Latvia scrambles to contain bank scandal fallout

Latvian lawmaker Veiko Spolitis thought the worst days in the Latvian banking sector were behind it. "We really strengthened our law to prevent Latvia from being a 'money laundering paradise,'" Spolitis told DW.

A member of the parliamentary defense, internal affairs and anti-corruption committee, Spolitis had hoped fining some banks' illegal activities, reducing non-resident accounts and enacting new laws last November would result in a fresh start for the eurozone's 18th member. The European Central Bank (ECB) was in direct supervision of Latvia's three largest banks. What could go wrong?

Read more: Can Latvia be a role model for reform in Europe?

Plenty, as it turns out. Last week, the US Treasury's Financial Crimes Enforcement Network (FinCEN) put out a sharply worded announcement that Latvia's third-largest bank, ABLV, had "institutionalized money laundering as a pillar of the bank's business practices," helping "corrupt politically exposed persons" funnel billions of dollars to North Korea's ballistic missile program. ABLV's dollar accounts were frozen.

A few days later in a separate case, Latvian Central Bank chief Ilmars Rimsevics was detained and then suspended on suspicion of taking bribes. Spolitis is calling on parliamentary colleagues to support new legislation to be introduced on Thursday that would limit a central bank chief's term in office. Rimsevics, who refuses to resign, has held the post since 2001.

FBI on Latvian frontline

In both cases, the US government and a report by the Associated Press, respectively, were the sources of more public information than was forthcoming from the Latvian government itself.    

Spolitis wants to know why. "It says something about the board of the European Central Bank [which supervises ABLV — the ed.] if FinCEN is coming up with this information and the Associated Press comes up with these allegations," he said. "We really would like to learn what is happening. There are a lot of demands on our secret service and intelligence agencies as to what happened and why it could happen." He expects Latvian authorities to seek help from the FBI and the European Anti-Fraud Office, OLAF. A US Treasury representative will arrive in Latvia within days to share evidence.

Eminent economist skeptical

Swedish economist Anders Aslund has been tracking Baltic economies since the fall of the Soviet Union and has written a book on Latvia's economy with former Latvian Prime Minister Valdis Dombrovskis. Aslund said he has serious questions about both cases.

"Latvia did a very substantial cleaning out in the banking sector in 2015, 2016," he told DW. "And I'm surprised that something so serious comes out now." As for Rimsevics, Aslund noted that the allegations of extortion attempts come primarily from one source, Norvik Banka Chairman Grigory Guselnikov, a Russian businessman who just may have an ax to grind.

The Latvian government fined Norvik Banka some €1.3 million ($1.6 million) last year, one of five Latvian banks charged with breaching money-laundering and counter-terrorist financing rules, after an FBI investigation revealed North Korean involvement.

"I'm simply skeptical," Aslund said. "I'm not saying Rimsevics is certainly clean but the people accusing him are definitely not clean."

Kremlin fanning the flames?

The extraordinary amount of international interest in the scandal, especially the unprecedented arrest of a sitting European central bank chief, prompted the Latvian Defense Ministry to take the unusual step of putting out its own statement alleging nefarious forces at work in amplifying the problems.

"All this suggests that this is probably a very large-scale information operation to defame the image of Latvia in the Western countries and to undermine the public's trust in the state," the statement said, implying that Russia was using a similar tactic to its alleged election meddling. "It is fairly likely that this is not the end of the information operation."

US actions 'crude,' EU's insufficient

Aslund blames other governments for meddling too, blasting the US for its announcement on ABLV which caused the immediate outflow of some $600 million, which required the ECB to step in with liquidity assistance and a moratorium on payments out of the bank.

"It's so crude," Aslund said. "You don't as a foreign country put out a statement that causes a bank run in another country." However, Aslund pointed out that neither the ECB nor any other EU institution even looks for money laundering activities.

Bruegel economist Maria Demertzis believes this is a much bigger problem for the EU than just Latvia. She is convinced the lack of a solid foundation in some EU countries undermines trust between governments to the point where it hinders progress on all fronts.

"We put all our efforts on fixing the economics and we forget the fundamentals like the rule of law," Demertzis told DW. "All the emphasis for entering the EU is about fixing your economics. Make sure your exchange rates converge, bring down inflation, reduce your debt and then you're fine." 

As it turns out, things are far from being in order, says Demertzis. "The answer is no, you're not fine."