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Two years ago, the prospect of missing out on OECD membership – not to mention a sharp kicking from US authorities – finally prompted Latvian policymakers to embark on a clean-up of the country’s banks.
It was long overdue. For nearly two decades, a sizeable chunk of the sector – the ‘non-resident’ banks – had been allowed to funnel billions of dollars in cash from Russia and other CIS countries to the west with little or no regulatory oversight. From the Magnitsky case to the Russian Laundromat, Latvian banks have featured in just about every big money-laundering scandal in the former Soviet Union of the last 10 years.
Tackling the issue was never going to be easy. Latvian authorities made a strong start, ramping up the powers and manpower of the regulator, introducing new anti-money laundering legislation and imposing a series of swingeing penalties for past infractions.
The impact of these moves can be seen in a substantial reduction in non-resident deposits in Latvian banks, which have fallen by nearly 30% since the end of 2015. Hopes that this might add some lustre to the sector’s tarnished reputation were once again dashed in July, however, with the emergence of further evidence of the extent of its misdeeds.
€80 million fine
At the start of the month, a Paris court slapped Rietumu Bank with a €80 million fine for its part in a five-year scam designed to help French citizens evade tax. More than €200 million is reported to have been laundered through the scheme, which ran for five years before being shut down in 2012.
The proposed fine would account for nearly all of Rietumu Bank’s 2016 net profit of €82.3 million. The lender, which is one-third owned by Irish tycoon Dermot Desmond, denies any wrong-doing and plans to appeal the judgement.
Its credibility took another blow two weeks later, however, with the announcement of a €1.5 million fine from the Latvian regulator for involvement in sanctions-busting in North Korea between 2009 and 2015. That investigation also resulted in a €1.3 million penalty for Norvik Banka, while three other lenders agreed to pay smaller fines totalling €641,000.
It seems unlikely that this is the end of the story. Further scandals will almost certainly emerge as regulators and investigators delve deeper into the non-resident sector. This will be bad news for Latvia’s bankers, who are desperate to put the negative coverage behind them – not least because it threatens to deprive them of access to direct dollar clearing.
JPMorgan cut all correspondent banking ties with the country in 2014, leaving Deutsche Bank as the only US-based clearer of Latvian dollars. Now the German house is also pulling back from the Baltics.
The unenviable reputation of Latvia’s banking sector was acquired over decades. Reversing it will also be a long process.