On 10 September, a discussion “Value of compliance: what is Latvia’s competitive advantage?” organised by the Foreign Investors’ Council in Latvia (FICIL) and the Financial Intelligence Unit of Latvia (FIU Latvia) took place. All participating parties agreed that the first step towards a safer and more open investment environment entails effecting the culture of financial compliance in the general public of Latvia.

Zlata Elksniņa–Zaščirinska, Member of the Board of FICIL, Ilze Znotiņa, Head of the FIU Latvia, Santa Purgaile, Chair of the Financial and Capital Market Commission (FCMC), Kaspars Rožkalns, Director General of Investment and Development Agency of Latvia (LIAA), and Reinhold Schneider, who represented Schwenk, participated in the discussion.

Problem of the finance sector — risk duality

During the discussion, Ilze Znotiņa, Head of the Financial Intelligence Unit of Latvia (FIU Latvia) underlined the dual risk profile of Latvia: on the one hand, it is related to the history that cannot be changed, but on the other, it is geared towards the future and mainly entails the fight against the shadow economy. “We are still struggling with the so called Soviet heritage when Latvia served as a transit country between the East and the West and the non-resident banking business was on the rise. These consequences were brought about by a consistently undermonitored finance sector, thus, FIU Latvia still mostly focusses on investigating cash flows remaining in the banks undergoing liquidation instead of fighting the shadow economy and corruption in Latvia. We hope that we will manage to deal with the “ghosts of the past” in 2-3 years to shift our focus to the local and EU financial crime,” explained I. Znotiņa.

The Head of FIU Latvia listed several future focus directions: from the promotion of a risk-based approach to a balance between the compliance culture and excessive interference in the business to creating a financial ombudsman that could deal with various disputes. Communication and an open dialogue between the public and the private sector is the main precondition for future success.

What about foreign investors in Latvia?

When asked how his company feels in Latvia, Reinhold Schneider, Chairman of the management board of Schwenk Latvia, was extremely brief — very welcome. During 18 months in Latvia, he had not faced any serious financial compliance problems and was rather happy about an opportunity to invest here. “The environment is good, and we have seen significant development during the last few years: the state has done its homework and achieved a notable progress in meeting the Moneyval effectiveness indicators that are very important to us. However, we were surprised by differences in banking requirements between Latvia and Lithuania: we believe that it is important to align these compliance criteria in the entire Baltic area to meet the Moneyval standards,” shared his experience R. Schneider. However, it was underlined during the discussion that Schwenk had noticed compliance problems related to the share of shadow economy and fair competition.

What is important to foreign investors?

Zlata Elksniņa Zaščirinska, Member of the Board of Foreign Investors’ Council in Latvia (FICIL), also underlined that fair competition was very important to investors. To achieve this goal, the entire legal proceedings should be transparent: from investigation to a trial.

“In Latvia, some sectors are strictly regulated, while the others are not, thus, one step towards the compliance culture would entail development of common standards to ensure a level playing field. It is also essential to decide about priorities: what do we want to solve first? This approach allows to ensure greater efficiency than a comprehensive and frontal effort,” added Elksniņa-Zaščirinska.

What are the most common problems of foreign investors?

Kaspars Rožkalns, the Director General of Investment and Development Agency of Latvia (LIAA), indicated that foreign investors had always complained about the financial sector or Latvia. “I would dare to claim that it is the second most visible problem after the lack of labour force. It is also difficult to open a company account in Latvia, we see that it is much faster and easier to go to Lithuania to do just that. One of the crisis lessons is that if we are put under pressure we can come together to discuss and agree about solutions even at the national level, for example, now we know that a visa can be received in just two days. To have more foreign investor success stories, it is essential to set priorities and do not shy away from asking the government for support,” claimed K. Rožkalns.

Risk-based approach should be strengthened

Santa Purgaile, the Chair of the Financial and Capital Market Commission (FCMC), agreed that many of the current problems were attributable to the state falling into a “black hole” a few years ago.

“We still have a lot to do to continue developing and improving the financial crime prevention system. However, we are progressing in the right direction, and in cooperation with industry actors we have prepared a manual for financial institutions to improve their customer due diligence and internal control systems. Currently, we have an active discussion with the sector to explain what shifting from the “rule based approach” to the “risk based approach” means,” explained S. Purgaile.

Compliance culture important for everyone

All participants of the discussion agreed that the entire society should have awareness of the compliance culture and its importance. Financial compliance should be treated as a behavioural culture, not as a penalty.

Entrepreneurs are invited to engage in raising public awareness of the compliance culture by focussing on three important activities: awareness, communication and education, and digitisation:

• Awareness: The first step towards a compliance culture entails leadership awareness of what is required from the company. Entrepreneurs should follow the recent developments in their respective sectors.
• Communication and education: Ethical conduct is a top-down process and requires the leadership to serve as an example and give directions to employees about what is expected from them. Transparent and explicit guidelines are essential for employees to have a better understanding of the role and benefits of financial compliance.
• Digitisation: Irrespective of what digitisation entails: technology that supports employee training, or an automated process that helps with daily tasks or reports violations, it always enables better corporate governance.