The tiny nations of Latvia, Estonia and Lithuania in Eastern Europe have a complicated history. These Baltic countries, formerly part of the Soviet Union, are today members of both NATO and the European Union. But their banks still maintain relations with Russia, and their wealthy oligarchs. This year, regulators uncovered a number of major financial crimes in the region.
In addition to poor internal controls, a major reason for the uptick in questionable Baltic transactions was the Cyprus debacle of 2012. The preferred destination for Russian oligarch money since the fall of the Soviet Union, the forced bail-in by Cypriot banks seriously changed laundering strategies, redirecting operations towards the Baltics.
As such, billions of dollars of illicit funds have flown out of Russia, through Baltic banks, and into the shadowy offshore financial system. The public is only recently becoming aware of the magnitude of these financial crimes. Needless to say, it’s keeping regulators, compliance professionals and fraud investigators incredibly busy.
Rumors of money laundering are long associated with Latvia’s banking system. According to Daniel Glaser, a former AML (anti-money laundering) official in the U.S. Department of Treasury, massive flows routinely travel through Latvian banks. He recently revealed that in 2015, approximately 1% of all U.S. dollars around the world were going through Latvia.1That’s an astounding number considering the size of the tiny Baltic nation and is 3,000% higher than is to be expected.2
Between 2011 and 2014, the Organized Crime and Corruption Reporting Project, OCCRP, reported Latvian banks helped move over $20 billion out of Russia and anonymously into the global financial system, by obscuring the beneficial ownership of the assets.3The operation was so big, it earned the nickname, the ‘Russian Laundromat’.
Amazingly, a total of $13 billion worth of funds traveled through one tiny Latvian bank called Trasta.4Soon after the scandal was uncovered, the bank was shut down for failing to comply with AML regulations. Like a scene out of a James Bond movie, an attorney who was working through Trasta’s insolvency was gunned down in the street by unknown assailants.5He was presumably digging a bit too deep and some didn’t want him to release what was being discovered.
Understandably, regulators and watchdogs are looking for someone to blame. They seem to have found him. In September, the Head of Latvia’s Central Bank, Ilmars Rimsevics, was accused of taking nearly $300,000 in bribes (plus an all-expenses-paid fishing trip in Eastern Russia) to look the other way when investigating Trasta Bank.6Mr. Rismevics staunchly maintains his innocence, despite Prosecutors claim to have audio evidence of wrong-doing (obtained from a sting in a sauna).7
This is especially damning considering Rismevics was the architect of the entire Latvian post-Soviet era financial system. He’s also been either the number one or two officials at the country’s Central Bank for over a quarter of a century. This would be like accusing Fed Chairmen Alan Greenspan or Ben Bernanke of financial crimes.
To complicate matters worse, Rimsevics also serves in the European Central Bank’s Governing Council, which, among other things, sets interest rates policy. Understandably, Rimevics is not traveling currently to Brussels himself for ECB meetings.
Estonia, with a similar reputation for relaxed banking regulations, has also been in the cross hairs of investigators this year. And for as big as Latvia’s problems are, they pale in comparison to Estonia’s.
Reports that the Estonian branch of Denmark’s Danske Bank may have also been used to launder money are surfacing. In fact, the Danske Bank Estonia scheme may turn out to be the largest money laundering scandal in history.Insufficient controls allowed some 200 billion euros worth of transfers to flow through the bank from former Soviet sources over a 9-year period.8
Estonia has apparently tightened up some controls. For example, Danske Bank’s Estonia branch has since stopped providing banking services for ‘non-resident accounts’.
Interestingly, much of the funds being moved offshore were in U.S. dollars so Danske needed the use of some American money center banks for access to the Fedwire system. These included Bank America, JP Morgan and Citigroup. These banks also had dealings with Danske Bank Estonia, but eventually disassociated themselves from Danske.9
It should be noted that these giant, money center banks were acting as so-called correspondent banks. Smaller banks themselves, like Danske, have accounts with the American banks for funds transfers. So the money technically comes through the correspondent banks. While the American banks are indirectly involved, they argue that it’s these sub-banks responsibility to know their customers identity and basic knowledge of their operations. They just facilitate the transfer.
Unfortunately for Danske Bank, the scandal may not be just in their Estonian branch. Not to be left out, their Lithuanian branch also saw a number of highly suspicious transactions. One example showed very large sums being transferred out to Yellowstone Import, Ltd., a shell company domiciled in the British Virgin Islands.10
We’ve previously written about the penchant for these offshore companies to be domiciled in tax havens to dodge taxes of a home country. The owners of Yellowstone Import are, not surprisingly, ‘unknown’ with only an address listed.
Officials are understandably frustrated at how such a large amount could be sent through offshore without any compliance red flags being set off. It’s only after internal auditors were investigating Danske’s Estonia branch that the Lithuanian incident was uncovered. Regulators clearly missed the clues. Case in point, Lithuania’s central bank reported “no basic systemic deficiencies” at the Danske branch in 2016.11
But it’s not just Danske Bank that has seen suspicious transactions. Lithuania’s now bankrupt Ukio Bank also had a history of questionable oversight. While this article has focused on the use of Baltic Banks to move Russian money, it should be noted that other countries including Sweden, Finland, Azerbaijan, Moldova and Cyprus are also known to have been using Baltic banks to move money offshore.
Combating Global Financial Crime
As you can see, global banks are constantly targeted by financial criminals, money launderers and tax crooks who create complex corporate structures to evade taxes. If banks are unwilling or unable to beef up their risk management processes, they face massive fines or even revocation of their license, as with Ukio Bank.
As these scandals come to light, banks are forced to hire more risk managers or professionals with similar experience (or advanced degrees) in the subject. Banks with global operations will likely staff some of these professionals overseas to help combat such improprieties.
As such, publicly traded companies are required to have financial experts serving on their board of directors, presumably to help maintain proper accounting and financial controls.
Forensic accounting is also becoming an increasingly valuable skill in light of these improprieties. The discipline typically scrutinizes complex financial documentation and systems to uncover financial fraud and deceptive practices. Fraud examiners and investigators utilize similar techniques.
Today, it’s easier than ever for aspiring professionals to get up to speed on the latest tactics used by criminals and learn the tools to detect and prevent financial crimes. Without specific work experience, consider an investment in your future by pursuing such as a Masters in Risk Management degree or Masters in Financial Crimes degree and join the fight against global financial crime.