Eurozone-bound Latvia is scrambling to defend the reputation of its banking sector amid allegations it is becoming an easy access tax haven, and even a money laundering hub. Prime Minister Valdis Dombrovskis has flatly denied that the ex-Soviet Baltic state has the makings of an offshore paradise along the lines of troubled Cyprus, with its hefty Russian deposits. The International Monetary Fund and European Commission have cautioned Riga that high levels of non-resident deposits in thirteen Latvian banks classed as \"foreign customer service-oriented\" carry significant liquidity and money laundering risks. As Latvia gears up to join the eurozone in January, foreign funds are rising and offshore money that doesn\'t end up staying often passes through its financial services sector on its way elsewhere, experts say. Foreign funds surged 17 percent in 2012 and a further five percent in the first quarter of 2013 to a total of nine billion euros ($12 billion). They now account for around half of all deposits in Latvian banks and are equivalent to 40 percent of the country\'s GDP, according to Latvia\'s financial regulator. By comparison, debt-mired Cyprus drew an estimated 22 billion euros in non-resident deposits, representing around 140 percent of the island\'s GDP, said Latvia\'s Financial and Capital Markets Commission (FKTK), insisting that little Russian money has been relocated to Latvia. IMF figures show that 90 percent of non-resident deposits in Latvian banks have their origin in CIS countries. Besides granting them accounts, Latvian banks also act as processing agents for non-resident clients who can pay $10-20 per transaction to transfer money elsewhere. Opinion is divided on whether Latvian regulators are able to guarantee the system is free of abuse. The FKTK \"enforces much stricter prudential requirements on those banks that engage in this business, in particular with regard to liquidity,\" Alexander Lehmann, an economist with the European Bank for Reconstruction and Development, told AFP. \"These funds do not flow to offshore jurisdictions, but are invested in highly liquid securities and deposits elsewhere in Europe,\" Lehmann added. But according to Daniel Hall of the London-based Focus corporate investigation firm, the system is not foolproof. \"Latvia isn\'t an offshore destination, it\'s a financial facilitator. Latvia is a very convenient bridge between east and west where offshore companies go to do their banking,\" Hall told AFP. \"The attitude (of regulators) is basically \'No Latvian interests are hurt directly, so it\'s not a Latvian problem\'. The reason Latvia is such a useful gateway for criminals and money launderers is that there\'s a system where the authorities aren\'t incentivised to crack down,\" he adds. Inga Springe of the Baltic Centre for Investigative Journalists agrees. \"There are two aspects - one is money laundering through the banks and the other is offshores,\" she told AFP. Springe says that since the mid-1990s, companies set up using Latvian proxies to hide the identities of their real owners have been common. \"They hire Latvian people as proxies, which is why a name like \'Eriks Vanagels\', constantly reappears in documents -- but someone like Vanagels seems to be just a pensioner who sold his signature.\" It\'s that aspect that irks Latvia\'s chief financial regulator Kristaps Zakulis, who insists Riga cannot be held responsible for fraud with origins and end-points elsewhere. \"If those companies (with Latvian proxies) were set up in some British dominion area, that\'s a question for the British government,\" the FKTK head told AFP, adding there was \"too much speculation and too few statistics proving\" irregularities. But the secrecy cloaking a recent FKTK decision to fine a Latvian bank for possible money laundering -- allegedly in connection with Russia\'s notorious Magnitsky scandal -- is doing little to reinforce claims that the banking sector has nothing to hide. The FKTK has so far refused to name the bank it fined, or even the exact date on which the penalty was levied. Magnitsky died in police custody in 2007 after he accused Russian interior ministry officials of orchestrating a $235 million tax scam against an investment fund. Last month a Moscow court convicted him posthumously of tax evasion, drawing sharp criticism on both sides of the Atlantic. Court records showed the Ukrainian-owned PrivatBank was the only one of Latvia\'s 29 banks to have recently appealed a decision by the FKTK. PrivatBank has refused comment. A former Soviet-ruled republic of two million people that joined the EU and NATO in 2004, Latvia also offers five-year residence permits to foreigners buying property worth 50,000 lats (71,000 euros, $94,000). Most of the over 6,000 applications made by May were from Russians and other CIS citizens. Virtually all were approved. As of the beginning of this year there were 43,856 Russian citizens with Latvian residency permits and 7,900 from the other eight former Soviet states in the CIS.