ILMARS RIMSEVICS, for 17 years the governor of Latvia’s central bank, had been due to retire next year. Instead, he is facing calls to resign. On February 17th Latvia’s anti-corruption authority detained him on suspicion of demanding bribes of at least €100,000 ($123,000). That sparked international concern. Mr Rimsevics is a member of the governing council of the European Central Bank (ECB) and privy to the most sensitive monetary-policy decisions.

The prime minister, Maris Kucinskis, says the allegations are so serious that Mr Rimsevics must stand down. But he is staying put. Released on bail on February 19th, the central bank chief says the allegations are a set-up to punish him for cracking down on lax practices. He also says he has received death threats. 

Latvia’s outsized and ill-regulated offshore banking industry has been a headache since the country regained independence in 1991. During the global financial crisis ten years ago, Parex Bank, the largest independent bank in the region, collapsed, prompting a budget-busting bailout—and the rescue of the Latvian economy by the IMF and the European Union. Mr Rimsevics played a leading role in resisting calls to abandon the peg which tied the lats, then the national currency, to the euro. That preserved Latvia’s credibility, but at a huge cost. The economy contracted by 25%; unemployment soared above 20% and a tenth of the population emigrated.

Latvian officials have repeatedly argued that the industry has cleaned up its act. But the facts tell another story. Several Riga-based banks were alleged to have moved money stolen in a tax fraud perpetrated by Russian officials on Hermitage Capital Management, an investment fund that specialises in Russia, in 2008. The evidence came from Sergei Magnitsky, a lawyer, who was later imprisoned in Russia and died in custody. Leaks in 2014 exposing the “Russian Laundromat”, whereby $20.8bn was moved illicitly from Russia, suggest that dirty money flowed through Moldova and Latvia to 732 banks in 96 countries. Many foreign institutions have refused to conduct transactions with Latvian banks since.

Most recently, America’s Treasury said last week that ABLV, one of Latvia’s largest banks, had “institutionalised money-laundering”, notably in sanctions-busting transactions with North Korea. Customers fled, withdrawing €600m. After a six-day hiatus, the ECB froze the Latvian bank’s payments on February 19th. Customers’ debit cards stopped working.

Bank regulation is not Mr Rimsevics’s direct responsibility, though he is responsible for nominating the officials supposedly in charge. The penalties levied have been strikingly mild. An audit of the banking system prompted by the Russian Laundromat case led to just €640,000 in fines being levied on three banks. For comparison, last July a court in Paris fined Rietumu, another large Latvian bank, €80m for money-laundering. 

Some regard the allegations against Mr Rimsevics as suspicious. On February 20th the Latvian defence ministry called them a smear operation “from outside” (ie, Russia), aimed at portraying Latvia as a badly run, untrustworthy ally. Sceptics noted that the bribes he allegedly demanded are modest compared with the graft that has made billionaires of some crooked Russian businessmen.

The ABLV case also highlights weaknesses in European banking regulation. Though the bank is under ECB supervision, it is national governments that enforce anti-money-laundering rules in the EU. One of them is Latvia’s.