By John O'Donnell and Gederts Gelzis
RIGA (Reuters) - A year after closing one of its largest banks for money laundering and the detention of its central bank governor for alleged bribery, Latvia is struggling to deal with the fallout from the corruption scandal.
The country's new government, formed in January after months of political deadlock, is trying to introduce reforms ahead of a review by international money-laundering standards watchdog Moneyval, which Latvian officials fear could label the Baltic state as high risk.
The stakes are high for Latvia, tarnished by a string of money laundering and corruption scandals, including the shuttering of banking group ABLV last year.
But efforts to clean up the country's reputation are moving slowly. Central Bank Govenor Ilmars Rimsevics is still awaiting trial 14 months on from his brief detention. A top European court has ruled that he should not have been barred from office, in an embarrassing setback for the tiny state.
"Latvia is coming to crunch time," said Valdis Liepins, chairman of anti-corruption group Transparency International in Latvia. "The whole system is corrupt. We finally need to do something."
Latvia's prime minister, Krisjanis Karins, has promised to accelerate an overhaul of the banking sector but his efforts have been overshadowed by lack of progress in the Rimsevics corruption case, the biggest in the former Soviet-ruled state's history.
Rimsevics was accused last year by Latvia's public prosecutor of accepting an offer of a 500,000 euro ($566,100) bribe from a Latvian bank.
Rimsevics, also a top policy-maker at the European Central Bank and who led Latvia into the euro, has denied wrongdoing.
He has returned to work following the European court ruling that Latvia broke EU law by barring him from office, and travels to ECB meetings in Frankfurt.
The Rimsevics case has sparked a public row between Latvia's justice minister and the state prosecutor over how to tackle corruption and financial crime.
Justice minister Janis Bordans told Reuters he was looking at how to reorganise work in enforcement agencies, promising radical reform after what he said was a mishandling of the case.
"This is the failure of the investigation agencies," Bordans said, singling out the state prosecutor. "It shows that there is some lack of efficiency and professionalism."
Bordans blamed "inefficient representatives ... in legal agencies" and poor leadership.
Latvia's prosecutor general Eriks Kalnmeiers responded that the minister had no information about the details of the case that would qualify him to comment.
Unless there are meaningful reforms, the Moneyval review, due out in coming months, could label Latvia as high risk.
The Rimsevics investigation is also being watched closely by the United States, which has become frustrated with Latvia's often years-long probes of corruption cases.
Rimsevics is also suspected of bribery linked to ABLV, prosecutor Viorika Jirgena and Jekabs Straume, who leads Latvia's anti-corruption agency KNAB, told Reuters.
ADVERTISEMENTRimsevics told Reuters he denied these allegations.
ABLV was shut last year when U.S. authorities accused it of money laundering and U.S. sanctions breaches, plunging the country into its worst financial crisis in a decade.
Marshall Billingslea, who leads the Office of Terrorist Financing and Financial Crimes at the U.S. Treasury, will visit the country again in the coming weeks, people familiar with the matter said, highlighting Washington's continued concern about the country's progress.
Corruption investigator Straume said Latvia was undertaking "thorough" reforms to avoid a so-called grey-listing in the international Moneyval audit. "We don't want to be on any list," he said. "We are a normal country."
But showing how the reforms are translating into action is tough.
ADVERTISEMENTMorten Hansen of the Stockholm School of Economics in Riga said Latvia was at a critical juncture: "This country is still struggling to prevail as a modern country."
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ADVERTISEMENT(Reporting By John O'Donnell. Editing by Jane Merriman)