## 1ltuea2022002

## Source details

**Canonical URL:** [1ltuea2022002](https://www.imf.org/-/media/files/publications/cr/2022/english/1ltuea2022002.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2022/english/1ltuea2022002.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2022/english/1ltuea2022002.pdf.json)

---

### Effects of Climate Change — Context and overview
- Global average surface temperature increased by about 1.1 degrees Celsius (°C) compared with the preindustrial average during 1850–1900.
- If greenhouse gas (GHG) emissions remain on the current growth path, global warming is projected to reach 4-6°C by 2100.
- 189 countries committed to reducing carbon dioxide (CO2) emissions by 30 percent in 15 years until 2030.
- Global CO2 emissions increased by 2.3 percent to 36.3 billion metric tons in 2021.
- After the war in Ukraine, crude oil prices rose from an average of $68 per barrel in 2021 to as high as $124 in 2022.
- Price of natural gas in Europe jumped to a record high of €345 per megawatt-hour, equivalent to $600 per barrel oil.
- Price volatility increased due to an unprecedented output decline in renewable energy assets and tight supply-and-demand balances in the European power system.

### Effects of Climate Change — Regional vulnerabilities and major risks
- Baltics / Europe projections and vulnerabilities:
  - Annual warming trend for the Baltics: about 0.10°C per decade (twice the global average of 0.05°C per decade).
  - Projected increase in annual mean surface temperature in the Baltics may reach as high as 4.3°C over the next century and remain above the global average under all scenarios.
  - Winter precipitation in the Baltics could increase by as much as 75 percent.
  - Energy imports: over 60 percent of all forms of energy in Lithuania; as much as 90 percent in the case of natural gas.
  - Europe reduced the amount of energy used to produce a unit of GDP by 46.4 percent over the past four decades; the Baltics lead in energy efficiency among European countries.
- Major climate risks (Box summary):
  - Sea level increase: even if global warming stays below 2°C, sea levels projected to surge 2–3 meters by 2300 and by 5–7 meters with faster global warming; by 2100, once-in-a-century coastal flood events will occur at least once per year at more than half of coastlines across the globe.
  - Widespread flooding: frequency of heavy downpours has increased by about 30 percent and they contain about 7 percent more water.
  - Extreme heat waves: already about five times more likely with existing warming of 1.2°C; with 2°C of global warming, frequency increases to 14 times as likely; hottest temperatures would reach nearly 3°C higher than previous heat waves.
  - Severe droughts: severe droughts that used to happen at an average of once per decade are now occurring about 70 percent more frequently; with 2°C warming, severe droughts will occur between two and three times as often.
  - Weather whiplash: wild swings between dry and wet extremes.

### Energy mix, energy efficiency, and emissions — Empirical findings
- Panel evidence (39 European countries, 1980–2019):
  - Increasing share of nuclear, renewables, and other non-hydrocarbon energy and improving energy efficiency are associated with lower CO2 emissions and lower energy imports over the long run, controlling for economic, demographic, and institutional factors.
  - Effects are statistically significant and more pronounced in emerging European economies.
  - Lithuania: reductions in CO2 emissions slower than the EU average due to increases in emissions from agriculture, transportation, services, and buildings, and dependence on hydrocarbons despite rising share of non-hydrocarbon energy.

### Climate mitigation policy tools and fiscal measures
- Three key policy areas to advance toward net-zero emissions:
  - (i) eliminating distortionary energy subsidies;
  - (ii) introducing a carbon tax and “feebates” (fees on high-emission products combined with rebates on low-emission products);
  - (iii) improving energy efficiency and decarbonizing the energy sector.
- Fiscal policy measures, including a carbon tax on fossil fuels, are identified as the most efficient tool for mitigation; even a modest carbon price can mobilize investment in non-hydrocarbon energy and encourage greater energy efficiency.
- Proposed carbon-tax reference levels (Black et al., 2021):
  - $75 per metric ton of CO2 for advanced economies;
  - $50 for high-income emerging markets;
  - $25 for low-income emerging markets.
- Across the world, only 17 percent of emissions are covered by a carbon price, at an average of US$3 per metric ton of CO2 emissions.
- The EU emissions trading system (ETS) covers about 30 percent of national CO2 emissions.

### CPAT simulation — carbon tax set to US$50 per metric ton of CO2 by 2030
- Simulation assumptions:
  - Carbon tax of US$50 per metric ton of CO2 emissions as the only policy instrument, using the Climate Policy Assessment Tool (CPAT) framework.
- Revenue gains at US$50 per metric ton of CO2 emissions (percent of GDP):
  - Estonia: 1.03 percent of GDP
  - Latvia: 0.64 percent of GDP
  - Lithuania: 0.75 percent of GDP
  - Czech Republic: 1.07 percent of GDP
  - Germany: 0.42 percent of GDP
  - Hungary: 0.95 percent of GDP
  - Poland: 1.38 percent of GDP
- Real GDP growth impact at US$50 per metric ton (no revenue recycling):
  - Lithuania: -0.4 percentage points
  - Latvia: -0.35 percentage points
  - Estonia: -0.6 percentage points
- Real GDP growth impact when additional revenues are recycled through lower taxes or higher investment spending:
  - Lithuania: -0.1 percentage points
  - Latvia: -0.1 percentage points
  - Estonia: -0.2 percentage points
- Simulation implications:
  - All Baltic countries would achieve—or exceed—the climate mitigation targets by 2030 under a US$50 carbon tax, although required tax level varies across countries because of differences in energy mix and responsiveness of emissions to fossil-fuel prices.
  - CPAT uses price elasticity assumptions; where initial renewable levels are exceptionally low, fossil-fuel price changes alone will not elicit large increases in renewables—non-tax policies are necessary to stimulate investment in alternative energy sources.

### Energy sector policy implications and recommendations
- Decarbonization must start in the energy sector, which accounted for about 80 percent of CO2 emissions in Europe as of 2019.
- Policy priorities:
  - Decarbonize the energy matrix (lower CO2 emissions per unit of energy).
  - Enhance energy efficiency (lower energy consumption per unit of GDP).
  - Eliminate distortionary energy subsidies.
  - Implement carbon pricing (taxes) and complementary measures such as feebates.
  - Recycle carbon-tax revenues toward lower distortionary taxes, targeted cash transfers to protect vulnerable households, and public investment to mitigate adverse distributional and growth effects.
  - Use non-tax policies and investments where initial renewable capacity is low to translate price signals into durable shifts in the energy mix.

---

### Increasing the share of renewable, nuclear and other non-hydrocarbon energy — Empirical models and magnitudes
- Empirical model specification (CO2 emissions and energy imports regressions):
  - y_{i,t} = β1 + β2 AE_{i,t} + β3 X_{i,t} + η_i + μ_t + ε_{i,t}
  - y_{i,t}: logarithm of CO2 emissions in metric tons per capita or net energy imports as a share of GDP
  - AE_{i,t}: share of alternative sources of energy including nuclear, renewable and other non-hydrocarbons
  - X_{i,t}: controls—logarithm of real GDP per capita, trade openness, logarithm of population, share of urban population, bureaucratic quality
  - η_i and μ_t: country and year fixed effects; robust standard errors clustered at the country level
- Main coefficients (Table 2, 39 European countries, 1980–2019):
  - All countries: Non-Hydrocarbon Energy = -0.003*** (CO2 Emissions) and -0.006*** (Energy Imports)
  - Advanced Economies (AEs): -0.001*** (CO2 Emissions) and -0.003*** (Energy Imports)
  - Emerging Markets (EMs): -0.012*** (CO2 Emissions) and -0.022*** (Energy Imports)
- Long-run magnitudes:
  - For all European countries, a 10 percentage point increase in the share of non-hydrocarbon energy is associated with lower CO2 emissions of 3 percentage points, after controls.
  - For all countries, a 10 percentage point increase in the share of non-hydrocarbon energy is associated with a reduction of 6 percentage points in energy imports, after controls.
  - Effects larger among emerging European countries than advanced economies.
- Selected additional statistics:
  - Real GDP Per Capita coefficients (CO2 Emissions): All = 0.618***; AEs = 0.419***; EMs = 0.689***.
  - Trade Openness coefficient (CO2 Emissions): All = -0.001*.
  - Number of observations: CO2 Emissions regressions = 1,145 (All), 823 (AEs), 322 (EMs).
  - Number of countries: 39 (All), 27 (AEs), 12 (EMs).
  - Adj R^2 (CO2 Emissions): All = 0.41; AEs = 0.56; EMs = 0.78.

### Impact of energy efficiency
- Empirical model specification:
  - y_{i,t} = β1 + β2 EE_{i,t} + β3 X_{i,t} + η_i + μ_t + ε_{i,t}, where EE_{i,t} is energy consumption per unit of real GDP
- Main coefficients (Table 3, 39 European countries, 1980–2019):
  - Energy Efficiency (CO2 Emissions): All = -0.088***; AEs = -0.121***; EMs = -0.046***.
  - Energy Efficiency (Energy Imports): All = -0.019***; AEs = -0.047***; EMs = -0.013***.
- Long-run magnitudes:
  - A 10-percentage point increase in energy efficiency is associated with lower CO2 emissions of 8.8 percentage points and energy imports of about 2 percent, after controls.
  - Effects significant across country groups and stronger among advanced economies.
- Selected statistics:
  - Real GDP Per Capita coefficients (CO2 Emissions): All = 0.875***; AEs = 0.860***; EMs = 0.678***.
  - Number of observations: CO2 Emissions regressions = 1,143 (All), 825 (AEs), 318 (EMs).
  - Number of countries: 38 (All), 26 (AEs), 12 (EMs).
  - Adj R^2 (CO2 Emissions): All = 0.62; AEs = 0.67; EMs = 0.74.

### Policy implications and Lithuania-specific targets
- Overarching policy implications:
  - Increasing share of nuclear, renewables, and other non-hydrocarbon energy and improving energy efficiency lead to significant reductions in CO2 emissions and improvements in energy security.
  - Environmental taxes, including a comprehensive, economy-wide carbon tax on fossil fuels, could raise considerable revenues to expand post-pandemic fiscal space and fund compensation for vulnerable households, multilayered safety nets, and structural resilience.
  - Policies should improve energy efficiency in commercial and residential use alongside shifting the energy matrix away from fossil fuels.
  - Mainstream climate adaptation into development plans; invest ex-ante in infrastructure and prearranged financial instruments to limit disaster impacts and protect fiscal sustainability.
- Lithuania-specific context and targets:
  - Lithuania committed to cut emissions by 80 percent—by increasing the share of renewables to 45 percent and improving energy efficiency—and remove 20 percent in order to achieve carbon neutrality by 2050.
  - Lithuania removed nuclear energy that had been generating more than 70 percent of electricity, shifting from net exporter to net importer and increasing dependence on energy imports from Russia.
  - Current pace of CO2 emissions is not on track to achieve the country’s reduction pledge by 2030 and net zero emissions by 2050.
  - Major sectoral sources: Transportation and agriculture.
  - Authorities proposed modernizing motor vehicle taxation and adjusting excise taxes on fossil fuels according to the level of CO2 emissions.
  - Environmental taxes are currently low relative to other EU countries; introducing a national carbon tax could accelerate the green transition.
  - Energy security actions: Lithuania liberalized its energy market and acquired alternative sources, including building a modern LNG terminal in Klaipeda to become independent of natural gas imports from Russia.

---

### AML/CFT — Growth and composition of fintech sector and cross-border ML/TF threats
- Fintech sector growth:
  - Number of fintech companies: increased from 55 in 2014 to 265 in 2021.
  - Of 265 fintech companies, 147 are licensed as EMIs, PIs or specialized banks.
  - Around 60 percent of fintechs have their headquarters in Lithuania; the remaining 40 percent mainly focus on non-EU markets, with nearly 70 percent of their core operations outside of the EU.
- Transaction volumes and concentration:
  - Total value of payment transactions conducted by EMIs and PIs increased by 3.8 times in 2021, reaching EUR 195 billion in 2021, with one company accounting for 58 percent of this turnover.
  - Overall inflows to and outflows from Lithuania increased by 2.4 times in October 2021–March 2022 compared to financial flows in 2015.
  - Share of non-resident deposits tripled in a year to the first quarter of 2021, but remains low at 3.3 percent.
- Anomaly detection:
  - IMF developed an unsupervised machine learning algorithm (isolation forest) to monitor global financial flows and detect unusual patterns using global cross-border payments since 2013 and multiple ML/TF risk indicators.
  - Number and value of outflows-outliers have spiked since 2020; majority of recent increase in outflows from Lithuania identified as outlier payments.
  - Anomaly detection indicators include bilateral trade, portfolio and direct investments, average transaction value, appearance of new payment corridors, strength of AML/CFT regime, financial secrecy, harmful tax practices, and corruption perceptions; payment amounts normalized on the ordering country level.

### National Risk Assessment (NRA) and non-resident ML/TF risks
- 2019 NRA (published 2020, using data from 2016–2019):
  - Identified 88 risk scenarios for 19 covered sectors.
  - Re-rated Lithuania to “largely compliant” with FATF recommendation on NRAs following NRA improvements.
  - ML threat scores: virtual assets (VA), transfer of funds, and cash deposits to FI accounts scored 4 (highest); banking (all products), currency exchange firms, investment companies, money remittances, EMI, and PI scored 3.
  - ML vulnerability scores: virtual currencies most vulnerable (score 4); other listed products and services scored 3.
- EMI and PI specific vulnerabilities:
  - Elevated inherent risk across customer base, delivery channels, geography of activity, and services provided.
  - Customer base: many EMI/PI client bases are mostly non-residents; in some entities close to 100 percent non-resident clients. NRA notes a large share of customers (up to 70 percent) is from offshore countries.
  - Delivery channels: widespread remote (non-face-to-face) onboarding; BoL identified cases of incorrect customer or beneficial owner information due to weaknesses in remote onboarding.
  - Services: cross-border payments are main service and higher ML/TF risk; pass-through payments where non-residents use Lithuania as a transit point noted.
  - Revenue composition: services to legal persons account for majority of EMI and PI revenue; services to natural persons generate 20 percent of the revenue.
  - Controls and preparedness: NRA notes AML/CFT systems and controls of EMI and PI are less effective than in the banking sector; most EMI and PI have not performed organization–wide ML/TF risk assessments.
  - Supervisory capacity: rapid growth (EMI and PI doubled to 107 in 2019) may challenge supervisors’ timely inspections and offsite monitoring; BoL rates EMI and PI in highest risk category requiring enhanced supervisory attention.
- NRA gaps and suggested enhancements:
  - NRA treats financial sector as bank-centric (banks hold 79 percent of financial system assets), not fully accounting for importance of payment services to Lithuania’s ML/TF risk profile.
  - NRA should strengthen analysis of ML/TF risks from non-resident activity and cross-border payments, focus on VASPs growth and VA/VASP regulatory developments, and incorporate analysis of economic rationale underlying cross-border activity to identify higher ML/TF risk countries.
- TF risk gaps:
  - National TF threat assessment focuses on domestic terrorist activity and assesses level of terrorist threat as low; gap in accounting for TF risks from substantial cross-border payments and pass-through activity.
  - NRA should analyze TF risks from pass-through payments, fundraising domestically for terrorism abroad, links with higher TF risk countries, financing of proliferation, and effectiveness of targeted financial sanctions implementation.
- Suggested national monitoring mechanism and data sources:
  - Consider establishing a national mechanism to monitor cross-border payments or conduct ad hoc thematic risk assessment ahead of next NRA in 2024.
  - Possible data sources: aggregated BoL AML/CFT supervision data on cross-border payments and non–resident deposits; BoL payments department data on CENTROlink transactions; suspicious transaction reports to the Lithuanian FIU; VASP transaction reporting; reporting on cross-border activity of taxed entities to State Tax Administration.
  - Expected benefits: comprehensive understanding of non-resident activity, inform jurisdictional ML/TF risk profile and risk appetite, inform AML/CFT policy priorities.
- Explicit recommendations (from the paper):
  - Expand the NRA to cover analysis of ML/TF risks from non-resident activity and cross-border payments and reflect the evolution of the financial sector.
  - Develop understanding of ML/TF higher-risk countries based on Lithuania-specific risk factors.
  - Consider developing a national mechanism for monitoring macro-trends in cross-border financial flows.

### Enhancing implementation of the risk-based approach to AML/CFT supervision
- MONEYVAL findings and supervisory context:
  - MONEYVAL concluded AML/CFT supervision was only moderately effective and major improvements were needed; BoL is responsible for licensing and AML/CFT supervision including fintechs.
  - BoL has good market entry controls and is moving towards comprehensive risk-based supervision; at time of assessment, sanctioning regime not fully effective and staff shortages reduced supervisory effectiveness.
- Progress since MONEYVAL:
  - December 2020: BoL adopted AML/CFT Supervision Policy and ML/TF Risk Scoring Methodology.
  - Methodology: frequency and scope of inspections based on risk and proportionality; FI-specific ML/TF risk scoring based on customer base, products/services, countries of operations, and residual risk combining inherent risk with quality of ML/TF systems.
  - Result: MONEYVAL re-rated Lithuania’s compliance with FATF recommendation on regulation and supervision of FIs from “partially compliant” to “largely compliant.”
- Risk scoring and supervisory coverage recommendations:
  - Incorporate supervised entity’s size as measured by turnover of cross-border activity.
  - Introduce overall value of EMIs and PIs payments activity as a separate risk factor in Risk Scoring Methodology.
  - Consider nominal values (number of customers and value of transactions with higher-risk countries) alongside shares from FATF/EU/Ministry of Finance lists.
  - Include delivery channels as a separate risk factor group; specific indicators: share of customers onboarded remotely, cash operations, use of intermediaries/agents/third parties.
  - Expand customer risk grouping to include VASPs and customers active in higher risk sectors (infrastructure, defense, financial services, real estate, extractive industries, DNFBPs); differentiate domestic and foreign PEPs.
- Supervisory resourcing and inspection capacity:
  - Typical on-site resourcing/duration: one to two months on-site, involving two to three full-time employees.
  - Resource constraints limit full-scope inspections to about five percent of supervised population (~15 institutions).
  - Last year BoL inspected three banks and six non-bank FIs.
  - Minimum engagement model (adopted 2020): highest risk institutions (group 4) inspected at least once in 2–3 years with thematic analysis once in 3–5 years and annual meetings with AML/CFT manager.
  - Given current inspection rates and majority of population in risk group 3 or 4, half of supervised population can be covered in more than 15 years.
  - Recommendation: increase dedicated AML/CFT staff and more active use of risk-based targeted on-site inspections to broaden coverage.
- Resources, capacity and staffing:
  - Dedicated AML/CFT division established; number of dedicated AML/CFT staff increased from five in 2018, to 10 in 2020, to 13.
  - January 2019 restructuring: separate AML unit under Financial Market Supervision Service.
  - Number of supervised entities grew from 130 at start of 2018 to close to 300 currently.
  - Recommendation: increase AML/CFT division resources per minimum engagement model, develop data analytics toolkit, diversify skillsets (risk management, fintech, data analytics).
- Explicit supervisory recommendations:
  - Increase number of FIs subject to on-site inspections by (i) increasing dedicated AML/CFT staff in BoL and (ii) more active use of risk-based targeted on-site inspections.
  - Strengthen BoL’s understanding of ML/TF higher-risk countries and incorporate into institutional risk scoring matrices, inspection activities and supervision.
  - Conduct thematic review of FIs’ exposures to identified higher-risk countries.
  - Integrate delivery channels and value/volume of cross-border payments as separate risk factors for EMIs and PIs.
  - Expand customer risk grouping to focus on high ML/TF risk client categories such as VASPs.
  - Strengthen coverage of all supervised FIs with data collection and risk scoring.

### VASP regulation and supervision
- VASP sector growth and risks:
  - 2019 NRA found VASPs highest ML/TF risk among assessed sectors and products.
  - Strong influx of VASPs registering in Lithuania since October 2021; current number of registered VASPs is high 407.
  - Lithuanian FIU estimates only 25 VASPs are fully operational at the moment.
  - At least 6 months required to fully launch VASP operations; sector activity may increase substantially in short-term with corresponding ML/TF risk increase.
- Registration regime and gaps:
  - Former regime: VASPs could start operating after registering with Register of Legal Entities by providing contact of MLRO and attestation of understanding AML/CFT requirements; entry controls light—only persons convicted of economic crimes cannot own/control a VASP.
- Recommended market entry control and supervision enhancements:
  - Stronger fitness and propriety tests for owners and senior management.
  - Assess ML/TF risks of VASP registrations by client base, products/services, geography, and quality of AML/CFT systems.
  - Strengthening entry controls likely requires AML/CFT law changes to support expanded supervisory functions and information collection during registration.
- Legislative amendments and supervisory powers:
  - Parliament adopted amendments to the law on the Prevention of Money Laundering and Terrorist Financing strengthening AML/CFT requirements for VASPs on June 30, 2022.
  - Recommendations: strengthen VASP market entry controls, develop institutional risk assessment methodology and offsite monitoring tools focused on ML/TF risks of VASP activity and VA type, and grant supervisor powers to revoke VASP registration for fundamental AML/CFT deficiencies or unacceptably high ML/TF risk.

### Lithuanian FIU Supervision unit and SRA of VASPs
- Supervision unit:
  - Established April 2021 in Lithuanian FIU; fully staffed and operational by July 2021, currently consisting of eight staff.
  - Unit plans to diversify skillset by hiring non-law enforcement officers with data analytics, risk and AML/CFT backgrounds.
  - FIU employs IT tools for data and blockchain analysis; Analysis division provides analytical support to VASP supervisors.
  - FIU updated Selection for Inspection order to introduce risk-based elements; commenced on-site inspections of VASPs with 6 planned inspections for 2022.
- Sectoral strategic ML/TF risk analysis (SRA) of VASPs:
  - 2022 SRA objectives: identify VASPs providing custodial and VA exchange services; develop understanding of VASPs’ client base, higher risk clients, types and value of VASP activities; assess quality of VASPs’ AML/CFT systems and controls.
  - SRA data sources: MLPD data collection survey on VASP clients, turnover, profit, transaction values; State Tax Inspectorate data on income declarations and registered employees; public information.
  - Suggested SRA expansions: analyse types of VAs used, analyse countries of VASP operations, explore banking and payments arrangements used for fiat operations and VA/fiat conversion.
  - Institutional recommendations: build on SRA results to develop institutional risk assessment methodology focused on ML/TF risks of VASP activity, customer base, VA type and AML/CFT controls; grant FIU powers to cancel registration of VASPs with fundamental AML/CFT deficiencies.
- VASP supervisory recommendations:
  - Strengthen market entry controls focusing on fitness and propriety.
  - Develop institutional risk assessment methodology and offsite monitoring tools based on SRA results.
  - Grant supervisor powers to revoke VASP registration and align AML/CFT framework fully with FATF Standards for VA and VASPs.

---

### CENTROlink — role, scale, risks, and AML/CFT controls
- CENTROlink role and scale:
  - Retail payment system operated by BoL providing access to SEPA for PSPs to conduct SEPA national and cross-border payments; launched in 2015 to foster innovation and payment infrastructure redundancy.
  - Currently 153 PSPs from 18 EEA countries use CENTROlink services, up from 90 in mid-2019 and more than doubling from early 2018.
  - Most FIs with access to CENTROlink are EMIs and PIs—131 out of 153, with 86 licensed in Lithuania and 67 in other EEA countries.
  - 2021 CENTROlink activity: 186 million SEPA payments worth EUR 358 billion (doubling from 95 million payments worth EUR 170 billion in 2020).
  - CENTROlink’s payments turnover is substantially higher than inflows to and outflows from Lithuania combined.
- CENTROlink customers and elevated ML/TF risk:
  - Some PSPs have business models aimed at high ML/TF risk customers (e.g., VASPs, gambling).
  - For many PSPs CENTROlink is critical: 26 percent of fintechs in Lithuania don’t have relationships with commercial banks.
  - As of end-2021, 68 percent of funds of Lithuanian-licensed PSP clients are held with the Bank of Lithuania, compared to 22 percent a year ago.
  - 21 percent are investments in liquid assets and 11 percent deposits in EU banks.
  - Higher risk countries, including those under FATF increased monitoring, are among main destinations of inflows/outflows via CENTROlink.
- CENTROlink AML/CFT controls and gaps:
  - Enhanced due diligence questionnaire introduced early 2021 for PSP onboarding and existing customers (62 questions on AML/CFT staffing, CDD, transaction monitoring, audit, governance, customer base statistics, business model, enterprise risk assessment, customer risk rating methodology).
  - Suggested questionnaire enhancements: add jurisdictions and licensing authorities of PSPs and group entities; expand coverage to origination/destination jurisdictions of payments; require information on all products and services; add cash transactions as a service and cash reporting; scrutinize reliance on third parties; consider prohibiting anonymous accounts and accounts for unlicensed FIs.
  - BoL view: CENTROlink administration seen as outside AML/CFT reporting entity scope; but by opening accounts for PSPs to conduct SEPA transfers, BoL effectively provides cross-border correspondent banking services—a higher risk service per FATF.
  - Monitoring gaps:
    - Some PSP customers not yet assessed using updated questionnaire; many applicants granted access shortly after licensing with onboarding decisions based on business plans without operational history.
    - CENTROlink operations and AML/CFT controls administered by BoL’s payments department—payments system development division; risk assessment function assigned but resource-constrained.
    - BoL conducted 173 risk assessments—53 during onboarding and 120 for existing PSP customers—with only two staff that joined in 2020; staffing insufficient relative to oversight of 151 PSP clients with annual transaction value exceeding a third of EUR trillion.
    - Current plan to add an additional employee does not appear to address resource gap.
    - Onboarding approval committee includes payments department director, head of payments system development division, head of payments systems division, and two AML/CFT risk employees.
- CENTROlink policy and operational recommendations:
  - Integrate BoL’s AML/CFT experts in CENTROlink onboarding and ongoing monitoring processes and boost AML/CFT-dedicated resources.
  - Formalize risk rating methodology to inform CENTROlink onboarding decisions and assign risk ratings to calibrate monitoring intensity and ongoing due diligence.
  - Strengthen ongoing monitoring of PSP activity in CENTROlink and fine-tune due diligence questionnaire to reflect Lithuania-specific ML/TF risks.
  - Additional operational steps:
    - Formalize risk scoring principles and adopt a risk assessment methodology and risk scoring tool to assist onboarding and calibrate monitoring.
    - Cover all CENTROlink customers with questionnaire and risk assessments.
    - Integrate AML/CFT division expertise into payments department onboarding committee and participate in formalization of PSP risk scoring methodology, ongoing monitoring procedures and regular information exchange.
    - Nuance BoL’s neutrality principle to account for differing quality of AML/CFT supervision across EEA countries and develop information exchange with foreign supervisors.

*Italicized source: 1ltuea2022002 (IMF PDF excerpt).*

### 1. Effects of Climate Change __________________________________________________________________ 5

### 1. Effects of Climate Change

### Context and overview
- The global average surface temperature has increased by about 1.1 degrees Celsius (°C) compared with the preindustrial average during 1850–1900.
- If greenhouse gas (GHG) emissions remain on the current growth path, global warming is projected to reach 4-6°C by 2100.
- 189 countries have committed to reducing carbon dioxide (CO2) emissions by 30 percent in 15 years until 2030.
- Global CO2 emissions increased by 2.3 percent to 36.3 billion metric tons in 2021.
- After the war in Ukraine, crude oil prices rose from an average of $68 per barrel in 2021 to as high as $124 in 2022.
- The price of natural gas in Europe jumped to a record high of €345 per megawatt-hour, equivalent to $600 per barrel oil.
- Price volatility has increased due to an unprecedented output decline in renewable energy assets and tight supply-and-demand balances in the European power system.

### Regional vulnerabilities and projections (Baltics / Europe)
- The annual warming trend for the Baltics has been about 0.10°C per decade, which is twice the global average of 0.05°C per decade.
- Over the next century, projected increase in annual mean surface temperature in the Baltics will remain above the global average under all scenarios and reach as high as 4.3°C.
- Winter precipitation in the Baltics could increase by as much as 75 percent.
- Energy imports account for over 60 percent of all forms of energy in Lithuania and as much as 90 percent in the case of natural gas.
- Europe reduced the amount of energy used to produce a unit of GDP by 46.4 percent over the past four decades; the Baltics lead in energy efficiency among European countries.

### Major climate risks (Box summary)
- Sea level increase: even if global warming stays below 2°C, sea levels are projected to surge 2–3 meters by 2300 and by 5–7 meters with faster global warming; by 2100, once-in-a-century coastal flood events will occur at least once per year at more than half of coastlines across the globe.
- Widespread flooding: frequency of heavy downpours has increased by about 30 percent and they contain about 7 percent more water.
- Extreme heat waves: already about five times more likely with existing warming of 1.2°C; with 2°C of global warming, frequency increases to 14 times as likely; hottest temperatures would reach nearly 3°C higher than previous heat waves.
- Severe droughts: severe droughts that used to happen at an average of once per decade are now occurring about 70 percent more frequently; with 2°C warming, severe droughts will occur between two and three times as often.
- Weather whiplash: wild swings between dry and wet extremes (destructive floods in one year and extreme droughts in the next).

### Empirical findings on energy mix, energy efficiency, and emissions
- Using a panel of 39 countries in Europe over the period 1980–2019, increasing the share of nuclear, renewables, and other non-hydrocarbon energy and improving energy efficiency are associated with lower CO2 emissions and lower energy imports over the long run, controlling for economic, demographic, and institutional factors.
- These effects are statistically significant and more pronounced in emerging European economies.
- In Lithuania, reductions in CO2 emissions have been slower than the EU average due to continuing increases in emissions from agriculture, transportation, services, and buildings, and dependence on hydrocarbons despite a rising share of non-hydrocarbon energy.

### Climate change mitigation: policy tools and fiscal measures
- Three key policy areas to advance toward net-zero emissions: (i) eliminating distortionary energy subsidies; (ii) introducing a carbon tax and “feebates” (fees on high-emission products combined with rebates on low-emission products); and (iii) improving energy efficiency and decarbonizing the energy sector.
- Fiscal policy measures, including a carbon tax on fossil fuels, are the most efficient tool for mitigation. Even a modest carbon price can mobilize investment in non-hydrocarbon energy and encourage greater energy efficiency.
- Proposed carbon-tax reference levels (Black et al., 2021): $75 per metric ton of CO2 for advanced economies; $50 for high-income emerging markets; $25 for low-income emerging markets.
- Across the world, only 17 percent of emissions are covered by a carbon price, at an average of US$3 per metric ton of CO2 emissions.
- The EU emissions trading system (ETS) covers about 30 percent of national CO2 emissions.

### Simulation results (CPAT framework) — carbon tax set to US$50 per metric ton of CO2 by 2030
- Simulation assumes carbon tax of US$50 per metric ton of CO2 emissions as the only policy instrument, using the Climate Policy Assessment Tool (CPAT) framework.
- Revenue gains at US$50 per metric ton of CO2 emissions:
  - Estonia: 1.03 percent of GDP
  - Latvia: 0.64 percent of GDP
  - Lithuania: 0.75 percent of GDP
  - Czech Republic: 1.07 percent of GDP
  - Germany: 0.42 percent of GDP
  - Hungary: 0.95 percent of GDP
  - Poland: 1.38 percent of GDP
- Real GDP growth impact at US$50 per metric ton (no revenue recycling):
  - Lithuania: -0.4 percentage points
  - Latvia: -0.35 percentage points
  - Estonia: -0.6 percentage points
- Real GDP growth impact when additional revenues are recycled back into the economy through lower taxes or higher investment spending:
  - Lithuania: -0.1 percentage points
  - Latvia: -0.1 percentage points
  - Estonia: -0.2 percentage points
- Simulation results suggest that all Baltic countries would achieve—or exceed—the climate mitigation targets by 2030 under a US$50 carbon tax, although the required tax level varies across countries because of differences in energy mix and responsiveness of emissions to fossil-fuel prices.
- The CPAT framework uses price elasticity assumptions to determine changes to the energy mix; if a country initially has an exceptionally low level of renewable energy, changes in fossil-fuel prices will not elicit a large increase in renewables. Therefore, non-tax policies are necessary to stimulate investment in alternative energy sources (these are not covered in CPAT).

### Policy implications and recommendations
- Decarbonization must start in the energy sector, which accounted for about 80 percent of CO2 emissions in Europe as of 2019.
- Policies should focus on:
  - Decarbonizing the energy matrix (lower CO2 emissions per unit of energy).
  - Enhancing energy efficiency (lower energy consumption per unit of GDP).
  - Eliminating distortionary energy subsidies.
  - Implementing carbon pricing (taxes) and complementary measures such as feebates.
  - Recycling carbon-tax revenues toward lower distortionary taxes, targeted cash transfers to protect vulnerable households, and public investment to mitigate adverse distributional and growth effects.
- Non-tax policies and investments are necessary to expand renewable capacity where initial levels are low and to translate price signals into durable shifts in the energy mix.

*Source: 1ltuea2022002 - 1. Effects of Climate Change (IMF PDF).*

### 10.      Increasing the share of renewable, nuclear and other non-hydrocarbon  energy

### 10.      Increasing the share of renewable, nuclear and other non-hydrocarbon  energy

### Impact of non-hydrocarbon energy on CO2 emissions and energy security
- Empirical model: y_{i,t} = β1 + β2 AE_{i,t} + β3 X_{i,t} + η_i + μ_t + ε_{i,t}, where:
  - y_{i,t} is the logarithm of CO2 emissions in metric tons per capita or net energy imports as a share of GDP;
  - AE_{i,t} is the share of alternative sources of energy including nuclear, renewable and other non-hydrocarbons;
  - X_{i,t} includes controls: logarithm of real GDP per capita, trade openness, logarithm of population, share of urban population, and bureaucratic quality;
  - η_i and μ_t are country and year fixed effects; robust standard errors clustered at the country level.
- Main findings (Table 2, panel of 39 European countries, 1980–2019):
  - All countries: coefficient on Non-Hydrocarbon Energy = -0.003*** (CO2 Emissions) and -0.006*** (Energy Imports).
  - Advanced Economies (AEs): coefficient = -0.001*** (CO2 Emissions) and -0.003*** (Energy Imports).
  - Emerging Markets (EMs): coefficient = -0.012*** (CO2 Emissions) and -0.022*** (Energy Imports).
- Magnitudes interpreted in long run:
  - For all European countries, a 10 percentage point increase in the share of non-hydrocarbon energy is associated with lower CO2 emissions of 3 percentage points, after controls.
  - For all countries, a 10 percentage point increase in the share of non-hydrocarbon energy is associated with a reduction of 6 percentage points in energy imports, after controls.
  - Effects are larger among emerging European countries than advanced European economies.
- Additional table statistics (selected):
  - Real GDP Per Capita coefficients (CO2 Emissions): All = 0.618***; AEs = 0.419***; EMs = 0.689***.
  - Trade Openness coefficients (CO2 Emissions): All = -0.001*.
  - Number of observations: CO2 Emissions regressions = 1,145 (All), 823 (AEs), 322 (EMs).
  - Number of countries: 39 (All), 27 (AEs), 12 (EMs).
  - Adj R^2 (CO2 Emissions): All = 0.41; AEs = 0.56; EMs = 0.78.

### Impact of energy efficiency on CO2 emissions and energy security
- Empirical model: y_{i,t} = β1 + β2 EE_{i,t} + β3 X_{i,t} + η_i + μ_t + ε_{i,t}, where:
  - EE_{i,t} is energy efficiency measured as energy consumption per unit of real GDP;
  - other elements as above; robust standard errors clustered at the country level.
- Main findings (Table 3, panel of 39 European countries, 1980–2019):
  - Coefficients on Energy Efficiency (CO2 Emissions): All = -0.088***; AEs = -0.121***; EMs = -0.046***.
  - Coefficients on Energy Efficiency (Energy Imports): All = -0.019***; AEs = -0.047***; EMs = -0.013***.
- Magnitudes interpreted in long run:
  - A 10-percentage point increase in energy efficiency is associated with lower CO2 emissions of 8.8 percentage points and energy imports of about 2 percent, after controls.
  - Effects are significant across country groups and appear stronger among advanced economies.
- Additional table statistics (selected):
  - Real GDP Per Capita coefficients (CO2 Emissions): All = 0.875***; AEs = 0.860***; EMs = 0.678***.
  - Number of observations: CO2 Emissions regressions = 1,143 (All), 825 (AEs), 318 (EMs).
  - Number of countries: 38 (All), 26 (AEs), 12 (EMs).
  - Adj R^2 (CO2 Emissions): All = 0.62; AEs = 0.67; EMs = 0.74.

### Policy implications and recommendations
- Decarbonization and energy security:
  - Increasing the share of nuclear, renewables, and other non-hydrocarbon energy and improving energy efficiency lead to significant reductions in CO2 emissions and improvements in energy security across Europe.
  - From a risk-reward perspective, benefits of reduced climate risks and stronger energy security outweigh potential short-run mitigation costs.
- Fiscal and market instruments:
  - Environmental taxes, including a comprehensive, economy-wide carbon tax on fossil fuels, could raise considerable revenues to expand post-pandemic fiscal space and fund compensation for vulnerable households, multilayered safety nets, and structural resilience.
- Energy efficiency priorities:
  - Policies and reforms should aim to improve energy efficiency in commercial and residential use alongside shifting the energy matrix away from fossil fuels.
- Adaptation and resilience:
  - Mainstream climate adaptation into development plans to strengthen physical, financial, institutional, and social resilience.
  - Invest ex-ante in infrastructure and prearranged financial instruments to limit disaster impacts and protect fiscal sustainability; upfront fiscal costs are warranted given higher costs of inaction.

### Lithuania-specific context and targets
- Lithuania’s commitments and challenges:
  - Lithuania has committed to cut its emissions by 80 percent—by increasing the share of renewables to 45 percent and improving energy efficiency—and remove 20 percent in order to achieve carbon neutrality by 2050.
  - Lithuania removed nuclear energy that had been generating more than 70 percent of electricity, shifting from net exporter to net importer and increasing dependence on energy imports from Russia.
  - The current pace of CO2 emissions is not on track to achieve the country’s reduction pledge by 2030 and net zero emissions by 2050.
- Sectoral sources and policy measures:
  - Transportation and agriculture are the most significant sources of GHG emissions in Lithuania.
  - Authorities have proposed modernizing motor vehicle taxation and adjusting excise taxes on fossil fuels according to the level of CO2 emissions.
  - Broader environmental taxes and introducing a national carbon tax could accelerate the green transition; environmental taxes are currently low relative to other EU countries.
- Energy security actions:
  - Lithuania has liberalized its energy market and acquired alternative sources of energy, including building a modern LNG terminal in Klaipeda to become independent of natural gas imports from Russia.

*Source: Author's estimations and text from the IMF chapter "10.      Increasing the share of renewable, nuclear and other non-hydrocarbon  energy".*

### 3.      This paper analyses selected aspects of Lithuanian anti-money laundering and counter-

### 3.      This paper analyses selected aspects of Lithuanian anti-money laundering and counter-

### B. Increasing Cross-Border ML/TF Threats
- Growth and composition of fintech sector
  - Number of fintech companies: increased from 55 in 2014 to 265 in 2021.
  - Of 265 fintech companies, 147 are licensed as EMIs, PIs or specialized banks.
  - Around 60 percent of fintechs have their headquarters in Lithuania; the remaining 40 percent mainly focus on non-EU markets, with nearly 70 percent of their core operations outside of the EU.
  - Many fintechs (financial software, data analytics, compliance management, cybersecurity) do not face ML/TF risks and are not subject to AML/CFT requirements.
  - Cross-border payments are the main area of focus: majority provide cross-border payment services, online foreign exchange, online payments, and e-commerce transactions.

- Transaction volumes and concentration
  - Total value of payment transactions conducted by EMIs and PIs increased by 3.8 times in 2021, reaching EUR 195 billion in 2021, with one company accounting for 58 percent of this turnover.
  - Overall inflows to and outflows from Lithuania increased by 2.4 times in the last six months of the analysis (October 2021–March 2022) as compared to financial flows in 2015.
  - Share of non-resident deposits tripled in a year to the first quarter of 2021, but remains low at 3.3 percent.

- Outlier activity and anomaly detection
  - The Fund developed an unsupervised machine learning algorithm (isolation forest approach) to monitor global financial flows and detect unusual patterns using global cross-border payments since 2013 and multiple ML/TF risk indicators.
  - The number and value of outflows-outliers have spiked since 2020 following a period of low outlier activity, with the majority of the recent increase in outflows from Lithuania being identified as outlier payments.
  - The anomaly detection incorporates indicators such as bilateral trade, portfolio and direct investments, average transaction value, appearance of new payment corridors, strength of AML/CFT regime, financial secrecy, harmful tax practices, and corruption perceptions; payment amounts are normalized on the ordering country level.

### C. National Understanding of Non-resident ML/TF Risks
- National Risk Assessment (NRA) and findings
  - The 2019 NRA (published in 2020, using data from 2016-2019) updated and expanded the 2015 NRA and addressed deficiencies identified by MONEYVAL.
  - The 2019 NRA identified 88 risk scenarios for 19 covered sectors.
  - Re-rating: Lithuania was re-rated to “largely compliant” with the FATF recommendation on NRAs following the NRA improvements.
  - ML threat scores: virtual assets (VA), transfer of funds, and cash deposits to FI accounts face the highest ML threat (score 4); banking (all products), currency exchange firms, investment companies, money remittances, EMI, and PI have the second highest ML threat (score 3).
  - ML vulnerability scores: virtual currencies are the most vulnerable (score 4), while the other listed products and services have vulnerability score (3).

- Specific vulnerabilities and risks for EMI and PI
  - EMI and PI face elevated ML/TF inherent risk across the four classical risk factors: customer base, delivery channels, geography of activity, and services provided.
  - Customer base: many EMI/PI client bases are mostly non-residents; in some entities close to 100 percent non-resident clients. NRA notes a large share of customers (up to 70 percent) is from offshore countries.
  - Delivery channels: customer onboarding is conducted remotely (non-face-to-face), increasing ML/TF risk; BoL identified cases of incorrect customer or beneficial owner information attributed to weaknesses in remote onboarding.
  - Services: cross-border payments are the main service and are particularly highlighted by FATF as higher ML/TF risk activity; pass-through payments where non-residents use Lithuania as a transit point are noted.
  - Revenue composition: services to legal persons account for the majority of EMI and PI revenue; services to natural persons generate 20 percent of the revenue.
  - Customer targeting: some EMI and PI specifically focus on serving higher risk customers, such as VASPs, gambling platforms, military companies.
  - Controls and preparedness: NRA notes AML/CFT systems and controls of EMI and PI (e.g., transaction monitoring systems) are less effective than in the banking sector; most EMI and PI have not performed organization–wide ML/TF risk assessments.
  - Supervisory capacity: rapid growth (EMI and PI doubled to 107 in 2019) might create challenges for supervisors to conduct timely on-site inspections and offsite monitoring. In the BoL Risk Scoring Methodology EMI and PI are rated as a sector in the highest risk category, requiring enhanced supervisory attention.

- Gaps in the NRA and suggested scope enhancements
  - The NRA treats the financial sector as bank-centric (banks hold 79 percent of the financial system assets), which does not fully account for the importance of payment services to Lithuania’s ML/TF risk profile.
  - The NRA should:
    - Strengthen analysis of ML/TF risks from non-resident activity and cross-border payments and reflect evolution of the financial sector.
    - Focus on the recent growth in registered VASPs, VA/VASP-related regulatory and legislative developments, risk assessment of various types of VA and VASP activities, and composition of the VASP sector.
    - Incorporate analysis of ML/TF threats inherent in cross-border payments, particularly with higher risk countries, and the economic rationale (e.g., foreign trade, portfolio, and direct investments) underlying cross-border activity to identify countries posing higher ML/TF risk to Lithuania.

- Terrorist financing (TF) risk understanding and gaps
  - National focus: Lithuanian authorities’ TF threat assessment focuses on domestic terrorist activity; Government assessed level of terrorist threat is low.
  - Gap: this focus does not take into account risks from substantial cross-border payments and the potential for Lithuania’s financial sector to be abused to transfer funds intended for terrorism from donors to terrorists outside the country.
  - NRA should analyze TF risks from pass-through payments, risks of raising funds domestically for terrorism acts abroad, links with higher TF risk countries, financing of proliferation of weapons of mass destruction, and effectiveness of implementation of targeted financial sanctions.

- Suggested national monitoring mechanism
  - Given rapid fintech developments and next NRA preparation in 2024, authorities may consider establishing a national mechanism to monitor cross-border payments or conducting an ad hoc thematic risk assessment.
  - Possible data sources for such a mechanism:
    - Aggregated data from BoL’s AML/CFT supervision division on cross-border payments, non–resident deposits and client base.
    - BoL’s payments department data on transactions through payment infrastructures, including CENTROlink.
    - Suspicious transaction reporting to the Money Laundering Prevention Board of the Financial Crime Investigation Service (Lithuanian FIU) related to non-resident activity.
    - Transactions in VAs from reporting of VASPs.
    - Reporting on cross-border activity of taxed entities to the State Tax Administration.
  - Expected benefits: develop a comprehensive and up-to-date understanding of non-resident activity in Lithuania, inform calibration of jurisdictional ML/TF risk profile and risk appetite, and inform policy priorities of key AML/CFT institutions.

- Explicit recommendations (from the paper)
  - Expand the NRA to cover analysis of ML/TF risks from non-resident activity and cross-border payments and reflect the evolution of the financial sector
  - Develop understanding of ML/TF higher-risk countries based on the Lithuania-specific risk factors
  - Consider developing a national mechanism for monitoring macro-trends in cross-border financial flows

### D. Enhancing Implementation of the Risk-Based Approach to AML/CFT Supervision
- MONEYVAL findings and supervisory context
  - The MONEYVAL assessment (finalized before the recent fintech growth) concluded AML/CFT supervision is only moderately effective and major improvements are needed.
  - The BoL is responsible for licensing and AML/CFT supervision of the financial sector, including fintech companies such as EMI and PI.
  - MONEYVAL highlighted very good market entry controls preventing criminals from holding controlling interest or management functions in an FI.
  - Assessors noted BoL has some strong elements of risk-based supervision and is moving towards a comprehensive risk-based approach and supervision proportional to risks.
  - At the time of assessment, BoL’s sanctioning regime was not fully effective and dissuasive; shortage of staff resources negatively impacted the effectiveness of risk-based supervision.

- Progress since MONEYVAL
  - BoL actions:
    - In December 2020, BoL adopted the AML/CFT Supervision Policy and the ML/TF Risk Scoring Methodology.
    - Policy envisages that frequency and scope of inspections should be based on risk and proportionality and allocation of resources should be based on risks of specific FI or sector.
    - ML/TF risk scoring methodology envisages FI-specific ML/TF risk scoring based on data collection and risk evaluation across customer base, products/services offered, and countries of operations to generate inherent ML/TF risk.
    - Residual risk calculation combines inherent risk ratings with a score representing the strength of the FI’s ML/TF systems and controls, reflecting supervisory judgment and qualitative assessment (including adverse media or negative information from another authority).
  - Result: MONEYVAL re-rated Lithuania’s level of compliance with the FATF recommendation on regulation and supervision of FIs from “partially compliant” to “largely compliant.”

_International Monetary Fund — 1ltuea2022002 (excerpt)_;

### 16.      The BoL should develop its understanding of higher-risk countries taking into account

### 1ltuea2022002 - 16.      The BoL should develop its understanding of higher-risk countries taking into account

### Cross-border country risk and BoL data
- The BoL collects detailed statistics on FIs’ cross-border activities with disaggregation on the individual country level.
- For risk scoring of FIs’ country risk, the BoL currently relies exclusively on the jurisdictions listed by the FATF, the European Commission and the Ministry of Finance of Lithuania.
- The BoL leverages offsite monitoring and quarterly data collection from EMI/PI to react dynamically to external events and analyze ML/TF risks from business relationships with certain countries.
- The BoL treats all transactions from and to the EU as lower ML/TF risk; the report recommends nuancing this blanket treatment to account for differences in risk profiles across EU countries.
- Suggested distinctions to incorporate into supervision:
  - Countries that provide non-transparent corporate vehicles (customer risk factor).
  - Countries posing higher risk of laundering foreign proceeds of economic crimes in or via Lithuania, or facilitating laundering of proceeds originating in Lithuania (geographical risk).

### Risk Scoring Methodology — size and cross-border activity
- Recommendation to incorporate supervised entity’s size as measured by the turnover of cross-border activity.
- Introduce the overall value of EMIs and PIs payments activity as a separate risk factor directly in the Risk Scoring Methodology to focus on institutions with material ML/TF risks.
- Rationale: size in terms of value and volume of cross-border transactions is more relevant ML/TF risk indicator than FI’s assets value in Lithuania’s context.
- Current geographical risk factors are based on share of clients from FATF/EU/Ministry of Finance lists and share of their cross-border transactions; the methodology should also consider nominal values (number of customers from and value of transactions with higher-risk countries).
- Benefits: ensures consistency of geographical risk scoring across institutions and helps prioritize FIs with the most material high level of ML/TF risks given resource shortages.

### Delivery channels as risk factors
- Delivery channel risks are currently adjustable in expert assessment by one point (out of 4).
- Recommendation: include delivery channels as a separate risk factor group in the risk scoring model to formalize and ensure consistency.
- Specific delivery-channel indicators to consider:
  - Share of customers onboarded remotely (common for fintech companies and vulnerable to ML/TF).
  - Cash operations (cash deposits or withdrawals) — BoL already collects and evaluates statistics on cash payments.
  - Use of intermediaries, agents, or third parties to offer services and products.
- Notes: Risks related to remote onboarding are considered by the BoL as part of the EPI/MI sectoral risk analysis and highlighted in communication to supervised entities. The BoL collects quarterly data on activities of intermediaries for EPI/MI sectoral analysis.

### Customer risk grouping enhancements
- Current coverage includes traditional higher risk customers: politically exposed persons (PEPs), legal entities, and non-residents.
- Recommendations to expand customer risk grouping to include:
  - VASPs and dealing in VA as a risk factor.
  - Customers active in higher risk sectors: infrastructure, defense, financial services, real estate, extractive industries, and DNFBPs.
- The BoL currently collects some EMI/PI customer base data: non-profit organizations, politically exposed persons, trusts; should expand to VASPs, gambling companies, financial institutions.
- Differentiate domestic and foreign PEPs due to different risk levels and supervisory focus on enhanced due diligence for PEPs (Lithuanian AML/CFT Law currently does not differentiate; all PEPs are considered high risk).

### Supervisory coverage and on-site inspections
- BoL conducts “full-scope” AML/CFT on-site inspections with focus on banks; inspections check internal controls, risk identification and assessment, customer and beneficial owner identification, CDD compliance, suspicious transaction reporting, and targeted financial sanctions.
- Inspection flexibility: methodology allows adjusting areas covered depending on purpose, scope, and complexity; BoL has experience conducting targeted on-site visits focused on specific CDD aspects.
- Typical on-site resourcing and duration:
  - BoL usually spends from one to two months on-site, involving two to three full-time employees.
- Resource constraint impact:
  - Full-scope inspections are resource-intensive; at current staffing levels they effectively limit the number of FIs that can be inspected “full-scope” to a maximum of around five percent of supervised population (approximately 15 institutions).
  - Last year the BoL inspected three banks and six non-bank FIs.
- Minimum engagement model (adopted 2020):
  - Highest risk institutions (group 4) should be inspected at least once in 2–3 years with a thematic analysis once in 3–5 years and annual meetings with the AML/CFT-responsible manager.
  - Given current inspection rates and that the majority of supervised population is risk group 3 or 4, half of supervisory population can be covered in more than 15 years.
- Targeted on-site inspections recommended to broaden coverage: shorter, focused inspections on elevated-risk aspects (customers, transactions, services, compliance gaps) and sector-wide categories, leveraging BoL’s off-site monitoring.

### Resources, capacity, and institutional arrangements
- Improvements made:
  - Dedicated AML/CFT division established.
  - Number of dedicated AML/CFT staff increased from five in 2018, to 10 in 2020, to 13.
  - January 2019 restructuring: separate AML unit under Financial Market Supervision Service replaced AML/CFT division within general operational risk division.
  - Other divisions (Licensing, Enforcement and Legislation) contribute to AML/CFT efforts.
- Resource shortfall and growth in supervised entities:
  - Number of supervised entities grew from 130 at the start of 2018 to close to 300 currently.
  - Newly licensed FIs are mostly fintech companies requiring strengthened supervisory capacity in financial technology and understanding of distinctive ML/TF risks.
- Recommendations for staffing and tools:
  - Increase AML/CFT division’s resources per minimum engagement model—hiring staff and developing data analytics toolkit.
  - Diversify skillsets of AML/CFT supervisors (risk management, financial sector operations, fintech, data analytics).
  - Current plan to hire an additional supervisor falls short of filling the resource shortage; further increases in supervised entities would add strain.

### Recommendations (explicit list)
- Increase the number of financial institutions subject to on-site inspections (and other bilateral supervisory engagements) each year by:
  - (i) increasing the number of dedicated AML/CFT staff in the BoL, and
  - (ii) more active use of risk-based targeted on-site inspections.
- Strengthen BoL’s understanding of ML/TF higher-risk countries and incorporate it in the institutional risk scoring matrixes, inspection activities and other elements of risk-based supervision.
- Conduct thematic review of FIs’ exposures to the identified higher-risk countries.
- Integrate delivery channels and value and volume of conducted cross-border payments directly as a separate risk factor in risk scoring of EMIs and PIs.
- Expand customer risk grouping to focus on the specific categories of clients that pose high ML/TF risk, such as VASPs.
- Strengthen the coverage of all supervised FIs with data collection and risk scoring.

### Regulation and AML/CFT supervision of VASPs
- VASP sector growth and risk:
  - 2019 NRA found VASPs to have the highest ML/TF risk among assessed sectors and products.
  - Strong influx of VASPs registering in Lithuania since October 2021; current number of registered VASPs is high 407.
  - Lithuanian FIU estimates only 25 VASPs are fully operational at the moment.
  - At least 6 months are required to fully launch VASP operations.
  - Resulting implication: VASP sector activity may increase substantially in the short-term with corresponding increase in associated ML/TF risks.
- Current registration regime characteristics and gaps:
  - Under the former regime, VASPs could start operating after registering with the Register of Legal Entities administered by the State Enterprise Centre of Registers by providing contact information of their money laundering reporting officer and attestation of understanding and compliance with AML/CFT requirements.
  - Entry controls are light; only a person convicted of economic crimes cannot own or control a VASP.
- Recommended enhancements to VASP market entry controls and supervision:
  - Stronger emphasis on fitness and propriety tests; examine integrity, reputation and competence of owners and senior management to prevent criminals from holding significant or controlling interest or management in a VASP.
  - Assess ML/TF risks of registering VASPs from client base, products and services, geography of operations, and quality of AML/CFT systems and controls.
  - Strengthening VASP sector entry controls would likely require changes to the AML/CFT law to support expanded supervisory functions and collection of relevant information during registration.
- Legislative amendments under consideration or in progress (as described):
  - Capital increase requirements, reinforcement of requirements for management staff, linking activities with Lithuania, prohibition of opening anonymous accounts, provisions on “travel rule,” bringing the scope of the VASP definition in line with FATF Standards, requiring customer due diligence for all transfers without monetary threshold.

*Source: 1ltuea2022002 - 16.      The BoL should develop its understanding of higher-risk countries taking into account*

### 30.      In April 2021 a Supervision unit was established in the Lithuanian FIU with responsibility

### 1ltuea2022002 - 30.      In April 2021 a Supervision unit was established in the Lithuanian FIU with responsibility

### Supervision unit establishment and VASP supervision
- In April 2021 a Supervision unit was established in the Lithuanian FIU with responsibility for supervision of obliged entities, including VASPs.
- The Supervision unit was fully staffed and operational by July 2021, currently consisting of eight staff.
- Being part of a law enforcement body, the Supervision unit has a strong investigative and law enforcement background and plans to diversify skillset by hiring several non-law enforcement officers with background in data analytics, risk and AML/CFT.
- The Lithuanian FIU employs IT tools for data and blockchain analysis and the Analysis division provides analytical support to VASP supervisors.
- The Lithuanian FIU updated its Selection for Inspection order to introduce elements of a risk-based approach and the Supervision unit commenced on-site inspections of VASPs this year.
- Identification of VASPs for inspections was based on suspicious transaction reports to the FIU and public information, with 6 planned inspections for 2022.
- Completion of the ongoing VASP sectoral analysis, development of offsite monitoring, continuing strengthening supervisory policies and procedures and other supervisory tools is required to develop fully risk-based approach to VASP supervision.

### Sectoral strategic ML/TF risk analysis (SRA) of VASPs and supervisory powers
- The Supervision unit started with developing ML/TF understanding of VA/VASPs, including individual Lithuanian VASPs.
- In 2022, the FIU launched a sectoral strategic ML/TF risk analysis (SRA) of VASPs with objectives to:
  - identify VASPs that provide custodial and VA exchange services;
  - develop understanding of Lithuanian VASPs’ client base, including of higher risk clients, types, and value of VASP activities;
  - assess the quality of VASPs’ AML/CFT systems and controls.
- Conclusions of the sectoral strategic analysis in area of VASP are due in June 2022 and the inspections of VASPs will be carried out later in 2022.
- To inform the sectoral assessment, the MLPD launched a data collection survey to gather statistics on VASP’s number of clients, turnover, profit, and value of client transactions.
- The SRA also incorporates data from the State Tax Inspectorate on VASPs income declarations, number of registered employees as well as public information (website, advertisements, customer reviews).
- Suggested SRA expansions and focus areas:
  - analyse the types of VAs with which Lithuanian VASPs are working, as VA vulnerabilities vary significantly depending on the VA design;
  - analyse countries of VASPs operations for useful information regarding VASP’s ML/TF risk profile;
  - explore what banking and payments arrangements VASPs are using for fiat operations, particularly for conversion of VA to fiat and vice-versa, to understand exposure of Lithuanian financial sector to risks emanating from VASPs’ activities.
- Institutional recommendations:
  - build on SRA results to develop institutional risk assessment methodology with a focus on ML/TF risks of VASP activity, its customer base, type of VA used and quality of AML/CFT controls;
  - grant the Lithuanian FIU powers to cancel registration of VASPs with fundamental deficiencies in AML/CFT controls or that face unacceptably high level of ML/TF risk.
- Legislative update noted:
  - The Parliament has adopted the amendments to the law on the Prevention of Money Laundering and Terrorist Financing strengthening the AML/CFT requirements for VASPs on June 30, 2022.
- Recommendations (VASP supervision):
  - Strengthen VASPs market entry controls with a strong emphasis on fitness and propriety tests
  - Develop institutional risk assessment methodology and tools for offsite monitoring with a focus on ML/TF risks of VASP activity and VA type based on the sectoral risk assessment results
  - Grant the supervisor powers to revoke VASP registration and bring the AML/CFT framework in full compliance with the FATF Standards as related to VA and VASPs.

### CENTROlink: role, scale, and ML/TF risks
- CENTROlink is a retail payment system operated by the BoL providing access to SEPA for various payment service providers to conduct SEPA national and cross-border payments.
- CENTROlink launched in 2015 and is part of the BoL strategic direction to foster innovation and a FinTech-conducive regulatory and supervisory ecosystem.
- CENTROlink objectives include promoting competition through pricing and providing payment infrastructure redundancy.
- Growth and scale:
  - Currently, 153 PSPs from 18 EEA countries use CENTROlink services, up from 90 in mid-2019 and more than doubling from early 2018.
  - Most FIs with access to CENTROlink are EMIs and PIs—131 out of 153, with 86 licensed in Lithuania and 67 in other EEA countries.
  - In 2021, a total of 186 million SEPA payments worth EUR 358 billion were made through the CENTROlink system—a doubling from 95 million payments worth EUR 170 billion in 2020.
  - CENTROlink’s payments turnover is substantially higher than the inflows to and outflows from Lithuania combined.
- CENTROlink customers and activity pose elevated ML/TF risk:
  - Some PSPs have business models aimed at high ML/TF risk customers (e.g., VASPs, gambling, other higher risk sectors).
  - For many PSPs CENTROlink is critical to their business model, with 26 percent of fintechs in Lithuania don’t have relationships with commercial banks.
  - As of end-2021, 68 percent of funds of Lithuanian-licensed PSP clients are held with the Bank of Lithuania, compared to 22 percent a year ago.
  - 21 percent are investments in liquid assets and 11 percent deposits in EU banks.
  - Higher risk countries, including countries under the FATF’s increased monitoring, are among main destinations of inflows/outflows via CENTROlink.

### CENTROlink AML/CFT controls: current measures and gaps
- BoL introduced and strengthened AML/CFT controls in granting access to CENTROlink:
  - An “Enhanced due diligence questionnaire” introduced in early 2021 as part of PSP onboarding and for existing CENTROlink customers.
  - The updated CENTROlink due diligence questionnaire includes 62 questions to PSPs on AML/CFT staffing, CDD, transaction monitoring, audit, governance, statistics on PSP’s customer base, business model, enterprise risk assessment, and customer risk rating methodology.
- Suggested enhancements to the due diligence questionnaire and assessment:
  - add jurisdictions and licensing authorities of PSPs and any group entities;
  - expand coverage to jurisdictions of origination and destination of payments the PSP conducts;
  - specify requirement to provide information on all products and services offered;
  - add cash transactions as a service and cash reporting as part of PSP’s AML/CFT program;
  - scrutinize reliance on third parties for AML/CFT program components and consider questions to prohibit anonymous accounts and accounts for unlicensed FIs.
- BoL’s institutional view and concern:
  - BoL administers CENTROlink on the basis that it is not covered by AML/CFT requirements and is not a reporting entity; operating payment infrastructures is seen as outside AML/CFT requirements.
  - However, by opening accounts for PSPs to conduct SEPA transfers, BoL effectively provides cross-border correspondent banking services, a higher risk service according to the FATF Standards.
  - Payments across national borders pose elevated ML/TF risk from an AML/CFT standpoint.
- Monitoring, resources, and oversight gaps:
  - BoL introduced screening for evasion of targeted financial sanctions using external software and sample testing for misreporting by PSP clients.
  - Some PSP customers have not yet been assessed using the updated questionnaire and many applicants were granted access shortly after licensing with onboarding decisions based on business plans without operational history.
  - CENTROlink operations and AML/CFT controls are administered by BoL’s payments department—payments system development division; BoL assigned resources to ML/TF risk assessment function.
  - So far, BoL conducted 173 risk assessments—53 during the onboarding stage and 120 for existing PSP customers—with only two staff that joined in 2020, limiting depth of assessment and degree of scrutiny.
  - This staffing appears insufficient relative to oversight of providing correspondent services to 151 PSP clients, with annual value of transactions exceeding a third of EUR trillion.
  - Current discussions to add an additional employee do not seem to address the resource gap.
  - BoL developed procedures for due diligence and onboarding that require approval by a committee consisting of the payments department director, head of payments system development division, head of payments systems division, and two AML/CFT risk employees.

### CENTROlink policy and operational recommendations
- Integrate BoL’s AML/CFT experts in CENTROlink onboarding and ongoing monitoring processes and boost the AML/CFT-dedicated resources
- Formalize risk rating methodology to inform CENTROlink onboarding decisions and to assign a risk rating that would allow to calibrate the intensity and nature of monitoring of the business relationship and determine intensity of ongoing due diligence
- Strengthen ongoing monitoring of PSP activity in CENTROlink and fine-tune BoL’s due diligence questionnaire to reflect Lithuania-specific ML/TF risks
- Additional operational recommendations described in text:
  - formalize existing risk scoring principles and adopt a risk assessment methodology and risk scoring tool to assist onboarding decisions and calibrate monitoring intensity;
  - cover all CENTROlink customers with the questionnaire and risk assessments;
  - integrate AML/CFT division expertise in the payments department committee for onboarding decisions, participate in formalization of PSP risk scoring methodology, ongoing monitoring procedures and regular information exchange;
  - nuance BoL’s neutrality principle to take into account different quality of AML/CFT supervision of PSPs across EEA countries and develop exchange of information with foreign supervisors.

*INTERNATIONAL MONETARY FUND*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1ltuea2022002.pdf_