significant control and responsible for making strategic decisions should be identified, as proposed by FATF. 

The introduction of such an approach in practice will mitigate the current risks associated with service provision to non-profit organizations by banks in financial transactions and help find ways to revise the imperfect regulations of the National Bank of Ukraine, in particular the Regulation on Financial Monitoring. 

At the same time, this requires direct participation of civic sector representatives in these processes since they are the ones who are most fully aware of the content and specifics of their work. Therefore, civil society organizations should already now agree on the internal position regarding the possibility for the purposes of financial monitoring and banking services to identify managers and members of collegial governing bodies as exercising significant control and responsible for making strategic decisions in the organization.

This material was prepared as part of the Project Ukraine Civil Society Sectoral Support Activity implemented by the Initiative Center to Support Social Action “Ednannia” in partnership with the Ukrainian Center for Independent Political Research (UCIPR) and Centre for Democracy and Rule of Law (CEDEM) with the sincere support of the American people through United States Agency for International Development.