High-risk countries

High-risk third countries and jurisdictions of increased risk

Financial institutions of Latvia and other reporting entities must take geographical risks into account, among other things, when developing internal control systems and conducting customer due dilligence. The assessment of geographical risks is an essential factor to protect not only the domestic, but also the international financial system from significant risks related to money laundering (hereinafter referred to as ML), terrorism and proliferation financing (hereinafter referred to as TF/PF), which are specific to the identified countries and territories.

As a member of the European Union (hereinafter - EU), Latvia complies with the recommendations set by the EU and other international organizations for the fight against ML/TF/PF.

If significant deficiencies are found in the AML/CFT/CPF systems of the countries and they are unable or unwilling to eliminate the identified deficiencies by improving the financial, supervisory and law enforcement system in accordance with international standards, they are included in the list of high-risk or enhanced supervision countries with which financial cooperation is difficult, is not recommended or even prohibited.

The Financial Intelligence Unit (hereinafter – FIU) regularly collects information on high-risk countries and informs the reporting entities about it. The collected information is evaluated through research, review of typologies, as well as by conducting detailed ML/TF/PF risk assessment for 2020. – 2022. (hereinafter – NRA 2023) analysis.

NRA 2023 uses several lists of high-risk countries[1], depending on the purpose of their use, where in Annex No. 3 lists five countries, structured according to the regulations of the Cabinet of Ministers and the lists defined by the European Commission and FATF.

In Latvian legal acts, the terms "high-risk third country" or "jurisdictions of increased risk" are used in relation to such countries. According to Section 1, (12.1) of the AML/CFT/CPF Law, high-risk third countries are countries or territories where, according to the assessment of international organizations, there is no effective AML/CFT/CPF prevention system, including countries or territories that pose significant threats to the EU financial system.

High-risk third countries include:

1. In the list created by the European Commission with third countries that do not adequately combat ML and TF;

2. The Financial Action Task Force lists of high-risk (FATF High-risk jurisdictions) and increased monitoring (FATF Jurisdictions under Increased Monitoring) countries.

However, Section (11) Clause 1 (3) point 2 of the AML/CFT/CPF Law provides an explanation of the jurisdiction of increased risk, namely:

a) high-risk third country,

b) a country or territory where there is a high-risk of corruption,

c) a country or territory in which there is a high level of criminal offenses that may lead to criminal proceeds,

d) country and territory against which the United Nations, the United States of America or the EU have imposed financial or civil restrictions,

e) a country or territory that provides financing or support for terrorist activities or on the territory of which national or international organizations recognized by the Cabinet of Ministers operate, which have compiled lists of persons suspected of involvement in terrorist activities or the manufacture, storage, transfer, use of weapons of mass destruction or dissemination, designated terrorist organizations,

f) a country or territory that has refused to cooperate with international organizations in the field of ML/TF/PF prevention.

Reporting entities of the AML/CFT/CPF Law must comply with the following lists of "high-risk third countries" and "jurisdictions of increased risk" when conducting customer due diligence:

1. The European Commission's list of third countries that are insufficiently combating ML and TF;
2. The FATF determined High-risk Jurisdictions and FATF Jurisdictions under Increased Monitoring;
3. Countries with a high level of corruption identified in the International Corruption Perceptions Index;
4. The countries specified in the legal acts of the Republic of Latvia [1].

In the context of geographic risk analysis, it would be advisable to evaluate transactions with those countries and territories that are geographically close to those countries that are associated with terrorism and/or proliferation.

Compilation of lists:

• FATF list of High-Risk Jurisdictions subject to a Call for Action
• FATF list of Jurisdictions under Increased Monitoring
• EU list of high risk third countries 
• EU list of tax non-cooperative jurisdictions
• Consolidated list of persons, groups and entities subject to EU financial sanctions
• EU sanctions map
• TF list. Countries where significant international terrorist groups operate (paragraph 66)

Countries and jurisdictions subject to high-risk and enhanced supervision of the FATF

FATF or its regional bodies (for example, MONEYVAL) carry out an assessment of countries' compliance with internationally recognized ML/TF/PF prevention standards.

40 FATF Recommendations

In addition to the compliance of the legal act of country, the ability of the country to effectively apply the specified legal acts in practice is also evaluated. Based on the results of the assessments, the FATF not only identifies countries and jurisdictions with strategic deficiencies in AML/CFT/CPF systems, but also actively cooperates with countries to help them eliminate identified deficiencies and mitigate risks to the international financial system.

The FATF has established and maintains two lists:

1. List of high-risk jurisdictions
2. Enhanced surveillance list 

The European Commission's list of high-risk third countries

On February 7, 2024, the European Commission adopted a regulation on high-risk third countries that do not adequately combat ML/.

• Delegated Regulation of the European Commission 
• Information on the EU's policy on high-risk third countries
• EU list of low tax or no tax countries
• EU list of tax non-cooperative jurisdictions

List of high-risk countries or territories in context of TF/PF, Sanctions violation risk

In management of sanctions risks, in order to prevent violations of sanctions and TF/PF, it is essential to identify and assess geographical risks related to the territory or country against which sanctions are imposed. Countries and territories against which sanctions have been imposed are considered to have an increased risk of sanctions violation and circumvention.

Information on EU sanctions and sanctions adopted by the EU from the UN against specific countries and thematic sanctions regimes can be found on the EU sanctions map, where you can search by specific country or territory.

Currently 10 UN sanctions regimes are in force with purpose to support the political resolution of conflicts, combating TF/PF. In total, the EU has more than 40 different sanctions regimes in place, including regimes adopted by the EU from the UN^[1].All legal acts issued by the EU, including sanctions regulations, are published in the Official Journal of the EU and available on the official EU website. Information on UN sanctions lists is available in the UN sanctions search engine.

It should be noted that a common typology in sanction circumvention is to use neighboring countries of countries or territories subject to sanctions and other countries that do not impose sanctions against the relevant country or that have not implemented an effective system for ensuring the enforcement of sanctions. Therefore, countries that are known to be used to circumvent sanctions are also countries with an increased sanction risk. Information about the countries that are used to circumvent the sanctions imposed on Russia and Belarus, including, is available in the methodological material of the FIU "Indicators of Sectoral and Targeted Financial Sanction Evasion (2024)" (points 2.7 - 2.12, point 3.29). It should be noted that methods of circumventing sanctions are changing and new countries may be used to circumvent sanctions.

The sanctions imposed individually by the UN, the EU and individual countries in the fight against TF are most often determined in the form of targeted financial sanctions, thus providing for the freezing of funds and economic resources of terrorist organizations and persons associated with terrorism and establishing a ban on making funds and economic resources available to such persons. The UN Security Council has adopted several resolutions that provide for the freezing of financial assets, travel bans and arms embargoes on individuals and organizations linked to terrorism, such as Al-Qaeda and Daesh (ISIS). Information about the activities of significant international terrorist groups is available in the methodological material of the FIU "Guidelines for the Prevention of Terrorism and Proliferation Financing" (paragraph 66).

In relation to the PF, North Korea is subject to EU and UN sanctions, while Iran is only subject to EU sanctions. Sanctions regimes include both targeted financial sanctions and sectoral sanctions, which prohibit the import, export and impose other restrictions of certain goods and services.

At the same time, it should be taken into account that countries and persons subject to sanctions carry out illegal activities in order to avoid sanctions, i.e. circumvent sanctions. For example, legal entities registered in other jurisdictions are involved in transactions, the beneficial owners, final recipients of the goods are hidden by using legal entities that have the characteristics of shell arrangements, the route of goods delivery is artificially extended, etc. In order to help the reporting entities and others to understand and identify TF/PF risks, the FIU, in cooperation with the State Security Service, has developed the 

Guidelines for the Prevention of Terrorism and Proliferation Financing

Indicators of circumvention of sanctions imposed against Russia

Furthermore, the FIU points out that current information on the implementation of international and national sanctions is available on the FIU website: https://sankcijas.fid.gov.lv/