Moneyval calls on Latvia to clean up banking sector

The Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, known as Moneyval, states in a new report published on August 23 that large financial flows passing through the country pose a significant money laundering threat. The release of the Moneyval report comes just days after GRECO, the Council of Europe’s Group of States against corruption (GRECO) called on Latvia to reinvigorate integrity in top executive functions.

“Latvia is a regional financial centre, with a majority of its commercial banks focusing on servicing foreign customers, mainly from the Commonwealth of Independent States (CIS) countries. Hence one of Latvia’s key money laundering risks remains the vulnerability of CIS countries to economic crime, especially corruption. Latvia’s own level of corruption, vulnerability to international organised crime and significant shadow economy are also key factors of the overall money laundering risk faced by Latvia,” reads the report.

Latvia’s third-largest lender, ABLV Bank, collapsed in February after US authorities accused it of “a wide array of illicit conduct,” linked to North Korea’s weapons programme and corruption in Russia and Ukraine. And in June, prosecutors charged the central bank governor Ilmars Rimsevics with bribery.

The report concludes that the overall appreciation of money laundering and financing of terrorism risk in the financial sector is not commensurate with the factual exposure of financial institutions in general, and banks in particular, to the risk of being misused for money laundering and financing of terrorism. The general understanding of risks among designated non-financial businesses and professions is limited to risks relevant for their particular businesses and professions; it does not amount to an appropriate perception and awareness of money laundering/financing of terrorism risks.

Moneyval underlines that certain authorities, such as the Office for the Prevention of Laundering of Proceeds Derived from Criminal Activity (financial intelligence unit) and the Financial Capital Market Commission (FCMC), demonstrated a rather broad understanding of the risks within the anti-money laundering and combating financing of terrorism (AML/CFT) system. However, there is uneven and overall inadequate appreciation of the potentially money laundering related cross-border flows of funds passing through Latvia.

The supervisors demonstrate widely varying views and knowledge about money laundering/financing of terrorism risks. Despite the knowledgeable and persistent approach taken by the FCMC to the non-resident banking sector, change of risk-appetite in this sector remains slow.

The report acknowledges that since the last evaluation, Latvia has taken steps to improve its AML/CFT legal framework. At the same time the report states that Latvia’s legal basis for targeted financial sanctions in the area of financing of terrorism and proliferation financing calls for urgent clarifications and improvements. It is unclear whether the competent authorities have taken sufficient steps and have the necessary means to mitigate targeted financial sanctions-evasion risks.

The Enterprise Register will be populated by beneficial ownership information obtained from all legal entities.  However, this functionality was not up and running as of the time of the visit. When fully implemented, information contained in the Enterprise Register will be publicly accessible.

The report also states that, until recently, the judicial system of Latvia did not appear to consider money laundering as a priority. Money laundering was not investigated and prosecuted in line with its risk profile as a regional financial centre.  While results from conviction-based confiscation are hampered by the modest number of money laundering-convictions, non-conviction based confiscation brought some encouraging first results, allowing Latvian authorities to confiscate considerable amounts in both domestic and international cases.

International cooperation constitutes a critical component of the country’s AML/CFT system. Moneyval has praised Latvia for proactively cooperating with foreign counterparts, effectively providing and seeking not only mutual legal assistance, but also exchanging financial intelligence, and engaging in joint investigations and cooperation meetings with positive results.

Latvia has been ordered to report to Moneyval at the last plenary meeting in 2019 about the implementation of its recommendations under enhanced follow-up procedures.