• Oleh Malskyy

    Partner, Head of Corporate and M&A, Eterna Law

  • Nickolas Likhachov

    Partner, Head of Banking & Finance Practice, ETERNA Law



Gulliver Business Centre,

1-A Sportivna Square, 32 Floor,

Kyiv, 01001, Ukraine

Tel.: +380 44 490 7001

E-mail: office.kyiv@eterna.law

Web-site: www.eterna.law

ETERNA Law is a full-cycle European law firm possessing strong expertise in Ukraine and the CIS region. Founded in 2002 in the Ukrainian capital, the firm has grown rapidly. We are continually named among market leaders for quality, responsiveness and reliability of service as well as for the depth of our expertise.

We are a dynamic, client-oriented and solution-focused firm whose team of energetic, foreign-educated young professionals provides concise and practical legal advice in a cost-effective manner, while not compromising on quality.

ETERNA Law has an extensive history and experience within Ukraine and the CIS region. We understand these diverse markets, which demand international experience from a law firm in unison with knowledge of local business realities and the legal environment. It’s for this reason that we consistently act in some of the most high-profile matters in Ukraine and the CIS for a broad range of clients, such as international financial institutions and corporations across various industry sectors, government bodies, non-governmental organizations, etc.

We are an exclusive member of four lawyers association — First Law International, PLG International Lawyers, Libralex, AIEL which gives us the possibility to cover more than 80 jurisdictions for the needs of our clients.

Source of Wealth Compliance Report — a New “Must Have” in the Banking and Finance World


Why it is Important and Useful

For at least the last two decades, the world community has been actively fighting the problem of money laundering. On 19 June 2018, the EU adopted the 5th anti-money laundering Directive (Directive 2018/843), which introduced many changes, particularly regarding transparency, openness, evaluation criteria and financial transactions protection as well as significantly affected the activities of banks, especially in the field of compliance procedures. Therefore, new customers face increased banking control regarding the confirmation of source of capital, activities and transactions legality.

Although compliance requirements are becoming more and more stringent, the risk-based approach remains the main method used for acceptability analysis. It follows that banks will continue developing their compliance policies for proper customer due diligence, based on regulatory requirements of national legislation and recommendations of specialized bodies, such as the Recommendations of the International Financial Action Task Force (FATF).

Consequently, a potential customer will be assigned to a certain risk group based on the adopted internal requirements and the direct compliance assessment will be carried out under specific procedures of the assigned group. Thus, the lower the risk of a potential customer, the fewer documents and information will be requested, and the less time needed to open a bank account. Without doubt, the source of wealth compliance report is one of the most efficient instruments, which can reduce the level of risk, simplify the opening procedures as well speed up the opening process.


Source of Wealth Risk Assessment as High Risk either at Customer or Matter Level

As already mentioned, risk criteria are set internally by each bank separately, but we can identify the following generally accepted risk criteria:

  • Politically Exposed Person (PEP) status;
  • conducting business in countries with high levels of corruption, organized crime, drug production or terrorism;
  • conducting business in countries with limited AML policies or those that have not implemented the provisions of EU directives and FATF recommendations into national legislation;
  • conducting vulnerable activities, such as cryptocurrency, gambling, military, armaments and others;
  • receiving income from companies without an economic presence, despite the lack of specific requirements for the creation of an economic presence in the jurisdiction of the company’s incorporation;
  • income from intricate corporate structures, which also include companies from offshore jurisdictions or companies that use bearer shares or other similar instruments;
  • conducting transactions without economic justification or with dubious economic justification, violation of transfer pricing or intragroup financing requirements;
  • conducting frequent identical transactions, cash or deferred payment transactions;
  • use of electronic funds;
  • inability to track the movement of capital due to defective reporting and unreasonable secrecy of materials, such as the formation of capital through cash loans with the inability to confirm the lender’s source of funds;
  • inability to confirm the fulfilment of tax obligations and the absence of tax debt;
  • conducting business activities with the use of fiduciary (trust) relations or unreasonable delegation;
  • negative media information or its absence and others.

For instance, where the funds come from a third party, the risk is large enough and leads to further enquiries about the relationship between the customer and the ultimate underlying principal of the funds (i.e. the actual provider of the funds) as well as assessment whether the purpose of the transaction is in line with the documented economic profile of the customer.

Besides, provision of source of wealth confirmation documents should be made considering the distinctions between laws of different states, business customs, mentality and other relevant factors as perfectly legal and habitual operations in the territory of one state may be questioned following the national law of the bank’s jurisdiction. Therefore, additional unwanted issues may arise and need to be clarified.

For example, foreign banks may question the veracity, validity and acceptability of private law agreements, which are not prohibited and are common practice in CIS countries, such as a loan agreement concluded between individuals. The regulation of this issue in Spain is indicative because, according to Articles 1218, 1227 of the Spanish Civil Code and Judgment No. 10.163 of the Supreme Court, private law contracts are not recognized as evidence of a fact in themselves, and only facts stated in public documents  should be taken into account.

Therefore, in the process of finding and choosing a bank, as well as in the initial communication, it is necessary to take into account the national characteristics of the state of incorporation of the bank, to correlate differences in the national legal systems of different jurisdictions and the potential perception of a fact by compliance officers.


Main Features of Source of Wealth Compliance Report

The Source of Wealth Compliance Report can be defined as a document that first of all explains the origin of the customers’ funds and answers potential questions from the bank regarding customer and matter issues.

Generally, the Source of Wealth Compliance Report includes, but is not limited to, customer identification, his/her history of formation, information regarding a customer’s activities, an overview of his/her reputation, transaction details, extracts from registries, indicators of well-being, a detailed list of related persons as well as the customer’s compliance assessment.

Such reports involve OSINT (Open Source Intelligence) investigation techniques and are based on accurate and reliable sources of information, documents provided by the customer, information received from the authorities, publicly available information, external Internet resources, the press and its sources. Whenever possible, all facts are documented and such pieces of proof are attached to the report. The exact scope of the report depends on the customer and his/her activities. If the bank has additional questions during the check, the report can be supplemented.

It should be noted that all the information presented in the report is objective, but is aimed primarily at meeting the interests of the customer. Therefore, one of the important points is description of the risks associated with the customer. Based on our experience, compilation of a list of risks that the bank is most likely to indicate during the check is very useful. These risks are usually described in order to reduce their impact on the final decision. For example, the conduct of customer activities in vulnerable territories can be considered as such that it is associated with terrorism. In this regard, extra early provision of objection or  explanation to such potential conclusion is of high importance as it can soften the possibility of a negative answer.

Negative data concealment is a blunder especially if negative information is publicly available. In this case, the best way is to include this information into the report and refute it with appropriate argumentation, supporting documents and legal opinions. Moreover, this approach can increase the credibility of both the customer and the entire report.

Last but not least, successful identification of the sources of a customer’s wealth is of great use for gambling industry participants. It enables gaming operators to mitigate risks related to money laundering and financial crime. Although uncovering the exact source of wealth is not always straightforward, it is already a regulatory requirement in many jurisdictions. Apart from reputational damage, the penalties for non-compliance may include: large fines and legal prosecution, increased scrutiny and monitoring by the regulator, suspension of operating licenses or even being shut down completely.


To Sum Up

Taking into account that tightened requirements of banks regarding proving the Source of Wealth Compliance Report of potential customers, which are likely to see an even bigger crackdown in the near future, provide for a number of challenges and obstacles during the opening process, Source of Wealth Compliance reports are  an instrument for proper assessment of customers and risk reduction.

Furthermore, the broadest majority of banks positively perceive such reports, since they contain a consistent detailed history of the formation of the customer’s capital, its evaluation, the customer’s personal history with supporting documents in an easy-to-process format, which contributes to a greater level of trust between the customer and bank, speeds up the verification process and significantly increases the customer’s chances for a positive decision. In addition, submission of statements on the source of a customer’s capital, prepared and certified by a reputable law firm, is the so-called “gold standard” for foreign  banks.

Therefore, a Source of Wealth Compliance Report is a new “must have” for private and corporate clients to tackle challenges in the banking and finance world.