Latvia banking scandal leaves Europe's regulators red-faced

Of all the embarrassing things about the Latvian banks’ money laundering scandal, perhaps the most striking is this: the problems were laid bare not by local or European authorities but by Americans.

The forced liquidation of ABLV, Latvia’s third-biggest bank, following US assertions of “institutionalised money laundering” — including violations of North Korean sanctions — is a humiliation for both Latvian and European authorities.

Don’t take my word for it. Europe’s top financial regulator, Danièle Nouy of the European Central Bank, told a member of the European Parliament last week: “I agree with you it’s very embarrassing to depend on the US authorities to do the job.”

The story of Latvia’s money laundering problems is one that few come out of looking good. That the Baltic country of 2m people had become a centre for illegal financial flows, particularly out of Russia and other ex-Soviet states, was well known.

Concerns about the high level of deposits from foreigners, or non-residents, were raised during Latvia’s accession to both the euro and the OECD this decade. But despite a crackdown by Latvian regulators in recent years, a red line for the US was crossed by the alleged breach of international sanctions on North Korea.

The US went public with its claims against ABLV in February, saying that the lender had “facilitated transactions related to North Korea” even after announcing a no- tolerance policy in the summer of 2017. Just 10 days later, the ECB pulled the plug on the Latvian bank.

The affair has revealed serious deficiencies in how Europe fights money laundering. Competence for checking breaches of anti-money laundering rules lies with national authorities, not with the ECB, which was the banking supervisor of ABLV.

Latvia’s financial regulator says that the allegations against ABLV were historical and already covered by a fine and remedies imposed in 2016. But many in Riga question the wisdom of ignoring clear warnings from the US, the main security guarantor for Latvia against potential Russian aggression. Authorities are now proposing to cut non-resident business by 90 per cent.

ABLV also raises awkward questions for the ECB. Even though it has no competence for money laundering, the ECB’s supervision arm — the Single Supervisory Mechanism — scrutinises the business models and governance of banks. “Everybody understands if you do supervise the business models, you can’t distance yourself from the risks that apply to the servicing of the non-residents,” says Dana Reizniece-Ozola, Latvia’s finance minister.

Both her and Ms Nouy argue that Europe could or should have some sort of centralised body for dealing with money laundering. But it is unclear how much political will there is to take the problem seriously.

As Latvian officials note, ABLV at most was one small part of a chain of banks across Europe and the world involved in the flow of money. “Why is it just us that is being picked on? Why not the banks the money came from and went to?” asks a senior Latvian official. He points to other well-regarded banks such as Nordea and Handelsbanken being fined for lax anti-money laundering rules in recent years, as well as concerns over countries such as Malta and Cyprus.

The size of the problem was laid out this week by the outgoing head of Europol, the EU’s law enforcement agency. “Professional money launderers — and we have identified 400 at the top, top level in Europe — are running billions of illegal drug and other criminal profits through the banking system with a 99 per cent success rate,” Rob Wainwright told Politico. He added that banks were spending $20bn on anti-money laundering compliance to seize just 1 per cent of criminal assets.

Even the US does not escape scrutiny. Steve Hanke, a professor of applied economics at Johns Hopkins University, describes a sense of unease at what he calls the “US Treasury’s war machine” picking on a bank located in a fellow Nato country. “There are few restraints on the [Treasury’s] war machine. Once the bureaucrats at the [Treasury] take aim, they can destroy institutions and reputations without the designated targets ever having their day before a judge and jury,” he wrote in Forbes.

For a bank that had just €3.6bn in assets, ABLV has highlighted big problems in how European banks and regulators handle money laundering. Urgent action is required. As Ms Nouy said last week of Europe’s dependence on the US: “This has to change . . . It’s not sustainable any more to be in this situation.”

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