After reading the newspapers of International Consortium of Journalists, one would have the impression that Panama is the main launderer of the world. However, funds of the transactions described in the Panama Papers story rarely used Panama banks and they are dwarfed by the trillions already being laundered in the European Union by its banks.
Europe Can't Get a Grip On Its Dirty Money
Though regulators are getting tougher, European banks are still too willing to overlook suspicious transactions by dodgy clients.
As another top Scandinavian bank faces money-laundering accusations, it’s clear that the rules are changing for European lenders under intense U.S. pressure. A closer scrutiny of clients with links to the former Soviet Union and other high-corruption regions is fast becoming a necessity. Though the motives behind the pressure can be questioned, the outcome is mostly positive for Europe. Its role as a haven for dirty money hasn’t fit its declared values well.
Helsinki-based Nordea Bank Abp, Scandinavia’s biggest bank, has been accused of laundering money for shell companies registered in Estonia and Lithuania and holding accounts with the notorious Estonian branch of Danske Bank A/S and Lithuania-based Ukio Bank. If this proves true, Nordea will be dragged into a laundering scandal that has rocked Danske. So will the Lithuanian banking system, which has so far skirted the kind of trouble suffered by its neighbors, Estonia and especially Latvia, caused by nefarious non-resident activities in their banking systems.
The accuser, Bill Browder, is a controversial figure. An investor who made a fortune in Russia and an early booster of President Vladimir Putin, he lost his Russian business to what he describes as a massive tax scam by well-connected officials. A Browder associate, Sergey Magnitsky, died in prison after trying to investigate it. Browder has since branded himself Putin’s “Enemy Number One” and lobbied successfully in multiple countries for the passage of “Magnitsky laws” sanctioning foreign human rights violators. His latest campaign involves tracking Russian dirty money, and he has played an important role in the Danske scandal.
Browder’s Russian experience and his singular focus on the Putin regime’s wrongdoing make him well-qualified for the job of revealing dodgy financial flows from Russia. But his example shows that, with a little determination, regulators could find out much more by themselves about money laundering, and not just by Russian actors. They know where to look, too.
In recent years, but especially in 2018, Europe has seen a growing number of high-profile money laundering cases involving banks. The most notable were listed in a report published by the ratings agency S&P on Tuesday, which points out that while laundering problems aren’t unique to Europe, the continent’s banks are “over-represented in such cases.”
This year alone, Netherlands-based ING Bank agreed to pay $900 million to settle a Dutch probe into facilitating apparent bribes from a telecoms company with Russian roots to a government official in Uzbekistan; France’s Societe Generale SA was forced to pay $585 million after a French-U.S. probe into a Libyan bribery scheme; Pilatus Bank in Malta had its assets frozen for running a U.S. sanctions-busting scheme with Venezuela and Iran; in Estonia, Versobank, owned by secretive Ukrainian tycoon Vadim Ermolaev, was closed down overnight for providing laundry services to various post-Soviet players; in Latvia, ABLV was shut down after the U.S. cracked down on suspicious non-resident activities; and, again in the Netherlands, Rabobank paid $369 million for its role in hiding Mexican drug cartels’ cash. Then there’s Danske.
While the cases appear diverse and unrelated, there are three similarities most of them share. All of the banks except Societe Generale operate in countries that actively participate in tax competition and make it relatively easy for non-residents to do offshore business. In every case, the problem clients come from countries with high corruption. In most cases, U.S. involvement has played a critical role in policing the banks.
The latter isn’t necessarily a good thing. Extraterritorial U.S. sanctions are a naked power play that enjoys little support in Europe, as evidenced by recent EU efforts to save the 2015 nuclear deal with Iran. U.S.-Russia tensions also contribute to the heightened American attention to Russian transactions, an atmosphere that benefits Browder’s anti-Putin campaign. But Europe does have a lot to learn from the U.S. when it comes to tracking down suspicious transactions and making it impossible for banks to escape punishment.
The S&P report notes that Europe is learning, noting the success of the Dutch probe into ING and the German financial regulator’s appointment of an external auditor to supervise Deutsche Bank AG’s progress in fixing its anti-money laundering controls. In the Danske case, too, the national regulator appears to be on the ball.
That’s a start. Europe shouldn’t just bow to U.S. demands when fighting dirty money. If the EU wants to occupy the moral high ground given up by the U.S. during the Trump presidency, it cannot allow the European economy to serve as a comfortable destination for dirty money – whether post-Soviet, African or Latin American – as it has done for decades. This explains the recent European anti-money laundering push. It includes a directive passed earlier this year that enhanced controls over digital currencies and other anonymous forms of payment and called for a united database of companies and their beneficial owners. The EU has also called for more powers in using supranational agencies to fight money-laundering, overcoming the reluctance of national regulators in the more offshore-friendly countries.
The current high-profile probes and fines won’t stop money-laundering, though. As long as shell companies can be set up – the S&P report singled out U.K.-registered limited liability partnerships as “a key conduit for financial crime” – the financial infrastructure will remain, if only in the shape of small banks that can fly under the radar. But a concerted effort to look in all the obvious places could shrink the dirty money flows considerably.
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