There have been instances, however, in which Latvia has gone beyond merely offering a variety of legal possibilities to avoid taxes. Formally, Latvia has improved its laws relating to money laundering. But several loopholes still remain, according to an analysis performed by Moneyval, the Council of Europe body focused on combating money laundering and terrorism financing. The report noted that adherence to regulations is not strictly monitored in all cases.
The result is that money with shady origins keeps appearing. In April 2012, the United Nations Security Council determined that Latvia's Parex Bank (which has since changed its name to Reverta) assisted military officers from the Ivory Coast in circumventing international sanctions. The bank refused to comment on the allegations. In mid-June of this year, a different Latvian bank was fined €191,000 ($249,000) for allegedly helping launder hundreds of millions of dollars that were stolen from the Russian government.
Latvia's financial marketplace is primarily attractive to customers from Russia and former Soviet states. Many private and corporate clients from these countries seek to keep their money safe from the kleptocratic elite at home. Others have darker motives.
Connections between Latvia and Russia have always run deep. Every second person in Riga has Russian origins and seven flights a day connect the city with the Russian capital. Even outside Riga, most people understand the Russian language and mentality. "Since the beginning of the 1990s, Latvia has continually expanded its status as a regional banking center for the former Soviet territories," says Tatiana Lutinska of Prime Consulting, a law firm in Rietumu Bank headquarters which manages foreign customers' holding companies.
Thanks to lower tax rates and the euro, interest is growing, Lutinska says. "We are receiving hundreds of inquiries from Russia, Belarus, Kazakhstan and Ukraine. Many want to move their money from Cyprus to Latvia. We are now better than Cyprus," she says.
Others are also trying to profit from the atmosphere of fear which has surrounded Cyprus. Privacy Management Group, an offshore agency headquartered in Cyprus, offered customers special conditions at the end of March for those who wanted to open a new account in Latvia. The offer was made just as the banking crisis was erupting in the Mediterranean island nation. At the time, Nicosia was forced to close the country's banks for 12 days to prevent huge quantities of money from being moved abroad.
For the moment, there is little concern about Latvia's financial health. Bank balance sheets in the country were only equivalent to 128 percent of the country's gross domestic product at the end of last year. The EU average is 359 percent.
Stable Financial System?
But with lower tax rates and impending euro-zone membership, that could soon change. "Latvia's share of fees paid by offshore havens has risen sharply in recent years," says Meinzer of the Tax Justice Network. "This trend is likely to continue." Rietumu manager Suharenko hopes that "at least 10 percent of the capital in Cyprus comes to Latvia" in the next three years.