Latvia is currently awash with allegations of money laundering and corruption, arising out of illicit flow of Russian funds. These may be the root of money laundering and other criminal alleged activities which is certainly something that is being watched very closely by Moneyval. At present, there are three banks in Latvia under the microscope and the largest one – ABLV – was declared insolvent. The other two are Rietumu Banka, and Norvik Banka.
ABLV was wound up together with its subsidiary ABLV Bank Luxembourg. The two other banks were also under investigation. Quoting Moody’s, it stated that “Rietumu Banka’s business model is geared toward affluent international individuals, such that in 2016, it reported that 62 per cent of its total lending was to borrowers in countries that are not part of the OECD.” Meanwhile “Norvik Banka’s high non-resident deposits were 57.8 per cent, also from non-OECD countries, including 25.3 per cent from Russia.” It is interesting to note how the volume of deposits in Rietumu Banka fell by almost one billion euros or 37.5 per cent as clients decided to abandon the bank. Yet due to its high liquidity status the massive outflow of funds did not materially degrade its operational abilities.
In a smart move, in the aftermath of ABLV closure, Rietumu Banka decided to change the base currency from the dollar to the euro. It also took immediate action to freeze the accounts of offshore companies, commissioning an in-depth inspection by its auditors KPMG. The latter started a thorough review to discover the true beneficiaries of various account holders in the bank’s registers. In the process, Rietumu Banka had closed over 4,000 accounts of which two thirds were of non-Latvian origin. Simply put, ABLV had experienced a bank run which drained it of money partly due to the stance taken by the refusal of ECB to bail it out.
Readers may ask what really caused the collapse of ABLV? The answer is plain and simple – the United States accused the bank of money laundering and breaking sanctions on North Korea. This prompted its closure, triggering the Baltic state’s worst financial crisis in a decade. One may stop and reflect. The stark truth is that the US dollar dominates international transactions, so if the US authorities have sufficient cause to take corrective action (as was the case with ABLV bank), and decides to order US correspondent banking not to have relationships with ABLV, this is tantamount to shutting it out of the global financial network. Following corrective measures triggered by the US Treasury, ABLV was denied US dollar funding, and as stated above, other banks ceased trading with in dollar terms.
In hindsight, one may comment that this corrective action by the United States has exacerbated the scale of the scandal and placed Latvia – a small country of two million people – pitched in the middle of a power struggle between Russia and the United States. It also fuelled a debate over the effectiveness of European money-laundering controls.The media was alive with criticism concerning ECB’s late intervention concerning the suspect dealings of ABLV. Critics said it was just a knee-jerk reaction focused on urgent capital and liquidity concerns and didn’t take into account all the different circumstances which caused so much harm to depositors. One observes how the ECB was quick to avoid responsibility over the ABLV case, arguing that it was not responsible for monitoring money laundering. Danièle Nouy, chair of the ECB’s supervisory board, recently said: “Breaches of anti-money laundering can be symptomatic of more deeply-rooted governance deficiencies within a bank, but the ECB does not have the investigative powers to uncover such deficiencies.”
With hindsight, as can be expected, the statement did not convince all critics, especially when one reflects that in the case of ABLV, really and truly it was the US that discovered the irregularities. On the other hand, the plot thickens in ABLV’s case, which is principally owned by two wealthy Latvian bankers, Ernests Bernis and Olegs Fils. They filed legal action with the Court of Justice of the European Union against the ECB’s role in its collapse. The saga of the three ugly sisters in Latvia, ABLV, Rietumu Banka, and Norvik Banka continues to haunt the dubious standards of banking, particularly where suspect Russian funds are concerned.