Finance sector’s development council supports prohibition of shell companies
On Wednesday, 21 March, Latvian Prime Minister Māris Kučinskis’ managed Finance Sector’s Development Council supported initiative on prohibiting shell companies, as confirmed by the prime minister.
«We have reached an agreement on prohibition of shell companies in Latvia,» said Kučinskis, adding that the government plans to review this matter on 3 April, and the Saeima – on 8 April.
Finance Minister Dana Reizniece-Ozola says that the goal behind prohibition of shell companies is making sure Latvia’s financial sector is stable, sustainable, secure and able to offer services that provide support for the national economy, not create risks. ‘We have agreed on a plan of actions. A total of 22 proposals submitted by the regulator, finance ministry, Association of Latvian Commercial Banks and non-government organizations, the main goal of which is reducing the proportion of risky clients in the country’s banking sector,’ she said.
The minister is also confident that new measures will help sort out the financial sector.
At the same time, Pēters Putniņš, head of the Finance and Capital Market Committee, mentioned that banks have been ten days to come up with strategic plans on future operations, specifically how they intend to cover losses caused by rejection of shell companies. «We expect this process to be relatively rapid. Because of that, it is highly important for stability’s sake to give banks some time to think things over,» he said. FCMC had previously reported that among clients of Latvian banks are 26,081 shell companies, including two based in Latvia. The proportion of shell companies in all Latvian banks is 36.57%. Their proportion in the foreign clients segment is 44.5%. In total, Latvian banks have approximately 2.6 million clients.
Because of the recent developments and the overall situation with Latvia’s financial sector, Association of Latvian Commercial Banks has asked the government to add changes to existing regulations.
The association fully supports introduction of restrictions and control measures in regards to shell companies. ‘The association proposes that in situations when shell companies fit all three criteria detailed in the Law on the Prevention of Money Laundering and Terrorism Financing, cooperation with them should be prohibited by law. We believe such a solution would help effectively reduce and prevent the presence of unwanted clients in Latvia’s financial system and clearly voice Latvia’s position,’ as informed by the association.
At the same time, the association adds that a proposal has been voiced in regards to introduction of a special fee for servicing shell companies. In this case, however, it is important to make sure such a fee does not create an impression of it being permission to act based on the situation.
«We believe adding such a fee without other restrictions on cooperation with shell companies would only create problems for Latvia’s international reputation. According to our information, such a tool for reducing systemic risks is not internationally accepted. Working on solutions, we ask officials to consider the possibility of people trying to circumvent restrictions. We have to be careful with risk coefficient or indication of jurisdiction in law/regulation, which is something that is easy to circumvent. What is important is why shell companies are formed and what they do. Estonian and Latvian companies can also serve as ‘shells’ used for money laundering and financial crimes. Application of a fee based on a legal principle could potentially contribute to a de facto increase of registration of shell companies in Latvia’s Enterprises Register. We believe a more effective measure would be a full prohibition on cooperation with shell companies that fit all three criteria of the Law on the Prevention of Money Laundering and Terrorism Financing. This would require law amendments,» the association notes.