Post Single Page

A Little Bit More Courage

Laura Ērkšķe

In FinTech Posted

You will agree that fear, including the fear of making a mistake, is not the best ally for making balanced, logically sound decisions and looking at the situation objectively, won’t you?

The purpose of this commentary is to share experience on the inspections performed by the State Revenue Service (the SRS) as one of the supervisory and control institutions in the field of prevention of money laundering and terrorism and proliferation financing. More precisely, to discuss how the SRS currently interprets the range of entities subject to the SRS in accordance with the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing (the AML Law).

Pursuant to Article 45 of the AML Law, the SRS supervises a number of economic and professional operators. This list is exhaustive but subject to interpretation as set out below. Thus, Article 45(2)(6)(a) of the AML Law stipulates that the SRS supervises those entities subject to the AML Law that provide credit services, including financial leasing, if the provision of services is not subject to licensing. In addition, Article 3 of the AML Law defines the persons subject to this law that are persons conducting economic or personal activities. Among other things, this article includes an indication that financial institutions are also considered to be subject to the AML Law. According to Article 1(7) of the AML Law, an economic operator, branch or representative office, which is not a credit institution and which provides at least one financial service within the meaning of the Credit Institutions Law, is considered a financial institution. It is evident that lending is one of such services. [1] It is quite easy to conclude from the aforementioned provisions that the provision of credit services allows an institution that is neither a credit institution nor a licensed consumer credit service provider to be considered an entity subject to the AML Law and subject to supervision by the SRS. This approach is logical and justified, as lending is one of the most common services where money laundering or terrorist and proliferation financing is possible.

However, here lies a rub – what exactly is considered lending? How regular and significant in volume should be the lending of money in order to be classified as lending? And does it matter to whom this amount of money is lent? By the way, neither the AML Law nor the Credit Institutions Law defines lending as a term. If we look by analogy at the explanation provided in Article 8 of the Consumer Rights Protection Law, then lending is a promise to grant or the actual granting of credit as a deferred payment, loan or other similar financial agreement. The Civil Law defines a loan as the transfer of ownership of a certain number of fungible property, with the duty to return property in the same quantity and of the same kind and quality as the property received. [2]

The current interpretation proposed by the SRS is that the lending of any amount of money by a legal entity, regardless of the amount, regardless of how often such lending takes place and regardless of whether it takes place within a group of companies or not, is the provision of credit services.

It automatically imposes a number of obligations on a legal entity under the AML Law. Namely, such entity must approve the person responsible for the prevention of money laundering, proliferation and terrorism financing, who must be familiar with this area (must be able to prove this with an appropriate training certificate) and be responsible for developing an internal control system. What exactly is to be stated in such internal control system (which, of course, must be produced both in hard copy and implemented in more or less advanced technical solutions, devoting both time and material resources to its development) is specified in Article 7 of the AML Law and also on the SRS website. [1] In practice, this means that the legal entity must at least carry out (and document) a risk assessment, i.e., assess both the risks inherent in itself and the risk of money laundering, proliferation and terrorism financing associated with its customer, the customer’s country of residence, the customer’s personal or economic activity, including the customer’s legal form, the credit service the customer uses, and the channel for receiving such service. [4] The risk assessment must be reasoned – unfounded statements that the customer, including its legal form, poses a low risk [5], that lending as a service poses a low risk and that the customer’s business poses a low risk are not appropriate. The SRS is likely to reject such a risk assessment.

After the risk assessment has been completed, it is necessary to develop the procedure under which the legal entity performs other obligations provided for in the AML Law. Namely, how customers are distributed according to their inherent risk, how they can be identified, investigated (listing specific research activities) and how the inherent risk is assessed when a suspicious transaction is reported, when a business relationship needs to be refrained, when a customer needs to be re-investigated, etc., etc. Besides, at least some questionnaires, such as identification, customer due diligence and enhanced customer due diligence questionnaires need to be developed. A register of suspicious transactions, a register of customers and a number of other measures need to be put in place.

I assume you are already tired just from reading what is listed here. Now imagine that a company you own 100% decides to lend money to its subsidiary, and after a year and a half or two, to lend money to another subsidiary. At the same time, the lending company is a manufacturing company and its core business is not lending. According to the current interpretation provided by the SRS, the lending company would be obliged to register as an entity subject to the AML Law, as it would qualify as a financial institution within the meaning of the AML Law. The company would be required to develop an internal control system, identify its subsidiary, including obtaining of a completed customer questionnaire from the subsidiary, determine the level of risk inherent in that subsidiary, and conduct due diligence of that subsidiary, including the obligation to verify the subsidiary’s beneficial owner (who is the same as the beneficial owner of the lending company). Thus, all activities arising from the AML Law are performed as if the two companies were not connected in any way, knew nothing about each other and, accordingly, acted completely independently of each other. From the outside, what are the aims of such an approach? Is there a good chance that the parent company will recognize its subsidiary as a high-risk customer that it will not want to work with (i.e., decide not to lend money)? Will the subsidiary be recognized as a high-risk customer subject to enhanced due diligence measures that will be repeated on a regular basis? Will a suspicious transaction be reported to the State Revenue Service or the Financial Intelligence Unit? I really doubt it.

Another example, a company with only one owner enters into two loan agreements and one convertible loan agreement over three years, where the lender has the right, at its discretion, to convert the lent amount into the borrower’s shares or to recover the borrowed amount. “Ordinary” loan agreements, in turn, are concluded with another company that is wholly owned by the same owner and with a company in which the same owner owns about 10% of the shares. Yes, you can see the logic that you need to know the company to which the convertible loan is issued and assess it. This would be the first step for any prudent entrepreneur – to investigate the company where he plans to invest his money. However, in the case of “normal” loan agreements, the lender is likely to lack the incentive to report any suspicious transaction by the borrower, even if the lender’s beneficial owner is in one case the same as the borrower’s, while with respect to another borrower where the lender holds only 10% , the lender is also interested in receiving its share of the profits from the company to which the money is lent. Consequently, it would be reasonable to conclude that there is little likelihood that a rational objective will be achieved.

The only benefit in both cases described above is that the SRS receives information about such transactions, because the companies that issued the loans have registered as entities subject to the AML Law, and the SRS has reason to go to check which loan agreements have been concluded and why. But the SRS also has such an opportunity, to request information, documents and perform company inspections, within the framework of tax audits. And if it has been established within the framework of the tax audit that the company is possibly involved in money laundering or proliferation or terrorism financing, this would not prevent the SRS from exercising its powers as a supervisory authority provided for in the AML Law. On the other hand, if the companies are required to take formal action, regarding which it is clear from the outset that there will be no added value (especially when loan agreements are concluded within the same group of companies) while the companies devote their time and financial resources, this seems disproportionate. Also from the aspect of the efficiency of the use of SRS resources – is it worth spending the time of civil servants for reading risk assessments, policies and procedures developed by companies in the cases I mentioned and the like?

I can say with rather great confidence that many companies do not even suspect that concluding one or a couple of loan agreements, if lending is not carried out as the main economic activity of this company, means, according to the SRS interpretation, the obligation to perform all activities following from the AML Law and legal acts derived from said Law. At the same time, the sanctions for non-compliance with the requirements of the AML Law, which may be imposed on such a company by the State Revenue Service, are quite severe – up to the ban on economic activity and the request to exclude the company from the commercial register.

The question is whether any company that has once lent money to someone should be considered an entity subject to the AML Law. May be the key should be searched in conjunction of the term “persons performing an economic activity” stated in Article 3(1) of the AML Law and the types of economic and professional activities specified in the same Article. In other words, only if a person is considered to be pursuing a [core] economic activity in the field of lending, should he be regarded as an entity subject to the AML Law. Such an approach would be in line with the examples of financial institutions provided in the AML Law, which are considered to be the entities subject to the AML Law. [6] This would also correspond to the explanation provided by the SRS itself that economic activity is performed if it is regular and systematic – three or more transactions per year or five and more transactions in three years. [7] Some cases when a company carries out certain types of transactions do not automatically mean that it is an economic activity of that company. Accordingly, due to the conclusion of individual loan agreements over a longer period of time, it is not justified to oblige the company to perform a “full cycle” of all activities stipulated by the AML Law. Asking a company to get to know its borrower, find out how the borrower plans to repay the loan, what its business is and what its sources of profit are – the lending company could do all this without huge paperwork. On the other hand, if the loan is issued within a group of companies, then even this range of activities would be narrowed, focusing on the funds from which the loan will be repaid.

In conclusion, I would like to call on the SRS to be bolder and, while performing its functions as an independent institution within the framework of the AML Law, to apply and interpret the provisions and requirements of the AML Law according to their purpose and meaning, not just the letter. In turn, I would urge entrepreneurs to be brave and oppose disproportionate requirements and not be afraid of undesirable consequences in the form of additional SRS audits or in other ways.

[1] See Article 1(4)(b), the Credit Institutions Law.

[2] See Article 1934, the Civil Law.

[3] See

[4] For more information on the content of data to be included in the risk assessment, interested parties may consult the Guidelines for the Entities subject to the Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing supervised by the State Revenue Service, available at

[5] Here and hereafter, unless the context otherwise requires, risk means the risk of money laundering, proliferation and terrorism financing.
[6] Pursuant to Article 1(7) of the AML Law, financial institution is an insurance merchant, insofar as it carries out life insurance or other insurance activities related to the accumulation of funds, and a private pension fund; an insurance intermediary, insofar as it provides life insurance or other insurance services related to the accumulation of funds; an investment brokerage company; an investment management company; a capital company carrying out the buying and selling of the foreign currency cash; a payment institution; an electronic money institution; a savings and loan association; other payment service provider; a manager of alternative investment funds; a provider of re-insurance services; a provider of financial leasing services; a person engaged in the provision of consumer credit services and to whom the Consumer Rights Protection Centre issues a special permit (licence) for the provision of credit services.
[7] See