A Common Understanding and Risk Mitigating Measures Have Substantially Reduced Opportunities to Use the Latvian Financial System for Criminal Activity

The NRA 2023 is a document of national significance that sets the framework for the preparation of ML/TF/PF measures to mitigate risks, serves as a basis for developing financial crime policies, and helps determine future priority activities for the prevention and combating of ML/TF/PF.

“The NRA 2023 shows that the overhaul of the financial sector has not only improved the capabilities and work of the responsible authorities in the field of financial crimes, but also ensured a targeted and effective crime prevention policy, as well as a reduction of ML/TF/PF risks and vulnerabilities. Equally important is the level of awareness of these risks. A better common understanding of risks, together with the introduction of risk-mitigating measures has significantly limited the possibilities of using the Latvian financial system to commit financial crimes. The NRA 2023 clearly demonstrates our shared vision of risks, their management and importance," says Toms Platacis, the Head of FIU.

During the reporting period, the prevention and combating of money laundering (AML) continued to be a top priority for the government, monitoring and control institutions, law enforcement agencies, prosecutor's office, and courts. Judicial practice in cases of criminally obtained property continued to develop, strengthening the involved parties’ understanding of the nuances of the asset recovery and the possibilities of applying legal norms, also the competences were improved and the number of considered ML cases increased. The Court of Economic Affairs was established, which significantly facilitated the examination of ML cases and processes. At the same time, a high level of inter-institutional cooperation has been preserved, both at the national and international level.

Key Findings from the NRA 2023 Report

The previous National Risk Assessments identified the risk of ML/TF/PF, which stems from Latvia's historical status as a regional financial center, while the NRA 2023 concluded that it no longer poses a significant threat. The most significant threats to AML are currently domestic crimes, including the illicit economy and related crimes - tax crimes, illegal circulation of excise goods and narcotics, smuggling and other crimes.

The NRA 2023 also concluded that the cooperation of the competent institutions in the ML/TF/PF prevention - based on structured coordination mechanisms, as well as the active use of international cooperation - has made significantly increased the effectiveness of AML prevention. Better cooperation has ensured that Latvia is able to more effectively stop the flow of criminally obtained funds, investigate complex schemes and confiscate proceeds of crime.

The risk level of breaching and evading financial restrictions or financial sanctions is medium. The NRA 2023 concluded that the threat of breaching financial restrictions is created not only by the subjects of sanctions, whose interests are to evade the restrictions set out in the sanctions, but also by people who are not subjects of sanctions, but who, for profit or other purposes, may try to conduct transactions that are contrary to financial sanctions.

On the other hand, the risk level of breaching and evading of sectoral sanctions, including bans on import and export of goods, is between medium high and high. Although the analysis of payment flows to and from countries that could potentially be used to evade sanctions showed a significant drop in payments to and from Russia. However, a trend was observed in the second quarter of 2022, of heightened payment flows to countries such as Kazakhstan, Azerbaijan, Turkey, Armenia, and China.

The NRA 2023 has also identified new risks that require appropriate risk mitigation measures. One such risk is related to the rapidly increasing number of Latvian individuals and legal entities that have opened accounts in foreign financial institutions, including financial institutions registered in Lithuania. This creates new challenges in preventing and combating ML/TF/PF, especially regarding the ML threat posed by predicate offences.

Russia's war in Ukraine and the subsequent European Union sanctions have also significantly increased the burden on those Latvian institutions that are responsible for the implementation of these sanctions, the detection of their violations, and the prosecution of violators. This can affect the effective combating of ML and the predicate offenses that pose the greatest ML threats, i.e., tax offences, illicit traffic of excise goods and narcotics, including smuggling, and evasion of cash declarations on the Latvian borders.

ML/TF/PF in Latvia have increased due to services provided to Latvian residents by   virtual asset service providers registered in countries with a weak ML/TF/PF prevention system. It should be noted that the vulnerability is increased by the fact that Latvian laws and regulations do not regulate the activity of foreign registered virtual currency service providers in Latvia. At the same time, it should be emphasized that the understanding and capacity of the competent authorities, law enforcement agencies, prosecutor's office and the court to work with cases involving transactions in the environment of virtual currencies has significantly improved.

It is also important to note that the level of terrorism and proliferation financing risk has remained unchanged from the previous reporting period - low and medium low.

Further steps defined in the NRA 2023

In accordance with the identified risks, the NRA 2023 also sets out a proposal for measures to be taken to successfully implement the prevention and combating of these risks. The NRA 2023 defines 100 ML/TF/PF risk mitigation measures to be implemented in the next reporting period. Some of them are:

• The development of the National Strategy for the Prevention and Combating of Financial crimes, which would help coordinate the cooperation of the state administration and the private sector for more effective prevention and combating of financial crimes. The National Strategy would promote the rule of law, Latvia's economic growth and investment environment, thereby strengthening both Latvia's internal and external security. It is important to emphasize that this measure has already been implemented, and on November 15 the strategy was presented at the Financial Sector Development Board;
• The organization of education events for the competent authorities on specific ML/TF/PF risks;
• The harmonization and centralization of the sanctions compliance system, to increase of effectiveness of sanctions and promote a unified approach at the level of the EU member states.
• The strengthening of control of cash movement and the capacity of the State Revenue Service on the internal and external borders of Latvia, including also capacity to control and investigate sectoral sanctions;
• Evaluate de-risking trends of the financial sector at the level of the entire ML/TF/PF prevention system and evaluate need to develop a de-risking strategy.

The NRA 2023 is an inter-institutional document. All competent institutions have participated in its development - the Ministry of Foreign Affairs, the Ministry of Finance, the Ministry of the Interior, the Ministry of Justice, the FIU Latvia, The Register of Enterprises, the Corruption Prevention and Combating Bureau, the State Revenue Service, the Latvian State Security Office, The Office of Internal Security, the State Police, the State Border Guard, the Prosecutor's Office, as well as supervisory and control institutions and private sector participants. It evaluates the effectiveness of the existing ML/TF/PF prevention system, identifies threats, vulnerability factors, risks, and their consequences, defines shortcomings and makes recommendations for improvement.

National Risk Assessment for Money Laundering and Terrorism and Proliferation Financing covering the 2020-2022 period is available in Latvian on the FIU Latvia website.