For the past decade the European Central Bank has been the apex bank supervisor within the Eurozone, the E.U.’s 19-member single currency area. Its remit includes the prevention of money-laundering, but the influence of Russian-linked criminal funds in peripheral E.U. states is now exposing the ECB’s limitations in this regard.
The Baltic country of Latvia is a member of the E.U. and the Eurozone, but until the early 1990s it was part of the Soviet Union. More than one quarter of its 2-million-strong population is ethnically Russian, and it borders Russia to the east. This helps explain why its banks appear to have illicit relationships with some of Russia’s Soviet-era allies, not least to North Korea.
On 18 February, the governor of Latvia’s central bank, Ilmārs Rimšēvičs, was detained on suspicion of soliciting a bribe. The government has suggested that the accusations against Rimšēvičs could be part of a mysterious ‘disinformation campaign’, but he remains suspended while the investigation continues.
Then, on 24 February, the ECB ordered the closure of ABLV, the third-largest bank in Latvia, after the U.S. Treasury Department accused it of involvement in money-laundering and helping to violate international sanctions on North Korea. This was after Latvian banking authorities fined two Latvian banks a total of USD3.26 million for allowing their clients to violate sanctions on North Korea in July 2017.
That the U.S. authorities discovered the money-laundering, rather than the ECB, was embarrassing for the latter institution. The ECB released a statement saying that individual member states were responsible for combating money-laundering and that it did not have ‘the investigative powers to uncover such deficiencies’.
This was a telling admission on the ECB’s part. E.U. officials had repeatedly flagged Latvia’s banks for their corruption risks, given that 40 per cent of their deposits – around USD13 billion – are from foreign residents.
Latvia has been hit by a number of scandals since joining the Eurozone. For example, in August 2014, just eight months after Latvia joined the currency, the international anti-corruption organisation OCCRP discovered that at least three Latvian banks were involved in a USD20 billion money-laundering scheme based in Russia.
Latvian banks are not the only institutions to be linked to money-laundering, but it does appear to be a particular problem for small or peripheral Eurozone states. The U.S. FBI opened an investigation into a now-defunct Cypriot bank in December 2017, suspecting it of laundering money for wealthy Russians. Sergei Magnitsky, a Russian auditor, was investigating state-sanctioned Russian money-laundering through Cyprus and Latvia when he was arrested in Russia in 2008, on spurious tax evasion charges. He died in prison.
Malta, the E.U.’s smallest member state, has consistently come under fire from fellow E.U. countries and the European Parliament for failing to prevent money-laundering and insufficient reporting of suspect transactions.
The European Parliament agreed on new measures to combat money-laundering in December 2017, including E.U.-wide definitions, but the punishment of the crimes will remain in the hands of national prosecutors.
ECB officials are unwilling to take on responsibility for fighting money-laundering. Mario Draghi, the President of the European Central Bank, has refused to address the Latvian issues, instead preferring to concentrate on his plans to continue injecting stimulus into the Eurozone economy.
The ECB has the power to audit bank officials and shareholders, and can send delegates to attend the board meetings of any bank within the Eurozone. In reality, however, the ECB’s resources are stretched.
In 2014, Eurozone governments implemented the Single Supervisory Mechanism (SSM), a new tool that gave the ECB the ability to supervise the financial stability of all Eurozone banks. This includes conducting stress tests and preventative interventions such as setting capital limits on individual banks.
However, even at the time, German Chancellor Angela Merkel worried that the ECB would be unable to properly supervise the 5,500 banks under its jurisdiction. Indeed, the final iteration of the SSM only monitors the most ‘significant’ banks in the Eurozone, such as those that own assets worth more than EUR30 billion, or figure among the three largest banks of a Eurozone country. Around 120 banks qualify to be directly monitored by the ECB. As Latvia’s third-largest lender, ABLV should have been among that number, though in reality the bank was simply too small for the overstretched ECB to conduct a thorough review of potential risks.
The closure of ABLV demonstrates the clear limitations of the SSM, a mechanism created as a direct reaction to the financial crisis of 2008, when the main concerns of Eurozone governments were the liquidity of their banks and the availability of capital. In other words, the ECB focuses more on financial stability than on compliance questions such as money-laundering.
As a result, 19 loosely-linked national authorities deal with what is almost always cross-border crime. There are significant disparities in punishment for money-laundering across the member states, ranging from a maximum of five years’ prison in Belgium to a 20-year sentence in Greece, Luxembourg and Slovakia. In the case of Latvia, the central bank apparently missed the signs of money-laundering altogether.