APPENDIX Assessment of Anti-Money Laundering Policies
The calculation of total assets of the financial system for the purpose of this report includes the assets of securities firms, but not the securities that are traded in the securities market (see Table 1).
This figure includes a state-owned asset management institution (Turto Bankas), which was classified under “other banking institution” until mid-2001.
Moreover, the government draws significant financing from eurobonds traded in London, Frankfurt, and Luxembourg (equivalent to about 9 percent of GDP, compared with total public debt of about 30 percent of GDP).
Wealthy individuals often invest in foreign markets. The general public does not participate in capital markets, reflecting low levels of wealth but also a lack of confidence in the wake of the voucher privatizations of the early 1990s, which marooned many households in illiquid and nonperforming investments. In December 2001, about 800 companies comprised the NSEL’s “Unlisted Sector,” which consists mainly of the residue of voucher privatization, with 300 or more companies having simply “vanished.”
Major nonlife insurance activity comprises automobile (about 27 percent), property (about 22 percent), and automobile liability (about 16 percent).
In 2000, the three largest life companies accounted for 80 percent of total assets and the three largest nonlife companies for 71 percent of total assets in their respective sectors.
In early October 2001, parliament passed an amendment to the Law on Public Trading in Securities to allow market participants to avoid complicated collateral registration procedures for overnight loans and similar instruments.
In the three months following the shift, average daily volume in the domestic interbank market increased by almost 60 percent compared with the 18 months preceding the shift; and both the standard deviation and the coefficient of variation of interbank market rates declined substantially (so interbank rates became less volatile). This occurred even as the average daily change in central government accounts with the BoL changed sign and more than doubled in absolute value.
This occurred because gross official reserves increased, despite a reduction in the reserve requirement ratio from 10 to 8 percent in 2000, while short-term external debt declined. A relatively low reserve coverage of short-term debt should be considered in the context of the availability of high quality liquid assets of the private and public sectors. At end-June 2001, Lithuania had a positive net short-term asset position.
See Section II of this report for details.
I.e., the Central Securities Depository of Lithuania (CSDL), brokerage departments of commercial banks, and brokerage companies licensed by the LSC.
Wages are transferred to bank accounts, payment cards usage and ATM networks are growing rapidly, and e-money schemes are in place. The use of checks is not widespread.
A full discussion of deposit insurance is found in Chapter IV.
See Section II of this report for the details of compliance with the Basel Core Principles for Effective Banking Supervision.
The organizational structure of SISA is specified in the Law on Insurance and includes a director, a board, and a staff. The director is appointed by the Minister of Finance (MoF). The board of SISA is appointed and dismissed, on the proposal of the director, by the MoF. The director serves as the chairman of the board.
Details are provided in Section II of this report.
An IMF Stand-By-Arrangement was approved on March 8, 2000 and expired on June 7, 2001 (EBS/00/28, EBS/01/19, and EBS/01/63). A new 19-month precautionary Stand-By Arrangement was approved by the IMF Executive Board on August 30, 2001, in an amount of SDR 86.52 million or 60 percent of quota (EBS/01/160). The authorities have indicated their intention not to make purchases under the arrangement.
Moreover, Lithuania has since May 1994 accepted the obligations of Article VIII and has eliminated all restrictions on current payments and transfers.
Foreign investment is prohibited in the national security and defense sectors, except for investment made by foreign entities meeting the criteria of European and Transatlantic Integration, and subject to the approval of the State Defense Council. Foreign investment in lotteries and land are also restricted, although these restrictions are to be liberalized prior to accession to the EU.
More generally, the data on non-performing assets can be regarded as reliable owing to the conservative approach to loan classification enforced by banking supervisors in Lithuania.
The reported ratios of non-performing loans to total loans vary from 0 to 16 percent.
Previous attempts ended unsuccessfully in 1998, when the only bidder offered an amount regarded as too small, and in 2000, when the sole participant in the auction unexpectedly pulled out.
Vilniaus Bank and the EBRD each own 11 percent of the shares of the Agricultural Bank.
Moreover, at least one of the new mortgage lending initiatives proposed by the private sector calls for substantial government subsidies to support borrowers and new specialized mortgage banks.
In the past, the Lithuanian Savings Bank (now privatized) also played an important role in providing loans to municipal governments.
Lending to municipalities may reflect an implicit guarantee by the central government to bail out the municipalities if they become unable to repay. Alternatively, banks may lend (and have lent) to municipalities at excessive interest rates, thereby increasing the debt burden of municipal governments and the potential debt burden of the central government.
Bank lending to the social security fund (SoDra), by contrast, has been virtually eliminated; and the nonguaranteed debt of SoDra declined to LTL 5 million at end-September 2001.
These rules have been inspired inter alia by a desire to protect small shareholders following the experience in the early years after independence with voucher privatization.
A pension reform that will create a three-pillar pension system will start in 2004 comprising: (i) a pay-as-you-go pillar; (ii) a mandatory contribution second pillar financed by a diversion of a least 5 percentage points of the payroll tax for the younger generation; and (iii) a voluntary, privately funded pillar.
Notably, the bank may be required to take specified corrective action and to remove members of its management team.
The EU and Lithuania agreed on a four-year transitional period following Lithuania’s accession during which its deposit insurance would be brought into line with EU requirements.
Beginning in 2008, the first euro 2,500 will be fully insured and the balance at 90 percent.
The three laws were adopted by parliament in November 2001. The Law on Accounting and will enter into force on January 1, 2002. The Law on Financial Reporting and the Law on Consolidated Financial Reporting will enter into force on January 1, 2003.
Regulatory reporting standards in Lithuania also form the basis for general purpose financial reporting. Responsibility for promulgating the financial reporting applicable to banks and other financial institutions is conferred on the Bank of Lithuania (BoL) by the Law on Commercial Banks. The new 2001 laws on accounting, financial statements, and consolidated financial statements specifically exclude banks from their scope of application.
The assessment was based on the preliminary methodology developed by the Fund and World Bank; and the authorities agreed to a pilot application of this methodology in Lithuania.
The BoL, SC, LSC, SISA, and DIF provided questionnaire responses to the mission.
The Committee was established at the initiative of the BoL. It can be dissolved by the BoL.
The data cover reserves requirements in litas and foreign currencies for the specified maintenance period, current account holdings of commercial banks at the BoL, average if current account holdings of commercial banks in the specified maintenance period, currency outside the BoL, overnight loans granted by the BoL. The BoL also publishes the results of open market operations on the same day it undertakes the operations.
Arthur Andersen audited the 1998 and 1999 statements and Pricewaterhouse Coopers audited the 2000 statements.
At the time of the mission, the calculation did not include market risk. As of January 1, 2002, banks will have to apply a market risk charge for exchange rate, interest rate, and securities price risks.
At present, less than 0.5 percent of the assets of deposit-taking institutions are held by credit unions. In the near future, a Central Credit Union will be established, which will provide some services, including funds transfer, to credit cooperatives. The BoL has decided that the Central Credit Union will be a direct participant in TARPBANK.
Lithuania has 55 bank branches per 1,000,000 inhabitants, the Czech Republic has 242, Poland has 298, Latvia has 310, and Estonia has 276.
During 2001, up to 20 low value transactions were rejected by the TARPBANK system; and there has never been a need for recalculation as a result of such rejections.
The Guarantee Fund may be accessed in the event that one or several brokerage firms are not able to fulfill their obligations. The Fund is financed by the deposits of the members of the NSEL. The rules of the Fund, which is administered by the NSEL, are approved by the Securities Commission. The Guarantee Fund may not be used to finance current expenditures of the Exchange. The Fund has not been used since 2000, as the percentage of suspended trades is very low (0.1 percent).
Rules and exact procedures of when and how the Guarantee Fund can be used are detailed in the document called “Rules on Settlement of Transactions concluded on the NSEL” approved by the Council of the NSEL and approved by the Securities Commission in April 2000.
To minimize the number of suspended trades, the CSDL plans to offer a securities lending facility and create a “reserve cash lending system” covering small “technical” cash defaults (approximately up to LTL 10,000) in the first half of 2002.
PHARE is a pre-accession instrument, financed by the European community to assist applicant countries of Central Europe in their preparations to join the EU.
The Czech Republic has more than 900,000 transactions per day, for 10 million inhabitants or 22.5 transactions per capita yearly; and Slovakia has 500,000 transactions, for 5 million inhabitants or 25 transactions on an annual average. Lithuania averages about 6 transactions per capita.
With the issuance of the Communiqué of the International Monetary and Financial Committee of November 17, 2001, the IMF’s action plan in this area envisages extending the IMF’s involvement beyond anti-money laundering to efforts aimed at countering terrorism financing and expanding its anti-money laundering work, including through FSAPs, to cover legal and institutional frameworks, and helping countries identify gaps in their anti-money laundering and anti-terrorist financing regimes in the context of Article IV voluntary questionnaires. The present assessment was undertaken before the most recent Communiqué was issued. Even so, it already addresses a number of the issues raised by the IMFC.
The First Mutual Evaluation Report on Lithuania, approved in 1999 by the Council of Europe’s Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures provides a full assessment of the Lithuanian regime.
In 1997, a provision of the Criminal Code was introduced in order to criminalize money laundering. It carries basic penalties of 3 to 7 years, and 5 to 8 years where there are aggravating features. Lithuania has signed and ratified the Council of Europe 1990 Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime, No. 141 (the Strasbourg Convention), which came into force in 1995, and the 1988 United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention), which came into force in 1998. Lithuania is not a member of the Financial Action Task Force on the prevention of money laundering.
Minor amendments were later adopted in 1999 and 2001.
Money laundering is defined as the “activities aimed at the legitimization or concealment of the origin of money derived from criminal activity.” Any criminal activity can be a predicate offense.
The former are defined in Act VIII-275 as banks and credit unions and other institutions licensed by the Bank of Lithuania, while the latter are defined as insurance companies and insurance brokers, investment companies of variable capital, managing enterprises and depositories of investment companies, brokerage firms, investment management, and consulting firms.
The scope of the obligations falling on credit and financial intermediaries is governed by the concept of “monetary transactions,” which are defined by Act VIII-275 as “depositing or receipt of money, withdrawal or payment of cash, exchange of currency at financial and credit institutions, also lending, gift and other types of payment, and receipt of money in civil monetary transactions or in some other manner other than the payments or settlements with state and municipal institutions, other institutions maintained from the budget, the Bank of Lithuania and state municipal funds, diplomatic missions or consular institutions of foreign countries.”
This obligation falls also on notaries and persons authorized to perform notarial acts.
This obligation falls also on notaries and persons authorized to perform notarial acts.
The law exempts credit and financial institutions from communicating to the Tax Police information described in the text when the customer’s activities involve continuous and regular monetary transactions. The exemption, however, does not apply if the customer is involved in a set of activities described in Art. 12, s. 7 (e.g., dealing in precious stones, organizing auctions, etc.).
This obligation applies only to credit institutions.
Resolution No. 34 incorporates, with minor amendments, previous Resolution No. 296 of December 18, 1997.
Resolution No. 34 also addresses other issues, including guidance on how the register of information should be kept by intermediaries using appropriate software programs. The resolution details the information that has to be kept in the register. The main regulation of the Register, however, is to be found in Resolution No. 1382/10, which provides for retention of the data and information for 10 years.
When a transaction is entered into through an agent, staff must establish the required data on the person represented, and also on the agent.
This report does not describe and assess the role of other authorities which perform law enforcement tasks or which are otherwise not directly relevant to this assessment, such as the Ministry of Internal Affairs, the Ministry of Justice, the Ministry of Foreign Affairs, the Organized Crime Investigation Service, the Customs Department under the Ministry of Finance, the Prosecutor General’s Office, the Chamber of Notaries Public of Lithuania, and the Association of Banks of Lithuania.
Such as the above mentioned Regulation No. 34. The Bank of Lithuania, as also noted, has issued other regulations together with the Government of the Republic of Lithuania.
Reports by credit and financial institutions are sent on floppy disks, while reports from notaries and customs are provided on paper.
Resolution No. 1331 if December 3, 1997, issued by the Government of Lithuania and the Bank of Lithuania, provides guidance to credit and financial institutions on the information required to identify customers. While it provides some guidance for financial institutions, it does not cover all issues touched upon by Resolution No. 34.
It should be noted that the two recommendations are not meant to be mutually exclusive, as the second may embrace a broader set of cases than the first, which is restricted to the suspicious transactions reports transmitted to the Tax Police under Act VIII-275.
Thus, beyond the authorities mentioned in this report, the forum should include all the authorities involved, such as the Ministry of Justice, the Notaries, and possibly industry representatives.