To ensure the management of required changes in the Latvian financial sector, amendments to the Law on the Prevention of Money Laundering and Terrorism Financing (hereinafter – the AML Law) came into effect on 9 May 2018, imposing on market participants in Latvia an obligation within 60 days to cease business relation with the companies bearing at least two characteristics of shell corporations – lack of proof of real economic business activity (of no economic value) and lack of requirement to submit annual financial statements. The above amendments took effect on 9 May 2018; consequently, their 60-day deadline is 7 July 2018.
FCMC Chairman Pēters Putniņš: “At this moment we can say with confidence that the Latvian banks have addressed this task with a great sense of responsibility, the process runs dynamically and the deadline of it will be met. In line with the purpose of law the situation has been improving day by day – risky money along with these shell corporations are leaving the Latvian financial sector. It should be noted that the banks, as a sign of goodwill, had already earlier started self-cleaning process related to the assessment of shell corporations. Today, the number of deposits by those shell companies with whom business is not prohibited, has also declined substantially; consequently, the total amount of shell companies’ deposits in Latvian banks has shrunk by more than 50 percent over this year.”
Most of the Latvian banks have already completely discontinued business with companies bearing two of above characteristics. The process of changes in the financial sector, commenced two years ago, giving up high-risk clients and their deposits (not only shell corporations), has been still continuing. The Latvian banks are changing their client structure by in-depth analysis of their client risk profile, and getting rid of high-risk clients, where necessary. At the end of June, the share of foreign client deposits in the Latvian banks was 28% (excluding ABLV Bank AS – 22% percent), this is an unusual state of affairs for the Latvian financial sector.
Putniņš: “This has been a notable reduction in the share of foreign customer deposits, and we must appreciate our banking sector that has succeeded to act professionally and peacefully, keeping the processes under control and avoiding redundant shocks. Besides, a considerably high liquidity ratio has been still retained, and this in a way is a positive statement of supervisory efforts exerted by the FCMC over past years, requesting higher operational ratios for the foreign bank segment. These requirements have now paid-off. The required level of 5 percent threshold for the risky CIS countries’ deposits will be reached in a couple of months. We will also examine the beneficiaries’ base for deposits qualified as “other countries”. If we find a large share of CIS beneficiaries in this segment, additional assessment and negotiations with banks will follow to prevent hiding of CIS clients behind other jurisdictions.”
The geographical structure of deposits demonstrates that domestic deposits are dominating in Latvia with 71 percent of the deposit portfolio, European Union (EU) deposits account for 12 percent, other countries’ deposits – 11 percent, whereas CIS countries’ deposits have shrunk to 6 percent.
In total, the outflow of foreign deposits over past two years has exceeded 5 billion euro. According to the FCMC’s estimates by the end of this year the foreign customer deposits are likely to make up around 3.5 billion euro, or 20 percent of total deposits in Latvian banks.
AML Law; Transitional Provisions 32:
32. Credit institutions, payment institutions, electronic money institutions, investment firms and — in relation to the individual portfolio management and distribution of UCITS fund certificates — also investment management companies shall terminate business relation and incidental transactions with the clients — shell corporations that conform to characteristics defined in Article 1 (15.1), sub-clauses a) and b) hereof within 60 days of the entry into force of Article 21.1 of this law.
(Wording of 26 April 2018, became effective on 9 May 2018)
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