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UPDATE APPENDED:

In November 2009, Gunta Razane, a senior banker with a fondness for gardening, returned to Latvia with her husband after four years abroad. She took out a €21,500 loan to repair their home outside of Riga, which stood on the site of a historic watermill and had suffered damage from a nearby natural spring.

Latvia at the time was still reeling from the global financial crisis that had left nearly a fifth of its working-age residents without jobs, and its banks, like hundreds of banks across Europe, struggling for liquidity. But the outlook was not so dour for the Baltic nation’s nonresident banking sector, which had emerged over the prior two decades as a gateway for funds moving from Russia and other former Soviet states into the West.

ABLV, the country’s largest private bank, had just opened a new office in Uzbekistan as part of a broader strategy to offset the damage from the global recession by attracting hundreds of millions of euros in deposits from wealthy foreign customers. The tide of foreign wealth would eventually lead the bank to ruin.

By 2015, the year before Razane joined Latvia’s Financial Capital Markets Commission as deputy to then-Chairman Peters Putnins, other lenders had adopted ABLV’s approach of prioritizing wealth from abroad, so much so that foreign clients—from Russia and elsewhere—came to account for more than half of the €23 billion of deposits in Riga’s banks.

Razane began her career with the FCMC in October 2016 with an ambitious plan to address what she and others perceived as Latvia’s acute vulnerability to suspicious funds from beyond its borders, including by collecting a “risk levy” from banks that disproportionately served clients who presented a high threat of money laundering or other financial crimes.

But her proposal for a new tax on high-risk banks never gained altitude after encountering strong resistance from the financial services industry, and perhaps more surprisingly, from some of her new colleagues in government.

By the end of her first year as a regulator, Razane found herself at loggerheads with her new boss, Putnins, over whether to penalize ABLV after an FCMC examination found weaknesses in the bank’s systems for complying with sanctions.

“When I joined the FCMC, I was trustful of the regulator’s dedication to put an end to the country’s reputation of being a hub for dirty money,” Razane told ACAMS moneylaundering.com. “But it was a gradual thing since the end of 2017, of making sure people were not independently minded, and afraid of taking the necessary decisions.”

Their relationship steadily worsened up to July 2019, when Putnins, then in his final days at the helm, reported his deputy to Latvia’s anti-corruption agency for allegedly failing to declare a conflict of interest.

Documents reviewed by moneylaundering.com show similarities between the action that Putnins initiated against Razane, who left the FCMC in July 2019, and an earlier action he took against a second senior regulator, Maija Treija, who led the agency’s compliance control department from July 2015 until September of last year, when she resigned as part of a court settlement.

Razane and Treija declined to comment on their work at the FCMC and the supervision of particular financial institutions, and said that confidentiality rules in Latvia bar regulators from discussing such details. The settlement Treija reached with the regulator in January 2020 separately bars her from publicly criticizing its processes and decisions.

Nevertheless, the facts and circumstances of their cases expose the fault lines that the U.S. decision to blacklist ABLV as a hub of illicit finance in February 2018 created within the FCMC ahead of a separate, damning assessment of Latvia’s overall defenses against financial crime.

“I decided to speak out to defend my reputation, which has been unjustifiably damaged by negative publicity,” Treija, the second senior regulator, told moneylaundering.com. “I believe it’s also necessary to speak out to enhance the protection of AML [anti-money laundering] staff and public officials who fight against financial crime.”

Razane, the subject of Putnins’ written complaint to anti-corruption authorities, said that in her view, he launched a sham administrative proceeding against her to harm her career after she pushed for tougher AML enforcement in Latvia.

In separate interviews with moneylaundering.com, three other sources with direct knowledge of Latvia’s AML regime questioned the FCMC’s independence under Putnins’ leadership.

Putnins, who has repeatedly defended his stewardship of the FCMC by citing the assessment of record AML fines and major reductions in the share of nonresident deposits in Latvia during his tenure, told moneylaundering.com in an email that he acted properly and legally in both cases.

Treija was temporarily suspended based on a suspicion, in strict accordance with the law, Putnins wrote in the email.

“As to Ms Razane—I was obliged by the law to inform competent authorities on any conflict-of-interest information,” he wrote. “The checking of information is [the] duty of competent authorities.”

Multibanka

Treija was no stranger to U.S. interventions with Latvian banks when she joined the FCMC. She began her compliance career in 2005 at Multibanka, shortly after the U.S. Treasury Department announced plans to designate the lender as a conduit for financial crime under the Patriot Act—the same measure that sunk ABLV more than a decade later.

Under Treija’s stewardship, Multibanka—which later rebranded as SMP Bank, then Meridian Trade Bank and is now known as Industra Bank—apparently righted the ship, so much so that the following year, U.S. officials took the rare step of withdrawing their proposed designation after finding that the lender’s AML program had markedly improved.

Treija began her decade-long stint at Multibanka as a board member responsible for AML. By 2013 she was overseeing the lender’s overall risk-management program, but left two years later to lead a new department that the FCMC had formed to bolster Latvia’s campaign to join the Organization for Economic Cooperation and Development.

To gain admission to the OECD, Latvia had to be seen as cracking down on the flow of suspicious funds through its nonresident banking sector.

“We started monitoring specific typologies, and began to fight them through targeted regulations and detailed onsite and offsite examinations,” Treija said, referring to the FCMC’s new compliance-control department. “It applied to all banks simultaneously … and was inevitably met by a certain reluctance to adjust to new requirements, and in some cases even with resistance.”

Results followed. In March 2016, the FCMC asked the European Central Bank to revoke the license of Trasta Komercbanka after determining that the lender had played a key role in several illicit-finance schemes, including a massive network of banks and shell companies now known as the Russian Laundromat.

By the end of the year, the FCMC had assessed nearly €6 million in total penalties against four banks for violating AML rules, led by the record €3.2 million fine in May against ABLV, Latvia’s third-largest lender at the time. Two months later, Latvia became the 35th country to join the OECD.

Stronger enforcement continued into 2017: Norvik Banka, Rietumu Banka and three other nonresident lenders incurred a combined €3.5 million in penalties that year after allowing offshore firms linked to North Korea’s ballistic missile program to open accounts and move funds over a period of several years.

The bevy of 2017 enforcement actions was underpinned by intelligence from the U.S. Federal Bureau of Investigation, which also flagged a sixth bank that served as a waypoint for transactions tied to Pyongyang. Reports later identified the bank as ABLV.

By November 2017, however, the FCMC, after conducting its own examination, had come to adopt the view of ABLV’s cadre of attorneys that the bank had not violated sanctions.

The FCMC also accepted ABLV’s argument that a newly discovered batch of AML violations was covered by the record fine against the bank in 2016, and even agreed to not go public with the case without the lender’s consent.

“It was about protecting ABLV,” Razane said. “Since the shareholders of ABLV quite openly said that they will go for each of us [in court] if the decision would not favor the bank, I felt that neither me, nor my colleagues at the board can be safe.”

Three months later, the U.S. moved forward with designating the lender as an institution of “primary money laundering concern,” triggering its collapse.

Ernests Bernis, one of ABLV’s largest shareholders, rejected Razane’s claim that the bank used the threat of legal action against individual employees of the FCMC to protect itself from stronger enforcement.

“Not in a single meeting have ABLV representatives, neither earlier, nor in 2017, voiced any threats to the officials of the FCMC,” Bernis told moneylaundering.com Friday. “It is absolutely false and fake information. Moreover, each meeting is recorded and it is easy to check these allegations.”

An ABLV spokesperson declined to comment.

The fall

The FCMC’s five-member board, which in the waning months of 2017 consisted of Putnins, Razane and Gvido Romeiko, head of legal and licensing, Ludmila Vojevoda, head of statistics, and Nora Dambure, head of prudential supervision, made key decisions on enforcement actions.

Razane said that domestic law bars her and other board members from disclosing how they voted on decisions related to ABLV and other financial institutions accused of violations.

Putnins—reportedly the only national regulator in the EU to vote against banning all payments to and from ABLV in the days after the U.S. finding—and Razane, his deputy, were appointed in February and October 2016 respectively by the head of Latvia’s central bank, the finance minister and Latvian lawmakers.

The other three board members answered directly to Putnins.

In June 2018, three months after the U.S. proposed to blacklist ABLV, the FCMC—allegedly under pressure from the bank and its allies in business, media and government—controversially decided to allow the lender to self-liquidate rather than place it under the control of court-approved administrators.

As part of the “legal and constructive voluntary liquidation process,” ABLV would appoint a team to review payouts to more than 3,300 customers seeking to recover their funds, and the FCMC would ensure the payments complied with AML rules.

ABLV turned to global consultancy firm EY to devise a system to screen the customers for AML purposes. But critics feared that in contrast to a court-led process, self-liquidation allowed the bank to administer payouts of potentially illicit funds from the €2.3 billion left in its accounts, and possibly place evidence of wrongdoing at risk.

Meanwhile, pressure on Latvia to tackle money laundering had begun to rise again by August 2018 after Moneyval, the European affiliate of the Financial Action Task Force, sharply criticized the country’s efforts against financial crime.

Moneyval rated Latvia’s implementation of sanctions designed to combat the proliferation of weapons of mass destruction as “low,” and appeared to refer indirectly to the FCMC’s purported lack of action against ABLV the prior year by citing an “unpublished administrative agreement … to which the evaluation team did not have proper access.”

The bank subsequently became “the subject of an action by a foreign government, which found DPRK-linked activity occurring even after committing to prevent such activity,” Moneyval wrote in a 224-page report. “Such ongoing conduct underscores the limited efficacy of the penalties levied [by the FCMC].”

As fears of Latvia’s potential inclusion on a “gray list” of nations prone to financial crime grew, Latvian officials came to view ABLV’s liquidation as a test and the FCMC began sharpening the system EY designed for vetting the bank’s remaining clients and funds.

“We proposed more than 700 amendments to the methodology, and had to spend a substantial amount of time and resources trying to reach a joint, adequate understanding of risks of the self-liquidation process and how to mitigate them,” Treija told moneylaundering.com.

Regardless of those efforts, Putnins removed Treija from the methodology review in January 2019 without explanation, she said, then scratched her from a government-led panel tasked with implementing Moneyval’s recommendations for Latvia’s AML regime.

The following month, he amended the compliance control department’s charter to assign supervision of onsite examinations to her deputy, Kristaps Markovskis, Treija said. “I felt restricted in my ability to take responsibility for the work of the department.”

A Latvian official told moneylaundering.com on condition of anonymity that by that point, the FCMC’s internal divisions had become serious enough to hamstring its ability to move forward with ABLV’s liquidation and work with other agencies.

Putnins then removed Razane from the European Banking Authority’s board of supervisors, which at the time was evaluating a series of money-laundering scandals at a host of European banks, including ABLV. He also excluded her from meetings with the U.S. Treasury Department, World Bank, OECD and Moneyval.

Tensions rose further when Ilze Znotina, the newly appointed chief of Latvia’s financial intelligence unit, began pushing for more rigorous screening of ABLV’s clients during the liquidation. Znotina’s plan eventually won out.

In April 2019, the FCMC announced that Treija, head of its compliance control department, was suspended amid an investigation by Latvia’s State Police into alleged fraud and abuse of power by former directors of Meridian Trade Bank, her previous employer.

The payouts from ABLV commenced in October 2019.

Old loans, new opportunities

A day before the FCMC announced the suspension, Latvian state broadcaster LTV reported that the police investigation into Treija centered on €8 million in loans that Meridian extended on unusually favorable terms to energy projects allegedly linked to Svetlana Dzene, a former shareholder and president of the bank, and her husband Andris Dzenis, an ex-board member.

LTV emphasized Treija’s status as a senior regulator and reported that at the time of the loans in 2011 and 2012, it was her responsibility to protect Meridian from unmanageably high-risk finance.

The necessity of protecting FCMC’s reputation as an unbiased supervisor justified Treija’s suspension, Putnins told LTV in an interview. “Given that we ourselves set a very high standard for our market participants, we also have to look at ourselves.”

Treija cast a different light on her suspension and the events that led to it.

She said that at the time of the loans, she was tasked with guarding Meridian against money laundering and did not have any role in preventing unsafe and improper lending practices. She said she never had a seat on Meridian’s credit committee, which, according to the bank’s annual reports, was responsible for managing such risks.

She further claimed that she had been open with the FCMC and Putnins about any shortcomings at Meridian throughout her tenure as a regulator. In November 2017, with the loans still unpaid, the FCMC fined Meridian almost €900,000 for poor management of credit risk.

An FCMC spokesperson said that the regulator was barred from indicating whether the loans that led to Treija’s suspension had also triggered the fine.

In July 2019, State Police told Latvian weekly IR that the investigation into former executives at Meridian had no connection to Treija’s suspension. Treija, who said she was never questioned as part of the case, remained suspended without pay by the FCMC for another month.

Putnins did not answer questions from moneylaundering.com on when he first learned of the loans and whether he had any information suggesting that the State Police considered Treija as a person of interest in the Meridian investigation.

Treija was suspended “strictly following the regulations of the law,” he wrote in an email to moneylaundering.com. “I have no knowledge what happened to her career after I left the FCMC.”

In November 2020, Latvian news outlets reported that the State Police had closed the investigation at the lender’s request, without charging any suspects.

Spokespersons for the State Police and Meridian Trade Bank, now known as Industra Bank, did not respond to inquiries by press time.

Around the time of Treija’s suspension, reports emerged that Putnins, who enjoyed strong support from ex-Prime Minister Maris Kucinskis, did not hold favor with Latvia’s new head of state, Krisjanis Karins, a former member of the European Parliament who helped craft the EU’s Fifth AML Directive.

Conflict of interest?

In July 2019, IR cited a confidential report in which the OECD praised the FCMC’s compliance control department for grasping Latvia’s exposure to financial crime, but more broadly questioned the regulator’s independence and leadership.

Fear of lawsuits and the outsized political influence of banks had made the FCMC a hostage to the financial services industry, the OECD found. The confidential report had been commissioned by Latvia’s then-Finance Minister Dana Reizniece-Ozola, who publicly criticized the FCMC’s handling of ABLV’s liquidation before resigning in January 2019.

Latvian officials introduced several AML reforms in the days before Treija’s suspension, led by new methods for selecting FCMC board members that would force Putnins and Razane to reapply for their jobs. Putnins criticized the reforms as political moves that threatened the FCMC’s independence, and made clear that he would not reapply.

On July 5, 2019, after a panel of Latvian lawmakers accepted her and Putnins’ resignations, journalists asked Razane whether she would apply for his job. “I said, ‘Yes, I may consider it,'” she told moneylaundering.com.

Three days later—a week before he and Razane left the FCMC—Putnins informed Latvia’s anti-corruption agency, KNAB, of his deputy’s alleged conflict of interest in taking part in the board’s September 2017 decision to allow Nordea’s branch in Latvia to transfer its assets to DNB Bank.

Putnins warned KNAB in a letter that Razane possibly breached rules that govern the conduct of public officials by not declaring before the decision that she had a €21,500 loan on the books with “Nordea Bank AB Latvian Branch” from November 2009 to May 2016.

Putnins’ complaint “indicated the likelihood of an infringement” by Razane, according to court records, but stopped short of definitively accusing her of misconduct. KNAB later ruled that Razane had violated disclosure requirements and fined her €170.

But Razane never held a mortgage with Nordea, nor been a customer of the bank.

According to court documents seen by moneylaundering.com, the loan to renovate her home near Riga originated from DNB Nord Banka, which became Luminor Bank in October 2017 after DNB acquired Nordea’s branch in Latvia.

Razane appealed her case to KNAB chief Jekabs Straume, who upheld the fine despite a letter from Luminor Bank confirming she had never obtained a loan from Nordea’s local branch. She then sued the agency, and on Oct. 9, Riga’s Vidzeme Suburb Court ruled in her favor, ordering KNAB to annul the penalty and close the case.

KNAB could have determined relatively easily that Putnins’ complaint did not hold water after consulting Latvia’s land registry, according to Razane, records clearly showed that DNB Nord Banka had loaned her the funds. KNAB never interviewed her as part of the case, she said.

Judge Biruta Horuna agreed, ruling that “the burden of proof in an administrative violation proceedings is on the institution, which … before making a decision was obliged to check the information … and obtain additional evidence, rather than relying on incomplete information provided by the Commission [the FCMC].”

Razane claimed Putnins’ true objective in making the complaint was to harm her career in the private sector after blocking her from his old job at the FCMC, as government rules allow only those with an “impeccable reputation” to chair the agency.

“Me saying I was considering applying [for the position of FCMC chair] was a red flag for them,” Razane said, referring to Latvia’s nonresident banking sector.

She has not worked since leaving the FCMC, opting instead to fight a legal battle to restore her reputation.

Putnins told moneylaundering.com that he was “obliged by the law to inform competent authorities on any conflict-of-interest information” and has “no specific knowledge why Ms Razane is no longer a council member of the FCMC.”

As for ABLV, “all decisions regarding [the bank] are public … all legal procedures have been followed before any decision was taken,” Putnins wrote in an email. “I have not taken any personal decisions in that regard, all of them are decisions by the Council [board] of FCMC.”

Treija successfully sued to have her suspension lifted, claw back the three months of salary she lost and recover her legal costs. She returned to the FCMC in August 2019 under new leadership but was told she would not resume her previous duties despite Putnins’ departure.

Asked whether decisions on Treija’s suspension and the complaint to KNAB against Razane were taken by the board or by Putnins alone, and whether the FCMC’s human resources department had reviewed the matter, an agency spokesperson said that such decisions “cannot be taken unilaterally, without the involvement of other structures.”

“The information provided [by Razane and Treija] is a one-sided view of past events, [and] the FCMC is distancing itself from the conflict between the persons you refer to,” the spokesperson said.

Treija’s case ended with a settlement in January of last year, pursuant to which the FCMC agreed to pay her outstanding salary, withdraw the statement announcing her suspension, state publicly that Putnins’ order to suspend her was “non-substantiated and illegal,” and express “regret for defamation of and possible harm” to Treija’s reputation.

The regulator also publicly acknowledged that Treija’s work at the FCMC had “always contributed to strengthening” Latvia’s AML regime and “raising of the international reputation” of its financial sector.

Treija agreed as part of the settlement to leave the FCMC in September. Like Razane, she remains unemployed.

Contact Koos Couvée at kcouvee@acams.org

UPDATE: Adds comment from ABLV shareholder Ernests Bernis.