Latvia
This report analyses the implementation of the AEOI Standard in Latvia with respect to the requirements of the AEOI Terms of Reference. It assesses both the legal frameworks put in place to implement the AEOI Standard and the effectiveness of the implementation of the AEOI Standard in practice.
The methodology used for the peer reviews and that therefore underpins this report is outlined in Chapter 2.
Overall findings
AEOI legal framework
Latvia’s legal framework implementing the AEOI Standard is in place but needs improvement in order to be fully consistent with the requirements of the AEOI Terms of Reference. While Latvia’s international legal framework to exchange the information with all of Latvia’s Interested Appropriate Partners (CR2) is consistent with the requirements, its domestic legislative framework requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures (CR1) has deficiencies significant to the proper functioning of elements of the AEOI Standard. More specifically, deficiencies have been identified in Latvia’s enforcement framework.
Overall determination on the legal framework: In Place But Needs Improvement
Effectiveness of AEOI in practice
Latvia’s implementation of the AEOI Standard is on track with respect to the requirements of the AEOI Terms of Reference to ensure the effectiveness of the AEOI Standard in practice. This includes ensuring Reporting Financial Institutions correctly conduct the due diligence and reporting procedures (CR1) and exchanging the information in an effective and timely manner (CR2). Latvia is encouraged to continue its implementation process, to ensure its ongoing effectiveness.
Overall rating in relation to the effectiveness in practice: On Track
General context
Latvia commenced exchanges under the AEOI Standard in 2017.
In order to provide for Reporting Financial Institutions to collect and report the information to be exchanged, Latvia:
introduced Regulation No. 20 “Procedures by which a Financial Institution Implements the Due Diligence Procedures for Financial Accounts and Provides Financial Accounts Information to the State Revenue Service”.
Under this framework Reporting Financial Institutions were required to commence the due diligence procedures in relation to New Accounts from 1 January 2016. With respect to Preexisting Accounts, Reporting Financial Institutions were required to complete due diligence procedures on High Value Individual Accounts by 31 December 2016 and on Lower Value Individual Accounts and Entity Accounts by 31 December 2017.
Following the initial Global Forum peer review, Latvia made amendments to its legislative framework to address issues identified, the last of which was effective from 19 March 2020.
With respect to the exchange of information under the AEOI Standard, Latvia:
is a Party to the Convention on Mutual Administrative Assistance in Tax Matters and activated the associated CRS Multilateral Competent Authority Agreement in time for exchanges in 2017;
has in place European Union Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation, as amended by Directive 2014/107/EU;
has in place agreements with five European third countries1; and
put in place three bilateral agreements.2.
Table 1 sets out the number of Financial Institutions in Latvia that reported information on Financial Accounts in 2021 as defined in the AEOI Standard (essentially because they maintained Financial Accounts for Account Holders, or that were related to Controlling Persons, resident in a Reportable Jurisdiction). It also sets out the number of Financial Accounts that they reported in 2021. In this regard, it should be noted that Latvia requires the reporting of Financial Accounts based on a prescribed list of exchange partners and some accounts may be reported more than once (e.g. jointly held accounts or accounts with multiple related Controlling Persons), which is reflected in the figures below. These figures provide key contextual information to the development and implementation of Latvia’s administrative compliance strategy, which is analysed in the subsequent sections of this report.
Table 2 sets out the number of exchange partners to which information was successfully sent by Latvia in the past few years (including where the necessary frameworks were in place, containing an obligation on Reporting Financial Institutions to report information, but no relevant Reportable Accounts were identified). These figures provide key contextual information in relation to Latvia’s exchanges in practice, which is also analysed in subsequent sections of this report.
In order to provide for the effective implementation of the AEOI Standard, in Latvia:
the State Revenue Service (SRS, the tax authority) has the responsibility to ensure the effective implementation of the due diligence and reporting obligations by Reporting Financial Institutions and for exchanging the information with Latvia’s exchange partners;
technical solutions necessary to receive and validate the information reported by Reporting Financial Institutions were put in place by the SRS, which are used to verify, sort and disseminate the data to Latvia’s exchange partners; and
the Common Transmission System (CTS), and in the European Union (EU) the Common Communication Network (CCN), are used for the exchange of the information, along with the associated file preparation and encryption requirements.
It should be noted that the review of Latvia’s legal frameworks implementing the AEOI Standard concluded with the determination that Latvia’s domestic legal framework is In Place But Needs Improvement and its international legal framework is In Place. This has been taken into account when reviewing the effectiveness of Latvia’s implementation of the AEOI Standard in practice and where particular identified gaps in Latvia’s legal frameworks directly impact its implementation in practice, these are mentioned below.
Findings and conclusions on the legal frameworks
The detailed findings and conclusions on the AEOI legal frameworks for Latvia are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Domestic legal framework: Jurisdictions should have a domestic legislative framework in place that requires all Reporting Financial Institutions to conduct the due diligence and reporting procedures in the CRS, and that provides for the effective implementation of the CRS as set out therein.
Determination: In Place But Needs Improvement
Latvia’s domestic legislative framework is in place and contains most of the key aspects of the CRS and its Commentary requiring Reporting Financial Institutions to conduct the due diligence and reporting procedures, but it needs improvement in relation to the scope of Reporting Financial Institutions (SR 1.1) and the framework to enforce the requirements (SR 1.4). Most significantly, Latvia’s domestic legislative framework does not incorporate sanctions on Account Holders and Controlling Persons for the provision of false self-certifications and does not include strong measures to ensure that valid self-certifications are obtained for New Accounts.
SR 1.1 Jurisdictions should define the scope of Reporting Financial Institutions consistently with the CRS.
Latvia has defined the scope of Reporting Financial Institutions in its domestic legislative framework in a manner that is largely consistent with the CRS and its Commentary. However, deficiencies have been identified. More specifically, the definition of Investment Entity and the definition of the term “managed by” are not in accordance with the requirements. The scope of Reporting Financial Institutions is material to the proper functioning of the AEOI Standard.
Latvia should amend its domestic legislative framework to include the definition of “managed by” in relation to the definition of Investment Entity.
Latvia should amend its domestic legislative framework to require the term Investment Entity to be interpreted consistently with similar language defining “financial institution” in the Financial Action Task Force Recommendations.
SR 1.2 Jurisdictions should define the scope of Financial Accounts and Reportable Accounts consistently with the CRS and incorporate the due diligence procedures to identify them.
Latvia has defined the scope of the Financial Accounts that are required to be reported in its domestic legislative framework and incorporated the due diligence procedures that must be applied to identify them in accordance with the CRS and its Commentary.
SR 1.3 Jurisdictions should incorporate the reporting requirements contained in Section I of the CRS into their domestic legislative framework.
Latvia has incorporated the reporting requirements in its domestic legislative framework in accordance with the CRS and its Commentary.
SR 1.4 Jurisdictions should have a legislative framework in place that allows for the enforcement of the requirements of the CRS in practice.
Latvia has a legislative framework in place to enforce the requirements in a manner that is largely consistent with the CRS and its Commentary. However, deficiencies have been identified. More specifically, Latvia’s legislative framework:
does not impose sanctions on Account Holders and Controlling Persons for the provision of a false self-certification; and
does not incorporate measures to ensure that self-certifications are always obtained and validated for New Accounts as is required.
The deficiencies relate to key elements of the AEOI Standard and are therefore material to its proper functioning.
Latvia should amend its domestic legislative framework to include sanctions on Account Holders and Controlling Persons for the provision of a false self-certification.
Latvia should amend its domestic legislative framework to include strong measures to ensure that valid self-certifications are always obtained for New Accounts in accordance with the requirements.
CR2 International legal framework: Jurisdictions should have exchange relationships in effect with all Interested Appropriate Partners as committed to and that provide for the exchange of information in accordance with the Model CAA.
Latvia’s international legal framework to exchange the information is in place, is consistent with the Model CAA and its Commentary and provides for exchange with all of Latvia’s Interested Appropriate Partners (i.e. all jurisdictions that are interested in receiving information from Latvia and that meet the required standard in relation to confidentiality and data safeguards) (SRs 2.1 – 2.3).
SR 2.1 Jurisdictions should have exchange agreements in effect with all Interested Appropriate Partners that permit the automatic exchange of CRS information.
Latvia has exchange agreements that permit the automatic exchange of CRS information in effect with all its Interested Appropriate Partners.
SR 2.2 Such an exchange agreement should be put in place without undue delay, following the receipt of an expression of interest from an Interested Appropriate Partner.
Latvia put in place its exchange agreements without undue delay.
SR 2.3 Jurisdictions should ensure that the exchange agreements in effect provide for the exchange of information in accordance with the requirements of the Model CAA.
Latvia’s exchange agreements provide for the exchange of information in accordance with the requirements of the Model CAA.
Assessed jurisdiction’s comments on the assessment of its legal frameworks
In general, Latvia agrees with the findings of this report as they comply with the findings of the Checklist “Assessment of the domestic legislative framework implementing the AEOI Standard”. However, we are in a position that our legislation provides the sanctions on Account Holders and Controlling Persons for the provision of false self-certification. These sanctions are a part of the Latvian anti-money laundering legislation, and we believe they are also applicable for the AEOI Standard. When addressing the recommendation put in the Checklist and this report, we will carry out consultations with the responsible institutions, providing a more detailed analysis on this issue and finding the optimal solution compatible with our legal system.
Findings and conclusions in relation to effectiveness in practice
The detailed findings and conclusions in relation to effectiveness in practice of AEOI for Latvia are below, organised per Core Requirement (CR) and then per sub-requirement (SR) as extracted from the AEOI Terms of Reference (see Annex C).
CR1 Effectiveness in practice: Jurisdictions should ensure that in practice Reporting Financial Institutions correctly implement the due diligence and reporting procedures, which includes a requirement for jurisdictions to have in place an administrative framework to ensure the effective implementation of the CRS.
Latvia’s implementation of the AEOI Standard is on track with respect to ensuring that Reporting Financial Institutions are correctly conducting the due diligence and reporting procedures and are therefore reporting complete and accurate information. This includes ensuring effectiveness in a domestic context, such as through having an effective administrative compliance framework and related procedures (SR 1.5), and collaborating with exchange partners to ensure effectiveness (SR 1.6). Latvia is encouraged to continue its implementation process to ensure its ongoing effectiveness.
SR 1.5 Jurisdictions should ensure that in practice Reporting Financial Institutions identify the Financial Accounts they maintain, identify the Reportable Accounts among those Financial Accounts, as well as their Account Holders, and where relevant Controlling Persons, by correctly conducting the due diligence procedures and collect and report the required information with respect to each Reportable Account. This includes having in place:
an effective administrative compliance framework to ensure the effective implementation of, and compliance with, the CRS. This framework should:
be based on a strategy that facilitates compliance by Reporting Financial Institutions and which is informed by a risk assessment in respect of the effective implementation of the CRS that takes into account relevant information sources (including third party sources);
include procedures to ensure that Financial Institutions correctly apply the definitions of Reporting Financial Institutions and Non-Reporting Financial Institutions;
include procedures to periodically verify Reporting Financial Institutions’ compliance, conducted by authorities that have adequate powers with respect to the reviewed Reporting Financial Institutions, with procedures to access the records they maintain; and
effective procedures to ensure that Financial Institutions, persons or intermediaries do not circumvent the due diligence and reporting procedures;
effective enforcement mechanisms to address non-compliance by Reporting Financial Institutions;
strong measures to ensure that valid self-certifications are always obtained for New Accounts;
effective procedures to ensure that each, or each type of, jurisdiction-specific Non-Reporting Financial Institution and Excluded Account continue to present a low risk of being used to evade tax; and
effective procedures to follow up with a Reporting Financial Institution when undocumented accounts are reported in order to establish the reasons why such information is being reported.
In order to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, Latvia implemented all of the requirements in accordance with expectations. The key findings were as follows:
Latvia has begun implementing a strategy to ensure compliance with the AEOI Standard developed after conducting a risk assessment that took into account a range of relevant information sources, such as information published by the Latvian Financial and Capital Market Commission and the MONEYVAL report on Latvia. Communication activities with relevant stakeholders were carried out and a questionnaire was circulated to Financial Institutions to understand how legislation in relation to the AEOI Standard and relevant guidelines are being applied. Latvia intends to keep its compliance strategy and risk assessment under review to ensure its effectiveness on an ongoing basis.
Latvia has worked effectively to understand its population of Financial Institutions, including relevant non-regulated entities, utilising various relevant information sources. This includes a list of regulated entities conducting financial services maintained by the Finance Latvia Association and the Financial and Capital Market Commission information, the Foreign Financial Institution list for FATCA purposes and the list of entities with relevant NACE 2 codes (NACE is the industry standard classification system used in the European Union). Latvia is also taking action to ensure that Reporting Financial Institutions are classifying themselves correctly under its domestic rules and reporting information as required. It intends to keep its understanding of its Financial Institution population up to date on a routine basis.
The institution responsible for implementing Latvia’s compliance strategy appears to have the necessary powers to discharge its functions. With respect to resourcing, Latvia has assigned the equivalent of two full time staff to monitor and ensure compliance by Reporting Financial Institutions, which have access to IT systems and tools to conduct risk assessments. As the audit programme is implemented, the possibility to assign additional staff will be further considered. Overall, they appear to have effectively implemented an operational plan to verify compliance with the requirements, incorporating appropriate compliance activities.
Latvia reviews and analyses the information reported by Reporting Financial Institutions under the AEOI Standard at the end of each reporting cycle. This informs the implementation of a risk-based approach based on the overall quality of the data and taking into account fluctuations in the data.
While no dissuasive penalties and sanctions for non-compliance have yet been applied, it appears that Latvia effectively verifies and enforces the requirements, including through the inspection of records of Reporting Financial Institutions. It also appears Latvia is ready to take effective action to address circumvention of the requirements if such circumvention is detected.
It appears that Latvia has taken effective action to identify undocumented accounts and to follow up with Reporting Financial Institutions that report them. Latvia has also implemented active monitoring and verification activities to ensure self-certifications are obtained as required. Latvia will also keep its jurisdiction-specific lists of Non-Reporting Financial Institutions and Excluded Accounts under review to ensure they continue to pose a low risk of being used for tax evasion purposes.
Table 3 provides a summary of the specific activities undertaken, or that are planned to be undertaken, in relation to each of the key parts of the framework described above.
With respect to the Financial Account information collected and sent by Latvia, the presence of the key data points of the Tax Identification Numbers and dates of birth appeared to be in line with most other jurisdictions, as did the level of undocumented accounts.
One exchange partner reported issues with respect to the information received in relation to the correctness of the Tax Identification Numbers. More generally, many of the exchange partners that received a significant number of records from Latvia indicated that they achieved a success rate when matching the information received from Latvia with their taxpayer database that was broadly equivalent to, or better than, what they usually achieve.
Based on these findings it was concluded that Latvia is fully meeting expectations in ensuring that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures, including by having in place the required administrative compliance framework and related procedures. Latvia is encouraged to continue its implementation process accordingly.
SR 1.6 Jurisdictions should collaborate on compliance and enforcement. This requires jurisdictions to:
use all appropriate measures available under the jurisdiction’s domestic law to address errors or non-compliance notified to the jurisdiction by an exchange partner; and
have in place effective procedures to notify an exchange partner of errors that may have led to incomplete or incorrect information reporting or non-compliance with the due diligence or reporting procedures by a Reporting Financial Institution in the jurisdiction of the exchange partner.
In order to collaborate on compliance and enforcement, it appears that Latvia implemented all of the requirements in relation to issues notified to them (i.e. under Section 4 of the MCAA or equivalent) in accordance with expectations. While no such notifications have yet been received, Latvia has the necessary systems and procedures to process them as required. It also appears that Latvia will notify its partners effectively of errors or suspected non-compliance it identifies when utilising the information received.
Based on these findings it was concluded that Latvia is fully meeting expectations in relation to collaborating with its exchange partners to ensure that Reporting Financial Institutions correctly conduct the due diligence and reporting procedures. Latvia is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
CR2 Effectiveness in practice: Jurisdictions should exchange the information effectively in practice, in a timely manner, including by sorting, preparing, validating and transmitting it in accordance with the AEOI Standard.
Latvia’s implementation of the AEOI Standard is on track with respect to exchanging the information effectively in practice, including in relation to sorting, preparing and validating the information (SR 2.4), correctly transmitting the information in a timely manner (SRs 2.5 – 2.8) and providing corrections, amendments or additions to the information (SR 2.9). Latvia is encouraged to continue its implementation process accordingly, to ensure its ongoing effectiveness.
SR 2.4 Jurisdictions should sort, prepare and validate the information in accordance with the CRS XML Schema and the associated requirements in the CRS XML Schema User Guide and the File Error and Correction-related validations in the Status Message User Guide (i.e. the 50000 and 80000 range).
Feedback from Latvia’s exchange partners did not raise any specific concerns with respect to their ability to process the information received from Latvia and therefore with respect to Latvia’s implementation of these requirements. Two (or 3%) of Latvia’s exchange partners reported rejecting more than 25% of files received, due to the technical requirements not being met, of which none reported rejecting more than 50% of files. This is broadly in line with the general experience of other jurisdictions. It was noted that Latvia is in the process of addressing the issues.
Based on these findings it was concluded that, overall, Latvia is meeting expectations in relation to sorting, preparing and validating the information. It was also noted that there is room for improvement with respect to file rejections. Latvia is therefore encouraged to continue its implementation process accordingly, including in relation to the area highlighted.
Latvia should continue to engage with its partners to address the issues raised.
SR 2.5 Jurisdictions should agree and use, with each exchange partner, transmission methods that meet appropriate minimum standards to ensure the confidentiality and integrity of the data throughout the transmission, including its encryption to a minimum secure standard.
In order to put in place an agreed transmission method that meets appropriate minimum standards in confidentiality, integrity of the data and encryption for use with each of its exchange partners, Latvia linked to the CTS and the CCN, which is used for exchanges within the EU.
Based on these findings it was concluded that Latvia is fully meeting expectations in relation to agreeing and using appropriate transmission methods with each of its partners. Latvia is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.6 Jurisdictions should carry out all exchanges annually within nine months of the end of the calendar year to which the information relates.
Feedback from Latvia’s exchange partners did not raise any concerns with respect to timeliness of the exchanges by Latvia and therefore with respect to Latvia’s implementation of this requirement.
Based on these findings it was concluded that Latvia is fully meeting expectations in relation to exchanging the information in a timely manner. Latvia is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.7 Jurisdictions should send the information in accordance with the agreed transmission methods and encryption standards.
Feedback from Latvia’s exchange partners did not raise any concerns with respect to Latvia use of the agreed transmission methods and therefore with Latvia’s implementation of this requirement.
Based on these findings it was concluded that Latvia is fully meeting expectations in relation to sending the information in accordance with the agreed transmission methods and encryption standards. Latvia is encouraged to continue to ensure the ongoing effectiveness of its implementation.
SR 2.8 Jurisdictions should have the systems in place to receive information and, once it has been received, should send a status message to the sending jurisdictions in accordance with the CRS Status Message XML Schema and the related User Guide.
19 exchange partners highlighted delays in the sending of status messages by Latvia, representing 18% of its partners. This represents a relatively high proportion of partners and has not improved over time. It was noted that Latvia is engaging with its partners to ensure that status messages are sent in accordance with the requirements and most of these issues have already been resolved.
Based on these findings it was concluded that, overall, Latvia is meeting expectations in relation to the receipt of the information. It was also noted that there is room for improvement with respect to the timeliness of status messages. Latvia is encouraged to continue to ensure the ongoing effectiveness of its implementation, including in relation to the area highlighted.
Latvia should ensure it sends status messages to all of its exchange partners in a timely manner.
SR 2.9 Jurisdictions should respond to a notification from an exchange partner as referred to in Section 4 of the Model CAA (which may include Status Messages) in accordance with the timelines set out in the Commentary to Section 4 of the Model CAA. In all other cases, jurisdictions should send corrected, amended, or additional information received from a Reporting Financial Institution as soon as possible after it has been received.
Latvia appears ready to respond to notifications and to provide corrected, amended or additional information in a timely manner and no such concerns were raised by Latvia’s exchange partners and therefore with respect to Latvia’s implementation of these requirements.
Based on these findings it was concluded that Latvia appears to be meeting expectations in relation to responding to notifications from exchange partners and the sending of corrected, amended, or additional information. Latvia is encouraged to continue to ensure the ongoing effectiveness of its implementation.