Ex-Soviet Cash Drain Deepens as Baltic Bank Rules Tighten

  • Latvian deposits exceed foreign for first time in three years
  • Regulators began crackdown after questioning sources of cash

Outflows of foreign cash from Latvian banks are set to deepen as the Baltic finance hub that’s been a popular choice for clients in the surrounding ex-communist region tightens regulation.

Latvian banks that cater to foreign clients saw a reversal in their fortunes last year, when deposits fell by a quarter. Having dominated savings for three years, that leaves them accounting for less than half the total. The trend will continue in 2017 as banks implement tougher rules designed to squeeze out riskier clients, according to the chief regulator.

“Business models, which for decades have been orientated to foreign transactions, have to change,” Peters Putnins, head of Latvia’s Financial and Capital Market Commission, said Tuesday in an interview in Riga, the capital.

Latvia, a European Union and euro-area nation of 2 million people, had long been a magnet for cash from ex-Soviet countries such as Russia. While that helped the financial industry expand, banks were accused of harboring wealth of questionable origin. Beginning in 2015, the nation handed out record fines and shut down one lender over money laundering. Deposits held by foreigners fell to 9.2 billion euros ($9.7 billion) in 2016, the least in five years.

Banks have been accused of handling some of the $1 billion stolen in 2015 from Moldova’s financial system, helping shift as much as $20 billion in illicit cash from Russia between 2010 and 2014 and facilitating bribes by a Scandinavian telecommunications company. The International Monetary Fund has also warned against allowing an over-reliance on non-resident cash, which can be volatile.

The clampdown began as access to correspondent accounts used to transfer U.S. dollars tightened, threatening a key resource for Latvian banks that transfer dollars for foreign clients. Latvia’s membership of the Organization for Economic Cooperation and Development also prompted a tougher regulatory stance. The Paris-based organization cited money-laundering risks and lax oversight in a report in 2015, the year before Latvia joined.

“A significant number of European countries will have to deal with the rising risk of anti-money laundering” initiatives, Putnins said. “It’s a big question whether they’ll all get through it. Here, I think we’re in a very good starting position.”

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