Latvia's financial regulator announced on June 18 that an unnamed bank has been hit with the stiffest fine possible for its role in laundering Russian funds connected to the infamous so-called "Magnitsky case". The move again raises concerns over the Latvian banking sector's high exposure to cash stemming from the former Soviet states.
The Financial and Capital Market Commission (FCMC) announced that it has levied a $191,000 fine on the bank for its role in laundering $230m in taxes allegedly stolen from the Russian government. The Latvian regulator did not name the bank, according to RFE, but a total of seven Latvian banks have been implicated by either the fund manager at the centre of the case or investigative reports by local media.
Until 2007, Hermitage Capital Management was one of the biggest investors in Russia. However, the fund's executives fled the country when authorities accused it of making fraudulent claims for a $230m tax rebate. However, Hermitage was actually the victim of Russian tax officials and police who had in fact stolen the cash. Sergei Magnitsky, a lawyer retained by the fund, was arrested as he investigated the claims and died while in custody, provoking a massive international outcry. In December 2012, the US Congress adopted the Magnitsky Act. It enables the US to withhold visas and freeze financial assets of Russian officials thought to have been involved with human rights violations.
Last year, Hermitage filed a complaint in Riga demanding the authorities look into allegations that six Latvian banks allegedly received $63m of the funds in 2007. The complaint was initially refused by state police. However, the Latvian prosecutor's office announced on October 2 that it had reversed that decision.
That decision was likely motivated by mounting pressure on Riga from Brussels to rein in the growing role of Latvian banks as a haven for foreign (read: Russian) cash. That concern has only grown this year in the wake of the mess in Cyprus - formerly Russia's offshore haven of choice - and Latvia's planned adoption of the euro at the start of next year.
Around half the €17bn deposited at Latvian banks are owned by non-residents. The International Monetary Fund (IMF) estimates that 80-90% of those funds come from former Soviet states, and Riga has been fighting since the EU forced Russian cash out of Cyprus in April - via a haircut on large depositors as part of its bailout - to quash claims that a significant chunk of those funds will end up in its banks.
However, international institutions continue to warn of the dangers, not only regarding the potentially dubious sources of that cash, but also the instability it casts on the sector. The European Commission brought it up as a major worry earlier this month, even as it was approving Latvia's application to join the Eurozone.
Other worries have been raised throughout the year. Speculation is rife that high-profile figures at the centre of corruption scandals such as Maxim Bakiyev, the son of the former president of Kyrgyzstan, and former Russian defence minister Anatoly Serdyukov may be banking in Latvia.
Complying with the official line out of Riga, Latvia's FCMC has rejected claims of instability in the banking sector. However, with the disastrous collapses of Parex Bank in 2007, and then Krajbanka in 2011, also fresh in the mind, the Latvian authorities are clearly under pressure to try to clean up their act.
Certainly, with the international spotlight shining brightly on the Magnitsky case - and authorities in both Estonia and Lithuania announcing early this year that funds linked to it had passed through their banking systems - it had little choice but to act. The details of the alleged schemes in Lativa have also been broadcast widely, thanks to the ongoing campaign by Hermitage and others.
In July, investigative journalism collective Re:Baltica sent a report to the Latvian regulatory authorities outlining the banks and offshore companies (registered in New Zealand, Panama, Seychelles Islands and the UK) engaged in the alleged money laundering. Close to $20m arrived into Latvian banks through two Moldova-registered firms: Bunicon-Impex SRL and Elenast-Com SRL, it claims.
Another $43m was reportedly deposited in Latvia's Privatbank by UK firm Technomark Business, the director of which is Latvian citizen Juris Vitmanis. The owner is Fynel Ltd, a company domiciled in Cyprus - a favoured offshore destination for Russian and Ukrainian entities - which was founded by Stanislavs Gorins. The directors of Fynel Ltd include Juris Vitmanis, Eriks Vanagels, Daniels Bangers and Martins Rauda.
Many of these names will be familiar to bne readers, as they've cropped up in several reports detailing their alleged involvement in questionable schemes, mainly surrounding state purchases in Russia and Ukraine, operating through Latvian- and UK-registered companies. Gorins was a director of a firm that won a contract to sell the Ukraine government oil drilling equipment at a hugely inflated price, while he joins Vanagels and Vitmanis as a director of the firm Olden Group LLC, which sold vaccines at double their real prices to the Ukrainian state.
Re:Baltica also claims that more than one of these names is connected to Gints Poiss, former council head at Parex Bank, which collapsed to devastating effect in 2008 and had to be bailed out by Riga. Hermitage Capital representatives said at the time that they hoped the Baltic authorities would investigate, and that they had asked the Latvian General Prosecutor and FCMC to freeze relevant accounts at Aizkraukle Bank, Baltic International Bank, Baltic Trust Bank, Rietumu Bank, Trasta Kommercbanka and Paritatas Bank.