After cooperating with the US Federal Bureau of Investigation (FBI) to identify the banks and their roles in dodging US sanctions, Latvia's finance authority, the Financial and Capital Markets Commission (FKTK), has issued fines totalling more than €0.6m for anti-money laundering and counter terrorist financing violations.
An FKTK release notes that "making use of offshore companies and complicated chain transactions" several clients of the fined banks had "transferred the funds from their bank accounts, to circumvent international sanctions requirements imposed against North Korea."
Baltikums (now trading under the name BlueOrange Bank) and Privatbank were fined €35,755 each for failure in monitoring transactions, while the Regional Investment Bank, fined €570,364, was also found to have failed to ensure its internal control system worked properly.
The finance watchdog also issued warnings to officials at the Regional Investment Bank.
“In the FKTK's view these penalties are preventive measures taken by the regulator, allowing the Latvian commercial banks to seriously reassess potential risks associated with violating or circumventing international sanctions requirements, to improve their internal control systems and avoid any possibility of recurring of such situations in the future," said FKTK chairman Pēters Putniņš.
Putniņš also thanked the US Department of Treasury’s Financial Crimes Enforcement for providing assistance.
The FBI stated that the banks' clients used offshore schemes to circumvent sanctions against nuclear-capable North Korea.
"Although North Korea is geographically far from the region, Latvian financial institutions may be used to circumvent international sanctions, specifically through the use of offshore companies," the FBI stated.
And while North Korea was said by the FBI to use "complex transactional networks", their front companies show up a number of red flags, which had been "extensively reported" on by the UN and various NGOs. The FBI also cited an even later date than FKTK for the period it was examining.
"During the period from 2009 to 2016, foreign nationals organised schemes of criminal transactions in order to circumvent the international sanctions regime concerning North Korea and its program of ballistic missiles and conventional weapons, including export of goods and equipment related to this program.
"According to the information provided by the FBI, financial services of the above-mentioned Latvian commercial banks were used at several stages of these schemes, where a number of transactions through the current accounts of customers were performed in the interests of sanctioned North Korean entities," the FKTK statement said.
At a press conference Tuesday morning, FKTK chairman Putniņš said "the investigation has not finished, neither in Latvia nor in America," and did not rule out the possibility that other banks could be named at a later date.
"We for our part will do all that is necessary to monitor the financial sector... if there is a basis for believing that other banks have been involved... we will take appropriate action," he vowed.
FKTK: Piemērotie naudas sodi bankām apliecina, ka LV uzraudzības iestādes spēj nodrošināt globalizācijas riskiem atbilstošu uzraudzību pic.twitter.com/opY5Olhm0G— FKTK (@FKTK_lv) June 27, 2017
The exact sum involved was not named, but FKTK confirmed that multiple transactions in the hundreds of thousands of euros and in various currencies had been brought to its attention.
The banks were told to draw action plans to prevent such situations in the future while the Regional Investment Bank will also have to improve its IT systems. It has committed to invest €2.8m in its internal control systems this year and 2018.
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, 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.
In a statement on its website, Privatbank played down the seriousness of its involvement in potentially funding the development of a nuclear arms program for a megalomaniacal despot.
"The FKTK has concluded that there was no deliberate and intentional violation of the regulations and that the bank was not directly involved in the circumvention of the sanctions. The Commission has furthermore concluded that the amount of the alleged violations as well as the number of customers involved is insignificant and, in general, that the bank’s violations can be assessed as insignificant," Privatbank said.
Meanwhile a statement by RIB failed even to mention the amount it would have to pay, saying instead that the bank and FKTK had "reached an administrative agreement" that would have no effect on the bank's future business plans.