After almost a year of haggling Latvia’s financial sector supervisors have finally agreed how they will probe cleanliness of funds at ABLV, the bank which is about to be wound up following allegations of institutionalized money laundering. This process has gathered dark clouds on the horizon for Pēters Putniņš, Latvia’s chief financial supervisor.
“Somebody will have to answer for these decisions. Both – the ones that will be taken and those that won’t.”
It was late autumn of 2017, and it was getting hot at a meeting at the Financial and Capital Market Commission (FCMC), which regulates Latvian banks. ABLV, Latvia’s third largest bank whose name would regularly come up in international money laundering scandals, was fighting against being penalized for a possible breach of international sanctions against North Korea.
The words above were said by Ernests Bernis – chief executive officer at ABLV, who is also the bank’s shareholder and the main brain power. He believed that some officials at the regulator cannot prove an offence, but were trying to unduly penalize the bank. (“Yes, occasionally negotiations were happening in an emotional atmosphere, it can’t be denied, but the bank was not ready to sign off for something it hadn’t done,” he explains to Re:Baltica.)
In the heightened atmosphere, Bernis’ words could have been taken as masked threats. The reason for his anger was a presentation, which was of “a low quality and a simplistic view”, as the banking regulator now admits. The bank went as far as to ask the State security service to investigate if public officials had created false materials on purpose to be able to take a decision unfavorable to the bank. Both investigations were closed with a refusal to initiate criminal proceedings.
Half a year later the bank was dead, but the second act of the fight was just starting. First of all, it concerned how the bank could get to its preferred solution – a “controlled voluntary liquidation”, the formal cause of which was not to let it be ripped apart by infamous insolvency administrators.
For nearly a year parties involved in the bank’s liquidation process were wrangling about how to investigate if the bank’s funds were clean. The process has gathered dark clouds over Putniņš’ head. “I have never been an advocate of ABLV, although I’m an advocate by profession,” Putniņš said in an interview for Re:Baltica/IR.
Facts shed a different light on it, though.
The beginning was promising.
Latvian parliament approved deputy Putniņš as the chairman of FCMC on February 11, 2016, right after the previous FCMC chairman Kristaps Zakulis had resigned from the post. Latvia wanted to join the OECD, but the organization was critical of the progress achieved in fighting dirty money.
Putniņš’ task, moving up the ladder, was to deal with scandals caused by the disproportionally big non-resident banking business. Only one Western bank was still clearing dollars for the local banks who focused on servicing non-residents. The US was tired of eye-turning from the dirty side of the business, but it was the last thing Latvia needed after the start of the war between Russia and Ukraine.
At Putniņš’ helm things really did change. FCMC increased fines for deficiencies in banks’ control systems. Before that it had collected less than 1 million euros in fines within 11 years, a laughable amount compared to the profits of banks. In 2016, FCMC had three employees responsible for money laundering controls, now it has 23 working on the subject. In March 2016, Trasta komercbanka – Latvia’s main dirty money laundromat at that time – lost its licence.
But then the tide turned. In February 2018, the US Treasury’s unit responsible for combating the financial crime (FinCEN) published a report of which they had notified their Latvian colleagues only an hour earlier. US banks were advised not to deal with ABLV, the description of which sounded more like that of an organized crime group, rather than a bank.
Some time back, when the US still trusted Putniņš, it had given information to FCMC about the bank’s potential role in breaching the North Korean sanctions, and was awaiting a punishment.
Instead of penalising the bank, FCMC closed the investigation with an administrative settlement – direct violation of sanctions had not been found, but for the shortcomings in money laundering prevention the bank had been fined already a year ago. Not only ABLV escaped a harsh penalty, but the settlement agreement also prohibited FCMC to talk about this case without a written consent from the bank.
FinCEN report was fatal to the bank as depositors moved quickly to withdraw their money. European Central Bank (ECB), which supervised ABLV, at first requested to impose a payment ban, but on February 23, 2018 it decided that there was no hope for the bank to recover and it should be wound up.
Understanding that the end had come, ABLV owners were fighting to tie up loose ends as they saw it fit. Thanks to donations to various political parties and culture sponsorship it did not lack powerful friends. Now the financial regulator had turned from a foe to a friend. At least four episodes – some of which yet unpublic – lead to such conclusion.
The first suspicious FCMC decision was the condition not to talk about the North Korean case without ABLV consent.
The next – Putniņš’ position against imposing the payments ban at the height of ABLV crisis, which hasn’t been public until now.
On February 18, 2018, one of the organisations at the European banking supervision voted on imposing a bank on all ABLV payments. From all participating countries there was only one vote against this decision and it was Putniņš’. These decisions are taken in secret, therefore Putniņš’ action and reasons behind it have not been known or discussed. “The person who has this information – if it is true at all – leaked to you has breached the law,” was the only answer from Putniņš. “You can rummage in your illegal actions, where do you get this information – I don’t want to have anything in common with it. Say whatever you wish.”
On the same weekend when this matter was discussed with the ECB, FCMC sent a letter to the Bank of Latvia warning that a payment block on ABLV may cause a domino effect and put at risk four more banks in Latvia. Nonetheless, ECB imposed the restrictions, but FCMC grim scenario did not come to life. Putniņš refuses to answer on what data that scenario was based, and should it be recognized now as misleading. In an interview to Delfi TV, where the FCMC letter first appeared, his comment was: “Fortunately, and maybe somewhat that is even our credit. Would you want it to happen?”
The third questionable decision was not to start an immediate investigation and take under state control all bank’s information to ensure its integrity. That still hasn’t happened. Putniņš claims that everything necessary has been done and one shouldn’t underestimate people’s willingness to risk a reputation and a career in order to breach a law. The last full-scale probe at ABLV was conducted in 2013. In the recent years there had been several sectional probes which had been “sufficiently extensive”.
In Luxembourg, where ABLV subsidiary continued to operate, the banking regulator acted immediately – it went into the bank for a full probe without a delay straight after the ECB took the decision to wound up the bank. Putniņš hadn’t acted that way because “the bank wasn’t there anymore”. In the process of voluntary liquidation, the investigation will be more extensive than it could have been back then. FCMC’s task was to supervise operations only of an ‘alive’ bank, the rest Putniņš considers to be a ‘history’, with which the task to deal with falls on Control Service, which receives, processes, and analyses reports on unusual and suspicious financial transactions.
The fourth circumstance is that FCMC used to refuse information to the Ministry of Finance, justifying it with the fact that the bank data is confidential. It lead to a parting shot – a condemning letter sent to FCMF and other state institutions – fired by the former finance minister Dana Reizniece-Ozola (Union of Greens and Farmers) in January during the last days of Maris Kucinskis’s government. While noting a number of issues on which FCMC did not provide information – was restructuring of the bank’s subsidiaries and related companies under control, why data hadn’t been gathered in a timely manner for an investigation, why FCMC actions gave an impression about submitting to the creditors’ and the bank’s interests, the letter concluded: “We haven’t received assurance that FCMC understanding of the bank’s voluntary liquidation corresponds with the opinion of other institutions and fully meets Latvia’s interests.”
“I won’t give any comment about this letter,” Putniņš said to Re:Baltica.
Four members of the newly elected parliament – Mārtiņš Bondars (“Development/For!”), Rihards Kols (National Alliance), as well as Daniels Pavļuts (“Development/For!”) and Ainars Latkovskis (New Unity) visited Washington at the beginning of December 2018 to participate in the 12th Parliamentary Intelligence-Security Forum. The delegation also met with Marshall Billingslea, the Assistant Secretary for Terrorist Financing of the United States Department of the Treasury.
The US Treasury did not respond to Re:Baltica’s questions. However, statements from Latvian politicians about this meeting are very alike – the US doesn’t trust Latvia’s banking regulator and there is no hope for further financial intelligence data in money laundering cases.
“In my diplomatic experience this was the most direct conversation that there could be, but at the same time nothing was said explicitly. In any case, it was clear that information was given to the supervisor, but the result was not as expected, and the US has a lot more information,” Kols told Re:Baltica.
Latvia’s foreign minister Edgars Rinkēvičs (New Unity) returned with the same message from a visit to US at the beginning of February. “It is clear that in the eyes of Americans we have an issue with certain institutions,” he said after the government’s coalition meeting refusing to specify the institution at the heart of the matter.
“Americans don’t have other conversation topics,” Juris Pūce (“Development/For!”), the minister for environmental protection and regional development, told Re:Baltica. “Three times I have been talked to about it. I can only imagine how many times already they’ve been to the prime minister.”
When Re:Baltica asked Putniņš when was the last time he had a conversation or correspondence with the US institutions (FinCEN) his answer was: “In my name – yesterday. And the day before.” For him, the relationship with FinCEN was good and constant. “There are two things that I did hear though – a surprise that they hadn’t been informed about information which we gave to the US embassy in Latvia. That is why we are forced to work with them directly, because the information gets lost in the wide corridors. The second – we now deal with FinCEN directly about everything involving ABLV liquidation without relying on any middlemen that have been there during the process. They can make their own conclusions onward.”
Putniņš was previously protected by the undivided support from the former prime minister Māris Kučinskis (Union of Greens and Farmers), although problems which have swelled around ABLV liquidation have wide and lasting consequences.
One of Riga’s worst kept secrets is the internal war between Putniņš and his deputy Gunta Razāne. The disagreement first appeared during the FCMC vote about ABLV and North Korea. Razāne didn’t participate in the vote because she did not agree with the bank not being punished. (Razāne refuses to give an interview because she needs an approval from the management for that, and she hadn’t asked for one). Animosity only progressed from there. The conflict has gotten to a stage where Razāne regularly hasn’t been admitted to various meetings on the financial sector, including the parliament’s Financial Sector Supervision Subcommittee’s special meeting in February because Putniņš hadn’t included her in the delegation.
There is a strained relationship also with the other partner – Control Service, chaired by Ilze Znotiņa. For several months it refused to accept the methodology, devised by ABLV-hired consultants Ernst & Young, on probing the source of the bank’s funds. The dispute was primarily about whether only current clients shall be probed or the investigators shall also look in the past.
“I really wanted to conclude the process. How many times did I call them to one table, but every time it ended in tears,” Kučinskis told Re:Baltica. “Both sides have gathered consultants, and that process costs money.” FCMC hired PwC to assess the methodology, while Control Service chose Kroll, experienced financial intelligence investigators. Both institutions keep their consultants’ fees a secret, yet it’s clear they run in hundreds of thousands of euros.
Kučinskis reveals what hasn’t been known so far – Putniņš, who can be dismissed from his post only by a parliament’s majority vote, last autumn had offered to resign himself if his actions were harming Latvia’s prestige. The then-prime minister had rejected this offer.
“It’s not a secret to anybody that I’m not clenching in this chair – it’s not exactly a piece of cake. I was just checking the situation, did the head of the government have any problems with policy which we were enforcing,” says Putniņš.
“Who should I trust if not one of our own?” says Kučinskis. “Moreover, Americans have not submitted any additional proof. Nothing more than we can read in newspapers.”
The current prime minister Krišjānis Kariņš (New Unity) has stressed publicly several times – while the institutions do their job, he won’t talk about personalities. However, several participants of talks forming the government confirmed to Re:Baltica that at least two times Kariņš had said: if Putniņš can’t handle the task and things keep on stalling, he is ready to change the chief financial supervisor.
Soon after taking the prime minister’s chair, Kariņš set an ultimatum to FCMC and Control Service: come to an agreement about the way to liquidate ABLV within two weeks. Kariņš had another surprise in his pocket after this deadline. Smiling triumphantly and shaking hands with his government’s ministers for justice, finance and interior, Kariņš announced “capital renovation” of the country’s financial sector supervision. He hadn’t previously informed about it neither FCMC nor Control Service.
“I have promised Kariņš all possible support in the parliament – my hand won’t shake on that [voting] button, but the ball what to do now is in his and finance minister’s hands, ” said the head of the responsible parliamentary committee, Mārtiņš Bondars.
Nonetheless, ABLV is not short of friends in the new parliament either.
In January, parliament created a special subcommittee for financial sector supervision. The chairman’s position was trusted to Gatis Eglītis (New Conservatives), who publicly has marked himself as a friend of the non-resident banking sector. He explained to Re:Baltica that there were no selfish reasons for his position. The goal of the subcommittee is to coordinate various initiatives to implement recommendations of Moneyval as Latvia faces a risk of being put on a “gray list” of high-risk countries for financial transactions if it won’t urgently patch up holes in its financial control system. Therefore the government has set the mitigation of this risk as one of its top priorities. The second goal of the subcommittee is to improve communication between FCMC and Control Service. “What effect does this public infighting leave on our country’s image? I think quite a few at the foreign embassies read the news and wonder: what is going on there?”
One of Eglītis’ first activities was to call for a closed subcommittee meeting to which both supervision organizations, ABLV liquidators and creditors had been invited. The meeting ended up being “a very one sided game”, according to several members of the parliament, who participated in the meeting but refused to give their names as only the chairman can publicly speak about closed meetings.
Ahead of the meeting liquidators had sent a letter to FCMC in which they indirectly complained about Control Service which was not forthcoming to communicate neither with the bank nor trilaterally with FCMC. The position of liquidators was strengthened by the decision of General Prosecutor who said that Control Service was asking too much from the bank. Liquidators pushed against the co-agreement on the methodology with Control Service and the US, reminding of the independence of FCMC.
A campaign, similar in character, was started in media (examples here, here and here), although the decision of Kučinskis’s government to consult with the international partners was taken based on a recommendation by Latvia’s financial sector association.
“Intervention in the FCMC competence (..) means an obvious violation of FCMC independence, as set in the law, which, taking into account FCMC’s role, is a serious threat to the financial system’s stability in Latvia,” ABLV liquidators say in the letter. In it they also note – this circumstance, as well as the delay of deposit payouts create risks for lawsuits against both the regulator and the state (there are no lawsuits for now).
The mood was similar in the subcommittee meeting, in the middle of which Eglītis suddenly offered to vote for a letter from the parliament. MPs had no idea the text existed before the meeting. It contained both the support to Putniņš and his actions, ensuring professional and transparent liquidation process of the bank, as well as critique for involving external partners in the process.
The situation was so ambiguous that coalition partners felt it necessary to ask New Conservatives in the next coalition meeting to explain what exactly was their position. After that, letter quietly faded from the agenda.
Similarly, talks about Putniņš’ replacement have quieted down in the coalition. Paradoxically, he might be saved by the return of the central bank governor Ilmārs Rimšēvičs to his post after being suspended over corruption allegations. The chairman of FCMC is nominated by the central banker and finance minister. Nobody wants a situation where the overhaul of the non-resident banking sector would be managed by one of its architects. During the former finance minister’s term, OECD was hired to carry out assessment of the financial regulator’s work. The first draft of this assessment has appeared at the end of February. Supposedly, it is harsh, but confidential – as many documents and things related with the ABLV liquidation.
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Written by Sanita Jemberga, Re:Baltica
Edited by Nellija Ločmele, IR
Help with interviews by Indra Sprance, IR
Illustrated by Raivis Vilūns, Īgnās govs komiksi
Graphics and technical support by Madara Eihe
Translated to English by Aija Krūtaine
Translated to Russian by Jara Sizova