June 2, 2017
T. Zaržeckytė. Do we fully understand the risks of ineffective money – laundering prevention?

In today’s world of modern technology, money laundering methods are improving every day, and the forecasts for laundered sums are at a record high.According to the United Nations, about 5% of the world’s Gross Domestic Product (GDP) is laundered annually.

The Western world is concerned about the rising number of terrorist attacks, and the fact that the amount of money needed to carry them out is decreasing.For example, 2,600 euros was the cost of the terrorist attacks that took place in Nice. When the sums are as low as this, even the best-developed bank prevention systems cannot detect them.And all this despite three decades of tightening regulation, and the huge cost of preventive measures and technology implemented. Compliance requires an enormous amount of public and private resources each year.Financial institutions are already spending up to 5% of their gross income on compliance, and these costs are projected to increase.Unfortunately, the goal of preventing crime and ensuring citizens’ security has side effects: an occasionally disproportionate administrative burden on business, rising prices of services for end users, and the decreasing attractiveness of a country for foreign investors, due to the high regulatory burden.

Business owners and CEOs face huge fines

At the end of June, the implementation of the 4th EU Directive on Money Laundering Prevention will entail the stricter enforcement of the Money Laundering and Terrorist Financing Prevention Act in Lithuania, which will regulate closely the obligations of economic agents in the area of ​​money laundering, and provide extremely strict sanctions for non-compliance. According to the latest version of this draft law, financial institutions might be subjected to a fine of up to 10% of the financial group’s total income, or up to 5.1 million euros (whichever is the greater). Enterprises outside the financial sector may have to pay up to 5% of their revenue or pay a fine (the benefit derived from the infringement multiplied by two) of up to 1.1 million euros, depending on which is higher. Corporate executives and shareholders will also be fined: management and owners of financial institutions up to 5.1 million euros; and 1.1 million euros or more (if the benefits from the infringement multiplied by two exceed 1.1 million) for owners and management of non-financial institutions. In addition, according to the law, inspections and penalties can be imposed by a range of very different institutions: the Financial Crime Investigation Board (FNTT), the Bank of Lithuania, the Department of Cultural Heritage, the Chamber of Bailiffs, and the Chamber of Auditors.

Lithuania is among the leaders

In addition to the implementation of the 4th Directive, Lithuania will have to prepare for MONEYVAL 2018 (Council of Europe Committee on Measures against Money Laundering and Terrorist Financing). It will assess the prevention of money laundering and terrorist financing in Lithuania. After the last assessment (in 2012), Lithuania was proud to be among the leading countries in the incorporation of money laundering prevention measures in their laws. The results of this international assessment have allowed Lithuania to occupy a respectable second place on the Basel Money Laundering Prevention Index, with a significant lead over her neighbors and 148 other countries. However, staying at the top can be much more difficult than getting there. Experts from MONEYVAL who came to Lithuania at the end of April this year introduced a fundamentally changed assessment method. The main evaluation criteria will no longer be the technical transposition of recommendations regarding the prevention of global money laundering and terrorist financing into existing national laws, but the effectiveness of real precautionary systems that will have to be proven by the evaluated state itself, by providing statistical information and other evidence.

The non-financial sector will have to make a big difference

While implementing international recommendations, Lithuania carried out the National Risk Assessment of Money Laundering and Terrorist Financing in 2015. Looking at the conclusions of this assessment, it is obvious that much work will be needed in order to comply with the new efficiency test. The national assessment concluded that financial institutions and other entities do not adequately implement the requirements for the prevention of money laundering and terrorist financing in all cases. Particularly serious weaknesses were found in the non-financial sector. Most economic entities do not scrutinize the list of targeted financial and other international sanctions, they do not apply risk-based customer ratings, and they do not check lists of people involved in politics before starting or continuing business relationships with customers.

Assessment weakness is mentioned as well

The national assessment identified a number of weaknesses in the money laundering assessment sector: supervisors themselves lack knowledge, there is a shortage of appropriately qualified specialists, and technical resources and funding are a drawback as well.This is particularly important, as MONEYVAL will also assess the effectiveness of the supervision: the educational activities carried out, the number of inspections carried out, the number of penalties imposed and their impact (of a preventive nature), the number of crimes detected, the amount of illegal property seized, and other quantitative and qualitative statistical information.Obviously, Lithuanian managers will have to work hard to improve the statistics. An unfavorable conclusion would undoubtedly affect negatively Lithuania’s image on the international arena, and the attractiveness of the country to investors would be reduced as well. An unsatisfactory MONEYVAL rating would be likely to affect the country’s banking system: it may be extremely difficult to maintain correspondence and other cooperative relations with institutions abroad.This is exactly what happened to our neighbor Latvia, and most recently to Estonia, which failed to ensure the effective prevention of money laundering. Deutsche Bank has discontinued its cooperation with all domestic banks.The 100-million US dollar penalties imposed on bankers for not complying have forced the global financial industry to overestimate their appetite for risk, and has led to a wave of ‘de-risking’, that is, the full termination of relations with riskier partners (and sometimes entire regions). Needless to say, as a result of stringent customer settlements in foreign currency, the consequences for the country’s business, financial system and economy as a whole can be dramatic.

The solution? Don’t wait until it’s too late

The aim of Lithuania’s private and public sectors in this process is unanimous: to ensure the adequate prevention of money laundering by adequate means and resources, and to be able to substantiate its effectiveness during international visits. We want to believe that supervisors will be proactive: they will organize special training programmes for the private sector, and make clear recommendations on how to properly implement the complex requirements of the law. In addition, it is necessary to initiate solutions to problems that have occurred (to create a public register of people involved in politics, etc). The requirement to use a risk-based valuation is applicable not only to business entities, but also to the assessment sector; and therefore, we hope that institutions will follow a principle of proportionality, by checking and applying sanctions against business entities that vary in size and risk. However, looking at FNTT plans for the period 2016 to 2018, it is evident that there were three times more checks than training programmes. And knowing the size of the penalties for businesses, the cost for faithful institutions can be simply too high. Businesses need to look for additional resources, trust external consultants, and improve their internal processes. The biggest challenges facing the companies are: the implementation of all the requirements of the law, remaining efficient, and focusing resources directly on business development.

 

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