Bad Neighbors Feed Woes for Baltic Bank Ruing Deutsche Loss

  • Estonia’s LHV says proximity to Russia, Latvia is problematic
  • Lender is struggling to regain access to dollar clearing

Just like in real estate, banking can be all about location.

Take AS LHV Pank. Despite being the biggest locally owned lender in its home market of Estonia, it’s struggling to regain access to dollar clearing after Deutsche Bank AG stopped providing the service last month, citing a wider review of its clients.

LHV’s difficulties are largely the result of geography: With a population of just 1.3 million people, it’s hard for the smallest of the three Baltic nations to justify its value in a world of global risk-reduction by banks. Compounding matters, proximity to Latvia -- a hub for cash from the ex-Soviet region that’s battling a reputation for money laundering -- and Russia -- under U.S. and European sanctions over Ukraine -- can scare off potential partners.

“There are no measures we can take as a bank or a country,” Andres Kitter, head of retail banking at LHV, said this month in an interview in Tallinn, Estonia’s capital.

Shares in LHV’s parent company, AS LHV Group, rose 0.3 percent to 7.28 euros at 3:55 p.m. in Tallinn. That’s down from a high of 7.9 euros on May 30, a week after its trading debut.

‘First Signals’

While the local units of Nordic lenders Swedbank AB and SEB AB still have access, LHV got the “first signals” to look for new correspondent banks about a year ago before ceasing dollar-clearing services through Deutsche Bank’s local client, AS SEB Pank.

“A couple” of other Estonian banks are dealing with similar issues, Kitter said, without naming them. Deutsche Bank “is globally reviewing client relationships,” spokesman Frank Hartmann said by e-mail, declining to comment on individual customers. It’s warned some of its local banking clients in neighboring Latvia that direct access to dollar-clearing facilities will be stopped, people familiar with the plans said last month.

Banking in Estonia is very different from Latvia, which is tightening regulation after money-laundering scandals involving Russia and Moldova. Non-resident deposits at Estonian banks were 15 percent at the end of June compared with almost half in Latvia. The Basel Institute on Governance ranks Estonia the third least risky among 149 nations for money laundering and terrorism financing. Latvia lies 35 places lower.

The Bank of Italy this week shut down the local unit of Latvia’s AS PrivatBank, citing “serious breaches of anti-money-laundering legislation.” Ukrainian-owned PrivatBank said in a statement that it’s “considering all conclusions and recommendations of the Bank of Italy” with regard to the “alleged violations.”

Evidence of efforts to counter illicit financial activity in Latvia this year may improve Estonia’s fortunes, according to Aivar Paul, head of LHV’s anti-money laundering unit. In the meantime, he warned that limitations on services to payment-processing companies may also be possible in addition to blocks on dollar clearing.

While Stockholm-based Swedbank AB, whose Estonian unit is that nation’s biggest bank by assets, is still offering dollar clearing for clients, it says the number of lenders in the Baltic region providing such services has declined in recent years.

“The reason is the small size of the region and high risk -- for example sanctions against Russia, and limitations and requirements stemming from that,” Toomas Tuuling, head of Swedbank AS’s anti-money laundering unit, said by e-mail. “To lower risks, banks that still mediate dollar payments here are implementing increasingly tighter compliance measures.” 

‘Elevated Risk’

Sweden’s SEB AB, whose Tallinn-based subsidiary is Estonia’s second-largest bank, already applies some restrictions to U.S. dollars payments for higher-risk businesses. It’s witnessed a similar trend to Swedbank.

“The Baltic region as a whole is an area of elevated risk for U.S. banks,” Ainar Leppanen, head of retail banking and technology at SEB’s local unit, said by e-mail. “De-risking measures are applied to the whole region.”

LHV’s local rivals may also suffer as a result. AS Eesti Krediidipank, majority owned by Bank of Moscow, “will do everything in its power to preserve the ability to clear dollar payments but can’t guarantee it,” spokeswoman Evelin Uudekull said in a statement. The lender has a direct client relationship on dollar transactions with Deutsche Bank.

Other Options

While Tallinna Aripanga AS has a similar arrangement with the German lender, it sees no payment difficulties for clients. “Deutsche Bank certainly isn’t the only bank mediating payments” and “there are alternative solutions,” management board adviser Juri Kats said by e-mail, citing other EU banks and those outside the trading bloc.

LHV is looking for alternatives, including offering smaller euro-to-dollar payments to U.S. bank accounts via payment processors such as TransferWise. The lender is speaking to some U.S.-headquartered banks about correspondent-banking agreements for dollar payments, Kitter said, without naming them. Others have declined, citing risk policies regarding locally owned Baltic banks, he said.

“In some discussions, our geographical position next to Russia has been brought up as an additional risk, which is absurd,” Kitter said. “There’s no problem with money laundering and the share of non-resident banking business is extremely low, unlike in Latvia.”

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