RIGA - Prime Minister Aigars Kalvitis opened up a potential Pandora's box last week when he said that money laundering in Latvia had become so rampant that the United States could impose sanctions against 12 local banks if the situation were not cleared up.
Equally devastating, the Baltic state might be unable to join the eurozone due to the prevalence of illegal funds in its banking system, the prime minister said.
Speaking at a press conference on Jan. 26, Kalvitis, who became head of government in December, unveiled plans for an anti-money laundering task force, adding that nobody knew for sure how widespread the problem could be, since no cases had been brought to justice.
The policy initiative seemed to have an immediate impact, as the Financial and Capital Markets Commission announced later in the week that it had requested two banks to change their management, one on suspicion of possible money laundering.
The names of the banks were withheld.
Hansabanka, the Latvian branch of the Hansabank Group, closed correspondent accounts with 15 's 16 banks, although the bank says the decision was made long before Kalvitis' statement. Bank officials said that similar measures would be taken by Hansabankas in Lithuania and Hansapank in Estonia.
"The decision to close the [correspondent] accounts is founded from the viewpoint of business because the accounts we decided to close are inactive and have no turnover. Practically they are of very little importance, both for us and our clients," said Arturs Eglitis, a bank spokesman.
Still, Latvia is perennially labeled as a money-laundering oasis, a charge that many in the industry do not deny when speaking off the record. The extent of the problem, however, is under question. Kalvitis reportedly said that Latvian banks were guilty of washing the fourth largest amount of U.S. dollars in the world, something experts said was impossible by virtue of the country's minute size.
Banking analysts said the prime minister's claim did not correspond to the most recent European Central Bank figures, where Latvia was fifth among EU accession states for the total value of transactions - under any currency - in 2002.
Still, the country's reputation as a dirty-money haven continues to hang over leaders thanks to close financial ties with Russia and Latvia's 23 banks, a number that far exceeds Lithuania and Estonia.
"The CIS countries are usually characterized by higher rates of financial crime," said Uldis Cerps, chairman of the Financial and Capital Market Commission.
"I don't think any bank that is serious about doing business would risk laundering money," added Michael J. Bourke, president of Rietumu Bank.
"It's no secret that there was capital flight from Russia in the early '90s. There is no doubt that part of this went through banks in the Baltics because of the rapid development of the banking system," he commented.
For Latvia, stricter measures also boil down to pleasing traditional allies such as the United States, which has been especially vigilant with global financial flows after the terrorist attacks of Sept. 11, 2001. The Patriot Act, which followed the attacks, allows the U.S. government to place sanctions on foreign banks. The legislation was recently enacted in relation to Belarus' Infobank and the First Merchant Bank of Northern Cyprus.
The U.S. Embassy released a short statement praising the decision, and embassy officials directed further inquires to the U.S. Treasury Department.
"The United States welcomes the decision of the Latvian government to create the Council for Preventing Legalization of Illegally Acquired Proceeds as described by the prime minister in today's press conference," the statement read.
Last March, the U.S. State Department placed Latvia on its list of countries of primary concern for money laundering, although the Baltic state was joined by many West European countries.
The government's new council should go far to promote vigilance in the industry, where bankers increasingly understand that the risk of handling questionable money far outweighs that of honest business. Janis Brazovskis, deputy chairman of the capital markets commission, has proposed amending the law on money laundering to publicize information on banks violating such laws.
Cerps was optimistic that the country could tackle the issue.
"More developed economies have this type of transparency. Latvia has reached a maturity where we could do this," he said.
Latvian banks saw a 37 percent increase in assets last year to 2.1 billion lats (3 billion euros), the Latvian Commercial Banks Association recently announced.