• NEW REPORT ABOUT MONEY LAUNDERING CALLS FOR STRICTER REGULATION OF TRUST AND COMPANY SERVICE PROVIDERS

    Transparency International Latvia has published the report: “Connections: Money Laundering in Latvia and the Role of Trust and Company Service Providers”, which gives an overview of Latvia’s role in enabling large-scale money laundering schemes in the post-Soviet space and beyond over the last decade. The report also analyses recent improvements in Latvia’s anti-money laundering regulatory and supervisory framework, and provides recommendations for further enhancing the country’s resilience against illicit financial flows.

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    The report was developed following several journalists and law enforcement investigations revealing how in the last decade Latvia’s banking system was used to funnel at least 20 billion in illicit funds from the post-Soviet space and beyond into the international financial system. The continued relevance of money laundering, even in terms of international security, was demonstrated in summer 2017, when five Latvian banks were found to have unwittingly helped the North Korean regime in evading international sanctions and fund its intercontinental ballistic missile programme.

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    Whereas most of the current publications on money laundering mainly emphasise the need to regulate the financial sector, TI-Latvia’s analysis shows that it is much more difficult to regulate professional intermediaries in the non-financial sector. In fact, insufficient and fragmented regulation and supervision of these actors at the domestic and international level have led to a situation in which there are virtually no measures to deter them from enabling money laundering schemes around the world. By helping in creating hundreds of anonymous shell companies in different jurisdictions and opening accounts in Latvian banks, Trusts and Company Service Providers have – wittingly and unwittingly – allowed criminal networks to hide their identity, get access to the international financial system bypassing customer identification checks, and avoid prosecution.

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    Despite the significant progress made in curbing money laundering over the last two years, TI Latvia and experts emphasise the need to recognise the negative effects of money laundering and to continue reforms.

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    Liene Gātere, Acting Director of TI Latvia: “There has been tremendous progress in the short term, but it is important to continue to improve Latvia’s regulatory framework and to promote openness, as reducing money laundering is crucial not only in the context of national reputation, but also for strengthening national security. Terrorists and undemocratic countries have used Latvia’s financial system to channel their illicit funds to Europe, where they are safe and used to gain influence, increasing the threat to other countries, including Latvia. Digitalisation and new technologies have changed the ways in which criminals set up complex money laundering schemes. Thus, it is important for Latvia to react proactively and increase its capacity to identify and mitigate money laundering risks in a timely manner.

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    Dr. Arnis Sauka, shadow economy researcher: “Money laundering is a serious problem, a threat to the economy in many countries of the world, including Latvia. Despite significant improvements over recent years, law enforcement and market regulators should not relax in this battle where the opponent is very strong. The fight against corruption in the public sector, where Latvia, unfortunately, does not do too well in comparison to many other countries, is also one of the ways to combat money laundering. Equally important is the constant strengthening of financial market supervision and control. Among other things, this will give positive results in reducing the shadow economy in Latvia, which is one of the priorities of the State.”

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    Since the beginning of 2016, Latvia has made significant progress in its efforts to curb the misuse of the national financial system:

     

    • Latvia’s Finance and Capital Market Commission’s staff and resources were increased, allowing it improve supervision and effectively enforce administrative fines for non-compliance with AML rules;

     

    • Strict regulations were issued in order to mitigate the money laundering risk arising from banks’ cooperation with unregulated and unsupervised TCSPs;

     

    • At the end of 2017, Latvia strengthened its AML legal framework by implementing the EU’s Fourth Anti-Money Laundering Directive and ensuring public access to information about the real owners of Latvian companies;

     

    • The 2017-2019 “Plan of Action for the Limitation of the Proceeds from Money Laundering and the Financing of Terrorism” acknowledges the money laundering risks arising from uncontrolled non-financial service providers, and lists actions to mitigate them. These include improving the supervision and risk assessment capacity of the State Revenue Service, development of licensing and regulation of TCSPs and increased AML trainings for firms operating n the sector.

     

    As a result of the reforms, the volume of non-resident deposits in Latvian banks has decreased substantially, from 53.4% in 2015 to 41.1% in the first quarter of 2017, indicating a partial transition of Latvian banks towards a new business model.

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    TI Latvia’s recommendations for strengthening Latvia’s resilience against money laundering:

     

    • Trust and company service providers should be prohibited from servicing corporate structures or arrangements facilitating anonymity of beneficial ownership and money laundering. Legal service providers should not be allowed to act as nominee directors for their clients.

     

    • Appropriate licensing requirements for firms carrying out TCSP services in Latvia should be developed. Before entering the market, these firms should be subject to a ‘fit and proper’ test (a series of checks, to make sure that they meet the requirements of the national AML laws and regulations) at the time of licensing and over the period for which they hold a license, applying similar standards of integrity as for financial institutions. Foreign branches and subsidiaries of Latvia-based TCSPs should also be subject to the same checks and integrity requirements.

     

    • Participation in anti-money laundering trainings organised by the State Revenue Service should be made a condition for obtaining and keeping a license.

     

    • A thematic review of the TCSP sector in Latvia should be conducted. This should: a) include an analysis of how many firms are operating in the sector as well as the number of their subsidiaries in other countries; b) encompass best-practices in AML procedures in the field and make a comparison with the actual standards in Latvia; c) provide solutions for improving those standards.

     

    * Trust and Company Service Providers are firms that help establish legal entities and provide a wide range of administrative services for them, including the opening bank accounts, the filling of tax paperwork, and the provision of nominee services and registered addresses.

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