An interview with Artūrs Surmovičs, lawyer
The forestry sector and the law linked to money laundering and terrorism. What does this really mean?
I would like to state: the regulatory act “Law on the Prevention of Money Laundering and Terrorism and Proliferation Financing” also applies to representatives of the forestry sector. Usually, when we think of or hear about the laundering of proceeds of crime (which we refer to in everyday life as money laundering), or the financing of terrorism, or proliferation (supporting the production of weapons of mass destruction), we think of banks (a topic we are occasionally reminded of by news from the Financial and Capital Market Commission), which are often fined for various violations related to this law.
In our minds, the forestry sector has nothing to do with this law. That is understandable! But – the entities of the aforementioned law can also include companies working in the forestry sector. How is that possible? The law contains a clause stating that a subject of the law can be an “intermediary in real estate transactions”. When discussing real estate in the context of proceeds of crime, people usually think of relatively expensive apartments or buildings located near the sea or a lake. We less often think of a forest, which is also real estate! Looking at this regulation: the law does not differentiate between types of real estate – forest, forest land, a house, or anything else. As far as I have become familiar with forestry companies and their operations, I see that there are quite a few entrepreneurs in Latvia who deal with both forest acquisition and harvesting, as well as resale – they act as intermediaries. In other words, they engage in intermediation in essence, or, when declaring their type of business, have indicated that they operate as intermediaries or agents in real estate transactions.
So, the law applies to them too! Experience shows that representatives of other sectors (who are similarly subjects of the law) find out about the existence of the law and the fact that they are subject to it only upon receiving a letter from the State Revenue Service (SRS), stating that SRS representatives will arrive for an inspection and asking them to prepare all documents related to compliance with the said law. Sometimes this is a surprise or news to the entrepreneur. The typical reaction is: what is this law and why does it apply to me?
If one can put it this way, the requirements for entrepreneurs are simultaneously simple and complex. One – you must know the risks (you must know and understand your clients well). Two – the need to implement an internal control system. Three – constantly monitor both your clients and the effectiveness of the internal control system. If these three things are working, that is excellent!
Furthermore, one must also keep in mind the so-called “Sanctions Law”, which applies to everyone regardless of what a person does for a living.
What does “monitoring your clients” mean?
The “magic” of the law lies in this question, because often implementing the three things I mentioned is more complex than it sounds. You have to start by needing to understand the risk of becoming involved in some money laundering scheme, and you must understand your own business. That is to say, you must understand whether, while conducting business, such an opportunity exists or not. This is the absolute foundation, starting with which the entrepreneur prepares the rest of the documents.
Forest land is a very attractive and desirable asset! Why? The price of an apartment or building can rise and fall depending on the market situation – it will be unstable. Forest is a different matter – it and its price grow slowly, but steadily! As is known, various funds in Latvia purchase forest land, for example, a Swedish pension fund, aware of the increase in value, invests in forest. The investment is successful, stable, and, what is important for a pension fund, long-term! And – what cannot be forgotten – because of these mentioned characteristics, such an investment can interest the criminal world, which operates with funds of illegal origin – by investing in forest land, they too will have an asset whose value only increases, from which there will be official, visible income and for which taxes might be paid. In such a situation, companies working in the forestry sector must understand: whether they can or cannot be involved in such schemes or activities! It is important – who we buy from and who we sell to when acting as intermediaries! For example: where is the client from and is it clear where they got the money to purchase the forest land. It must also be understood on whose behalf the client is acting – their own or someone else's!
Is a serious investigation required on the part of the entrepreneur here? Secondly – all the information is at the disposal of state institutions, so why unnecessarily burden the entrepreneur, who has other tasks?
State institutions do have a lot of information, but this is about something else! People, when encountering the laundering of proceeds of crime, have a tendency to exaggerate a little. There is no need to hire an investigator, nor to become one yourself – we pay taxes, and state institutions employ people in the relevant services whose duty it is to know and act. But – there are certain functions that the entrepreneur should perform themselves. For example, asking where the money came from. Or, if a buyer or seller does not appear in any registers or elsewhere as a wealthy person, but wishes to purchase property worth several hundred thousand. In such a case, it would be only reasonable to inquire where they got the money! We are a small country and a small society, and – whether we like it or not – a wealthy person in Latvia cannot really “hide”; there will be at least some information about them! If there is no such information, it is very likely that the income is not legal! By helping such a person purchase property, we are helping to launder this money! Therefore, we are supporting this criminal offence. This is a situation that must be avoided! The internal control system I already mentioned, which is individual for every entrepreneur and company, will certainly help here. If everything is understood, the system is not complicated!
It should probably be emphasised that the mentioned law relates to and applies to intermediary services in forest purchases. If, for example, a person buys a forest for themselves, that is a different story and different laws apply!
Exactly – we are talking about intermediation!
Latvian citizens live in many places; there are those who have never even been to Latvia. How can one ascertain the wealth of such citizens?
Firstly, you can simply ask about the origin of the funds, find out what the person does, what their “history” is. Secondly, google.com, public databases and other information-gathering tools are capable of “working miracles”. You can and, in fact, should (!!!!) combine both methods: both ask and check for yourself. No one expects an investigation at the level of the Security Police from an entrepreneur, but one must use the available instruments; then problems should not arise.
Are intermediary services widespread in Latvia in relation to forest and forest land?
As much as I have researched advertisements and information about companies working in the industry, there are enough of them. Furthermore, advertisements often also indicate legal and accounting consultations on settling property purchase documents and – lawyers and accountants are also subjects of the law! So! This is again a nuance that many do not realise, but it is important!
An important and unresolved issue – forest owners, land properties and the restrictions set for them.
There is a certain compensation for restrictions (prohibitions), but it is not adequate on several levels. The existing system provides for compensation for annual forest growth (160 euros), which representatives of the sector consider ridiculous.
What is not talked about or what remains “behind the scenes”: what to do with the forest that has already grown? No one compensates for the value of existing trees – the forest is there, you can look at it, but… I do not want to pit forest owners against nature conservation, but other questions arise: do the people who impose the restriction bear any responsibility for it? There is no responsibility – it is not really possible to prove and check; a bird may or may not be in the respective territory, the forest property is mine "de iure", but "de facto" it has been taken away from me! A similar situation exists at present with the ongoing Rail Baltica project, where expropriation of property for public needs is slowly, slowly beginning. Ideologically, both situations – a restriction for a protected species and the Rail Baltica route – are no different! Just as well, a railway could be built on my land and 160 euros per hectare per year could be paid! In the case of railway construction, they do not do that; they buy out the land. A similar situation exists with power lines, where the land is not expropriated, it belongs to the owner, a restriction is set, but a many times larger compensation is paid. How is the situation different for a person if there is a bird's nest or a power line on their land? It is not! The question: why is fair compensation paid to one, but practically nothing to another?
Another thing – the compensation is 160 euros regardless of whether pines, willows, scrub or fast-growing spruces are growing in the forest. The situation is absurd because persons in different states and situations are treated as equal to one another. That is discriminatory! In a democratic country – if a person's rights are restricted for the good of society – this same society compensates for it appropriately. Of course, it will not always be the market price, but the system currently in place cannot be recognised as fair in any way!
If the legislator has chosen a certain course of action in the interests of society, this action is appropriate, but upon reaching one specific person, we see that this person (the forest owner) has paid for society's interests with their own property. That is not fair!
The talk about the responsibility of those who set restrictions is current among forest owners because – it has happened to see and hear about nests where the inhabitant is someone else, not the one for whom the restriction should be set!
I would not like to think that anyone among us would intentionally lie by calling a magpie's nest an eagle's. Rather, a passionate and fanatical defence of one's interests is observed in Latvia! Essentially, it is not bad if you are a defender of your interests or convictions. The problem starts when a person's views and life position start to cloud their eyes and thinking. We can apply this to ornithologists, foresters, and hunters alike. The moment you become blind and do not see or hear others, problems begin, because blind fanaticism does not lead to anything good! A balance is necessary. I think it would be good if foresters, ornithologists and hunters complemented and balanced each other in their actions, because only in balance can the best result be achieved! Over-exaggerated defence starts to hinder development. Nature conservation activities are financed by those who use nature themselves. And at one point we see that we ban this, we ban that, there are no checks, no control, and quite a lot of people rejoice that there are restrictions everywhere, and the forests are full of birds. What next? For many people, property has been intentionally taken away, they have been banned from working in it, and development opportunities have been denied! Decisions need control; they must be transparent and verifiable! There must be an option to lift a restriction. Undoubtedly! By the way, it is often mentioned: it can be lifted! How many restrictions have been lifted? Rights must exist not only in documents, but also in practice. If there are possibilities to lift a restriction, and it is justified, the restriction is to be lifted!
The balance in Latvia is relative, as people have long been given a rather distorted and one-sided impression of forests, forestry and the sector. This includes praising unnamed friends of nature who are fighting for something…
The money circulating in the nature conservation sector is quite large and, unfortunately, we do not know if it is spent sensibly and prudently! As far as I know, the State Audit Office has checked hunting organisations 3-4 times in the last six years, but the nature conservation system – not even once.