By Drew Hinshaw 

RIGA, Latvia -- A Latvian bank threatened with U.S. sanctions for allegedly conducting a global money-laundering scheme, including for companies connected to North Korea's missile program, is seeking more than a half billion dollars in government bailout money in an effort to stay afloat.

The accusations against ABLV Bank by the U.S. Treasury Department have ignited one of Europe's biggest money-laundering scandals in years and shined a spotlight on Washington's efforts to go after Eastern European banks it says have ties to Russian money laundering.

The case has also sparked criticism of the European Central Bank, which has supervised the largest banks in the eurozone since 2014. The ECB defended its oversight on Thursday, saying it isn't granted the investigative powers to uncover illegal activities.

ABLV says it isn't guilty of money laundering, but conceded at a news conference that it suffered compliance issues big enough to merit disciplinary actions in the past.

The bank is requesting as much as EUR480 million ($590 million) from the Latvian central bank, which uses the euro and is an ECB member, to survive proposed U.S. sanctions, it said.

"We are doing everything we can to ensure the stability of the bank," said ABLV's chairman and chief executive, Ernests Bernis, who added he had accepted the resignation of his compliance officer.

The country's banking regulator said it was examining the request. The central bank didn't comment.

Legislators widely ruled out any parliament-approved bailout: "If it comes from taxpayers, forget it," said Ainars Latkovskis, a member of parliament's defense committee.

ABLV is one of the country's biggest taxpayers, and its loss would be a big one for a government that depends on banking to pay the salaries of lawmakers and banking regulators alike.

But such a bailout would be a huge and politically fraught undertaking for Latvia, a tiny country on Europe's increasingly restive Russian border. Many Latvians view it as a possible bailout for the wealthy Russians who do business at ABLV as tensions with Moscow mount.

U.S. Deputy Secretary of State John Sullivan said on a visit to Latvia's capital on Thursday that Washington would take a harder line against Russian money laundering in Europe, stepping in where regulators have been politically or legally constrained from cracking down on their own banks.

"It's a national-security issue," he said. "Security threats can take many forms, including corruption and efforts to undermine the integrity of the financial system."

The U.S. has deployed several hundred troops and a small deployment of tanks in Latvia since last year, in part to check what they say is a growing effort by Russia to antagonize a swath of Europe it once governed over centuries.

Latvia's government and military have gone along with that approach, boosting defense spending and policing its internet for alleged Russian propaganda. On Thursday, Latvia's parliament voted to restrict the use of Russian in public schools, a divisive issue in a country with a sizable Russian-speaking minority.

Latvian banks and regulators have been slower to adjust the new geopolitical reality. Roughly half of the deposits in the country's banks come from abroad, particularly Russia. It is a lucrative business that has helped turned the country into an improbable banking center for Russians looking to convert their money into euros, away from Russian tax authorities.

For years, U.S. regulators have warned European counterparts that the nation of two million was turning a blind eye to billions of dollars that slip from rogue states, internationally sanctioned oligarchs, and Russian organized crime, via local banks, then into Europe's wealthiest economies.

European regulators have repeatedly flagged that risk, and warned Latvia that its government lacks the staff and capability to monitor those financial flows. This week, the ECB froze all payments by ABLV.

The ECB said on Thursday that under EU law only national anti-money-laundering authorities can investigate their banks.

"Only when such breaches have been established by the relevant national authority can the ECB take these facts into consideration for the purposes of its own tasks," said Daniele Nouy, the head of the ECB's banking-supervisory authority, without citing the bank or Latvia.

Latvian regulators say they have been trying to improve their oversight, but struggle to attract people qualified to police an enormous number of transactions.

Roughly half of the deposits in Latvian banks come from people and companies who don't reside in the country, particularly from Russia and Moldova, and ABLV has become a specialist in the field of foreign money, growing into Latvia's third-largest lender.

The U.S. Treasury Department accused the bank of making criminal actions a "pillar of the bank's business practices." The department has proposed sanctions that would cut off the bank's access to dollars. ABLV has until April to respond to that proposal.

The bank has hired senior figures from the George W. Bush White House -- including a deputy secretary of the Treasury and a deputy national-security adviser -- to consult the bank, and defend it publicly. At home, the company runs one of Latvia's biggest charities.

The bank has shed more than EUR600 million in value, and scrambled to keep money in its accounts. More than 1,000 depositors have been asked -- and have agreed -- to keep their money in the bank for at least a year, Mr. Bernis said.

--Patricia Kowsmann in Frankfurt contributed to this article.

Write to Drew Hinshaw at drew.hinshaw@wsj.com

 

(END) Dow Jones Newswires

February 22, 2018 17:34 ET (22:34 GMT)

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