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Leonid Bershidsky

How Latvia Built Its Post-Soviet Money Pipeline

The scandal at the Latvian central bank is part of a bigger picture.
Networked bank.

Networked bank.

Photographer: Roni Rekomaa/Bloomberg

The Latvian central bank has barred its governor, Ilmars Rimsevics, from working on its premises. Despite Rimsevics's determination to resist multiple accusations of bribery, his career, which culminated in a seat on the European Central Bank's Governing Council, appears to be ending. It is, however, just a symptom of a more significant fall -- that of what's known as "Latvian-type correspondent banking," a system which has facilitated the flight of tens of billions of dollars from the former Soviet Union to offshore jurisdictions.

Since it became independent in 1990, tiny Latvia has been pragmatic about making money off its proximity -- cultural more importantly than geographic -- to vast, messy, corrupt countries such as Russia, Ukraine and Kazakhstan. In the early 1990s, it became known as a post-Soviet Switzerland for its extremely flexible and secretive banking industry. It was, however, in a way the opposite of the Swiss one. The Latvian banks that specialized in servicing non-residents were always a group apart from those that worked with locals, and didn't focus on attracting deposits. Rather, through a strong network of correspondent relationships with Western banks, they served as a pipeline for post-Soviet money to safer havens, a pipeline as capacious as the ones that have pumped Russian gas to Europe. In 2013, when the IMF reviewed the system, it found that a quarter of the non-resident banks' assets were parked with foreign banks with which they had correspondent relationships. Switzerland, in other words, was not so much a model as a destination.