CASE STUDY: U.S. targets Latvian bank for dealing with sanctioned North Korean entities

23 March 2018 Bachir El Nakib (CAMS), Senior Consultant Compliance Alert LLC

The U.S. Treasury Department on Tuesday issued a proposed rule that names Latvia's ABLV Bank a "foreign bank of primary money laundering concern," a move that obliges U.S. financial institutions to sever any ties. The proposal, which accuses ABLV of, among other things, aiding North Korea, also highlights broader money laundering risks associated with Latvian banks.

Although the notice issued by Treasury's Financial Crimes Enforcement Network (FinCEN) is technically a 
proposed rule authorized by Section 311 of the USA PATRIOT Act, in effect it bars U.S. institutions from offering correspondent banking services, direct or indirect, to ABLV. Based in Riga, Latvia, ABLV is the country's second largest bank.

"FinCEN will continue to take action against foreign banks that disregard anti-money laundering safeguards and become conduits for widespread illicit activity," Treasury Secretary Steven Mnuchin said in a 
written statement


Immediate Release

February 13, 2018

FinCEN Finds the Bank Orchestrates Money Laundering Schemes, Obstructs Regulatory Enforcement, and Has Conducted Activity Linked to North Korea

WASHINGTON – The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) today issued a finding and notice of proposed rulemaking (NPRM), pursuant to Section 311 of the USA PATRIOT Act, seeking to prohibit the opening or maintaining of a correspondent account in the United States for, or on behalf of, ABLV Bank.  FinCEN is proposing this action based on its finding set out in the NPRM that ABLV is a foreign bank of primary money laundering concern.

“FinCEN will continue to take action against foreign banks that disregard anti-money laundering safeguards and become conduits for widespread illicit activity,” said Steven T. Mnuchin, Secretary of the Treasury.  “Deficient practices at banks foster a wide array of illicit conduct, including activity linked to North Korea’s weapons program and corruption connected to Russia and Ukraine.  FinCEN is committed to protecting the U.S. financial system from these types of risks.”

As described in the finding, ABLV has institutionalized money laundering as a pillar of the bank’s business practices.  ABLV’s management permits the bank and its employees to orchestrate money laundering schemes; solicits high-risk shell company activity that enables the bank and its customers to launder funds; maintains inadequate controls over high-risk shell company accounts; and seeks to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices.

ABLV’s failure to implement, and disregard for, effective AML/CFT and sanctions policies and procedures have made the bank attractive to a range of illicit actors engaged in organized crime, weapons proliferation, corruption, and sanctions evasion.  Illicit financial activity at the bank includes transactions for parties connected to UN-designated entities, some of which are involved in North Korea’s procurement or export of ballistic missiles.  In addition, ABLV has facilitated transactions for corrupt politically exposed persons and has funneled billions of dollars in public corruption and asset stripping proceeds through shell company accounts.  ABLV failed to mitigate the risk stemming from these accounts, which involved large-scale illicit activity connected to Azerbaijan, Russia, and Ukraine.

Section 311 actions alert the U.S. financial sector to foreign institutions, such as ABLV, that are of primary concern and through the public rulemaking process, if necessary, cut them off from the U.S. financial sector.

The NPRM as submitted to the Federal Register is currently available here.

Written comments on the NPRM may be submitted within 60 days of publication.

"Deficient practices at banks foster a wide array of illicit conduct, including activity linked to North Korea's weapons program and corruption connected to Russia and Ukraine."

Although ABLV holds no correspondent accounts at U.S. financial institutions, it "accesses the U.S. financial system through nested U.S. dollar correspondent relationships with other foreign financial institutions," FinCEN said. 

A "nested" correspondent relationship can allow a foreign bank to clandestinely pump funds of unknown origin into the U.S. financial system. The upshot, therefore, is that U.S. banks will need to take steps to ensure that the foreign banks they serve are not facilitating ABLV's transactions.

ABLV has wittingly "institutionalized money laundering as a pillar of the bank's business practices," thereby attracting organized crime groups, weapons proliferators, corrupt officials, and those seeking to evade sanctions, FinCEN said. 

Corrupt officials in Azerbaijan, Russia, and Ukraine have purportedly funneled billions of dollars in dirty money through shell company accounts at the bank, which also has facilitated transactions for parties "involved in North Korea's procurement or export of ballistic missiles," FinCEN said. 

FinCEN's proposal also said the Latvian banking system in general is reliant on non-resident deposits for capital, exposing it to increased illicit finance risk, in part because verifying clients' backgrounds and business activities is difficult.

"Criminal groups and corrupt officials may use elaborate offshore services to hide true beneficiaries or create fraudulent business transactions," the Treasury bureau said.

Latvia's primary banking regulator, the Financial Capital and Market Commission (FCMC), must do more to ensure the country's banks comply with AML requirements, it said.

A banking scandal in Latvia has revealed money-laundering holes in the euro zone. American regulators have accused the Baltic country's third-largest lender, ABLV, of busting North Korean sanctions. The bank quickly lost more than a fifth of its deposits, prompting the European Central Bank to freeze payments. Latvian banks, which rely heavily on neighbouring former Soviet states for financing, are no strangers to allegations of financial misconduct. Euro members Malta and Cyprus have also faced criticism for poor oversight.

The U.S. Treasury's financial crime unit did not mince its words: its website describes money laundering as a "pillar" of ABLV's business. Through the banking of high-risk shell companies, the Baltic lender has exposed itself to exploitation of its network for a wide range of criminal activities, the watchdog says. It has therefore proposed blocking ABLV from accessing the U.S. financial system. The bank denies the allegations. And the affair has been blurred by a separate bribery investigation involving Latvia's central bank governor. Even so, the case points to serious oversight deficiencies that affect the broader euro zone.

ABLV is not the first Latvian bank to be accused of financial misconduct. Last year two other lenders were fined for similar breaches, also a result of a U.S. investigation. And a European Parliament report identified a suspiciously high number of Latvian-linked shell companies in leaked legal documents known as the Panama Papers. All this reinforces a long-held view that the country is a euro zone gateway for dodgy Russian money.

EU authorities' apparent inaction in the face of widespread financial crime adds to the embarrassment. But the bloc's oversight structure does not help. The ECB, which supervises ABLV, is chiefly tasked with monitoring financial stability rather than conduct. The fight against illicit financing is mostly left to a hodgepodge of loosely coordinated national authorities. Not all member states, especially small and peripheral ones, are up to the task.

The obvious solution would be to set up a supra-national body with powers to monitor anti-money laundering controls across the single currency area. The ECB seems ideally placed but has been reluctant to take on the task. The Latvian scandal might change that. The euro zone cannot further delay policing its weakest financial links. 

Context news

  • The U.S. Treasury's Financial Crimes Enforcement Network on Feb. 13 proposed shutting ABLV bank, Latvia's third-largest lender, out of the U.S. financial system. It accused the bank of facilitating widespread money laundering and illicit financing, including to banned North Korean entities involved in the country's weapons programme.


  • The U.S. announcement triggered deposit withdrawals of around 600 million euros, or 22 percent of total deposits, ABLV said on Feb. 19. This prompted the European Central Bank to temporarily suspend the lender's ability to process some payments.


  • ABLV has rejected the U.S. claims that it participated in illegal activities.


  • Two other Latvian banks were fined last year for allowing clients to violate European Union and United Nations sanctions on North Korea. The fines followed a U.S. investigation. Separately, Latvia's anti-corruption agency briefly detained Ilmars Rimsevics, the long-standing governor of the country's central bank, over bribery allegations.


  • Rimsevics, who represents Latvia on the European Central Bank's Governing Council, is suspected of demanding a bribe of no less than 100,000 euros, the head of Latvia's anti-corruption authority told reporters at a news conference on Feb. 19.


  • Rimsevics denied any wrongdoing, saying he is the target of a smear campaign.

Latvia launched just 85 money-laundering investigations in 2017 even though its banks flagged 17,900 suspect transactions, data seen by Reuters shows, highlighting the challenge the Baltic state faces in repairing its tarnished reputation.

Prime Minister Maris Kucinskis has vowed to invest more in monitoring banks after the United States triggered the closure of Latvia's third biggest bank, ABLV, by accusing it of money laundering and breaching sanctions on North Korea. 

Washington, an important military ally for the former Soviet-ruled state of 2 million people on the EU's eastern flank, is watching closely how Latvia tackles money laundering, much of which is suspected to involve wealthy Russian clients.

More resources to monitor banks would be welcomed by Viesturs Burkans, who has been in charge of the Latvian agency fighting money laundering for two decades - as would lowering the burden of proof needed to prosecute suspects.

"The level of evidence is rather high in Latvia if you are comparing with other countries," said Burkans, who has a staff of 33, some of whom are paid only 800 euros a month. "The number of convicted persons per year is low - close to 10."

The number of unusual or suspicious banking transactions in Latvia referred to the authorities lags far behind similar statistics for Switzerland and the European Union.

In 2017, only 225 files were forwarded to Latvian enforcement authorities, or 1 percent of the transactions flagged, according to the government data seen by Reuters.

In Switzerland, about 60 percent of reports of suspicious activity were forwarded to police in 2016.

For the EU as a whole, police investigated one in 10 of roughly 1 million transactions flagged as suspected money laundering in 2014, according to law enforcement agency Europol.

Already subject to EU law, Latvia joined the euro zone in 2014 and later put its big banks under the supervision of the European Central Bank, but the country has consistently failed to shake off suspicions about lax financial controls.

"In Latvia, we have the best legislation," said former justice minister Janis Bordans. "The problem is in enforcement. Who is the controller?"

Swiss-style secrecy 

The stakes are high for Latvia, whose reputation has been hit by the closure of ABLV last month, as well as the detention of central bank governor Ilmars Rimsevics in a separate bribery investigation. Rimsevics denies any wrongdoing. 

Since securing independence from Russia in 1991, more than a dozen Latvian banks have promoted themselves as a gateway to Western markets for clients in Russia and former Soviet states such as Ukraine - and promised Swiss-style secrecy for clients.

In many cases, money was lodged in a Latvian bank and then funnelled to accounts elsewhere, such as Switzerland, bankers and officials said. Since Latvia joined the European Union in 2004, transfers were deemed less risky for Western banks to handle than if they had come directly from Russia, they said.

The International Monetary Fund warned as long ago as 2007 that Latvia had a reputation for lax due diligence in opening bank accounts and the Organisation for Economic Co-operation and Development criticised the country in 2015 for failing to do enough to tackle financial crime and money laundering.

The opacity of Latvia's banking system was built on the fact many lenders taking foreign deposits dealt with shell companies, making it hard to identify the ultimate beneficiary.

At the peak in 2015, Latvian banks held deposits of about 12 billion euros ($15 billion) for foreign customers, according to the country's financial watchdog. Bankers and officials have said much of the money came from Russia.

"Money is deposited here for a short time period or forwarded to Western Europe ... but mainly to Switzerland," said Burkans, describing one typical transaction.

Some clients were also taking advantage of a Latvian scheme granting a residency permit allowing them to travel freely throughout much of continental Europe - in exchange for depositing 280,000 euros in a bank for five years.

One state official, who declined to be named, said these clients generated profitable business for the banks, which were processing roughly $15 billion of payments a month during 2015.

Many officials who spoke to Reuters agreed that a lack of resources and lax enforcement of rules have made it hard to control the country's financial system.

More than 200 million euros was taken out of Latvia last year in cash, bringing the total value of banknotes leaving the Baltic state to more than 750 million euros since the start of 2015, according to customs data seen by Reuters. (

Shell firms

Since Washington singled out ABLV and rattled Latvia's financial sector, the government has pledged tighter controls.

The U.S. accusations effectively froze ABLV out of U.S. dollar financial markets, a critical part of its so-called non-residential business whose loss ultimately led to its closure. The bank has denied wrongdoing.

It was an abrupt fall from grace for a bank that modelled its headquarters on a luxury hotel and displayed a gold bar worth $500,000 in its lobby, as well as modern art it planned to donate to a new museum.

Rivals have been hit too. Since the U.S. announcement on Feb. 13, ABLV's rivals have lost up to 700 million euros of foreign deposits, leaving 6.6 billion euros in total, according to the country's financial watchdog.

A government official who declined to be named said it was examining a "risk duty", or levy, on banks doing business with customers whose identity was unclear. The government also wants to make it easier to withdraw banking licences and tighten curbs on taking cash out of Latvia.

"Quite a big share of these non-residents still come from shell or offshore companies, which are considered to be the most risky ones," said Finance Minister Dana Reizniece-Ozola.

"Over the following years, the non-residential business will notably shrink. But the non-residential business ... I wouldn't say that it is completely bad."

While some politicians and bankers said Latvian lenders would continue to cater for Russia's wealthy elite whatever the changes, others took heart from the planned reforms.

"When Latvia regained its independence, it was poor and corrupt, with gangs and mafia. I don't see that any more," said Jekabs Straume, who leads Latvia's anti-corruption agency KNAB and is heading the investigation into the central bank governor.

"There is still corruption ... but it's improving. There is the political will to change."