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European banks in money laundering scandals: what lessons for the EU?

Maíra Martini

What do all recent major grand corruption scandals have in common? Individuals and companies involved in the schemes like the Russian and Azerbaijani Laundromats and Operation Car Wash in Brazil relied on European banks to pay bribes, transfer illicit funds and hide the proceeds of corruption. In less prominent schemes, we have also seen that kleptocrats and their family members also used European banks to launder reputation and the proceeds of crime: the Dos Santos family from Angola, the Obiangs from Equatorial Guinea, Viktor Yanukovych from Ukraine and Gulnara Karimova from Uzbekistan, among a long list of others.

If we take the Russian Laundromat as an example, more than US$13 billion of illicit funds were transferred to the Trasta Komercbanka in Latvia and, from there, around the world. From 2010 to 2014, 21 shell companies made almost 27 thousand payments via 732 foreign banks. Many of these banks were located in Cyprus, Denmark, Estonia, Germany, Netherlands, Sweden and the UK — all EU countries.

Banks that received the Russian Laundromat money, according to OCCRP. View full infographic.

Bad laws or poor practice?

Over the past few years, the European Union (EU) has strengthened its anti-money laundering rules and regulations. Yet, supervision and enforcement by national regulators and law enforcement bodies in Member States has been inconsistent.

In some cases, supervisory bodies reacted only after the US Treasury’s Financial Crimes Enforcement Network (FinCEN) took special measures or investigative journalists uncovered wrongdoing. These individual episodes undermine the integrity and reputation of the EU financial system as a whole, suggesting it relies on outsiders to point out failures.

Even when malpractice is identified, national authorities often don’t take appropriate action. When they are applied, fines are often too low. Information on sanctions is not always publicly available.[1] What’s worse, high profile financial institutions and their senior management seem untouchable, with very few being prosecuted for facilitating money laundering.

A national audit of the Latvian banking system following the Laundromat led to just US$ 850,000 (EUR 640,000) in fines against three banks. Danske Bank was reprimanded but has not faced any financial sanctions in spite of widespread evidence of wrongdoing. Danish and Estonian authorities opened criminal investigations as late as August 2018 — four years after the Estonian regulator first pointed out serious shortcomings. In December, Estonia arrested 10 client managers as part of the investigation. Last week, the Estonian Financial Supervision and Resolution Authority ordered Danske Bank to shut down its Tallinn branch. It remains to be seen, however, if the bank and its senior management will face any other sanctions.

An EU problem

The EU recognises that the corrupt and criminals often operate across different Member States and that their assets, including bank accounts, are often located in others. Given the cross-border dimension of serious crimes, including terrorism, and of related financial activities, competent authorities carrying out investigations often need to access information on bank accounts held in other States.

The need to improve cooperation between national authorities is clear. This should not happen in an ad hoc fashion on a case-by-case basis; instead, cooperation and information-sharing should happen throughout the various phases of the supervisory processes, including prudential supervision — standards that require firms to control risks and hold adequate capital, with the goal of protecting the markets.

Nevertheless, in the wake of recent money laundering scandals the question is whether relying only on national authorities for anti-money laundering supervision is sufficient or whether the EU should have more responsibility when it comes to money laundering involving financial institutions in Member States. Given the scale and number of scandals in recent years, the reasonable answer would be a firm “yes” to the latter question.

Failure to supervise

When it comes to anti-money laundering standards, the EU seeks to ensure that Member States consistently comply by means of its Directives. The same, however, cannot be said about supervision, where rules are not precise enough. Member States have divergent supervisory practices and have allocated different levels of resources to tackle financial crime. In many cases, these practices have proven ineffective in detecting malpractice by banks in a timely manner and resulting in sanctions.

Currently, the European Central Bank (ECB) is tasked with prudential supervision of EU financial institutions, but the scope is very limited when it comes to anti-money laundering. This isn’t optimal, many of the issues under the responsibility of the ECB — licensing, qualifying holdings proceedings and “fit and proper” checks — would benefit from information related to anti-money laundering practices of the financial institutions it’s watching. As things stand, those are under the exclusive responsibility of national authorities.

The European Banking Authority (EBA) oversees Member States’ anti-money laundering and prudential supervision of banks. In particular, the EBA may investigate “breaches of Union law” and, in some circumstances, even override individual decisions of national authorities. However, this has not been done in a proactive and timely manner:

● In July 2018, Malta became the first Member State to receive a recommendation from the EBA for breaching Union law in the areas of money laundering. This was only done in reaction to a significant supervisory failure.

● Last week, the EBA opened a formal investigation into a possible breach of Union law by the Estonian Financial Services Authority and the Danish Financial Supervisory Authority over Danske Bank and its Estonian branch. The decision to open an investigation followed a request from the European Commission.

There seems to be a broad consensus emerging — from ECB representatives to international media and experts — that the current system is inadequate, and that more needs to be done to improve anti-money laundering supervision in the EU.

What is the EU doing?

In response to recent money laundering scandals, in September 2018 European Commission President Juncker announced new potential measures to strengthen the supervision of EU financial institutions to better address money-laundering and terrorist financing threats.

Jean-Claude Juncker tweets during the State of the European Union address where the new draft measures were announced.

Specifically, the European Commission proposes to revamp the EBA to reinforce its supervisory role in anti-money laundering. If approved, the EBA will have powers to, among others, request national anti-money laundering supervisors to investigate potential material breaches and to request them to consider targeted actions such as sanctions and address decisions directly to individual financial sector operators if national authorities do not act.

The European Commission is calling on the European Parliament and the Council of the European Union to endorse the proposed amendments and to adopt the relevant legislative proposals by early 2019 at the latest. There are concerns, however, that these new powers won’t be sufficient to ensure effective supervision.

The EBA already has some jurisdiction over anti-money laundering but clearly lacks adequate resources and capacity to carry out its functions. It is unclear to what extent these tasks will be matched with resources. As of late 2018, the EBA had an equivalent of 1.8 staff members working on money-laundering issues.

Who should watch Member States?

A recent paper published by a Brussels think tank, Bruegel, makes a compelling argument for EU-wide anti-money laundering supervision by highlighting gaps in the current framework. According to the authors, the existing framework of an integrated, enforceable single financial market policy and of national anti-money laundering supervisory structures create loopholes and opportunities for abusing the system.

Alarmingly, anti-money laundering supervisory weaknesses in one member state make it attractive for money launderers interested in gaining access to the entire single market. The authors also highlight the risk that this could create a constituency against anti-money laundering enforcement in the country — criminals and their representatives, service providers and others — that could even lead to policy and government capture.

Some experts are advocating for a new European anti-money laundering body, that would be more suitable to address existing problems related to supervision and enforcement of anti-money laundering rules. Bruegel recommends a unitary architecture centred on a new European anti-money laundering authority:


“The imperative of establishing sound supervisory incentives to fight illicit finance effectively demands a stronger EU-level role in AML supervision. We recommend a unitary architecture centred on a new European AML Authority that would work on the basis of deep relationships with national authorities such as financial intelligence units and law enforcement agencies. The new authority should have high standards of governance and independence, publish all its decisions and be empowered to impose sufficiently large fines to deter malpractice.”

The Commission seems to be of the view that it is too early to discuss the need for a new body but it will consider this discussion in its longer-term reform plans. According to them, there are other measures that can be taken in the short- to medium-term, such as the implementation of the 5th EU Anti-Money Laundering Directive (AMLD) by Member States and improved financial intelligence unit (FIU) coordination.

While it is important that Member States duly implement the 5th EU AMLD, the Directive’s primarily aim is to improve legal frameworks to prevent and detect money laundering. It does not provide detailed guidance or any sort of harmonisation related to supervision. In recent cases such as the Danske Bank in Estonia or ING in the Netherlands, banks had inadequate procedures in breach of international standards as well as EU and domestic rules.

Would the situation have been different had the provisions of the 5th EU AMLD already been in place? If the supervisory approach was to remain the same, then probably not.

Money laundering and corruption go hand in hand. At Transparency International, we believe that effective supervision and enforcement against money laundering are key to stopping corruption. At the EU level in particular, the existence of a unitary financial market calls for better supervisory integration. Decisive action from national authorities to stop dirty money from finding its way into the EU single market is long overdue. While the exact institutional arrangements still need to be worked out, the EU undoubtedly needs to ensure that Member States take this task seriously and consistently.

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[1] The Fourth EU Anti-Money Laundering Directive (AMLD) attempts to close this loophole by requiring Member States to issue a public statement in the case of administrative sanctions, identifying the natural or legal persons involved in the wrongdoing. EU Member States should have transposed the 4th EU AMLD by mid-2018. If Member States implement the requirement adequately, transparency around administrative sanctions related to non-compliance with anti-money laundering obligations will improve in the next years. It is important to note, however, that at least a summary of the actions taken by the natural or legal person that caused the breach of AML rules must be included in the public statement.

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