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When the U.S. hit North Korea with sanctions last year, Pyongyang's state-owned banks found a quiet backchannel to keep money flowing to the country's ballistic missile programs, the U.S. says: the tiny European country of Latvia.

One of the biggest banks in Latvia — a member country of the European Union and NATO — built a business from processing illegal money transfers, enabling North Korea to continue to procure missiles, the U.S. government says.

Latvia has come into focus as a potential weak link in the West's banking system as the U.S. and EU increasingly rely on financial sanctions as a weapon in their diplomatic spats — with North Korea, but also Russia and Syria, among others. After a slew of accusations of high-level corruption, Latvia is now trying to appease its U.S. and European allies and drastically reform its financial sector.

Prime Minister Maris Kucinskis told The Associated Press in an interview that the tiny Baltic state "cannot afford to have any uncontrolled money flows from the countries which have to be constantly monitored in order to avoid meddling or influence."

In February, the U.S. accused one of Latvia's biggest banks, ABLV, of proactively laundering money, skirting sanctions, and bribing local officials to do so. ABLV denied the accusations, but the U.S. report caused a run on the bank, which collapsed within days.

That same week, Latvian authorities said their central bank chief, Ilmars Rimsevics, was suspected of taking bribes. Security services also are investigating him after an AP report containing allegations he asked a Latvian bank to launder money from Russia.

Latvia has strong business ties to Russia, and a third of its population is ethnically Russian. Since the 1990s, it has sought to become a "Switzerland on the Baltic" by offering financial services to foreigners, often shell companies.

That made it a convenient conduit for dirty money into the EU. Several small EU countries, like Cyprus and Malta, also have been accused of being used for money-laundering. But the scale of Latvia's problem was made clear by reports in recent years detailing how billions of dollars flowed through the country.

To solve the issue, Latvia says it will ban banks from doing business with shell companies, which can be used to mask wrongdoers' identities. In the case of ABLV, the U.S. says North Korea used shell companies.

The country also aims to reduce the amount of foreign deposits its banks hold from 40 percent of the total to 5 percent this year.

In 2015, Latvian banks held 12 billion euros in foreign deposits, worth almost half the economy. By the end of 2017, that had fallen to 8 billion euros. About half are owned by 26,000 shell companies, regulators estimate.

Experts are cautious about the probability of success.

Eriks Selga, a researcher with the Foreign Policy Research Institute, called the efforts by far the most ambitious Latvia has attempted but said the key will be implementation.

"We have some of the highest quality anti-money-laundering laws in Europe, if not the world. But the enforcement is just not there," Selga said.

Latvian authorities investigate only about 1 percent of reports of suspicious transactions, compared with an EU average of 10 percent, according to official records.

Selga's skepticism was shared by the owner of Latvian bank Norvik, which holds many accounts by non-Latvians. Grigory Guselnikov said the kind of money-laundering that took place in Latvia in recent years is "not possible without regulator involvement."

Guselnikov said Rimsevics regularly asked for bribes and demanded he launder $100 million from Russia — allegations Rimsevics rejects.

Meanwhile, a photo obtained by the AP shows Rimsevics on vacation in 2010 in the company of the head of a Russian military company now sanctioned by the U.S., as well as a Latvian businessman, Jurijs Simonenkovs, who owned a bank that was sanctioned by the U.S. for money-laundering in 2005.

Rimsevics said he knows nobody in the photos, but Latvian secret services are investigating his links to Russia.

He has been banned from doing his job, including at the powerful European Central Bank, where he sits on the top policymaking board. But he has refused to resign and can be removed only if charged with a crime.

Further illustrating Latvia's challenge is that the official in charge of detailing to the U.S. how Latvia is fighting financial crime has a history of working for banks that engaged in money-laundering.

Arnis Lagzdins worked for Latvia's Parex bank before its collapse in 2008 and for Lithuania's Ukio bank before its demise in 2013. In both cases, he was in charge of ensuring the banks followed anti-money-laundering rules. Lagzdins declined requests for comment.

The U.S. Treasury will send officials to Latvia this summer to evaluate its progress. But the risk is that the dirty money might flow elsewhere.

Money-laundering is cited as a growing problem in other EU states, like Malta, which gives citizenship to foreigners willing to invest 650,000 euros ($750,000). Russian and Arab names featured heavily on the list of new citizens last year.

"Money-laundering is going to drift somewhere else," Selga said. "From what I understand, it's happening already to a large part."