FATF AML Deficiency List
US Dept of State Money Laundering assessment
Corruption Index (Transparency International & W.G.I.)
Latvia is not on the FATF List of Countries that have been identified as having strategic AML deficiencies
Compliance with FATF Recommendations
The latest Follow-up Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Latvia was undertaken in 2019. According to that Evaluation, Latvia was deemed Compliant for 7 and Largely Compliant for 33 of the FATF 40 Recommendations. It was also deemed Highly Effective for 0 and Substantially Effective for 1 with regard to the 11 areas of Effectiveness of its AML/CFT Regime
US Department of State Money Laundering assessment (INCSR)
Latvia was deemed a Jurisdiction of Primary Concern by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR) but has not been included since. Key Findings from the last report are as follows: -
Latvia is a regional financial center with a large number of commercial banks and a sizeable non-resident deposit base. Foreign depositors account for more than half of the 30 billion euros (approximately $33 billion) in Latvia’s banking system, which markets itself as a gateway to the European Union. Nonresident cash continues to flow across the border from neighboring Russia and other former Soviet states. The Financial and Capital Market Commission (FCMC) stated in May 2015 that the growth of nonresident deposits from Russia has remained steady despite international sanctions imposed in the spring of 2014. Nonresident deposits pose a substantial risk in that money obtained from corruption and other crimes committed outside of Latvia can be laundered inside the country. Latvia’s geographic location, large untaxed shadow economy (estimated at about 25 percent of the overall economy), and public corruption make it challenging to combat money laundering.
Officials do not consider proceeds from illegal narcotics to be a major source of laundered funds in Latvia. Authorities identify the primary sources of money laundered in Latvia as tax evasion; organized criminal activities, such as prostitution and fraud perpetrated by Russian and Latvian groups; and other forms of financial fraud. Officials also report that questionable transactions and the overall value of laundered money have remained below pre-financial crisis levels. Latvian regulatory agencies monitor financial transactions to identify instances of terrorism financing.
There is a black market for smuggled goods, primarily cigarettes, alcohol, and gasoline; however, contraband smuggling does not generate significant funds that are laundered through the official financial system.
Four special economic zones provide a variety of significant tax incentives for manufacturing, outsourcing, logistics centers, and the transshipment of goods to other free trade zones. The zones are covered by the same regulatory oversight and enterprise registration regulations that exist for other areas.
There are no international sanctions currently in force against this country.
BRIBERY & CORRUPTION
Rating (100-Good / 0-Bad)
Transparency International Corruption Index 57
World Governance Indicator – Control of Corruption 68
Corruption is a problem for businesses operating in Latvia, and demands for bribes and other irregular payments are pervasive. Close ties between public officials and businesses, the influence of private interests involved in illegal political party funding and the unethical behaviour of companies are considered competitive disadvantages for the country. Latvia's Criminal Law criminalises several forms of corruption, including active and passive bribery, gifts, conflicts of interest and influence peddling. Anti-corruption laws are not effectively implemented by the government. The government recently strengthened the independence of the country’s anti-corruption commission, established a comprehensive e-government system and centralised procurement processes, but procurement remains the sector most affected by corruption. Giving gifts to expedite or obtain administrative services is reportedly widespread, and irregular payments may also occur. For further information - GAN Integrity Business Anti-Corruption Portal
Latvia is a small, open economy with exports contributing nearly a third of GDP. Due to its geographical location, transit services are highly-developed, along with timber and wood-processing, agriculture and food products, and manufacturing of machinery and electronics industries. Corruption continues to be an impediment to attracting foreign direct investment and Latvia's low birth rate and decreasing population are major challenges to its long-term economic vitality.
Latvia's economy experienced GDP growth of more than 10% per year during 2006-07, but entered a severe recession in 2008 as a result of an unsustainable current account deficit and large debt exposure amid the softening world economy. Triggered by the collapse of the second largest bank, GDP plunged 18% in 2009. The economy has not returned to pre-crisis levels despite strong growth, especially in the export sector in 2011-14.
The IMF, EU, and other international donors provided substantial financial assistance to Latvia as part of an agreement to defend the currency's peg to the euro in exchange for the government's commitment to stringent austerity measures. The IMF/EU program successfully concluded in December 2011. The majority of companies, banks, and real estate have been privatized, although the state still holds sizable stakes in a few large enterprises, including 99.8% ownership of the Latvian national airline. Latvia officially joined the World Trade Organization in February 1999 and the EU in May 2004. Latvia joined the euro zone in 2014.
Agriculture - products:
grain, rapeseed, potatoes, vegetables; pork, poultry, milk, eggs; fish
processed foods, processed wood products, textiles, processed metals, pharmaceuticals, railroad cars, synthetic fibres, electronics
Exports - commodities:
foodstuffs, wood and wood products, metals, machinery and equipment, textiles
Exports - partners:
Lithuania 17.8%, Russia 11.5%, Estonia 11.1%, Germany 6.3%, Poland 5.6%, Sweden 5.2%, UK 5%, Denmark 4% (2015)
Imports - commodities:
machinery and equipment, consumer goods, chemicals, fuels, vehicles
Imports - partners:
Lithuania 16.9%, Germany 11.2%, Poland 10.5%, Russia 8.1%, Estonia 7.7%, Finland 5.2%, Netherlands 4% (2015)
Investment Climate - US State Department
Located in the Baltic region of northeastern Europe, Latvia is a member of the EU, eurozone, NATO, and the World Trade Organization (WTO). The Latvian government recognizes that Latvia, as a small country, must attract foreign investment in order to foster economic growth, and thus has pursued liberal economic policies and developed infrastructure to position itself as a transportation hub. According to the World Bank’s Doing Business Report 2015, Latvia is ranked 22nd out of 189 countries in terms of ease of doing business. In 2015, Latvia made significant progress in negotiations to accede to the Organization for Economic Cooperation and Development (OECD) and hopes to become a full OECD member in 2016.
As an EU member, Latvia applies EU laws and regulations, and, according to current legislation, foreign investors possess the same rights and obligations as local investors with certain exclusions. Any foreign investor is entitled to establish and own a company in Latvia and has the opportunity to acquire a temporary residence permit.
There is a perceived lack of fairness and transparency in the public procurement process in Latvia. A number of companies, including foreign companies, have complained that bidding requirements are sometimes written with the assistance of potential contractors or couched in terms that exclude all but “preferred” contractors.
Nonetheless, Latvia provides several advantages to potential investors, including:
Regional Hub: Latvia bridges West and East, providing strategic access to both the EU market and to those of Russia and Central Asia to the east. Latvia’s three ice-free ports are connected to the country’s rail and road networks and the largest international airport in the Baltic region. The road network is connected to both European and Central Asian road networks. The railroads connect Latvia with the other Baltic states, Russia, and Belarus, with further connections extending into Central Asia and China.
Workforce: Latvia's workforce is highly educated, is multilingual, and its culture promotes hard work and dependability. Labor costs in Latvia are the 4th lowest in the EU.
Low Taxes: Latvia has one of the lowest corporate income tax rates in the EU at a flat rate of 15 percent, and personal income tax rate of 23 percent. To further boost its competitiveness, the Latvian government has established special incentives for investment, both foreign and domestic. There are four special economic zones (SEZs) in Latvia: Riga Free Port, Ventspils Free Port, Liepaja Special Economic Zone, and Rezekne Special Economic Zone, which provide various tax benefits for investors. The national government is in the process of establishing a broader Special Economic Zone to cover a portion of Latgale, the most economically challenged region in Latvia, bordering Russia and Belarus.
In 2015, GDP growth in Latvia remained stable at 2.7 percent. Although growth was strong relative to the rest of the EU, Latvia’s economy was affected by the weak performance of the euro currency area, as well as geopolitical tensions involving Russia. The continued economic slowdown in Russia will continue to affect both exports and investment in Latvia in 2016.
The most competitive sectors in Latvia include woodworking, metalworking, food processing, IT, life science, green tech, and finance.
Recent reports suggest that some of the most significant challenges investors encounter in Latvia include insufficient development of infrastructure, corruption, and non-transparent or non-responsive bureaucracy. The non-resident banking sector has come under increased regulatory scrutiny, with one commercial bank losing its operating license for alleged involvement in money laundering; several other banks are facing heavy fines by Latvia’s Financial and Capital Markets Commission.
The chart below shows Latvia's ranking on several prominent international measures of interest to potential investors.
Office for Prevention of Laundering of Proceeds derived from Criminal Activity (Control Service) (KD)
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