Courtesy of AFP

October 22, 2015

Latvia’s bid for OECD membership in 2016 came under scrutiny Wednesday as the organisation issued a report raising serious concerns about graft in the Baltic eurozone member’s banking sector.

Fourteen of Latvia’s 20 registered commercial banks cater to foreigners, with the vast majority of those clients coming from Russia and other countries from the former Soviet Union.

Foreign depositors account more than half of the 30 billion euros ($34 billion) in Latvia’s banking system which sells itself as a gateway to the European Union.

These “non-resident deposits” (NRDs) are subject to weak financial regulation and paltry penalties, the Organization for Economic Cooperation and Development said in its report.

“Non-resident banking poses a substantial risk that money obtained from corruption committed outside of Latvia is laundered inside the country,” it said.

“Furthermore, the cross-border nature of transactions and the distance at which these transactions are conducted pose challenges to supervision.”

The supervisory regime overseen by Latvia’s state FKTK financial regulator “does not adequately address the money laundering risks posed by non-resident deposits,” the OECD said.

It has recommended a long list of measures to improve Riga’s legal and enforcement regime. Among others, they include giving investigators more resources, making it a priority to inspect banks that specialise in NRDs and investigating why previous instances of money laundering were not detected and acted upon.

– Unusual rules –

Latvian ’boutique banks’ have featured in a series of money-laundering scandals including the notorious Magnitsky case in Russia.

A report compiled by the Kroll financial investigative agency and released to the public in May alleged that more than a billion euros from Moldova were laundered in just three days via Latvian banks, an allegation the OECD makes a point of noting.

“The media has also reported cases of foreign officials allegedly laundering in Latvia the proceeds of corruption, fraud and embezzlement committed in Afghanistan, Moldova, Kazakhstan and Russia,” the OECD said.

“Very large amounts of money — in one instance $1 billion — were allegedly laundered in these cases.”

The OECD also uncovered several startling rules applied by regulators that may explain their ineffectiveness.

Banks, for instance, are given a weeks’ notice before investigators arrive. People considered to be “politically connected” are no longer regarded as such one year after they were last in power.

Investigators also routinely only take an interest in money laundering cases involving 20 or more people. Even if caught, banks face a maximum fine of just 142,000 euros.

Fewer than one percent of suspicious transactions actually find their way onto the desks of the country’s KNAB dedicated anti-graft agency, the report revealed.