New euro member Latvia brings dirty money headache

By Gary Peach

Associated Press

Published: Monday, Dec. 30 2013 12:00 a.m. MST

"Latvia has historically had a large banking sector, has extremely strict data privacy laws, speaks Russian and 'gets' the post-Soviet mentality," said Tom Wallace, an analyst at C4ADS, a Washington, D.C.-based firm that specializes in data analysis and security.

Wallace, who co-authored a report on the links between Latvian banks and Ukrainian companies involved in the illicit arms trade, added that Latvia "is an EU member and so acts as a conduit to Western financial institutions. If you have money you want to discreetly move out of the former Soviet Union, Latvia has a lot of advantages."

Latvia's banks face scrutiny in a eurozone-wide review by the European Central Bank, which is trying to find weak spots in the financial sector to improve transparency and confidence.

The good news for the eurozone is that Latvia's banking system is not too big compared with its economy. That means the country is less likely to need a bailout from its new eurozone partners to save its banks, should they run into trouble, as happened with Cyprus. As of Sept. 30, the banks held nearly 20 billion lats ($30 billion) in assets, or about 120 percent of gross domestic product, far less than the average 320 percent in the eurozone in 2011.

On the flip side, for Latvia, the eurozone is now a safer economic bloc to join than it was 18 months ago, when many investors worried it would break apart. Markets have calmed since the ECB vowed in the summer of 2012 to do whatever it takes to keep the bloc together.

Latvia's regulator says it has introduced a number of controls aimed at anti-money laundering, counter-terrorist financing, and preventing excessively large sums from entering the banking system. Experts agree that the regulator has acknowledged the risks of dirty money and is addressing them, even if slowly.

But Latvian bankers say that pinpointing dirty money is not cut-and-dry.

"As anti-laundering regulations become more elaborate across the globe, so are the schemes used by persons who try to avoid them," said Arvids Sipols, who has worked 16 years in Latvian banks and is now on the board of Nord Capital Markets, a Riga-based asset management firm.

"In certain cases, simple filters do work and help to avoid the acceptance of rogue players," said Sipols. "In other cases it will not suffice, and it is not a banker's job to become an international detective."

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