A corruption scandal rocking euro member state Latvia underscores the limits of Europe's banking supervision and is likely to lead to reforms, experts said Thursday.
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Latvia, which is one of the 19 countries using the euro, has launched an investigation into corruption against its top banking chief, Ilmars Rimsevics. The issue is particularly sensitive because he sits on the ECB's top policymaking council.
The crisis deepened after the AP reported accusations that Rimsevics is linked to money laundering from Russia and detailed allegations of extortion by local bankers.
Rimsevics was detained Saturday for two days before being released on bail without charges. He has been banned from performing his duties but cannot be fired outright, leading to a standoff that is creating uncertainty over the country.
After remaining silent for days, the European Central Bank issued a statement Thursday that puts the onus on Latvia to solve its scandal.
Without naming the country, the ECB noted that it is up to member states to fight money laundering and that the ECB doesn't have the power to investigate such actions in individual nations.
The ECB said that "breaches of anti-money laundering can be symptomatic of more deeply rooted governance deficiencies within a bank."
"The ECB does not have the investigative powers to uncover such deficiencies," it said.
Jennifer McKeown, chief European economist at Capital Economics, said that the case highlights the lack of controls in the European banking system.
"What's worrying is that the Latvian central bank may have missed this for one reason or another," McKeown said. "I think it's bound to lead to a review of how oversight is carried out."
Mark Galeotti, a senior researcher at the Institute of International Relations Prague, said that while European nations and institutions may want to bolster regulations, they were likely to want to keep this scandal contained in the short-term.
They don't want to punish Latvia too harshly at a time when the country has been trying to clean up its financial sector, and other countries aren't perfect either in the way they manage banking, he said. Reports on global money laundering, like the so-called Laundromat leak of documents in 2014, have shown how much of this money has flown through banks in London and Frankfurt, Germany.
Whatever the merits of the Latvian investigation, he said that the emphasis on transparency is a good thing.
"It's a sign of progress," he said.
Meanwhile, U.S. Deputy Secretary of State John Sullivan visited Latvia on Thursday to discuss security and economic issues.
He was quizzed by journalists over a recent U.S. Treasury report that accused Latvian bank ABLV of "institutionalizing money laundering" and breaching North Korea sanctions. The Treasury put restrictions on ABLV, leading it to need a financial rescue from Latvia.
He linked the report to Washington's wider concern over the Baltic nation both in terms of the economy as a eurozone member and security as a NATO member.
"Money laundering is a concern to the United States as it affects a NATO ally in Latvia," Sullivan told reporters.
He said the sanction on ABLV bank "indicates the seriousness with which the United States takes money laundering."
ABLV has denied the accusations but its finances apparently deteriorated since then, leading it to need a rescue loan from the Latvian central bank.