Breaking the Bank: Latvian Money Laundering

With a population of merely 2 million people Latvia is an unusually large banking hub for non-resident clients, specifically ex-soviet union countries who make up 80% of Latvia’s banking customers.  Latvia’s lack of banking regulation, absence of political will, and a familiarity with Russian culture have made it a convenient center for international money laundering, with over half of the 25 banks working predominantly with non-resident clients (4)(1). The capital of Latvia, Riga, has been the center of this country’s banking community where 1% of all worldwide US dollar transactions pass through (4).  A number of high profile cases have been traced back to this Baltic nation’s fraudulent banking system, including the Sergei Magnitsky case and the Russian Laundromat case which resulted in the laundering of US $20 billion (6). 
 
In January of 2014 the banks maintained an extensive network of currency clearing partners despite JP Morgan’s halted connections with the local Latvian banks.  JP Morgan made this decision after the United States Government advised the bank to strengthen its safety measures against money laundering. Recently, Latvia has lost numerous links as most local Latvian lenders now maintain a relationship with few lenders who provide a dollar clearing facility, Deutsche Bank being one of the largest.  This July, however, Deutsche Bank warned the Baltic nation that they would cut off access to their dollar clearing facility from some of the local Latvian banks (2).  This is problematic for these lenders as most money launderers conduct transactions in hard currency, specifically the US dollar.  The ability to trade in US dollars has been imperative for the ex-Soviet money launderers as the Russian Rupel has been decreasing in value enormously since the invasion of Ukraine.  These banks may not completely lose their ability to perform business in US dollars but instead will be forced to “go through more layers of middlemen to make payments” claims Gene Zolotarev, who is employed at Maximus Capital SA, increasing costs and making it more difficult to cool the hot money.  Not all banks will be affected by this loss, but it will certainly lead to alterations in the way many local banks complete US dollar transactions (3).
 
More pressures were added to Latvian banks this June when leaked documents revealed that many Riga-based banks are directly involved in money laundering scandals and often act as a middleman.  The documents include emails exchanged between government officials and bank employees.  These communications involved discussion of offshore companies, some of which are shell companies.  These shell companies play an important role in the second step of laundering called “layering,” which involves making the hot money difficult to trace by moving it to and from different corporations.  Also discovered in these leaked documents was a type of manual that included precautions and guidelines on how to use the banks services to covertly launder money.  Many of these banks have denied the charges but nonetheless attention has been drawn to the illegal actions consistently overlooked by Latvian bank and government officials (6).
 
Despite these concerns, Latvia earned their long awaited accession into the OECD (Organization for Economic Cooperation and Development) on May of 2016 when they were invited to become members.  Their addition came two years after their entrance into the Eurozone as the 18th member, which brought much controversy as countries feared the increase of dirty money flowing throughout the nation-state (5).  OECD membership has been a goal of Latvia’s since their independence and was narrowly missed because of links to massive laundering cases.  Latvia’s sudden crackdown beginning in January of 2016 on some of the banks identified as servicing money laundering was the final step in earning an invite from the OECD.  Latvia placed a 2 million Euro fine on Privatbank in January and, later in March, issued a 1 million Euro fine on Baltic International Bank, at the same time revoking the European Central Bank’s license. These actions were steps in the right direction for Latvia but have far from cleansed the country of its serious banking dilemma (1).
 
Despite warnings from influential countries, particularly the United States, Latvia has failed to completely clean up its banking system.  This country has only enjoyed independence for 25 years, and, in a rush to become self-reliant from Russia, the economy was rapidly built and became dependent on off-shore client banking.  To truly combat this problem Latvia will have to build a sustainable economy that does not rely on the illegal actions of their banks.  With the pressure closing in from different countries and the recent revelations of their broken system, it will be critical for the Latvian government to find a different way to grow their economy.

​(1) Collier, Mike. "Latvia Makes It into OECD Thanks to Crackdown on Non-resident         Banks." Bne IntelliNews. N.p., 27 May 2016. Web. 10 Aug. 2016.
 
(2) Eglitis, Aaron. "Deutsche Bank Said to End Latvian Lenders' Dollar Accounts."         Bloomberg. Bloomberg, 28 July 2016. Web. 10 Aug. 2016.
 
(3) Eglitis, Aaron. "JPMorgan Halts Latvia Dollar Deals After Probes, Group Says."     Bloomberg. Bloomberg, 2 Jan. 2014. Web. 10 Aug. 2016.
 
(4) Jemberga, Sanita, and Evita Purina. "US Pressures Latvia to Clean up Its Non-resident     Banks." Baltic Times. The Baltic Times, 10 Feb. 2016. Web. 10 Aug. 2016.
 
(5) Peach, Gary. "Latvia's Eurozone Entry Set to Attract Dirty Money from Russia, Eastern     Europe." Financial Post. The Associated Press, 30 Dec. 2013. Web. 10 Aug. 2016.
 
(6) Stack, Graham, and Arta Giga. "Latvian Banks Promote Money Laundering Companies."     OCCRP. Open Society Institute, 16 June 2016. Web. 10 Aug. 2016. 

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