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Clampdown on shell companies

In May 2018 the amendments to the Law on the Prevention of Money Laundering and Terrorism Financing (“the Law”) came into force, which aimed to strengthen the Latvian state financial system by reducing the number of high-risk transactions with particularly high-risk customers, which are shell companies.

At present, the Law sets the characteristic features of a shell company are as follows: the absence of an actual economic activity; registration in a country whose laws do not provide an obligation to prepare and submit financial statements to the relevant national supervisory authorities; as well as the absence of a place (premises) for the performance of economic activity. The legislator assumed the first two features as the most significant ones, reflecting typical risks of money laundering and terrorism financing related to shell formations.

In practice a typical shell company is, for example, a company that does not carry out real business, does not employ employees, hides the true origin of its assets, is registered in one of the so-called offshores (low tax or duty-free countries and territories) etc.

In the light of the risks associated with shell companies, new stronger restrictions were added into the Law to cooperate with shell companies. Along with the banks registered in Latvia this prohibition applies also to credit institutions, payment institutions, electronic money institutions, investment brokerage companies and investment management companies.

Similarly, the prohibition of cooperation with shell companies also applies to tax consultants, external accountants, sworn auditors, debt collection services providers etc. In certain cases this prohibition is also applicable to sworn advocates, sworn notaries and other service providers when they provide legal assistance in relation to:

  • buying or selling of real property, shares of a commercial company capital,
  • managing their customer’s money, financial instruments and other funds,
  • opening or managing of all kinds of accounts in credit institutions or financial institutions,
  • formation and management of operations of legal entities and their investments.

The above-mentioned professionals are now under obligations to terminate business relations and refrain from occasional transactions with shell companies. Advisably, they should carefully reassess all their cooperation partners and clients. The Financial and Capital Market Commission (“FCMC”) as the supervisory authority will carry out supervision in assessing compliance with this obligation.

The information gathered by the FCMC on the fourth quarter 2017 demonstrated that the portion of turnover of loans from shell companies in Latvian credit institutions rated 27.8%. In view of this fact the latest Law amendments were passed by Saeima (the parliament) under the urgency procedure of two readings (the ordinary procedure provides for three readings).