Baltic banking scandals have hit the headlines repeatedly over the past few years. First, Latvia’s Trasta Komercbanka was at the centre of the Russian Laundromat investigations in 2014. ABLV, another Latvian bank, was exposed by the US authorities for their involvement in a wide array of illicit conduct last year, causing it to shut down. And of course there is the infamous case of Danske Bank in Estonia, the many threads of which have made it the largest money laundering scandal in Europe. Ever.
In contrast, things have been quiet in Lithuania. With a relatively small banking sector, Lithuania’s financial system was not known as a target for criminals and the corrupt seeking an entry point to the European Union (EU) single market.
But now, in the aftershock of a new investigation published this week by the Organized Crime and Corruption Reporting Project (OCCRP), Lithuania must brace for a reputational crisis.
Just two weeks ago, in February 2019, an extensive investigation by the Swedish broadcaster SVT revealed that at least US$5.8 billion of the dirty money that passed through Danske Bank came from another Nordic bank, Swedbank. This Swedish bank allegedly allowed transactions from 50 of its suspicious accounts for nearly a decade. Money was funneled through all three Baltic branches, including Lithuania — where an alleged bribe of US$4.2 million was transferred for the ultimate benefit of Ukraine’s corrupt ex-president Viktor Yanukovych.
In response to the findings, the Bank of Lithuania — the country’s central bank — stated that it has “a zero-tolerance approach to money laundering” and will help Estonian and Swedish authorities uncover the truth. The Bank of Lithuania also insisted that the country’s share of non-resident clients that may potentially pose a money laundering risk is one of the lowest in the EU; and that “factual data shows that the risk of money laundering and terrorist financing in Lithuania is not high”.
The latest mutual evaluation of Lithuania conducted by the Financial Action Task Force (FATF) — an international body responsible for setting anti-money laundering standards — partially confirms this statement. The evaluation shows that after ŪKIO bankas went bankrupt in 2013, the number of bank accounts held by non-residents, considered as high-risk for money laundering, dropped dramatically. Before 2013, ŪKIO bankas accounted for a significant share of Lithuania’s non-resident customers.
According to this week’s investigation by OCCRP, some of these non-resident customers were linked to a massive money laundering scheme, the Troika Laundromat. The scheme operated from inside the Russian investment bank Troika Dialog and involved more than 70 offshore companies registered in places such as the British Virgin Islands and Panama. At least 35 of these companies had accounts with ŪKIO bankas in Lithuania and were used to move more than US$4.6 billion between 2006 and early 2013.
The findings of the OCCRP investigation raises questions as to whether anti-money laundering supervision in Lithuania is fit for purpose. If the share of non-resident high-risk customers is so small, as the Bank of Lithuania insists, should it not have been easier for the authorities to detect and stop the scheme?
Red flags everywhere
If the value of transactions and number of accounts — at least 35 accounts belonging to companies registered in tax havens — were not enough to raise suspicions, there were other elements that should have. Documents reviewed by OCCRP show that the registered beneficial owners for many of the accounts were seasonal workers from Armenia. If the bank followed a proper due diligence process, they surely would have found that these individuals did not match the profile of a company owner involved in million-dollar transactions in another jurisdiction.
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The purpose of these transactions was not always very convincing either, as documented in the written exchange between ŪKIO employees. Inexplicably, the transactions weren’t stopped and no suspicious activities seem to have been reported by the bank.
Considering that the bank in question held most of the high-risk non-resident accounts in the country, the low number of submitted suspicious transaction reports should have served as a warning sign to the authorities.
In addition, at the time when the Troika Laundromat was fully operational, the Bank of Lithuania investigated whether ŪKIO had been one of the banks involved in the Russian Laundromat. The investigation seemed to have been quite narrow in focus, as the authorities didn’t find any pointers to a larger money laundering scheme.
Lithuanian authorities looked closer at ŪKIO at least one more time. When the bank went bankrupt in 2013, the circumstances around its insolvency led the authorities to investigate whether it had been defrauded. The Bank of Lithuania found that the main owner of ŪKIO had embezzled the bank’s money using three fake loans and shell companies. The embezzled funds were sent out of the country and the owner fled to Russia. The investigation led to the sanctioning of ŪKIO’s external auditor Deloitte and the loss of license for one of its auditors. But even then, the authorities do not seem to have extended their investigations to look at bank’s other business.
The Bank of Lithuania is responsible for prudential and anti-money laundering supervision of financial institutions. The Bank of Lithuania supervises 470 financial market participants — including banks — using risk-based supervision. This type of supervisory approach conforms with best practice but is only effective if (a) there is a good understanding of risks and (b) actions are taken to mitigate these and detect potential wrongdoing.
While there is a recognition that the Bank of Lithuania has made noteworthy improvements in the last two years, recent anti-money laundering reviews conducted by FATF and OECD show that significant shortcomings remain, particularly related to risk-based supervision and level of resources available to supervisory bodies.
In 2014–2015, key government bodies such as the Financial Crime Investigation Service and the Bank of Lithuania, carried out Lithuania’s anti-money laundering risk assessment. The report, however, does not address the risks around cross-border illicit payments, particularly those from and to higher risk countries. According to the 2018 FATF evaluation, this gap still impacts authorities’ current understanding of money laundering vulnerabilities in the country. Further, the Bank of Lithuania seems to primarily rely on off-site inspections that draw on annual reports submitted by the financial institutions.
In higher risk cases, this approach might not be sufficient. Preventive random on-site inspections should be the norm to review whether financial institutions are complying with their anti-money laundering obligations and detecting any suspicious activity. In a 2017 evaluation, the OECD concluded that inspections of financial institutions in Lithuania appear insufficient. The report recommends that the Bank of Lithuania allocate sufficient resources to ensure more rigorous supervision of reporting entities.
The issue of resources is also raised in the FATF assessment, although the report recognises that the Bank of Lithuania has demonstrated a strong commitment during the last two years, in particular to increasing its resource capacity, so as to continue to move towards comprehensive risk-based supervision. As of December 2017, the Bank of Lithuania had seven staff members allocated to the supervision of anti-money laundering and counter terrorism financing systems, information technology and operational risk in all financial market participants. This number is hardly sufficient to effectively supervise the 470 entities under its responsibility, particularly considering that their use of automated processes in investigations is limited.
The FATF report stresses that Lithuania’s financial intelligence unit, Financial Crime Investigation Service, which is responsible for collecting and analysing suspicious transactions reports submitted by financial institutions and other professionals, also appears to be “slightly ill-equipped in terms of staffing and analytical tools”.
If these shortcomings are not addressed, there is a risk that supervisory authorities would fail to detect a similar scheme if there were to happen now.
Recent revelations show that no country is immune to corruption and money laundering. Serious steps need to be taken to ensure Lithuania’s financial system cannot be misused by criminals as an entry point to the EU financial market. The authorities should thoroughly investigate the freshly unearthed schemes, identify suspicions accounts and transactions and take the necessary measures to sanction those involved. Next, Lithuanian financial supervisors must share their findings with other countries so that further investigations can be conducted into the origin and final destination of the money that passed through ŪKIO and Swedbank.
In order to prevent another Laundromat in the future, supervisory bodies need to gain a better understanding of cross-border money laundering schemes so they can deal with the problem effectively. Access to technology as well as adequate human and financial resources are key. On-site inspections should be carried out more frequently, particularly in higher-risk sectors.
Moreover, supervisory authorities should provide guidance and training on customer due diligence and on identifying and reporting suspicious transaction reports to financial institutions and other professionals. As reported by FATF, the current number and quality of suspicious transaction reports submitted by anti-money laundering obliged entities in Lithuania is not satisfactory. This has had an impact on the detection of wrongdoing but also on the authorities’ understanding of money laundering risks in the longer term.
Lithuania’s reputation has been tainted because of the Swedbank and ŪKIO revelations, and now Lithuania’s financial sector needs to work hard to regain trust from citizens, customers and partners, sending a strong signal that dirty money is not welcome.
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