February 22, 2018 / 7:06 AM / 8 months ago

RPT-EXPLAINER-Latvia's reputation at stake after corruption allegations

 (Repeats without changes)
    By John O'Donnell and Gederts Gelzis
    RIGA, Feb 21 (Reuters) - Latvia's central bank chief has
been suspended pending an investigation into bribery
allegations, and the Baltic country's third biggest bank has
sought emergency support following U.S. accusations of
money-laundering and sanctions-busting.
    The problems, which the government says are not connected,
have dealt a blow to Latvia's reputation as a financial hub that
bridges Russia, which it borders, and the West.  
    
    WHAT IS THE CRISIS ABOUT?
    The U.S. Treasury Department's Financial Crimes Enforcement
Network said on Feb. 13 it was seeking restrictions on ABLV bank
on suspicion of involvement in money laundering and helping 
clients violate United Nations sanctions on North Korea.
             
    ABLV denied the accusations. But it said on Monday it had
sought temporary liquidity support from the central bank after
depositors withdrew 600 million euros ($740 million), about 22
percent of total deposits, following the U.S. Treasury comments.
            
    The ECB has stopped all payments at the bank to prevent its
collapse.
    Separately, central bank chief Ilmars Rimsevics was detained
on Saturday on suspicion that he solicited a bribe. He was
released on Monday, and denied the accusations, but was
suspended from his post on Tuesday.
    Latvia's Defence Ministry said on Tuesday the allegations
may be part of a disinformation campaign intended to damage
trust in the country and influence the outcome of a
parliamentary election in October.
    It did not say who was behind this but drew parallels with
campaigns before recent French, German and U.S. elections.
Russia has denied it was behind those campaigns and says it does
not meddle in elections in the West.             
   
    WHO IS THE SUSPENDED CENTRAL BANK CHIEF?
    Ilmars Rimsevics was part of the political movement that led
Latvia to independence from the Soviet Union and is a member of
the European Central Bank's governing council. 
    The 52-year-old economist is known internationally as a
conservative policy maker and in Latvia as a firm manager at the
central bank, according to people who know him.
    Rimsevics says he is the victim of a smear campaign and
refuses to resign. He is not allowed leave the country. 
    "I have not demanded or received any bribes," Rimsevics told
a news conference on Tuesday. "I have become the target of some
Latvian commercial banks to destroy Latvia's reputation."
    
    WHAT IS AT STAKE?
    Latvia has a population of only about 2 million. Occupied by
the Soviet Union during World War Two, it won independence in
1990, joined the European Union in 2004 and adopted the euro
currency a decade later.
    The allegations against Rimsevics and ABLV could damage
Latvia's standing in the euro zone and its reputation as a
financial hub, Latvian politicians say.
    The events of the past few days have shaken Latvia's
financial system but economists say it would survive intact if
ABLV collapsed and see little likelihood of contagion into other
Baltic states.
    Latvia's economy has suffered much more serious financial
problems before. Its economy nosedived during the 2008-09 global
financial crisis that forced it to seek an international rescue,
but recovered after the adoption of austerity measures including
slashing spending and wages and increasing taxes.
          
    DO LATVIA'S PROBLEMS AFFECT THE ECB?
    Latvia's commercial banking association called on the ECB on
Wednesday to step in and sort out the problems at ABLV, putting
pressure on it to explain why it has not acted in the crisis.
            
    What has happened in Latvia raises questions about a system
that makes the ECB responsible for supervising banks across the
euro zone, including many in Latvia
    One senior official at the ECB said it had been caught by
surprise by the developments in Latvia and that the governing
council was informed by conference call only at the weekend. The
central bank has since remained publicly silent.             
    But the root cause of the problem was hardly hidden.
Latvia's banks hold around $13 billion worth of foreign
deposits, roughly half of all deposits in the sector, an issue
highlighted as a source of risk by authorities year after year. 
    
    IS MONEY LAUNDERING A PROBLEM IN LATVIA?
    International authorities have long worried about small
banks in Latvia that hold funds for foreign clients, mostly from
 Russia and other former Soviet republics. Several of the
clients have been punished for breaches of rules on
money-laundering and financing of terrorism, and for sanctions
busting.             
    The International Monetary Fund said in 2007 that Latvia was
hosted many shell companies and had a reputation "for widespread
lax due diligence" in the opening of bank accounts.  
    The situation had improved little when the Organisation for
Economic Co-operation and Development criticised Latvia in 2015
for failing to do enough to tackle financial crime, including
the "laundering of proceeds of corruption from overseas".
    Although it conceded that Latvia had sought international
cooperation to tackle corruption, it urged stronger anti-money
laundering measures and warned of the risk that foreign bribes
could be laundered by foreigners through Latvian banks.
    
    DOES RUSSIA HAVE A ROLE IN THE CRISIS? 
    Latvia's relationship with Russia has long been complicated
but has deteriorated since Russia seized the Crimea peninsula
from Ukraine in 2014 and fighting broke out in east Ukraine
between government forces and Russia-backed separatists.
    Many Latvians saw Russia's intervention in Crimea as a
worrying precedent. Their country not only borders Russia but
has the largest Russian-speaking minority in the Baltics.
    Asked about suggestions that Russia may have had a role in
the crisis, Kremlin spokesman Dmitry Peskov said "such
statements are not measured and lack a sense of reality." 
 
($1 = 0.8120 euros)

 (Additional reporting by Simon Johnson in Stockholm and Balazs
Koranyi in Frankfurt, Editing by Timothy Heritage)
  
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