- Money laundering and violation of sanctions are a long-term topicality in the world and in Latvia.
- The volume of transactions exposed to risks in Latvia is large, while awareness of the significance of risks is low.
- Recommendations of the State Audit Office to the public sector are already under implementation.
The audit of the State Audit Office has concluded that the public sector needs many significant improvements to be ready to identify and prevent risks of money laundering and violation of sanctions, to assess practices proactively to detect suspicious transactions promptly and avoid transactions with sanctioned persons, thus avoiding negative consequences for the state of Latvia and the population.
“In Latvia, the public sector has been obliged to report any suspicious transactions to the Financial Intelligence Service since 2008; however, the current risks in the public sector have not been directly assessed and analysed at the national level. The audit findings reveal that the public sector lacks a common understanding of the importance of money laundering and sanction risk management and practical actions, although the volume of transactions exposed to such risks in Latvia is large. For example, only in 18[1] audited local and regional governments, the amount of transactions exposed to risks reaches 340 million euros,” states Mr Edgars Korčagins, Council Member of the State Audit Office, Director of the Fifth Audit Department.
During the audit, the State Audit Office assessed the internal control system, possibilities, and practices of 18 local and regional governments, 13 ministries, and 12 central government institutions to manage the risks of money laundering and sanctions. The auditors have found that most local and regional governments and institutions do not have an internal control system in place to manage those risks. In addition, the public sector does not have sufficient methodological support through training, guidance, or other means, and its access to free information is limited. The audit also identified cases where the public sector was not prepared to react and act promptly in the face of the risks of money laundering and breaches of sanctions. For instance,
- In 2019, the US Office of Foreign Assets Control (OFAC) imposed sanctions on Mr Aivars Lembergs, the Ventspils Development Agency, the Business Development Association, the Latvian Transit Business Association, and the Ventspils Freeport Authority, considering them to be Lembergs-influenced institutions.
- In 2020, JSC “Pasažieru vilciens” encountered problems in purchasing spare parts for diesel trains, as their manufacturer was subject to OFAC sanctions.
- In 2021, the Tax and Customs Police Department of the State Revenue Service initiated criminal proceedings against Erbauer group Ltd for large-scale money laundering. The said company belongs to a Councillor of the Jēkabpils City Council and has won the procurements organised by the Jēkabpils City Municipality, the Madona Regional Government, the Food and Veterinary Service, state-owned “Latvijas valsts ceļi” Ltd, and other public entities, including procurements related to projects financed by the European Union (EU) funds.
- In 2021, a ship whose owner was included in the OFAC sanction lists entered the Port of Liepaja for repairs.
Edgars Korčagins explains, “Irregularities can affect a country’s reputation and economic growth, as well as the availability and quality of services provided to the population if with one of the risks occurring the transaction commenced could not be executed. For instance, a local or regional government will not be able to complete the construction of a facility, will have to repay the received EU funding, or will fail to provide public transport services. Therefore, proactive awareness-raising of the public sector about the risks and providing support for the development of the internal control system are crucial.”
The auditors of the State Audit Office are confident that considering the audit findings in the context of the effectiveness of Latvia’s anti-money laundering and terrorism financing system would be useful. “In 2019, the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism of the Council of Europe (Moneyval) noted that Latvia had made progress in strengthening the system but maintained its supervisory status. In 2020, the Financial Action Task Force (FATF) decided not to include Latvia in the so-called “grey list” and not subject it to enhanced supervision, based on all successfully implemented recommendations to combat money laundering and respond to Moneyval’s recommendations. This audit is a strategic tool through which the Republic of Latvia demonstrates its commitment to improving the system by minimising the risks of corruption, money laundering, and sanctions, including in the public sector,” states Edgars Korčagins.
The SAO’s recommendations under practical implementation
In co-operation with the Financial Intelligence Service, the Ministry of Foreign Affairs, and the State Audit Office, the State Chancellery, has already started work on organising training to increase the qualification and competence of those responsible officials.
The proposals submitted by the auditors of the State Audit Office to the Financial Intelligence Service, the Ministry of Foreign Affairs, the Ministry of Environmental Protection and Regional Development, and the State Chancellery aim at identifying risks to public administration, providing methodological support and training to the public sector, and improving database availability and functionality to achieve proportionality in inspections, as well as reducing the administrative resources spent.
Local and regional governments and public administrations need to review and improve their internal control system for managing the risks of money laundering and sanctions.
General information
Compliance audit “Compliance with the requirements of the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing (NILLTPFN) and the Law on International and National Sanctions of the Republic of Latvia in the public sector” was performed in 18 local and regional governments, 13 ministries, and 12 central government institutions.
Since 13 August 2008[2], public authorities, derived public entities, and institutions have been obliged to report any suspicious transactions to the Financial Intelligence Service. In its turn, the Law on International and National Sanctions of the Republic of Latvia is binding on every individual and legal entity by stipulating the obligation to observe and enforce international and national sanctions. Thus, public entities may not engage in activities that allow or facilitate the circumvention of the sanctions regime or the avoidance to implement the sanctions.
Additional data
[1] The audit was carried out before the Administrative Territorial Reform, when the number of local and regional governments was 119 instead of the new 43.