By Tom Fairless 

The European Central Bank has frozen all payments by a Latvian bank, following U.S. accusations that the small institution laundered billions in illicit funds, including for companies connected to North Korea's banned ballistic-missile program.

The ECB -- which supervises ABLV Bank directly from Frankfurt -- said it had imposed the moratorium following "a sharp deterioration of the bank's financial position" since the U.S. proposed sanctioning the lender on Feb. 13.

In a separate blow for the Baltic nation's financial sector, Latvia's anticorruption agency on Monday said it had launched criminal proceedings against the country's central-bank governor, Ilmars Rimšēvičs, on suspicion of soliciting and accepting a bribe of more than EUR100,000 ($124,090).

Mr. Rimšēvičs, who sits on the ECB's 25-member governing council, was detained by the agency over the weekend. State television showed him walking free on Monday evening, but he won't be allowed to continue his previous duties, the antigraft agency said. A spokeswoman said the case wasn't related to any credit institution currently operating in Latvia.

In a related development, Latvian state police on Monday said they had launched a criminal investigation into a complaint a high-ranking official in Latvia's financial sector had extorted bribes from a Russian businessman, Grigory Guselnikov. The Latvian official wasn't named. State police announced the probe at a joint press conference with the anticorruption agency, where details of the probe into Mr. Rimšēvičs were revealed.

Mr. Guselnikov is the largest shareholder of AS Norvik Banka, a Latvian lender that lodged a request for arbitration against Latvia with a World Bank division in December. The bank complained of "unfair, arbitrary, improperly motivated and unreasonable regulatory treatment accorded to the Bank by the Latvian authorities."

Mr. Rimšēvičs didn't respond to a request for comment.

Prime Minister Maris Kucinskis convened a two-hour meeting of cabinet ministers on Monday to discuss the two cases. He suggested after the meeting that Mr. Rimšēvičs should step down, at least while the investigation is going on, local news agency Leta reported. The country's finance minister, Dana Reizniece-Ozola, made a similar suggestion on Sunday.

ABLV, Latvia's third-largest lender by assets, is based in Riga but has an office in Luxembourg and a subsidiary in the U.S. It is supervised directly by the ECB under a new system of eurozone bank supervision introduced during the region's recent financial crisis, under which national authorities remain responsible for enforcing money-laundering laws.

The bank was charged last week by the Treasury Department with having "institutionalized money laundering as a pillar of the bank's business practices," the government said, which proposed preventing the bank from opening an account in the U.S.

That decision made ABLV a pariah to other financial institutions, effectively cutting its access to the dollar and funding flows from the world's most important market.

In proposing the ban on ABLV, Treasury said the bank managed transactions for clients connected to several long-sanctioned North Korean firms. These include North Korea's Foreign Trade Bank, the institution that manages Pyongyang's foreign-currency earnings, revenue that U.S. and United Nations officials say go directly to North Korea's nuclear and missile programs.

ABLV's alleged illegal activity also included funneling billions of dollars in public corruption proceeds from Azerbaijan, Russia and Ukraine through shell company accounts, Treasury said.

ABLV said on Monday that it is "fully engaged with U.S. and Latvian regulators," and committed "to address the issues raised in the proposed order as quickly as possible."

"ABLV believes that the issues outlined in the order are inaccurate in important respects and looks forward to working quickly and cooperatively with U.S. regulators to resolve their concerns," a spokesman said in an emailed statement.

Latvia's central bank on Monday said it had extended a loan of EUR97.5 million to ABLV following a request by the bank. The loan was granted against high-quality securities that exceeded the amount of the loan, and state resources weren't used, the central bank said.

Mr. Rimsevics's duties will be carried out by his deputy in his absence, the central bank said Sunday. It declined to comment on the investigation into the governor but said it wouldn't interfere with the bank's operations. The ECB declined to comment on Mr. Rimšēvičs' detention.

Latvian President Raimonds Vejonis said on Twitter on Sunday that the country's National Security Council would review the situation in the Latvian bank sector this week.

--Samuel Rubenfeld contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com

 

(END) Dow Jones Newswires

February 19, 2018 17:03 ET (22:03 GMT)

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