The eastern European state of Latvia has improved its laws since it signed the Organisation for Economic Control and Development's Anti-Bribery Convention in 2014, yet serious personnel issues and problems with the KNAB, Latvia’s anti-corruption law enforcement agency, have cast doubts over its capacity to enforce those laws.

The 41-country OECD bribery working group has just completed its report on Latvia’s adherence to the "Convention on Combating Bribery of Foreign Public Officials in International Business Transactions" and related instruments. It recommends that the small state ought to:

• ensure that the KNAB is fully functional and not subject to "improper government criticism," whatever that may mean;
• go out of its way to investigate foreign bribery, with the implication that this has not been happening so far;
• strengthen and enforce its anti-money laundering efforts;
• improve legislation on the foreign bribery offence, extradition, corporate liability and external auditor reporting; and
• protect public and private sector informants who have tales to tell in a comprehensive way.

The report is not all negative. There have been some legislative reforms to improve compliance with the convention, a wide range of investigative techniques is available whenever there is a foreign bribery investigation, Latvia co-operates internationally in cases involving corruption and is not tardy in asking for such co-operation in return, and the government has been active in trying to raise awareness about the problem in the public and private sectors.

Latvia has had less petty corruption than other previously communist states but high levels of grand corruption and evidence of “state capture”. Recent information indicates that the level of public trust in Latvia's government, parliament and political parties remains low.

Latvians’ perception that their legislators were captive to private oligarchic interests came to a head with the financial crisis of 2008 and the so-called Oligarchs Case of 2011 that involved charges of bribery, money-laundering and other crimes. The investigation of this case has seen delays owing to its complexity and to trouble at the KNAB. This and other high profile domestic corruption scandals (such as the bribery of officials of the state-owned electrical power company) have raised awareness and fostered public debate about domestic corruption.

Nonetheless, it is thought that there is still a lack of public awareness of the negative consequences of corruption, responsibility for corrupt behaviour, and exercise of authority of state officials in case of a conflict of interest. Public awareness of foreign bribery appears to be even lower.

More than half of Latvian bank deposits originate from outside Latvia, with around 80% of non-resident deposits from beneficial owners in countries in the Commonwealth of Independent States (CIS) in Eastern Europe and Central Asia. The report warns: “Existing measures have failed to detect alleged large-scale money laundering that was subsequently reported in the media. Latvia should accordingly require banks that take non-resident deposits to adopt stronger anti-money laundering measures. It should also inspect banks more frequently and sanction banks that breach relevant laws. The money laundering offence should be enforced more consistently.”

Regulatory shortcomings

Latvian auditors are not required to report foreign bribery to competent authorities, though they are required to report suspected money laundering transactions to the financial intelligence unit.  The media has reported cases of foreign officials allegedly laundering in Latvia the proceeds of corruption, fraud and embezzlement committed in Afghanistan, Moldova, Kazakhstan and Russia. Very large amounts of money – in one instance $1 billion – were allegedly laundered in these cases.

The report describes the Financial and Capital Market Commission as 'inactive' and finds fault with Latvia's anti-money-laundering laws as well. FCMC Regulation 125/2008 does not adequately address the money laundering risks posed by non-resident HNW depositors. It does require regulated entities to “conduct enhanced due diligence” (EDD) when establishing relationships with non-face-to-face customers. A non-resident who opens an account with a Latvian bank through an office outside Latvia, however, is considered a face-to-face customer and EDD is not required on this basis alone; the OECD finds fault with this. The regulation also requires EDD with respect to clients from countries designated as tax havens by Latvia or blacklisted by the United Nations, the European Union or the Financial Action Task Force. These countries do not necessarily correspond to those that are sources of non-resident deposits, however. Section 15.5 states that “customers whose commercial or private activities are not related to the Republic of Latvia” are considered high money-laundering risks, except in cases where a non-resident client opens an account at an overseas branch office of a bank, and his/her private or commercial activities are in the country where the branch office is located. Most non-resident depositors probably benefit from this exception, thus avoiding extra scrutiny. The list of a financial institution’s activities considered at risk of money laundering also does not include the taking of non-resident deposits (Section 18).