Bribery allegations, a eurozone central bank governor arrested and a leading bank accused of laundering tens of billions of dollars. For the past 12 days, life in Latvia, the small but strategically important ex-Soviet republic by the Baltic Sea, has felt something like the plot of a TV crime drama.
At the centre of this explosive tale is Ilmars Rimsevics, the long-serving central bank chief, who was detained last Saturday after anti-corruption police said he was suspected of soliciting a €100,000-plus bribe from an unidentified bank. Released on bail on Monday, Mr Rimsevics immediately faced new allegations, from the Anglo-Russian owner of Latvia’s Norvik Bank, who accused him and intermediaries of repeatedly trying to solicit bribes. Latvian police signalled these were not the same allegations over which they had detained the central bank chief.
Only days earlier the US Treasury had accused ABLV, Latvia’s third-largest bank, of “institutionalised money laundering”, including handling transfers that ended up with entities linked to North Korea’s nuclear programme. ABLV has denied money-laundering, but this week requested a €480m emergency loan from the Latvian authorities to help it survive proposed US sanctions.
Mr Rimsevics has denied the bribery claims. He told the Financial Times that banks were keen to oust him after he tried to make the sector more transparent. Now prosecutors, regulators and courts, and a Washington-based arbitration centre where Norvik chairman Grigory Guselnikov first brought his complaint in December, must establish the truth.
The scandals have hurt the reputation of a country that has worked hard to embed itself in Nato, the EU and the eurozone since regaining its independence after the collapse of the Soviet Union in 1991. Mr Rimsevics is its representative on the European Central Bank’s governing council, the eurozone’s inner sanctum. Washington is assumed to have gone public on ABLV because private warnings to Riga had not produced enough results. On Friday, Latvian prime minister Maris Kucinskis said the government was “firmly set” to reduce the share of foreign deposits in its banks.
That it took US officials to sound the alarm on a eurozone bank has also highlighted shortcomings in EU regulation, where fighting money laundering is left to member states. After the 2013 financial crisis in Cyprus which, like Latvia, is an offshore banking centre for Russian corporates, the events are a reminder of the surprises smaller, newer EU members can throw up.
Latvia’s defence ministry claimed on Tuesday that the affair might be a foreign smear campaign similar to those seen before the US, French and German elections — indirectly pointing the finger at Moscow. Though Latvia has elections in October, many citizens were sceptical, while a Kremlin spokesman said it “lacked a sense of reality”.
But some overseas observers took it seriously. “I think this whole affair is more about national security than about banking security,” says Anders Aslund, a Washington-based expert on post-Soviet economies. “It is very unclear who is the real actor behind it.”
After independence, Riga set out to regain its centuries-old position as the Baltic’s leading financial and trading hub. Mr Aslund recalls that its first central bank governor, Einars Repse, had a vision of a Baltic Switzerland. Swedish banks bought heavily into Latvia’s market for resident customers.
But Latvia’s commercial, cultural and linguistic ties to ex-Soviet republics — one-quarter of its citizens are Russian — provided an opportunity to become an east-west financial bridge. EU membership in 2004 increased its attractiveness in both directions. Cheap credit from Swedish banks fuelled an economic boom in Latvia. The global financial crisis turned that to a bust.
Riga was forced in December 2008 to bail out its second-largest lender and leading bank for non-resident customers, Parex Bank, which tipped Latvia into needing a €7.5bn IMF rescue worth more than one-third of its gross domestic product. Fulfilling the bailout terms while keeping the local currency pegged to the euro, to preserve ambitions of later joining the single currency, required a crippling austerity programme that saw Latvia’s economy shrink almost one-fifth in a year.
The economy began to bounce back, and ex-Soviet customers were attracted to Latvia as a safe haven. Some of the money flowing in was tainted.
Troubled times for some Latvian banks
ABLV, Latvia’s third-largest bank, is accused by the US Treasury of laundering tens of billions of dollars. It has asked the authorities in Riga for an emergency loan of up to €480m to help it survive the impact of any possible sanctions
Trasta Komercbanka lost its banking licence and fell into insolvency in 2017 after allegations that up to $13bn of stolen funds had been laundered through its accounts
Sanita Jemberga, executive editor of Re: Baltica, a Baltic investigative journalism centre, says many Latvians feel the authorities turned too much of a blind eye, allowing “part of the banking system to become a washing machine for ex-USSR countries”.
Latvian banks were later alleged to have handled “dirty” money from a variety of sources. Campaigners for justice for the late Sergei Magnitsky, a tax lawyer who uncovered a $230m fraud by senior Russian officials and an organised crime group against the Russian treasury, have documents showing that some of the proceeds passed through Latvian banks. Investigators’ reports showed Latvian banks handled some of the $1bn illegally siphoned out of three Moldovan banks in 2014.
In the same year, the Organised Crime and Corruption Reporting Project alleged $20.8bn was siphoned out of Russia in the so-called “laundromat”. About $13bn was said to have passed through a Latvian bank, Trasta Komercbanka, which later lost its licence and is now bankrupt.
International pressure prompted efforts to clean up non-resident deposits, which account for 39 per cent of the total in Latvian banks. A new regulatory head levied heavy fines. Last year five banks, including Norvik, were fined for violating US and UN sanctions on North Korea between 2008 and 2015. But ABLV was not among them.
“From what I’d seen, I thought the Latvians were trying reasonably hard,” says Tom Keatinge, a financial crime expert at the UK’s Royal United Services Institute. “I think things have caught up with them, unfortunately.”
Mr Rimsevics, as deputy central bank governor since 1992 and governor since 2001, has outlasted 13 prime ministers. Now his reputation is being challenged as never before.
The Latvian anti-corruption bureau’s comment that its investigation into whether Mr Rimsevics sought a bribe is linked to a financial institution not currently operating in Latvia has prompted speculation that the accusations were connected to Trasta Komercbanka. Neither investigators nor Mr Rimsevics will confirm this. But one source familiar with the probe suggested the speculation may be accurate.
Separately, Mr Guselnikov told the AP news agency that Mr Rimsevics and intermediaries tried repeatedly to extort bribes from him, punishing his Norvik Bank with regulatory actions when he refused. He says meetings with Mr Rimsevics took place at a suburban house and once in the back of a car outside a Chinese restaurant in Riga.
Mr Rimsevics dismisses the bribery claims as “totally ridiculous” and says the restaurant meeting never happened. While not directly responsible for banking supervision, he says his pressure to increase transparency, including audits by US law firms and “opening their books to US regulators”, damaged some banks’ business models. Now, he says, some, he doesn’t know which or how many, want to topple him.
“It is a well-orchestrated action in concert among several individuals and banks who have served non-resident clients at various times . . . to whom I have become a burden,” Mr Rimsevics adds.
Mr Guselnikov told Latvian television this week that he had evidence to substantiate his claims and Oliver Bramwell, Norvik’s British chief executive, says the bank owner has privately been making his accusations for months. Mr Bramwell told the FT the bank had informed the UK’s Serious Fraud Office last August of its concerns, since Mr Guselnikov has British citizenship. When it got no response from the SFO within three months, Norvik’s owner took his complaint to Latvian police and to arbitration.
The fact all the scandals have come at once, Mr Bramwell suggests, is a coincidence, not a plot. “I think certain things have probably been brewing over time, and have all bubbled up in a few days.”
A few doors down from Norvik headquarters, at ABLV, officials have been scrambling to stabilise its finances after the ECB on Monday froze payments and withdrawals. Ernests Bernis, its chairman, said 1,000 depositors had agreed to keep their money in the bank for at least a year. Economists say ABLV’s limited links to the local economy mean it may not pose a systemic risk in Latvia. But the effects are rippling into other countries.
Dana Reizniece-Ozola, Latvia’s finance minister, says the investigation into Mr Rimsevics is itself a “good sign” of the government’s determination to root out graft everywhere. “It doesn’t matter whether it is a big fish or small,” she says. Riga has taken “active steps” to tackle money laundering, though “a lot of things still need to be improved”.
The Latvian scandals may yet lead to EU-level changes. Danièle Nouy, chair of the ECB’s supervisory board, has said that member states’ decision to retain responsibility for tackling laundering left the ECB bereft of the “investigative powers to uncover such deficiencies”.
The US, meanwhile, signalled it was ready to step in if European regulators were unable to clamp down on money laundering. John Sullivan, deputy secretary of state, said during a visit to Riga on Thursday it had done so in Latvia as it was concerned about a Nato ally. “Security threats can take many forms,” he said, “including corruption and efforts to undermine the integrity of the financial system.”
Additional reporting by Claire Jones in Frankfurt and Jim Brunsden in Brussels