Financial Monitoring in Ukraine: Institutional and Legal Framework and Tasks in the Context of Existing Challenges

Abstract

The article examines the institutional and legal foundations of the formation and functioning of the financial monitoring system in Ukraine as one of the key elements of the national economic security. The subject of the study is the analysis of the current mechanisms of state and primary financial monitoring and their adaptation to contemporary challenges related to martial law, the dynamic digitalization of economic, administrative, and financial processes, and the emergence of new forms of assets (virtual assets). The purpose of the article is to summarize the institutional and legal framework of financial monitoring, assess its effectiveness, and identify the main directions for improving state policy in the field of preventing and countering the legalization (laundering) of proceeds of crime and the financing of terrorism. The methodological framework of the study is based on general scientific and specialized research methods, including analysis, synthesis, comparison, statistical and graphical methods, and generalization. The research results indicate that during the period of 2021–2024, the total number of primary financial monitoring entities decreased by 24% due to stricter regulatory requirements and the cleansing and consolidation of certain segments of the primary financial monitoring market (including insurers, insurance brokers, pawnshops, credit unions, and gambling establishments). At the same time, there is a noticeable increase in the number of professional participants in financial monitoring (accountants, auditors and audit firms, lawyers, law firms, and associations), which reflects the expansion of the functional base of the financial monitoring system. During the period under review, the volume of financial transactions subject to financial monitoring increased by 24%, and the number of information reports grew by 5,5% (or by 48% in 2022–2024). This indicates the ongoing automation of financial monitoring processes, the active implementation of the risk-based approach, and broader coverage of financial market operations. Within the structure of transactions monitored by the State Financial Monitoring Service of Ukraine, a gradual decline in the share of threshold transactions (from 95,3% to 82,3%) was recorded, along with a simultaneous increase in the share of suspicious transactions (from 4,4% to 17,6%). These trends confirm the strengthening of the risk-based approach to detecting suspicious transactions and the improvement of analytical aspects of financial monitoring. Banking institutions continue to play a dominant role in the financial monitoring system, submitting approximately 99% of all reports on monitored transactions. The deepening of the risk-based approach, the digitalization of data collection and processing, further harmonization of national legislation with international standards, and the enhancement of the professional competence of financial monitoring entities will form the foundation for increasing the effectiveness of the financial monitoring system.