HOW HAS LATVIA’S RISK PROFILE CHANGED?
Just a few years ago, Latvia was considered a regional financial centre with a significant share of non-resident clients in the banking sector. Now the situation has changed radically:
- Non-resident deposits from countries outside the EU have decreased by approximately 87%; while
- Transactions involving ultimate beneficial owners (UBO) from high-risk jurisdictions - by 95%;
- Transactions with shell companies have significantly decreased;
- Risks related to international money laundering schemes have decreased.
This means that Latvia’s financial system is now much more oriented towards the local and regional economy. If previously the main risks were linked to the inflow of foreign criminal funds then now they arise from the local economy such as the shadow economy, tax crimes and excise goods smuggling, fraud and corruption. The risk of terrorist financing is assessed as low. Read the full report on the FIU website here.
FINANCIAL SECTOR: STRONGER SUPERVISION, LOWER RISK
Latvijas Banka (after the integration of the FCMC) has significantly strengthened supervision especially in the banking sector. The report concludes that:
- In the banking sector risk has been significantly reduced by applying a risk-based approach;
- Supervisory sanctions are effective and deterrent including the application of corrective measures;
- Customer due diligence (CDD) practices have improved significantly.
However, in other financial sectors (excluding banks and VASPs) the intensity of supervision has been lower although the overall level of compliance has increased.
Businesses should take into account that financial institutions are increasingly assessing customer risks more precisely. State authorities are paying greater attention to tax discipline, cash circulation, actual economic activity and the economic justification of transactions.
WHAT DOES THIS EVALUATION MEAN FOR ENTREPRENEURS?
Entrepreneurs should ensure the accuracy of UBO data, the ownership structure must be clear and documented and it must be possible to justify the role of any foreign owner. In daily business operations it is important to document the origin of funds, ensure clear accounting and avoid partners with unclear reputations.
👉 Implement an internal risk assessment. Even a small company can prepare a simple document identifying its key risks, setting out CDD procedures and describing transaction control mechanisms.
👉 Cooperate with reliable and verified partners.
👉 Ensure the ownership structure is up to date. Avoid unjustified intermediary companies, unclear offshore elements and complex chains without business logic.
👉 Comply with the sanctions regime. For several years there has been a significant increase in the emphasis on sanctions compliance. Latvia has established a centralised sanctions supervision mechanism which means mandatory screening of business partners, compliance with export controls and risk assessment when cooperating with partners in high-risk jurisdictions. Even indirect cooperation with a sanctioned person can lead to serious consequences.
According to the latest international evaluation Latvia achieves a high or substantial level of effectiveness in most AML/CFT areas. This means that the financial system is more stable, the country’s reputational risk has decreased and the investment environment is becoming more predictable but the requirements for entrepreneurs are stricter than before.
Latvia’s financial environment has become more structured, more transparent and more professional. For entrepreneurs this means more documentation and a more careful approach to risk management but in the long term it promotes fair competition, a stable banking system and international trust. Entrepreneurs are encouraged not to see this environment as an obstacle but to use it as a competitive advantage.
High-quality accounting, a transparent ownership structure and documented internal controls are becoming a competitive advantage. If you are planning to establish a company in Latvia or want to organise your accounting, contact us and we will help both with company formation and full-cycle accounting services.
