The State Financial Monitoring Service of Ukraine (SFMS) placed CSOs into a high-risk category for their potential misuse for illicit activities, such as money laundering and terrorism financing. However, experts criticise the significant risks brought by the document's broad assumptions and lack of evidence, which could unjustifiably increase scrutiny and financial restrictions on CSOs operating during the war. This development risks undermining vital humanitarian efforts and damaging the reputation of legitimate organisations.
On 10 October 2024, the SFMS published a review targeting CSOs as high-risk entities for financial misconduct, citing vague indicators such as activities at territories close to the area of military operations or links to politically exposed persons (PEPs). This review, together with the 2025 National Risk Assessment, will influence future financial monitoring practices. Such measures could inadvertently restrict CSOs’ access to essential financial services. Vague AML/CFT regulations have been linked to CSOs inability to access banking services, transfer essential funds and operate their bank accounts. It is a common problem for CSOs working in conflict regions, in Ukraine this will hinder CSOs ability to address pressing humanitarian and social needs during the ongoing war.
Previous shadow risk-assessment conducted by civil society concluded that the overall risk level for the sector is low.
New risk indicators are vague and lack evidence
These developments raise critical concerns for CSOs' financial sustainability and operational freedom. Experts argue that many of the review's indicators lack evidence and misrepresent lawful activities as potential red flags.
The SFMS review introduces numerous risk factors which can result in increased financial monitoring of selected CSOs, critically affecting their work:
- Discrimination against internally displaced persons (IDPs). CSOs led by IDPs or those with ties to temporarily occupied territories are flagged as suspicious. The report implies that the presence of an IDP leader is an indicator of potential misuse. This risk disproportionately targets vulnerable groups and could lead to discrimination and exclusion of IDPs from leadership roles in civil society, weakening their representation and participation.
- Stigmatisation of politically exposed persons (PEPs). Organisations linked to PEPs or their family members face heightened scrutiny, regardless of the legitimacy of their operations. This approach risks unfairly targeting organisations associated with PEPs and undermines their reputation, potentially discouraging them from engaging in public service and civil society leadership.
- Vague and overbroad risk indicators. The review lists indicators of suspicious activities that lack clear definitions and justification, such as financial operations involving IT, legal, or consultancy services. These are routine and legitimate expenses for CSOs but could be misinterpreted as high-risk, resulting in arbitrary financial restrictions and administrative hurdles.
- Undermining humanitarian efforts. CSOs operating in frontline areas risk being labelled as high-risk entities. Such a provision potentially puts at risk the enhanced financial monitoring and supervision by law enforcement agencies of all organisations that carry out humanitarian and charitable activities to help the population from the frontline areas, as well as support the armed forces of Ukraine, delaying critical aid delivery and discouraging organisations from operating in high-need areas.
- Overgeneralisation of risks to the sector. The review generalises isolated incidents of financial misuse to the entire non-profit sector, despite data showing that only 0.18% of CSOs were involved in suspicious activities. This blanket approach risks tarnishing the reputation of the entire sector and undermines the trust of donors, beneficiaries, and the public.
- Misrepresentation of fundraising activities. Certain fundraising efforts are considered to be one of the ways in which CSOs are misused. For example, receiving funds in small amounts from different persons over a short period of time in favour of one person with the purpose of ‘assistance’, ‘treatment’, ‘charity’, etc. Short-term crowdfunding campaigns could thus easily create reputational risks for CSOs engaged in legitimate and essential fundraising activities, further straining their financial stability.
- Lack of statistical and contextual evidence. The review provides limited statistical backing for its claims, failing to demonstrate a significant vulnerability of the CSO sector. The absence of evidence raises questions about the credibility of the findings and risks promoting unfounded narratives that undermine the enabling environment for civil society.
These risks collectively create an environment of mistrust and overregulation, threatening the operational freedom, sustainability, and effectiveness of CSOs in Ukraine during a critical time of recovery and resilience building. Addressing these risks requires urgent consultation and a balanced approach to ensure compliance without undermining the sector’s contributions.
Critical impact on delivering aid in wartime
Imagine a CSO providing life-saving aid to internally displaced persons near a conflict zone, only to face frozen accounts and enhanced scrutiny because its activities are misclassified as high-risk. These measures not only jeopardise their operations but also deprive vulnerable communities of critical support. Such actions may demoralise activists and volunteers who are already overburdened by the war, pushing them out of the sector altogether.
To mitigate these risks, consultation with CSOs and independent expert reviews are essential to refine the SFMS findings and align them with international standards. Advocacy efforts must focus on ensuring that unfounded accusations do not hinder legitimate CSO activities. The next steps could involve revising the review’s methodology and increasing awareness of its flaws within the international community. Civil society's shadow risk-assessment provides multiple recommendations for addressing current challenges. The Tbilisi Principles also offer a blueprint for national, international and financial institutions. A collaborative approach could safeguard Ukraine’s vibrant civil society and its pivotal role in recovery and resilience.