As the Baltic nation of Latvia goes through its deepest financial scandal yet, the ECB, which supervises its banks, is powerless to act on allegations of corruption against Latvian officials sitting on its governing board. At the same time, the country's third-biggest lender faces collapse after the U.S. named it a primary conduit of international money laundering.
The governor of the country's central bank, Ilmars Rimsevics, was arrested by anticorruption authorities Feb. 17 on suspicion of bribery. Rimsevics was suspended Feb. 20. Grigory Guselnikov, the owner of Norvik Banka, another Latvian lender, accused Rimsevics of soliciting bribes of €100,000 a month from all local banks, according to the Associated Press.
FinCEN, the US Treasury's financial crime watchdog, published a proposal Feb. 13 to ban ABLV Bank AS from using the dollar, prompting a run on deposits at the bank.
The ECB, which has supervised Latvian banks since 2014, blocked withdrawals from ABLV on Feb. 19, following a "sharp deterioration" of its financial position. A person close to the discussions said on condition of anonymity that the ECB was unaware of the FinCEN allegations before they were published.
FinCEN accused ABLV's shareholders, executives and staff of having "institutionalized money laundering as a pillar of the bank's business practices." ABLV bankers routinely devised money laundering schemes, forged documents, and obstructed and bribed regulators, FinCEN said, adding that North Korea continued to use the bank for financing its missile program even after ABLV said it would adopt a "no tolerance" policy toward the rogue state in 2017.
ABLV accesses the dollar system through correspondent accounts at other banks, which themselves have direct access to the U.S., according to FinCEN. Between 2012 and 2017, ABLV ran tens of billions of dollars in transactions through the accounts of opaque offshore shell companies which make up a large majority of its customer base, the U.S. agency said.
Oleg Fils, a career banker and one of the richest men in Latvia, is the largest investor in ABLV, holding 43.13% of its stock though his vehicle, OF Holdings.
In a statement published on its website, the bank denied all allegation of impropriety, saying the FinCEN notice used "false information."
"The Bank is currently contemplating possibilities to make FinCEN reconsider its proposals. The Bank shall make [sic] every care to rebut the released allegations," it said, denying bribing officials or ever knowingly facilitating money laundering.
Furthermore, the ECB cannot act against financial crime at a state level, and often the best it can do is to report wrongdoing to national enforcement teams. "The states do not want to give up their regulatory powers," said the anonymous source, adding that "the [enforcement] setup is unfortunate."
The ECB is therefore forced to treat the scandal as a national matter, but because of Latvia's membership of the eurozone, the ECB is also responsible for regulating the largest banks in the country. This apparent contradiction has left the Frankfurt-based regulator baffled, and the other Latvian banks frustrated and fearful of contagion in their own deposit bases.
The Association of Latvian Banks urged ECB Supervisory Board Chair Danièle Nouy on Feb. 21 to visit Latvia to "assess the situation."
Outflows at ABLV topped €600 million between Feb. 13 and Feb. 19, Reuters reported. At the end of June 2017, ABLV held €2.97 billion in deposits, according to data from S&P Global Market Intelligence. This amount compares to liquid assets of €1.7 billion as of the end of 2017, per the bank's own estimates.
Given that it also had debt liabilities of €466.4 million as of June 2017, it would have to be able to potentially fill a gap of roughly €1.74 billion in order to stay afloat without blocking withdrawals, available figures suggest.
Its board canceled the issuance of $75 million and €50 million in bonds scheduled for the first quarter, it said Feb. 20.
ABLV risks being wound up by the ECB in the next few days, unless it manages to prove that it has a viable path back to health, which would involve bringing in new shareholder equity.
But ABLV spokesman Arturs Eglitis told S&P Global Market Intelligence that he is optimistic: "We are working hard with [the] restructuring plan which we are going to submit to [the] ECB during these days. Yes, we believe it will be approved, taking into account our strong financial situation."
Latvian banks, including ABLV, have previously been sanctioned for weak money laundering controls and the country as a whole is considered to pose high risks to the wider financial system. In 2016, the ECB withdrew the operating license of Trasta Komercbanka, AS Baltic International Bank was fined €1.1 million for defective anti-money laundering guards and the Riga unit of Ukraine's PAO KB Privatbank was fined another €2 million for its involvement in a large-scale Moldovan bank fraud that also engulfed ABLV. France fined JSC Rietumu Banka €80 million for money laundering in 2017.
Both the U.S. State Department and FinCEN recognized Latvia's efforts in combating money laundering and criminal financing in its banks, and vowed to continue their support for the country continuing to do so.
Latvia's anticorruption body has said another, as yet unnamed, high-level bureaucrat was also under investigation for bribery.
The Latvian defense ministry added to the confusion by weighing into the scandal, saying that the accusations are part of a foreign disinformation campaign ahead of the upcoming elections.