FCMC Press Release: FCMC implementing a far reaching ban on shell companies
On 29 May 2018, the Board of the FCMC approved amendments to a number of the existing FCMC regulations, determining measures that should be taken by the market participants to make certain whether the actual economic activities of customers (legal persons) are of any or no economic value, and whether the company may be regarded as the entity bearing at least one feature of shell company.
In order to ensure the management of changes in Latvia, amendments to the Law on the Prevention of Laundering the Proceeds from Criminal Activity (Money Laundering) and of Terrorist Financing (AML Law) took effect on 9 May 2018 banning the market participants to have business relations with the companies bearing at least two features of shell company, namely:
- a) connection to the company's actual business operations cannot be proven and the company's activity consists of small or no economic value, and the credit institution has no documentary information proving the contrary;
- b) the company neither prepares, nor presents financial reports on their activities to competent supervisory authorities of the state in which it is established.
The new rules provide for measures to be taken by the market participants to clarify and obtain additional information and documentation on the business model, compliance of profit with its business activity and turnover and the persons that ensure the economic activities of the company, as well as existence of economic value.
FCMC Chairman Pēters Putniņš points out, "The self-cleaning process launched in the Latvian banking sector now has become very dynamic. The total decrease in foreign deposits over last two years, declining the funds of suspect origin, has reached minus 58%, and is still going on. We see that the Latvian banks have understood that the changes regarding the customers – shell companies must be carried out rapidly, as this is the matter of the reputation and further development of the sector. There are some banks in Latvia that have already completely ceased business relationship with the companies that fit two features of shell companies. Our experts follow the process and provide advice. As the regulators we see that a continuous change management dialogue is taking place and the desired progress is reached in the sector."
The opinion of professional associations has been taken into account in drafting new regulations, the Association of Latvian Commercial Banks has also supported the new rules aimed at developing common standards for identification of shell companies characteristics.
Sanda Liepiņa, Chairwoman of the Association of Latvian Commercial Bank: "Such cooperation between the regulator and industry in addressing complex issues is a prerequisite for faster regain of the international reputation and demonstration of adherence to zero tolerance policy to illegal actions in day to day operations and effective combatting of financial crime. The Association's members will terminate business relationship with legally banned shell companies in full. This work has been launched already in 2016 and is aimed at reducing the share of high-risk foreign customers in Latvian banks, now is consistently continued. Assessing the performance of Latvian banking sector in combatting financial crimes, a significant change process has been taking place since 2016 to prevent the use of Latvian bank system for the criminal purposes”.
Preliminary estimates of FCMC experts show that in May the share of shell companies in the bank deposits was only 9.8%, whereas the share of companies subject to the ban as they fit two features of shell companies, could be under 4%. The Latvian banks ensure changes in the structure of customers not only regarding the shell companies but also provide for enhanced assessment of customer risk profile and refuse servicing high-risk customers.
The ban on business relations with the companies bearing at least two shell companies features refers to credit institutions, payment institutions, electronic money institutions, investment firms, and also investment management companies regarding the management of individual portfolios and distribution of open-end fund certificates.
On 2 June 2018, amendments to Regulations on Enhanced Customer Due Diligence took effect providing for minimum measures to be taken to verify compliance or non-compliance of legal person with the first feature of shell company (economic activity) https://www.vestnesis.lv/op/2018/107.7, as well as amendments to Regulations on the Due Diligence of Credit Institutions and Licensed Payment and Electronic Money Institutions providing for minimum measures to be taken to verify compliance or non-compliance of legal person with the first feature of shell company (economic activity) https://www.vestnesis.lv/op/2018/107.6.
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