Fight against money laundering forces banks to take drastic measures

Banks focused on the non-resident market must close accounts of shell companies to ensure compliance with the AML law.

Banks in Latvia have been on a rocky road as of late. The anti-money laundering (AML) law has thus been amended, and now explicitly prohibits banks, payment institutions, investment firms, and others from engaging directly with shell companies. Under the AML law, a company meeting even one of the following criteria is now presumed to be a shell company:

  • It has no justifiable economic activities and minor economic value or no value at all, unless the bank has proof of the contrary;
  • The laws of its home country do not mandate disclosure of the company’s financial statements;
  • The company has no premises for performing economic activity in its home country.

Triggering the first criterion results in banks and other subjects of the AML law having to investigate the company to determine whether the company truly meets the definition. If the results of the investigation fail to invalidate the presumption, and if the second criterion is met as well, all trading relations must be ended within 60 days, but no later than by 9 July 2018. This has resulted in banks focused on the non-resident market requiring extensive documentation from their foreign clients, and the freezing of those clients’ accounts during the in-depth investigation.

The amendments supplement prior changes to the AML law requiring disclosure of companies’ beneficial owners, also intended to clean up the financial sector.

This does not, however, mean that shell companies are deprived of their assets. Instead, assets are to be transferred to the company’s accounts at a different bank, returned to the originator, or disbursed in cash. Nonetheless, clients of opportunistic banks have seen their account servicing fees and other such expenses skyrocket, indicating potential foul play. In such cases, the respective regulatory authorities must be involved.

Source: Law on the Prevention of Money Laundering and Terrorism Financing

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