Proposals for regulatory measures to ensure sustainable development of the financial industry in Latvia
Taking into consideration recent events and debates about the situation in the Latvian financial sector, the Association of Latvian Commercial Banks (further in text — ALCB) proposes several legislative amendments that need to be reviewed as soon as possible.
Please note that in October 2017 the ALCB Council approved a document on the subject of the industry’s self-regulation — policy and guidelines on Anti-money laundering, counter-terrorist financing and sanctions compliance (AML/CFT) — to ensure that in the next 2-3 years ALCB members reach the highest international standards in preventing and combating financial crime.
The ALCB will continue its steady work on consistent implementation of these self-regulation norms and will ensure they have binding authority for ALCB members. The Association will also regularly evaluate whether refinements or additions to these guidelines on self-regulation are necessary.
The new financial industry policy implements a zero-tolerance principle for infringements of the law and illegal activities and commits to strengthening active cooperation with governmental institutions and law enforcement authorities.
Our policy describes in detail the principles of cooperation with shell companies, significantly restricting banks’ collaboration with such entities. It also states a commitment to compliance with international financial sanctions, including those imposed by the Office of Foreign Assets Control.
In order to strengthen the international reputation of banks operating in Latvia, we also propose several amendments to the existing law.
1. Requirements for employees of financial institutions
Members of the ALCB have discussed optimal solutions that would allow for thorough assessment of current and potential employees of a financial institution regarding their compliance with job requirements. This would ensure public trust in financial institutions and minimise the risk of a financial institution being involved in illegal activities due to the actions of a dishonest employee.
We have concluded that the Credit Institution Law should include restrictions on individuals who have been convicted for intentional criminal conduct (until the record of conviction has been officially removed), as well as persons currently subject to insolvency proceedings, banning such people from working in positions directly involved in providing financial services. The law should allow for examination of the compliance of potential employees of financial institutions using the corresponding state registries and other information.
We have prepared amendments to the Credit Institution Law, including the statement of reasons, and have informed the Ministry of Finance about the proposal. We are hoping for constructive collaboration in directing these legislative changes.
In addition to that, we invite a discussion about another issue, the inherent conflict of interest in the following situations: should a private individual who is a significant shareholder of a financial institution (holding a share of 10% or more) be able to occupy the post of member of the board, a chairman of the board or chairman of the council at the same bank? We believe this needs to be evaluated with regards to corporate governance and risk management.
2. Exchange of information between banks, and between banks and government authority
Since 2017, the ALCB has worked to strengthen collaboration between banks and government authorities in combating the informal economy and financial crime. Our committees have concluded that amendments to the law are needed to stimulate effective and productive collaboration, and to ensure that legal regulation is in line with the latest global examples good practices in combating financial crime. We believe, the principle of cooperation before enforcing official procedures needs to be included in the law. In November 2017, ALCB carried out consultations with the law enforcement authorities of the United Kingdom and the United States of America for representatives of the Latvian banking sector and government institutions, in order to analyse best practice in the industry and assess the possible solutions.
The solution that has been developed as a result includes three areas of action.
2.1. Exchange of information between financial institutions
The Latvian Law on the Prevention of Money Laundering and the Financing of Terrorism, in Article 44, Part Four, determines that financial institutions can exchange personal data on individuals with whom they have not entered into a business relationship or with whom that relationship has been ended in accordance with this law, as well as on their beneficiaries and authorised persons. However, in practice, the risks of data processing and the lack of a standard for information exchange holds financial institutions back from fully using these progressive legal provisions.
We propose holding consultations with the Ministry of Finance, the Ministry of Justice, and the Financial and Capital Market Commission to identify the best way to ensure the effective functioning of this legal provision (this may involve issuing special Regulations of the Cabinet of Ministers, or norms in the form of recommendations of the Financial and Capital Market Commission). The ALCB is prepared to engage in preparation of these legislative acts immediately.
2.2. Exchange of information between financial institutions and government authorities
One of the ALCB’s priorities is to introduce to Latvia a practice that is currently rapidly developing around the world — public-private partnership in exchanging information and combating financial crime. The most outstanding example of this is the Joint Money Laundering Intelligence Taskforce of the United Kingdom. Its formation has made a significant and statistically measurable impact on combating financial crime. In Latvia, the participation of financial institutions in such a partnership would initially be voluntary.
Research data demonstrates that, worldwide, approximately 80–90 per cent of reports on suspicious transactions handed down to monitoring institutions have not been useful to law enforcement authorities in their investigations. Europol notes that only 10 per cent of reports received have been used for further investigation by Europol member countries. The annual report for 2016, currently available on the webpage of the Latvian Office for Prevention of Laundering of Proceeds Derived from Criminal Activity (further in text —FIU), states that it has received over 15,000 reports, and only slightly over 200 of those have been handed over to law enforcement authorities for further investigation.
The example of the United Kingdom involves the creation of a small operating group of law enforcement authorities and credit institutions that directly exchange information on particular cases and persons under investigation so that each party can better prepare themselves for completing their respective tasks. Upon receiving the relevant information, each party takes actions already provided for by the law but enacts them in a more focused and accurate way. It is often the case that law enforcement authorities do not know which information to request from banks and in what form. Similarly, banks do not know the correct way to communicate the information or are not aware that the problem concerns numerous banks and not just a single entity.
The ALCB already cooperates with law enforcement authorities (including the State Revenue Service and the National Police Force) within the framework of existing regulation, although the latter clearly puts limitations on broader and more effective cooperation.
The ALCB has developed proposals for specific amendments to the Law on the Prevention of Money Laundering and Terrorism Financing that would foster improvement of the cooperation model and exchange of information, and it is ready to submit them to the government for consideration.
2.2.1. The role of the FIU; institution’s place in public administration
Implementation of the aforementioned proposals essentially presupposes strengthening of the FIU. Currently, it is precisely on the FIU that the current legislation places responsibility for the exchange of information and for creating an effective basis for the improved normative regulation. Unfortunately, the FIU has not, to date, promoted such a model of cooperation, and we consider the structural exclusion of the FIU from executive power to be an obstacle to more active cooperation of institutions, with the latter’s participation. In turn, such models of cooperation will not be fully functional without the participation of the FIU, as in the framework of international cooperation it is precisely the FIU that is entitled to receive full information on the existing threats and emerging risks faced by the Latvian financial system.
In a letter to the Defence, Internal Affairs and Corruption Prevention Committee of the Latvian Parliament (Saeima), dated January 9, 2018, the ALCB pointed out the need to consider the structural improvement of the FIU and adjustment of its institutional affiliation in order to achieve more effective cooperation between the FIU, the National Police Force, the Prosecution Office and the State Revenue Service. The ALCB considers that this cannot be achieved solely by decisions on personnel policy taken within the FIU — world practice amply testifies to the insufficiency of such measures (https://rusi.org/sites/default/files/201710_rusi_the_role_of_fisps_in_the_disruption_of_crime_maxwwell_artingstall_web_2.pdf).
The ALCB proposes to engage in the discussion and take a decision on further development of the FIU part of the executive power [the FIU is currently under the auspices of the Prosecution Office].
2.3. Exchange of information between credit institutions and the State Revenue Service
The ALCB already cooperates with the State Revenue Service as we seek a better way to implement the reporting of suspicious transactions provided for by Article 22.2 of the law “On Taxes and Duties”. Formal reporting is a burdensome process both for banks and the State Revenue Service itself. An accompanying description of the cooperation process, allowing for operative exchange of data for analysis, is needed to facilitate this communication.
We propose starting a pilot project that would facilitate exchange of specific client data under analysis between both parties, as the first attempt. The State Revenue Service would receive more accurate reports, and neither it, nor the banks would be overburdened by technical information to be processed.
To make the exchange of information, part of a common effort to counter the informal economy, more efficient, Article 63 of the Credit Institution Law must provide for operative cooperation between the State Revenue Service and credit institutions “in order to analyse the activities of the clients to identify suspicious transactions in the area of taxation”. Such cooperation would initially be voluntary for credit institutions (possibly, with initially specifying a fixed term in the transition rules).
The implementation of such a mechanism would substantially strengthen law inforcement in the fight against the informal economy, and reduce the exploitation of financial sector with the aim of avoiding taxes.
3. Limiting cooperation with shell companies
The ALCB fully supports the initiative to substantially limit and implement special control of the services provided by financial institutions to shell companies. This is in line with AML/CFT policy and the guidelines of the ALCB[²]
The ALCB proposes that, in case a shell company fulfils all three criteria, specified in Article 15.1 of Section 1 of the Law on the Prevention of Money Laundering and Financing of Terrorism, any cooperation with it must be prohibited by law. In our view, such a solution will, in effect, reduce the number of undesireable clients in the Latvian financial system, and prevent any such others from entering. It will also be a clear statement of Latvia’s stance on the issue.
A proposal has been made by the Ministry of Finance to introduce a special duty: a fee for providing services to shell companies. It is crucial that such a duty should not create the impression in those paying it that by doing so they have secured “permission to act as one wants”. In our view, introducing such a payment without establishing other limitations on cooperation with shell companies will only do harm to Latvia’s international reputation. According to the information at our disposal, such an instrument of risk mitigation is not accepted in international practice. In working out the solutions, we ask you to consider the possibility that some individuals will attempt to evade the duty in question. One must also be careful about specifying fixed indicators (risk coefficients) or particular jurisdictions in the law or rules ― such limitations can be easy to avoid. What is important is the reason a shell company was created and what it actually does. An Estonian or Latvian company could well be a shell company whose aim is to launder money and commit financial crimes. Defining the duty according to the jurisdiction of the company or other similar principles may encourage the registration of de facto shell companies in the Register of Enterprises of Latvia. In our view, the most effective solution would be a clear prohibition on cooperation with any shell company that meets the three criteria listed in Article 15.1 of Section 1 of the Law on the Prevention of Money Laundering and Terrorism Financing. This requires amending the law.
[²] Please see more on recent developments, legislative, as well as policy, including evaluation of efforts in Latvia. Jenifer Henley Giersch (2017): https://www.acamstoday.org/ultimate-beneficial-ownership/
4. Directory of politically exposed persons
Currently, a number of Latvian public officials, on whom and on whose relatives the State Revenue Service has data, can be identified as politically exposed persons without further inquiry being necessary. These individuals are to be regarded as politically exposed persons, based on their declarations of financial interests of public officials submitted to State Revenue Service.
It is undeniably the responsibility of every legal subject to identify such persons. However, it is hard to account for the fact that one has to acquire data on Latvian politically exposed persons from foreign databases (which are not easily accessible to some legal subjects (not banks) due to their subscription costs). Furthermore, to identify the relatives of these persons one has to obtain a large amount of data from many unconnected persons and various registries, which the State Data Inspectorate has already described as disproportionate amounts of data processing
Therefore, we propose establishing a directory of politically exposed persons that would include the most typical and significant persons of this kind (it will never be exhaustive). Being merely a source of information, this directory would not exempt legal subjects from liability. It would not require costly IT solutions; for instance, in Denmark, it is a public directory in Excel format (https://www.finanstilsynet.dk/da/Tal-og-Fakta/PEP-liste).
5. Other relevant issues
The ALCB expresses its support for the idea of imposing stricter regulation on real estate agents, outsourced accountants and registrars of legal entities that was proposed by the responsible institutions. We are ready to assist in its implementation.
The ALCB stresses again that it is crucial to increase sanctions against business entities and individuals failing to notify authorities about the true beneficiaries or giving false information on them. In Germany and Austria, to take two examples, such sanctions are 100 000 euros and more. This could also include a prohibition on managing capital shares, as currently provided for by the National Security Law with regards to capital companies significant to national security.
The ALCB is presently actively working with the Ministry of Finance and the Ministry of Environmental Protection and Regional Development (currently responsible for the government’s IT framework) with the aim of facilitating the exchange of information between banks and state registers. This would significantly speed up and enhance acquisition of information on individuals, thus helping with the fight against financial crime.
The ALCB is consulting responsible institutions regarding the best legal solution to enable the withdrawal of funds arrested during criminal prosecution from credit institutions, and their transfer to the account of the investigating institution in the Treasury. Legal proceedings in the case of the Trasta Commercial Bank (Trasta komercbanka) have previously taken place or are currently underway regarding this issue. Repetition of such a situation in the future would not be acceptable.
We appreciate the willingness of the government and all responsible institutions to take steps to improve the reputation of the financial sector of Latvia and we are ready to participate in the improvement of relevant legal regulation. There are many questions that cannot be put aside. We ask for your support in the process of elaborating and solving these questions.
As submitted to the government by the Association of Latvian Commercial Banks on March 6
Sanda Liepiņa, Chairman of the Executive Board, Association of Latvian Commercial Banks