UPDATE 1-ECB to take over supervision of Latvian bank that accused central bank head

The European Central Bank will take over the supervision of Latvia's PNB Banka, a small lender that has accused the country's central bank governor and financial regulator of running a racket after being itself fined over money laundering.

The decision followed a request by the Latvian financial watchdog, which said it was hoping this would help "avoid any misunderstanding and possible reproaches" after PNB's allegations. It came just two weeks after the country's central bank chief, Ilmars Rimsevics, was reinstated to his post by the European Union's top court after being suspended over separate bribery allegations.

The ECB supervises the euro zone's 117 largest banks but it can choose to oversee a smaller firm when necessary to ensure consistent application of high supervisory standards. "The European Central Bank ... will assume its direct supervision as of 4 April 2019," the ECB said. "This follows a request made by the Latvian Financial and Capital Market Commission (FCMC)."

PNB's Anglo-Russian owner Grigoriy Guselnikov has brought a request for international arbitration against Latvia. In it, Guselnikov accuses a senior Latvian official, later identified as Rimsevics, of seeking bribes from PNB and of using the FCMC's decisions "as a goad to extort" money. Rimsevics' lawyer dismissed these allegations as nonsense on Monday.

Rimsevics was suspended from his post early last year on allegations of corruption in a separate case. But the European Court of Justice ruled late last month that Latvia broke EU law by barring him from office, saying there was no evidence to prove the allegations.

Last week, Rimsevics took part in a meeting of the ECB's policy-making Governing Council for the first time in a year after obtaining permission from Latvian prosecutors. PNB, which was then called Norvik, was fined 1.5 million euros ($1.7 million) by the FCMC in 2017 for allowing clients to violate sanctions imposed by the European Union and United Nations on North Korea.

($1 = 0.8895 euros) (Reporting by Francesco Canepa and Gederts Gelzis; Editing by Angus MacSwan and Mark Potter)

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