Table of Contents
Latvia’s banking sector was once viewed by some as a hub for dirty money flowing out of Russia. Now, with the U.S. and Europe imposing an array of economic sanctions on Russia over its invasion of Ukraine, the former Soviet republic faces a new challenge: proving it can enforce the punishing measures.
The country is among a number of Baltic and Nordic nations on the front line in the economic war being waged against Russia. Many businesses in those countries have longstanding ties with their neighbor to the east, and the banks that service them have grappled with thorny questions in recent weeks about how to navigate an increasingly complex array of prohibited transactions.
“The first days were a shock for probably everyone,” said Ulvis Jankavs, deputy head of anti-money-laundering at
Skandinaviska Enskilda Banken
AB’s Latvian subsidiary, one of the largest financial institutions in the country.
The heavily regulated financial industry functions as a bulwark against financial crimes. Like their counterparts elsewhere, Baltic and Nordic banks are obliged to review transactions by their customers to ensure they don’t violate the sanctions on Russia and its regional ally Belarus.
In Latvia, banks have reason to be especially cautious when it comes to application of the sanctions. After the fall of the Soviet Union, the newly independent country set out to become a financial hub for the region, and quickly attracted money from sources such as wealthy Russians who saw Latvia as a transit point to the West.
The business led to a series of scandals that continue to loom large over Latvia’s banking sector. The country in recent years has taken steps to repair its reputation, and officials there say Latvia has reduced its exposure to Russia and Belarus. In the region more generally, the scrutiny has forced banks to invest more resources in financial crime prevention.
Whether those steps have fully prepared Latvia and its neighbors for the latest crisis remains to be seen. Although Nordic and Baltic banks have dealt with sanctions on Russia since its annexation of Ukraine’s Crimea region in 2014, the latest measures imposed by the U.S. and Europe are far more severe, and present a nearly unprecedented compliance challenge for the region, experts say.
Complicating the situation in Latvia is the fact that Russia remains a significant trading partner across the entire Baltic region, despite some decline in relations since 2014. In Latvia, Russia supplies key goods used by local manufacturers such as fuels, metals and wood. Russians and people of Russian origin, meanwhile, make up more than 25% of the country’s population, which numbers just under 2 million. Many local businesses have Russian owners, suppliers or customers, often with legitimate reasons to send money to or from Russia.
Efforts to adhere to the sanctions in recent weeks have placed an enormous burden on the compliance departments of Nordic and Baltic banks, according to senior executives and compliance officers from more than half a dozen of the region’s largest financial institutions. Compliance staff there have dealt with case backlogs, prompting delays and frustrating clients.
The risk for banks isn’t small. Within the first two weeks of enhanced monitoring of Russia-related payments, one Nordic bank’s compliance department found that at least two-thirds of the transactions it reviewed would have violated the sanctions placed on Russia if they hadn’t been stopped, according to one senior compliance executive. Even one errant transaction is enough for banks to incur large fines from regulators.
“We are tracking all transactions in [Russian] rubles, it doesn’t matter which side of the transaction [they are on],” said Mr. Jankavs, who is based in Latvia. “We are stopping them, and checking those customers and their counterparties.”
Some banks, after assessing the costs of doing such enhanced monitoring, have simply decided to cease most Russia-related business, a process known as de-risking.
AB, the largest bank in Latvia, in early April said that it would halt transactions to Russia and Belarus starting late April, and those originating in Russia starting in May.
Other banks have tried to take a more nuanced approach in an effort to continue providing services to companies with suppliers or customers in Russia or Belarus. Latvia-based Rietumu Banka has indicated it will continue processing payments, although it has warned customers they may need to provide the bank’s compliance department with additional documentation on their transactions.
The scrutiny of Latvia’s banking sector and its relationship with Russia extends back decades. In 2018, the U.S. Treasury Department declared ABLV Bank AS, then one of Latvia’s largest private banks, an “institutionalized money laundering” operation and cut its access to the U.S. dollar. Officials said the bank was laundering money for corrupt clients in Russia, Azerbaijan and Ukraine, as well as for North Korea’s nuclear missile program.
In another scandal in 2019, several Nordic banks admitted that hundreds of billions of dollars had flowed unchecked from Russia and other former Soviet states through their operations in Estonia.
Latvia’s financial regulator has held regular roundtables with banks on the Russia sanctions and worked with the European Commission to resolve confusion around technical aspects of the prohibitions. Latvia requires companies to also follow sanctions issued by the U.S., which can vary from European Union sanctions, creating ambiguities.
“Like a lot of the big Western banks, it’s been a matter of playing constant catch-up, because rules kept changing so frequently and so rapidly,” said Tyler Nielsen, a former U.S. Treasury Department official who now consults on compliance from Copenhagen. “We have had all these questions, and even the competent authorities have been playing catch-up.”
Authorities in Latvia in recent weeks said they have seen attempts to circumvent sanctions by individuals with links to the Russian government. There is no evidence so far that those attempts were successful, said Ilze Znotina, the director of Latvia’s financial intelligence unit.
One red flag, compliance officers said, is when a corporate customer that traditionally had many counterparties in Russia suddenly switches to using counterparties in another country, such as Hungary, that may be viewed as having weaker oversight.
Executives and regulators say the country has tightened its anti-money-laundering controls since the ABLV scandal. “We cleaned up the Latvian financial sector really to an extent that no other European country has cleaned [their own] up,” said Ms. Znotina.
“I don’t have any worries in relation to the banking sector here,” she added. “They are the most experienced part of the entire sanctions regime.”
Write to Dylan Tokar at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8