The financial industry in Latvia has been at the center of attention from counterparties in the US and EU after the countries third-largest lender, ABLV Bank, was accused by the Financial Crimes Enforcement Network (FinCEN) of being an institution of primary money laundering concern by serving as a conduit for illicit financial transactions. Although senior management of the bank denies any wrongdoing, the bank proposed a voluntary liquidation to avoid further damages for its clients and keep control over its assets.
In March 2018, the Latvian Parliament agreed to prohibit shell companies and their activities in Latvia. The Latvian regulator, the Financial and Capital Market Commission (FKTK) defined a shell company by means of a) the lack of actual economic activities and business operations; and b) the absence of the requirement to file financial records.
Shell companies as described above can be abused by dictators and oligarchs who control their country, area or organization, criminal networks, and other illegal groups to hide shady business transactions at the end of the supply chain. Often, the sole purpose of a shell company is to keep and control the financial assets of a multi-layered company structure. Such a company structure mostly contains several companies incorporated in tax havens with limited control. Their management is provided in the form of nominees by domestic service providers to create a false sense of local presence, while the shares of such an offshore company are held by another offshore company in a different jurisdiction. Multi-layering aims to maximize the privacy of the ‘Ultimate Beneficial Owner’ (UBO) of such a company.
In Latvia alone, the number of shell companies is estimated by the FKTK at over 25.000 legal persons. The main concerns of a shell company relate to the understanding of the activities and the origin of funds, whilst the final beneficiary or UBO of the company is unknown by those that need to supervise the financial system.
Its geographic location makes Latvia an important hub for legal persons willing to trade with the Commonwealth of Independent States (CIS), the European Union and the United States. According to a publication by FinCEN in the US Federal Register, the reliance on non-resident deposits (NRD) for capital, exposes the country to illicit finance risk, where NRD is estimated at 13 Billion USD. NRD reflects about 40% of total deposits in the Latvian financial system.
Credit institutions in Latvia have already started to terminate relationships with customers they considered a shell company. Banks in Latvia were obliged to investigate the economic activities of all clients, and amendments to local regulation took effect on the 2nd of June 2018. The swift implementation of new rules resulted in a temporary block of many accounts from offshore companies at various Latvian banks while the lenders examined the activities of the company based on the definitions given by the regulator. The outflow of illicit funds is still a concern and migrates the Latvian challenges and anti-money laundering (AML) procedures to other banks and countries.
Individual customers are often not aware that receiving undeclared incoming payments from an offshore (shell) company can be seen as a tax offense and therefore can result in an inquiry by local authorities for money laundering. The receiver of payments from an offshore company that either is registered in Latvia or banks in Latvia is advised to consult a local tax advisor to avoid incalculable risk.