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WebMoney in Breach of Ukranian Law, Company Funds Frozen

Jun 20 2013

Less than a month ago, the world saw Liberty Reserve get shut down, its servers confiscated and its owner sent to prison on charges of money laundering. As a result, many brokers announced they would be terminating their partnerships with the company. This got people wondering what the future has in store for online payment methods and who would be next. The answer to that question has now come, a lot sooner than expected – a few days ago, Ukranian tax authorities froze 60 million hryvnas ($7.5 million) worth of assets belonging to WebMoney, an online payment method popular in Russia, Ukraine and their surrounding countries. According to an official statement released by the company, the company's office in Kiev was raided and the authorities confiscated company equipment, documentation, even employees' personal belongings. 


Luckily, this is as far as the similarity with Liberty Reserve goes. No immediate proof of money laundering or any financial fraud was found in the WebMoney office, though the company's servers are still being held for investigation. In fact, the main charges against WebMoney deal with the fact that, according to the latest amendments to the law “On Payment Systems and Money Transfers in Ukraine”, the National Bank of Ukraine (NBU) is the entity responsible for regulating the issuance and usage of e-money in the country. It also has the arduous task of endorsing and regulating electronic payment providers. Any company wishing to offer such services must first coordinate its rules with the NBU. Since WebMoney is not authorized by the bank, its function as an online payment company is illegal in Ukraine.


Unfortunately, this is where we fall into a bit of a Catch-22. The way WebMoney payments work is, indeed, in breach of Ukranian law. The company's interface allows its users to control and operate property rights over assets stored in so-called Guarantors (specialized entities, usually banks). Payments are conducted over the Internet, using special WebMoney units (WM units), which fall under the category of “e-money” and, consequently, under NBU jurisdiction. WebMoney clients can hold a number of “purses” in different currencies in their account, but those purses merely keep track of property rights the client has over money held elsewhere. All transactions made with these purses are done in WM units.


So where's the catch, you ask? Well, although WebMoney was actually breaking Ukranian law, it had in fact applied for NBU endorsement... nearly four years ago! However, the bank froze the process of harmonizing the rules for electronic payment services, leaving about a dozen electronic payment  companies hanging. This is pretty strange since, for the past two years, the NBU has steadily been working on popularizing electronic payments in Ukraine, going as far as to propose restrictions of the allowed size of cash payments between businesses and individuals. WebMoney, on the other hand, was part of the European Business Association 's Electronic Payments Committee whose objectives were to work hand in hand with authorities and assist the NBU in keeping e-money regulations up to date. 


It is very difficult at this point to establish exactly who is right and who is wrong is in this situation. Some of the allegations against WebMoney are definitely implausible. The company is and always has been against anonymity in online transactions. Anyone wishing to open an account must first submit detailed personal information, which is verified before the account can be activated. This leaves very little room for financial fraud. Also, WebMoney does not allow transfers to be made to third parties, making money laundering virtually impossible. Its only proven transgression so far is that it was not regulated as per the latest Ukranian laws. However, the company did everything in its power to become NBU-endorsed. The NBU, on the other, has obviously been neglecting its duty to coordinate electronic payment rules for far too long. So far, its response to the current situation has been to impose restrictions on the amount of money users can withdraw from their WebMoney accounts. It has instated special chip cards which allow only 500 hryvnas (approximately $61) to be withdrawn per day, no more than eight times a month. According to WebMoney officials, however, the restrictions will only apply until the end of July this year, and will have no significant impact on the system's users.


The worst case scenario would be for this situation to mark only the beginning of regulative action by the NBU against all online payment methods operating in Ukraine without its endorsement. This would be completely in its power and right, despite the fact that it has not, so far, provided them an opportunity to amend the situation. What we're hoping for instead is that the bank will finally re-open the process for coordinating these companies' rules with its own and allow them to function to the benefit of their numerous clients. 


Happily, from a Forex-side perspective, the situation is less dire. Although many brokers, such as RoboForex, Mayzus and FBS for instance, offer WebMoney as a deposit and withdrawal method, they are not very likely to be affected by the current turn of events, since it only applies to the Ukranian users of the system. All others should remain unaffected and be able to transfer their funds freely.


TAGS: webmoney  webmoney ukraine  e-money  online payment 
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