In February, 2020, the Latvian authorities breathed a sigh of relief after the Financial Action Task Force voted against adding Latvia to the so-called “grey list” of jurisdictions with strategic anti-money laundering deficiencies. Prior to that, MONEYVAL, the permanent monitoring body of the Council of Europe entrusted with the task of assessing compliance with the principal international standards to counter money laundering, found that Latvian financial institutions had failed to introduce sufficient methods to identify suspicious funds primarily associated with clients from the former Soviet bloc countries.
Building Culture of Compliance
Since the European Union anti-money laundering directives require only minimum harmonization and consist of high-level principles, the Member States have wide discretion in implementing the standards into national laws. This has led to different national supervisory practices, and, in the wake of the collapse of ABLV Bank – which was blacklisted by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network – Latvian authorities introduced far more stringent anti-money laundering and sanctions compliance rules than required under European Union law. As a result, Latvia requests more information from financial institutions and their clients than many other Central and Eastern European and Nordic countries do.
As a Baltic business hub, Latvia continues to attract foreign investors and multi-national companies operating in Latvia both via subsidiaries and on a cross-border basis. Now, these businesses are required to be even more transparent – for instance, until January 1, 2021, all branches and representative offices of foreign entities included in the Latvian Register of Enterprises, as well as permanent representative offices registered with the Latvian State Revenue Service, are obliged to disclose their ultimate beneficial owners.
The same principles also apply to financial institutions licensed in other Member States and operating in Latvia on a cross-border basis. Namely, in addition to group-wide anti-money laundering and sanctions compliance policies and procedures, branches of financial institutions are expected to comply with the applicable Latvian regulations which may – and in most cases do – substantially differ from analogous obligations under the laws of their home Member States.
Increasingly demanding regulatory requirements have led to the phenomenon of “de-risking,” pursuant to which Latvian financial institutions terminate or limit business relationships with high-risk clients rather than managing the risks in line with a risk-based approach. To prevent the potentially adverse effects on Latvia’s economy, various professional associations closely linked to foreign investors and financial industry have pushed the Latvian Government to adopt a clear anti-money laundering strategy moving forward.
In the meantime, however, both businesses and financial institutions are somewhat unevenly balanced between the risk-based and rule-based anti-money laundering approaches, with the latter taking precedence. The Financial and Capital Market Commission – Latvia’s financial supervisory authority – has very recently adopted recommendations intending to serve as a practical guide for financial institutions through customer due diligence and enhancement of internal control systems, also averting the rule-based trend.
In practice, there is still room for improvement, as the current law imposes largely the same anti-money laundering obligations on all financial institutions, notwithstanding the fact that there are significant differences between credit institutions and other participants of the financial and capital market, such as private pension funds, savings and loan associations, and alternative investment fund managers, which operate in areas posing less risk of money laundering.
According to state authorities, further changes in the applicable laws are expected to be introduced to provide more clarity and lessen the administrative burdens. However, these amendments are unlikely to be less strict, and will, probably, only address the current ambiguity clouding certain legal principles. As such, businesses operating in Latvia are expected to continue encountering high transparency and disclosure requirements, with financial institutions under strict obligations to provide internal control mechanisms to ensure the relevant transparency levels.
By Girts Lejins, Partner, and Krisjanis Buss, Associate, Cobalt