May 24, 2018 / 5:30 PM / a year ago

Latvia warns its clampdown is pushing hot money to Europe

RIGA (Reuters) - Latvia has warned the European Union to bolster fragmented money laundering controls as much of the cash now leaving the Baltic state to escape tighter scrutiny is going to other EU countries.

FILE PHOTO: Latvian Prime Minister Maris Kucinskis speaks to Reuters during an interview in Brussels, Belgium, February 23, 2018. REUTERS/Yves Herman/File Photo

The warning was issued by the country’s prime minister and finance minister in interviews with Reuters, when both called for better coordination across Europe in battling financial crime.

In February the United States accused Latvia’s third biggest bank, ABLV, of money laundering and breaking sanctions on North Korea, prompting its closure and the Baltic state’s worst financial crisis in a decade.

The government is now introducing stricter rules to prevent money laundering, such as making it harder for banks to deal with opaque shell companies that are set up to move money rather than do genuine business.

Officials say this has hurt business done by more than a dozen Latvian banks which have promoted themselves as a gateway to Western markets for customers largely in Russia, but also in Ukraine and Moldova.

Dana Reizniece-Ozola, Latvia’s finance minister, said EU countries and authorities needed to share more information to tackle laundering and prevent a repeat of Latvia’s problems.

She noted the fall in deposits held by foreign customers in Latvia after the reforms, saying the cash wasn’t heading back to ex-Soviet republics in the Commonwealth of Independent States (CIS).

“You would expect that the money would be flowing to Russia or CIS countries,” she said. “This is not the case. The major share stays within the European Union. This is why all the countries ... should be safeguarding their systems as well.”

Her concerns were echoed by Prime Minister Maris Kucinskis who also said such money leaving Latvia usually goes to European countries. “Those bank accounts are being transferred,” he told Reuters. “The exchange of information between all of these countries ... is a top priority.”


Kucinskis has promised to improve the policing of banks, while Washington, an important military ally for Latvia, is keeping up pressure on the country to tackle money laundering, much of which Latvian officials and bankers privately say involves wealthy Russians.

Reform is proving difficult as Russian-speaking opposition lawmakers, who come from a 500,000-strong minority in the country, are skeptical about the need for change.

EU governments are also considering new rules to counter money laundering, according to officials.

“There are so many deficiencies,” said Reizniece-Ozola, referring to the patchwork across the EU. “The rules of the game are different in each and every country.”

Banks are free to move money around the 28-country bloc but checks on money laundering are left to local authorities.

FILE PHOTO: Latvia's Minister of Finance Dana Reizniece-Ozola speaks to media in Riga, Latvia February 23, 2018. REUTERS/Ints Kalnins -/File Photo

After securing independence from Russia in 1991, more than a dozen Latvian banks promised Swiss-style secrecy for clients. In many cases, money was lodged in a Latvian bank and then funneled to accounts elsewhere, such as Switzerland, bankers and officials said.

After it joined the EU in 2004, transfers were deemed less risky for Western banks to handle than if they had come directly from Russia.

More than 200 million euros ($235 million) was taken out of Latvia last year in cash, bringing the total value of banknotes leaving the Baltic state to more than 750 million euros since the start of 2015, according to customs data seen by Reuters.

Reporting By John O'Donnell; editing by David Stamp

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