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*home* Financial Crime Investigation Service under The Ministry of the Interior of the Republic of Lithuania

FCIS analysis of the virtual currencies sector: threats highlighted, inspections under way

FCIS analysis of the virtual currencies sector: threats highlighted, inspections under way

The Financial Crimes Investigation Service (FCIS) has conducted a strategic sectoral analysis of virtual currency operators providing services in Lithuania and found that of the 195 operators analysed, around 90% do not provide the required information to the FCIS. This analysis was carried out in order to assess the activities related to virtual currencies and the risks they pose.

According to the provisions of the Law on Prevention of Money Laundering and Terrorist Financing of the Republic of Lithuania (the "AML/CFT Law"), virtual currency operators are obliged to report to the FCIS on the persons appointed as managers responsible for the implementation of the AML/CFT and for the co-operation with the FCIS, as well as on suspicious monetary operations or transactions, and to report on cash/virtual currency operations with an amount of EUR 15 000 or more.

"The biggest jump in the establishment of virtual currency operators in Lithuania is expected in 2022. By mid-October this year, 788 companies have already informed about the start of their operations. However, almost 90% of the analysed companies have never reported suspicious money transactions or transactions equal to or exceeding €15,000 to the FCIS. Here we see a risk that improper implementation of anti-money laundering measures could create a breeding ground for criminal activities", says FCIS Director Rolandas Kiškis.

According to Mr Kiškis, these risks are partly confirmed by the planned inspections of companies providing virtual currency services, which have shown that companies are not implementing all the measures to prevent money laundering and terrorist financing, and that there are serious gaps in the prevention of money laundering and terrorist financing in some companies.

Characteristics of Virtual Currency Operators

The sectoral analysis reviewed the activities, legal framework, company characteristics, company founders, etc. of 195 companies providing services as depositary virtual currency wallet operators and virtual currency exchange operators.

The analysis shows that the majority of virtual currency companies are managed by Lithuanian nationals (30 companies, of which 13 are established for sale), followed by nationals of the United Kingdom (13), Cyprus (12), the Russian Federation (11), Estonia (10), Latvia (10), the Ukraine (10), France (9), and the United States of America (7), and by citizens of other countries, such as India, Australia, Canada, and the United Arab Emirates. The majority of companies - over 80% - were found not to have any employee reported to the State Social Insurance Fund Board. Almost 12% of companies have only one employee and only about 7.7% have more than one employee.

The clientele of the companies analysed consists mainly of non-European Union citizens.

The absence of a place of business, employees, accounts with financial institutions, minimum authorised capital, foreign nationals and permanent residents as managers/shareholders, and a very small number of Lithuanian citizens as clients indicate the absence of a real link between the companies established for the operation of virtual currency operators and Lithuania.

Problem and inspections

The previously minimal legal regulation of virtual currency operators in Lithuania and the unfavourable situation of the sector in other countries have opened the Lithuanian market for virtual currency operators' services, and companies have started to be established to carry out this activity. As the sector has expanded, the risk that the activities may be used for money laundering and terrorist financing has also increased.

The strategic analysis of virtual currency operators has identified 15 companies providing these services and 4 entities providing company formation services, which will be subject to inspections by the Supervision Division of the FCIS.

At present, 4 virtual currency operator companies and 4 entities providing company formation services have been inspected. All the companies inspected have been found to be in breach of the AML/CFT Law. The findings of the inspections will be further examined by the Commission for the Examination of Infringements of the AML/CFT Law, which will decide whether the infringements are serious and impose proportionate sanctions.

As of 1 November, following the entry into force of the amendments to the AML/CFT Law, which tighten the conditions for the operation of virtual currency operators in Lithuania, it is likely that most companies will no longer comply with the established requirements, in particular those related to share capital, senior managers, managers and operational links to Lithuania.

The amendments to the AML/CFT Law introduce more detailed customer identification requirements. The law increases the authorised capital of service providers to EUR 125,000, and increases the requirements for senior managers, who will have to be permanent residents of Lithuania and represent only one company or group of companies.

The threshold for identification of customers in financial transactions is tightened, and customers will have to be identified, when the amount of a single transaction equals or exceeds €700.

As of 1 February next year the Registrar of Legal Entities will publish a list of persons operating as a virtual currency exchange operator and a depository virtual currency wallet operator, thus bringing more transparency to the market for cryptocurrency service providers.

The FCIS may impose warnings, other sanctions or fines of up to €1.1 million on obliged entities (other than financial institutions) for systematic, serious or repeated infringements of the Law on Prevention of Money Laundering and Terrorist Financing.

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