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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.


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