February 14, 2020

LATVIA: Banking sector reform clouded by potential coalition infighting

BY Andrius Tursa

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Latvia’s progress in tackling money laundering has lowered the probability that the country will be “grey-listed” by the G7’s Financial Action Task Force (FATF) next week. Despite the notable regulatory reforms in the banking sector, the political and legal focus on fighting corruption has yet to translate into real sentences for financial crimes. Mounting tensions in the five-party coalition government led by Krisjanis Karins (New Unity party) pose a risk to reform continuity.

On 22 January, the Council of Europe’s Moneyval committee issued a largely positive assessment of progress in Latvia’s compliance with the committee’s recommendations on strengthening the framework to fight money laundering and terrorist financing. Moneyval re-rated Latvia upward in 11 recommendations, making it “compliant” or “largely compliant” in all 40 areas. This positive evaluation raises the chances that Latvia will avoid being “grey-listed” by the FATF during its meeting next week, a move that could inflict reputational damage for the country’s troubled banking sector.

Tackling corruption in the financial sector has been one of the key priorities of the Karins government since coming to office in January 2019. To this end, the Karins cabinet has managed to introduce notable regulatory changes, such as a strengthening the supervisory authorities, banning financial transactions with shell companies, forcing local banks to build up their own anti-money laundering procedures and review their business plans in close cooperation with the regulator. Tightened regulation and improved supervision has led to a sharp decline in non-EU deposits in Latvia’s banks, while the number of criminal proceedings in the sector has been rising.

Despite considerable regulatory changes, however, very few high-profile figures have faced real sentences for financial crimes, as court investigations in such cases tend to be dragged out for years. For example, the Ministry of Economy is considering dropping the EUR 230mn litigation procedure against the former owners of the Parex Bank, which was taken over by the state back in 2008. Another warning sign came from the US in late 2019, when the Department of the Treasury sanctioned Aivars Lambergs – the long-standing mayor of Latvia’s second largest port city Ventspils – for money laundering and bribery. The move forced the Latvian government to swiftly take control of the Riga and Ventspils ports from companies associated with Lambergs to ensure their continued operation. This, once again, exposed the influence local oligarchs wield on Latvia’s economy and politics.

Moreover, frequent government changes pose a risk to reform continuity. During the past 30 years, none of the country’s coalition governments has managed to serve a full term. The current five-party coalition led by Karins will likely follow suit due to internal fragmentation and growing public discontent. One of the key coalition parties, the populist Who Owns the State?, is gradually disintegrating, while several cabinet ministers are openly calling for each other’s resignation.

Amid mounting tensions, even a minor political disagreement could become a threat to the government’s survival. Signposts in this regard could be the snap elections taking place in the capital Riga council in April or the proposed controversial reforms of the higher education system and territorial administration. Finally, around 50,000 Latvian voters have already signed a petition calling for a referendum to dissolve parliament. Such a vote would become mandatory if the number of signatures reaches 150,000 (10% of electorate) by November 2020.

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