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IMF Country Report No. 23/320
NORDIC-BALTIC REGIONAL REPORT
TECHNICAL ASSISTANCE REPORT—NORDIC-BALTIC TECHNICAL ASSISTANCE PROJECT: FINACNIAL FLOWS ANALYSIS, AML/CFT SUPERVISION, AND FINANCIAL STABILITY
September 2023
This technical assistance report on the Nordic-Baltic region was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in September 2023.
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Title Page
TECHNICAL ASSISTANCE REPORT
REGIONAL REPORT
Nordic-Baltic Technical Assistance Project Financial Flows Analysis, AML/CFT Supervision, and Financial Stability
September 2023
Prepared By:
Grace Jackson, Maksym Markevych, Pierre Bardin, Alexander Malden, Antoine Bouveret (consultant), Santiago Texidor Mora, and Indulekha Thomas
Authoring Departments:
Legal Department
DISCLAIMER
The contents of this document constitute technical advice provided by the staff of the International Monetary Fund to the authorities of the Nordic-Baltic Region (the "CD recipient") in response to their request for technical assistance. Unless the CD recipient specifically objects to such disclosure, this document (in whole or in part) or summaries thereof may be disclosed by the IMF to the IMF Executive Director for Denmark, Estonia, Finland, Iceland, Latvia, Lithuania, Norway, and Sweden, to other IMF Executive Directors and members of their staff, as well as to other agencies or instrumentalities of the CD recipient, and upon their request, to World Bank staff, and other technical assistance providers and donors with legitimate interest (see Staff Operational Guidance on the Dissemination of Capacity Development Information). Publication or Disclosure of this report (in whole or in part) to parties outside the IMF other than agencies or instrumentalities of the CD recipient, World Bank staff, other technical assistance providers and donors with legitimate interest shall require the explicit consent of the CD recipient and the IMF’s Legal Department.
The analysis and policy considerations expressed in this publication are those of the IMF Legal Department
MEMBERS/PARTNERS
Table of Contents
ACRONYMS AND ABBREVIATIONS
INTRODUCTION
BACKGROUND ON RISK AND CONTEXT
FINANCIAL INTEGRITY ANALYSIS OF FINANCIAL FLOWS IN THE NORDIC-BALTIC REGION
A. Macro-trends: Aggregate Financial Flows
B. Intraregional Flows
C. Regional Financial Flows with Higher-Risk Countries
D. Countries that could present higher ML risks
E. Correspondent Banking Flows
F. flows Between Financial institutions
CROSS-BORDER FINANCIAL INTEGRITY RISKS AND AML/CFT SUPERVISION
A. Supervisory ML/TF Risk Assessment of Banks: Cross-Border ML/TF Risks
B. AML/CFT Supervision of Banks and Enhancing Effectiveness of Preventive Measures
C. AML/CFT Supervisory Cooperation and Information Sharing
D. Crypto assets and Crypto asset Service Providers
AML/CFT FAILINGS AND FINANCIAL STABILITY
ANNEX I. USING PAYMENTS DATA AND MACHINE LEARNING FOR FINANCIAL INTEGRITY SURVEILLANCE DATA AND VARIABLES USED FOR THE ISOLATION FOREST MODEL
ANNEX II: A METHODOLOGICAL APPROACH FOR ASSESSING THE IMPACT OF FINANCIAL INTEGRITY EVENTS ON FINANCIAL STABILITY OF THE BANKING SECTOR: A CASE STUDY IN THE NORDIC-BALTIC REGION
A. Literature survey
B. Misconduct costs and financial stability
C. Conceptual framework
D. A financial integrity scenario for stress testing and risk analysis: Estimation approach and calibration
E. Limits and possible extensions
ANNEX III: DENMARK - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. Virtual Assets & Virtual Asset Service Providers (VASPs)
ANNEX IV: ESTONIA - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. Virtual Assets (VAs) & Virtual Asset Service Providers (VASPs)
ANNEX V: FINLAND - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. Virtual Assets & Virtual Asset Service Providers (VASPs)
ANNEX VI: ICELAND - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. Virtual Assets & Virtual Asset Service Providers (VAs & VASPs)
ANNEX VII: LATVIA - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. VAs & Virtual Asset Service Providers (VASPs)
ANNEX VIII: LITHUANIA - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. Virtual Assets & Virtual Asset Service Providers (VASPs)
ANNEX IX: NORWAY - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. Virtual Assets & Virtual Asset Service Providers (VASPs)
ANNEX X: SWEDEN - EXECUTIVE SUMMARY
A. Background
B. Financial Flows Analysis
C. ML/TF Risk Assessment
D. AML/CFT Supervision
E. Virtual Assets & Virtual Asset Service Providers (VASPs)
REFERENCES
BOXES
1: Brexit and Nordic-Baltic Financial Flow
2. IMF Economic Fundamental Analysis
3. Use of Data Analytics in Entity Risk and Assessment
4. Use of Data Analytics in Supervisory Activities
5. Private-Private Information Sharin
6. The EU Anti-Money Laundering Authority (AMLA)
7. Policy and Regulatory Frameworks: International and Regional Developments
8. Remaining Gaps in the Legal Frameworks for Crypto assets
9. Estimating the impact of FI issues, the example of Swedbank in February 201
10. Assessing Contagion through Conditional Analysis
FIGURES
1. Regional Inflows, Outflows, and Net Flows, 2013—July 2022 (USD B)
2. Nordic-Baltic Countries Aggregate Flows, 2013—July 2022
3. Nordic-Baltic Aggregate Flows Greater than $5 B by Country, 2020-July 2022
4. Nordic-Baltic Inflows, Outflows, and Net Flows with UK, 2013-July 2022
5. Nordic-Baltic Inflows, Outflows, and Net Flows with CIS countries, 2013—July 2022
6. Aggregate Flows with Select Country Groupings, 2020-July 2022
7. Nordic-Baltic Aggregate Flows by Share of Country, 2013—July 2022
8. Chord Diagram of Intraregional Flows by Country,
9. Aggregate Flows with FATF, EU High Risk Countries, and EU Non-Cooperative Jurisdictions for Tax Purposes since 2020 (USD B)
10. Share of Flows with Higher-Risk Countries in Overall Flows
11. Nordic-Baltic Inflows, Outflows, and Net Flows with Ireland, 2013-July 2022
12. Nordic-Baltic Inflows, Outflows, and Net Flows with Luxembourg, 2013-July 2022)
13. Nordic-Baltic Inflows, Outflows, and Net Flows with Switzerland, 2013-July 2022)
14. Inflows, Outflows, and Net Flows with Offshore Financial Centers, 2013-July 2022 (USD B)
15. Aggregate Financial Flows with Offshore Financial Centers as a Share to Total Regional Aggregate
14. Inflows, Outflows, and Net Flows with Offshore Financial Centers, 2013-July 2022 (USD B)
16. Nordic-Baltic Flows with Financial Centers by Country (USD B)
17. Inflows-Outliers from Nordic-Baltic Region, 2020-July 2022
18. Outflows-Outliers from Nordic-Baltic Region, 2020-July 2022
19. Value and Volume of Regional Correspondent Banking Flows, 2013-July 2022 (USD B)
20. Largest Originators and Recipients of Correspondent Banking Flows through the Nordic-Baltic region by share of Total, 2020 - July 2022
21. Nordic-Baltic MT202 Inflows, Outflows, and Net Flows, 2013-July 2022
22. MT202 Inflows, Outflows, and Net Flows with the United States, 2013-July 2022 (USD Tr)
23. MT202 Outflows by Country, 2013-July 2022
24. MT202 Inflows by Country, 2013-July 2022
25. Highest ML Risk Sectors Across NRAs and Number of Mentions
26. Technical Compliance with FATF Recommendation on Supervision of Financial Institutions (2014-2019) & Improvements in Technical Compliance in Follow-Up Assessment (2019-2022)
27. Supervisor Supervisory ML/TF Risk Assessment Model
28. Inherent Risk Assessment Model
29. Illustration of Key Inherent Risk Factors
30. Product Risk Weightage in Inherent Risk Assessment (Anonymized)
31. Cross-border Transactions Data Collected across the Region
32. Example of a Minimum Engagement Model
33. Topics Covered in Thematic Inspections
34. AML Colleges Participation and EBA Monitoring Approaches and Selection Criteria
35. Cooperation Between Prudential and AML/CFT Supervisors
36. CASP Populations in the Region (Anonymized)
37. Country-Level Good Practices: Toolkit for Identification of Illicit CASP Activity
38. Information on Scale of Activity and on CASP Specific Characteristics
39. Sharp Decline in Stock Prices
40. Increase in Credit Risk
41. Increase in CDS Spreads
42. Change in Equity Prices Conditional on One bank Facing a Large Drop in Stock Prices
43. Change in Deposits
44. Deposit Run-off Rates
45. Shocks in the Stress Scenario
46. Short-term Transmission Channels
47. Medium-term Transmission Channels
48. Identification Flow Chart
49. Relative Equity Performance
50. Relative CDS Performance
51. Change in Deposits
52. Shocks in the Stress Scenario
53. Denmark’s Flows with Financial Centers as a Share of Overall Flows, 2013-July 2022
54. Estonia’s Flows with Higher-Risk Countries as a Share of Overall Flows, 2013-July 2022
55. Finland’s Flows with Financial Centers as a Share of Overall Flows, 2013-July 2022
56. Latvia Inflows, Outflows, and Net Flows, 2013-July 2022
57. Lithuania’s Inflows, Outflows, and Net Flows, 2013-July 2022
58. Aggregate Flows with Financial Centers as a Percentage of Total Aggregate Flows
59. Sweden’s Flows with Financial Centers as a Share of Overall Flows, 2013-July 2022
TABLES
1. Intraregional Aggregate Flows as a Share of Total Aggregate Flows, 2020-July 2022
2. Economic Fundamentals Results
3. Share of Outlier Payments in Overall Flows
4. Materiality of Correspondent Banking
5. Recent Financial Integrity Issues
6. Expected Weekly Change in Equity Prices Conditional on Banks (in rows) Facing a ML
7. Expected Weekly Change in 5Y CDS Spreads Conditional on Banks (in rows) Facing a ML
Acronyms and Abbreviations
| AML | Anti-Money Laundering |
| AMLA | The EU Anti-Money Laundering Authority |
| Bdl | Bank of Italy |
| BIS | Bank for International Settlements |
| CA | Crypto Asset |
| CASP | Crypto Asset Service Providers |
| BoT | The Bank of Thailand |
| CDD | Customer Due Diligence |
| CDS | Credit Default Swaps |
| CFT | Combating the Financing of Terrorism |
| CIS | Commonwealth of Independent States |
| DNB | De Nederlandsche Bank |
| EBA | European Banking Authority |
| EC | European Commission |
| EDD | Enhanced Due Diligence |
| EEA | European Economic Area |
| ESRB | European Systemic Risk Board |
| FATF | Financial Action Task Force |
| FI | Financial Integrity |
| FIU | Financial Intelligence Unit |
| FSAP | Financial Sector Assessment Program |
| GDP | Gross Domestic Product |
| MAS | Monetary Authority of Singapore |
| MER | Mutual Evaluation Report |
| MiCA | Market in Crypto-Assets |
| ML | Money Laundering |
| NBC | Nordic-Baltic Constituency |
| NRA | National Risk Assessment |
| IFC | International Financial Center |
| OFC | Other Financial Corporation |
| PEP | Politically Exposed Person |
| PPP | Public-Private Partnership |
| STR | Suspicious Transaction |
| TF | Terrorist Financing |
