A Latvian regulator has penalized a home country bank 2.2 million euros, or $1.9 million, for “serious” financial crime compliance deficiencies, including failing to query customers to determine risk or source of funds, poor transaction monitoring systems and not following up on large, suspicious, out-of-scope transactions.

The Board of the Financial and Capital Market Commission (FCMC) recently levied the fine on the joint stock company LPB Bank, which provides a range of banking products and services primarily for private and corporate clients in Latvia, the EU and internationally. In its last full year financials, covering 2017, the bank had assets of 234.5 million euros, up from 204.7 million euros in 2016.

The regulator is requiring the bank to create and follow an action plan to improve the identified gaps and engage an independent third-party consultant to review the remediation and scour for missed controls or instances of suspicious activity that were never reported. To read the full report, click here.

The penalty occurs as Latvia is under enormous pressure from internal and external anti-money laundering (AML) watchdogs for being linked to several high-profile investigations into illicit financial flows, many originating from Russia.

Domestically, regulators and authorities have in recent months sanctioned several other banks for a range of AML failings while the U.S. named and shamed a Latvian bank, effectively forcing U.S. banks to cut formal ties with the operation – and rethink all operations with the country itself.

More broadly, banks in Denmark, the Netherlands, France and others have also been the subject of sanctions and penalties for AML failures, in some cases allowing billions of dollars in suspicious funds from high-risk regions and absorbing record fine figures in the hundreds of millions of dollars.

The Latvian government is also facing a crisis of confidence at the very heart of agencies that should be setting the tone for compliance in the banking sector.

To wit, authorities have charged the country’s central bank chief with bribery. Further, a lawyer tasked with liquidating the bank that was accused of bribing him was gunned down, according to media reports.

In the case of LPB, the bank had failed to set up its internal control systems appropriate to be in line with the “operational risks that would ensure efficient compliance with regulatory provisions,” according to the order, including that the bank failed to:

  • Ø  Document the manner how the beneficiary of customer exercised utmost control over the company and benefitted from the economic activities of the customer;
  • Ø  Timely obtain documents to verify the origin of the funds in the customer accounts, and whether the transaction volumes were proportionate to the amount of the funds received;
  • Ø  Timely ensure customer due diligence and documentation of results, as well as conclusions in the customer cases were incomplete;
  • Ø  Document a reasoned judgement regarding the activities of a group of connected clients, including legal and economic substance of intra-group transactions;
  • Ø  Give sufficient weight to the unusually large, complex, inter-related transactions that have no apparent economic or visible lawful purpose, as well as failed to assess transactions with major cooperation partners and adequately document conclusions of due diligence, failed to timely obtain documents supporting customer business activities, failed to assess compliance of the business activities with the declared activities.

Statement-making penalty?

The FCMC is hoping the penalty makes a statement to other banks to more rigorously take their AML duties seriously.

“Our decision is yet another sign that we are closely following how this area in the banking sector has been brought to order,” FCMC Chairman Pēters Putniņš said in a statement. “Other market participants should bear in mind that such deficiencies and system weaknesses are not permitted in any of Latvia’s banks.”

Part of the reason for the size of the penalty is that the regulator identified failings over multiple exam cycles that were not adequately addressed.

The FCMC had previously imposed sanctions on the bank for AML issues July 2017, eventually receiving a formal administrative agreement. After the deadline to correct the compliance problems, the regulator reviewed the bank again and “established that the Bank’s internal control systems in the AML/CTF had still failed to adequately meet provisions of the external and internal regulatory provisions.”

In tandem, the regulator specifically cited A. Kalveršs, a board member responsible for the AML program, by seeking the officer’s dismissal from the bank and the compliance field along with a formal warning.

“Of course, it annoys us as a banking regulator that irregularities detected in the Bank have been already identified on several occasions and this has been continuous non-compliance, therefore the penalty is adequate to what we have established,” the regulator said in a statement.

“I would like to emphasize that we will continue performing similar checks and other supervisory activities to ensure further development of the Latvian financial sector in line with the government’s instructions and the management of the change in the financial sector pursuant to regulatory requirements.”

The penalty against LPB is a stark counterpoint to how seemingly committed the bank is in its AML and sanctions duties on paper.

On its homepage, the bank goes into great detail about its AML requirements and that customers should prepare themselves to answer detailed questions about their source of funds, the purpose of opening the account and expected financial throughput and, if a corporate, provide data about beneficial owners.

In parallel, the bank devotes pages upon pages to AML and sanctions controls in its quarterly and annual reports, specifically parsing out financial crime into a plethora of risk categories.

“Anti-money laundering and terrorism financing prevention continues being hot topic in Latvia also in 2017, resulting in increased legal requirements in this area,” the LPB stated in its annual report.

The bank stated it has strengthened its AML program to both EU and U.S. standards and made “significant investments” in financial crime compliance through stronger controls, an upgraded transaction monitoring system, and two staffers who achieved an industry certification.

Latvia under fire, domestically, internationally

Other Latvian banks have also come under withering fire by Latvian and U.S. regulatory bodies.

At least a half dozen other Latvian banks have been hit with formal enforcement actions in their home country.

But perhaps the most damaging action against the country, bringing the harshest reputation harm, came from the United States.

In February, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) unsheathed a rare and powerful weapon against a Latvian bank the bureau stated had “institutionalized money laundering,” actively thwarted financial crime compliance programs and sought out and profited from dealings with organized criminal groups, terror cells and rogue regimes.

The “notice of proposed rulemaking” to designate ABLV Bank, Latvia’s third-largest by assets, would effectively cut the institution off from the U.S. financial system. To read the full action, click here.

If finalized, the ruling would require banks subject to U.S. AML rules to “prohibit the opening or maintaining of a correspondent account in the United States for, or on behalf of, ABLV Bank.”

The authority for FinCEN to designate an institution as a “primary money laundering concern” is granted under section 311 of the USA Patriot Act. FinCEN has only used 311 roughly two dozen times against institutions and regions.

The bank had “institutionalized money laundering as a pillar of the bank’s business practices,” according to FinCEN in its notice of proposed rulemaking. The bank allowed employees to “orchestrate” money laundering schemes, including from high-risk regions, shell companies and involving corrupt politically-exposed persons (PEPs).

The bank’s lax policies made it “attractive to a range of illicit actors engaged in organized crime, weapons proliferation, corruption, and sanctions evasion,” involving regions including North Korea, Russia and Ukraine.

Latvia responds with AML action plan

The U.S. action has embarrassed many government officials, with Latvia last month crafting a financial crime “action plan” prove to AML oversight body, Moneyval, it has addressed identified concerns and will strengthen processes to detect and deter illicit funds flowing through its borders.

The plan has several key focal points, including:

·         Strengthening risk-based supervision and introducing preventive measures, including management of a controlled, transparent and professional liquidation process of ABLV Bank;

·         Facilitating efficient exchange of information to contribute to ML investigation, harmonization of approaches and guidelines;

·         Providing supervisory, controlling and law enforcement institutions with adequate human resources by enhancing their analytical capability and capacity;

·         Introducing IT solutions for timely and efficient data management and sharing among institutions;

·         Improving the targeted financial sanctions system by developing a common understanding among cooperation partners about this system and the need for its operation.

Under the plan, Latvia will “strengthen the legal framework for international sanctions enforcement, to make it easier to punish institutions who try to evade their obligations,” according to a statement.

“Latvia will also ensure greater cooperation among intelligence institutions to identify potential violations and commit further resources to allow law enforcement institutions to investigate cases thoroughly and promptly.”