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European Parliament committee TAX3 evaluates managing the changes in Latvian banking sector

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26.04.2018

Press release 

European Parliament committee TAX3 evaluates managing the changes in Latvian banking sector 

FCMC's new approach to supervision of the banking sector – managing the self-cleaning process

The initiative is developing on a single authority for financial investigation in Europe 

On April 26, the European Parliament's new special committee TAX3 in Brussels held the public hearing on "Combat of Money Laundering in the EU Banking System". The first panel of the discussion was devoted to examining the money laundering risks in the EU banking sector through selected examples of financial institutions involving recent developments related to four banks: AS ABLV Bank – Latvia's case; Pilatus Bank – Malta's case, Danske Bank and Versobank AS – Estonia's case.  

 

FCMC's new approach to supervision of the banking sector – managing the self-cleaning process 

The Financial and Capital Market Commission (FCMC) Chairman Pēters Putniņš participated in the public hearing representing Latvia and highlighted the changes in the Latvian financial sector over the last years: 

"We are approaching, I would say within the time-period of three to four months, the 20% threshold, which is the lowest level of foreign deposits in 20 years. This decline will continue because of the required self-cleaning work to relieve the Latvian banking sector of reputational risk burden." 

Following the tightened global AML standards and Latvia's joining the OECD (in 2016) the approach to supervision has changed, namely, the new FCMC management (since February 2016) now is calling the banks for essential revision of their customer base and avoidance of the money of questionable origin. Currently, as a result of mentioned efforts, the foreign deposits cover 31% of total deposits in the Latvian banking sector. 

 

FCMC: Effects of historical legacy in the banking sector have had an impact on the developments in AS ABLV Bank 

Pēters Putniņš, Chairman of FCMC: "It should be noted that supervision over ABLV Bank has been very tight on part of the FCMC in particular over the last years. One cannot deny that Latvia is still facing the AML-related problems. However, significant remedial work has been done in the bank by the FCMC over last two years. The fine imposed on ABLV Bank has been the highest ever applied in Latvia. The total investment for remediation of internal control system was about 20 million euro; and the first agreement on elimination of deficiencies with the bank was fulfilled, investing 6 million euro in the IT systems. Above is unprecedented in Latvia. In my opinion, it was simply the past that played a negative role in the fate of ABLB this time. The bank collapsed because of international isolation it occurred after the US FinCEN statement, markets simply isolated the bank. Besides, the bank was under remediation. Assessing above developments the role of reputational risk now should be taken into account more seriously by other participants of the financial sector."

The initiative is developing on a single authority for financial investigation in Europe 

FCMC has already emphasized that the bank's risk appetite must align with its internal control system ability to manage risks in accordance with the AML regulatory provisions. If there are radical changes in the national regulations, then the regulator ensures their implementation and the banks proactively react by changing their approach to the servicing of risky customers. 

Pēters Putniņš, Chairman of FCMC: "The changes are really taking place in Latvia in this regard, but the issue is, where does the suspicious money come to Latvia from and where does it go after the money, categorized as undesirable, is operated in Latvia and Latvian banks have been penalized for that? The movement of this money in the Euro zone must be assessed in its entirety. We have a certain situation with the North Korean monies and there have been indirect breaches of sanctions regime in Latvia, so we took it serious - but my question is: did that money arrive from the moon in Latvia? It arrived through other European banks; the money was processed through the branched network of banks. We haven't heard that any other jurisdiction anywhere has ever taken enforcement actions against the banks involved. So this is something to think about. We are sure that this is high time to call for discussing the initiative of the joint approach for monitoring ML risk control in Europe and take all the necessary international activities, like the FinCen and other institutions are operating in the United States". 

During his speech to the European Parliament the FCMC chairman pointed to the awareness of the Latvian financial sector that the foreign resident customer niche has always been an increased risk zone. New business models now have been developed for the so-called foreign customer banks in Latvia, and strategic changes are possible in the sector, because the increased stability ratios set on this banking segment by the FCMC now are the safe ground to fulfil obligations toward customers, at the same time providing for drastic changes to the business models. The foreign customer banks in Latvia have expressed their willingness to operate in the new conditions, at the moment each bank has a dialogue with the FCMC experts regarding the managing of changes. 

The video record of the 26.04.2018 TAX3 public hearing "Combat of Money Laundering in the EU Banking system" at:  https://ec.europa.eu/avservices/video/player.cfm?ref=I154635

Further information on TAX3: In the European Parliament's special committee on financial crimes, tax evasion and tax avoidance, known as TAX 3, there are also two Latvian MEPs: Krišjānis Kariņš (EPP) and Roberts Zīle (ECR), besides, Zīle has been appointed the first vice chair. The committee is focusing on investigation of financial crime issues, including money laundering and tax evasion, as well as assessing national schemes providing tax privileges, VAT frauds, taxation of the digital economy and others. The newly established committee will continue the work of previous committees (TAXE 1* and TAXE 2**, as well as PANA*** Papers).

 

Fur further information:

Ieva Upleja 

Head of FCMC Communications Division 

Phone: + 371 67774807; e-mail: ieva.upleja@fktk.lv