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10 December 2023

Banking overhaul seeks to shut Latvian money laundromat


Eurozone member Latvia is scrambling to reform its banking sector after US authorities accused its third largest lender of large-scale money laundering with connections to North Korea's nuclear weapons development programme.

Desperate to restore credibility, Riga is eliminating deposits in US dollars, cracking down on dealings with shell companies that may be used to facilitate money laundering and setting limits on the number of non-resident depositors that banks can serve.

Latvia's "boutique banking" sector has long sold itself to foreigners as a gateway to the European Union, with 11 of Latvia's 23 registered commercial banks catering to non-residents. A lucrative sector, exports of financial services brought in 446 million euros ($475 million) in 2016.

But the dream of the Baltic state of 1.9 million people to become a regional financial hub turned into a nightmare after authorities shrugged off repeated calls by international organisations such as the IMF and OECD that it needed to tighten banking regulations to prevent it being used for money laundering by foreign clients, the vast majority of which hailed from Russia and other countries from the former Soviet Union.

The US allegations against ABLV Bank were a rude wake up call that has stirred the nation's authorities into curbing the practices which landed the bank, Latvia's third largest bank despite having few local clients, in trouble and prompted its liquidation in February,
Shell companies are the first on the chopping block.

Latvian bank depositors own more than 26,000 of them according to Peteris Putnins, head of Latvia's Financial and Capital Markets Commission (FCMC).

Existing only on paper, shell companies may be used for legitimate business purposes as a vehicle for a transaction or to hold an asset. However, they can also be used to launder money and obscure ownership.

Latvian lawmakers have adopted legislation, which is expected to be signed into law soon, that bans lenders from all dealings with companies that cannot prove they have real operations.

- 'Substantial risk' -

Latvia has also vowed to slash the number of non-resident accounts to five percent of the total, down from 39 percent in 2017. All the existing and future non-resident clients will also face greater scrutiny over the origin and legality of their money.

The OECD already warned Riga in 2015 that non-resident deposits pose "a substantial risk that money obtained from corruption committed outside of Latvia is laundered inside the country."

According to FCMC chief Putnins, most of the reforms will take effect within six months.

Latvia's financial sector is also reeling from the suspension in February of central bank chief Ilmars Rimsevics amid a corruption probe unrelated to the ABLV debacle.

A member of the European Central Bank's governing council, Rimsevics faces allegations in Latvia that he received bribes of at least 100,000 euros ($122,000). He has denied any wrongdoing.

An earlier spate of murky money-laundering scandals had already sent Latvia's once thriving banking industry into decline, with thousands of foreign clients withdrawing deposits.

Total deposits in Latvian banks fell to 18.2 billion euros in April, according to the FCMC, down from a peak of 23 billion euros in 2015.

The capital exodus shows little sign of abating.

"There is a widespread opinion that the dream of Latvia as a regional centre for finance is over," said Vjaceslavs Dombrovskis, an economist with the Certus think tank that was largely financed by ABLV Bank.

- String of scandals -

A March report by the Organized Crime and Corruption Reporting Project (OCCRP) alleged that between 2011-14, shell companies used Riga-based Trasta Komercbanka to launder around $13 billion in proceeds from corruption and fraud schemes in Moldova.

Another bank, a Latvia-registered subsidiary of Ukraine's Privatbank, laundered $3 billion, according to the OCCRP report.

The FCMC shut down Trasta Komercbanka in early 2016, while Privatbank was fined two million euros and forced to fire its senior management.

Rietumu Banka, another bank offering services largely to non-residents, is appealing an 80-million-euro fine for money laundering levied by a French court.

The US Treasury sanctioned ABLV Bank in February, alleging that it "facilitated transactions for corrupt politically exposed persons and has funneled billions of dollars in public corruption and asset stripping proceeds through shell company accounts."

ABLV shareholders voted for it to fold after the ECB froze its payments.

Latvia's ongoing clean-up is limited to banks catering primarily to non-residents.

It will not affect retail banking, insurance companies and other financial services used by hundreds of thousands of local clients.

The closure of ABLV barely caused a ripple in the local economy as most of the bank's depositors were foreign.

Local depositors appear to be unfazed by the wave of money laundering allegations. Their deposits are increasing even as non-resident money is being withdrawn, according to the FCMC.