FCMC in collaboration with U.S. law enforcement authorities identifies weaknesses and imposes monetary fines on three banks

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Riga, 27.06.2017

Press Release 

FCMC in collaboration with U.S. law enforcement authorities identifies weaknesses and imposes monetary fines on three banks 

Successful cross-border cooperation in detecting violations is a signal that Latvia is capable of ensuring effective financial markets supervision against global risks 

 

The Financial and capital Market Commission (FCMC) in collaboration with the Federal Bureau of Investigation’s (FBI) Counterproliferation Center has identified three Latvian banks, JSC “Baltikums Bank”, JSC “Privatbank” and JSC “Reģionālā investīciju banka” which had not complied with the provisions of anti-money laundering and counter terrorist financing (AML/CTF) regulatory framework. Violations relate to customer due diligence, including also transaction monitoring and obtaining insufficient information about the beneficiaries indicated by the customers and transactions performed. In the period from 2009 to 2015, on several occasions several customers of those banks, making use of off-shore companies and complicated chain transactions, transferred the funds from their bank accounts, to circumvent international sanctions requirements imposed against North Korea. Cross-border cooperation in detecting such weaknesses indicates that being aware of the risks associated with the development of Latvia as a growing regional financial centre the national supervisory authorities have ensured managing and mitigating above risks both in the AML/CTF and international sanctions areas.

“In the FCMC’s view these penalties are preventive measures taken by the regulator, allowing the Latvian commercial banks to seriously reassess potential risks associated with violating or circumventing international sanctions requirements, to improve their AML/CTF internal control systems and avoid any possibility of recurring of such situations in the future. Under the increasing geopolitical tensions and constantly evolving of criminal schemes, internal control systems of the banks such as "know your customer'', awareness of economic activities and associated risks, must be sufficient to prevent the banks from being used for suspicious deals. Cooperation between the FCMC and other national supervisory authorities indicates that the Latvian banking sector will continue enhancing as a reliable partner,” FCMC Chairman Pēters Putniņš points out.

“FCMC would also like to thank U.S. Department of Treasury’s Financial Crimes Enforcement (FinCEN) for providing assistance with the actions taken today,” continues P. Putniņš.

The mentioned banks are cooperating with the FCMC and have admitted the identified weaknesses. FCMC has entered into administrative agreements with the three banks that most effectively enable the banks to ensure taking immediate measures, to timely identify transactions that led to the circumventing of international sanctions and to act in line with the procedures defined in laws and regulations. Conditions of the agreements stipulate that the banks pay the monetary fine in the total amount of 641 514 euro into the national budget within one month. FCMC will monitor the fulfilment of the banks’ commitments under the predefined time schedules and scope.

In cases of transactions related to circumventing international sanctions, the FCMC performed targeted inspections in JSC “Baltikums Bank” and JSC “Privatbank”. In addition, the FCMC also carried out the planned onsite inspections of JSC “Reģionālā investīciju banka”, covering a broader scope of those banks' internal control programs. Consequently, the fine applied to the bank is set also in accordance with the violations of the AML/CTF law and relevant regulatory requirements identified during the inspections. The bank did not ensure adequate functioning of internal control systems. The bank is committed to improving the AML/CTF internal control systems and to strengthening their effectiveness through enhancements of IT solutions, ensuring external testing, and other measures. 

Monetary fines and measures applied to banks: 

Credit institution

Type of the offence

Fine to be paid to national budget

Further obligations to bank

JSC “Baltikums Bank”

Breaches of AML/CTF law and FCMC regulatory requirements: weaknesses in customer due diligence and transaction monitoring that led to the situation that bank had been used to circumvent international sanctions requirements imposed against North Korea.

EUR 35 575*

Obligation to draw up an action plan, to enable the bank to further identify transactions that are aimed at circumventing or breaching of the international sanctions.

JSC  “Privatbank”

Breaches of AML/CTF law and FCMC regulatory requirements: weaknesses in customer due diligence and transaction monitoring that led to the situation that bank had been used to circumvent international sanctions requirements imposed against North Korea.

EUR 35 575*

Obligation to draw up an action plan, to enable the bank to further identify transactions that are aimed at circumventing or breaching of the international sanctions.

JSC “Reģionālā investīciju banka”

1)    Breaches of AML/CTF law and FCMC regulatory requirements: weaknesses in customer due diligence and transaction monitoring that led to the situation that bank had been used to circumvent international sanctions requirements imposed against North Korea;

2)    Failure to ensure effective functioning of internal control system.

EUR 570 364

 

Warnings, issued to the AML/CTF responsible officials of the bank

 

 

Obligation to assess its AML/CTF internal control system and take the necessary measures to improve its functioning and effectiveness in line with the action plan, to perform external testing on the categorization of customer base and IT solutions, as well as assess the risks associated with cross-border enforcement of sanctions.

The bank is committed to contribute EUR ~2,8 million to the improvement of its internal control system in 2017/2018.

*In accordance with the Credit Institution Law effective at that time period (2009-2014) of execution of transactions, the maximum of monetary fine to be imposed for the breaches of AML/CTF law could be up to 142 300 euro. In determining the amount of the monetary fine, the FCMC has considered the number and extent of offences.

FBI information on circumventing international sanctions against North Korea 

Based in part on information provided by FBI’s Counterproliferation Center, during the period from 2009 to 2016, foreign nationals organised schemes of criminal transactions in order to circumvent the international sanctions regime concerning North Korea and its program of ballistic missiles and conventional weapons, including export of goods and equipment related to this program. According to the information provided by FIB, financial services of the above-mentioned Latvian commercial banks were used at several stages of these schemes, where a number of transactions through the current accounts of customers were performed in the interests of sanctioned North Korean entities. The offshore companies holding accounts at the banks did not transact directly with entities appearing on EU, UN, or US sanctions lists at the time the transactions occurred, but instead used a network of intermediaries to circumvent those sanctions.  Those intermediaries conducted transactions on behalf of EU, UN, and US-sanctioned entities.  As North Korean financial institutions and other North Korean entities are subject to financial sanctions and face several international trade restrictions, North Korean entities must rely on vulnerable financial institutions to execute transactions through complex transactional networks.  Oftentimes these transactions are conducted in such a manner as to not directly touch a sanctioned entity or North Korean interest. However, these concealment techniques used by North Korean front companies often contain red flags, which have been detected and reported extensively over the years by a variety of entities, including the United Nations and non-governmental organizations. Those red flags include offshore companies sharing the same officers and located at the same addresses cycling payments to the same beneficiary. Banks that cater more to offshore customers and lack adequate know your customer, customer due diligence, and transaction monitoring and screening procedures are especially vulnerable to facilitating this type of deceptive financial activity. Therefore, the financial market participants of Latvia must conduct additional due diligence on offshore customers and their transactional counterparties.  Although North Korea is geographically far from the region, Latvian financial institutions may be used to circumvent international sanctions, specifically through the use of offshore companies.

Investigation in this case is on-going, and FCMC continues to cooperate with the FBI and other partners. 

To reduce the risk of being used for circumvention or violation of international sanctions, Latvian financial institutions must pay the most attention to:  

Financial service providers usually ensure international sanctions compliance through their AML/CTF internal control systems which is not sufficient in all cases. However, additional control systems have been already imposed on part of market participants.

It would be inadmissible to reduce the sanctions compliance to the screening of special sanctions lists. Each market participant must determine and be aware of the risk profile of its financial services and customer base and associated specific risks of sanction infringements. In line with those risks additional regulatory and technological solutions must be developed and implemented enabling application of sufficient, effective and timely sanctions infringement control mechanisms. 

 

The geographical risk factor, as well as the risks arising from transactions in export/import of goods and provision of transportation services should be particularly highlighted, where the possible supply of dual-use goods to the sanctioned persons or countries must be identified.

 

Invitation to the media briefing  
Today, 27.06.2017, at 11.30-12.30 FCMC Chairman Pēters Putniņš and FCMC Compliance Control Department Director Maija Treija will reply to the media questions regarding the fines imposed on those banks.

Venue: Financial and Capital Market Commission, Riga, 1 Kungu Street (entrance from the Town Square, Rātslaukums). 

Registration: Media representatives are required to apply for the event by e-mail: laima.auza@fktk.lv or phone: +371 26148001. 

Please take valid identify documents to receive an access pass.

 

Further information:

Laima Auza

Financial and Capital Market Commission 

Head of Communications Division 

Phone: +371 67774860, +371 26148001

E-mail: laima.auza@fktk.lv 

 www.fktk.lv, Twitter.com/FKTK_LV