NCEffective Insolvency and Creditor Rights Systems
A significant development in Latvia's insolvency regime was the passage of a new Law on Insolvency in 2007. The new law took effect on January 1, 2008 and, according to a 2008 report by the European Bank for Reconstruction and Development (EBRD), it represents an improvement over the insolvency legislation that the EBRD had assessed in 2004. The content of that earlier legislation was rated by Harmer and Cooper as achieving only "low compliance," due to deficiencies in several key areas. It failed to define "insolvency" clearly enough to prevent creditor abuse and conferred inadequate powers to the courts for the supervision of restructuring. The most compelling concern expressed by the EBRD in its 2004 evaluation of the old law was with regard to implementation. According to the EBRD's 2004 Legal Indicator Survey on Insolvency, Latvia's insolvency regime was deemed to be too slow, too expensive, unnecessarily complex, unpredictable, and lacking in transparency, for both debtor-initiated and creditor-initiated proceedings. Although the 2008 EBRD report indicates that some of these issues have been addressed by the new legislation, no direct information as to the compliance of the new legislation with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank is available.
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NCInternational Financial Reporting Standards
According to the 2005 World Bank Report on the Observance of Standards and Codes on Accounting and Auditing, national Latvian laws and regulations for financial reporting were generally in line with European Union (EU) directives, but some fundamental differences with International Financial Reporting Standards (IFRSs) existed. Latvian accounting rules, which must be complied with in the preparation of annual accounts of listed and non-listed companies, are developed based on IFRSs; however, as stated in the 2006 self-assessment prepared by the Latvian Association of Certified Auditors (LACA), the alternatives which contradict Latvian accounting legislation are excluded, disclosure requirements for financial information are reduced, and additional illustrations to the standards are added. In a way, these Latvian standards are a simplified version of IFRSs suitable for the needs of small and medium-size enterprises. Being a member of the EU, Latvia complies with the European Commission (EC) Regulation No. 1606/2002, which requires all EU listed companies to prepare their consolidated financial statements in accordance with IFRSs endorsed by the EU from January 1, 2005. As far as the option for the extended use of IFRSs provided for in the EC regulation is concerned, Latvia requires the application of IFRSs in the annual and consolidated accounts of banks, insurance companies, and other supervised financial institutions, and permits the use of IFRSs in the consolidated accounts of all other companies.
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ENPrinciples of Corporate Governance
According to the IMF's 2002 Financial System Stability Assessment (FSSA) of Latvia, the corporate governance framework in Latvia "either fully observed or largely observed" the Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance. However, weaknesses remained regarding compliance and enforcement, as pointed out by the 2002 World Bank Report on the Observance of Standards and Codes. In 2004, the European Bank for Reconstruction and Development (EBRD) conducted a Corporate Governance Sector Assessment on Latvia, which assessed its corporate governance related "laws on the books" against the OECD Principles. Latvia achieved "high compliance" in this study, while weaknesses were revealed with regard to disclosure and transparency as well as the protection of shareholders. Further, EBRD's 2005 assessment on Commercial Laws of Latvia noted that the enforceability of judgments could be problematic, and courts and prosecutors appeared not to be well experienced and competent in corporate cases. Therefore, the 2005 EBRD assessment concluded that despite the good corporate governance legal framework in place, Latvia needed to improve the effective implementation and enforcement of existing legislation. As a follow up to the 2004 report, EBRD's 2008 Country Strategy for Latvia stated that Latvia's corporate governance legislation in force in November 2007 showed "a good level of compliance" with the OECD Principles. In 2005, following the IMF and World Bank reports, the Riga Stock Exchange in Latvia issued the Principles of Corporate Governance. This voluntary code was regarded by the 2007 EBRD Corporate Governance Legislation Assessment as "the most significant legal development affecting corporate governance" in Latvia.
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IDInternational Standards on Auditing
The World Bank in its 2005 ROSC on Accounting and Auditing noted that under the Commercial Law financial statements of all limited liability companies are required to be audited. However, some companies that that do not exceed two of three size thresholds are exempt from audit requirements. With the enactment of Directive 2006/43/EC of the European Parliament and Council, all statutory audits of annual and consolidated accounts in European Union member states must be carried out on the basis of International Standards on Auditing (ISAs) as adopted by the European Commission. According to the information provided on the European Commission website, Latvia has fully transposed the above-mentioned Directive into its national legislation. Per a 2006 self assessment by the Latvian Association of Certified Auditors (LACA), pursuant to the Law on Sworn Auditors, statutory audits must be carried out in accordance with ISAs issued by the International Federation of Accountants (IFAC), and approved by the LACA. As stated in the LACA self-assessment, as of 2006, the 2004 version of ISAs was effective in Latvia and the 2005 IAASB Handbook was in the process of being translated. Further, the IFAC Code of Ethics for Professional Accountants was fully adopted in December 2004. In the 2005 ROSC the World Bank expressed its concern about the low quality of the actual statutory audits carried out in Latvia. In this respect, the World Bank recommended that Latvia enhance enforcement mechanisms, improve systems of professional education and quality assurance, and increase public oversight of the audit profession.
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IDAnti-Money Laundering/Combating Terrorist Financing Standard
The Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL), in cooperation with the International Monetary Fund (IMF), conducted a joint mutual evaluation of Latvia's Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) system against the Financial Action Task Force (FATF) forty recommendations and nine special recommendations in March 2006. MONEYVAL published its findings in a June 2007 report, in which it concluded that Latvia either complied or largely complied with over half the FATF's recommendations and special recommendations. The assessment found significant shortcomings in the customer due diligence and record keeping framework for financial institutions. At the time of the mutual evaluation, in 2006, the main laws that governed AML/CFT activities were the 1998 Law on the Prevention of Laundering of Proceeds derived from Criminal Activity, the Criminal Law, and the Criminal Procedure Law. However, subsequent to the 2006 mutual evaluation, in 2008, Latvia enacted the Law on the Prevention of Laundering the Proceeds from Criminal Activity (Money Laundering) and of Terrorist Financing, which repealed the 1998 AML Law. This new Law, according to the 2008 U.S. DoS report, adopts an overall risk-based approach to the application of the AML/CFT requirements in Latvia, which was one of the recommendations of the 2007 mutual evaluation report. There is no publicly available source that assesses the comprehensiveness and effectiveness of the 2008 Law, however, it is generally observed that the new Law is an improvement over its predecessor. Furthermore, the 2007 MONEYVAL report noted that the Latvian authorities have pursued an active strategy, particularly over the past few years, to achieve compliance with international standards on AML/CFT and this work has been guided by the FATF Recommendations.
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CPCore Principles for Systemically Important Payment Systems
The latest information indicates that Latvia has only one systemically important payment system (SIPS), namely, the Automated Interbank Payment System (SAMS). The International Monetary Fund (IMF) in 2002 conducted an assessment of Latvia's payment systems, and at the time noted that there were two SIPS, the SAMS and the Electronic Clearing System (EKS). SAMS, a real time gross settlement (RTGS) system, was assessed by the IMF as being largely compliant with the Committee on Payment and Settlement Systems' (CPSS) Core Principles for Systemically Important Payment Systems (CPSIPS). The only significant deficiency noted by the IMF report was expected to be addressed once amendments were made to the existing law. After the IMF assessment a new law was passed to address these weaknesses. A 2004 self assessment of SAMS conducted by the Bank of Latvia (BoL) arrived at a similar conclusion as the IMF assessors. The only difference in findings between the two assessments was that the BoL assessment noted that all the deficiencies mentioned by the IMF were addressed with the passing of the new Law. However, there is no other publicly available source confirming these findings. Another important change to the Latvian payment infrastructure was that, in 2007, Latvia joined the European Union's Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET2) system. Latvia was not linked to TARGET2's predecessor system, TARGET as the country was not then part of the EU. TARGET2-Latvija is the TARGET2 component in Latvia and it provides its participants with an efficient, fast and reliable infrastructure for payments in euro, using deposits with the BoL for settlement. It is not clear from information provided on the BoL website or other publicly available sources as to whether the BoL defines TARGET2-Latvija as systemically important to Latvia and unlike several other TARGET2 member countries the commencement of the new system in Latvia did not result in the replacement of the old RTGS system, SAMS.
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