State Audit: Latvian municipalities should improve money laundering and sanction violation prevention capabilities

The public sector in Latvia requires major improvements in order to successfully identify and prevent money laundering and sanction prevention risks, as concluded in the report by the Latvian State Audit on preventive measures for uncovering suspicious deals and sanction violation.
«Since 2008 the public sector in Latvia has a duty to report every suspicious deal to the Office for Prevention of Laundering of Proceeds Derived from Criminal Activity. However, until now there has been no analysis of existing risks on a national risks. Results of the audit reveal that the public sector has no unified understanding of the term money laundering, the importance of sanction violation risk prevention and practical measures even though the number of deals and activities subjected to aforementioned risks in Latvia is large,» says State Audit council member Edgars Korčagins.
«For example, the extent of deals subject to risks in municipalities in the 18th audit alone reaches EUR 340 million.»
During the audit VK looked at 18 municipalities, 13 ministries and 12 central state institutions, their internal control systems, money laundering and sanction risk prevention practices. Auditors found hat most municipalities and institutions do not have an internal control system to manage these risks. Additionally, the public sector does not have sufficient methodology training or guidelines. On top of that, the public sector has limited access to free information. During the audit cases were uncovered when the public sector was unprepared to react and take action against money laundering and sanction violation risks.
For example:
in 2019 US Office for Foreign Asset Control (OFAC) imposed sanctions against (now ex-mayor of Ventspils) Aivars Lembergs, Ventspils Development Agency, Business Development Association, Latvian Transit Business Association and Freeport of Ventspils authority. The organizations listed here were labelled as institutions under Lembergs’ control.
in 2020 AS Pasažieru vilciens experienced problems with procurement of spare parts. The reason is because the supplier was subjected to US OFAC sanctions.
in 2021 State Revenue Service Taxes and Customs Police commenced a criminal procedure against SIA Erbauer Group for laundering a large sum of illegally obtained funds. This company is owned by Jekabpils City Council deputy and had won in procurements organized by Jekabpils municipal administration, Madona municipal administration, Food and Veterinary Service, Latvian State Roads. All of those procurement projects included the use of money provided by European funds.
in 2021 a ship entered the sea port of Liepaja. The owner of this ship is on the US OFAC list of international sanctions.
Korčagins explains «violations may affect both the country’s reputation and economic growth, as well as availability and quality of public services if the commenced deal is unable to go through due to any of the risks».
«For example, a municipality will not be able to complete construction of an important structure and may be forced to pay back EU financing or public transport services may become unavailable. This is why it is important to proactively improve the public sector’s understanding of the risks and provide support to help improve their internal control system.»
Auditors are confident results of the audit can be viewed in the context of the effectiveness of Latvia’s adopted money laundering and terrorism financing prevention system.
«In 2019 European Council Moneyval said Latvia has accomplished progress by enhancing its system. Nevertheless, the country remained under monitoring. In 2020 Financial Action Task Force (FATF) decided not to include Latvia in the so-called grey list. The reason is because Latvia managed to implement recommendations to battle money laundering and meet Moneyval recommendations. This audit is a strategic tool to help the Republic of Latvia demonstrate commitment to improving the system and reducing corruption, money laundering and sanction violation risks to a minimum in the public sector,» explains Korčagins.
Latvian State Chancellery, Office for Prevention of Laundering of Proceeds Derived from Criminal Activity, Ministry of Foreign Affairs and State Audit have commenced work on organizing training for officials to raise their competence in corruption prevention.
The recommendations provided by State Audit to the aforementioned institutions, as well as Ministry of Environment Protection and Regional Development are intended to help identify risks, provide support and organize training for the public sector.
Municipalities and state administration institutions should be able to review and improve their internal control system to manage money laundering and sanction risks.