57 MPs voted for the initiative, while 17 were against and four 'abstained'.
The opposing MPs came from the Harmony party, with Jānis Ādamsons saying the law will sound the death knell for non-resident business in Latvia.
"All this business passes us by, just so we can tell our elder brother we've done it," he said, apparently in reference to the United States.
The amendments to the Law on Anti-Money Laundering and Combating the Financing of Terrorism will come into force the next day after being promulgated by the president, which is likely to happen within days.
Under the bill, a shell company is defined as an entity that fits one or several of the following three criteria. Firstly, it carries out no actual economic activity and has no documentary proof to the contrary. Secondly, the entity is registered in a jurisdiction where companies are not required to submit to the authorities their financial statements. Thirdly, the entity has no place of business in its country of domicile.
The bill says banks will have to cease cooperation with shell companies within 14 days and close the companies' accounts within 60 days. Following this period, these clients will be able to retrieve the money to their accounts in the holder bank or another one, but the clients will not be able to use this money for business dealings.
The proposed ban will not extend to legal entities registered in Latvia, as under Latvian law each company must prepare financial statements, including annual financial reports, and submit them to the authorities.
The bill seeks to limit the possibility of using the Latvian finance system for channeling laundered money. Financial institutions will also have to take steps to reduce their risk profile.
The Association of Latvian Commercial Banks (LKA) said it welcomed the move, but warned that it would not be enough on its own.
"The LKA still expects the banking supervisory authorities to take clear and decisive action to remedy the shortcomings identified so that we do not receive repeated reports from the Financial Crimes Network of the US Department of the Treasury or other international partners that would completely ruin Latvia's international reputation," the association said in a statement.
"The Latvian government must do everything in its power to show clear action and resolve to combat financial crimes and to prevent the use of the Latvian banking system for illegal activities that do not comply with international practice and law," the LKA said, adding that a forthcoming report from Moneyval would be decisive in shaping the future of the banking sector.
As previously reported by LSM, Prime Minister Māris Kučinskis said earlier this week that Latvia has until July to convince its international partners its banking sector has been cleaned up.