Latvia has vowed to overhaul its offshore banking system and drastically reduce foreign deposits as it tries to appease US and European regulators following accusations of money laundering and breaching sanctions against North Korea.
The country’s finance minister and its main regulator told the Financial Times that bank deposits from foreigners — often from Russia and other ex-Soviet states — would be slashed from 34 per cent of the total to just 5 per cent within the next six months.
Dana Reizniece-Ozola, finance minister, said Latvia had already clamped down on its non-resident banks but would take further action after its third-biggest lender was forced to liquidate itself following US allegations of institutionalised money laundering.
“We do understand that the situation has changed due to geopolitical tension. It’s not the pace that suits our strategic partner. We are fully dedicated to reduce the high-risk business,” she said.
Peters Putnins, chairman of the Financial and Capital Markets Commission regulator, said: “It’s an incredibly complex and heavy exercise. It’s clear that this reduction must occur within quite a tight timespan.”
The involvement of Latvian banks in breaking sanctions on North Korea was the tipping point for the US, prompting Washington to take action. Five lenders were fined by the Latvian regulator last year for breaking money laundering and terrorist financing rules. But the US laid out allegations against a sixth bank, ABLV, last month that led to its collapse and a crisis in Latvian banking.
The problems for Latvia’s financial sector have been amplified by an anti-corruption investigation into the country’s central bank governor, who is barred from his duties both at home and at the European Central Bank.
Marshall Billingslea, US assistant secretary for terrorist financing, visited Riga this month and told authorities that the level of non-resident deposits in many western banking systems was 4-6 per cent. The US made clear its displeasure with a Nato ally hosting banks that it claimed were involved in laundering money from Russia and North Korea among others. Mr Putnins said: “Our foreign ministry has said this is a matter of national security.”
Ms Reizniece-Ozola said that Latvia’s financial regulator had already met the dozen or so non-resident banks and told them that they must change their business model. She added that some banks might prefer to liquidate themselves or merge instead. “The ball is on their side,” she said. The government will seek to ban certain types of shell companies as part of the push to cut non-resident deposits.
Latvia’s banking system is largely split in two with big Swedish banks such as SEB and Swedbank catering for locals while a host of smaller, less-known lenders offers services to those outside the country. The non-resident sector has long been bedevilled by accusations of money laundering with the financial regulator stepping up the number of fines in recent years.
Non-resident deposits have already been falling. In 2015, they represented just over half of the total deposits in Latvia and by the start of this year that was down to 40 per cent. Due to ABLV’s collapse and some outflows in the aftermath from other banks, non-resident deposits are now down to 34 per cent.
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