Commission Report (2002): Latvia

• Progress since the last Regular Report
• Overall assessment
• Conclusions

Chapter 4: Free movement of capital

Progress since the last Regular Report

Since the last Regular Report, Latvia has continued to align with the acquis in the area of free movement of capital and has taken further steps to improve the administrative capacity in this field.

In the field of capital movements and payments, no major developments have taken place since the last Regular Report.

The Bank of Latvia has been granted new powers this year through amendments to the Law on the Bank of Latvia, which entered into force in January 2002. These amendments assigned the function of payment systems oversight as a legal responsibility of the Bank of Latvia. In April 2002 amendments to the law on credit institutions were adopted to include provisions on the settlement of disputes between banks and customers on cross borders credit transfers. In July 2001, the Bank of Latvia adopted Recommendations to align with the acquis on electronic payment instruments. Finally, in July 2002 the Bank of Latvia adopted Regulations to fully transpose the Directive on cross-border credit transfers.

As regards money laundering, in November 2001 new guidelines concerning suspicious financial transactions were approved. The guidelines broaden the scope of supervision by extending the reporting obligations not only to credit institutions, but also to brokerage firms, investment companies, insurers, stock exchanges and private pension funds. The Latvian Financial Intelligence Unit (FIU), the Office for the Prevention of Money Laundering, has improved its software and IT systems and strengthened its internal control mechanism.

Overall assessment

In the field of capital movements, liberalisation in line with the acquis is now almost complete. However, a number of restrictions on capital movements nevertheless remain. The law on security services, which entered into force in July 2001, still includes restrictions concerning citizenship and language requirements. With regard to the acquisition of real estate, Latvia still has to adopt legislation in order to end the restrictions concerning acquisition of land by foreign natural persons. Further alignment is also necessary to reach full compliance with respect to the four guarantee funds, as well as the Law on Collective Investment Undertakings. As regards investments in foreign assets by supplementary pension funds and insurance companies, further alignment of the laws on private pension funds with the acquis is necessary.

As regards payment systems, the alignment of security settlement systems and of cross-border credit transfer with the acquis, especially the Settlement Finality Directive, remains to be completed. Latvia still needs to establish an out-of-court redress scheme to deal with the settlement of complaints between banks and their customers.

The Bank of Latvia regulates and supervises credit and financial institutions, operates exchange controls and oversees the payment system. The Bank appears to have appropriate competence and capacity to administer the liberalisation scheme and to initiate the flanking policies needed to fully implement a regime of free capital movements.

As regards money laundering, Latvia`s legislation is generally in line with the acquis. However, a few amendments to the Law on prevention of the legalisation of the proceeds derived from criminal activity are still necessary. Further improvements are still required in respect of alignment with the acquis of the law on the prevention of the laundering of proceeds from crime.

Latvia has a separate Financial Intelligence Unit (FIU - the Office for the Prevention of Money Laundering), which employs 13 staff, including 5 financial transaction analysts. Out of the total number of 3 303 reports received in 2001, only 59 were forwarded to the Prosecutor General`s Office (40 in 2000). The Office needs to be reinforced further, in particular in terms of staff and equipment. Training activities for the FIU, Economic Police, Prosecutors, Customs Officials, Bank Managers and employees should be pursued. More emphasis should be placed on reinforcing co-operation between the competent bodies and on rendering the prosecution of complaints lodged by the FIU with the law enforcement bodies more effective. In addition, an adequate increase in the resources of the FIU is necessary. Steps should be taken to ensure compliance with the Recommendations of the Financial Action Task Force.

Conclusions

In its 1997 Opinion, the Commission concluded that Latvia had introduced current account convertibility and almost completed liberalisation of capital movements. It added that Latvia should be able to eliminate the remaining restrictions on the movement of capital in the medium term, thus fully assuming the Community acquis in this area.

Since the Opinion, Latvia has made steady progress, both in aligning its legislation and in developing the necessary administrative structures. Overall, legislative alignment is well advanced, but the process needs nevertheless to be completed as regards capital movements and payments. The administrative structure has been put in place in this field, but further reinforcement of its capacity in some areas remains necessary.

Negotiations on this chapter have been provisionally closed. Latvia has not requested any transitional arrangements in this field. Latvia is generally meeting the commitments it has made in the accession negotiations in this domain.

In order to complete preparations for membership, Latvia's efforts should now focus on completing alignment and eliminating all remaining restrictions, and reinforcing administrative capacity, paying particular attention to the bodies involved in the fight against money laundering.

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