An office building of ABLV Bank AS stands in Riga, Latvia, on Thursday, Feb. 22, 2018. ABLV, the Latvian lender accused of money laundering by the U.S. Treasury, said it's drawn up a plan to end a freeze on making payments after its mainly foreign clients began to withdraw their money. Photographer: Roni Rekomaa/Bloomberg
US move against ABLV led to the bank's collapse and the announcement by Latvia that its offshore banking industry must be reduced almost to nothing © Bloomberg

When Latvia’s financial regulator punished five banks last summer, the reason was remarkable enough: they had been caught circumventing international sanctions against North Korea. 

But US officials found something else almost as extraordinary: the fines for the banks ran from just €36,000 to €1.6m. The US ambassador in the Baltic nation protested to the foreign ministry against what she saw as paltry penalties.

Further irritating the Americans, one bank — ABLV — was left unpunished, leading the US to name it publicly last month as involved in “institutionalised money laundering” as well as breaches of North Korean sanctions.

The fallout has led to the collapse of ABLV and the announcement by Latvian authorities that its offshore banking industry must be reduced almost to nothing within six months.

Marshall Billingslea, US assistant Treasury secretary for terrorist financing, showed intelligence on at least one more bank that was “extremely heavy”, according to a Latvian official. “It’s clear there’s more to come” in terms of money laundering allegations, he said. 

But US concerns go beyond individual banks’ behaviour to systemic issues in a country that has tried to be a financial bridge between east and west.

Latvia’s banking sector is divided in two: by 2015, non-resident deposits — those of foreigners, often from Russia or other former Soviet states — accounted for more than half of the total in the country.

Outsiders, including the US, the OECD and others, saw a system where money laundering was rife and with little joined-up action by Latvian authorities. 

There have also been questions about the role of the European Central Bank as the banking supervisor for ABLV and others, although the ECB has stressed that money laundering matters are for national authorities.

Further scrutiny of Latvia’s financial sector is likely as the country’s anti-corruption agency tries to build a case against central bank governor Ilmars Rimsevics, who was briefly detained in a bribery probe last month just days after the US accusations against ABLV. Mr Rimsevic, who has not been charged, denies the allegations.

The Americans have long complained of the lack of any prosecution for money laundering in recent years, a court system that does not work, a corrupt insolvency regime, and a large shadow economy.

Joe Biden, then US vice-president, articulated some worries in a speech in Riga in 2016, saying: “Justice systems must be equitable and efficient and transparent. Otherwise, we will not attract international commerce and business. And in a moment when Russia seeks to use corruption as a tool of coercion and influence around the globe, rooting out corruption is essential to preserve your national sovereignty. It’s a cancer to the body politic.” 

It seems the message was not taken seriously enough by Latvian authorities. Dana Reizniece-Ozola, Latvia’s finance minister, says in an interview: “The business was developing at such a skyrocketing pace that the control and supervisory institutions were lagging far behind. The country came to a point where we couldn’t control the risks any more.” 

Ilmars Rimsevics, governor of the Bank of Latvia, gestures while speaking during a Bloomberg Television interview in Riga, Latvia, on Thursday, Feb. 22, 2018. Rimsevics said he's never been offered a bribe but there's been a "hint" of one and that he regrets not reporting it. Photographer: Roni Rekomaa/Bloomberg
Further scrutiny of Latvia’s financial sector is likely as the country’s anti-corruption agency tries to build a case against central bank governor Ilmars Rimsevics © Bloomberg

The regulator, the Financial and Capital Market Commission, did start action in 2016, fining ABLV a record €3.2m for various breaches of money laundering and terrorist financing laws.

But US patience was tested when it became clear Latvian banks were involved in breaking sanctions on North Korea. A senior Latvian official said six lenders were suspected. Five accepted fines in two separate decisions last June and July. But ABLV held out, the official added, with the bank arguing that it had already been punished the year before and that no breach of sanctions could be proved. 

Peters Putnins, head of the FCMC, declined to comment on the procedure, saying merely that if the regulator had fined ABLV in 2017 it would have been double punishment. Instead, the regulator specified in an agreement with ABLV that it had not found a breach of sanctions but ordered the bank to commit €12m to improve its money laundering compliance. 

Many in Riga believe that legal argument sparked US anger and led it to “name and shame” ABLV. In their proposal to bar ABLV from accessing the US financial system, Treasury officials wrote that the lender “facilitated transactions related to North Korea” even after the bank announced a “no tolerance” policy in 2017. ABLV, which is liquidating itself, denies it ever engaged in money laundering. 

Ms Reizniece-Ozola suggests the regulator failed to see the increased importance of North Korea to the US. “If the regulator [had] taken strict measures towards ABLV last year it would have helped. The overall geopolitical situation has changed. The level of tolerance of strategic partners has decreased towards non-Nato members using our system for money laundering.” 

Ainars Latkovskis, head of the Latvian parliament’s defence committee, is more blunt on the regulator’s inaction: “In my mind, it is very stupid.” But US officials remain supportive of Mr Putnins even if they were perplexed by the ABLV decision. 

Others in Latvia are grateful to the US. Ojars Kalnins, head of parliament’s foreign affairs committee, says of the US action: “It was the kick in the rear that was needed. For many of us, we are glad to see it come to a head as we’ve known about it for years. It goes beyond the economy; it’s a security issue.” 

Now Latvia is promising tougher action. Ms Reizniece-Ozola and Mr Putnins propose reducing the share of non-resident deposits from 34 per cent to about 5 per cent by banning the opaque shell companies behind much of this business. Banks are being told to change or close.

“If they can’t find a new business niche and their old business model was servicing non-resident transactions, then they should realise that self-liquidation is a way out. A banking licence is nothing that is granted forever. If their business isn’t there any more, why not change?” asks Mr Putnins. 

Ms Reizniece-Ozola promises action in other areas. The government is seeking a new head of the office for prevention of laundering of proceeds derived from criminal activity, with the US offering to train the candidate. “The overall capacity for dealing with financial crime needs to be improved,” Ms Reizniece-Ozola adds. 

Liene Gatere, acting director of Transparency International in Latvia, says that just as the country has committed to spending 2 per cent of GDP on defence to satisfy US president Donald Trump, so it should increase its spending on financial crime. “If you don’t invest it doesn’t matter which laws you amend,” he says. “Police have been understaffed and under-budgeted for a long time.”

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