Latvian banks to stop servicing shell companies’ accounts

Latvian banks to stop servicing shell companies’ accounts 30.03.2018

In the late March 2018 the financial authorities of Latvia have announced a dramatic change in their policy in respect of so called “shell companies” (i.e. the foreign companies existing as legal entities but having no significant assets, independent business operations, etc.) that constitute a considerable part of clients of Latvian banking sector.

The change is that Latvian banks will be legally prohibited from accepting such companies as clients (opening accounts for them), as well as to continue servicing accounts of the existing clients qualified as shell companies. Actually this means compulsory and final termination of servicing offshore companies’ accounts by Latvian banks. It is expected that the proportion of non-residents serviced in Latvia should finally be reduced to around 5 per cent.

In the meantime, during the last several years a number of banks have been organizing their business model so that the mentioned category of clients did not prevail in total portfolio in order to prevent significant losses or even leaving the market in case of simultaneous refusal of such clients. However, the outflow of non-resident companies from Latvian banks is currently intensifying.

The declared purpose of the said changes is to make Latvian financial sector sustainable, predictable and generating less risk (including reputational risk).

What is a shell company?

The definition of a shell company is set forth in paragraph 15.1 of article 1 of the Law of the Latvian Republic “On prevention of laundering of criminal proceeds and financing of terrorism”: shell company is a legal entity that have at least one of the following features:

  1. a legal entity has no links with a real economic activity and generates no economic value (or such value is insignificant), and the credit institution possesses no documentary evidence of the contrary;
  2. laws of the country of incorporation of a legal entity do not require preparation and filing of financial statements with the relevant national supervising authorities;
  3. a legal entity has no place of business (premises) in the country of incorporation.

First of all, such situation may be incidental to the majority of international companies of “classic” low-tax jurisdictions (e.g. Belize, British Virgin Islands, Seychelles and others). Virtually a shell company has a meaning close to an offshore company without “substance”. At the same time, it cannot be ruled out that nominally onshore companies may also fall under the category of “shell” if their business meets the above named criteria.

The future of shell company account holders

If your non-resident company with the account opened (or planned to be opened) with any Latvian bank, falls under the definition of shell company, you should be aware of the following:

  • In the nearest time (during April 2018) the Latvian Cabinet and then Saeima (the Parliament) are going to consider the legal prohibition of servicing shell companies in the country’s credit institutions.
  • New accounts will cease to be opened approximately since 1 May 2018, while the existing clients with shell companies will be given a transition period to close their accounts and return money (the duration of such period is not yet determined, but allegedly it may last up to the end of 2018).
  • Simultaneously (already now) the holders of the existing accounts of shell companies may face delay in payments due to in-depth analysis of the nature of such payments conducted by banks in accordance with the requirements of the regulator (Financial and Capital Market Commission).

Considering the sensitivity of these measures both for banks and for customers, the Latvian banks have been proposed to develop plans of their work for the said period and recommendations to the clients who would like to continue operations through a certain bank.

Probable recommendations

In a generalized and approximate form (the specific information can only be provided by your bank) such recommendations are as follows:

  1. When choosing a jurisdiction for incorporation of a business entity and further opening an account, one should prefer the countries the laws of which provides obligatory preparation and filing of financial statements with the state authorities for a given type of companies.
  2. It is necessary to have the documents confirming the real nature of business in the country of incorporation available.
  3. If there is no documentary evidence of real business, an account holder may be required to provide information on significant assets and transactions of the company (including contracts, payment documents, bank statements) or other reliable information on business held with publicly known contractors.

Seychelles companies with special license (CSL)

One of the possible solutions that meet the new requirements to potential non-resident clients of Latvian banks, may be the use of Seychelles Special License Companies (CSL) instead of the traditionally used International Business Companies (IBC).

This type of Seychelles companies is not classified as offshore and is governed by separate legislation. Such companies have more complex registration procedure, however they have a number of advantages crucial for opening a bank account:

  • CSL must prepare and submit financial statements in the country of incorporation;
  • CSL are subject to taxation (at a 1,5% corporate income tax rate);
  • CSL may use (rent) a real office in Seychelles and operate there within the license granted and in compliance with the local laws.

The said features prevent Seychelles CSL companies from being qualified as shell companies and may, along with other factors being equal, considerably increase chances to open an account.


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