Transparency International Latvia has published a new report which provides a bird-eye view of the main features of the complex money laundering schemes carried out through Latvian and other Baltic banks, while assessing governments’ efforts to prevent the occurrence of similar schemes in the future and evaluating the ongoing risks linked to the abuse of shell companies, the exploitation of corporate services, and the emergence of the e-money and digital payment industry.
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Non-resident banking and money laundering in Latvia and the Baltics
As of today, at least three major “Laundromats” involving Baltic banks have been uncovered by investigative journalists – the Russian Laundromat (2017)[1], the Azerbaijani Laundromat (2017)[2] and the Troika Laundromat (2019)[3]. These enabled kleptocratic network in the Former Soviet Union (FSU) to launder illicit funds for over $30-$80 billion derived from corruption, fraud and embezzlement, and use them for different purposes, including purchase of real estate and luxury assets, lavish expenses, silencing of human rights and much more.
Money laundering through banks in the Baltic countries, including Scandinavian banks with a high reputation, was facilitated by their “non-resident banking” business model. This consisted in the attraction of thousands of high-risk foreign customers located in the FSU, who were allowed to hold deposits through shell companies with little or no information on their beneficial owners and carry out international transactions in US dollars across multiple jurisdictions thanks to correspondent banking relationships with reputable financial institutions based in the US.[4]
This business model brought disproportionate money laundering risks, not corresponding to the banks’ capacity to handle them. The exposure of the Laundromats and other scandals, including the indictment of ABLV Bank in Latvia[5], prompted a crackdown by governments in Latvia and other Baltic countries on non-resident banks, and this resulted in a sharp fall of foreign deposits. Even though risks are not as high as in the past decade, the FinCEN files investigation published in September 2020 showed that are still ongoing risks related to shell companies and TCSPs.[6]
The shell games
As revealed by the investigations on the Laundromats, criminal networks gradually moved from using shell companies registered in notorious offshore jurisdictions, such as the British Virgin Islands (BVI) and Panama, to using shell companies in reputable “onshore” jurisdictions. The majority of shell companies used in the Laundromats was registered in the UK. This was due to its veneer of legitimacy, the ease and low cost of incorporation of companies, and the de facto anonymity of beneficial ownership offered by partnership structures.[7]
While in April 2018 the Latvian government banned banks from servicing shell companies[8], and nowadays there is much more alertness about risks posed by UK companies, it is likely that criminals will keep seeking to set up shell companies in jurisdictions with features similar to the UK. The risk of this happening is exacerbated by the fact that beneficial ownership transparency and accessibility is still very low, both in Europe[9] and globally[10]. The Latvian government has mitigated such risks by opening up its beneficial ownership register[11], but more decisive efforts are needed to end the shell games.
The role of Trust and Company Service Providers
Trust and Company Service Providers (TCSPs) played a key role in the Laundromats and other major money laundering cases, helping criminals to create hundreds of shell companies in the UK and other jurisdictions. Crucially, they also handled the opening of accounts in Latvian and other Baltic banks, which through cooperation agreements relied on them to bring in new customers from the FSU, while applying little or no AML checks. At times, they also assumed the form of “para-bank” structures, and bankers themselves were found to run TCSPs as a side-business.[12]
While nowadays the use of TCSPs among Latvian and other Baltic banks is much less common, there are still thousands of businesses engaging in the creation and trade of shell companies, and the money laundering risk associated to those operating in Latvia is still high due to the cross-border nature of the services they offer and their weak AML capacity.[13] In the past few years, the State Revenue Service has strengthened supervision of the sector, but the lack of licensing for these businesses and, more in general, the lack of a common approach to their supervision at the global level makes them very difficult to control.
E-money – a new frontier for high-risk business?
There are indications that the crackdown on Latvian and Baltic banks and the ensuing process of de-risking has coincided with a gradual migration of high-risk clients from the FSU to Electronic Money Institutions (EMIs) and Payment Institutions (PIs). A recent investigation found not only that several of such businesses in the UK are being run by former executives and officers at Latvian non-resident banks that were fined for insufficient AML compliance, but also that the sector has become increasingly intertwined with the shell company business.[14]
In Latvia, the EMI/PI sector has been developing in recent years, and the FIU attributes them a medium-high money laundering risks explicitly noting the progressive shift of high-risk clients to this industry.[15] Following a strengthening of supervision rules in 2018 the number of registered EMIs in the country has dropped. However, EMIs/PIs with freedom to provide services across the EU still pose a high money laundering risk for Latvia, as they may be established in countries with a weaker supervisory system. This indicates a need for better cross-border supervision and intelligence sharing.
The EU’s new AML package
Prompted by the growing concerns on money laundering, in July 2021 the EU Commission presented an ambitious package of legislative proposals to strengthen the EU’s anti-money laundering system. This includes the creation of a new EU AML authority (AMLA); a new regulation on AML containing directly applicable rules, including in the areas of Customer Due Diligence and beneficial ownership; a 6th AML Directive containing provisions for the new rules be transposed into national law; and a strengthening of AML rules for the crypto sector.[16]
While this is a much-welcomed move, it will be still a long time before Member States can fully adapt to the new framework and reap the benefits of enhanced cross-border AML monitoring and control by AMLA (assuming this will have adequate resources and governance). As such, governments Latvia and other Baltic countries should not only fully support the EU Commission proposal in Council negotiation, but already take some steps to tackle the most pressing problems identified in this report and to prepare themselves and facilitate the transition to the new rules.
Policy recommendations
Based on the findings of this report, we recommend the Latvian government to fully support current EU efforts to establish a supranational supervision and reporting mechanism for cross-border transactions, and work in concert with the FIU, the FCMC, the SRS, the Enterprise Register, and members of the Financial Sector Development Board to implement the following measures:
- Ensure the regular publication accurate statistics about banks’ relationships with TCSPs and EMIs/PIs, including at least: i) number of TCSPs with whom they have a cooperation agreement and number of EMIs/PIs to whom they provide correspondent banking accounts; ii) jurisdictions in which those TCSPs and EMIs/PIs are based and operate; iii) information about the different types of cooperation agreements and correspondent banking services.
- Take steps to further strengthen the monitoring and transparency of the provision of corporate services in in Latvia, by: i) developing licensing requirements for TCSPs, regardless of the specific business category to which they belong; ii) setting up a public register of all TCSPs under the supervision of the SRS; iii) publishing a list of disqualified TCSP owners’ and directors.
- Engage with competent authorities in Estonia and Lithuania to ensure interoperability among corporate registries in the three countries and harness their AML intelligence value, by: i) adopting common open data standards; ii) developing common tools and indicators to detect suspicious TCSP activities (e.g., bulk-formation of companies; iii) developing technical solutions that allow for cross-border verification of accuracy of basic beneficial ownership information (e.g., verifying whether information provided by a Latvian national setting up a company in Estonia corresponds to information held by Latvian authorities about that person).
- Seek to upscale financial intelligence cooperation and information sharing related to EMIs/PIs, across the three Baltic States, by: i) undertaking a joint cross-border risk assessment or thematic study focused on current money laundering threats posed by EMIs/PIs operating in the three countries and targeting high-risk customers from the FSU; ii) establishing regional Expert Groups to share intelligence with the largest private EMIs/PIs operating in the three countries; and iii) consider the introduction of mandatory targeted transaction and record-keeping requirements on EMIs/PIs serving legal entities owned by high-risk customers.
[1] https://www.occrp.org/en/laundromat/the-russian-laundromat-exposed/
[2] https://www.occrp.org/en/azerbaijanilaundromat/
[3] https://www.occrp.org/en/troikalaundromat/
[4] Stack G. (2015), “Shell companies, Latvian-type correspondent banking, money laundering and illicit financial flows from Russia and the Former Soviet Union”, Journal of Money Laundering Control, vol.18, no.4, pp. 496-512.
[5] https://www.fincen.gov/news/news-releases/fincen-names-ablv-bank-latvia-institution-primary-money-laundering-concern-and
[6] https://www.icij.org/investigations/fincen-files/
[7] Transparency International Latvia / Delna (2018), Connections – Money Laundering in Latvia and the Role of Company Service Providers
[8] https://www.mk.gov.lv/en/article/saeima-imposes-ban-servicing-shell-companies
[9] Transparency International (2021), Access Denied? Availability and Accessibility of Beneficial Ownership data in the European Union, https://www.transparency.org/en/publications/access-denied-availability-accessibility-beneficial-ownership-registers-data-european-union
[10] Tax Justice Network (2020), The state of play of beneficial ownership registration in 2020, https://taxjustice.net/wp-content/uploads/2020/11/State-of-play-of-beneficial-ownership-Update-2020-Tax-Justice-Network.pdf
[11] https://data.gov.lv/dati/lv/dataset/plg-bods
[12] Stack G. (2015), “Shell companies, Latvian-type correspondent banking, money laundering and illicit financial flows from Russia and the Former Soviet Union”, Journal of Money Laundering Control, vol.18, no.4, pp. 496-512
[13] Financial Intelligence Unit of Latvia, National ML/TF/PF Risk Assessment 2017-2019 (Executive Summary), https://fid.gov.lv/uploads/files/2021/NRA_2017_2019_Executive_Summary%20%28002%29.pdf
[14] https://www.opendemocracy.net/en/dark-money-investigations/will-e-money-boom-make-uk-hub-money-laundering/
[15] Financial Intelligence Unit of Latvia, National ML/TF/PF Risk Assessment 2017-2019 (Executive Summary)
[16] https://ec.europa.eu/commission/presscorner/detail/en/ip_21_3690
This publication was produced in the framework of the Global Anti-Corruption Consortium and it reflects the opinion of the Transparency International Latvia.
