Even for a country long accused of funneling dirty Russian funds into the European Union, Latvia’s latest banking scandal is a doozy.
Just days after the U.S. threatened to penalize Latvia’s third-biggest lender for having “institutionalized money laundering,” including for clients linked to North Korea’s nuclear-weapons program, authorities in Riga detained veteran central bank Governor Ilmars Rimsevics on suspicion of bribe-taking.
Hours later, after Rimsevics’s two-day detention ended, the drama deepened with the publication of an Associated Press investigation that suggested he’s a target of Russia’s security services. As a member of the European Central Bank’s governing council, Rimsevics is privy to market-moving decisions, as the AP noted, and he’s also a senior official in a former Soviet state that angered Moscow by joining NATO.
Under fire from multiple sides, Rimsevics quickly summoned reporters Tuesday to deny wrongdoing, accuse banks of conspiring against him and declare himself the victim of a death threat designed to destabilize Latvia. Premier Maris Kucinskis thickened the plot shortly after by urging Rimsevics to resign—while also disparaging the bank Norvik and its Russian owner Grigory Guselnikov for publicly accusing Rimsevics of demanding a bribe without producing evidence.
Then the Defense Ministry weighed in with what amounted to a national-security alert that all but accused Russia of a disinformation attack it called “identical” to those seen in the U.S., France and Germany. President Raimonds Vejonis followed with a warning of his own, saying Latvia is locked in a “hybrid war” and that Rimsevics should step down for the sake of the financial system.
Rimsevics dug in Thursday, telling Bloomberg Television that he won’t step down, even temporarily. He denied ever accepting an illegal payment, though he said he regretted not reporting the “hint” of a bribe in the past.
“I’m not a friend of the banking system in this country,” Rimsevics said in his lawyer’s office in central Riga. The ECB, whose council met Wednesday without Rimsevics, its Latvian representative, has yet to comment.
With Vladimir Putin and his lieutenants once again at the hazy center of a geopolitical storm, the Kremlin responded with a characteristic shrug: “This is an internal political matter for our Latvian comrades,” presidential spokesman Dmitry Peskov said. “We wouldn’t want to get involved.”
As the murky events engulfing this Baltic outpost unfold, officials in Riga point to tighter rules, record fines and annual checks for banks with foreign clients as progress in their efforts to shed the country’s reputation as a laundering center. The amount of dollars banks handle has fallen by two-thirds, from $221 billion in 2014 to $76 billion last year, mainly because major counterparties like Deutsche Bank AG closed their Latvian dollar accounts. Foreign deposits in Latvia have fallen by a third in the last two years and the finance minister expects another 50 percent decline over the next few years.
A country of just 2 million bordering four other former Soviet republics—Russia, Belarus, Lithuania and Estonia—Latvia emerged as a trusted conduit of dollar flows westward after the sudden collapse of the Soviet Union in 1991, which triggered the equally sudden emergence of legions of millionaires. Like Cyprus—an even bigger mover of Russian funds—Latvia is a regional banking hub on the fringes of the EU with a large Russian-speaking population.
From 1996 to early 2005—the year after Latvia joined both the EU and NATO, the U.S. Treasury identified Russia and Latvia as major violators of anti-money-laundering laws. Of the 1,002 so-called suspicious activity reports it received on U.S. shell companies in the period, 504 involved banks in Russia and 449 in Latvia that together handled $18 billion of illicit transfers.
In 2005, Latvia’s oldest commercial lender, Multibanka, and VEF became two of the few institutions to be blacklisted by the U.S. as a “primary money-laundering concern” under a measure of the 2001 Patriot Act that gives Treasury the power to ban lenders from the U.S. system through which all dollar transfers must pass. Multibanka was later bought by a Russian lender controlled by the Rotenberg brothers, Putin’s old friends from St. Petersburg who are both sanctioned by the U.S. over Ukraine along with their bank.
“Russian money will always try to find the easiest way out and that means the Baltics will always be an attractive channel,” said Aivar Paul, a former head of Estonia’s financial police who’s now an executive at LHV bank in Tallinn. “How many EU countries offer extensive banking services in Russian?”
Three years later, a Treasury delegation flew to Riga to discuss with Latvian officials Iranian efforts to circumvent penalties imposed over its nuclear program through Krajbanka, according to a classified cable from the U.S. embassy and released by Wikileaks. Krajbanka eventually collapsed amid fraud allegations. It was one of several domestic banks involved in a case where $1.6 billion went missing from lenders owned by a Russian investor.
From 2011 to 2014, Latvian banks helped shift illicit cash out of Russia in a $20 billion scheme the Organized Crime and Corruption Reporting Project, which uncovered it, dubbed “The Russian Laundromat.”
“You get the feeling the authorities are scared of the banks in Latvia, not vice versa,” said Bill Browder, a fund manager whose lawyer, Sergei Magnitsky, died in a Moscow prison after alleging a $230 million tax fraud by officials. The Hermitage Capital Management founder said much of those funds were laundered via Latvian banks. “There was never any interest in pursuing laundering charges, even when we brought them a case on a platter,” he said.
Trasta Komercbanka had its license pulled by the ECB two years ago for breaching regulatory requirements. And last year, a Paris court fined another Latvian lender, Rietumu, a record 80 million euros for helping clients of a French company evade taxes. The bank, which denies wrongdoing and is appealing the decision, once counted former Moscow Mayor Yury Luzhkov—the husband of Russia’s first woman billionaire—among its investors.
Two weeks after the French ruling, Rietumu became the fifth Latvian bank to reach a settlement with local regulators over involvement in attempts to circumvent sanctions on North Korea. Another lender fined over North Korea at the same time, Norvik, is the one now accusing Rimsevics, the central bank governor, of demanding 100,000 euros a month in bribes.
“For 25 years, Rimsevics controlled everything,” Guselnikov, the Norvik owner, said by phone from London. “He and his team are unmovable. He’s been in charge of supervision since 1992 and all his employees have been there since the 1990s or 2000 and they owe him their careers and positions.”
Since the North Korean fine, Guselnikov, who’s also a British citizen, has lured two western security experts to Norvik’s board: former NATO Secretary General Anders Fogh Rasmussen and former German foreign intelligence chief August Hanning. Cofer Black, the former head of the CIA’s counter-terrorism center, is also a director of a Latvian lender, Baltic International Bank.
One bank that escaped fines in the North Korea probe, ABLV, is the lender the U.S. designated a “primary money-laundering concern” last week, just the 18th time Treasury has invoked clause 311 of the Patriot Act. The ECB instructed Latvia to impose a payment moratorium on the bank after clients withdrew about 600 million euros in deposits and securities. ABLV denied the charges, said it’s taken steps to prevent laundering and pledged to work with U.S. officials.
“In money-laundering centers like Latvia there’s a sense their hands aren’t really dirty,” said Mark Galeotti, a fellow at the Institute of International Relations in Prague who tracks Russian organized crime. “The money just passes through and earns fees. You could argue the true laundering capitals are London and Frankfurt, but money arrives there pre-washed.”By