By Matei Rosca
A string of money laundering scandals, culminating in 700 banks being reported as conduits for the so-called Russian Landromat, highlights the ineffectiveness of European authorities in enforcing regulations and ensuring that accurate information is available about who controls the many shell companies active in the financial sector, according to experts.
At least $20 billion is estimated to have been channeled through the Laundromat, which was run between 2010 and 2014 by a loose grouping of Eastern European businessmen with ties to Moscow espionage, according to The Guardian and the Organized Crime and Corruption Reporting Project. With help from corrupt Moldovan magistrates who validated fictitious promissory notes, the gang created a system that sucked in funds of unknown origin in Russia and transferred them through shell companies throughout Europe to banks worldwide as seemingly legitimate capital, the reports said. Danish, Swedish, British, Moldovan, Latvian and other authorities are investigating.
Barclays Plc, HSBC Holdings Plc, Danske Bank A/S, Royal Bank of Scotland Group Plc, Citigroup Inc., Nordea Bank AB (publ) and Credit Suisse Group AG were just a handful of the banks that had allegedly ill-gotten money pass through them, according to the reports. None is accused of wrongdoing, and a number of the banks named in the reports issued statements shortly afterward indicating that they complied with all relevant legislation and work to prevent financial crime.
Lenders have spent billions on new compliance investments to meet tight regulations and forestall the threat of hefty fines should they be found to facilitate crime. Yet as a number of Nordic banks told S&P Global Market Intelligence in the wake of the reports, efforts to create a failsafe system are always likely to be an ongoing process.
“This case highlights the need for greater information sharing between the public and private sectors, each of whom holds important information the other does not,” HSBC said in a statement to S&P Global Market Intelligence. The British Bankers Association, which represents U.K. lenders, said: “The industry works closely with government and other law enforcement agencies both in the U.K. and overseas to identify, address and report as appropriate money laundering and other financial crimes. Threats continue to evolve and banks are continuing to work in public-private partnerships with government, law enforcement and regulators to help protect customers and maintain a safe and secure financial system. Sharing knowledge and understanding of the threat and how to mitigate it is fundamental to this process.”
“It is right that regulators deal properly with any malpractice that threatens to harm Britain’s reputation as a leading financial center and that those who commit a crime should be subject to the full force of the law,” said TheCityUK, another industry lobby group in the U.K.
Worries over restricting flows
For all the attention paid to the Laundromat and similar scandals, national-level politicians in some European countries have been reluctant to pass laws that could deter the flow of illicit capital for fear of also blocking legitimate flows, said Floris Alexander, a financial crime lawyer based in Nicosia, Cyprus. He said smaller, less regulated jurisdictions such as Cyprus and some U.K. overseas territories such as the Isle of Man are still regarded by bad actors as having lighter-touch regulation.
“All EU members need to work on the same regulatory framework to end Wild West-style financial dealing. That is not happening everywhere right now,” added Alexander, who represents deposit holders seeking to recover funds from FBME Bank Ltd., a Tanzania-based lender primarily active in Cyprus that lost its license after U.S. authorities identified it as a conduit for money laundering.
Common reporting standards and automatic exchange of information are being employed on paper, but in reality, Alexander said, local regulators shy away from using them and “do not know how to handle” the information they receive. He said there is little collaboration among the financial intelligence units, or FIUs, of European countries. FIUs are government agencies tasked with investigating financial crime, but they don’t have authority across borders and they are underfunded, he said.
The European Commission disputes this view, with a spokeswoman pointing to its 4th Anti-Money Laundering Directive, which lays out EU norms for money laundering controls to be undertaken by banks and other financial companies, including gambling firms. The directive was adopted in 2015 and is slated for review in the summer of 2017.
“FIUs cooperate closely on the basis of detailed provisions contained in the 4th AML Directive,” said spokeswoman Sara Soumillion. “They also have sophisticated channels for exchange of information among themselves, such as the FIU.net which is a state of the art IT system, currently embedded in Europol. Europol has financial investigations capacity and is supporting member states. “She noted, however, that it remains up to individual states to carry out enforcement, something that Alexander said they often fail to do.
Beyond the Russian Laundromat, banks to have been penalized in recent years for failing to prevent money laundering include Deutsche Bank AG, for control failings that enabled $10 billion of Russian laundering; Standard Chartered Plc, for violations involving Iranian clients; and HSBC, for failings including preventing Mexican drug dealers from laundering criminal proceeds.
‘Much more power’ for US authorities
The U.S., by contrast, “has much more power,” Alexander said, pointing to the Financial Crime Enforcement Network, or FinCEN, which has no equivalent in the EU. FinCEN is part of the U.S. Treasury, yet has in the recent past cracked down on banks within the EU as well. FMBE Bank and Banca Privada d’Andorra SA were both designated by FinCEN as primary money laundering concerns, a branding that can lead to a lender’s being cut off from the U.S. financial system and by extension from access to U.S. dollars. American banks were the only ones who raised red flags about Laundromat-related transfers, The Guardian reported, and Bank of New York Mellon Corp. went as far as rejecting suspicious requests to move cash.
Meanwhile, JSC Trasta Komercbanka, a now-shuttered Latvian bank central to the Laundromat, was shut down only in March 2016, after an overhaul of Latvia’s financial regulator. The bank “had been committing serious and sustained breaches of regulatory requirements in several areas for a long period,” the revamped regulator said in explaining its decision to ask the ECB for a revocation of Trasta’s license.
“It’s obviously the case that the U.S. has much bigger [money laundering enforcement] powers than the EU,” said Tom Keatinge, head of financial crime and security studies at the RUSI think tank in London. “What is required is a root and branch assessment of whether the financial crime fighting apparatus that we have in Europe is fit for purpose. … The modern-day system is much faster and more complex, but we are still using a legal framework which is fundamentally based on the way banking was in the 80s and 90s.”
“Should we actually be ripping up the whole thing that we have right now and creating a regulatory architecture that reflects the state of the financial industry today? Because the current one doesn’t,” he added, noting that technologies using behavioral patterns tracking, real-time monitoring of high-risk accounts and large-volume data analysis have the potential to help. Before RUSI, Keatinge spent most of his career as an executive in JPMorgan’s European operation.
Shell company disclosure
One area in which the EU could do more, according to Laure Brillaud, a money laundering researcher for anticorruption advocacy group Transparency International, is in enforcing transparency around those behind so-called shell companies, whose uses in the Laundromat included the creation of and “defaulting” on fictitious debt obligations. The use of shell companies is not illegal, but inconsistent disclosure requirements can make them a useful tool for concealing the identity of an asset’s true owner.
“The ‘Laundromat’ reflects a typology where money launderers establish a company in one jurisdiction, but its bank accounts are opened in another,” said the U.K.’s National Crime Agency. “The launderers exploit the distance and legal barriers between the two, whilst being able to control both the company and the bank accounts either directly or indirectly.”
Brillaud said in an interview that the case highlights the need for transparency over beneficial owners of shell companies. “We are calling for the establishment of a public register of beneficial owners at national level, of all legal entities operating in the European Union, not just incorporated in the EU,” she said, noting that “European banks clearly failed to identify who was behind” the Laundromat.
If such a register existed, criminals would have a much more difficult time evading bank compliance officers, she said, but the European Council, formed by heads of government, has so far opposed the project. The European Commission under President Jean-Claude Juncker said in the wake of the Panama Papers revelations that it supported public databases of beneficial owners, and Valdis Dombrovskis, the European commissioner for financial services, said in March that an upcoming shake-up of the bloc’s watchdogs will aim to stop “regulatory arbitrage” and plug gaps in supervision.
The scale of the challenge is daunting: More than a trillion in illicit transfers crosses the financial system globally every year, according to consultancy PwC — which itself also allegedly received a €27,000 payment to advise a Cyprus-based firm implicated in the Laundromat. PwC said it passed details of the payment to the Cypriot regulator. “The European Union is not there yet on money laundering. It doesn’t have enough information … a lot more work needs to be done,” said Alexander. “Clients are always looking for loopholes.”
Original title: Money laundering scandals said to reveal gaps in EU enforcement
Source: S&P Global Market Intelligence
Publication date: Friday, April 07, 2017 11:02 AM GMT