CEDEM held a panel discussion to discuss key challenges Ukrainian civil society organizations face in accessing payment services when receiving cross-border transfers from non-resident philanthropists and donors, and to develop options to prevent and address them.

On August 29, 2023, moderated by CEDEM lawyer Nataliia Povtar, an expert panel discussion was held on “International CSO Financing: War-Induced Banking Challenges”.

The speakers included representatives of Ukrainian civil society organizations, professional banking associations, consulting sphere, lawyers and international experts.

In her opening remarks, Anna Isichko, CEDEM Deputy Director, noted that CSOs’ access to basic financial services and related problems are related to the implementation and functioning of the financial monitoring system. 

At the same time, the war has created a different context for the application of legislation in this area. And so it is important to understand which problems need to be addressed at the state level in a systemic way, and which can be handled by CSOs themselves. It is also important to understand what tools are available to work safely in Ukraine. 

This discussion is focused on building and expanding cooperation between the civic sector, banks and the National Bank of Ukraine. After all, it is the cross-sector dialog that will help to determine where CSOs can independently mitigate the risks of their operational activities, and where banks and the regulator need to issue clarifications to protect the rights of consumers of banking services.

Ihor Koblikov, a CEDEM lawyer, cited CSOs’ current problems in receiving foreign currency receipts from non-residents – both donors and benefactors.

For example, non-resident banks suspend the transfer of funds in foreign currencies from non-resident donors until detailed explanations are provided. Such situations are resolved through the efforts of international donor organizations themselves: they provide explanations and documentary evidence. 

Charitable aid and donations from non-resident donors and emergency aid from international donors are also blocked, and the funds are returned to the sender without any explanation. At the same time, not all benefactors report their intentions to provide aid, and therefore CSOs are prevented from receiving it. 

That is, despite the requirement to identify and manage risks, non-resident banks apply de-risking, which has a negative impact. 

Access to at least basic financial products and services is a prerequisite for public participation in economic and social life. For the most vulnerable clients, including refugees and the homeless, this can be a matter of survival. Without this, humanitarian aid might not reach those who need it most. This is the position taken by the European Banking Authority.

It is important to understand that the Council of the European Union adopted Decision (CFSP) 2022/1908 dd. 10/06/2022, which extended the sanctions restrictions to the territories outside the control of the Government of Ukraine in Donetsk, Kherson, Luhansk and Zaporizhzhia Regions. In particular, it is prohibited to provide, directly or indirectly, financing or financial assistance.

However, foreign banks block transactions of persons registered on the entire territory of the mentioned regions, regardless of whether they are under the occupation of the Russian Federation or under Ukrainian control.

The Ministry of Reintegration is currently working on the introduction of a unified English-language information base as a source of information on the Ukrainian government’s control of certain territories. This will allow European banks to be sure that there are no terrorism financing risks.

Larysa Polska, Chairwoman of the Board of the Kherson Community Foundation “Defense”, and Nataliia Kravets, Chairwoman of the NGO “League of Socially Responsible Women”, shared their experience of obtaining international financing in the conditions of war and the obstacles they faced. 

Special problems, which consist in blocking payments, are observed when working with donors and philanthropists from Europe, because even the presence of the word “Kherson” in the name of the organization leads to the impossibility to receive any funds from European countries.

According to the speakers, this directly affects the ability of people in difficult life circumstances caused by the war and their children, in particular those who live in the recently liberated territories (Kherson Region), to receive timely and urgent assistance.

Andrii Dubas, president of the Association of Ukrainian Banks, confirmed that the problem of blocking cross-border payments by non-resident banks is urgent and the Association is involved in solving it. 

However, what is needed now is a comprehensive solution that would combine the work of the Ministry of Reintegration and the Ministry of Infrastructure to ensure functioning of the information system of the list of territories where hostilities are (have been) taking place or temporarily occupied by the Russian Federation not only in Ukrainian, but also in English, so that it can be used by non-residents.

If necessary, AUB is ready to join in overcoming these urgent challenges by providing feasible assistance to state bodies and institutions, as well as by conducting explanatory work with non-resident partners. 

Vadym Romaniuk, Head of Banking and Financial Law Practice at PwC Legal, outlined the concept of de-risking during financial monitoring on the example of CSO activities. He noted that de-risking is a “by-product” of financial monitoring.

A clear illustration of this is the situation when even the use of certain “trigger” words in the name (e.g., “Kherson”) can serve as the basis for applying de-risking measures. Usually CSOs operating in the context of armed conflict – particularly Ukrainian CSOs – face de-risking.

The main reasons for such actions on the part of banks are commercial inexpediency (because it requires efforts related to the implementation of appropriate control mechanisms for quite specific entities), as well as high penalties from the regulator.

Despite the fact that the problem of de-risking is generally recognized at the level of both FATF and NBU, there are no examples of banks being held liable for it. The Global NPO Coalition and the US Treasury have generated documents that identify these problems and the need to counter them.

Disclosure of an open list of occupied territories may not solve the existing de-risking problems, as foreign banks act in accordance with their national legislation, and therefore there is a fear that they will wait for clarifications from their regulators and will be reluctant to take into account even official information from Ukrainian information systems.

Problems for Ukrainian CSOs on the part of Ukrainian banks are easier to resolve, because if the situation occurs in Ukraine, it is possible to assert their rights. However, there is a lack of opportunities for pre-trial settlement of disputes with banks. And here the NBU could play the role of a certain arbitrator between the client and the bank, where the latter would not risk getting punitive (financial) sanctions from the regulator itself.

If problems arise outside Ukraine, each CSO should take an objective look at the existing risks for its activities and decide on measures that would help to avoid de-risking, taking into account trigger aspects such as location or certain geographical names in the name.

Liuben Panov, Senior Program Advisor at the European Center for Not-for-Profit Law (ECNL), described the practice of successful cooperation between CSOs and banking institutions to ensure access to financial services. 

According to him, banks consider non-profit organizations (NPOs) as low-value, high-risk clients that require high compliance costs (customer due diligence). Banks are also afraid of high fines from regulators or damage to their reputation as a result of potential mistakes.

Common problems faced by NPOs in banking include, but are not limited to:

• Difficulty opening a bank account because NPOs are considered high risk in terms of potential involvement in terrorist financing
• NPOs have difficulties in complying with enhanced due diligence requirements when opening a bank account
• Lack of information and guidance: NPOs are unaware of the systemic factors behind banks’ decisions
• NPOs have no legal recourse in case of rejection by the bank
• Blocking of accounts and transfers
• Sometimes banks may close accounts without prior notice or proper justification.

This results in over-complication of CSOs’ activities and affects their beneficiaries.

Giving examples of foreign experience, the speaker mentioned the Dutch bank ABN AMRO, which recognizes access to banking services as a human right, allocates resources to ensure NPO access to financial services and created the first specialized portal to inform and assist NPOs.

Therefore, it is necessary to establish a cross-sectoral dialog (financial institutions, NPOs, government agencies) on bank risk mitigation in order to understand current issues and risks.

Pavlo Verkhniatskyi, Managing Partner, Director of COSA Solutions, shared his experience in preventing risks of limiting cross-border payments in favor of residents of Ukraine. 

He noted that banks can take de-risking measures using automated systems to analyze information where certain geographical names, addresses or hypothetical connections to certain personalities may be relevant. Another option is customer due diligence by conducting in-depth customer due diligence.

According to the speaker, in such circumstances, the client makes decisions independently: whether to apply individual measures to minimize the risk of de-risking applied to them.

During the discussion of the approaches and cases described, the panelists came to a common opinion that the problem of blocking/suspension of cross-border payments in favor of Ukrainian CSOs is extremely topical, carries significant risks and has significant consequences both for the activities of CSOs themselves and their beneficiaries. Solving these problems requires cooperation between CSOs, banks and their professional associations, the NBU and government authorities. 

While waiting for official information from the Ministry of Reintegration regarding the information system of the list of territories where hostilities are (were) taking place or temporarily occupied by the Russian Federation, CEDEM is also working on the preparation of practical material with tips for CSOs on how to solve problems with banking services when it comes to receiving funding from abroad.

Prepared by Ihor Koblikov, CEDEM lawyer

The expert discussion was organized 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.