Latvia’s banking regulator has shut down the country’s smallest bank, Rīga-based VEF banka, noting that shareholders were not following the law on credit institutions. Five years ago, the U.S. government singled out VEF banka and another institution over money laundering.

The Financial and Capital Market Commission (Finanšu un kapitāla tirgus komisija, or FKTK) announced May 26 that it has annulled VEF banka’s license and ordered that the bank stop all financial operations.

However, the head of the commission said its decision has nothing to do with the bank’s financial condition.

“The reason for annulling the license is not related to the bank’s insolvency,” FKTK Head of Office Anna Dravniece said in a press release.

The bank’s shareholders, according to the FKTK announcement, for some time have not had the commission’s permission to increase their holdings in the bank and do not have a say in the bank’s operation.

As of May 5 the bank had LVL 4.9 million in assets and 170 depositors, only 20 of whom had account balances greater than LVL 1,000. The FKTK has determined that the bank has enough financial resources to cover guaranteed settlements to depositors and that the state’s deposit insurance fund will not be needed. Depositors are guaranteed no more than EUR 50,000 each in settlements.

In their 2009 annual report, VEF banka officials said the financial institution was still recovering from its 2005 designation by the U.S. Treasury Department as a “primary money laundering concern” under a provision of the USA PATRIOT Act. The Treasury Department’s Financial Crimes Enforcement Network in 2006 banned American banks from dealing with VEF banka and with Rīga-based Multibanka.

“These two Latvian banks represent a danger to the international community because they facilitate the placement and movement of dirty money in the global financial system,” a Treasury Department official said in a 2005 statement.

VEF banka, which began operation in 1992, was singled out because of concerns about lax controls against money laundering and because less than 20 percent of the bank’s clients were Latvian residents.

Despite its efforts in curbing money laundering, as well as changes in its major shareholders, the Treasury Department has not lifted its sanctions, VEF banka officials wrote in the annual report. They added that removing the restriction was one of their goals for 2010.

VEF banka officials did not have an immediate comment on the FKTK decision to close the institution.