As Lithuania, the financial powerhouse of the Baltic states, enjoys a wave of fintechs obtaining financial licences, recent years indicate regulators play a balancing act between fostering innovation and preventing financial crime through robust AML/CTF frameworks. Whilst Lithuania’s fintech market booms, despite numerous money laundering scandals in the Baltic states, one thing is certain; regulators will continue to tread the fine line between stepping up AML/CTF compliance measures, whilst also supporting an innovative ecosystem for start-ups. Lithuania’s fintech boom may just be a wave destined to crash for businesses ill-equipped to face the constantly changing compliance measures.
As the swathe of money laundering scandals swept through the Baltic states between 2010 and 2018, the post-Soviet vision of acting as a bridge between east and west appeared fanciful. If anything, the bridge allowed a syndicate of trojan horses to infiltrate Europe’s financial system under the guise of increasing international investment. The scandals exposed not only the region’s vulnerability to money laundering but also the weaknesses of the EU’s AML/CTF regulatory framework.
The widespread money laundering revealed the titanic failure of regulators and financial institutions to identify suspicious transactions. Swedbank’s three Baltic subsidiaries processed approximately $19 billion of suspicious incoming transactions, and $20 billion outgoing, between 2014 and 2019. In Estonia, Danske Bank also failed to detect money laundering, resulting in an estimated $200 billion in suspicious transactions flowing into the country, making it likely the largest money-laundering operation in history. Similarly, Ukio in Lithuania became a crucial steppingstone for the Troika Laundromat, funnelling an estimated $4.9 billion out of Russia and into Europe. In 2018, Latvia’s third-largest bank, ABVL, went into voluntary liquidation due to systematic money laundering, which led to the circumvention of sanctions on North Korea. The following year, there were also corruption allegations against the governor of the Central Bank of Latvia.
In response, regulators re-evaluated their approach and placed the Baltic states under intense scrutiny to ensure they were better equipped to combat money laundering. Despite the goal of developing a global fintech hub in Lithuania, the country has struggled to swallow MONEYVAL’s medicine, being downgraded during the Enhanced Follow Up Report from ‘largely compliant’, to ‘partially compliant’.
As Lithuania courts fintechs via a throng of attractive measures such as tax rebates, as well as technical and legal cooperation, it also risks replicating the same relaxed AML/CTF compliance mistakes of the past. This is precisely why regulators at the intergovernmental and international level have hammered Lithuania’s on its head during their evaluations.
By 2019, Lithuania was enjoying its crowned position as the largest growing fintech sector in the European Union. Challenger banks, EMIs and FX have become increasingly prominent in Lithuania. More recently, the country is showing signs of becoming the new epicentre of govtech. Yet, of all the fintech niches, payments and remittances had been central to Lithuania’s burgeoning economy, accounting for 37% of the fintech sector in 2020.
How such a small economy outbid the rest of Europe reflects Lithuania’s flexibility of regulation for fintechs. It reduced the electronic banking licence application timeline to three months, whereas most European countries take twelve. Lithuania provided English translation for documentation, and for lending and payments companies it also lowered the minimum capital threshold to $1 million, whereas traditional banks require $5 million.
Yet, Lithuania has simultaneously been stepping up its regulatory framework for combating financial crime despite these ease of business measures. Lithuania became one of the first countries in the world to adopt the IMF and World Bank’s guiding principles for fintech regulation.
Marius Jurgilas, board member for the Bank of Lithuania notes this high wire balancing act, “Seeking to achieve a balanced approach, we maintain a supportive and open attitude to help foster innovation in the financial sector, while at the same time demanding strict regulatory compliance to ensure appropriate risk management.”
Even though the European regulatory focus is now on the innovators, the recent Wirecard scandal shows that the measures in Lithuania are still not enough to effectively curb financial crime. Like a broken record in a loop, this has been met yet again with increased pressure from regulatory bodies at the EU level for Lithuania to improve its level of oversight of the fintech sector.
The ebb and flow of financial regulation in Lithuania reflects its aim of developing an attractive ecosystem for innovators, whilst also maintaining efforts to impose strict anti-money laundering requirements. Developing a nuanced approach where regulations are proportionate to the size and risk of the company would be an important step forward for maintaining the longevity of the fintech boom.
Efforts such as the Bank of Lithuania’s regulatory sandbox, which allows start-ups to live test their solution in a controlled environment, whilst also allowing the bank to identify risks, is a promising development. Initiatives such as these that develop dialogue will help foster financial innovation while mitigating risk and regulatory shortcomings. Additionally, the newcomer programme is another promising initiative that promotes dialogue between regulators and new entrants to the market.
For the fintech sector, Lithuania’s flippant approach to regulation can be a major impediment for financially strapped start-ups aiming to scale their business, while also maintaining compliance. Too often, compliance measures rely on applying static transaction monitoring rules based on outdated risk typologies, which create a blind-spot as illicit actors continually
adapt their modus operandi. The results of this process are costly and time-consuming as they require the manual assessment of large numbers of false-positive transactions.
However, budding innovative financial institutions in Lithuania, such as Mano.bank – a digital bank delivering easy access to financial products for both individuals and businesses, are now proactively addressing regulatory compliance measures by partnering with regtech companies using future-proof AI technologies. AI-powered transaction monitoring systems offer future-proof support helping fintechs remain compliant with the fast-paced regulatory landscape, at the same time accelerating their business growth. While Mano.bank's use of an AI-powered transaction monitoring system may make it an outlier today, AI-based solutions are already shaping the future of the industry.
If we can glean a lesson or two from Lithuania’s financial sector’s recent history, regulatory measures will continue to ebb and flow. Lithuania has developed its fintech sector largely due to the innovative approach taken by regulators to foster innovation but the ease of gaining a payment institution license comes at a cost. Inherent in innovation are mistakes and blunders. For young financial institutions to succeed they need to approach transaction monitoring compliance with innovative solutions that allow the flexibility to easily adapt processes according to the changing regulations. Technologies like machine learning are emerging as a path forward for fintechs aiming to scale their business, whilst maintaining regulatory compliance. As Lithuania continues to cement its position as Europe’s fintech hub, quashing money laundering, quashing money laundering will continue to be front and centre for regulators. For those unable to implement the right regtech solutions and keep pace with the changing AML/CTF regulatory environment, capitalising on Lithuania’s fintech boom may just be a mirage on the horizon.
Sentinels' mission is to balance the fight against financial crime by arming financial institutions with better client surveillance solutions. Get in touch to learn more about our AML and transaction monitoring tool.
To support your use of the website of Sentinels, we, Sentinels traded by Slimmer AI Sentinels B.V., need to register some of your information. We consider taking proper care of your data of utmost importance. We treat all information you provide as confidential.
In this privacy statement, we explain how we process your data. If you have any questions, remarks or complaints please contact us at email@example.com.
Your data is used for the following purposes:
Based on your data, the website of Sentinels does not make autonomous decisions that affect you or other people.
The website of Sentinels only stores your data as long as your account exists. You may delete your account at any time. If you use the website of Sentinels without a personal account, we only store the data you provide for as long as needed to be of service to you.
For security reasons, we store your IP address up to a maximum duration of 1 month. However, when a user attempts to access the website of Sentinels in a way that clearly differs from its intended use, this can be considered suspicious activity. As a result, the IP address may be stored for a maximum of 2 years for security purposes, and the IP address may be reported to organizations involved in internet security.
Any statistics based partly on your data will be stored, but cannot be used to identify you.
The website of Sentinels has no intention to process information of users younger than 16 years of age, unless they are permitted to use the website of Sentinels by their legal guardians. However, we have no reliable way to determine the actual age of users. We, therefore, advise parents to be involved in their children’s online internet activities to prevent any data from being gathered without their permission.
If you feel that we gathered personal data from minors without proper permission, please contact us at firstname.lastname@example.org. We will remove the data upon your request.
All your data is protected by state of the art technology. This ensures that your data cannot be accessed by parties who have no business doing so. If you feel that this is not happening in an appropriate way, please contact us at email@example.com.
Sentinels traded by Target Holding B.V. does not sell your data to third parties. Your data is only shared when this is needed for proper operation of the website of Sentinels, or to fulfil lawful obligations.
Any data we share with third parties is based on a data processing agreement with these parties. This agreement ensures that the parties process your data under the same terms that we do. Any shared data will be as restricted in scope and size as possible, given the purpose for which it is shared.
The website of Sentinels may also make use of third-party cookies like Google Analytics. These cookies allow us to analyze the operation and usage of the website of Sentinels.
You are entitled to view your data stored by the website of Sentinels, and you are entitled to have your data corrected or removed. You can send a request to do so to firstname.lastname@example.org.