DEVELOPMENTS IN ANTI-MONEY LAUNDERING EFFORT

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000249

SIPDIS

E.O. 12958: DECL: 05/05/2019
TAGS: PGOV KCOR LG
SUBJECT: DEVELOPMENTS IN ANTI-MONEY LAUNDERING EFFORT

REF: A. 05 RIGA 313 B. 08 RIGA 425 C. 08 RIGA 446 D.
RIGA 690

Classified By: Charge d'Affaires a.i. Bruce Rogers for reason 1.4 (b)


1. (C) Summary: Since the 2005 U.S. Patriot Act actions
against two Latvian banks the government and banking industry
have worked hard to regain international trust in that
sector. Although there is more work to do, new Anti-Money
Laundering (AML) laws are in place, and the Financial
Intelligence Unit (FIU) is receiving fewer, but more useful,
suspicious transaction reports (STRs) from banks. Although
the economic downturn has been devastating in Latvia, the
Financial and Capital Market Commission (FCMC) and the
Association of Latvian Commercial Banks (ALCB) agree that
banks' AML systems have not been adversely affected. Parex
Bank, always a cause for concern, is under tight government
control and is in less of a position now to be a money
laundering concern with the help of regulatory scrutiny and
new investment partners. It is important to maintain
vigilance in dealing with the banking sector in Latvia and
not to ignore the potential for criminals to utilize it for
their own ends, but it is equally important to recognize the
improvements that the sector has made. End Summary.


2. (C) In 2005, U.S. Patriot Act Section 311 actions against
two Latvian banks cast a shadow of doubt and concern over the
Latvian banking industry. (ref a) Since that time,
government regulators and business associations have launched
a major campaign to reestablish Latvia as a financial center
and to attempt to shed their tarnished image. On May 7 post
will host a digital video conference with Treasury Deputy
Assistant Secretary Daniel Glaser. The purpose of the
meeting, to include the FIU, FCMC, ALCB and bank compliance
officers, is to discuss progress in Latvian banking
compliance with AML laws since Treasury,s banking conference
in Vilnius last October. Although there is more work to be
done, many of these changes are positive and encourage
better-functioning compliance systems that leave Latvia's
banking system less vulnerable to money laundering.

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AML and the Legislative System
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3. (C) The new AML law, fully compliant with EU standards and
known as the Law on Prevention of Money Laundering and
Terrorist Financing, was passed in August 2008 with strong
support from President Zatlers. (ref b) To ensure correct
interpretation and implementation of the law,s requirements,
the FIU quickly trained the majority of banking compliance
officers on its usage. According to the FIU and the FCMC,
banks are now able to generate fewer, but more useful STRs
based on real factors defined within the banks, internal
systems. In response to the STRs, the law gives the FIU the
power to freeze suspicious funds for a longer period of time,
allowing for appropriate investigation of transactions.


4. (C) On the regulator side, the FCMC continues to
strengthen its position. The July 2008 denial of the banking
license for the proposed new Ukrainian owners of 311 action
VEF Banka (due to the bank,s inability to identify the
source of money to purchase the bank) (ref c) highlighted the
FCMC,s willingness and ability to persevere against strong
pressure (largely from outside Latvia) to issue the license.


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Influence of the Economic Crisis on AML
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5. (C) The economic downturn has been devastating for Latvia,
but there has been a silver lining for compliance. First,
since the end of 2008 there have been fewer nonresident
deposits, reducing to some extent the potential risk commonly
associated with these accounts. According to the FIU the
most common STRs they have recently received from banks are
for tax evasion in other countries (around 65% of reports).
However, compared to last year, the number of these STRs has
declined by about one-third, and transaction amounts involved
are much lower. Second, the August 2008 timing of the AML
Law and Enhanced Customer Due Diligence Measures were key.
By the time the downturn hit, the FIU had trained most banks
on the new law and they had started to implement changes in
their systems. In most cases these compliance budgets and
personnel are still in place and banks are reporting a
smaller number but more useful STRs than in previous years.
Third, in the midst of the downturn, the FIU managed to avoid
budget cuts using the U.S. International Narcotics Control
Strategy Report II, Money Laundering and Terrorism Finance
section, as justification. The FIU is a small but important
contributor to Latvian,s AML structure and the dispensation

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from large cuts allowed them to retain staff and memberships
to international cooperation organizations such as Egmont.
To date, the FCMC has also avoided staffing cuts, in fact
increasing their number of employees, and salaries have been
reduced by a lower than average percentage.

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Parex Bank
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6. (C) Parex Bank has historically been a money laundering
concern. Although not included in the 311 measures, it was
strongly considered for review. In November 2008 the Latvian
Government took over the bank. (ref d) There was a fear that
the former owners Valery Kargins and Viktor Krasovickis, who
allegedly had ties to Russian organized crime, would be able
to regain control easily. The government has since reversed
its original decision to let Kargins and Krasovickis remain
on the bank's board. With the new 25% ownership by EBRD, and
the damning findings of a yet to be released
Price-Waterhouse-Cooper government-mandated audit (which
included an audit of AML compliance) it is highly unlikely
that Kargins and Krasovickis will be able to buy back the
bank and resume its former business model. Although the
intense scrutiny Parex is experiencing now leaves little room
for non-compliance with AML law, the FCMC remains vigilant in
its dealings with the bank. The FCMC has forwarded a case
for reprimand to the Prosecutor General, stating that, under
previous management, some non-resident accounts were excluded
from Parex,s automatic compliance monitoring system.


7. (C) Comment: Latvia's geographic position, the technical
ability of its population, and the public's complacency
toward graft and corruption make it very attractive to money
launderers and other criminals seeking to take advantage of
the banking system. But it is impossible to ignore the
attention that the Latvian government and the banking
industry have paid to cleaning up the banks and strengthening
oversight. Each major threat Latvia encounters forces them to
build internal mechanisms and, step-by-step, makes them less
open to criminal activity. As a result, it is improbable
that
banks will return to the level of naivete and laissez faire
that they allowed prior to 2005. It is important to
recognize the progress that the banking industry has made
since that time. We believe that Latvia will continue to
improve oversight, if for no other reason than that Latvia's
financial sector is one of its few competitive businesses.
End Comment
WASER