The International Monetary Fund (IMF), in 2007, released a report on Latvia's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime and concluded that Latvia has in place most of the legal and institutional requirements of the FATF's Recommendations. However, the report also observes that Latvia's legal framework lacks clarity on some of the Special Recommendations (SR) relating to the financing of terrorism and more importantly the laws do not adequately cover all Designated Non-Financial Businesses and Professions (DNFBPs). The IMF notes that the Latvian authorities are in the midst of addressing the issue on DNFBPs and have in recent years made several amendments to laws and regulations so as to bring Latvia closer to full compliance with FATF requirements. The report also states that as of 2007, few amendments which are often minor are needed in the AML Law to achieve full compliance with the FATF Recommendations. The main laws governing AML/CFT in Latvia are the AML Law of 1998, the Financial and Capital Market Commission (FCMC) Regulation of 2006 and the 2005 Criminal Procedure Law. The Control Service serves as the Financial Intelligence Unit (FIU) of Latvia and the 2007 IMF report notes that the Control Service is effective in its function and is adequately staffed with competent personnel.

General Overview

The International Monetary Fund (IMF) in 2007 (June) released its Report on the Observance of Standards and Codes (ROSC) on Latvia's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime. According to this report, Latvia's AML/CFT regime has in place most of the legal and institutional requirements of the FATF's recommendations. However, it lacks clarity on some of the Special Recommendations (SR) relating to the financing of terrorism. Moreover, according to the IMF report, the AML/CFT measures do not adequately cover all Designated Non-Financial Businesses and Professions (DNFBPs), as required by the FATF. The report does state that the Latvian authorities are aware of this and are in the midst of addressing the issue.

According to a 2007 report by the U.S. Department of State (DoS), money laundering has been criminalized in Latvia since 1998, in accordance with the Law on the Prevention of Laundering of Proceeds derived from Criminal Activity (AML Law). The 2007 IMF ROSC notes that, in recent years, Latvian authorities have made several amendments to the legal framework to achieve compliance with FATF requirements. However, they have yet to achieve full compliance because the amendments seem to have been made in a piecemeal fashion and lacks clarity on some issues (IMF 2007). The DoS reports that the amendments needed to achieve full compliance with the FATF recommendations are often minor. The 2005 Criminal Procedure Law greatly enhanced the powers of the Control Service - the Financial Intelligence Unit, and other regulatory bodies such as the Financial and Capital Market Commission (FCMC), to investigate, confiscate, and seize assets and funds related to money laundering and terrorist financing (IMF 2007). Moreover, the 2006 Regulation of the FCMC, according to the IMF 2006 report, has supplemented the AML Law in terms of preventive measures.

The Control Service serves as the Financial Intelligence Unit (FIU) of Latvia. The 2007 IMF report notes that this service is functionally effective and adequately staffed, employing competent personnel. The FCMC is the supervisor for the insurance, banking, and securities sectors (FCMC 2006). The 2007 IMF report notes that the FCMC conducts detailed, on-site visits to banks in order to ascertain whether proper AML/CFT measures are being applied. The FCMC has issued sanctions against non-compliant institutions in the past (IMF 2007).

The 2007 IMF report further observes that Latvia's financial sector is dominated by banks, and that these banks "appear to be well advanced in improving AML/CFT internal control systems and customer due diligence, particularly in meeting the legal requirement to identify beneficial owners" (p. 4). According to the 2007 U.S. DoS report, Latvia has issued regulations to implement sanctions imposed by United Nations Security Council Resolution (UNSCR) 1267, and is party to several United Nations conventions and European Union (EU) bodies that fight the financing of terrorism. The Control Service (Latvia's FIU) is a member of the Egmont Group, which allows it to access the Egmont Secure Web in order to exchange information that can help prevent terrorist financing (FCMC 2006).

The Latvian authorities responded to the IMF's 2007 assessment by noting that, of the 5 recommendations (R7, R16, R33, SR-VII and SR-IX) against which they were rated as non complaint, they had addressed Special Recommendation (SR)-IX and will be addressing R7 shortly (IMF 2007). SR-IX was addressed through the enactment of the Law on Cash Border Declarations in July 2006, subsequent to the IMF's on-site visit in 2006, and R7 will be addressed with the implementation of EU Directive 2005/60/EC (IMF 2007).

The Principles

1. Legal Systems and Related Institutional Measures

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The 2007 IMF ROSC found that Latvia largely complies with FATF R1 and complies with R2, relating to the criminalization of money laundering (p. 11). According to the IMF report, Latvia's money laundering legislation includes all the predicate crimes as defined by the FATF.

The 2007 IMF ROSC notes that Latvia only partly complies with FATF Special Recommendation SR-II relating to criminalization of terrorist financing (p. 15). Latvia's money laundering regime falls short in that, although financing of terrorism is criminalized by law, the definition of the crimes do not include all elements specified by the International Convention for the Suppression of the Financing of Terrorism.

The 2007 IMF ROSC further notes that Latvia largely complies with FATF R3, relating to confiscation, freezing, and seizure of proceeds of crime (p. 11), and only partly complies with FATF SR-III relating to freezing of funds used for terrorist financing (p. 15). As stated in the IMF's 2007 assessment, there are several measures in the Latvian legislation that enable the authorities to confiscate property, and there is evidence of implementation as well. However, the report indicates that the system could be more effective. The report notes that, in the case of SR-III, there is a comprehensive system in place, however "a number of definitional and practical issues remain to be addressed to make the system more flexible and effective" (p. 6).

According to the IMF's 2007 ROSC, Latvia largely complies with FATF recommendation relating to the Financial Intelligence Unit (FIU) and its functions, namely R26, R30 and R32 (p. 14). The Latvian FIU, the Control Service, is a legal entity that is operationally independent (although monitored by the Prosecutor General) and has the necessary powers to conduct money laundering and terrorist financing crimes and prosecute such crimes (IMF 2007). The 2007 IMF report also indicates that Latvia complies with R27 and R28, relating to law enforcement, prosecution, and other competent authorities (p. 14).

The 2007 IMF ROSC notes that, at the time of the assessment, Latvia did not comply with SR-IX relating to cross border declaration and disclosure (p. 16). In July 2006, however, the Law on Cash Declaration at the Border requires for all cash and other financial instruments over EUR10, 000 to be declared to the State Revenue Service of Latvia at the border (p. 6).

2. Preventive Measures - Financial Institutions

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The FCMC is the supervisory authority for all financial institutions in Latvia except for exchange houses and the Latvian Post Office, and exchange houses are supervised by the Bank of Latvia (IMF 2007). According to the 2007 IMF ROSC, the AML Law and the FCMC Regulation (2006) outline many of the requirements for preventive measures, as stipulated by the FATF recommendations. However, the report states that the wording in the law and the regulation is ambiguous as to setting mandatory obligations, and amendments in the AML Law, albeit minor, are required to achieve full compliance with FATF Recommendations (p. 7).

The 2007 IMF ROSC indicates that Latvia partly complies with all but one FATF recommendation relating to Customer Due Diligence (CDD). The report identifies less than full coverage of the requirements for R5 and R6 regarding CDD and Politically Exposed Persons (PEPs) because the CDD requirements are not explicit enough, and for PEPs there are no requirements for bureaux de change and the Latvian Post Office. To make sure that banks apply CDD requirements, the FCMC has conducted several on-site inspections over recent years and applied sanctions to non complying banks (IMF 2007).The 2007 IMF report notes that Latvia does not comply with R7, relating to correspondent banking, and recommends that Latvia remove the exemption from applying AML/CFT measures to correspondent banks from OECD countries (p. 12). However, the Latvian authorities indicate that the requirements for R7, as stipulated by Latvian law, do not apply to OECD countries because the authorities see no risks in Latvia's relationships with financial institutions from OECD countries (IMF 2007). The Latvian authorities informed the 2007 IMF assessment staff that, with the implementation of EU Directive 2005/60/EC,the exemption on OECD banks will be removed. The 2007 IMF report also indicates that the current correspondent banking requirements in Latvia addresses the FATF requirements albeit in less detail than required.

The IMF 2007 assessment notes that R9, relating to third parties and introduced business, is not applicable to Latvia, and that Latvia complies with R4, relating to financial institution secrecy/confidentiality. The assessment further notes that Latvia only partly complies with the FATF recommendations relating to record keeping, namely R10, and that Latvia does not comply with SR-VII (on wire transfer rules). With regards to R10 the IMF report notes that the Latvian rules lack detail and clarity and therefore was partly compliant. However, the report adds that, with the June 2005 improvements to the AML Law, banks are taking measures to ensure that supporting documents accompany transactions and that these documents clearly identify the beneficiary, whether they be corporate accounts, offshore companies, or third parties. The IMF report also observed that banks in Latvia were found to have closed those accounts where the customers did not provide the required information.

Latvia largely complies with R11 and partly complies with R21 dealing with monitoring of transactions and relationships (IMF 2007, pp. 12-13). With regards to R21, Latvia does not have any specific requirements for countries that do not comply with FATF requirements. On the other hand, Latvia largely complies with R13 regarding suspicious transaction reporting (STR), complies with R14 and R19, relating to other forms of reporting (IMF 2007). The 2007 IMF report notes that Latvia only partly complies with R25 (on guidelines and feedback) and SR-IV (on suspicious transaction reporting relating to the financing of terrorism). According to the IMF, on SR-IV, the Latvian reporting requirements on financing of terrorism is incomplete and not explicit enough.

According to the IMF's 2007 report, Latvia largely complies with R15 on internal controls, compliance, and audit, and partially complies with R22 since Latvia has no specific requirements for branches of subsidiaries of financial institution in countries that do not comply with FATF requirements Latvia only partly complies on R18, dealing with shell banks, according to the IMF's 2007 report. However, the report also notes that there is no indication that a shell bank will be set up in Latvia. The report also states that Latvia largely complies with R23, R29, R30 and R32, relating to the supervisory and oversight system, and partly complies with R17 and R25, relating to FATF requirements on sanctions and guidelines and feedback. With regards to R17 (on sanctions) the 2007 IMF report gave Latvia a partly compliant rating because sanctions were not universally applied to Designated non-Financial Business and Professions (DNFBPs) which are not relevant to this Principle.

On SR-VI, the IMF 2007 report indicates that "remittance services are generally adequately monitored and supervised when they are provided by banks and electronic money institutions" (p. 8), the Latvian Post Office is not supervised for AML/CFT compliance of its money transfer business and therefore SR-VI on money or value transfer services is rated as partly compliant.

3. Preventive Measures - Designated non-Financial Business and Professions

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The IMF 2007 report notes that "there are significant gaps in the legal framework for Designated non-Financial Businesses and Professions (DNFBPs), with the categories subject to the AML Law's requirements for preventive measures being too narrow, leaving out some parties who should be covered and restricting the circumstances in which the requirements apply to others" (p. 8). However, the report also states that the Latvian authorities are aware of this and are in the midst of addressing the issue. The IMF report indicates that Latvia only partly complies with R12, dealing with CDD and record keeping. and does not comply with R16, dealing with STRs. The IMF assigns a level of no compliance for R16 because it deemed the legal framework for STRs to be too narrow for DNFBPs and does not cover all categories of professions, such as independent lawyers and independent accountants.

The 2007 IMF report judged Latvia compliant with R20 relating to other non-financial businesses and professions according. The report noted that Latvia partially complies with R24 and R25 on regulation, supervision, and monitoring of DNFBPs and recommends that Latvia designate a supervisory authority for each category of DNFBP.

The U.S. DoS 2007 report notes that, according to Latvian law, the following entities are obligated to report suspicious activities: organizers and holders of lotteries and gambling enterprises; companies engaged in foreign currency exchange; and individuals and companies who perform professional activities and services associated with financial transactions (money transfer services, tax consultants, auditors, auditing companies, notaries, attorneys, real estate companies, art dealers, and commodities traders).

4. Legal Person and Arrangements & Non-Profit Organizations

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The IMF's 2007 report judges Latvia to be compliant with SR-VIII relating to non-profit organizations (IMF 2007) but does not comply with R33 relating to legal persons' access to beneficial ownership and control information. The report, however, indicates that, in Latvia, legal persons are subject to a registration system but that the arrangements to verify registration details are weak and need to be strengthened. The IMF report further points out that this issue would not have been a serious concern prior to 2004, as the dematerialization of bearer shares was required, but subsequent to 2004 bearer shares are being issued again, thus increasing the probability of money laundering abuses. R34 is not applicable to Latvia.

The Control Service, Latvia's Financial Intelligence Unit, has not detected any cases of charitable or nonprofit entities used as conduits for terrorism financing in Latvia (U.S. DoS 2007).

5. National and International Co-operation

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Latvia largely complies with R31 and R32 dealing with national co-operation and coordination (IMF 2007). Cooperation on AML/CFT issues between domestic agencies in Latvia functions well, according to the IMF's 2007 report, and there is an AML Council that coordinates matters between these agencies. Latvia has provision for the FIU to exchange information with its foreign counterparts and a 2007 U.S. Department of State (DoS) report indicates that Latvia has signed multilateral agreements with several European Union (EU) countries to automatically exchange information with the EU Financial Intelligence Units using FIU.NET. The Control Service (the FIU) is also a member of the Egmont Group, which allows it to access the Egmont Secure Web in order to exchange information that can help prevent terrorist financing (FCMC 2006). The FCMC also cooperates with foreign financial and capital market supervision authorities, according to the 2007 IMF report.

The 2007 IMF report indicates that Latvia largely complies with R35, regarding international conventions, and also largely complies with SR-I, regarding the ratification and implementation of United Nations (UN) instruments on the suppression of the financing of terrorism. The 2007 U.S. DoS report notes that Latvia is a party to several UN bodies addressing AML measure, including the UN International Convention for the Suppression of the Financing of Terrorism and eleven other multilateral counterterrorism conventions. The country is also a party to the 1988 UN Drug Convention, the UN Convention against Transnational Organized Crime, and the UN Convention against Corruption. In addition, the Latvian government has initiated a number of measures aimed at combating the financing of terrorism, including applying sanctions imposed by United Nations Security Council Resolution (UNSCR) 1267 (U.S. DoS 2007).

The 2007 IMF report notes that while Latvia complies with R36 on mutual legal assistance (MLA), partially complies with R38 on MLA on confiscation and freezing and SR-V on international cooperation on confiscation and freezing. The IMF reports that confiscation rules for MLA and cooperation with foreign authorities lacks clarity. Latvia complies with FATF recommendations on extradition, namely R37 and R39. The report also notes that Latvia largely complies with R40 relating to other forms of cooperation.