By Tom Fairless 

The European Central Bank has frozen all payments by a Latvian bank, following accusations by the U.S. administration that the small bank laundered billions in illicit funds, including for companies connected to North Korea's banned ballistic-missile program.

The ECB -- which supervises the Latvian lender, ABLV Bank, directly from Frankfurt -- said it had imposed the moratorium following "a sharp deterioration of the bank's financial position" since the U.S. proposed sanctioning the lender on Feb. 13.

In a separate blow for the Baltic nation's financial sector, Latvia's anticorruption agency said Monday it suspected the country's central-bank governor Ilmars Rimšēvičs of accepting a bribe of more than EUR100,000.

Mr. Rimšēvičs, who sits on the ECB's 25-member governing council, was detained by the agency over the weekend, but he is expected to be released on bail on Monday evening, according to a spokeswoman for the antigraft agency. She said the case wasn't related to any credit institution currently operating in Latvia.

Mr. Rimšēvičs didn't respond to a request for comment.

Prime Minister Maris Kucinskis convened a two-hour meeting of cabinet ministers on Monday to discuss the two cases. He suggested after the meeting that Mr. Rimšēvičs should step down, at least while the investigation is going on, according to local news agency Leta. The country's finance minister, Dana Reizniece-Ozola, made a similar suggestion Sunday.

ABLV, Latvia's third-largest lender by assets, is based in Riga but has an office in Luxembourg and a subsidiary in the U.S. It is supervised directly by the ECB under a new system of eurozone bank supervision introduced during the region's recent financial crisis, under which national authorities remain responsible for enforcing money-laundering laws.

Latvia's Financial and Capital Markets Commission, which is responsible for policing corruption in the country's financial sector, said on Monday it was cooperating with the ECB. In a statement last week, the supervisor's chairman Pēters Putni š said it had carried out "significant remedial work" on ABLV over the last two years, demanding that the bank improve its internal control systems and imposing large fines for breaching its rules. Mr. Putni š suggested the current U.S. interest in the bank was related to a "historical legacy" of problems.

The bank was charged last week by the Treasury Department with having "institutionalized money laundering as a pillar of the bank's business practices," according to a government statement, which proposed preventing the bank from opening an account in the U.S.

That decision made ABLV a pariah to other financial institutions, effectively cutting its access to the dollar and funding flows from the world's most important market.

In proposing the ban on ABLV, the Treasury said the bank managed transactions for clients connected to several long-sanctioned North Korean firms. These include North Korea's Foreign Trade Bank, the institution that manages Pyongyang's foreign-currency earnings, revenue that U.S. and United Nations officials say go directly to North Korea's nuclear and missile programs.

ABLV's illegal activity also included funneling billions of dollars in public corruption proceeds from Azerbaijan, Russia and Ukraine through shell company accounts, the Treasury said.

ABLV said on Monday that it is "fully engaged with U.S. and Latvian regulators," and committed "to address the issues raised in the proposed order as quickly as possible."

"ABLV believes that the issues outlined in the order are inaccurate in important respects and looks forward to working quickly and cooperatively with U.S. regulators to resolve their concerns," a spokesman said in an emailed statement.

Latvia's central bank said Monday it had extended a loan of EUR97.5 million ($121 million) to ABLV following a request by the bank. The loan was granted against high-quality securities that exceeded the amount of the loan, and state resources weren't used, the central bank said.

Mr. Rimšēvičs' duties will be carried out by his deputy in his absence, the central bank said Sunday. It declined to comment on the investigation into the governor but said it wouldn't interfere with the bank's operations. The ECB declined to comment on Mr. Rimšēvičs' detention.

Latvian President Raimonds Vejonis said on Twitter on Sunday that the situation in the Latvian bank sector would be reviewed by the country's National Security Council this week.

--

Samuel Rubenfeld

contributed to this article.

Write to Tom Fairless at tom.fairless@wsj.com

(END) Dow Jones Newswires

February 19, 2018 12:04 ET (17:04 GMT)