Despite Reforms, Latvia Still a Hub for Illicit Foreign Cash: Moneyval

By Koos Couvée

Latvian authorities and financial institutions have failed to protect their country from abuse by foreign money launderers, sanctions evaders and terrorist financiers, an intergovernmental group claimed Thursday.

In a 224-page report, Moneyval, the Financial Action Task Force’s representative in Europe, praised Latvia for “proactively” exchanging financial intelligence and providing legal assistance to foreign investigators, but concluded that the country failed to address poor compliance with sanctions or increase the transparency of legal entities prone to abuse by money launderers.

Latvia suffers greatly from exposure to proceeds of corruption originating from Russia and other former Soviet states, and government supervisors and financial institutions do not fully grasp the extent of the country’s vulnerability, according to Moneyval.

“Large financial flows passing through Latvia as a regional financial center pose a significant threat,” Moneyval claimed. “However, there is uneven and overall inadequate appreciation of the potentially money laundering-related cross-border flows of funds passing through.”

The Baltic nation risks inclusion on FATF’s “gray list” of high-risk jurisdictions if the country fails to implement 12 Moneyval recommendations for improving its controls against financial crime. Latvian officials must report to Moneyval on the status of the overhaul by the end of next year.

“This slows down business, adds costs for imports and exports and will inevitably disable them from continuing to be a financial center as they like to be,” Yehuda Shaffer, former head of Israel’s financial intelligence unit and an ex-Moneyval evaluator, told ACAMS

Moneyval for the first time measured the effectiveness of Latvia’s rules against financial crime, assigning the country one of four scores in 11 “immediate outcomes. The Baltic nation was ranked “low” or “moderate”—the two lowest possible scores—in 10 of the outcomes, and received one “substantial” score.

The country’s efforts to identify and address compliance-related risks, supervise the financial sector, and prevent, investigate and prosecute terrorist financing all require “major improvements,” according to the report.

Compliance officers generally show “fair knowledge” of anti-money laundering rules and customer due-diligence practices, according to Moneyval, but the intergovernmental group questioned the quality of information Latvian banks collect to verify the beneficial owners and income sources of corporate clients.

“Primary emphasis is made on self-identification and there is overreliance on internet data,” Moneyval concluded, noting that the “very sizeable base of non-resident customers” makes any problems that may arise as a result of these practices particularly acute.

By contrast, Latvia received fully “compliant” or “largely compliant” in 30 of 40 of FATF’s technical recommendations.

“It’s striking … it shows that the laws and regulations are in place but what is lacking is the capacity and the political will to enforce and focus on the country’s risks,” said Shaffer, the former Israeli official. “The AML effort was focused on domestic crime rather than on the potential abuse of Latvia as a financial center.”

Moneyval also identified the apparent dearth of a national counterterrorism strategy and lack of a “robust” assessment of the risk posed by terrorist financiers as a “major deficiency” in Latvia’s compliance with FATF standards.

The widespread use of only “rudimentary transactional analyses” and lists for sanctions-screening purposes left banks ill-equipped to spot complex legal structures and other “highly sophisticated” schemes that countries such as North Korea use to evade financial embargos.

“A list-based approach to compliance… large numbers of foreign shell companies, deficiencies in the effectiveness of [CDD] measures and limited penalties imposed to date, among other factors, create a permissive environment for sanctions evasion,” the watchdog concluded.

Compliance officers and audit departments frequently lack independence because of the concentrated ownership of Latvian lenders, limiting their ability to report suspicious transactions and close problematic accounts.

After ABLV

In February, the U.S. Treasury Department blacklisted ABLV Bank, the country’s third largest lender, as a “primary concern for money laundering” for allowing arms traffickers, corrupt officials and other criminals to move funds through accounts nominally held by foreign legal entities.

Latvian officials responded with a multipronged strategy to clean up the banking sector, including by banning the provision of accounts to certain types of shell companies.

The prohibition, which came into force in May, covers firms that cannot demonstrate genuine commercial activity or originate from nations that do not require annual financial disclosures to supervisors.

A major outflow of capital propelled by the ban now threatens the viability of lenders which, like ABLV, largely relied on non-resident business.

In a statement, Ilze Znotina, the head of Latvia’s financial intelligence unit, or FIU, acknowledged Wednesday that Moneyval’s report “objectively reflects” the nation’s AML regime as of last November, when evaluators visited and assessed the country.

But Latvian officials have introduced “several important reforms” since then, such as establishing a public register of beneficial owners of legal entities, authorizing regulators to take action against sanctions violators and shifting the FIU’s focus towards cross-border money flows, she said.

“However, to improve the efficiency of our system, we must persist in the work that we have started,” Znotina said. “All public institutions involved and the private sector, including their representative organizations, share this responsibility.”

The ABLV designation and subsequent liquidation may represent an opportunity in this regard.

“Looking at the report, it’s will be difficult to demonstrate effectiveness on all frontiers [within a year],” Shaffer, the former Israeli official, said. “But if they get their act together they can use the scandal to show they’ve changed focus and are actually doing something about AML safety.”

Latvia’s Financial Sector Development Council, which is chaired by Prime Minister Maris Kucinskis and comprises public officials and financial services industry representatives, will meet next month to adopt a plan for addressing Moneyval’s criticisms.

Topics : Anti-money laundering , Counterterrorist Financing
Source: Latvia , Moneyval
Document Date: August 23, 2018