However bad a spiralling money laundering scandal has been to the three Baltic countries, it could get even worse.
Financial regulators in Estonia and Latvia told the Financial Times they are afraid Swedish banks — which dominate both headlines on money laundering and their banking systems — could withdraw from the region, just as Danske Bank and Nordea have already done amid dirty money allegations.
“Sure, we are very worried,” said Peters Putnins, head of the Latvian regulator. “Should other banks follow the route of Danske, it would be very destabilising in all three Baltic countries.”
His Estonian counterpart Kilvar Kessler said he viewed the matter from a national security perspective: “If you think that somebody in the headquarters of the large Swedish banks would think their Baltic banks are more of a liability than an asset, it’s rather uncomfortable for me. You don’t know who would replace them.”
The Baltics are almost completely dependent on Swedish banks for their local banking. Swedbank and SEB — the two biggest banks in the Baltics and both Stockholm-based — have market shares of more than 50 per cent in Estonia and Lithuania and 42 per cent in Latvia, based on assets or deposits.
Throw in Luminor — a joint venture between Finland’s Nordea and Norway’s DNB that is set to have US private equity group Blackstone as an owner — and foreign banks control four-fifths of the market in Estonia and Latvia and two-thirds in Lithuania.
The warning signs are already there. Nordea has said it intends to leave the region while Danske is quitting after being forced to close in Estonia by the financial regulator.
The worry is that shareholders might send an implicit message to the banks to get out. Danske’s shares halved last year as it confessed to a €200bn money laundering scandal and criminal investigations in the US, Denmark and Estonia. This year, Swedbank’s shares plunged by a fifth in one week on money laundering allegations.
“Investors are quite shaky. Share prices are going down and this in turn has the effect that this Baltic region is seen as not so nice and maybe not an asset but a liability,” said Mr Kessler. In turn, Mr Putnins said: “That is the price you pay if you don’t have your own banks.”
Only the Lithuanian regulator seems relaxed. Vytautas Valvonis, head of supervision at the Bank of Lithuania, said: “We don’t see any risk coming from this. The banks are well capitalised and well funded.”
The picture was very different two decades ago. Then the three Baltic states, having freshly regained independence after their occupation by the Soviet Union, turned to Swedish and other Nordic banks to rid themselves of corruption.
Erik Thedéen, head of Sweden’s financial regulator, said: “Generally speaking, we are not as alert as you will be if you stay in Cyprus or countries where they don’t have the same tradition of being transparent and far away from corruption. Nordic people have this tendency to think we are better than others.”
But he conceded the recent scandals had changed the picture. “Generally speaking, we knew too little about it. We knew that there was risk in the Baltic region, which is being revealed with fairly spectacular transactions. We need to do better.”
However, Mr Thedéen stressed that his institution would be sensitive to the geopolitical need for Swedish banks to stay in the Baltics when imposing remedial action. “It’s extremely important that we do this in a manner that does not push the Swedish banks out of the Baltics. It goes beyond my [professional] responsibility; it’s important for the European context,” he said.
He added that due to the Baltics’ tangled history with Russia, “there are risks at stake if we push out the Swedish banks. I have no agenda of pushing them out from the Baltics.”
All four regulators say they have learnt lessons. Estonia and Latvia have both cracked down on the non-resident banking business at the heart of the Danske scandal in which money came from abroad — mostly from Russia and other ex-Soviet countries.
Another lesson is to boost resources for preventing money laundering. Mr Kessler said that Estonia’s regulator had 7 per cent of its staff in anti-money laundering activities. “To be frank, in Estonia anti-money laundering experts don’t grow on trees,” he said, adding that more people need to be trained.
Penalty levels are also an issue. Until recently, Estonia’s maximum fine for money laundering was €32,000 — a level Mr Kessler called “crap” and “peanuts for a bank”.
All four regulators are aware that heavy scrutiny is falling on their actions. They have started a joint investigation into the Swedbank allegations, although for some critics it all smacks of too little, too late. They argue that attention needs to be paid to law enforcement — which polices individual transactions — as much as regulation.
Mr Putnins admitted that Latvia was under “immense” pressure after the US effectively closed one of its banks for what it alleged was “institutionalised money laundering” and an international body urged it to make urgent changes to avoid being blacklisted.
But he said that while supervisors can “fix” their issues, more attention needed to be paid to the root causes of money laundering. “We should look at why this is possible. One of the answers is that there are jurisdictions where you can set up companies and hide the ownership. The root of all this has to be taken away,” he added.