The less-than-impeccable reputation of Latvia’s boutique banks has long been chronicled in the pages of bne IntelliNews – often accompanied by some sort of official complaint that the reputation is ill-founded. However, the announcement on December 11 that Latvia’s financial regulator was handing out its biggest-ever fine to the local subsidiary of Ukrainian-owned PrivatBank performs the double role of both making the regulator look serious at last and confirming that something has been decidedly fishy for years. 

In a statement, the Financial and Capital Markets Commission (FKTK) said it was fining PrivatBank, effectively Ukraine’s savings bank yet dogged by controversy, a record €2mn and demanding the replacement of its management board for “irregularities in line with the Money Laundering and Terrorism Financing Prevention Act”, as well as other breaches of the rules.

“FKTK has reason to believe that the bank had not taken all the necessary measures... Thus, the bank was involved in transactions that lead to a high reputational risk, money laundering and terrorism financing risk,” the statement said.

FKTK chairman Kristaps Zakulis suggested the fine should act as a deterrent, with a slight hint that more might be to come. ”I invite all bank officials to consider that their work will be individually assessed and breaches of regulations will be appropriately punished,” he warned.

The action came after a report by the Kroll financial investigator outlined the role of Latvian banks in transferring money from the Moldovan Central Bank to offshore destinations as part of an alleged billion-dollar fraud perpetrated in 2014.

FKTK acknowledged that its action came as a direct result of the Kroll report – which was leaked to the press by a Moldovan official in a desperate effort to get action on a fraud that sucked 10% of the country’s GDP through Latvia in just three days.

Latvia’s large number of boutique banks specializing in non-resident clients from Russia, Ukraine and the countries of the former Soviet Union have long been linked to numerous money-laundering allegations, though until now little action has been taken.

The fact that FKTK’s previous biggest fine, for “possible” failures in money laundering rules, was for just €140,000 in 2013 and did not even name the bank involved was hardly a major disincentive with billions at stake.

Latvian banks have also been linked to the notorious Magnitsky case and as recently as December 10 Russian anti-corruption campaigner Aleksey Navalny alleged an unnamed Latvian bank was involved in the ‘Chaika’ scandal currently causing headlines in Moscow.

While the FKTK action is unprecedented, it is not perhaps as unexpected as might be supposed. Indeed, the timing itself may be significant as bne IntelliNews understands that US auditors are currently on Latvian soil and determined to get to the bottom of precisely how dodgy some of the banks are.

The scale of the losses to the Moldovan state has caused thousands to take to the streets and has contributed to political chaos in the country.

Yet despite frequent contacts between Moldovan and Latvian officials in recent weeks, discussion of the massive fraud has been notable only for its absence. As recently as December 7, Latvian Foreign Minister Edgars Rinkevics was telling new Moldovan ambassador Eugen Revenco that his country’s “reforms should be more actively pursued and implemented in the areas of the justice system, banking and finance, anti-corruption, media transparency and improvements to the business environment”.

Revenco’s reply is not recorded – but may have involved a certain amount of spluttering.