How do you supervise the dissolution of a dirty bank when your country is under intense international scrutiny for serving as a harbor and funnel for tens of billions of dollars in illicit wealth for decades?
That is the question Latvian authorities must answer with ABLV Bank, which collapsed in February after American officials moved to sever the lender’s access to the U.S. financial system for counting organized crime syndicates, Eastern European kleptocrats and blacklisted firms tied to North Korea’s ballistic missile program as clients.
The ongoing liquidation of Latvia’s former third-largest lender and the distribution of the almost €2.5 billion in client funds still on the books represents a litmus test of sorts for Latvian authorities, who have responded to U.S. and EU pressure by implementing sweeping reforms to domestic anti-money laundering rules.
“We are having to deal with something without any precedent,” Ilze Znotina, the head of the Control Office, Latvia’s financial intelligence unit, told ACAMS moneylaundering.com.
While the significance of the controlled liquidation is not lost on Latvian officials, Znotina and others question whether the Baltic nation has the wherewithal to monitor and ensure that funds do not reach criminals and designated entities.
ABLV viewed roughly 90 percent of its 3,800 total clients as posing a high risk of financial crime as of February, when the U.S. Treasury Department proposed to classify the lender as a money-laundering conduit.
The bank “primarily” maintained accounts for shell companies registered in secrecy jurisdictions such as the British Virgin Islands, Cayman Islands and the Seychelles, according to the department’s Financial Crimes Enforcement Network.
By June 2017, almost 85 percent of the bank’s deposits originated from offshore firms whose beneficiaries hailed from Russia and other former Soviet states, according to an internal report cited by EU lawmakers in April.
“Latvia cannot handle this in an effective manner alone,” Jeppe Kofod, a Danish MEP and member of the European Parliament’s special committee on money laundering and tax evasion, told moneylaundering.com. “They need EU authorities, like the ECB [European Central Bank] and others … to go as far as they can.”
Latvia’s Financial and Capital Market Commission, or FKTK, decided in June to allow ABLV to undergo a voluntary liquidation, a move to ensure that the regulator has “maximum involvement and control” over the process.
The appointed liquidators—Riga-based attorneys Eva Berlaus and Elvi Veber, and financiers Andris Kovalcuks and Arvids Kostomarovs—disclosed last month that around 3,300 of 3,800 eligible clients had submitted claims totaling €2 billion, roughly 98 percent of the assets on hand.
The liquidators separately hired global consultancy EY to conduct the necessary due-diligence checks on clients and implement an anti-money laundering and sanctions compliance methodology to assess their claims.
The methodology now under development will be “tested and agreed” on by the FKTK as well as a second, unidentified consultancy, a spokesperson for the regulator wrote in an email to moneylaundering.com, adding that six officials now work on the liquidation full-time.
“After approval of the methodology, FKTK will continue supervising the process of disbursements to the creditors pursuant to the methodology and, where necessary, carry out further inspections regarding creditor compliance with requirements laid down in the methodology,” the spokesperson added.
The first payments to clients with deposits exceeding the state-guaranteed sum of €100,000 could transfer out as early as January.
Znotina, the FIU chief, noted that auditors have yet to submit a risk assessment of the bank and its clients to Latvian authorities.
“We’re still in the beginning, from my point of view,” Znotina said. “In order to receive quality information—and most probably there are many customers that should be reported to us—we need to know how they’ll examine whether customers, their accounts or funds are suspicious.”
The FIU in the coming weeks plans to hire external consultants to assist in reviewing suspicious transaction reports, or STRs, ABLV filed before and after its collapse, and comb through intelligence obtained from overseas agencies.
According to Znotina, transactions that show links to criminal activity will be referred to law enforcement agencies and the Control Office will freeze accounts where necessary.
But the FIU chief warned that the growing stack of STRs submitted by the bank on transactions that often date back several years risks overwhelming her agency.
“That type of report will not be very useful and this is something that concerns me a lot,” Znotina said. “It shows that right now, when the bank realized that there was something wrong, they are starting to put all the pressure on us, dumping tons of reports on us.”
The desired effect
The stakes grew in August, when Moneyval, the Financial Action Task Force’s representative in Europe, concluded in an assessment that Latvian authorities and financial institutions have failed to protect their financial system from abuse by money launderers and sanctions evaders.
Latvia now faces the prospect of being added to FATF’s gray list of high-risk nations if the country fails to upgrade its defenses against financial crime by the end of 2019. Inclusion on the list would carry potentially devastating consequences for the nation’s banking sector.
“The liquidation process will have an impact on the assessment of the country’s progress next year,” said Yehuda Shaffer, the former head of Israel’s FIU and an ex-Moneyval evaluator. “Latvia may use it to illustrate progress and effectiveness in almost all [areas].”
Latvian authorities last month finalized a plan to implement the recommendations, including by making it easier to penalize firms for sanctions violations and boosting the resources of agencies fighting economic crime.
The plan follows the adoption in May of legislation to ban the provision of accounts for foreign shell companies as part of a broader drive to reduce the proportion of high-risk non-resident customers in the financial sector, a market segment formerly dominated by ABLV.
“Anecdotal evidence” suggests that the pressure has had the desired effect on the sector, Egons Pikelis, a partner at Ellex Klavins in Riga, said, adding that a string of ABLV clients had asked his firm to advise them on withdrawing their money from the bank.
Since March, customers have withdrawn up to €100,000 of deposits at ABLV under a process managed by a second Latvian lender, Citadele Banka, which must conduct the necessary anti-money laundering checks.
Citadele receives those assets via the Deposit Guarantee Fund, a pot of insurance money jointly funded by financial institutions and administered by the FKTK.
Some customers have found the process of receiving their funds from Citadele “relatively straightforward,” while other, mainly foreign clients have encountered more difficulty, according to Pikelis.
“I suspect that given the profile of nonresident clients, since AML [anti-money laundering] rules seemed loosely enforced when they opened accounts, they’re somewhat unpleasantly surprised they’re now being asked all these questions,” the attorney said. “Whether that reflects rigor on the part of the bank or merely the fact the client is surprised … it’s probably a bit of both.”
The tough business of liquidation
The issues plaguing Latvian authorities go beyond lack of resources.
Last month, the Riga-based law firm of Janis Karklins, an attorney representing Olegs Fils and Ernests Bernis, ABLV’s largest shareholders, ran an advertisement in the Latvian daily Diena offering a reward for information on “active efforts” by corrupt financiers and state officials to “enforce” a mandatory liquidation of the bank.
Karklins declined to provide specifics on the allegations, but said shareholders fear that a “sabotage” of the voluntary liquidation will result in their assets being placed under the control of court-approved insolvency administrators who in the past have proven prone to corruption.
The attorney cited the case of Trasta Komercbanka, a small Latvian lender which lost its license to operate in March 2016 after incurring significant financial losses and violating AML rules.
In January, Latvian prosecutors charged six individuals, including two administrators overseeing the liquidation of Trasta Komercbanka, with extortion and money laundering for allegedly threatening to mark creditors’ funds as illicit if they refused to give them a percentage.
“Our clients’ main interest is to not allow this to happen,” Karklins, the attorney, said. “This is of course also a question of shareholders’ interest to preserve their reputation … as much as possible in the current situation.”
Some suspect corrupt elements still work within the bank.
In June, the local chapter of Transparency International, or TI, warned that complicit employees may use the liquidation process as cover to destroy evidence of criminality, including by disappearing files.
The advocacy group called on Latvian authorities to notify liquidators, bank employees and shareholders of their legal obligation to preserve evidence and the legal consequences for failing to do so.
“These [money laundering] activities on such a scale could not have happened without participation by some of the bank’s employees,” Liene Gatere, executive director at TI Latvia said in an interview.
Gatere also raised concerns that given the FIU’s limited resources, the “very tight timeline” before payouts to creditors commence in January may hamper investigations.
TI’s warning came after British financier and anti-graft campaigner Bill Browder lodged a criminal complaint with Latvian authorities alleging that ABLV staff helped launder $100 million of $230 million in tax rebates fraudulently claimed by members of the Klyuev Organized Crime Group in Russia with the help of complicit Russian officials.
On Oct. 4, Latvia’s economic crime police announced they had opened a criminal investigation into large-scale money laundering at the bank.
“The investigation continues and Latvian state police don’t have any suspects,” a police spokesperson told moneylaundering.com.
|Topics :||Anti-money laundering , Corruption/Bribery , Counterterrorist Financing|
|Document Date:||October 18, 2018|