European Regulators Failed to Spot Suspicious Money Flooding Through Latvia’s Banks
22 Sep 2020

By Graham Stack, OCCRP, 21 September 2020

OCCRP — European regulators gave the green light for international banks to handle billions of dollars that flowed from the former Soviet Union through Latvia’s banking sector, even as thousands of these transactions were being red-flagged to the U.S. Treasury, leaked bank records show.

In 2005, acting on tips from German banks, that country’s anti-money laundering police took a long, hard look at Latvia’s banks — and decided they were clean.

Not only did the Federal Criminal Police (BKA) financial intelligence unit find “no indication” of high money laundering risks, its annual report that year said it had determined Latvia’s anti-money laundering legislation went “beyond the standards” applied in Germany.

Years later, in 2012, a report by European anti-money laundering body MONEYVAL concluded that Latvia did not breach a single one of its anti-money laundering rules.

Those reviews encouraged major banks, including JP Morgan, Deutsche Bank, and Commerzbank, to offer their Latvian counterparts correspondent accounts in dollars. These were then used to move billions out of the ex-Soviet states and into the international financial system.

But U.S. regulators were less sanguine. In 2005, the same year BKA gave its glowing appraisal, the U.S. Financial Crimes Enforcement Network (FinCEN) filed two notices warning of the risk of money laundering in Latvia and cut two of its banks off from the dollar system.

Daniel Glaser, the U.S. Treasury Department’s Deputy Assistant Secretary for Terrorist Financing and Financial Crimes at the time, called the banks “a danger to the international community.”

In 2018 FinCEN filed notice against Latvia’s largest offshore bank for “institutionalized money laundering,” prompting the government to eventually close down its offshore sector.

Multiple money laundering scandals over the years, including OCCRP’s investigations into the Russian Laundromat as well as exposés at Danske Bank and Swedbank, have also revealed the key role Latvia’s banks played in moving high-risk money from former Soviet states.

“There were clearly very high money laundering risks with Latvian banks at that time which continued for a long time afterwards and may not have even been resolved today,” said Martin Woods, manager of AML Woods and an expert in financial crime.

“Notwithstanding the commentary from the German regulator,” he added wryly.

Germany’s BKA said it no longer knew how it had concluded Latvia was not a high-risk country for money laundering in 2005 — an assessment that has never been revised. The European Central Bank told OCCRP it “depends entirely on the information provided by national AML/CFT authorities” in its determinations.

A Vulnerable Banking Sector

The small Baltic state of Latvia has a population of less than 2 million people. Yet, surveys conducted on behalf of the European Central Bank in 2010 and 2012 found its banks were moving some $16 billion to $20 billion of foreign currency every day using their U.S. and European correspondent accounts, according to OCCRP calculations.

As much as 90 percent of the non-resident deposits in Latvian banks at the time — most of them in dollars — were thought to come from former Soviet states, according to analysis by the International Monetary Fund.

There’s no doubt the offshore sector accounted for the bulk of the transfers. After Latvia banned non-resident shell firms from opening accounts in 2018, official data shows the flow of funds slowed to a relative trickle of less than $10 billion through all of the following year.

In Latvia, which had been hit hard by the global financial crisis, the influx of cash was seen as a positive. Latvian parliamentarians later told the European Parliament that “Russian money and transactions were welcome” at that time, while resources to investigate financial crime were cut.

But the torrent of funds flooding out of former Soviet states had U.S. officials worried.

Thousands of Suspicious Activity Reports (SARs) sent to FinCEN between 2008 and 2017 point to major money laundering operations via Latvia. The leaked filings list nearly 18,000 potentially problematic transactions from the tiny country — more than global banking hub Switzerland (almost 10,200) and its Baltic peer Estonia (4,200), and not far off economic powerhouse China (22,000).

The SARs flagged suspicious activities running to billions of dollars at Latvian banks, including Trasta Komercbanka and ABLV. Both lost their licenses due to alleged money laundering. In the six months before Trasta Komercbanka lost its license in March 2016, FinCEN was notified of over $200 million in suspicious transactions from Trasta alone.

In 2017, Bank of New York Mellon reported $318 million in suspicious transactions involving ABLV over the previous year. OCCRP reported on money laundering at ABLV as early as 2014. FinCEN filed notice against the Latvian bank in 2018. It is currently in liquidation.

Latvian MP Ainars Latkovskis told OCCRP that in 2015, when he was chairman of Latvia’s parliamentary committee on defense, internal affairs, and corruption, Glaser had warned him that policing such vast sums would be difficult.

“He said, ‘As long as your banks are clearing 1 percent of all dollar transactions, you must have big enforcement capacities to control it, even if your country is small,’” Latkovskis recalled.

By 2016, the growing warnings from the U.S. meant Germany’s Deutsche Bank was the only international bank willing to provide dollar clearing to Latvian banks. It stopped in 2017, when the FBI found that several Latvian banks had transactions linked to North Korea.

The following year, the U.S. Assistant Secretary to the Treasury and then-President of FATF Marshall S. Billingslea said decades of poor regulation meant Latvia’s banking sector was “one of the most vulnerable in Europe.”

Read more at OCCRP

RiskScreen: Eliminating Financial Crime with Smart Technology

You can claim CPD minutes for this content, by signing up to our CPD Wallet