Where Latvia's Financial Corruption Scandal May Lead

(Bloomberg) -- Its central bank chief has been charged with bribery. A lawyer liquidating the bank that was accused of bribing him was killed in a hail of machine-gun fire. One of the country’s biggest lenders was shut down after the U.S. levied allegations of money laundering and violations of sanctions on North Korea. What’s going on in Latvia? The Baltic nation of 2 million people, once an unwilling part of the Soviet Union, is no stranger to financial scandal. After episodes of drama befitting a new Netflix series, the country is locked in a standoff with the European Central Bank that could go on for quite a while.

1. What’s the central bank governor accused of?

Ilmars Rimsevics, who’s been in charge of Latvia’s central bank as governor or deputy since 1992, is accused of soliciting a bribe from Trasta Kommercbanka AS, a small lender that was shut in 2016 after being implicated in a $20 billion money-laundering scheme. Specifically, he’s accused of receiving 250,000 euros ($294,000) five years ago and a paid fishing trip to Russia’s Far East in 2010 in exchange for helping Trasta with its regulator problems. Prosecutors allege he received the bribe in payments between 2012 and 2013. Martins Bunkus, a Latvian lawyer who’d been working on Trasta’s insolvency, was machine-gunned to death while driving in Riga, Latvia’s capital, on May 30. A police official said it looked to be “a carefully planned murder” that was “connected with the victim’s professional work,” though police haven’t linked his death with any specific client he worked with.

2. What’s become of Rimsevics?

Not much has changed. He denies all allegations and refuses to resign, despite being urged to do so by the country’s political leaders. Since EU law states that the heads of central banks can be removed only if found guilty of “serious misconduct," this standoff might last until his second term runs out at the end of 2019. Prosecutors will weigh the evidence on whether to send his case to trial and could make a decision by year-end. Trials in Latvia usually take years.

3. How is the ECB involved?

Latvia is one of the smallest countries that uses the common European currency, the euro, and Rimsevics is a member of the ECB’s Governing Council, which sets interest rates. He can’t leave the country to attend ECB meetings and is banned from his old offices at Latvia’s central bank. The governor gave his deputy, Zoja Razmusa, his proxy at the Governing Council until the end of 2018 after the European Union’s highest court ruled that prosecutors must allow him to name an alternate. The ECB and Rimsevics had their first hearing on Sept. 25 at the Luxembourg-based European Court of Justice in a challenge to the restrictions he faces. The court has fast-tracked the two cases, so a decision can be expected in four to six months.

4. What does Rimsevics say?

He’s rejected allegations that he asked for and received a bribe but said he regrets not reporting the “hint” of a bribe in the past. He says he submitted evidence proving he paid for the trips to Russia’s far east. From the outset, Rimsevics has blamed his legal woes on a conspiracy by a group of banks including ABLV Bank AS, the country’s No. 3 lender, which was hit with U.S. money-laundering claims on Feb. 13, shortly before he was detained. Some of ABLV’s clients pulled their money after the U.S. accused it of being a magnet for organized crime and corruption and evaded sanctions related to North Korea’s nuclear program. The ECB declared ABLV failing or likely to fail.

5. How is this all connected?

That’s not clear, if it’s connected at all. At his first press conference after being released from detention, Rimsevics said the central bank had turned down a request by ABLV for liquidity support just before his home was raided. ABLV, in turn, blames its predicament on Rimsevics. Latvian authorities have repeatedly said the two cases aren’t related.

6. Why are Latvians accustomed to financial scandal?

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. In 2016, the same year Trasta was shut down after being implicated in money-laundering violations, Privatbank AS’s Latvian unit was hit with a 2 million-euro ($2.3 million) fine 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.

7. What explains Latvia’s track record?

Latvian banks have long served as magnets for massive money flows, and their notoriety picked up after communism collapsed. As some Russians amassed great wealth in the 1990s, Latvia was quick to set up shop as a clearinghouse for cash from Russia and the former Soviet union. 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. About 1 percent of all U.S. dollars moving around the world in 2015 were going through Latvia, according to Daniel Glaser, then a top official in the U.S. Department of the Treasury. Latvia reversed the trend that year 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.

8. What’s the impact on Latvia?

The repeated scandals prompted a complete overhaul of Latvia’s banking model. The government has banned lenders from working with risky shell companies and regulators are helping reduce the amount of business activity with clients from the former Soviet Union. The share of non-resident deposits, which once eclipsed domestic holdings, has fallen to less than 30 percent from 40 percent at the end of 2017. The plan is to cut it to about one-fifth, with those held by customers from the Commonwealth of Independent States -- an alliance of ex-Soviet nations -- plunging to 5 percent. Even with the decline in non-resident banking, the Baltic country’s economy grew 5.3 percent in the second quarter, and Standard & Poor’s lifted Latvia’s credit rating to A, its highest level ever, citing a decline in non-resident deposits and external debt positions.

The Reference Shelf

• A profile of Rimsevics, the charges against him and the background of the sector.
• A new documentary about Rimsevics is showing in Riga.
• A look at the ECB’s Latvia "Containment Dome," by Gadfly’s Marcus Ashworth.
• The U.S. Treasury’s statement.
• ABLV’s initial response, and then a longer response.
• The ECB’s statement on the moratorium.
• A story about how Latvia thrived on ex-Soviet cash, before it drained out.

--With assistance from Ott Ummelas, Nicholas Comfort, John Glover, Radoslav Tomek and Stephanie Bodoni.

To contact the reporters on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net;Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net

To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net, Andrew Langley, Laurence Arnold

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