Restrictions of servicing of shell companies in Latvian banks

Restrictions of servicing of shell companies in Latvian banks

On 26 April 2018 Seim of Latvia has approved an Amendment to Law on the Prevention of Money Laundering and Terrorism Financing in second reading (the Amendment). The Amendment will enter into force after being published officially.

The main change is the prohibition of servicing of some shell companies in all Latvian financial institutions, including banks, insurance organizations, electronic money institutions, brokerage companies, etc. The prohibitions will not embrace all shell companies, but only those that correspond to the characteristics numbered in the Amendment. In accordance with the Section 15 Subsection 1 those characteristics are the following:

a) absence of the affiliation of a legal person to an actual economic activity and the operation of a legal person forms a minor economic value or no economic value at all, and the financial institution has no documentary information at its disposal that would prove the opposite;

b) laws and regulations of the country where the legal person is registered do not provide for an obligation to prepare and submit financial statements for its activities to the supervisory institutions of the relevant state, including the annual financial statements;

c) the legal person has no place (premises) for the performance of economic activity in the country where the relevant legal person is registered.

The prohibition will cover only those shell companies that correspond to characteristics “a” and “b” of the Section 15 Subsection 1 simultaneously. In accordance with Section 21.1 Subsection 1 all financial institutions in Latvia are not entitled to maintain permanent servicing of such shell companies, as well as enter into one-time transactions with them.

Most frequently such characteristics may correspond to offshore companies from such jurisdictions as British Virgin Islands, Belize and Seychelles. In these jurisdictions there is no legislative requirement to submit financial statements to any institutions. If any legal entity incorporated in such jurisdictions is not actually active the financial institutions in Latvia will have to qualify them as a shell company.

All financial institutions that previously serviced such shell companies must inform them about the termination of servicing in 14 days after the date when the Amendment enters into force. The servicing itself shall be terminated in 60 days after the date when the Amendment enters into force.

The Amendment will be effective after being published in the Official Gazette of Latvia. It is expected that it will take place not later than on 15 May 2018.

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