RIGA (Reuters) - Latvia’s central bank chief has been suspended pending an investigation into bribery allegations, and the Baltic country’s third biggest bank has sought emergency support following U.S. accusations of money-laundering and sanctions-busting.

Latvia's central bank governor Ilmars Rimsevics speaks to the media during a news conference in Riga, Latvia February 20, 2018. REUTERS/Ints Kalnins

The problems, which the government says are not connected, have dealt a blow to Latvia’s reputation as a financial hub that bridges Russia, which it borders, and the West.

WHAT IS THE CRISIS ABOUT?

The U.S. Treasury Department’s Financial Crimes Enforcement Network said on Feb. 13 it was seeking restrictions on ABLV bank on suspicion of involvement in money laundering and helping clients violate United Nations sanctions on North Korea.

ABLV denied the accusations. But it said on Monday it had sought temporary liquidity support from the central bank after depositors withdrew 600 million euros ($740 million), about 22 percent of total deposits, following the U.S. Treasury comments.

The ECB has stopped all payments at the bank to prevent its collapse.

Separately, central bank chief Ilmars Rimsevics was detained on Saturday on suspicion that he solicited a bribe. He was released on Monday, and denied the accusations, but was suspended from his post on Tuesday.

Latvia’s Defence Ministry said on Tuesday the allegations may be part of a disinformation campaign intended to damage trust in the country and influence the outcome of a parliamentary election in October.

It did not say who was behind this but drew parallels with campaigns before recent French, German and U.S. elections. Russia has denied it was behind those campaigns and says it does not meddle in elections in the West.

WHO IS THE SUSPENDED CENTRAL BANK CHIEF?

Ilmars Rimsevics was part of the political movement that led Latvia to independence from the Soviet Union and is a member of the European Central Bank’s governing council.

The 52-year-old economist is known internationally as a conservative policy maker and in Latvia as a firm manager at the central bank, according to people who know him.

Rimsevics says he is the victim of a smear campaign and refuses to resign. He is not allowed leave the country.

“I have not demanded or received any bribes,” Rimsevics told a news conference on Tuesday. “I have become the target of some Latvian commercial banks to destroy Latvia’s reputation.”

WHAT IS AT STAKE?

Latvia has a population of only about 2 million. Occupied by the Soviet Union during World War Two, it won independence in 1990, joined the European Union in 2004 and adopted the euro currency a decade later.

The allegations against Rimsevics and ABLV could damage Latvia’s standing in the euro zone and its reputation as a financial hub, Latvian politicians say.

The events of the past few days have shaken Latvia’s financial system but economists say it would survive intact if ABLV collapsed and see little likelihood of contagion into other Baltic states.

Latvia’s economy has suffered much more serious financial problems before. Its economy nosedived during the 2008-09 global financial crisis that forced it to seek an international rescue, but recovered after the adoption of austerity measures including slashing spending and wages and increasing taxes.

DO LATVIA’S PROBLEMS AFFECT THE ECB?

Latvia’s commercial banking association called on the ECB on Wednesday to step in and sort out the problems at ABLV, putting pressure on it to explain why it has not acted in the crisis.

What has happened in Latvia raises questions about a system that makes the ECB responsible for supervising banks across the euro zone, including many in Latvia

One senior official at the ECB said it had been caught by surprise by the developments in Latvia and that the governing council was informed by conference call only at the weekend. The central bank has since remained publicly silent.

But the root cause of the problem was hardly hidden. Latvia’s banks hold around $13 billion worth of foreign deposits, roughly half of all deposits in the sector, an issue highlighted as a source of risk by authorities year after year.

IS MONEY LAUNDERING A PROBLEM IN LATVIA?

International authorities have long worried about small banks in Latvia that hold funds for foreign clients, mostly from Russia and other former Soviet republics. Several of the clients have been punished for breaches of rules on money-laundering and financing of terrorism, and for sanctions busting.

The International Monetary Fund said in 2007 that Latvia was hosted many shell companies and had a reputation “for widespread lax due diligence” in the opening of bank accounts.

The situation had improved little when the Organisation for Economic Co-operation and Development criticized Latvia in 2015 for failing to do enough to tackle financial crime, including the “laundering of proceeds of corruption from overseas”.

Although it conceded that Latvia had sought international cooperation to tackle corruption, it urged stronger anti-money laundering measures and warned of the risk that foreign bribes could be laundered by foreigners through Latvian banks.

DOES RUSSIA HAVE A ROLE IN THE CRISIS?

Latvia’s relationship with Russia has long been complicated but has deteriorated since Russia seized the Crimea peninsula from Ukraine in 2014 and fighting broke out in east Ukraine between government forces and Russia-backed separatists.

Many Latvians saw Russia’s intervention in Crimea as a worrying precedent. Their country not only borders Russia but has the largest Russian-speaking minority in the Baltics.

Asked about suggestions that Russia may have had a role in the crisis, Kremlin spokesman Dmitry Peskov said “such statements are not measured and lack a sense of reality.”

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