* Baltic state offered Swiss-style banking to wealthy Russians
* Latvia's third-largest bank shut for sanctions breach
* Government attempts reform to repair image
By Gederts Gelzis and John O'Donnell
RIGA/FRANKFURT, May 17 (Reuters) - Latvia's new anti-money laundering chief pledged on Thursday to improve control of financial crime, urging the Baltic state's banks to become more hands on in spotting and preventing it.
Ilze Znotina, who will lead Latvia's anti-money laundering agency from June, said she wanted to change the tendency of local banks to share 'low quality' information with the authority about suspect transactions.
Znotina's appointment is the latest step by the country to tighten control of its banks, after some were accused of laundering hundreds of millions of euros for wealthy Russians and others from former Soviet states.
Earlier this year the United States accused Latvia's third biggest bank, ABLV, of money laundering and breaking sanctions on North Korea, prompting its closure and triggering the Baltic state's worst financial crisis in a decade.
The scandal placed the country of two million people in the middle of a power struggle between Russia and the United States, and fuelled a debate over European money-laundering controls.
"What we see now is that the Financial Intelligence Unit receives a very large amount of reports which tend to be of very low quality," Znotina told journalists.
"Either the banks have not understood what they have to report or they are inclined to observe the letter but not the spirit of the law."
Latvia is also facing calls to impose harsher penalties on banks that launder cash.
The country launched less than 100 money-laundering investigations last year even though its banks flagged thousands of suspect transactions, data seen by Reuters has shown.
Latvia is trying to repair its reputation by paring back those roughly one dozen boutique banks that attracted clients in Russia and former Soviet states such as Ukraine with the promise of Swiss-style secrecy.
Prime Minister Maris Kucinskis has pledged to improve the policing of banks, while Washington, an important military ally for the former Soviet-ruled state, is keeping up pressure on Latvia to tackle money laundering, much of which Latvian officials and bankers privately say involves wealthy Russians.
But reform is proving difficult as Russian-speaking opposition lawmakers, who come from a 500,000-strong minority in the country, are sceptical about the need for change.
Since securing its independence from Moscow in 1991, more than a dozen Latvian banks have promoted themselves as a gateway to Western markets for largely Russian customers.
After it 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.
More than 200 million euros was taken out of Latvia last year in cash, bringing the total value of banknotes leaving the Baltic state to more than 750 million euros since the start of 2015, according to customs data seen by Reuters. (tmsnrt.rs/2FFXn3W) (Writing By John O'Donnell; Editing by Toby Chopra)