ADVERTISEMENT

Why the Global Banking Spotlight Is Shining on Latvia: QuickTake

Why Alleged North Korean Links Froze a Baltic Bank: QuickTake

(Bloomberg) -- One of its biggest lenders is accused of laundering money for North Korea. Its central bank chief was detained by anti-corruption police. All in a matter of days. What’s going on in Latvia? The Baltic nation of 2 million people — once a Soviet republic — is no stranger to financial scandal.

1. What does Latvia have to do with North Korea?

The U.S. Treasury Department alleged on Feb. 13 that Latvia’s third-biggest lender, ABLV Bank AS, institutionalized money laundering as a "pillar" of its business. It’s a magnet for organized crime, corruption and evasion of sanctions, including those related to North Korea’s missile program, according to a Treasury statement. That prompted some of ABLV’s clients to flee, and the European Central Bank to tell Latvia to freeze payments from the bank, since Latvia uses the common European currency, the euro. ABLV denied the charges, said it’s taken steps to prevent money laundering and pledged to work with U.S. officials.

2. Why was the central bank governor detained?

In a separate case, Ilmars Rimsevics, who is also a member of the ECB’s governing council, was held for 48 hours by the Latvian anti-graft bureau in a bribery investigation over the weekend. The governor, who was released on bail, rejected allegations that he asked for and received a bribe, saying they’re false and an attempt to undermine him. Protected by the central bank’s independence, he refuses to resign, despite being urged to do so by the country’s political leaders. Rimsevics has also made wide-ranging allegations against several lenders, including Norvik Banka JSC, which has accused him of attempting to extort money from the bank. Rimsevics has also denied that allegation.

3. How did we get here?

Latvian banks have long served as magnets for cash, and their notoriety picked up after communism collapsed. An ex-Soviet country with a large Russian-speaking minority, Latvia regained independence in 1991 and joined the European Union in 2004. While this helped develop Latvia’s banking industry, the country also drew criticism from groups such as the Organization for Economic Cooperation and Development, which cited concerns about money-laundering risks and lax oversight. The inflow of foreign cash accelerated in 2012 as Cyprus’s economic woes prompted wealthy depositors from the former Soviet Union to seek an alternative offshore home for their money. Latvia reversed the trend in 2015 as the nation was trying to join the OECD, handing out record fines and shutting down lenders over money laundering. Foreign deposits fell by a quarter last year.

4. Do Latvian banks have a bad reputation?

There have been several banking scandals in the country in the last couple of decades. Latvian banks were accused of handling some of the $1 billion stolen in 2015 from Moldova’s financial system, helping shift as much as $20 billion in illicit cash from Russia between 2010 and 2014 and facilitating bribes by a Scandinavian telecommunications company. There have been casualties. Trasta Kommercbanka AS, implicated in the $20 billion scheme, was shut down in 2016, though it denied wrongdoing. Privatbank AS’s Latvian unit was hit with a 2 million euro ($2.2 million) fine the same year for handling money from the Moldovan fraud. Last year, five Latvian banks agreed to fines for failing to gather sufficient information on transactions and beneficiaries in deals linked to North Korea.

5. What’s the impact on Latvia?

Finance Minister Dana Reizniece-Ozola said the country’s reputation is in crisis over both the central banker’s detention and the allegations about ABLV. Her ministry has changed its borrowing strategy and will refrain from refinancing operations in the near term, she said. Latvia is rated A3 by Moody’s and A- by Standard and Poor’s, the seventh-best grade at both agencies. SEB AB, the Swedish bank whose local unit is one of Latvia’s biggest lenders, said the country’s financial market remains "stable overall."

6. What has the ECB done?

The ECB asked Latvia’s Financial and Capital Markets Commission to impose a moratorium on ABLV, which means the bank is temporarily barred from making payments on financial liabilities including deposits and bonds until further notice. The measure, a first for the ECB, was necessary to stabilize outflows after a “significant deterioration of the bank’s financial position.”

7. What’s effect will the ECB moratorium have?

Beyond depositors not being able to access their funds, imposing a stay on payments is controversial because of the potential damage to a bank’s counterparties. When Austria imposed a halt in 2015 on payments from Heta Asset Resolution AG, a company created to wind down a collapsed lender, German creditors took heavy losses, with one needing a bailout. That said, EU banking authorities like the flexibility such a moratorium offers because it buys time, preventing creditors from fleeing a distressed lender and sending it into a terminal spiral. EU banking law currently doesn’t allow European authorities to impose a stay directly, but instead allows member states the option of handing that power to local regulators. A provision giving EU regulators that right is under discussion.

8. What’s the bank’s future?

The ECB wouldn’t have pushed for a moratorium if the situation wasn’t serious. Deposits aren’t the only source of funding, but a bank needs the trust of its clients and counterparties to operate. In extreme cases, the ECB can also declare banks failing or likely to fail, meaning they are taken over by the euro area’s resolution authority. When it comes to alleged misconduct, anti-money laundering issues are dealt with by national authorities, but the decision on whether to withdraw a bank’s license ultimately lies with the ECB. Whatever the outcome, the U.S. Treasury is considering prohibiting ABLV from accessing the U.S. financial system, which would be a major blow.

The Reference Shelf

--With assistance from Ott Ummelas and Aaron Eglitis

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net, John Glover in London at johnglover@bloomberg.net, Radoslav Tomek in Vienna at rtomek@bloomberg.net.

To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net, Balazs Penz, Leah Harrison Singer

©2018 Bloomberg L.P.