Business Fragmentation and Banking Monitoring

Every year, Ukraine uncovers billions of turnover operations linked to so-called “business fragmentation.” Specifically, it refers to the artificial division of large profitable companies into hundreds of individual entrepreneurs (sole proprietors or FOP), who operate primarily under the first group of unified tax and benefit from a simplified taxation system. In this way, businessmen attempt to evade corporate income tax, value-added tax (VAT), and often withdraw cash outside the legal system.

Definition and Essence of Business Fragmentation.  Business fragmentation is the reorganization of a single commercial enterprise into multiple separate legal entities or individual entrepreneurs for the purpose of minimizing tax burden. In practice, this looks like: a large retail store or restaurant chain, instead of being registered as a single company, is registered as several hundred individual entrepreneur entities. Officially, each of them operates under the first group of unified tax, pays minimal taxes, and is not obligated to issue cash register receipts. However, in reality, all these individual entrepreneurs are employees of one parent company, which manages their operations and receives the profit.

The main purpose of fragmentation is tax optimization. Instead of paying:

• Corporate income tax (18–25% depending on profit size);
• Value-added tax (VAT) at 20%;
• Military levy at 1.5%;
• Social security contributions;

the company engages individual entrepreneurs who pay only the first group of unified tax (from 94 to 110 hryvnias per month in 2025). The difference in tax burden amounts to tens of millions of hryvnias annually.

The State Financial Monitoring Service of Ukraine in 2025 identified billions of turnovers and numerous groups of individual entrepreneurs involved in fragmentation schemes. These schemes span various economic sectors: retail electronics, food products, clothing, footwear, hospitality, restaurant, and tourism businesses.

Types of Fragmentation and Typical Schemes.  Business fragmentation develops in various forms, each with specific characteristics and operational mechanisms:

Vertical Fragmentation. One large company is divided into many small individual entrepreneur entities, each performing separate functions. For example, one entrepreneur receives the goods, another sells them, a third settles with suppliers. In this way, each transaction is broken down into parts, complicating the detection of the complete operation.

Horizontal Fragmentation. A large network of stores is registered as hundreds of separate individual entrepreneur sellers in each location. Each entrepreneur appears to be an independent operating unit, yet in reality all work under a single management system.

Operational Fragmentation (Payment Fragmentation). Instead of one large transaction that would exceed the monitoring threshold (400,000 hryvnias), the transaction is split into hundreds of smaller payments. For example, a payment of 675,000 hryvnias is split into 15 operations of 45,000 hryvnias each. This allows avoidance of automatic registration in monitoring systems.

Cash Withdrawal Schemes. Payments between individual entrepreneurs (or between an individual entrepreneur and the parent company) are made in cash to leave minimal traces in the banking system. Cash is withdrawn from accounts and stored at home or in offices, minimizing banking control.

Fictitious Fragmentation with Intermediaries. The true owners of the scheme remain hidden, but the accounts of individual entrepreneurs are managed by authorized persons with powers of attorney, often unaware of the actual schemes. This allows shifting responsibility to nominal managers.

Banking Monitoring Mechanism: How Banks Detect Fragmentation.  Modern Ukrainian banks apply a fundamentally new approach to client control—they do not manually review bank statements; instead, they employ automated analysis algorithms.

Stage 1: Automated Analysis.  Banks build algorithms that analyze:

• Number of incoming transactions on the account.If previously an individual entrepreneur received 5–10 payments per month, but suddenly began receiving 100–200, the system automatically flags the anomaly.
• Payment size.The system detects fragmentation signs: if the account constantly receives payments of exactly 45, 50, or 100 thousand hryvnias (when exceeding the 400,000 threshold would be suspicious), the system generates alerts.
• Account balance.If the account balance is always “0” at the end of the day (the individual entrepreneur received money and immediately withdrew it), this indicates the account is used merely as a channel for fund transfers, not actual business operations.
• Senders and recipients.The algorithm analyzes whether payments come from one company or hundreds of different persons. If the account receives payments from one company (the parent company) and transfers funds to a third party or parent company, this indicates fragmentation.
• Nature of business.If an individual entrepreneur is officially registered as a travel agent, yet the account receives payments from retail stores, the system detects the mismatch.

Stage 2: Manual Analysis by Inspectors.  Based on automated alerts, financial monitoring inspectors review cases individually. They ask the individual entrepreneur:

• Does the individual entrepreneur receive payments from third parties in accordance with their declared activity?
• Does the individual entrepreneur perform real work or is the account used to process funds from another company?
• Can they provide documents about the type of services they provided and for which they received payment?

Stage 3: Decision Making.  Based on the information received, the bank makes one of the following decisions:

• Request for Explanation.If few violations are detected, the bank simply asks the individual entrepreneur for the reason for anomalies and requests justification.
• Enhanced Verification.If violations are serious, the bank applies enhanced verification, requiring additional documentation, contracts, and invoices.
• Account Blocking.If signs of fragmentation are convincing, the bank has the right to terminate relations with the client without notice. This means the account is blocked and all operations cease.

Signs and Indicators of Fragmentation That Banks Detect.  The National Bank of Ukraine has issued recommendations to banks regarding specific signs requiring attention. These indicators are used both in automated algorithms and during manual analysis:

Abnormal Increase in Operations.

• Sudden increase in the number of incoming transactions to the account from different counterparties several times over a single day or week;
• Operations do not correspond to the previous character and volume of the individual entrepreneur’s activity;
• Operations exceed the declared business profile.

Operations Resulting in Zero Balance.

• Receipt of payment to the account and its immediate withdrawal (often in cash);
• Account balance equals zero throughout the entire day;
• Operations conducted without economic logic for a real business.

Uniform Payments.

• Receipt of equal-sized payments from multiple persons into a single account;
• Sending of equal-sized payments to the same account throughout the month;
• Payment sizes selected specifically to avoid threshold registration (e.g., 45,000 instead of 50,000).

Fictitious Transfers.

• Fund transfers between accounts of one group of persons exhibiting all signs of circular money flow;
• Funds received in the account often transferred to the same account of a third party;
• Operations lacking real economic substance or service provision.

Mismatch Between Classification Codes and Operations.

• An individual entrepreneur registered as a consultant, yet receiving payments from retail stores;
• Classification code not matching actual account operations.

Payment Fragmentation.

• Operations intentionally split to avoid exceeding the 400,000 hryvnia threshold;
• Example: Instead of one operation for 550,000 hryvnias, six operations of 92,000 hryvnias each are executed.

Account Management on Behalf of the Individual Entrepreneur.

• Account controlled on behalf of the individual entrepreneur without their direct participation;
• Individual entrepreneur unaware of account operations;
• Use of powers of attorney for account management by third parties.

Penalties and Consequences for Participants in Fragmentation Schemes.  Detection of fragmentation signs has serious consequences for both individual entrepreneurs and the parent company:

Bank Account Blocking.  If a bank detects signs of fragmentation, it has the right to terminate the service agreement and block the account without notice. This means the individual entrepreneur cannot receive payments and cannot conduct operations. According to data from parliamentarian Yaroslav Zheleznyak, from 2025, Ukrainian banks have blocked the accounts of approximately 30,000 individual entrepreneurs due to financial monitoring violations.

Information Transmission to Tax Authorities.  The bank must transmit information about suspicious activity to the State Financial Monitoring Service of Ukraine (SFMS). This service, in turn, transmits data to the tax service, which begins verification of the company and individual entrepreneurs.

Tax Audits and Penalties.  The tax service conducts detailed audits of individual entrepreneur networks to detect fragmentation. If fragmentation is confirmed:

• Penalties for tax non-payment apply: from 50% to 100% of unpaid taxes;
• For VAT evasion, the penalty is 50% of the tax amount plus the tax itself;
• For income tax evasion, the penalty is up to 50% of improperly paid amounts;
• Penalties are imposed for submission of false reports.

Criminal Liability.  If the amount of tax evasion exceeds the sum equivalent to 2,500 minimum wages (approximately 42.5 million hryvnias in 2025), the case may be referred to law enforcement. Scheme organizers may face charges for:

• Tax evasion on a large scale (often criminal prosecution);
• Money laundering (legalization of proceeds from crime);
• Organization of a criminal group.

Social Consequences for Individual Entrepreneurs.  Many individual entrepreneurs involved in fragmentation schemes do not themselves understand they are participating in illegal activity. For them, account blocking means loss of income and inability to meet obligations.

Detection Mechanism at Various Levels.  Detection and investigation of fragmentation is conducted comprehensively at three levels:

Level 1: Banks – primary control through automated algorithms and enhanced customer verification. Banks terminate relations with risky clients and transmit information.

Level 2: State Financial Monitoring Service – analysis of bank reports, pattern detection, transmission of information to tax authorities and law enforcement.

Level 3: Tax Service and Law Enforcement – conducting audits, seizing documents, investigating criminal cases. At this level, the Security Service of Ukraine, National Bureau of Investigation, and other special services may be engaged.

How to Avoid Problems with Banking Monitoring.  For legitimate individual entrepreneurs conducting real business, it is important to understand how to pass financial monitoring without problems:

1. Conduct Real Business.  Provide real services, sell genuine goods. The account must be used in accordance with the declared business profile.

2. Keep Records.  There must be contracts with clients, invoices, completion certificates for work performed, and receipts. This should justify each account operation.

3. Do Not Split Operations.  If a transaction exceeds 400,000 hryvnias, conduct it as one payment rather than splitting it into smaller parts.

4. Do Not Leave the Account at Zero.  Normal business involves maintaining cash reserves on the account. If you receive a payment and immediately withdraw it in cash, this indicates fragmentation.

5. Provide Bank Explanations.  If the bank asks about your operations, provide clear and complete explanations. Non-response or incomplete information is considered a fraud signal.

6. Clarify Your Business Specialization.  Ensure your business classification code corresponds to actual operations. If you changed business direction, update your registration.

7. Do Not Use Powers of Attorney for Account Management.  If you are an individual entrepreneur, you must manage your account yourself. If you need assistance, hire an administrator, but do not transfer control to a third party.

Conclusions and Forecasts.  Business fragmentation is a large-scale problem for Ukraine’s tax system. Over recent years, state bodies have introduced strict control, and banks have begun employing modern technologies to detect schemes. Now just a few suspicious operations are enough for the system to trigger automatic account blocking.

Most importantly, individual entrepreneurs must understand that business fragmentation can no longer be hidden. Monitoring systems are too sophisticated, and penalties too severe. Any taxpayer who resorts to fragmentation exposes themselves to the risk of losing everything—from account closure to criminal liability.

Author -Julia Popadin, attorney at the Tax and Customs Law Practice,  WINNER Law Firm.

If you have questions or problems related to financial monitoring, protection of bank accounts from unlawful blocking, challenging bank actions, consulting on lawful business conduct, understanding tax control requirements, and anti-money laundering legislation—contact our team of professionals in tax and financial law.

WINNER Law Firm is ready to provide:
· Expert consultation on detecting and overcoming business fragmentation schemes;
· Protection from groundless bank account blocking;
· Assistance in communication with banks and law enforcement agencies;
· Representation during tax service and SFMS inspections;
· Appeal of penalties and account blocking decisions;
· Legal support for legitimate individual entrepreneur networks and small businesses.