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Europe's Russia problem? Latvia dismisses 'dirty money' claims

Ex-soviet state Latvia - which became a fully-fledged member of the euro zone on Wednesday - has hit back at claims that it could become a haven for "dirty money".

Latvia's regulator, the Financial and Capital Market Commission (FCMC), moved to alleviate any concerns over the country's banking sector and downplayed a decision by JPMorgan to stop clearing U.S.-dollar transfers for the nation's lenders.

"JPMorgan's decision to reduce the amount of operations is due to the U.S. bank's strategy shift in the interbank market in the world. It is not connected with Latvia or Latvian banking sector," the organization said in a press release on Wednesday. JPMorgan was not immediately available for comment when contacted by CNBC.

(Read More: Latvia to join euro zone: what you should know)

Martins Bicevskis, the president of the Association of Latvian Commercial Banks added his voice to the response declaring that anti-money laundering and terrorism financing is the same for all EU member states.

"Any speculations regarding the amounts of 'dirty money' that could increase with Latvia joining (the) euro zone is not only unjustified, but also is in sharp contrast with the existing supervision of financial system," he said in the same press release.

Five thousand rouble notes.
Stepan Popov | E+ | Getty Images
Five thousand rouble notes.

The Baltic nation joined the 17 nation bloc this week despite previous concerns from the European Central Bank over the reliance of its banking sector on non-resident deposits as a source of funding. Added to this, there have been accusations that this non-resident cash is mainly flowing from neighboring country Russia.

(Read more: Krugman can't admit he was wrong on austerity: Latvia PM)

Mark Galeotti, a professor at New York University who researches organized crime in the former Soviet Union told the AP news agency on Tuesday that he expected a "spike in dubious money flowing in" after it had joined the currency bloc.

A spokesperson for the FCMC told CNBC via email that the introduction of the euro will raise confidence about the stability of the Latvian banking sector and will not be the main driving force for a rise in non-resident deposits.

Nearly 50 percent of deposits in Latvian banks were held by non-residents in 2012, according to FCMC statistics. Whilst this is not the highest it has been, it has risen from a low of 38 percent in 2009 after being hit hard by the global financial crisis the year before. In November 2013, non-resident deposits had increased by approximately 513 million euros year-on-year, the FCMC told CNBC, adding that the 6 percent increase showed a "considerably" slower pace of increase than in the previous years.

Latvia has fought hard to shake of any comparisons made with the struggling Mediterranean state of Cyprus. When the southern European nation asked for a bailout from international creditors in 2012, concerns surfaced from Germany that suspicious money from Russia in Cypriot banks had added greater difficulty to the problem.

(Read More: How Russia Could Take Revenge Over Cyprus Deal)

German newspaper Der Spiegel reported in November 2012 that a secret German intelligence report had revealed that the main beneficiaries of the aid to Cyprus would be rich Russians who have "invested illegal money" there.

Up to 40 percent of Cypriot bank deposits were estimated to have belonged to Russian businesses, according to Moody's ratings agency, worth around $32 billion. A 47.5 percent haircut was eventually levied on Cypriot deposits over 100,000 euros in July last year, with reports that a cash exodus from the country had already begun.

Whilst non-domestic deposits are not close to that of Cyprus, Moody's rating agency has previously stated in a report last September that it views the recent increases in non-resident deposits in Latvia as "a risk to the system".

(Read More: 'Unfair, Dangerous' Cyprus Deal Whacks Rich Russians)

London-based anti-corruption campaign group Global Witness says allegations that money is pouring into Latvia from Cyprus following the latter's financial crisis should put the authorities on full alert. The group told CNBC that Latvia and others need to ensure they are properly implementing the financial laws they already have.

"Once money has been accepted by one bank in the EU then it is cleared to be transferred to any other bank without checks needing to be done. That's why it is vital that all member states ensure that the Anti-Money laundering Directive is strengthened," Stuart McWilliam, a senior campaigner at the group said.

FCMC told CNBC that it does not hold statistics of non-resident deposits split by countries, but added that the overall trend clearly shows that Latvia has not been the main destination for Cypriot money after the "bail-in" agreement.

By CNBC.com's Matt Clinch; Follow him on Twitter @mattclinch81

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