Money laundering and corruption scandals haunt Latvia as its president meets Trump at the White House

Key Points
  • President Trump hosts the leaders of Latvia, Lithuania and Estonia at the White House.
  • The principal topic with the Baltics leaders will be the growing spectre of Russian aggression against NATO allies in Eastern Europe.
  • Another national security concern, however, is likely to cast a shadow: Latvia's apparent failure to curtail widespread money laundering and corruption in the nation's banking sector.
Latvian President Raimonds Vejonis arrives at the White House before meetings with U.S. President Donald Trump and his Baltic counterparts April 3, 2018 in Washington, DC.
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When President Donald Trump hosts the leaders of Latvia, Lithuania and Estonia at the White House on Tuesday, the principal topic will be the growing spectre of Russian aggression against NATO allies in Eastern Europe.

Another national security concern, however, is likely to cast a shadow over U.S. relations with one of the visiting countries: Latvia's apparent failure to curtail widespread money laundering and corruption in the nation's banking sector.

The scourge of financial crime in Latvia is not new, and its roots trace all the way back to Soviet-era state policies. But at a time when cybercrime and transnational criminal networks are top priorities for U.S. law enforcement, Latvia's struggles have gained new urgency. They've also touched Trump personally, in the form of a 2014 FBI inquiry into talks he and several of his employees held with Russian and Latvian businessmen about building a hotel in Latvia's capital, Riga.

The problems in Latvia's financial industry grew so dire in February that the Treasury Department took steps to cut off the nation's third largest bank, ABLV, from the U.S. financial system. Investigators had found evidence that money moving through the Latvian bank was helping to finance North Korea's ballistic missile program.

The bank denied the allegations, but a new rule proposed by the Treasury Department's Financial Crimes Enforcement Network was enough to cause ABLV to collapse. In mid-March, the privately held bank announced a "voluntary liquidation" after the European Central Bank refused to bail it out.

Latvia suffered yet another blow to its banking sector during the same February weekend that the European Central Bank suspended ABLV's activities. Ilmars Rimsevics, president of Latvia's central bank, was detained on corruption charges, accused by Latvian authorities of soliciting around $130,000 in bribes from an unidentified bank.

Rimsevics, the Latvian equivalent of the U.S. Federal Reserve chairman, denied the charges. Yet shortly after he was released on bail, a different Latvian bank leveled new allegations of bribe solicitation against him.

It was unclear Tuesday to what extent, if any, U.S. officials might use the visit of Latvian President Raimonds Vejonis to raise the sensitive subject of his nation's corruption woes.

A White House spokeswoman told CNBC that Latvia's banking and regulatory problems are not slated to be on Trump's agenda when he meets Tuesday with Vejonis, Estonian President Kersti Kaljulaid and Lithuanian President Dalia Grybauskaite.

A spokesman for the Treasury Department declined to comment, noting that the 60-day public comment period is still open for the department's proposed rule on ABLV.

A history of money laundering

Latvian banks' involvement in money laundering goes back decades, tracing its origins to official state policy during the Soviet Union, according to Louise Shelley, a professor of public policy at George Mason University and founding director of the school's Terrorism, Transnational Crime and Corruption Center.

"In the Soviet era, the Soviets wouldn't let people who'd just been released from prison settle in desirable cities. At the same time, they were also attempting to Russify the Baltics, so they allowed former criminals to settle in [Latvia's capital] Riga. Over time, Riga became home to a large Russian population, and some of them had criminal backgrounds," Shelley told CNBC.

"When the Soviet Union ended, there was already a criminalized population [in Riga] made up of mostly Russians, and it helped make Riga into a nexus for criminal networks engaged in money laundering and human trafficking," she said.

Following the fall of the Soviet Union, Latvia's privatization of formerly state-owned industries was done haphazardly, Shelley said, resulting in a new class of oligarchs, some of whom operated in legally murky waters.

By contrast, "Estonia was very, very careful in their privatization process, and they headed off a lot of these issues at the outset," Shelley said. "But such care was not applied in Latvia. That's why nearly every case of financial crime with Russian ties runs through either Latvia or Moldova."

The Trump connection

In recent years, Shelley said, cases involving alleged financial crimes in Latvia have drawn the attention of U.S. investigators at the Justice and Treasury departments.

In 2014, these efforts collided head-on with Trump, who was then still running his family real estate company and mulling whether to mount a bid for the White House.

That year, at the request of Latvian anti-corruption authorities, the FBI began looking into talks that Trump and his daughter Ivanka Trump — now a top White House aide — held in 2010 and 2011 with Russian and Latvian real estate developers about partnering to build what one developer referred to as "Trump Plaza Riga."

According to U.K. newspaper The Guardian, the talks were led by Igor Krutoy, a Russian composer and businessman with close ties to Russian President Vladimir Putin. Krutoy and his Latvian partners held several meetings with the Trumps in New York about the prospect of building a Trump hotel in Riga. Krutoy even attended Trump's 2013 Miss Universe pageant, held in Moscow, where the two men were photographed together.

The Trump hotel talks, however, collapsed in 2011, shortly after Krutoy and his partners were targeted by Latvian authorities as part of a broad, multiyear corruption inquiry. The developers all denied wrongdoing and were never charged with crimes. As part of the probe, the Trump Organization turned over information about its Riga talks to the FBI, The Guardian reported. Alan Garten, a lawyer for the Trump Organization, told The Guardian in March that he did not recall the FBI request, but that if one was received, the company would have done everything it could to aid in the investigation. Garten declined to comment Tuesday to CNBC.

Trump's Riga talks could also be of interest to special counsel Robert Mueller, who is investigating Russian election meddling in 2016. That investigation has expanded to include links between Russia and members of the Trump campaign, and reportedly, between Russians and Trump himself.

Latvia, meanwhile, is taking steps to crack down on money laundering, and recently pledged to halve the number of foreign-owned accounts held in Latvian banks. Non-Latvians currently make up nearly 40 percent of the nation's total account holders.

A spokesman for the Latvian Embassy in Washington said Tuesday's summit would focus primarily on security, strengthening economic ties and energy cooperation, but added that "the four presidents might choose to talk, of course, about any topic they wish to."

Right now the United States "has great concerns about transnational crime in our National Security Strategy, and combating this activity requires that you follow the money," said George Mason University's Shelley. "The [Latvian] president is trying, but there needs to be enhanced and continued scrutiny."