Tue | Aug 3, 2021

Latvia brings dirty money headache

Published:Wednesday | January 1, 2014 | 12:00 AM

When Latvia adopts the euro on January 1, it will bring with it a banking sector that is swelling with suspicious money from Russia and the east - just as the currency bloc is trying to clamp down on such havens.

It was just nine months ago that the eurozone had to rescue Cyprus, a similarly tiny member state that also specialised in attracting huge deposits from Russia. Since then, eurozone leaders have vowed to crack down on financial sanctuaries and improve transparency.

But as the 18th member of the eurozone, Latvia is likely to see a greater - not smaller - influx of dirty money as the country will be viewed as safer than other former Soviet states while financial oversight remains loose.

"Immediately after Latvia joins the eurozone, I imagine we're going to see an actual spike in dubious money flowing in," said Mark Galeotti, a professor at New York University who researches organised crime in the former Soviet Union.

For years, Latvia's political and financial leaders had hoped to create a mini-Switzerland in Eastern Europe - a place where capital in unstable countries such as Russia or Kazakhstan could either park for a while or channel its way further west to banking meccas like Zurich or London.

After a slight dip during Latvia's financial crisis in 2008-2010, the amount of non-resident bank deposits has risen rapidly over the past two years ahead of the country's entry into the eurozone.

"The issue with Latvia is that you have a pretty permissible political environment, and you have the massive and quite efficient infrastructure for managing these funds from the East. The question is, why wouldn't you want to go to Latvia?" asked Galeotti.

20 Domestically Registered Banks

Latvia has 20 domestically registered banks, or one for every 100,000 residents - an extremely high ratio. Of these, about 13 are considered 'boutique banks' that rely almost exclusively on foreign funds, mainly from volatile countries of the former Soviet Union. Rather than lend to businesses and consumers, these tiny financial institutions primarily serve as safe havens or money transfer operations. They tend to keep their money in liquid assets so it can quickly be moved.

Some of the money is dirty. This year, Latvia's bank regulator slapped a 100,000-lat ($200,000) fine on a bank for failing to exercise sufficient internal controls with money connected to the so-called Magnitsky case.

Sergei Magnitsky was a Russian lawyer who worked for Hermitage Capital, an investment fund whose chief executive accused Russian police officials of stealing $230 million in tax rebates after illegally seizing Hermitage subsidiaries. In 2008, Magnitsky, at the age of 37, died in prison of pancreatitis, allegedly after being beaten and denied medical treatment.

Hermitage Capital claimed that tens of millions of dollars of the stolen money passed through Latvia.

Claiming confidentiality and a risk of destabilising the industry, Latvia's regulator refused to "name and shame" the bank connected to the case. This refusal, as well as the small size of the fine, triggered criticism and renewed doubts about the regulator's integrity despite imminent eurozone membership.

- AP