EU warns Latvia about non-resident banking

(RIGA) - The European Commission warned eurozone aspirant Latvia on Wednesday to guard against growing banking sector imbalances and to closely monitor the identity of non-resident account holders.

In its second report since the Baltic country completed a 7.5-billion-euro ($10-billion) bailout programme, the Commission drew particular attention to the high level of non-resident deposits in the Latvian banking sector, many of them from Russia and neighbouring countries.

"The Commission invites the authorities to follow closely what kind of financial flows are attracted, where they are invested, [and] what are the activities of non-resident banks in the domestic market," a statement said.

A small ex-Soviet republic that joined the EU in 2004, Latvia is to formally apply in February for eurozone admission on January 1, 2014.

"The business, legal and regulatory environment in CIS (Commonwealth of Independent States) countries is often weak and investments/loans in these countries call for caution," the Commission said.

It insisted that Latvia beef up funding and staffing for law enforcement and the judiciary to tackle "complex economic, financial, money laundering and tax evasion crimes."

Two Latvian banks with large non-resident portfolios, Parex and Krajbanka, have run into trouble, and both ended up being bailed out by the taxpayer at huge expense.

Large scale fraud that was undetected by Latvia's Financial and Capital Market Commission (FKTK) until it was too late is alleged in both cases.

According to FKTK's own figures, in the third quarter of 2012 non-resident deposits accounted for around half of the 12 billion lats (17 billion euros, 22 billion dollars) deposited in Latvia's 29 bank groups, of which 14 are classed as specializing in non-resident business.

The amount of non-resident deposits with banks in Latvia grew by 19.7 percent year-on-year while resident deposits decreased by 4.5 percent.

Laws that allow foreigners who buy expensive Latvian real estate to apply for resident visas, giving them the right to travel throughout the European Union, have drawn hundreds of investors from Russia and beyond.

Just 37 percent of non-resident account holders come from other European Union states, and of that figure, more than one in five comes from Cyprus, as Russians who previously held offshore accounts on the Mediterranean island transfer funds to Latvia owing to Cyprus' economic problems.