Latvia has long served as a bridge for Russian companies looking to do business in western markets, offering banking services to Russia and former Soviet countries. Following Latvia’s EU accession in 2004, access to western markets for those in Russia became even easier, as it was deemed less of a risk to process transactions from Latvia than Russia.
However, a number of recent scandals, including the arrest of Ilmars Rimsevics, governor of the Latvian National Bank, as well as separate accusations of sanctions-busting directed against ABLV, the country’s third-largest lender, have seen Latvia scrambling to defend the integrity of its banking system.
In an effort to clean up the sector, Latvia’s parliament voted at the end of April to reduce ties between domestic banks and shell companies. The new law is aimed at reducing and eventually eradicating money laundering.
Following the announcement, Latvia’s Prime Minister Māris Kučinskis tweeted:
“In order to facilitate cooperation in the process of transformation of the financial sector, restore the international reputation of the Latvian financial sector, and assess the effects of changes in the business environment, today I signed an order for the creation of a cooperation group.”
The steps being taken could be seen as a direct result of the recent problems involving ABLV, which has since been forced to close. This follows actions taken by both the European Central Bank (ECB) and the United States to crack down on money laundering.
“Over the last two years there have been very clear signals from our international partners about the situation with the banks,” said Finance Minister Dana Reizniece-Ozola. “This is a clear signal to other banks that the situation is serious.”
The new legislation is not only targeted at cleaning up Latvian bank’s by dealing with the issue of shell companies but will also, according to the Association of Latvian Commercial Banks (ALCB), “create an information-sharing platform between the public and private sectors to effectively fight against financial crime.”
According to Ms Reizniece-Ozola, while steps are being taken to better the enforcement of cleaning up the sector, it will take time. “It can’t be changed overnight,” she said.
Latvia’s prime minister has indicated that Latvia has three months to show that they are making progress to clean up the banking sector.
The end of April also saw a public hearing of a special committee on financial crimes, tax evasion and tax avoidance (TAX3) in Brussels at which Pēters Putniņš, head of Latvia’s Security Police, Financial and Capital Markets Commission said:
“Suspicious money didn’t land in Latvia from the moon. It arrived through other European banks…we haven’t heard about other jurisdictions sanctioning their banks or carrying out other steps. This is food for thought…We’re sure that it’s high time to look at an initiative of a joint European institution that would supervise the risk control of dirty money in the region and carry out all the necessary international operations, like FinCEN and other institutions are doing in the US.”
More than Latvia alone
The views of Mr Putniņš were shared by heads of financial authorities from other EU countries, as well as by Roberts Zīle, the vice-chair of the TAX3 committee, who agreed that there should be a European body to monitor money laundering.
“It shows that if we don’t launch a joint European institution, it’s a very small step if only Latvia sorts out its banking sector,” said Mr Zīle.
Latvia itself still has a long way to go, however. The country’s own association of commercial banks (ALCB) published a statement to coincide with parliament’s adoption of the new rules:
“In the event that the Council of Europe’s Moneyval report on Latvia, due to be published this autumn, proves to be unfavourable, we can confirm that it will bring immense challenges for banks servicing Latvian companies and residents. The Latvian government must do everything necessary to demonstrate clear action and commitment to fighting financial crime and to not allow Latvia’s banking system be used for unlawful activities which go against international practice and rights.”