RIGA - In a move that will fundamentally change the Latvian banking sector's near-term outlook, the U.S. Treasury Department on April 19 singled out VEF Banka and Multibanka as two institutions of "primary money laundering concern" and promised to pressure American banks to close correspondent accounts with them.
The announcement had an immediate impact, as Multibanka reported a sharp drop in assets, losing 8 million lats (11.4 million euros) the day after the news went public.
"These two Latvian banks represent a danger to the international community because they facilitate the placement and movement of dirty money in the global financial system," said Daniel Glaser, the U.S.treasury's deputy assistant secretary for terrorist financing and financial crimes, on the department's Web site.
Both banks denied any allegations of wrongdoing or impropriety and said they would appeal the decision to American authorities.
Locking out the two local banks from the U.S. financial market would make it difficult if not nearly impossible to continue the transfer of funds denominated in American dollars. The U.S. blacklist stigma will also make it increasingly challenging for the banks to maintain liquidity, which in turn could lead to their demise.
In response to the move, the Foreign Ministry has sent a letter to U.S. authorities, challenging the statement that the fight against money laundering was hampered by the level of corruption in the government and security institutions, something included in a report on Latvia by the U.S. government.
Curiously, the treasury department's decision came as a surprise to many, despite the recent initiative by Prime Minister Aigars Kalvitis to clean up Latvia's banking system and cut down on money laundering. The prime minister confirmed this policy in response to the United State's move.
"Only by clearing the market from activities connected with organized crime and money laundering can Latvia continue to develop as a major provider of banking services," he said in a statement.
Other observers were less than impressed with government behavior.
"The news is basically a complete disgrace for our regulator," one banking executive said in reference to the Finance and Capital Markets Commission. "Whether we like it or not, it's impacting all of us because it gives the impression that dirty money is going through Latvia and the regulator cannot handle it."
As the banker went on to say, "Many of the smaller banks simply lack the resources to effectively watch the transactionsâ€¦ No one can be completely insured against scandal."
Uldis Cerps, who heads the Finance and Capital Markets Commission, defended the watchdog. "Financial crime exists outside of our scope and is the responsibility of the Latvian FIU and law enforcement," he said. "We have applied a range of sanctions ourselves, some of which have been very severe."
Cerps pointed out 35 on-site inspections carried out in 19 banks in 2004 and fines levied against two banks as evidence. Five banks, he said, are under enhanced scrutiny.
Latvia's banking system, the largest in the Baltics, is already feeling the impact of such intense scrutiny 's from both within and without. In the first two months of 2005, total banking assets fell for the first time in years 's by a meager 10 million euros 's but still a bad sign for an economy that is clicking in at about 8 percent annually.
With 23 banks, Latvia has the most in the Baltics and possesses the largest aggregate assets 's 11.6 billion euros.
According to insiders, larger banks make most of their money off loans followed by securities, with very little made by way of transfer fees. Some of the smaller banks make much larger amounts of money off transfer fees, or essentially by becoming clearing houses.
From 1996 to 1998, foreign assets in Latvian banks were nearly even or surpassed resident assets. Since then domestic assets have outpaced foreign ones. Still, the proximity to Russia, the large ethnic Russian population, and the massive capital flight that Russia has and is undergoing has perennially struck a chord of fear among international regulators. After Sept. 11, 2001, that fear only intensified.