US sanctions have a weak spot: tiny allies like Latvia

RIGA, Latvia (AP) — When the U.S. hit North Korea with sanctions last year, Pyongyang’s stateowned banks found a quiet backchannel to keep money flowing to the country’s ballistic missile programs, the U.S. says: the tiny European country of Latvia.

One of the biggest banks in Latvia — a member country of the European Union and NATO — built a business from processing illegal money transfers, enabling North Korea to continue to procure missiles, the U.S. government says.

Latvia has come into focus as a potential weak link in the West’s banking system as the U.S. and EU increasingly rely on financial sanctions as a weapon in their diplomatic spats — with North Korea, but also Russia and Syria, among others. After a slew of accusations of high-level corruption, Latvia is now trying to appease its U.S. and European allies and drastically reform its financial sector.

Prime Minister Maris Kucinskis told The Associated Press in an interview that the tiny Baltic state “cannot afford to have any uncontrolled money flows from the countries which have to be constantly monitored in order to avoid meddling or influence.”

In February, the U.S. accused one of Latvia’s biggest banks, ABLV, of proactively laundering money, skirting sanctions, and bribing local officials to do so. ABLV denied the accusations, but the U.S. report caused a run on the bank, which collapsed within days.

That same week, Latvian authorities said their central bank chief, Ilmars Rimsevics, was suspected of taking bribes.

Security services also are investigating him after an AP report containing allegations he asked a Latvian bank to launder money from Russia.

Latvia has strong business ties to Russia, and a third of its population is ethnically Russian.

Since the 1990s, it has sought to become a “Switzerland on the Baltic” by offering financial services to foreigners, often shell companies.

That made it a convenient conduit for dirty money into the EU. Several small EU countries, like Cyprus and Malta, also have been accused of being used for money-laundering.

But the scale of Latvia’s problem was made clear by reports in recent years detailing how billions of dollars flowed through the country.

To solve the issue, Latvia says it will ban banks from doing business with shell companies, which can be used to mask wrongdoers’ identities.

In the case of ABLV, the U.S. says North Korea used shell companies.

The country also aims to reduce the amount of foreign deposits its banks hold from 40 percent of the total to 5 percent this year.

In 2015, Latvian banks held 12 billion euros in foreign deposits, worth almost half the economy.

By the end of 2017, that had fallen to 8 billion euros. About half are owned by 26,000 shell companies, regulators estimate.

Experts are cautious about the probability of success.

Eriks Selga, a researcher with the Foreign Policy Research Institute, called the efforts by far the most ambitious Latvia has attempted but said the key will be implementation.

“We have some of the highest quality anti-money-laundering laws in Europe, if not the world.

But the enforcement is just not there,” Selga said.

Latvian authorities investigate only about 1 percent of reports of suspicious transactions, compared with an EU average of 10 percent, according to official records.