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Method of YouControl express analysis of contractors

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Express analysis of contractors is a complex analysis of factors recommended to pay special attention to when evaluating the contractor’s reliability. The result of the YouControl express analysis is a summary chart with early warning signal for each company, automatically updated and, if detected, highlighted.
The set of factors for contractor’s analysis is based on the accumulated experience of YouControl and best practices of compliance assessments, including the companies compliance with the requirements and recommendations that are approved in the regulatory acts or mentioned in the letters of the Verkhovna Rada of Ukraine, the National Bank of Ukraine, the State fiscal service, State Service of Financial Monitoring of Ukraine, etc.
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Need your special attention
4
Number of factors with critical values that require special attention. In the chart below, such signals are being highlighted red.
Need your attention
2
Number of factors with values that may require your attention. However, they are less significant than the group of signals above. In the chart below, such signals are being highlighted yellow.
No problems
18
Number of factors with no problems identified. In the chart below, such signals are not being highlighted.
Need more data to calculate
0
Number of factors, where data for calculation or exact identification is insufficient.
The number of factors requiring special attention should not be directly identified with the level of company's unreliability, because:
  • The importance of each signal can vary significantly (for instance, depending on the purpose of the analysis);
  • Due to the effect of interconnection, the combination of negative values of some factors can give a significantly higher negative signal than the simple sum of the individual factors;
  • Some factors may indicate only potential problems and require more precise assessment;
  • Signals detected during the express analysis are not 100% accurate, but only narrow the level of uncertainty in terms of the list of verified factors.
Express Analysis Components (verified factors)
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Group of factors “Legal personality”
Lack of legal entity status
According to Articles 91, 92 of the Civil Code of Ukraine, the capacity and competence of a legal entity arise once it is created and terminated from the date of making of a record of its termination in the Unified State Register. Legal relations (including making any contracts) with a non-existent entity is impossible de jure. Any activity of such an entity, any deal signed are fictitious. Partnership with such contractors may have negative financial and tax consequences, criminal prosecution.
Bankrupt
In accordance with articles 42, 73 of the Bankruptcy Code of Ukraine, transactions made by the counterparty after the opening of bankruptcy proceedings or during the three years preceding the opening of bankruptcy proceedings may be declared invalid by the economic court.
In termination
According to Article 105 of the Civil Code of Ukraine, after making a decision about legal entity termination, only the chairman of the termination commission (liquidation commission), its members or the liquidator may act on its behalf. In this case, the procedure and the term of the creditors' claims to the legal entity are being established. For joint-stock companies, this term is 20 days after sending to the creditor a notice (Article 82 of the Law of Ukraine "On Joint Stock Companies"). In case of the debtor liquidation, the overdue claims of creditors are being satisfied with his/her property, remaining after satisfaction of timely claims. In the absence of such property, claims are considered to be repaid. Cooperation with a company in termination creates a risk that it may be impossible to meet the claims to it. Including through signing contracts with a contractor’s representative who acts in the absence/with excess of his/her authority.
Limited competence of officials
Limitation of the authority of legal entity directors or signatories is a risk factor (when making an agreement for an amount exceeding the size of such restriction, without obtaining the necessary internal approvals, etc.). According to Article 241 of the Civil Code of Ukraine, an act committed by a representative with an excess of authority creates legal consequences for the entity he/her represents only in case of his/her subsequent approval of this transaction.
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Group of factors "Sanctions"
Company under sanctions
Contractors of an entity (and/or its founder/ultimate beneficiary) under national/international sanctions may be deprived of carrying out any transactions with them (including payments for contracts signed). In some cases, international sanctions provide for the restrictions on contractors of an entity under sanctions, on the fact of the transactions. This entails financial losses and business destabilization, as well as the attraction attention of law enforcement (depending on the legal qualification of the cooperation). In addition, partnering with a contractors under sanctions provides for reputational risks.
A company was re-registered in the occupied Crimea
There are high military-political and operational risks.
The founder/participant/final beneficiary is a resident of a country under sanctions
Contractors of a entity located in a country subject to international sanctions, depending on the kind of the sanctions, may be banned of any transactions with them (including payments under contracts signed). In some cases, international sanctions provide for the restrictions on contractors of an entity under sanctions, on the fact of the transactions. This entails financial losses and business destabilization, as well as the attraction attention of law enforcement (depending on the legal qualification of the cooperation). In addition, partnering with a contractors under sanctions provides for reputational risks.
A company trades with countries under sanctions
Trade with countries under sanctions increases not only reputational risks, but also the chances to get to the sanctions lists in the future, in particular because of violations of international law (terrorist financing and money laundering).
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Group of factors "Qualification criteria"
Short period of company existence
Any company should have relevant professional experience, well-established organizational and business processes. The less time has passed since the date of registration, the higher the risk one can trust the partner serious projects and expect a qualified execution. A short period of company existence, which usually does not exceed the tax reporting period (for example, a year or quarter), may also indicate that the company avoids public oversight (control) measures, in particular tax audits.
Insufficient funding according to the reported founding capital
Inconsistency of financial resources with the volumes of the activities carried out, according to the recommendations of the National bank of Ukraine, may indicate the company's fictitiousness. Small authorized capital can not be considered as a guarantee of reliability of a partner. The size of the authorized capital is less than the statutory minimum (for joint-stock companies, banking, financial, insurance), etc. can indicate the existence of financial problems, the risk of cancellation of licenses (if the type of business activity requires licensing), refusals to obtain credit, etc. The lower this figure, the higher the risk of cooperation with the counterparty.
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Group of Factors "Risk Types of activities"
The main activity is wholesale trade
Mostly "general" activities are the risk that the contractor's business is not aimed to achieve the real results and is fictitious.
A wide range of registered activities
A wide range of activities may be the risk that the contractor's business is not aimed at achieving real results and is fictitious.
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Group of factors "Risk Institutional Changes"
Frequent institutional changes
Contractors stability is a guarantee of successful cooperation with them. At the same time, frequent changes in the constituent documents, in particular, the name, ownership structure, managers and activities, may indicate instability, and, consequently, the risks of business relations.
Changes in types of activities
Frequent changes in the client’s constituent documents, including name, ownership structure, managers and activities, are a sign of risk.
Short term of the director's activity
Contractors stability is a guarantee of successful cooperation with them. At the same time, a short time since the appointment of a new head may indicate instability, and, consequently, the risks of business relations.
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Group of factors "Location"
A company from the occupied territories
Contractors of an entity located in a temporarily occupied territory are deprived of any transactions with them (including payments under contracts signed). This entails financial losses and business destabilization, as well as the attraction of law enforcement’s attention (depending on the legal qualification of such cooperation). Moreover, due to the tense situation between Ukraine and the Russian Federation, the armed conflict on the temporarily occupied territories, as well as vague regulations in Ukraine of business relations with partners from these territories, cooperation with them also carries reputational risks.
A founder/final beneficiary is a person registered on the temporarily occupied Ukrainian territory
Contractors of an entity located in a temporarily occupied territory are deprived of any transactions with them (including payments under contracts signed). This entails financial losses and business destabilization, as well as the attraction of law enforcement’s attention (depending on the legal qualification of such cooperation). Moreover, due to the tense situation between Ukraine and the Russian Federation, the armed conflict on the temporarily occupied territories, as well as vague regulations in Ukraine of business relations with partners from these territories, cooperation with them also carries reputational risks.
Location in the housing stock
According to the law, providing premises in residential buildings for industrial purposes is prohibited. Residential buildings and dwellings are reserved exclusively for the citizens' residence. Locating a company in a residential building (this is usually a founder’s address) may indicate its insufficient solvency for renting a premises of appropriate functional purposes: office, shop, warehouse, etc. Industrial activities, placing employees in a housing stock may be the basis for sanctions for violation of labor laws and licensing conditions (if they provide for appropriate restrictions).
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Founders/participants in foreign jurisdictions
Founders/participants in "offshores" recognized in Ukraine
If the contractor's founders are persons registered in a jurisdiction with an" offshore" status, this may indicate that persons who are the ultimate beneficial owners may conceal their relations to this contractor by using services related to the concealment of involvement in business (Thus, relationships with such an "opaque" contractor, because of the lack of information about its real connections, can be risky.

Decree of the Cabinet of Ministers of Ukraine of December 27, 2017 No. 1045 approved a list of states (territories), which transactions with contractors are recognized controlled. Belonging to a non-resident in the relevant jurisdiction is a sign for classifying economic transactions with them as "controlled" and applying the relevant principles of tax adjustment.

In accordance with the procedure for conducting counter-checks by the controlling bodies (Cabinet of Ministers Decision No. 1232 of 27.12.2010), the controlling authorities may conduct the necessary counter-checks to obtain tax information necessary in connection with the conduct of taxpayer audits. In particular, regarding contractors participating in the supply chain of goods (works, services) that are the subject of controlled operations. The information obtained as a result of such checks may be the basis for carrying out appropriate unscheduled inspections and/or resort to law enforcement agencies.
Founders/participants in the EU "Black list"
Conclusions of the Council of the EU 2017/C 438/04 of 19.12.2017 define the list of non-cooperative jurisdictions for taxation purposes, the legislation, policy and administrative practice of which represent problems in the areas of transparency of taxation, fair taxation and combating the erosion of the base and the withdrawal of profits from taxation (Annex 1). This is the so-called EU's "black list".

The ownership of the contractor's founders/participants in the EU's "black list" may indicate that persons who are the ultimate beneficial owners may conceal their involvement in this contractor by using services related to the concealment of involvement in business (nominal service). So, a relationship with such an "opaque" contractor can be risky due to the lack of information about its real connections.

Regarding residents from the EU's "black list" and related individuals, specific EU sanctions have not yet been taken, however, this is not ruled out in the future. Cooperation with contractors, which involve individuals from the EU's "black list", may itself bear reputational risks. In addition, individual EU Member States and other States and subjects of law may impose their own restriction policies with respect to such entities and/or their founders/participants.
Founders/participants in the FATF "Black list"
To protect the international financial system from the risks of money laundering and terrorist financing at the international level, the Financial Action Task Force on Money Laundering (FATF) has identified a list of jurisdictions whose national anti-money laundering and terrorist financing regimes have strategic weaknesses that threaten the international financial system. This is the so-called FATF "blacklist".

FATF strongly recommends that all states pay particular attention to their financial institutions for business relations and transactions with companies and financial institutions from the "black list" jurisdictions, as well as to the need for enhanced verification of clients when performing transactions with entities from these jurisdictions.

A number of residents from the FATF "black list" and related persons of the UN, the EU, the United States and a number of other countries and international organizations have been sanctioned accordingly. In accordance with the recommendations of the FATF, Member States introduce appropriate restrictions, for example banks and other financial institutions (including Ukraine) block financial transactions with blacklisted contractors. Cooperation with contractors, which include individuals from these jurisdictions, can be the object of increased attention of state supervision (control) authorities, as well as attract the attention of law enforcement agencies and bear reputational risks.
Founders/participants in the OECD "Black list"
The Organization for Economic Cooperation and Development (OECD) has set up internationally agreed standards for the exchange of information for tax purposes. OECD creates a rating of jurisdictions on conformity to these standards and presence of the risks connected with observance of the tax laws.

Cooperation with contractors, which founders/participants are persons with jurisdictions that do not comply with these standards (the so-called "black list" of the OECD"), may itself bear reputational risks. It is also possible that individual OECD member states and other states and subjects of law may impose restrictions on their own entities and/or their partners.
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Court decisions related to a contractor
Court decisions related to a contractor
It is very important to study court decisions involving a particular business entity as they may contain facts established by the court:
  • • committing/involvement in crimes (of the entity itself, its officials / related persons, etc.)
  • • debt presence / collection (including tax debt)
  • • contracts invalidation (including fictitious ones)
  • • about termination or bankruptcy procedures
  • • other negative facts indicating the risk of business relations
The number of "negative" decisions, their frequency, severity of the crimes / other violations, size of debt collected can give an understanding of the contractor, its ways of doing business and the risks of business relations.
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Group of Factors "Debt"
Tax debt
Tax debt is the amount of a monetary obligation coordinated (including penalties, if any), but not paid by the taxpayer in due time, as well as penalty on the amount of the monetary obligation. Bodies of income and duties carry out tax debt collection, organize and control the property arrest of a taxpayer with a tax debt, and / or stop debit transactions on his/her bank accounts. Thus, the tax debt confirms the existence of temporary or permanent problems with the contractor’s solvency, as well as its financial strength in general.
Open enforcement proceedings
The vast majority of enforcement proceedings against business entities concern the collection of cash and/or other property. Penalties for executive documents primarily refers to the debtor's funds in UAH and foreign currency, other property, including funds on accounts and deposits in banks and other lending organizations, on securities accounts with securities depositories. Such a situation can considerably complicate/ban business relations with the contractor, cause financial losses and business destabilization.
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Group of factors "Owners are unknown"
Final beneficiaries are not identified
The lack of information on end-beneficiaries does not allow adequately evaluating the reputational risks of cooperation with the contractor and may indicate that there are motives for concealing the ownership structure, which, according to the legislation, should be transparent and reflected in the USR.
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Group of factors of "Risky Relations"
Operations with "offshore" jurisdictions recognized in Ukraine
Decree of the Cabinet of Ministers of Ukraine of December 27, 2017 No. 1045 approved a list of states (territories), transactions with contractors of which are recognized controlled. Belonging of a non-resident to the relevant jurisdiction is a sign for classifying economic transactions with it as "controlled" and applying the relevant principles of tax adjustment.

In accordance with the procedure for conducting counter-checks by the controlling bodies (Cabinet of Ministers Decision No. 1232 of 27.12.2010), the controlling bodies may conduct the necessary counter-checks to obtain tax information necessary in connection with the conduct of taxpayer audits. In particular, regarding contractors participating in the supply chain of goods (works, services) that are the subject of controlled operations. Information obtained from the results of such reconciliations may be the basis for conducting appropriate unscheduled inspections and/or appeals to law enforcement agencies.
Transactions with jurisdictions from the EU's "Black list"
Conclusions of the Council of the EU 2017/C 438/04 of 19.12.2017 define the list of non-cooperative jurisdictions for taxation purposes, the legislation, policy and administrative practice of which represent problems in the areas of transparency of taxation, fair taxation and combating the erosion of the base and the withdrawal of profits from taxation (Annex 1). This is the so-called EU's "black list".

Regarding residents from the EU's "black list" and their partners, specific EU sanctions have not yet been taken, however, this is not ruled out in the future. Cooperation with such contractors may itself bear reputational risks. In addition, individual EU Member States and other States and subjects of law may impose their own restriction policies with respect to such entities and/or their partners.
Transactions with jurisdictions from the FATF "Black list"
To protect the international financial system from the risks of money laundering and terrorist financing at the international level, the Financial Action Task Force on Money Laundering (FATF) has identified a list of jurisdictions whose national anti-money laundering and terrorist financing regimes have strategic weaknesses that threaten the international financial system. This is the so-called "blacklist" of FATF.

FATF strongly recommends that all states pay particular attention to their financial institutions for business relations and transactions with companies and financial institutions from the "black list" jurisdictions, as well as to the need for enhanced verification of clients when performing transactions with entities from these jurisdictions and related persons.

A number of residents from the FATF "black list" and related persons of the UN, the EU, the United States and a number of other countries and international organizations have been sanctioned accordingly. In accordance with the recommendations of the FATF, Member States introduce appropriate restrictions, for example banks and other financial institutions (including Ukraine) block financial transactions with blacklisted contractors. Cooperation with contractors, partnering with individuals from these jurisdictions, can be the object of increased attention of state supervision (control) authorities, as well as attract the attention of law enforcement agencies and bear reputational risks.
Transactions with jurisdictions from the OECD "Black list"
The Organization for Economic Co-operation and Development (OECD) has internationally agreed standards for the exchange of information for tax purposes, and the OECD carries out a rating of jurisdictions on compliance with these standards and the existence of risks associated with compliance with tax laws.

Cooperation with contractors partnering with persons with jurisdiction that do not comply with these standards (the so-called OECD "Black list"), can itself bear reputational risks. It is also possible that individual OECD member states and other states and subjects of law may impose restrictions on their own entities and/or their partners.
Connection to a national public figure
The head/founder (participant)/ultimate beneficial owner of a legal entity is a person connected to a national public figure. Connected are those who jointly or are agreed to carry out economic activities, including jointly or are agreed to influence the economic activities of the enterprise. In particular, connected individuals are family members (persons who are married, as well as their children, including adults, parents, persons under guardianship and custody, other persons who live together, share common life, have mutual rights and obligations (except for persons whose mutual rights and obligations are not family-like), including persons who live together but are not married).

National public figures are persons in a particularly responsible position related to the possibility of conflicts of interest and influence (including illegal) and in the sphere of economic activity. Considering that the scale of their influence and the consequences of conflicts of interest are significantly greater compared to other entities, the economic activities to which such persons are involved (in particular, financial transactions) should be carefully monitored.
The total number of proven factors is increasing as Express analysis of contractors is developing, according to the best international practices.
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