Grandiose penalties for commercial banks, which result in the paranoid attitude of credit institutions towards customers and the image of Latvia that deters investors, are undesirable side effects in the overhaul of the financial sector. The industry is demanding that government experts repair their slapdash work with more sensible risk assessment procedures. So that the banks clearly understand what is and what is not allowed, but customers are not denied just because banks are hysterically afraid of their supervisors FCMC and FIU.
Although the Latvian banking sector has transformed beyond recognition in a couple of years, almost completely refusing foreign money, which has been basically recognized as harmful, dirty and spent for terrorist purposes, commercial banks are still being punished and with huge sums. The money is simply taken from the bank because it has serviced a transaction that the supervisor does not like, or has not introduced a new norm of bank behavior that the supervisor approves of.
Citadele banka was forced to pay more than half a million this spring, while this month the Financial and Capital Market Commission (FCMC) imposed a fine on the Regional Investment Bank. Nearly half a million euros, which will get the lion's share of first-half profits. The audit found “insufficient verification of the origin of funds in large-value cash transactions carried out by high-risk bank customers from high-risk jurisdictions. As a result, the bank did not ensure adequate risk management and was exposed to disproportionate reputational risk”. Neatkarīgā asked the Regional Investment Bank for its opinion on the proportionality of the fine imposed and the violation committed, but did not receive a substantial answer:
"The bank is currently evaluating the FCMC decision in detail and therefore we cannot comment further on it yet." It is also common practice for banks not to speak publicly about the penalties received. Probably in order not to follow the trail of ABLV bank, which was in an exemplary position, but was closed because it was decided politically by receiving a corresponding order from the USA.
Why are the penalties imposed on banks so high? The FCMC explains that this is an international practice arising from an EU directive. The amount of the fine applicable to infringements in the field of prevention of criminal money laundering and terrorism shall be set at up to 10% of the total annual turnover of the credit institution or financial institution concerned. In determining the amount of the fine, the gravity and duration of the violation are taken into account, as well as mitigating and aggravating circumstances are assessed. “The imposition of a fine is one of the measures used by the FCMC in circumstances when essential requirements of Latvian and European Union regulations have been violated and an effective preventive mechanism is needed to ensure safe and prudent operation of the financial market, thus ensuring protection of financial services recipients."
And it should be emphasized here that the imposition of a penalty does not mean that the transactions that led to the imposition of a penalty are automatically investigated. Punishment is a preventive tool to keep banks under constant stress, and it is clearly effective. However, whether such a public policy is in the interests of service users could be debated.
Even the basic action of opening an account in Latvian banks has become an impossible mission, especially if the potential customer is not called by a classic Latvian name such as Līga, but by, for example, Vasilisa.
Existing customers, on the other hand, have to justify their crystal-clear income and look for evidence for transactions that are ten years or older. Even our allies Americans who want to make money in Latvia through orders in the military sector have found it so inconvenient to work that they have placed their own people in the Ministry of Finance to distinguish good suspects from bad suspects. The American presence is defined as technical assistance.
However, in order not to annoy supervisors, the industry tries to draw attention to the negative consequences of capital repairs, and the necessary solutions are also discussed in the Saeima Economic, Agricultural, Environmental and Regional Policy Committee, where the banking lobby - Finance Latvia Association presented its plan to a reasonable requirements to improve risk-taking capacity. In translation - to not be afraid of customers. With regard to the current situation, the following conclusions can be drawn:
These conclusions also lead to the industry-led proposals. There are more than twenty of them, and they relate not only to customer research and the demands placed on banks, but also to the rhetoric of politicians.
Currently, the industry needs a unified, consistent and less emotional communication of the state, which would not discredit the Latvian financial sector and the fight against crime. The requirement to study and re-study what the state already knows about bank customers should be abandoned. A reasonable time limit should be set for the verification of customer transactions in the distant past. It is also necessary to end the never-ending audit cycle, which is leading to ever-increasing penalties and banks abandoning risk-taking. Here is the opinion of the Finance Latvia Association provided to Neatkarīgā on the currently very severe system of penalties:
“The Association has called on the FCMC to develop a clear, pre-defined, preferably published, approach to commission inspections (a manual). A clear and comprehensible inspection process and inspection elements are essential. Without a review process that also includes a dialogue on identified and comprehensibly and predictably interpreted regulatory requirements, de-risking is inevitable. It should be noted that only after a test with comprehensible requirements will it be possible to recognize that a prudent, risk-based approach is being applied in practice. Further and continuous strengthening of trust and professional cooperation between supervisors and the industry is now very important, as the work already started by the commission in this area is very welcome, but the industry will only be able to draw conclusions from its inspections and results."
It is possible to get acquainted with the opinion of the banking industry regarding the necessary measures to strengthen the proportionate and reasonable approach in fulfilling the anti-money laundering requirements in the following letter sent to the responsible officials.
At the sitting of the Saeima Economic Committee, at which the requirements of the sector were considered, politicians and representatives of the bank's supervisory institutions conceptually agreed that the mistakes made in capital repairs should be corrected. Time will tell how this will be done in practice and whether all industry proposals will be taken into account. Discussions in the Financial Sector Development Council chaired by Prime Minister Krišjānis Kariņš are still ahead. The Ministry of Finance promises to start developing a concrete action plan in December. The Financial Industry Association hopes that the improvements will gradually take effect by mid-2021.
Maybe then Vasilisa will manage to open an account in one of the Latvian commercial banks?!