Dirty Money: U.S. pressures Latvia to clean up its non-resident banks


History Repeats Itself

This is not the first time.

Ten years ago similar pressure from U.S. on Latvia to get its act together ended in two banks locked out of the U.S. financial market (VEF banka had its license revoked, Multibanka underwent several changes of ownership and names, but until the EU/US sanctions on Russia were imposed they were controlled by Rotenberg brothers, childhood friends of Vladimir Putin).

In 2005, promises were made to clean up the banking sector and laws were altered to demand that banks identify owners of offshore accounts. Aigars Kalvītis, then Prime Minister, criticized the prosecutor’s office and created a special council to oversee developments, with himself as the head. The structure last met two years ago, in February 2014.

Ten years later Latvian banks appear as laundering intermediaries in high visibility cases involving countries of the former Soviet Union. Latvian banks transferred dollars defrauded from the Russian state budget, which were investigated by Hermitage Capital lawyer Sergey Magnitsky, who later died in prison. The dollars of Serhiy Kurchenko, a self-declared billionaire and associate of Viktor Yanukovych, the overthrown President of Ukraine, that Ukrainian law enforcement is chasing around the world. The illegal procurements of “Russian Railways” which were exposed by a Reuters investigation.

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The latest scandal is the billion siphoned out of three Moldovan banks.

The political elite of Latvia did nothing but looked on – as did the bank regulator (FCMC). Out of almost 150 employees in the banking regulator just 3 – 5 people were directly tasked with fighting money laundering.

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Before May 2014 the largest fine the regulator could impose on a bank was EUR 142 000: a small risk compared to the profits of banks. Neither FCMC nor the lawmakers proposed to increase it. Much larger fines – up to 10% of a bank’s net revenue (which would realistically be from 450,000 euros up to 18.5 million euros) – were only introduced because the EU adopted such a law. Only after this law was it mandatory to name banks that were punished by the regulator, previously the regulator claimed financial stability would be threatened if people knew which banks were fined.

Action started towards the end of 2015. First, Privatbank was fined a record sum for its role in the theft of the billion of Moldova. In January 2016, the regulator imposed significant restrictions on Trasta komercbanka, prohibiting its existing clients from making transactions with amounts exceeding 100,000 euros (both banks deny wrongdoing). . This move was followed by the resignation of Kristaps Zakulis, head of the regulator. If he hadn’t left voluntarily, the Minister of Finance and the head of the Bank of Latvia were ready to seek his removal in parliament.

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Riga’s political elite were seized by fear that the flexible attitude towards money laundering could be a reason to reject Latvia’s bid to join the OECD. Another possible risk feared by the Bank of Latvia was the closing of the U.S. dollar correspondent account with “Deutsche Bank” – the last western credit institution that still cooperates with Latvian banks (DB declined to comment).

The former would be a smack in the face of the international reputation of the country. The latter – a blow to the non-resident bank business model, as intermediaries in Asia or elsewhere would have to be involved. That would slow down business and make it more expensive.

“We continue to look to Latvia to do more to protect the integrity of the U.S. and international financial systems. We will continue to enforce and pursue action against banks anywhere that present money laundering concerns and risks to the U.S. financial sector,”

U.S. sources involved in the case told Re:Baltica. The response of the U.S. Department of the Treasury was more diplomatic: it regularly encourages countries to establish strict supervision and actively control it, and that applies to large European financial centres, including Latvia.


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