Blog Post

Latvia’s money laundering scandal

Latvia’s third largest bank ABLV sought emergency liquidity from the ECB and eventually voted to start a process of voluntary liquidation, after being accused by US authorities of large-scale money laundering and having failed to produce a survival plan. What does it mean for the ECB?

By: Date: April 9, 2018 Topic: Finance & Financial Regulation

The US Treasury Department’s Financial Crimes Enforcement Network said on February 13th 2018 that it was seeking restrictions on ABLV bank, on suspicion of involvement in money laundering and helping clients violate United Nations sanctions on North Korea. Separately, central bank chief Ilmars Rimsevics was detained on Saturday on suspicion that he solicited a bribe. Shaun Richards has a good summary of the events, with relevant news quotes that you may want to read. This Reuters summary is also very good to catch up with the basic facts.

A piece in Politico Europe points out that the ECB has been quick to avoid responsibility over the ABLV case. In a statement, Danièle Nouy, chair of the ECB’s supervisory board, said that “breaches of anti-money laundering can be symptomatic of more deeply rooted governance deficiencies within a bank but the ECB does not have the investigative powers to uncover such deficiencies.”

But the Politico piece finds that the ECB itself seems to be split-minded about taking on such a role. In an interview with a Latvian publication in March 2017, Nouy rejected any calls for the euro-zone central bank to take on money-laundering-related responsibilities, saying: “The Single Supervisory Board cannot take on such a responsibility, because we already have many tasks which require our full attention.” But in a letter to Green MEP Sven Giegold five months later, she admitted that conduct risk – which includes money laundering – is “one of the key risks for the euro area banking system.”

Richard Milne writes for the FT that Latvia’s banking scandal leaves Europe’s regulators red-faced and that the forced liquidation of ABLV is a humiliation for both the Baltic country and European authorities. Of all the embarrassing things about the Latvian banks’ money laundering scandal, perhaps the most striking is the fact that the problems were laid bare not by local or European authorities but by Americans.

The affair has revealed serious deficiencies in how Europe fights money laundering. Competence for checking breaches of anti-money laundering rules lies with national authorities, not with the ECB, which was the banking supervisor of ABLV. ABLV also raises awkward questions for the ECB. Even though it has no competence for money laundering, the ECB’s supervision arm – the Single Supervisory Mechanism – scrutinises the business models and governance of banks.

Ferdinando Giugliano and Clive Crook at Bloomberg think that the ECB is the euro zone’s most powerful policy-making institution; but even so, the failure of the Latvian bank shows that the ECB doesn’t have all the powers it needs. Gaps remain, and they put Europe’s financial system at risk. They point to the decision of the Single Resolution Board (SRB) that ABLV was too small to pose a systemic danger, and was therefore to be liquidated under national insolvency procedures.

Meanwhile, a Luxembourg court rejected calls from yet another national regulator to close ABLV’s local branch, saying it was financially strong, which flatly contradicts the ECB’s assessment. This ongoing muddle calls the credibility of the euro zone’s top financial regulator into question. The ECB is in charge of prudential supervision, but not money laundering: so long as this is left to member states, banks will be watched more closely in some countries than in others. That undermines the supervisory system and makes it harder to build a single capital market for the euro zone. Responsibilities over money laundering should be handed to a European institution.

Frances Coppola looks at the chain of the events that led to the liquidation, and argues that ABLV would have died anyway: even if there had not been a bank run, the bank would not have survived the action that the US Treasury proposed to take against it. FinCEN’s accusation hangs on the fact that ABLV has – or had – very high levels of non-resident deposits and an extremely large and risky non-resident customer base. FinCEN says that 90% of its customers are “high-risk per ABLV’s own risk rating methodology” and are “primarily high-risk shell companies registered in secrecy jurisdictions”, some of which are connected to sanctioned individuals and companies. Most damning of all, FinCEN alleges that the bank not only facilitated transactions for North-Korea-sanctioned entities, but also that it lied about doing so. ABLV, therefore, was not just laundering money, it was systematically breaking sanctions all over the world.

Coppola thinks this also explains why the ECB imposed a moratorium on payments. A high proportion of ABLV’s non-resident deposits were of dubious provenance, and those were the deposits that ran the moment FinCEN made its announcement. The ECB’s emergency liquidity assistance would have facilitated the movement of money suspected of being laundered. The only question is why it took the ECB six days to impose the moratorium, given the seriousness of FinCEN’s allegations and the fact that the involvement of Latvian banks in international money laundering networks has been an open secret for years

Joshua Kirschenbaum points out that, meanwhile, Estonia’s financial regulator announced on March 26th that the ECB, acting at Estonia’s request, had revoked the license of Versobank AS, a small Estonian bank catering to clients based in Russia and Ukraine. The bank had been involved in a variety of money laundering schemes, including the infamous “Russian Laundromat” in Moldova. Recent developments in Latvia and Malta – as well as long-standing issues in Cyprus – have started a much-needed discussion about whether money laundering supervision in Europe should be entrusted to a central authority that could proactively revoke or restrict licenses without needing to wait for national authorities to submit a recommendation.

This policy discussion presents an opportunity to evaluate which national regulators need to be further strengthened, how to deepen European information-sharing to combat illicit financial activity, and whether there needs to be a more assertive role for European law enforcement in combatting Russian money laundering. For the first time, the ECB has now taken explicit, unequivocal action to shut down a bank for money laundering violations. This precedent gives the ECB and European national regulatory authorities a new and powerful tool to combat Russian illicit financial activity in Europe. The more aggressive stance also augurs well for enhanced US-EU cooperation.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

The debate on euro-area reform

A paper jointly written by 14 French and German economists set off a debate about the reform of euro-area macroeconomic governance. We review economists’ opinions about it.

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 16, 2018
Read about event More on this topic

Upcoming Event

May
25
08:30

Where is China’s financial system heading? Implications for Europe

An event on the Chinese Banking Sector.

Speakers: Alicia García-Herrero and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

The Lesser Evil for the Eurozone

For three decades, the consensus within the European Commission and the European Central Bank on the need for market reforms and sound public finances has been strong enough to overcome opposition in small countries and outlast procrastination in large ones. Today, however, the Eurozone playing field has become a battleground.

By: Jean Pisani-Ferry Topic: Finance & Financial Regulation Date: April 4, 2018
Read article More on this topic More by this author

Blog Post

Milton Friedman's " The role of monetary policy" - 50 years later

In March 1968, Milton Friedman’s “The Role of Monetary Policy” - after his famous presidential address to the American Economic Association - was published in the American Economic Review. 50 years later, economists reflect on this famous work.

By: Silvia Merler Topic: Global Economics & Governance Date: April 3, 2018
Read article Download PDF More by this author

External Publication

European Parliament

Cash outflows in crisis scenarios: do liquidity requirements and reporting obligations give the SRB sufficient time to react?

Bank failures have multiple causes though they are typically precipitated by a rapidly unfolding funding crisis. The European Union’s new prudential liquidity requirements offer some safeguards against risky funding models, but will not prevent such scenarios. The speed of events seen in the 2017 resolution of a Spanish bank offers a number of lessons for the further strengthening of the resolution framework within the euro area, in particular in terms of inter-agency coordination, the use of payments moratoria and funding of the resolution process.

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: March 28, 2018
Read article More on this topic More by this author

Blog Post

The Brexit Transition Deal

Michel Barnier, the European Union’s Brexit negotiator, and David Davis, Britain’s Brexit secretary, announced a transition deal on March 19. We review recently published opinions about the deal and its implications.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: March 26, 2018
Read article More on this topic More by this author

Blog Post

Central banks in the age of populism

Two years of elections have shown that we live in an age of increasing political and economic populism. What are the consequences of that for central banks? We explore opinions about it, from both 2017 and more recently.

By: Silvia Merler Topic: Finance & Financial Regulation Date: March 19, 2018
Read article More on this topic More by this author

Blog Post

Are we steel friends?

The U.S. administration is considering to impose tariffs on steel (25%) and aluminium (10%), based on a national security argument. We review economists’ views about this major shift in U.S.’ trade policy.

By: Silvia Merler Topic: Global Economics & Governance Date: March 12, 2018
Read article

Blog Post

Breaking the Stalemate on European Deposit Insurance

Many EU-level reports have highlighted a European Deposit Insurance Scheme (EDIS) as a necessary component of banking union, but none of these options has met sufficient consensus among euro-area countries. The authors of this blog propose to end the deadlock with an EDIS design that is institutionally integrated but financed in a way that is differentiated across countries.

By: Isabel Schnabel and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: March 5, 2018
Read article More on this topic More by this author

Blog Post

Getting accustomed to Brexit - UK and the customs union scenario

The Labour Party’s support of customs union membership has the potential to change the course of Brexit, with 13 months left to close negotiations. This week we review the commentary around the possibility of a post-Brexit EU-UK Customs Union.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 5, 2018
Read article More on this topic

Blog Post

Don’t put the blame on me: How different countries blamed different actors for the Eurozone crisis

Why did the eurozone have such difficulties coming to terms with its own shortcomings? The authors believe they have found part of the answer, through an algorithm-based cross-country media analysis.

By: Henrik Müller, Giuseppe Porcaro and Gerret von Nordheim Topic: European Macroeconomics & Governance Date: March 1, 2018
Read article More on this topic More by this author

Opinion

The EU’s Seven-Year Budget Itch

On February 23, EU members began negotiations on the bloc's multiannual financial framework for 2021-2027. But, with all countries focusing on net balances – how much they receive minus how much they pay – will the composition of spending bear any relation to the EU’s stated priorities?

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: March 1, 2018
Load more posts