Outfoxing the Oligarchs in Latvia

Eager to advance its accession to NATO and the European Union, Latvia established the Corruption Prevention and Combating Bureau (KNAB) in 2002 to take on government corruption, a legacy from decades of Soviet rule. KNAB had a tough task ahead; many of the people who enjoyed power and privilege did not want a strong anti-corruption agency — only the appearance of one. Despite leadership turmoil within the agency, clashes with parliament, and a worldwide financial crisis, KNAB proved its effectiveness in nabbing high-level suspects and spurring popular support for a wave of anti-corruption reforms. 

After independence from the Soviet Union in 1991, Latvia rapidly transitioned toward European-style free-market democracy. This abrupt transition opened opportunities for individuals and firms to subvert key state institutions for private advantage, using state assets, the provision of government contracts, and the design of financial regulations, to lock out competitors and cement their own economic advantage. Through such "state capture," these power brokers undermined democratic processes and citizen trust in government. 

Accusations of state capture in Latvia centered on the so-called "oligarchs," successful business leaders known for their power and wealth, but reputedly tied to corruption. Most prominent were three men — Aivars Lembergs, Andris Skele, and Ainars Slesers — who were leading power brokers within major right-leaning political parties. Until 2011, nearly all of Latvia’s governing coalitions included at least one of these parties. Skirting opprobrium, the oligarchs skillfully parlayed their private-sector success into public respect and support. They built extensive networks of influence and intelligence within government, media, and business that intimidated officials and journalists into turning a blind eye towards their dealings. 

Recognizing Latvia’s problems with state capture, the World Bank released landmark studies highlighting Latvian corruption and setting back their membership process to the European Union and NATO. To demonstrate its commitment to tackling corruption, the government embraced the World Bank’s recommendation to follow the model of Hong Kong’s Independent Commission Against Corruption by empowering a single agency to handle corruption investigation, prevention, and education. But when they unveiled KNAB in 2002, many reform advocates were skeptical, seeing it as a paper tiger designed to impress the international community rather than achieve real progress. 

Designed by a working group under the justice ministry, KNAB had full investigative powers, including the authority to carry out special police activities like undercover work, sting operations, and telecommunications surveillance. "It had to be strong or it wouldn’t work," explained Inese Voika, a member of the working group and founder of Delna, Latvia’s Transparency International chapter. 

The draft law put the bureau under the leadership of a director and two deputy directors, for investigation and prevention respectively. The bureau was responsible to the prime minister, but had broad authority to carry out its mission with limited political interference. The cabinet’s primary lever of control over KNAB would be the ability to appoint and, upon legal cause, remove the head of KNAB, with parliamentary confirmation. KNAB would report semiannually to the cabinet and parliament, and make annual budget requests to the finance ministry. 

Parliament passed the KNAB creation law in May 2002 without controversy; preoccupied by upcoming elections, politicians did not want to appear soft on corruption. Moreover, foreign governments made clear their support for KNAB. "When the law got to parliament, the Americans played a major role in pushing the committees of the parliament to leave it like it is," Voika said. 

Before parliament passed the law, it additionally gave KNAB a responsibility unique among anti-corruption agencies: the power to monitor compliance with campaign finance regulations. This decision was impromptu — parliament had just passed new party finance regulations in response to public outcry, existing agencies did not want responsibility for implementing them, and the KNAB law was open for amendment. But eventually, this power would become a game changer in the fight against corruption, as the bureau sought to stanch the flow of money that expedited state capture. 

An independent committee chose Juta Strike, an experienced police investigator in an elite state security agency called the Constitution Protection Bureau, to be the KNAB’s director. However, parliament rejected Strike’s candidacy in a secret-ballot vote. Prime Minister Einars Repse, who had campaigned on an anti-corruption platform, contended the vote reflected legislators’ fears about having an assertive leader in the position. Incensed by the defeat, Repse appointed Strike as deputy director of investigation and then made her acting director anyway — a defiant act that prompted the collapse of his government. "This was too much for members of my coalition," Repse recounted. "The three so-called oligarchs made a coalition between themselves that was unthinkable before." Latvia’s next three prime ministers all came from oligarch-associated parties. 

Alvis Vilks, former head of the State Revenue Service’s anti-corruption unit, joined KNAB as a senior specialist and quickly became deputy director of prevention. Vilks and Strike hired most of their staffers through informal processes. Applicants had to demonstrate commitment against corruption, be university educated, and qualify for a security clearance. Eager for the bureau to become operational as quickly as possible, the leadership team eschewed open competitions in selecting its staff members — a decision that proved regrettable. 

From the beginning, the agency faced high expectations. Strike lamented the public’s beliefs that KNAB would quickly catch "not just one big fish, [but] all the big fish." One of KNAB’s early targets was judicial corruption. Strike said judges were too lenient in corruption cases, which often involved oligarchs or their associates. The judges regularly granted suspended or conditional sentences to powerful defendants. Through surveillance and sting operations, KNAB uncovered cases of judicial bribery that reached high-level judges and prosecutors. "When the public saw how the judges were taking bribes to make decisions, it was a very big scandal," Strike later recounted. After a media firestorm, judges began to take corruption more seriously, handing down harsher sentences in corruption cases. 

KNAB also achieved early successes in its prevention efforts, particularly in monitoring party finances. The bureau turned up a large number of violations during the first year. Unaccustomed to oversight, parties expected they could flout the law with impunity. "They were so ridiculous, these violations," Dina Spule, a KNAB member, observed. For example, lists of major party donors included low-income individuals, young children, and the deceased. 

With Repse out of power, oligarch-associated parties consolidated their control over Latvian politics, confronting KNAB with new political challenges. Repse’s successor, Indulis Emsis, had to appoint the bureau’s first permanent director. An independent committee named Strike, Vilks, and Aleksejs Loskutovs as finalists. Once again, the committee awarded Strike the most votes, but the cabinet rejected her candidacy as untenable in parliament. Lembergs, one of the oligarchs, invited Loskutovs to a secret meeting outside the gates of Lembergs’ mansion. A sof
t-spoken lawyer and police academy professor, Loskutovs appeared inexperienced and complacent. During a short stint on KNAB’s preventive staff, Loskutovs had feuded with Strike and earned a reputation for absent-mindedness. "It was obvious," Loskutovs said, "that the [ruling coalition’s] advisers proposed my candidacy as a theoretical academician who would be more or less easy to manage." Parliament approved the choice in May 2004. 

Strike and Vilks were wary of working with Loskutovs because of his tacit support from the oligarchs. However, the new director quickly proved his mettle. Just weeks into his term, the prime minister’s party implored Loskutovs to override a KNAB decision to fine the party an unprecedented $185,000 for campaign finance violations. "All journalists in Latvia were waiting to see what he would do," Strike recalled. "He said that he trusted KNAB’s unit on political party funding control and lawyers. He read [the case] through, and he agreed the party had to be punished. It was the first sign for us that he was trustful." 

When the prime minister’s chief of staff wanted to fire Strike, Loskutovs insisted he could only take that action if "there was a legal basis to do so. [And] of course, they had nothing." For the KNAB staff, the incident showed  that Loskutovs was dependable. "It’s not a secret that when Loskutovs was selected, politicians thought that he would be sleepy and ineffective," Spule said. "Then it turned out he made a good team with both deputy directors." The trusting relationship between the three leaders eased staff cooperation and encouraged an open, collegial culture. 

Loskutovs next had to earn public trust. KNAB communicated regularly about its activities, achievements, and Latvia’s corruption problems. Under Loskutovs’ leadership, KNAB conducted a series of high-profile investigations from 2004 to 2007, implicating the three most powerful oligarchs in high-level corruption. The first case involved bribery charges related to the March 2005 municipal elections in Jurmala, an upscale beachside suburb outside the capital of Riga. The case resulted in three convictions, including a former Jurmala mayor. (Trial evidence leaked to the media showed all three major oligarchs’ involvement, although prosecutors found insufficient evidence to bring charges against them.) 

A second case that dominated headlines involved the introduction of digital television in Latvia in 2003; the case charged 20 defendants with fraud totaling tens of millions of dollars. Former Prime Minister and oligarch Skele sat as a witness and many of his close associates were defendants. While the case did not directly implicate the oligarchs, it pointed to lurking corruption. 

Most significant was a third case directly targeting Lembergs. Beginning in October 2005, KNAB and other agencies investigated accusations against him including bribery, money laundering, and misuse of his mayoral authority in the town of Ventspils — charges associated with $15 million in ill-gotten wealth. Police briefly arrested Lembergs in March 2007 and courts in Latvia and the United Kingdom froze $200 million of assets tied to him and his close relatives. 

These courtroom successes won KNAB support from the public and high-level figures like President Vaira Vike-Freiberga and Prosecutor General Janis Maizitis, limiting the government’s ability to rein in Loskutovs. By 2007, however, Prime Minister Aigars Kalvitis — coming off the heels of a resounding reelection victory after years of economic growth — sought to scale back KNAB, which had fined his party $1.9 million for campaign finance violations. Kalvitis called for Loskutovs’ dismissal, citing an audit report that found weaknesses in KNAB’s internal controls in managing assets and human resources. "These were problems you would find in any public office," contended Liga Stafecka of Delna. "[Kalvitis’] response was very disproportionate." 

Kalvitis instructed Prosecutor General Maizitis to investigate the issue, who found no evidence of corruption or serious lapses of duty. Still, Kalvitis submitted Loskutovs’s dismissal to parliament, prompting a series of mass anti-corruption protests drawing celebrities, public intellectuals, and business leaders. Confronted by post-communist Latvia’s largest protest, Kalvitis’ cabinet collapsed. Parliament suspended its vote on Loskutovs, Kalvitis resigned, and the popularity of the oligarch-associated parties began to flag. 

Although Kalvitis’ effort to oust Loskutovs had failed, the agency soon encountered internal problems that threatened its operations. In March 2008, KNAB discovered it was missing seized assets worth $300,000. Two staffers were found responsible and convicted, but the funds were never recovered. Maizitis’ report faulted Loskutovs for failing to set strong internal controls, spurring parliament to dismiss Loskutovs in June 2008. KNAB adopted several internal regulations in response to the incident, such as new protocols on the management of classified materials, a code of ethics, and an open recruitment process for new hires. However, the episode still tarnished the bureau’s reputation. 

In January 2009, outgoing Prime Minister Ivars Godmanis appointed Normunds Vilnitis as Loskutovs’ replacement, with parliamentary approval. A former law professor and law enforcement official, Vilnitis quickly aroused controversy. KNAB Deputy Director Vilks cited "rumors [that Vilnitis] was sent by politicians simply to make the work of KNAB worse." Vilnitis exerted authority over long-time KNAB staff, issuing formal complaints against Strike and Vilks for insubordination and incompetence, and accusing them of foreign espionage. Both Prosecutor General Maizitis and Delna lobbied to remove Vilnitis, but the new prime minister, Valdis Dombrovskis, was reluctant to intervene. 

Seeing Vilnitis as an internal threat to KNAB, bureau veterans defied his orders and cut him out of sensitive operations. Under Vilnitis’ nose, they pursued their high-level investigations, despite security threats such as the discovery of a Russian smuggling syndicate’s assassination plot against Strike, which briefly forced her to leave the country. 

KNAB’s efforts paid off in May 2011 with the first search raids and arrests in a massive operation that the press dubbed the "Oligarchs Case." The case ensnared 26 companies and 11 defendants, including six officials, in a complex web of kickbacks and hidden assets. All three oligarchs faced serious charges. The case added fuel to public fury over state capture, becoming a public symbol of oligarchic excess against the backdrop of a painful economic crisis. 

When KNAB’s investigations reached Slesers, his parliamentary immunity protected his property from search and seizure. Public outrage exploded. On May 28, President Valdis Zatlers called for a referendum to dissolve parliament, specifically naming the three oligarchs as threats to Latvian democracy. "In a sense, everyone knew it, but it was brave that he said it so decisively," said Rasma Karklina, a Latvian parliamentarian. Delna organized a rally outside of parliament that attracted thousands to protest the oligarchs, and proposed a list of "The First 10 Steps to Recover the Stolen Country." The first step was to dismiss Vilnitis as KNAB director. 

Parliament conceded and dismissed Vilniti
s. According to Karklina, "parliament was getting dissolved, so deputies who previously had been reluctant [to dismiss him] were trying to position themselves as good guys before the [September 2011] election." Election results gave Lembergs’ party 13 percent of parliament; Slesers’ party won no seats; and Skele’s party was bankrupt after losing court battles with KNAB over campaign finance violations. For the first time, a government coalition formed that involved none of the oligarchs’ parties. 

The anti-oligarch wave that began in 2010 opened a window of opportunity for KNAB to push long-stalled legal reforms, including the criminalization of campaign finance violations, judicial reforms to expedite trials, whistle-blower protections, and the lifting of parliamentary immunity for administrative offenses. Perhaps the most ambitious reform was the 2012 passage of the Zero Declaration Law, which required all residents of Latvia to declare all assets valued at more than $18,500 (including assets abroad), to curtail the underground economy, and prevent public officials from hiding tainted assets by transferring ownership to friends and relatives. 

KNAB’s successes depended on a strong leadership team. The agency performed best, and built its strongest public credibility, when the leadership team worked in an atmosphere of harmony and mutual trust. This trust required strict controls and management of internal corruption risks, preventing the lapses that led to Loskutovs’ dismissal and blemished KNAB’s reputation.

KNAB’s experience showed the important roles played by the public and by powerful allies like the president and prosecutor general. KNAB won this support by strengthening media relations, achieving tangible results, and demonstrating independence and integrity. Ultimately, KNAB’s survival and entrenchment within the Latvian state helped curtail high-level corruption and drive a broad-based wave of reform that helped level the playing field of Latvian democracy.