European banks know that violating U.S. sanctions hurts, paying billions of dollars in fines for providing countries like Iran and Sudan access to the U.S. financial system. Now Latvia’s third-largest lender, ABLV Bank AS, has been plunged into crisis after the U.S. said it may label the firm a money launderer for North Korea. That prompted the European Central Bank to tell Latvia to freeze payments by ABLV after some of the bank’s clients fled. The bank denies the charges.
1. What’s the bank accused of?
On Feb. 13, the U.S. Treasury Department made broad allegations about ABLV’s lack of anti-money-laundering controls and highlighted recent transactions on behalf of entities related to North Korea. “ABLV facilitated transactions related to North Korea after the bank’s summer 2017 announcement of a North Korea ‘No Tolerance’ policy,” the Treasury’s Financial Crimes Enforcement Network wrote in a notice this month.
2. How did the bank respond?
The U.S. Treasury relied on “false information” in reaching its findings and didn’t take into account advances ABLV has made to prevent money laundering and terrorism financing, the bank said in a statement posted on its website. The bank said it will work with U.S. officials and provide information so that doubts about it can be laid to rest.
3. Is there a connection to Latvia’s central bank head?
No, says Prime Minister Maris Kucinskis. Central banker Ilmars Rimsevics, who is also a member of the ECB’s governing council, was detained by the Latvian anti-graft bureau over the weekend. The governor considers his detention to be “clearly illegal,” according to his lawyer.
4. What has the ECB done?
The ECB asked Latvia’s Financial and Capital Markets Commission to impose a moratorium on ABLV, which means the bank is temporarily barred from making payments on financial liabilities including deposits and bonds until further notice. The measure, a first for the ECB, was necessary to stabilize outflows after a “significant deterioration of bank’s financial position.”
5. What’s the catch?
Beyond depositors not being able to access their funds, imposing a stay on payments is controversial because of the potential damage to a bank’s counterparties. When Austria imposed a halt in 2015 on payments from Heta Asset Resolution AG, a company created to wind down a collapsed lender, German creditors took heavy losses, with one needing a bailout. That said, European Union banking authorities like the flexibility such a moratorium offers because it buys time, preventing creditors from fleeing a distressed lender and sending it into a terminal spiral. EU banking law currently doesn’t allow European authorities to impose a stay directly, but instead allows member states the option of handing that power to local regulators. A provision giving EU regulators that right is under discussion.
6. Who owns ABLV?
Chairman Olegs Fils, Chief Executive Officer Ernests Bernis and Nika Berne directly and indirectly held about 87 percent of ABLV voting shares as of Nov. 1. The heads of the bank’s divisions, employees, customers and business partners also own shares, according to its website.
7. What’s the company’s future?
The ECB wouldn’t have pushed for a moratorium if the situation wasn’t serious. Deposits aren’t the only source of funding, but a bank needs the trust of its clients and counterparties to operate. In extreme cases, the ECB can also declare banks failing or likely to fail, meaning they are taken over by the euro area’s resolution authority. When it comes to the alleged misconduct, anti-money laundering issues are dealt with by national authorities, but the decision on whether to withdraw a bank’s license ultimately lies with the ECB. Whatever the outcome, prohibiting ABLV from accessing the U.S. financial system would be a major blow; the country has the deepest financial markets and the dollar is key to international trade.
8. What’s the impact for Latvia and its banks?
ABLV isn’t alone in having alleged ties to North Korea. Five Latvian banks agreed last year to pay fines for failing to perform adequate due diligence and gather sufficient information on transactions and beneficiaries of deals linked to North Korea. Even if that issue is dealt with, the ABLV case comes as Latvia tries to shake off allegations that its banks hold wealth with questionable origins. Tighter regulation has already caused outflows of foreign cash from Latvian banks, which had been a popular choice for clients in the surrounding ex-communist region. Finance Minister Dana Reizniece-Ozola said the country is suffering a crisis of reputation over both the detention and ABLV. Her ministry has changed its borrowing strategy and will refrain from refinancing operations in the near term, she said.
The Reference Shelf
- The U.S. Treasury’s statement.
- ABLV’s initial response.
- A longer response from ABLV.
- The ECB’s statement on the moratorium.
- A story about how Latvia thrived on ex-Soviet cash.
- A story on how that ex-Soviet cash is draining out of Latvian banks.
— With assistance by Ott Ummelas, and Aaron Eglitis