In light of the commitment of the Government to take immediate measures for strengthening the ability of Latvia to combat money laundering and the financing of terrorism, as well as to enhance the regulation for liquidation of credit institutions, the Ministry of Finance (MoF) has prepared the amendments to the Law On the Financial and Capital Market Commission (FCMC) and the Credit Institutions Law.
These draft laws are part of the 'capital repair' of the sector announced by the Prime Minister and foresee significant changes in the institutions supervising the financial sector.
“The ability of the responsible authorities to monitor and prevent money laundering, and the fight against financial and economic crime is the basis for the development of the financial system. A stable financial system, on the other hand, is a catalyst for further economic growth and investment in the nation’s economy. The financial sector of Latvia is not isolated from international developments, so we are continuing the necessary reforms to improve the functions, powers and responsibilities of the responsible control institutions as well as to exclude the possibilities for suspicious transactions. Our goal is a well-supervised and controlled financial and capital market that works in the interest of the entire society,” emphasizes the Minister of Finance, Jānis Reirs.
The need for introduction of the reform is also confirmed by the conclusions of the assessment report of the Organisation for Economic Co-operation and Development (OECD) on the effectiveness of supervision and governance of anti-money laundering and combating the financing of terrorism (AML/CFT) system of Latvia.
In order to strengthen the prevention of money laundering and financing of terrorism in the financial and capital market, the amendments to the FCMC Law include extending the purpose, functions and responsibilities of the institution. At the same time, the already existing statutory objective of the FCMC regarding prudential supervision of financial and capital market players, while ensuring financial stability has been retained.
Last summer, taking into account the possible money laundering in a number of European banks, a working group composed of representatives of the European Central Bank (ECB) Single Supervisory Mechanism, the European Supervisory Authorities and the Commission for the Prevention of Money Laundering was set up based on the call by three European Commissioners. The working group issued a report on the necessary measures to improve supervision and control in the area of AML/CFT. One of the recommendations is to improve the link between the prudential monitoring and supervision of the prevention of money laundering and financing of terrorism. Although, in accordance with the AML/CFT Law, the FCMC is already performing certain functions in the area of AML/CFT, the functions included in the FCMC Law have been complimented with a duty to supervise and control the financial and capital market players in their compliance with the requirements of the AML/CFT Law and the Law On International Sanctions and National Sanctions of the Republic of Latvia.
The amendments also provide for changes in the procedure for nomination and appointment of the FCMC Chairman of the Council and Council Members, which also set forth a time limit for the Council Members as well as stipulating that the FCMC officials and employees are not responsible for the consequences of lawful decisions incurred by the financial and capital market players and third parties. The amendments set forth that, further more, all Council Members shall be appointed by the Saeima on the recommendation of the Cabinet of Ministers. The Cabinet of Ministers shall announce an open tender for the position of the Council Member by determining the conditions and procedures for applying for the candidates as well as the procedure for selection and evaluation of the candidates.
The requirements for candidates for the position of the Chairman of the Council and Council Member are also supplemented by setting forth that the candidate for the FCMC Council Member must be a citizen of Latvia who has acquired a higher education, is fluent in Latvian and at least two foreign languages, and who has at least five years experience in the area of financial and capital markets. Likewise, the candidate must have an impeccable reputation, be competent in financial management matters and have practical experience as a manager. The candidate must also meet the requirements for access to official secrets, so amendments to the Law on Official Secrets are promoted, taking into account the link between the financial sector and national economic security issues, and the need to assess sensitive information.
The amendments to the Law on Credit Institutions, on the other hand, aim to clarify the rules governing the process of liquidation of credit institutions by improving its supervision and control of money laundering. The draft law provides that the FCMC is obliged to supervise the liquidation process, while also defining the right to obtain the information necessary for the performance of this task. The purpose of the FCMC is to promote the protection of interests of investors and depositors, and it is important that it continues to provide for protection also in the process of liquidation, as not all depositors will have received their deposits from the Deposit Guarantee Fund (deposits up to 100 thousand euros are guaranteed by the state) and will recover those only in the process of liquidation.
Likewise, the Law on Credit Institutions specifies that the liquidator of a credit institution is obliged to ensure the control of AML/CFT in accordance with the requirements of laws and regulations, and the risk inherent in the activities of the credit institution to be liquidated, including reporting to the Financial Intelligence Service (FIS) on suspicious transactions detected in the process of liquidation.
At the same time, according to the risk of money laundering and terrorist financing inherent in the credit institution, the liquidator must develop a methodology for their control in accordance with the requirements of FCMC and FIS. In the light of past experience, these amendments will ensure better cooperation between the responsible supervisory and control authorities in the process of liquidation of a bank.
In order to improve the timeliness of administrative sanctions as well as for the regime of administrative sanctions by the FCMC and the supervisory enforcement framework to be transparent, predictable and its procedure clearly accountable, authorisation has been incorporated in to the Law on Credit Institutions for the FCMC to issue regulations defining the criteria for substantial breaches of AML/CFT. The issuance of such regulations will allow a clearer understanding of the system of administrative sanctions as well as the cases in which the FCMC will approach the ECB with a proposal to withdraw the license of a credit institution. Since the withdrawal of a license within the framework of the Banking Union is within the competence of the ECB, this is one of the directions where work on the improvement of the system is continued at the level of the European Union as well.
In addition, the Government plans to review the amendments to the AML/CFT Law developed by the MoF. By means of this draft law, it is planned to implement in the legal system the so-called AML Directive 5 as well as a number of recommendations included in the Moneyval assessment report, in order to ensure compliance of the regulatory framework with the recommendations of the Financial Action Task Force (FATF). This will provide clearer requirements for customer research for collaboration with high-risk third countries and requirements applicable to in-depth customer research.
Amendments have been incorporated in the draft law in cooperation with the FIS to conceptually change the procedure of suspicious transaction reporting to the Service, as well as to abandon the concept of an unusual transaction. The amendments extend the range of subjects of law to insolvency administrators. One of the first steps to be taken in the insolvency proceedings of both individuals and legal entities is a complete inventory of documents and property of the debtors. However, no law or regulation governing insolvency provides for criteria or obligations resulting from alienation of the debtor's property in order to make sure that the origin of the property is legal. Given the functions of the administrator in the insolvency proceedings, it is proportionate and reasonable to set forth that administrators are subjects of the AML/CFT Law in order to ensure that money laundering does not take place by means of insolvency proceedings.
Amendments have been incorporated in cooperation with the Ministry of Justice and the Register of Enterprises that will grant to the Register of Enterprises greater authority to evaluate the submitted information and will facilitate timely notification of law enforcement authorities about the false information provided by companies to the Register of Enterprises. Likewise, these amendments will allow the completion of the real beneficiary disclosure process in 1740 high-risk LLCs that have still not fulfilled their statutory obligation.
All these amendments of law will further enhance the anti-money laundering system by strengthening a competitive business environment to promote sustainable growth of the national economy.