Anti-money laundering: banking scandals prompt rethink of EU regime

Jonathan Watson

‘Anti-money laundering (AML) supervision has failed all too often in the EU’, says Valdis Dombrovskis, the EC Vice-President responsible for financial affairs. He adds that Brussels wants the EBA to ‘make sure that different supervisors cooperate and exchange information, and that AML rules are enforced effectively across EU countries’.

Supervisory failings have led to a number of recent scandals. Danske Bank’s Chief Executive Thomas Borgen resigned in September over revelations that €200bn in dubious flows from Russia and other former Soviet states had passed through its Estonian branch between 2007 and 2015. The Danish bank said many of those payments were suspicious. It’s now facing a criminal investigation in the United States over the payments.

In September, the largest bank in the Netherlands, ING, was fined €775m over a laundering scandal. ING admitted that ‘the shortcomings resulted in clients having been able to use their bank accounts for money laundering practices for a number of years’. In 2017, Deutsche Bank paid a total of $630m to regulators in the US and the United Kingdom over ‘mirror trades’ through its Moscow branch which were allegedly used to launder $10bn out of Russia.

According to the United Nations Office on Drugs and Crime, the estimated amount of money laundered globally in one year is between two and five per cent of global GDP, or up to $2 trillion in current US dollars.

Louise Delahunty, a partner at Cooley in London and a member of the IBA’s Anti-Money Laundering Forum, says Europe’s problems may stem from a lack of conformity between Member States in how deeply they implement relevant EU directives and how far they embed AML supervision schemes.

‘The UK has previously been seen as “gold-plating” the directives, while some other EU countries have implemented lighter touch regimes,’ she says. ‘It has also been said that a lack of cooperation and failure to quickly exchange information means that AML rules have not been enforced consistently across the EU.’

Rob van der Hoeven, a partner at Dutch firm NautaDutilh, agrees: ‘The Dutch are known for their eagerness to apply strict rules, whereas authorities in other Member States seem to be satisfied with much less compliance and supervision.’

The other key problem identified by the EC is enforcement. According to Filippo Ferri, a partner with Italian law firm Cagnola & Associati and Publications Officer of the IBA’s Business Crime Committee, there’s still a gap in the EU between law and action. ‘We have laws and legal instruments, but often there’s a lack of practical efficiency,’ he says.

While not opposed to giving the EBA more powers, Ferri argues that a more urgent problem that needs addressing is cooperation between the judicial authorities of different countries.

The EU’s existing AML framework needs more time to bed down fully, says Francien Rense, associate partner at NautaDutilh. ‘The legal framework is quite strong, but awareness of it may have been lagging behind in the last couple of years.’ She says the ING case shows that while financial institutions need to devote more attention to the EU’s legal framework, that framework can be very useful in fighting money laundering. ‘We first of all have to deal with it, implement it and live with it,’ says Rense. ‘Then we can assess if any adjustments and remediations are needed.’

Many believe that bigger fines are part of the answer. ‘Substantial fines should concentrate corporate minds, as they have done for boards and senior management in dealing with criminal risk and the non-prosecution agreement and deferred prosecution agreement regimes in the US and UK,’ says Delahunty.

However, Ferri notes ‘we should not forget that we cannot solve money laundering just with fines. It’s the culture of juridical cooperation which must be changed’.

Fines don’t seem to be a key focus for the EC or the UK’s Law Commission, which recently held a consultation on proposals for reviewing the UK Suspicious Activity Reports (SARs) regime. This requires banks and others in the regulated sector to submit SARs where they know or suspect that a person is money laundering. The UK’s National Crime Agency estimates that tainted funds flowing into the country amount to £90bn a year, set against enforcement recoveries of less than £40m.

Regulators have to be careful not to impose too much of an administrative burden, says van der Hoeven. ‘There are already banks that off-board clients due to money laundering legislation – not because their transactions are very high risk, but because it takes a lot of effort for the bank to monitor the compliance of that client with AML law.’

According to the Law Commission, UK banks say they spend at least £5bn a year on core financial crime compliance, including enhanced systems and controls and recruitment of staff.

Even in low-risk cases, the administrative burden that comes with compliance with AML laws is still quite heavy, adds van der Hoeven. ‘Taking into account that many financial institutions have tens of thousands of clients who, all together, have tens of millions of transactions, it’s a huge and sometimes impossible task to have client due diligence that fully complies with AML law in all aspects.’