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The Bank of Lithuania has determined that UK-headquartered electronic money institution Transactive Systems seriously and systematically infringed anti-money laundering and counter terrorist financing (AML/CTF) requirements.
Having assessed infringements, the Bank of Lithuania imposed a fine of €280,000 on the company and revoked its licence.
This means that the company can no longer provide financial services in the country and must inform its clients about the settlement procedure within five working days at the latest.
The enforcement action raises questions about what Transactive Systems' fate beyond the Baltic payments hub will be.
After being approached by VIXIO about the company’s base in the UK, a spokesperson for the Financial Conduct Authority (FCA) said: “We look at a wide range of information in our supervision of firms, including action taken by our international counterparts.”
"I would hope that with the Bank of Lithuania acting so fast, and so publicly, that this would force the FCA’s hand,” said Kathryn Westmore, senior research fellow at the Centre for Financial Crime and Security Studies.
Westmore continued that she finds it hard to believe that this company is not on the FCA's radar.
"It has been well known that it has poor AML controls in Lithuania, considering the Bank of Lithuania first announced action months ago.”
The FCA also clearly has a focus on the payments sector, considering its recent Dear CEO letter calling out issues such as poor AML controls.
"I would be surprised if they revoked the licence immediately as they may be subject to legal challenges. I would have thought restrictions on business may be more likely at this stage,” suggested Westmore.
Indeed, the FCA could have already put restrictions on the business that will not be made public until a final decision notice if the firm is fined or subject to enforcement action.
“This could be several years down the line,” Westmore pointed out.
She continued that it would be surprising if the company has not been placed under a Section 166.
Under Section 166 of the Financial Services and Markets Act, known as S166, the FCA has the power to require a firm to appoint a so-called “skilled person” to produce a report on specified matters or to appoint a skilled person directly.
In February, it was reported that Barclays has been placed under an S166
“This would usually be the start of regulatory action, it may be a long time until we see how the situation unfolds," Westmore said.
Storms that start in Vilnius have previously made their way over to London, including the case of once-fintech unicorn Railsr.
In early February, the Bank of Lithuania announced that it was limiting the activity of Railsr subsidiary PayrNet over concerns it is “grossly and systematically violating” money laundering compliance requirements.
Weeks later, the UK’s FCA was reported to be auditing the firm and it has since undergone a rescue deal.
Main infringements
Transactive Systems compliance issues are copious, according to Lithuanian authorities, detailing a long list of failures.
According to the Bank of Lithuania, the institution apparently has no terrorist financing controls in place, and it failed to properly identify clients, their representatives and beneficiaries.
In establishing business relations with the vast majority of the audited clients, Transactive Systems identified them without complying with the requirements of local AML laws, the bank said.
The institution failed to ensure the application of enhanced customer identification measures in cases where a relationship with third-country financial institutions was established or where a higher risk of money laundering and terrorist financing of the client was identified, although it was obligatory, the regulator said.
In opening virtual accounts for its clients, the Bank of Lithuania says that Transactive Systems has been allowing the opening of anonymous accounts and that the institution did not have at its disposal information on the end users of these accounts.
It enabled the provision of financial services to entities that are not financial institutions and which are not licensed or otherwise specifically authorised by supervisory authorities to provide such services.
Transactive Systems failed to ensure that clients' transactions corresponded to their operational profile, risk profile and source of funds.
The Bank of Lithuania noted that the means of determining whether clients' funds and assets were derived directly or indirectly from a criminal offence were of poor quality and insufficient.
There were also cases when the institution failed to detect suspicious transactions of the client and did not report them to the relevant authorities in accordance with the established procedure.
The Bank of Lithuania further complained that the institution’s “instantaneous and retrospective” monitoring of transactions was ineffective, the selected monitoring model did not match the number of transactions processed and suspicious transactions were not reviewed and analysed properly.
The institution did not properly implement international financial sanctions and restrictive measures, and its monitoring and verification systems were ineffective, the regulator said.
Transactive Systems failed to ensure the independence of the internal control function to avoid any conflicts of interest as part if its responsibilities for the organisation of the prevention of money laundering and terrorist financing.
It was also found that the company provided incorrect, incomplete and inaccurate information to the Bank of Lithuania, which complicated the inspection process.
The Bank of Lithuania says it received numerous complaints and enquiries from natural and legal persons, as well as financial market supervisory authorities of various other EU member states regarding potential cases of fraud related to the company’s clients or accounts opened with it.
