RIGA, Latvia — One was a dodgy investment adviser who used a pyramid scheme to bilk unsuspecting Russians out of $10 million. Another was a Taiwanese businessman who was secretly helping North Korea buy precision tools for its nuclear weapons program. Yet another was a corrupt Ukrainian politician spiriting millions of embezzled dollars out of his country.
For years, according to the authorities in Europe and the United States, some banks in the drowsy Baltic port city of Riga specialized in helping these and other criminals wipe their fingerprints off dirty money before it was moved to offshore havens.
Recent scandals at the Scandinavian banks Swedbank and Danske Bank have exposed more instances of substantial sums of suspicious money flowing through the Baltics. The bad publicity has driven honest investment away while intensifying the pressure being applied by the United States, which is trying to block North Korea and blacklisted Russians from evading financial sanctions.
In response, Latvian officials have promised to crack down on the corrupt banks that made the country one of the world’s pre-eminent money-laundering centers, especially for money flowing out of Russia.
American officials are watching closely to see if a new government, in office since January, can deliver on that pledge. Krisjanis Karins, the prime minister of Latvia, met in Washington this month with Steven Mnuchin, the United States Treasury secretary, who pushed for “meaningful implementation” of a new law to fight money-laundering, according to a Treasury statement.
For Latvia, a country of two million people, the stakes are high. Its economy has already struggled because of the downturn in investment, and it could wind up on a so-called gray list of chronic money-laundering centers, as defined by an international task force supported by the United States and other countries.
Such a designation would severely constrain Latvia’s access to the global financial system, meaning local businesses would have even more trouble conducting transactions with foreign partners and Latvians would no longer be able to use their credit cards abroad.
Once a promising example of the transition from Soviet-style communism to Western liberal democracy, Latvia could join a list that includes a rogue’s gallery of money-laundering centers like Pakistan, Syria, and Trinidad and Tobago.
The prospect worries the Latvian government so much that it ranks cleaning up money laundering above other urgent tasks like fixing a broken health care system and improving substandard schools and universities.
“It’s a matter of the reputation of the country,” Janis Reirs, the finance minister, said in an interview. “That’s why we said this is priority No. 1 for our government.”
Foreign observers do not doubt Mr. Reirs’s sincerity, but they are skeptical that a small, relatively poor country like Latvia can win a battle that essentially pits it against Russian oligarchs and organized crime figures who have been known to meddle in local politics. The government is an unstable alliance of five center-right parties.
“The problem is that you have a number of Russian- and Ukrainian-owned banks in Latvia with owners of dubious origin,” said Anders Aslund, a former Swedish diplomat who is a Russia expert at the Atlantic Council in Washington. “These people are strong and skillful.”
A few people in Latvia have gotten rich helping criminals move their money into the mainstream financial system, but revelations about illicit activity corroded the country’s reputation as a stable member of the North Atlantic Treaty Organization and the eurozone. In the past year, credit has become scarcer and banking more difficult.
Deutsche Bank and other Western financial companies have severed their correspondent banking relationships with Latvian lenders, effectively cutting off direct access to dollars. Now, when Latvian banks need to do business in dollars, they must go through intermediate banks in places like Poland or Spain, a process that creates delays.
“Correspondent accounts in U.S. dollars are basically nonexistent for Latvia players,” said Martins Bondars, the chairman of the Latvian Parliament’s budget committee, which on June 14 passed legislation to strengthen the country’s bank regulator and its ability to police money laundering.
Dollar transactions “take time for clients and businesses, and time is money,” Mr. Bondars said. “To lose this is not O.K.”
The fraying ties to the American and European financial systems have set Latvia back in its long struggle to turn away from Russia and toward the West. In that sense, money laundering helps President Vladimir V. Putin of Russia achieve his goal of destabilizing the European Union while enriching his cronies.
It has not helped Latvia’s image that the chief of the country’s central bank, Ilmars Rimsevics, was accused last year of demanding bribes from banks. Mr. Rimsevics won a court battle in February to remain in office while an investigation into his activities proceeds. He declined a request for an interview, but he has denied the allegations.
Latvia has also been an embarrassment for the European Union, which has mostly been a bystander as the United States government forced a crackdown. Last year, the Treasury Department precipitated the shutdown of ABLV Bank, Latvia’s second-largest bank, by exposing a wide range of dubious practices.
A Treasury report found, for example, that ABLV helped a Ukrainian business tycoon, Serhiy Kurchenko, use a network of shell companies to funnel billions of dollars he is accused of embezzling from Ukrainian government coffers. The United States and the European Union have imposed sanctions on Mr. Kurchenko, who according to media reports is in Russia.
The report also identified North Korea, which has a long history in Latvia, as an ABLV client.
In 2014, a Taiwanese businessman, Hsien Tai Tsai, pleaded guilty in the United States to relying on Latvian and Estonian banks as conduits for money used to buy precision metalworking machines for North Korea’s nuclear program.
ABLV closed in February 2018 after the Treasury report prompted its depositors to flee, and the European Central Bank declared it a failed bank. To the annoyance of American officials, Latvia allowed ABLV to “self-liquidate,” meaning its owners got to oversee the bank’s dissolution and, potentially, to profit from it.
That case and others have raised doubts about the effectiveness of Latvia’s cleanup effort.
The government has cut back substantially on the number of bank accounts that belong to nonresidents, the biggest source of money laundering. But they still make up a big share of Latvian banks’ clients.
The country’s bankers insist that many of their nonresident clients are legitimate entrepreneurs. They note that Latvia has targeted the use of shell companies and demands more information about who owns money passing through the country.
“We call it international business,” said Oliver Bramwell, a native of Britain who is the chairman of PNB Banka, a prominent lender that is down the road in Riga from the now empty offices of ABLV. PNB is not accused of wrongdoing. “The stereotype is some dirty Russian oligarch who is laundering money through British Virgin Island holding companies,” Mr. Bramwell said. “That may have been the reality 20 years ago. But today the requirements are very, very tight.”
But a report by the European authorities found that enforcement remains lax. Those accused as money launderers are able to delay court proceedings for years, and no one has ever gone to jail in Latvia for money laundering, the report found. Financial penalties are modest and regarded as simply a cost of doing business.
“Latvia can and must do better in its fight against corruption,” Nancy Bikoff Pettit, the United States ambassador to Latvia, said in a statement last year. “Money laundering makes Latvia vulnerable to malign external actors who aim to undermine Latvia’s independence and democratic principles.”
The Latvian government has been rushing legislation through Parliament to address these criticisms. The country has about eight months to clean up its act before being added to the list of money-laundering nations kept by the Financial Action Task Force, an international alliance whose members include the United States, the European Union and China.
“We are doing everything not be on this gray list,” said Liga Klavina, deputy state secretary for financial policy at the Ministry of Finance. “I think we will succeed.”
But Ms. Klavina added that Latvia would never be able to change one factor that made it attractive for laundering money in the first place: the 200-mile border it shares with Russia.
“We are where we are geographically,” she said. “We have inherent risks where we are.”