Analytics, Banks, Financial Services, Latvia, Legislation, USA

On February 13, 2018 the Financial Crimes Enforcement Network (FinCEN) at the US Treasury proposed to ban ABLV from having a correspondence account in the United States due to money laundering concerns. The agency accused the lender of institutionalising money laundering as a pillar of the bank’s business practices and failing to implement effective anti-measures, allowing its clients with ties to North Korea anti-ballistic program to circumvent the United Nations’ sanctions.

The FinCEN description of the work of ABLV made the lender seem more like a crime syndicate than a bank. “ABLV management permits the bank and its employees to orchestrate and engage in money laundering schemes; solicits the high risk shell company activity that enables the bank and its customers to launder funds; maintains inadequate controls over high-risk shell company accounts,” statement said. Furthermore, FinCEN accused ABLV of bribing Latvian officials when they felt the bank’s business practice was threatened.

Evidence of corruption is one of the key questions when US Assistant Secretary for Terrorist Financing Marshall Billingslea visits Latvia this week.

“This has been our conversation: if you put this information in the notice, put the evidence on the table. Taking into consideration the backdrop of this, the issue of Latvian officials’ alleged involvement in corruption is more important for the Latvian society than a single bank,” said Latvian ambassador to the US Andris Teikmanis, who met U.S. Treasury representatives shortly after the statement about ABLV was published.

The backdrop of failures of the banking sector oversight is indeed quite damning: at around the same time, the governor of the Latvian central bank, who was one of the architects of non-residents’ banking system, was detained on accusation of taking a bribe in a case of now closed Trasta Komercbanka (TKB).

“The answer was we are cooperating closely with Latvian authorities,” Teikmanis said.

Bells were ringing

Latvian diplomats and banking regulator (FCMC) were notified an hour before FinCEN published the notice. Latvians were surprised at the harsh language and the use of the USA Patriot Act as a legal basis for the proposed action. A source familiar with the situation compared it to Re:Baltica with a “dry anesthetic”, a slang term describing making a person unconscious by hitting him with a hammer on the forehead.

The finance minister, Dana Reizniece-Ozola, who was in New York at that time, offered Latvia’s help in investigation. In phone conversations with Billingslea and the US Ambassador to Latvia, she asked the US to provide evidence of the corruption accusations.

“We were not anticipating a nuclear bomb,” said Ainars Latkovskis, the head of a parliamentary committee on defence and anti-corruption, who often talks with the US officials about the Latvian banking sector.

However, the blow did not come out of the blue. Ever since the Russian aggression against Ukraine in 2014, the American message for Latvia was simple: we will take care of weapons and soldiers, you clean up your banks.

In the beginning of 2016 on his visit to Latvia to reassure the Baltic states of security in light of the increasingly aggressive confrontation between US and Russia, the Vice President Joe Biden had a message for the local elites. “Justice systems must be equitable and efficient and transparent,” he told the gathering at the Latvian National Library, the pride for many Latvians. “And in a moment when Russia seeks to use corruption as a tool of coercion and influence around the globe, rooting out corruption is essential to preserve your national sovereignty. It’s a cancer to the body politic. It’s among the highest acts of patriotism to root it out.”

During his meeting with Prime Minister Māris Kučinskis, Biden urged Latvia to take further steps to clean up the non-resident banking sector. A similar message awaited Latvian finance minister and head of regulator when they met US Treasury officials last April and October on sidelines of IMF bi-annual meeting. “There was a talk about the sector as a whole and what exactly are we doing, but also the specific bank was mentioned,” said a source familiar with the discussions.

Fatal North Korea?

ABLV name frequently featured in the loud international money laundering scandals – the Magnitsky case in Russia, the Ukrainian billionaire Serhiy Kurchenko affair, the laundromat of Azerbaidjan’s elite. Yet, the bank always managed to survive and defend itself by saying “nothing is proven and we are not fined”.

Things changed in May 2016 when the banking regulator fined ABLV 3.16 million euros for it’s involvement in the theft of one billion dollars from three Moldovan banks. ABLV saw itself as a victim of swindling by one of his old clients. Even though the law allowed the regulator to fine a bank up to 10 percent of the bank’s turnover, ABLV pledged to spend at least 6.5 million euros on anti-money laundering (AML) prevention.

In the summer of 2017 the banking regulator fined five other non-resident banks in Latvia for failing to research their clients, thus allowing them to circumvent the UN sanctions against North Korea.

The probe was started also against ABLV at the end of 2016. For the North Korean case, bank hired many consultants, including the former US Assistant Secretary for Terrorist Financing Daniel Glasser. It ordered independent audit on sanctions of violations and enlisted an army of local and American lawyers to examine the validity of FBI evidence in the Latvian courts. ABLV also committed itself to investing another 12 million euros in AML system and cut the number of shell companies among its clients to 35 percent (Latvian government announced on Tuesday that it will apply a new tax to the banks which allow shell companies to operate with the aim to drive down their presence of Latvian banks’ clientele from current 37% t0 the half of it).

At the end, the regulator lost a fight by failing to find sufficient evidence to penalise the bank. The probe concluded that the UN sanctions against North Korea were not violated, but the bank did not act in good faith. Since the bank was fined previously in 2016, it could not be fined again for the same violations, the regulator said.

It left the ABLV competitors in the non-residential banking sector seething.

“This is not a slaughterhouse, it is a regulator,” the head of the Financial Capital and Market Commission (FCMC) Pēters Putniņš said to Re:Baltica. He pointed out that the US can fine banks for indirect support or intent, but in Latvia law calls for an actual offence. “As a lawyer, I cannot operate with the words like “possibly,” “likely” and do that arbitrarily,” he said.

The regulator’s decision not to penalise the bank was not taken unanimously, which happens rarely. Gunta Razāne, a deputy of Putniņš and wife of former Latvian ambassador to US, did not vote for it, but she refused to comment for this story.

“That [FCMC decision – ed.] was the end. Since 9/11 the Americans see fight against terrorism as the priority. This is one of those rare cases that would receive support of both Republicans and Democrats,” said Ainars Latkovskis, MP. “And they just imposed new sanctions against North Korea. You have to be crazy to do business with the prime enemy of our strategic partner.”

From a small-town bank to a real estate player

For a country of fewer than 2 million people, Latvia boasts an unusually large banking sector, divided into two large sub-sectors. One segment is dominated by Scandinavian banks which service the locals. Another segment works with non-residents,  mostly  from ex-USSR states or CIS.

Historically, it started in the early 1990s after Latvia broke away from the Soviet Union. It collapsed  in 1991, but new elites in newly formed states shared a lot of personal connections. They pushed Latvia to become a financial bridge between the East and the West — or Switzerland that is closer, cheaper, and speaks Russian.

ABLV was founded as Aizkraukles Banka in 1993 on the basis of a small town branch of the Latvian central bank. When the queen bee of non-residential banking, Parex Bank, collapsed in 2008 in the wave of the global recession and credit crunch, rumors at the time circulated that ABLV lured part of Parex’s client base. Both sides denied it.

From a small bank in the small town of Aizkraukle, 90 kilometers from the Latvian capital Riga, ABLV had grown to the conglomerate of more than 900 employees. Its tentacles stretched almost everywhere. . It promised to build a new office and apartment city block in capital Riga. City council was ready to connect it with a tram line, in spite of the opposition from residents. ABLV spent a lot of money on charity and promised to invest 30 million euros for the construction of a museum of modern art.

The bank’s owners also pulled significant weight among politicians as they donated to their campaigns lavishly. During the last  decade, the two owners — Ernests Bernis and Oļegs Fiļs —  and leading bank’s employees donated more than 226,000 euros to the both sides of the political spectrum.

Recently, Fiļs appeared in the media not so much as an owner of a bank as an escort to his new wife. Bernis along with a board member Vadims Reinfelds, played key roles in trying to save the bank.

What happened afterwards?

Clients started pulling out money from ABLV almost immediately after the FinCEN statement. At first, the outflow was small — a little over 40 million euros a day — but the trickle was growing. At that moment, the ABLV management still believed it could save the bank.

The plan was to settle on smaller size and get rid of dubious clients (FinCEN said by ABLV own methodology 90 percent of the bank’s clients were high risk, the bank claims 50 percent). If it was cut off from the US banking system, it could still trade in other currencies. And the bank still had 60 days to convince Americans that the facts on which their proposed decision was based were false. Bernis said that an unnamed Latvian official was bad-mouthing the bank and the bank reported it to the anti-corruption agency, which has launched a criminal probe.

The bank had enlisted US lobbyists Blue Star Strategies to work in the US Congress (ABLV had hoped to open the representation in United States for a while). Company’s co-founder Sally A. Painter in the past lobbied the US government for the NATO expansion to eastern Europe in 2004.  On ABLV payroll were also hired consultants from Financial Integrity Network (FIN), including Daniel Glasser. As Assistant Secretary for Terrorist Financing and Financial Crimes at the US Treasury he had regularly argued with the Latvian officials over the dirt in the non-resident banking sector. Glasser joined the group in March 2017. In June, he became a consultant for ABLV. FIN refused to talk about its clients and directed all questions regarding a potential conflict of interests to the US Treasury (it did not answer Re:Baltica questions).

As the days went by, the money continued flowing out of ABLV. According to the bank’s own data, clients withdrew more than 600 million euros in three days.

It is clear that if the decision to close the bank was taken by Latvian officials, it wouldn’t have happened.