In interviews with US experts on anti-money laundering issues, several concerns were expressed, which could be briefly formulated as follows: no US bank wants to get into trouble for serving a Russian oligarch either intentionally or inadvertently through its partners in Latvia.
20 years ago, the Latvian banking sector first came onto the radar when the US launched a global fight against the financing of terrorism and money laundering. The first signal was the suspicion expressed by the US Department of the Treasury in 2005 that "VEF banka" and "Multibanka" (neither of which exists today) were of primary money laundering concern.
“Hope at the Treasury Department two decades ago was that through the EU accession process Latvia’s financial center would get cleand up. (..) The feeling was that it did not happen," recalls Daniel Glaser, the former Assistant Secretary for Terrorist Financing at the United States Department of the Treasury.
After the global financial crisis, the idea of Riga as a center of financial services continued to strengthen in the segment of Latvian banks that served Eastern money. However, it was increasingly difficult to reconcile these plans with reality.
US regulators imposed penalties on international banks for various violations that occurred at their branches elsewhere in the world. And the fines prompted banks to take a more serious look at who they were working with.
New York University professor Jennifer Arlen says that one of the scandals that served as the gamechanger was the HSBC bank being caught in money laundering in 2012.
“US law requires banks to have compliance programs designet to detect illigal money flowing into the US. The traditional view was that banks simply needed to look at whether their direct customer might be a criminal. And they did not always pay extra attention to customers that were other banks. What happened was that HSBC Mexico was sending billions of dollars to the US, and a substantial portion of that was coming from major Mexican drug cartels,” says Arlen.
“To do business in dollars, you're inevitably going through the US. If you do an illegal transactions that comes through the US, you have now done a crime in the US,” Arlen adds.
As a result, banks, in order to avoid further penalties, began to develop control systems for checking not only their customers, but also their customers' customers.
The US bank JPMorgan Chase stopped providing dollar transfers to Latvian banks in 2014. In the following years, the largest correspondent bank partners Deutsche bank and Commerzbank also stopped cooperating with some Latvian banks.
Although Latvia's regulator, the Financial and Capital Markets Commission (FKTK), attributed this to a change in bank strategy, a recent journalist's investigation of FinCEN files revealed that reports of suspicious transfers through Latvian banks were piling up: US banks had reported 18 000 problematic transfers from Latvia over a 10-year period - more than from Switzerland.
Glaser, the former official of the US Treasury, explains that in the international banking system, regardless of political relations, financial institutions make independent decisions as to whether it is worth taking a risk when cooperating with one or another bank.
"If I do business with a Latvian bank and in so doing I have Russian organised crime funds funneling into my bank, now I’m going to have problems with my regulators. And it has nothing to do with politics, it has nothing to do with secret communication between regulators, it has nothing to do with any sort of conspiracies against Latvia or anybody else," says Glaser.
In order to preserve dollar settlements, in 2016 the FKTK tried to save the situation by hiring US specialists to audit the compliance of 12 Latvian 'non-resident' banks with US standards. Alma Angoti, a partner at the New York law firm Guidehouse, who was one of the auditors, remembers that Latvian banks had rather immature control programs at the time: "They had deficiencies, generally speaking, in the tehnology they were using to identify suspicious transactions. Some deficiencies in due dilligence of their higher risk customers.”
After the audits, the banks had to implement recommendations during 2017, but fines for the use of Latvian banks in circumventing North Korean sanctions followed, and finally the US decided on disconnecting ABLV bank from the US financial system.
Former Assistant Secretary at the US Department of the Treasury Marshall Billingslea, who was in office when measures were taken against ABLV, believes that the Latvian governments did a great job in solving the problems.
“Generally speaking, the financial situation in Latvia is very stable. And foreign banks should not have a hesitation in doing business and having correspondent banking ties with number of the Latvian banks that are highly credible and have good AML/CTF programs,” Billingslea says.
However, this year the situation has been worsened by Russia's invasion of Ukraine and sanctions, which several US experts cited as the biggest potential risk in interviews with LTV both in front of the camera and off camera. In addition, the US Department of Justice announced in September that repeat corporate crimes will face tougher penalties in the future.
“Latvia will be a medium or high risk jurisdiction to most US banks. Just because of proximity to Russia, because it is still in the process of improving its controls, although international measures of those controls by Moneyval and OECD are very good, at least showing improvement. With the recent war in Ukraine and the sanctions against Russia, I think, it's only made it harder for Latvia," says Angoti.
Glaser still calls Latvia a "risky jurisdiction", explaining: “There has been intetense focus on Eastern Europe and the region in the last year due to Russia’s agression in Ukraine. And that draws even more concern about the ways that Russia may be trying, and Russian oligarchs, and Russian individuals and Russian entities, Russian banks, may be using to avoid sanctions. It makes people all the more concerned about what is perceived as potentially soft spots in the internation financial system, especially with respect to frontline
states like Latvia is. It makes it all the more urgent for Latvia to contuinue to take the steps that have been taken to try to alleviate those concerns.”
Santa Purgaile, head of the FKTK financial regulator, understands that Latvia has a "border town status" and
must be reckoned with. However, she has received good feedback from her colleagues in the US about compliance with sanctions in the financial sector.
"Latvia as a geography, as a country does not have a particularly bad status. As we were told, our health record is clean. This is the most important signal to America's banks. The next step is the banks' own ability to establish this relationship," says Purgaile.
From what she said, it is clear that all major credit institutions are currently able to provide dollar payments, but there are still problems among the smaller ones. "I would say that improvements would be desirable precisely for the purposes of diversification and for the purposes of less important credit institutions to get these dollar settlements," notes the head of the FKTK.
