The Bank of Italy has launched proceedings to shutter the local branch of Latvian lender PrivatBank, the Latvian financial market regulator FKTK reported on August 10.
The move appears just the latest to stem from Latvia's new drive to clean up its banking sector, with the watchdog having launched a series of strikes against banks this year. Riga has been pushed into action by building pressure from the EU and US over the sector's reputation as a refuge for suspect money, especially from the former Soviet states. On the one hand, the news offers another sign that Lativa's effort is starting to help expose networks reaching across the EU. On the other, there is also evidence that it may struggle to do more than scratch the surface.
Italy’s central bank said in a statement the previous day that audits carried out at the Italian branch of PrivatBank revealed “serious violations of regulations to prevent money laundering” and that there was a risk that these violations would be repeated.
PrivatBank's Latvian operation is 46% owned by the Ukrainian parent of the same name. It has 13 branches in Latvia and one in Italy. The Bank of Italy said the local branch will not be allowed to carry out any operations beyond allowing clients to withdraw or transfer funds.
Around half of deposits in Latvian banks are 'non-resident', stemming mainly from Russia and other members of the Commonwealth of Independent States. Latvian banks have also been implicated in major corruption cases in Ukraine and Moldova in recent years.
The Italian case only adds to PrivatBank’s recent problems both in its home market of Ukraine and in Latvia. The FKTK handed out its biggest ever fine of €2mn to the local unit in December for its role in the Moldovan frauds that siphoned out up to $1bn from two of the country's banks.
That was followed a few days later with hefty fines for individual board members. A criminal case was launched against the lender by the Latvian economic crimes police in early February. The scandal, which also involved Russian banks, has thrown the small southeastern European country into chaos.
The pressure on Latvian banks comes following a reform of FKTK. Despite warnings from international institutions such as the OECD, the country's role as a money-laundering hub – which has expanded hugely since the Cyproit banking system, the previous favourite offshore destination for the Russian-speaking world, went into meltdown – was exacerbated for years by the ineffectiveness of the watchdog, according to critics.
The regulator has been making a concerted effort to change that image in recent months. Riga fined ABLV, the largest independent bank in the country, for insufficient supervision of transactions, and pulled the licence of Trasta Komercbanka for alleged money laundering. FKTK has also launched a special money-laundering unit.
Now, with the local authorities pressing the issue, links to other EU banking systems are being exposed. The Italian case follows an April move by French prosecutors, which charged Rietumu, one of Latvia's largest banks, over an alleged €100mn scam by a French company.
However, questions continue over how deep the zeal for transparency actually runs. Reports in June claimed that Latvian banks, including PrivatBank, offer customers advice on how to use bogus offshore companies to launder money or evade taxes without running afoul of regulators around the world.