Latvia makes it into OECD thanks to crackdown on non-resident banks

Latvia makes it into OECD thanks to crackdown on non-resident banks
Latvian Foreign Minister Edgars Rinkevics greets OECD Secretary General Angel Gurria. / Photo by Latvian Foreign Ministry
By Mike Collier in Riga May 27, 2016

At a ceremony in Paris on June 2, Latvian Prime Minister Maris Kucinskis will sign his country up as a full member of the Organization for Economic Cooperation and Development (OECD), in the process becoming the second Baltic state to join the so-called “rich countries' club” after Estonia.

But it very nearly didn’t happen. OECD membership was selected by then-PM Valdis Dombrovskis as the next target after Eurozone membership was assured in 2014. The accession process started smoothly, but once Dombrovskis left the scene in 2013 the pace of reform in areas such as Latvia’s numerous state-run companies slackened.

However, confirmation of Latvia's accession came on May 11, with OECD Secretary General Angel Gurria saying: “With Estonia already an OECD member since 2010, Latvia now invited to join and Lithuania in the process of accession, the OECD will be much better connected to the Baltic region.”

While technical ratification by Latvia’s Saeima (a formality) will still need to be completed over the summer, the Paris ceremony will effectively mark the moment at which Latvia hits a target it came perilously close to missing.

The main problem was Latvia's large boutique banking sector. More than half of Latvia’s 25 registered banks specialize in serving the needs of non-residents, mainly from Russia, Ukraine, Belarus, Kazakhstan and other former CIS countries. Among the leading banks of this type are Rietumu banka, ABLV, Baltic International Bank, a local subsidiary of Ukraine's PrivatBank and – until recently – Trasta Komercbanka.

More than half (53%) of the deposits in the Latvian banking system, representing some €12bn in total, are classed as non-resident.

For years – from the collapse of the notorious Parex banka in 2008 onwards – bne IntelliNews investigations as well as other investigative journalists have claimed that many of these non-resident deposit (NRD) banks were being used to launder money on a massive scale. Six Latvian NRD banks have been linked to the well-known Magnitsky case in Russia and are believed to have laundered at least $63mn.

Rietumu is part of a major scandal in France, accused by prosecutors of helping a company called France Offshore enable tax dodging. For years bne IntelliNews has been reccounting the tale of the mysterious $400mn sale and resale of a Ukrainian oil rig using Trasta, and there’s also the small matter of various banks processing $20bn filched from Russian state coffers, according to the Organized Crime and Corruption Reporting Project.

Such stories were routinely batted away by the Latvian financial regulator, the Financial and Capital Markets Commission (FKTK), which refused even to give details of the banks it had fined token amounts for breaking the rules. Until last year the largest fine it ever handed out was a paltry €140,000 penalty.

But it was the involvement of Latvian NRD banks in an astonishing fraud that saw a billion dollars sucked out of Moldova in a matter of days in 2014 that finally gained the world's attention. That such a massive amount could be laundered so quickly and with no consequences not only provoked political turmoil in Moldova itself that still threatens to derail its EU membership aspirations, it also got the US, jealously protective of its currency, on the case.

Latvian officials were summoned to Washington and told in no uncertain terms the banks had to be cleaned up or the US would use its weight to block OECD membership, well-placed US sources have confirmed to bne IntelliNews.

Suddenly, there was a problem in the NRD banking sector after all. FKTK head Kristaps Zakulis was hauled in front of a parliamentary committee and asked why nothing was being done to tackle money laundering. On January 29 he resigned, to be replaced by his deputy, Peters Putnins. That itself sent out a signal, as it had been Putnins rather than Zakulis who had pushed the FKTK to finally start handing out serious sanctions against NRD banks for failing to make proper checks on their clients’ identities and transactions.

First, PrivatBank was hit with an unprecedented €2mn fine. In addition, members of PrivatBank's board were hit with individual fines ranging from €8,000 to €96,000 and dismissed.

Next in to bat, Trasta Komercbanka had its activities suspended by the FKTK and the European Central Bank, and in March had its license revoked, shutting it down – the first time such a sanction had ever been applied by the ECB for money laundering.

Also in March Baltic International Bank, owned by Valerijs Belokons of Blackpool Football Club fame, was issued a million-euro fine, again for “violations of the provisions of the Law on the Prevention of Laundering the Proceeds from Criminal Activity (Money Laundering) and of Terrorist Financing and Regulations on Customer Due Diligence”.

In the background, the FKTK was also handing out smaller penalties to individuals and traders for market manipulation in a desperate attempt to show the US and other OECD member states that Latvia's laissez-faire attitude to money laundering was over. With OECD teams in Riga during March and April to check how Latvia was meeting all the chapters necessary to join the organization, the NRD blitz was a last-ditch effort.

It may have come late in the game, but it worked. Responding to the departure of the last OECD mission on April 14, Putnins said: “Implementation of higher standards set by international organizations, and in particular the OECD, in the financial sector in relation to anti-money laundering and counter-terrorist financing has been one of the most important tasks for the [KFTK] in recent years. We have come a long way.” 

No resting on laurels

The question now is whether the Latvian authorities will continue the crackdown. It seems so, for on May 26 ABLV, the second largest bank in the country, announced it had agreed to pay a huge fine after signing an “administrative agreement regarding the violations detected under the [FKTK] inspections, which is aimed at improving the functioning of the bank’s internal control system. According to the agreement, a fine of €3.17 million will be applied to the bank and warning will be given to the responsible member of the bank’s board.”

The idea that the FKTK and ABLV actually negotiated something akin to an out-of-court settlement is extraordinary. ABLV’s size means it is overseen by the ECB as well as the FKTK. Coincidentally, the ECB was shut for business on May 26 because it was a public holiday in Germany.

Similar but not identical statements released by the FKTK and ABLV noted that the bank, “had not ensured appropriate extent of verification and documentation of economic nature and legal purpose of particular clients’ transactions in previous year… the bank had not paid sufficient attention to the client’s untypically large, complex, or interrelated transactions and also had not performed intense supervision of some clients’ transactions”.

And yet the words “money laundering” do not appear anywhere despite the frequency with which the FKTK has bandied them around recently and the fact it makes an explicit connection between ABLV and the massive Moldovan fraud. Such linguistic sensitivity is presumably worth paying €3mn for – though according to its own rules, the FKTK would have been within its rights to ask for up to €12mn, being 10% of the bank’s profits for the previous year.