Latvia overhauls banking amid money-laundering accusations

EUROZONE member Latvia is scrambling to reform its banking sector after US authorities accused its third-largest lender of large-scale money laundering with connections to North Korea’s nuclear weapons development programme.

Desperate to restore credibility, Riga is eliminating deposits in US dollars, cracking down on dealings with shell companies that may be used to facilitate money laundering, and limiting the number of non-resident depositors that banks can serve.

Latvia’s “boutique banking” sector has long sold itself to foreigners as a gateway to the European Union, with 11 of Latvia’s 23 registered commercial banks catering to non-residents. A lucrative sector, exports of financial services brought in 446 million euros (S$722 million) in 2016.

But its dream to become a regional financial hub turned into a nightmare after authorities shrugged off repeated calls by international organisations such as the IMF and OECD that it needed to tighten banking regulations to prevent it being used for money laundering by foreign clients, the vast majority of which hailed from Russia and other countries from the former Soviet Union.

The US allegations against ABLV Bank were a rude wake-up call that has stirred the nation’s authorities into curbing the practices which landed the bank in trouble and prompted its liquidation in February.

Shell companies are the first on the chopping block. Latvian bank depositors own more than 26,000 of them according to Peteris Putnins, head of Latvia’s Financial and Capital Markets Commission (FCMC).

Existing only on paper, shell companies may be used for legitimate business purposes as a vehicle for a transaction or to hold an asset. But they can also be used to launder money and obscure ownership.

Latvian lawmakers have adopted legislation, which is expected to be signed into law soon, that bans lenders from all dealings with companies that cannot prove they have real operations.

Latvia has also vowed to slash the number of non-resident accounts to 5 per cent of the total, down from 39 per cent in 2017. All the existing and future non-resident clients will also face greater scrutiny over the origin and legality of their money.

A spate of murky money-laundering scandals had already sent Latvia’s once thriving banking industry into decline, with thousands of foreign clients withdrawing deposits.

Total deposits in Latvian banks fell to 18.2 billion euros in April, according to the FCMC, down from a peak of 23 billion euros in 2015. AFP