The news comes after revelations in late June that three Latvian banks were used to channel funds to nuclear-capable North Korea through offshore companies.
Two banks - Norvik and Rietumu - were identified by the Federal Bureau of Investigation and Latvia's finance regulator, the Financial and Capital Market Commission (FKTK) as having been used to transfer funds to the nuclear-capable country subject to international sanctions. FKTK issued fines to both banks totaling €2.89m for anti-money laundering and counter terrorist financing violations.
Norvik Banka was fined €1,324,667 for violations in the period from 2013 to 2014, while Rietumu was fined a total €1,566,604 for non-compliance with finance regulations from 2009 to 2015.
You can find a handy summary of the penalties and the reasons they were imposed on the FKTK website in English HERE.
"These are similar cases to those that were discovered about a month ago [in three other banks] .. these cases are such that Latvian banks were used due to insufficient internal control systems to circumvent sanctions for the clients of the bank's clients," FKTK representative Agnese Līcīte told Latvian Radio.
"It must be stressed that the banks have admitted these shortcomings and promised to fix them ... these violations weren't intentional on the part of the banks. On-site FKTK inspections were also carried out encompassing a wider [review] of the internal control systems' operations. Thus the total fine is larger and the fact is related both to the larger size of the banks and the discovered violations," she said.
FKTK chairman Pēters Putniņš thanked the FBI and the U.S. Department of Treasury’s Financial Crimes Enforcement for their help in uncovering that Latvian banks were used for sanctions-busting.
"Cross-border cooperation offers to the FKTK more opportunities to investigate in depth such complicated cases as the circumvention of sanctions against North Korea. I would also like to thank U.S. Department of Treasury’s Financial Crimes Enforcement (FinCEN) and FBI for cooperation," said Putniņš
He also said the banks will have to review their internal control systems and claimed that Latvia's cooperation over the matter signals that it is a safe and stable partner.
"The measures taken in this case is a lesson to all the banks in Latvia not to be used for suspicious deals. The banks have to reassess their AML/CTF internal control systems as well as ensure international sanctions compliance accordingly to global risks. Today’s announcement confirms that Latvia is a stable and safe jurisdiction and only with such countries that sort of cooperation is possible,” FKTK Chairman Pēters Putniņš said in a press release.
A statement appearing on July 21 on the website of Norvik says the bank will invest up to €2m to improve its internal control systems.
“The bank, in close cooperation with the Commission, has reviewed its client portfolio, developed a very concrete corrective action plan, and will be investing upwards of 2 million euro over the coming 18 months in ensuring compliance with all regulatory and best practice requirements," said Oliver Bramwell, Chairman of the Board of Norvik.
Meanwhile the statement by Rietumu played down the bank's violations of anti-money laundering rules and the possibility the bank was used to fund a brutal regime and growing threat to international stability.
"The mentioned transactions do not constitute a direct non-observance of the sanctions regime, due to the fact that such transactions were not carried by involving persons that are included into sanctions lists," the statement says.
".. the bank acknowledges that [it] had no relation to the organization of these transactions and was not interested in their provision. Moreover, the bank had terminated its relations with these clients," it told the press.
Rietumu said it will invest further into its internal control system but its announcement is short of being specific with the bank revealing neither how much it will invest nor when.
Rietumu, often seen as the most successful of Latvia's numerous boutique banks specializing in serving non-resident clients, was also in early July handed a massive €80m fine in France for aiding a financial manager that helped French citizens evade paying taxes at home via offshore entities and Rietumu bank accounts. The bank said it will appeal.
Commenting the revelations on the FKTK website, the FBI said that while North Korea uses "complex transactional networks", their front companies used show up a number of red flags, which had been "extensively reported" on by the UN and various NGOs.
The FBI also claimed the sanctions-busting was used to channel funds to North Korea and its program of ballistic missiles and conventional weapons, including export of goods and equipment related to this program.
This is by no means the first time that Latvian banks have found themselves supporting players in major international controversies involving money laundering and offshoring. Past cases have linked banks to the Magnitsky case in Russia, major frauds in Ukraine and Moldova and even African arms smugglers. However, with five banks now being linked, albeit indirectly, to North Korea's nuclear arms program brings the boutique banks into an entirely new realm.
FKTK has toughened its stance over the last couple of years as fears have grown that the corporate excesses and lax regulation of previous years are having a disastrous effect on the reputation of Latvia's financial sector.
However, it is not the first time Latvian bank accounts have been linked to North Korea. Back in 2010 this report suggested a Latvian bank account was involved in a scheme involving beef sales to Pyongyang - and also featured a potential Russia connection. The transaction was reportedly blocked by authorities in New Zealand.