Dienas Bizness: Evidence of past transactions can be as valuable as gold

Riga, Latvia, January 7, 2020, 14:02 / Industry News / Translation from Latvian to English. Magazine Dienas Bizness.

In the context of anti-money laundering, transactions that took place in the distant past with no documentary evidence retained are increasingly being investigated. Entrepreneurs have many questions as to why this situation has arisen in Latvia and how to deal with it.

This will also be discussed at a conference Banks in the Changing World organized by the Law Research Institute this April in cooperation with BA School of Business and Finance, the University of Latvia and the magazine Dienas Bizness.

Over the last year, the requirements for anti-money laundering (AML) and their consequences have been one of the most debated topics not only in mass media, but also at various conferences, debates, and discussions behind the scenes. The key issues are related to the proportionality of AML checks against the review periods, as well as the proportionality in examining more than five-years-old past events. One of the central questions is how justified is the examination of the legal origin of money, as well as the creditor's well-being in terms of legal security, looking at evidence of 10, 15 or 20 years ago. In particular, if so long ago banks and public authorities did not request the amount of information that exists today. Namely, there was no current regulatory framework at the time. However, if the client has no evidence that is required, the origin of his funds is likely to be treated as criminal. Therefore, the issue of reverse application of current AML requirements is unclear.

Banks encounter increased risk

"In the current environment of ever increasing requirements, banks have to spend more and more resources, as the details and scope of obligations imposed on each bank to research the client’s funds and wealth are only growing in Latvia. One might say that now the client details expected from banks are similar to those associated earlier with the operations of national law enforcement agencies when the relevant case was initiated," Kaspars Dreimanis, AML expert, certified ACAMS (Association of Certified Anti-Money Laundering Specialists) specialist, co-founder of the Baltic Branch, long-standing member of the Association of Latvian Commercial Banks (now Finance Latvia Association) Control Committee, believes. He points out that even prior to starting its cooperation with a potential client the bank needs to know who he is and to obtain information about him. To obtain information about a potential client is one thing, but it is also necessary to analyse and evaluate that information critically in order to answer the basic question of how risky the person may be. Moreover, it should be noted that banks were not and will not be able to obtain all possible information about a person that is or might be at the disposal of, for example, law enforcement or tax control authorities.

"If the estimated client risk is too high, the bank will refuse to cooperate with such potential client; if the potential risk is acceptable, cooperation will start and the client's transactions and counterparties will be evaluated in its course in accordance with the determined risk level," said K. Dreimanis. He believes that currently banks are facing the consequences. "It is necessary to look at the past and the requirements set nowadays and to answer what was good and what is right in the regulation of the requirements and the application of the regulations, because the AML area is very new for Latvia and understanding is still developing," adds K. Dreimanis.

"Today, the financial sector still faces the challenge of how detailed the research of the client and his transactions should be in the AML context, how to predict the risk and consequences the client may cause in the future and where is the limit of sufficiency because it is impossible to exclude all risks. In practice, there is still no clear and unified position or understanding between the regulators and the financial sector players," points out K. Dreimanis. Investigating the nature of the breaches by banks found in various countries, including Latvia, he concludes that penalties are mostly imposed for insufficient client due diligence, as well as insufficient examination of the past history or the level of detail of that examination - how much the bank has found out about a particular client, his transactions and counterparties. And then the question arises - if banks were largely penalized for insufficient research, is it really true that the regulation, its application and its understanding have been clear at the time when it was imposed? Having worked in the area for about ten years, he concludes that in Latvia the area develops based on the principle that important, essential provisions are incorporated in the regulatory documents in a hurry, but at that moment neither supervisors nor banks have clear understanding of their uniform application. How the provisions should be applied in practice becomes clear only when various practical situations are encountered in real life; however it requires time and common understanding between regulators and banks, rather than penalties for insufficient research.

Issues of the past

"We often want to turn AML matters in the wrong direction, because money isn't sitting in a bank account for 20 years, it is circulating constantly, but the problem is the speed of money circulation (sometimes this takes a few seconds), when no one will be able to understand what’s going on, the response is possible only afterwards," Juris Stukāns, Chairman of the Judicial Panel of Criminal Cases of Riga Regional Court, says. He points out that in situations where transactions are delayed or bank accounts are seized, there is no term for looking into the past. "This is a matter of currently available funds, where, in accordance with the conventions signed by Latvia, the account holder is required to explain the origin of his funds, their sources and, if possible, to submit documents," said J. Stukāns. In his professional experience, he has not seen the seizure of accounts where money was deposited for many years. These are accounts where funds are used for transactions.

"For these reasons, it is silly to talk of questions about the events of nearly 100 years ago," said J. Stukāns. He reminds that, unlike administrative proceedings, criminal proceedings have no five-year limitation - the period for keeping accounting documents. "Banks, including the entrepreneur, are to know their client, his business model, the origin of his funds, and if the counterparty is a foreigner, they must respond, but a red flag must be added if the foreigner is registered in offshore areas," Agnese Rudzīte, Director of the Anti-Money Laundering Department of the State Revenue Service (SRS), explains. She points out that at present all these parameters are initially responded to by appropriate systems that banks have in place and are not available to anyone else.

Practice differs from theory

"I do not know of any cases where criminal proceedings were not initiated and funds were not seized - frozen, but none of the banks, the Financial Intelligence Unit or the police are interested in evidence, and this is more like a technological pattern - one institution, another institution, a third institution and eventually the account is frozen - seized - with criminal proceedings being initiated," Āris Bočs, a sworn lawyer at the IUSTUS Law Office, explains. A. Rudzīte points out that such a situation is justified because of the threat of negative consequences to everyone as funds transfers will take longer, and additional explanations about them will be required, unless Latvia has done well by February 2020. "Currently, the public authorities choose the easiest way - to prosecute and seize the account with funds, so that these funds can be 'frozen' for two years, but then one should also work actively on the justification," says J. Stukāns. He points out that politicians have now changed who has to prove the legality of the funds origin, i.e. since 2020 this obligation has been imposed on the person whose account is seized, but earlier investigators had to prove that the funds were obtained illegally. "This is a misconception because, before the state freezes funds and makes accusations, it must collect evidence to prove that the funds are linked to a crime or are of criminal origin, rather than just say: there are funds available in the account, we seize them," says J. Stukāns.


"The SRS does not look into a more distant past than November 2017, when major amendments were made to the AML Law," reminds A. Rudzīte. In his turn, J. Stukāns points out that in practice there are cases when people provide all kinds of contracts and documents for the time that is difficult to check. In particular, under one recent case old contracts were provided that, as experts showed, were forged - the other party to the contract had never existed. As a result, the relevant persons were charged in accordance with another article, but the funds involved in the transactions were seized at the same time. Banks have a risk-based analytical system in place, i.e. when a client makes a non-typical transaction unexpectedly, as a result a red light appears at the bank, whereas nothing of this kind occurs if the client does exactly the same all the time. In its turn, when the bank closes (freezes) an account of a local company, its management may file a complaint with the banking regulator. "Upon careful examination of the documents, one may see that it is not always those who make a fuss are right, because blowing a bubble by itself does not solve anything - it is not constructive," A. Rudzīte shows a practical situation. She admits that all situations cannot be put in one basket because, for example, in case of frozen accounts credited with funds from the UK (which is currently an EU member) one must take into consideration that the above country hosts most of the so-called shell companies. "More attention is paid to transactions with companies registered not only in the UK, but also in Cyprus, although the qualification, knowledge and experience of the specialists evaluating these transactions are of the utmost importance," explains A. Rudzīte. J. Stukāns believes that there should be precedents of and that banks should be liable for cases where accounts are closed without reason and the entrepreneur incurs economic damage. Exaggerations are common, for example, when the bank requests a contract regarding a funds transfer from the husband to the wife. But there is no smoke without fire, although there is always the question of the source of funds. "Currently, exaggerations often occur in Latvia, where entrepreneurs and, ultimately, the state suffer, but sooner or later the state will realize this when the budget revenue decreases," J. Stukāns comments the situation. A. Rudzīte gives an example where the state has no revenue from tens of thousands of companies, because their losses are several-fold larger than their cash flow.

Complicated regulation

A. Rudzīte acknowledges that the Law on the Prevention of Anti-Money Laundering and Terrorism Financing is complicated and difficult to understand, all the more so if the provisions of the European Directive are to be applied to understanding the provisions of this law, which gives many people the creeps. It should be taken into account that the regulatory framework in this area develops rapidly and completely new provisions should be applied as often as not, which makes it difficult to find meaningful precedents.

Problem of experience

In the current situation, though, not everything is working as it should, because bankers are frightened. In order to minimize any risk, a large number of cases are reported to the Financial Intelligence Unit, which forwards them to the Economic Crime Police in its turn, where cases are accumulated. K. Dreimanis emphasizes that the requirement for a person to prove the legality of the origin of his funds is logical, but there is no uniform, clear understanding of what sufficient or credible means, and the scope of actions required to comply with this requirement is interpreted differently. "That is why banks most often choose the cheapest route, because foreign experts also admit that being an AML specialist at a bank means constantly walking on thin ice as it is not known how much needs to be done so as not to be asked questions subsequently together with reprimands concerning a case where it turns out another check was required. Foreign colleagues are surprised at the scope of checks implemented in Latvia," points out K. Dreimanis. J. Stukāns, on the other hand, opposes this view because there are regulatory enactments (law, Cabinet regulations) and the relevant methodology for unusual and suspicious transactions, which state the principles, although they can never be exhaustive or completely appropriate to all situations in life. The practice, however, is much tougher because it is required to state the origin of funds in 2000 or even earlier, when there was no obligation to document or provide the source of funds to banks. "Today’s understanding cannot be applied to the evaluation of past events of five or even 10 and 20 years ago, but we cannot avoid such a situation, although it will be impossible to confiscate property for what happened in the distant past (unless required by the effective law of the time)," points out J. Stukāns. In his view, what is most important in such a situation is the expertise of officials - investigators, prosecutors and judges. K. Dreimanis points out that banks have their own professionals, however the understanding of the application of several essential provisions changes with the changing external circumstances. "The old European countries have implemented the norms in practice over many years, but Latvia adopts the best practice by translating and incorporating them into laws, but there is no practice or experience of the proper application of these norms in this country, therefore strange situations arise," said K. Dreimanis. He also emphasizes that all penalties applied to banks (not only in Latvia but also abroad) are for insufficient evaluation. "The Netherlands has the most experience - 20 years - which has both criminal cases and convictions," points out A. Rudzīte. K. Dreimanis points out that the Netherlands has gained rich practical experience in combating money laundering from the sale of illicit drugs. "AML regulation for banks in Latvia changed dramatically at the end of 2016, and it is not that long ago," adds K. Dreimanis. A. Rudzīte reminds that five Moneyval evaluations have been carried out in Latvia so far: the first four were technical (compliance with the directive), which showed good results; however, as soon as the fifth evaluation touched on the effectiveness of these provisions, the evaluation became unsatisfactory. "There is no cause for concern that we are somewhere in the list alongside exotic African countries, as Latvia is only the 16th country in the world where the effectiveness of its current provisions has been evaluated, and in 10 years’ time specialists from Latvia will teach people from other countries how and what to do," says A. Rudzīte. In his turn, Ā. Bočs points out that the most important thing is that, while the relevant case-law is being developed in Latvia, business should not be destroyed, because there are neither tax revenue nor jobs without it. A lot of the so-called suspicious funds come in Latvia from Uzbekistan, Moldova, Kazakhstan, Belarus, Ukraine and Russia. It has come so far that in Latvia, when a person fulfils all customs procedures for declaring money, no one even thinks of explaining anything without a criminal case, because the person and the money have simply come in Latvia from the mentioned countries. "The paradox is that at Sheremetyevo airport in Moscow a person declares cash being brought to Riga, then he also declares it in Riga, but he is charged under two articles and his money is withdrawn at Riga airport," says Ā. Bočs. In her turn, A. Rudzīte explains that the days when huge amounts (hundreds of thousands and even millions of euros) could be brought in cash and placed in a bank account or a safe deposit box are over in Latvia. "If a person places significant cash in his bank account within a month, the bank will report accordingly to the Financial Intelligence Service," said K. Dreimanis. J. Stukāns mentions proceedings where one person’s money (1.5 million euros) was confiscated from two bank safe boxes, but before that the person’s income in his home country was checked and his personal explanation was obtained - "given as a gift at my son’s wedding". "The purpose of money launderers is not to keep money in the safe box, but rather to put it into circulation, to inject it into the economy by purchasing real estate, cars, companies, other assets," emphasizes K. Dreimanis. J. Stukāns draws attention to the fact that there is no reason to fear that old transactions of the past might be subject to today’s regulation - requirements and penalties. There is a unique situation in Latvia - everyone had to complete zero declarations, but the police and other authorities have forgotten about that. Therefore, the regulation is in place, but this is just a matter of normal application, recommends J. Stukāns.

Deadlines have been set

Although nobody speaks about this publicly yet, the issue is the maximum period of checking the seized - frozen - blocked accounts (both cash and securities). The question is related to compliance with the general principles of law ensuing from Article 1 of the Satversme [Constitution] (for example, the principles of proportionality, confidence in legality of actions, etc.). "Funds may be seized for two years and six months, then there must be some decision," explains J. Stukāns. He also adds that there are situations where a person’s account is frozen for reasons that are entirely different from AML requirements, while frightened bankers are trying to break any relationship with the relevant person at that moment.

"Every bank has security services in place that are mostly staffed by former law enforcement officers, so it would be logical to find out the reason at the moment when the account is frozen - for example, for paedophilia, but treating it as a risky financial transaction is nonsense," says J. Stukāns. He also reminds that, when funds are seized, transactions of even 10 to 15 years ago may be checked, provided these transactions are identified as the source of funds. "The retrospective distance is basically determined by the claimant for the seized funds, because, of course, old transactions are more difficult to check than the recent ones," says J. Stukāns.

Armands Smans, PhD student of the University of Latvia Faculty of Law

The matters of determining the deadline of the check are becoming increasingly topical in the debates on the issue of proof of origin of the property. There have been hearsay cases where a person is requested to provide documents of transactions that occurred at the beginning of this century or even at the end of the previous century. It is no wonder that in such cases the person often cannot fulfil his obligation of proof, as there are simply no documents retained to confirm the transaction. It is believed that both credit institutions, law enforcement agencies and courts should deal with such cases with some understanding in applying the provisions of law in a reasonable and proportionate manner. However, such cases should be extremely rare if the subject matter of the check were properly defined. If a person is to prove the origin of particular property, the primary focus should be on the circumstances in which that particular property was made available to the person. For example, if a person is to prove the legal origin of the funds in his bank account, the first step would be to find out which transactions resulted in the checked balance in the person’s bank account. If it is impossible to define specific transactions precisely, then the largest recent transactions that could generate the checked balance should be examined. To be more precise, to verify the origin of a person’s property, it is absolutely not necessary to investigate the person’s business history of several years or decades, of course, unless the specific circumstances of the individual case so require. It should be remembered that procedural law recognizes the principle of procedural economy, which requires that procedural objectives be achieved as quickly and economically as possible. In accordance with the principle of procedural economy, activities that are objectively ineffective in pursuing the procedural objective should be avoided. In case of an unnecessarily long period of time for the check, this can lead to a breach of the principle of procedural economy, as well as to the waste of resources both for individuals and the state. For example, the principle would obviously be violated if legal due diligence regarding a person’s conduct, incl. that resulting in the person acquiring property whose legal origin is to be verified, would be carried out outside the limitation period for a specific offence under the Criminal Law.