* Latvia aims to cut ties to as many as 17,000 shell companies
* Experts say Baltic state needs to do even more
* Ministers say new law is first step on reform path
By Gederts Gelzis and John O'Donnell
RIGA/FRANKFURT, April 26 (Reuters) - Latvia's parliament voted on Thursday to scale back domestic banks' ties with risky shell firms under laws aimed at tackling money laundering, but pressure will remain on the Baltic state to do more.
Prime Minister Maris Kucinskis vowed to improve policing of banks after the United States triggered the closure of Latvia's third biggest bank, ABLV, accusing it of money laundering and breaching sanctions on North Korea.
The scandal placed the country of two million people in the middle of a power struggle between Russia and the United States and has triggered a debate over stricter money-laundering controls throughout Europe.
Washington, an important military ally for the former Soviet-ruled state, is keeping up pressure on Latvia to tackle the problem, much of which officials privately say involves wealthy Russians.
Riga has scrambled to show its willingness to reform. Earlier this month, Finance Minister Dana Reizniece-Ozola travelled to Washington for talks with senior U.S. Treasury officials, her agenda showed.
Ahead of the vote, Reizniece-Ozola called for patience from critics. Transparency International said Latvia still needed to beef up its authority to fight money laundering, for example.
"The criticism is not directed to the policy ... but to enforcement," she said. "It can't be changed overnight."
The law passed on Thursday bans banks from dealing with shell companies unless they can prove they are legitimate firms.
The vote was 57 in favour and 17 against, all members of the pro-Russian opposition Harmony party.
Latvia's financial watchdog said it hoped the law would cut the number of the roughly 17,000 opaque shell firms with links to Latvia by at least two-thirds within a couple of months.
Louise Shelley, a professor and expert in money laundering at George Mason University in Virginia, said Latvia would need to do more, however.
"Until the U.S. government sees a significant change in the flows of Russian money through Latvia, it is unlikely they will relieve the pressure," she said. "This requires ... greater law enforcement action."
Since securing independence from Russia in 1991, more than a dozen Latvian banks have promoted themselves as a gateway to Western markets for clients in Russia and former Soviet states such as Ukraine - and promised Swiss-style secrecy for clients.
Since the country joined the European Union in 2004, transfers were deemed less risky for Western banks to handle than if they had come directly from Russia, bankers and officials have said.
In many cases, money was lodged in a Latvian bank and then funnelled to accounts elsewhere, such as Switzerland, they said.
Many lenders taking foreign deposits dealt with shell companies, roughly half of which are registered in Britain and the British Virgin Islands, making it hard to identify the ultimate beneficiary.
The new law will upset what experts see as a central pillar of a financial system that allowed money to arrive from Russia or elsewhere and be taken out as dollars or euros.
More than 200 million euros was taken out of Latvia last year in cash, bringing the total value of banknotes leaving to more than 750 million euros since the start of 2015, according to customs data seen by Reuters. (tmsnrt.rs/2FFXn3W)
The case has now attracted the attention of the European Parliament, as well as officials in the European Commission, the bodies responsible for writing new European laws.
Lawmakers at a European Parliament hearing on Thursday examined the situation in Latvia and similar problems in Malta.
Earlier this year, the chairman of Malta's Pilatus Bank was arrested on charges of breaking U.S. sanctions, prompting criticism of the Maltese authorities for inaction.
Peters Putnins, who heads Latvia's banking watchdog, spoke at the hearing and acknowledged the need for change.
"The global political situation has changed," he said, adding that the proportion of foreign deposits in Latvian banks would further decline from roughly 30 percent of the total now.
Foreign minister Edgars Rinkevics said further reforms were in train.
"We are all interested in cleaning up things," he told Reuters. Latvia wants to be "the country that managed to clean up the sector and to get out of this situation stronger than before".
Not everyone is in agreement, however. The Russian-speaking opposition, who come from a 500,000-strong minority in the country, are sceptical about the need for radical change.
Igors Pimenovs, a Harmony party lawmaker, said the government should be careful not to drive away foreign clients and allow "political retaliation between the East and the West".
"Latvia is really a bridge" between Russia and the West, said Pimenovs. "Not only a geographical one but also an economical one."
Writing By John O'Donnell Editing by Sonya Hepinstall