Following up a similar warning from the International Monetary Fund (IMF) in November, the European Commission has stressed its concern to Latvia over the use of its banking sector by "non-residents" - a thinly veiled reference to suspected widespread money-laundering involving Russia and other former Soviet states.
In the second report since Latvia completed a €7.5bn bailout programme from the IMF and EU, released on January 16, the European Commission warned the Eurozone aspirant to guard against growing banking sector imbalances and to closely monitor the identity of non-resident account holders, reports AFP.
The use of Latvian banks to deposit money coming from from Russia and other Commonwealth of Independent States (CIS) nations has grown exponentially in recent times as crisis grips Cyprus, with the banks in this previously favourite offshore destination for CIS depositors in the frontline. Latvian regulator FKTK said in late 2012 that deposits by non-residents account for almost half the total in the banking system.
The offer of residency visas - translating as EU residency - to foreign investors in Latvian real estate has helped encourage further inflows from the CIS. No more than 37% of non-resident account holders come from other EU states, and of that figure, more than one in five comes from Cyprus.
At the same time, bne has reported several times on the longer-term role of Latvian banking networks as middlemen in shady deals, often concerning large public procurement deals in former-Soviet states. Meanwhile, regulators have been criticized over their inaction ahead of the collapse in November 2011 of Latvia's fifth biggest bank Krajbanka due to the misappropriation of assets by Russian owner Vladimir Anotonov.
"The Commission invites the authorities to follow closely what kind of financial flows are attracted, where they are invested, [and] what are the activities of non-resident banks in the domestic market," a statement said. "The business, legal and regulatory environment in CIS (Commonwealth of Independent States) countries is often weak and investments/loans in these countries call for caution."
The warnings echo the first post-programme report issued by the IMF in November. "The rather rapid increase of non-resident deposits in the banking system warrants vigilance," the Washington-based lender said after its officials visited the country. "The supervision of NRD (non-resident deposit) specialised banks should be sufficiently intensive and frequent given their relatively higher risks."
Brussels insists in the latest report that Latvia beef up funding and staffing for law enforcement and the judiciary to tackle "complex economic, financial, money laundering and tax evasion crimes." Two Latvian banks with large non-resident portfolios, Parex and Krajbanka, have run into trouble, and both ended up being bailed out by the taxpayer at huge expense. Large scale fraud that was undetected by Latvia's Financial and Capital Market Commission (FKTK) until it was too late is alleged in both cases.
Jason Corcoran in Moscow - Russian banks are disappearing at the fastest rate ever as the country's deepening recession makes it easier for the central bank to expose money laundering, dodgy lending ... more
bne IntelliNews - The Kremlin supported by national sports authorities has brushed aside "groundless" allegations of a mass doping scam involving Russian athletes after the World Anti-Doping Agency ... more
Jason Corcoran in Moscow - Revelations and mysticism may have been the stock-in-trade of Nikolai Tsvetkov’s management style, but ultimately they didn’t help him to hold on to his ... more