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Huge Pools of Dirty Money Are Europe’s Worst-Kept Banking Secret - BLOOMBERG

MARCH 14, 2019

With so much questionable cash sloshing around the system, some are asking why the European Union can’t police itself.

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PHOTO ILLUSTRATION: CHRIS NOSENZO AND CAROLINE DAVID FOR BLOOMBERG BUSINESSWEEK. PHOTO: GETTY IMAGES

By 

Alan Katz

14 March 2019, 05:00 GMT

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The dirty money scandals pouring out of Europe may seem like déjà vu. A crackdown on illicit cash made a big splash in the first half of this decade: HSBC Holdings Plc was fined $1.9 billion in 2012 for handling funds from drug traffickers, terror groups, and Washington-sanctioned nations such as Iran; in 2014, BNP Paribas SA had to pay almost $9 billion for dealing with Iran and other countries deemed pariahs by the U.S., such as Cuba and Sudan; and in 2015, Commerzbank AG had to hand over $1.45 billion in fines to U.S. regulators for processing transactions with some of those same countries. It’s practically taken for granted that there’s always someone somewhere trying to make ill-gotten wealth look innocent by sneaking it through legitimate companies and banks. So why should it be such a shock that a bunch of Nordic banks appear to have been caught handling suspicious Russian money?

Russians hold about $1 trillion outside their home country, according to both Bloomberg Economics and a 2017 study by economists Filip Novokmet, Thomas Piketty, and Gabriel Zucman that cited the U.K., Switzerland, and Cyprus among centers of funds. It’s such an open secret that until the current revelations, relatively few Europeans seemed perturbed by that money coursing through their financial systems and real estate markets. Certainly not enough to push for real reform—although its impact was obvious in rental costs and restaurant prices in London neighborhoods such as Knightsbridge and Mayfair.

“This has gone beyond banking supervision and has become a security issue”

For most of Russia’s post-communist history, that salting away of the country’s treasure, ill-gotten or not, has been considered a problem for Moscow and a boon for the West, which received cash that revived also-ran soccer teams such as Chelsea Football Club and boosted real estate demand in London, New York, and Monte Carlo. The U.K. showed its indifference to the effects of Russian money as recently as November 2017, when it allowed Oleg Deripaska—since sanctioned by the U.S. for having acted on behalf of a senior Russian government official—to raise $1.5 billion by listing an energy and aluminum company he controlled on the London Stock Exchange.

relates to Huge Pools of Dirty Money Are Europe’s Worst-Kept Banking Secret

Deripaska in 2017.

PHOTOGRAPHER: SIMON DAWSON/BLOOMBERG

Then, on March 4, 2018, former Russian spy Sergei Skripal and his daughter, Yulia, were rushed to a hospital after collapsing on a park bench near a shopping mall in the sleepy English cathedral city of Salisbury. That attack, using a military-grade nerve agent carried into the U.K. in a counterfeit perfume bottle, failed to kill the two targets. It did, however, kill Dawn Sturgess, whose boyfriend had found the bottle and presented it to her as a gift. The incident led to more than 100 Russian diplomats being expelled from Europe and the U.S., charges against the two alleged Russian intelligence operatives who attempted the assassination, and a surreal interview on Russian television in which the two claimed they were simply tourists.

The botched effort to kill Skripal and his daughter turned out to be more effective in souring Europeans on Russian money and stoking anger against the banks that enable its flow. “With Russia’s strategy regarding the West, this has gone beyond banking supervision and has become a security issue,” says Nicolas Véron, a senior fellow at Bruegel, an economic think tank in Brussels. The brazenness with which the act was carried out and the indifference to the lives of bystanders convinced many in Britain and elsewhere in Europe that Russia’s actions were potentially dangerous to them.

That was the subtext in September 2018, when across the North Sea another bombshell revealed the scope of suspicious money flowing through Denmark’s Danske Bank AS—much of it linked to Russia. In late February 2019, Sweden’s Swedbank AB was implicated in the flow as well. The underlying fears raised by the Skripal assault and the scale of funds moving through European banks have pushed the issue beyond the narrow world of financial compliance and regulation. The way the Russians favored the Baltics, whose financial system is dominated by Scandinavian banks, linked those funds to a region known as among the least corrupt.

Danske Bank minimized the problem at first, but reported in September it had moved about $230 billion, much of it suspicious, through its Estonia unit. Since then a picture has emerged of a string of Nordic banks, including Swedbank and Finland’s Nordea Bank Abp, whose Baltic units were used as channels by Russians eager to move their money into the West. Some of those transfers have been connected to funds tracked by Sergei Magnitsky, who died in a Russian prison in 2009 after exposing massive tax fraud by officials; other funds to Igor Putin, a cousin of Russian President Vladimir Putin who’s been a board member at Russian banks later found to have siphoned off investors’ assets or to have moved funds illegally out of the country.

(Swedbank acknowledged in February it had handled questionable transactions and has hired an outside firm to investigate; Nordea Chief Risk Officer Julie Galbo said this month that many of the allegations against the bank were already known and it is trying to establish if any were new. If so, they would be reported to the authorities.)

Magnitsky’s former employer, the U.S.-born British financier Bill Browder, has worked for a decade to hunt down the funds from the $230 million tax scheme, persuading the U.S. to pass a law going after the officials involved in the fraud and in Magnitsky’s death. He’s also been pushing banks, regulators, and courts in Europe to crack down on what he sees as questionable funds. “Our investigation continues to lead to new evidence and new information and new suspicious transactions,” Browder said in a March 7 interviewon Bloomberg Television.

relates to Huge Pools of Dirty Money Are Europe’s Worst-Kept Banking Secret

Browder on Bloomberg TV.

PHOTOGRAPHER: LUKE MACGREGOR/BLOOMBERG

While some of the funds that moved through the Nordic banks have been linked to money transferred from Russia, Moldova, and Azerbaijan, it remains unknown where much of the cash originated or who’s behind most of the transactions. But it’s clear the money didn’t remain in the Baltic states. “Those moneys didn’t go from Danske into the Baltic Sea, but they went from Danske into some other European bank,” says Krisjanis Karins, Latvia’s prime minister.

Germany’s Deutsche Bank AG said in January it had started a broad internal probe into its own actions as the main bank that handled dollar transactions on behalf of Danske’s Estonia unit, a role known as correspondent banking. Deutsche Bank has repeatedly said it’s yet to find evidence of wrongdoing on its part. The U.S. Federal Reserve is also examining Deutsche Bank’s role in the affair, as is German financial supervisor BaFin. “There’s a new sense of awareness among banks, supervisors, and the general public following the cases of money laundering that we’ve seen in Europe,” says Thorsten Poetzsch, who oversees money laundering prevention at BaFin. He declined to discuss any specific institutions. “The banks realize that money laundering isn’t just a question of cost, but that it can threaten their very existence.”

European authorities have generally been slower to act on allegations of Russian money laundering than their U.S. counterparts. The U.S. Treasury blindsided Latvia and the European Central Bank in February 2018 when it named ABLV Bank as a primary money laundering concern over allegedly corrupt funds flowing through it from Russia and Ukraine, as well as for links to North Korea’s weapons program.

Three Steps for Washing Cash

 

 

Sources: United Nations Office on Drugs and Crime; Global Financial Integrity

 

Even before the Skripal attack and the extent of the Danske scandal was known, the U.S. had been pushing Europe to do more. Forcing ABLV, Latvia’s third-biggest bank, out of business was an overt example of that, according to a U.S. official who focuses on money laundering. He says Latvia has since changed its policies. Karins, who became Latvia’s prime minister in January, has pledged to tighten regulation and demand proof of the origin of cash in the financial system. He’s less confident that the rest of Europe would follow suit.

Lithuania has been trying to drum up U.S. support. Last June a team of Lithuanian central bank officials visited counterparts at the Federal Reserve and the Treasury Department to explain how the country’s banking business was different from those of the other two Baltic states. “We are not naive,” Lithuanian Central Bank Governor Vitas Vasiliauskas told reporters on March 8. “Large amounts of money [entered] the Baltic banking market—and some really large amounts were identified in the Danske case.” He added that it would be unrealistic to believe that no suspicious funds transited through accounts in his country.

Estonia kicked out Danske in February. The bank responded by announcing its withdrawal from the entire Baltic region as well as from Russia. Kilvar Kessler, chairman of Estonia’s Financial Supervision Authority (FSA), said this month that authorities in his country are doing everything in their power to clean up and have been doing so for half a decade. “We need a collective response, because it’s an issue of reputation for the jurisdictions,” Vasiliauskas added.

Traditionally, Scandinavia’s reputation for being clean has been one of its calling cards. Transparency International’s corruption perceptions index lists Denmark, Finland, Norway, and Sweden among its top seven least corrupt countries. However, the index doesn’t measure money laundering. The Financial Action Task Force, an intergovernmental body set up to fight money laundering and terror financing, gave the countries only middling ratings. (The U.S. received top marks in multiple areas.) And in 2017 the task force published a scathing analysis of Denmark’s anti-money-laundering framework, harshly criticizing its ability to prevent such crimes. Jesper Berg, director general of Denmark’s FSA, said last September that he’d made it his goal never to get such a bad report again.

So why does money slip through the cracks in Europe? That’s because while funds are allowed to flow freely among banks and across borders, European rules against dirty money are implemented unevenly across the bloc and efforts to clamp down on illicit cash have largely been national affairs. Europe’s banking rules were designed to protect taxpayers from having to bail out banks, not to prevent illegal flows.

That will be difficult to change. The European Commission, which functions as the executive branch of the EU, has proposed giving more authority to the European Banking Authority, allowing it to request national investigations. But extra staffing at this point is budgeted at just 12 people, a very limited number compared with the size of the task, according to José Manuel Campa, who’s slated to take over the agency this year. Furthermore, some government officials have resisted efforts to create a centralized European enforcement authority. Given the surge in populist parties, it would be difficult to win approval for an EU-level enforcement agency that could order raids on banks or seize people’s accounts. “This is about criminal activity, their own jurisdictions, their own police forces, and that is not a joint EU undertaking today,” says Erik Thedeen, head of Sweden’s FSA. “I’m a little bit skeptical about saying that everything should go central.” On March 8 at a Stockholm conference on Europe’s banking union, Berg, the Danish regulator, said coordinating financial intelligence units, police, and prosecutors with a European agency would be a challenge.

The attack on Skripal and his daughter has had the most significant impact in the U.K. While several efforts to clamp down on London’s role as a hub of dirty funds were already under way, the impact of the assassination attempt, with its use of a chemical weapon, was palpable. “The Salisbury attack has made it clear that there are grave national security risks coming from Russia, and money laundering is intimately tied up with that,” Browder says.

Just before the incident, the U.K. had imposed its first so-called unexplained wealth order, which, with other tools, allows the government to seize property when the owner can’t identify a legitimate source of the funds used for buying it. The British mood toward Russia darkened dramatically after the attack, and the U.K. took a series of actions against the country, including expelling 23 diplomats. It also chose not to renew the visa of Russian billionaire Roman Abramovich, who owns Chelsea Football Club, prompting him to move to Israel.

relates to Huge Pools of Dirty Money Are Europe’s Worst-Kept Banking Secret

Abramovich, center, in 2011.

PHOTOGRAPHER: SIMON DAWSON/BLOOMBERG

Europe has been embarrassed by the policing so many of its banks have gotten at the hands of the U.S. and has started to change rules and the size of fines for misconduct. A French court last month imposed a $5.1 billion penalty, the biggest ever levied in the country, on Switzerland’s UBS Group for helping clients launder hidden assets. UBS has appealed the ruling. In Germany, BaFin took the unprecedented step in September of appointing a monitor to oversee Deutsche Bank’s efforts to improve money laundering and terrorism financing controls. In November, 170 law enforcement officials raided the bank’s headquarters in Frankfurt looking for information on suspected money laundering and the Panama Papers, a series of articles in 2016 based on leaked emails from a law firm detailing shell companies it set up for clients. According to the U.S. official involved in money laundering enforcement, Germany and France are committed to fighting the practice. As long as that’s the case, he says, the rest of Europe will follow.

But even in the U.K., change has been patchy. In early December the Home Office announced that it would suspend investor visas for the rich, closing a route to permanent residency and British citizenship that was popular with Russian oligarchs and wealthy Chinese. Less than a week later, it put that decision on hold. On March 7, the U.K. said it was tightening rules on the visas, requiring applicants to prove that they have had control of the required funds for at least two years or provide evidence of their source. It’s easy for bankers, regulators, and politicians to talk about cracking down on illicit funds. Keeping that resolve is much harder. —With Amanda Billner, Ethan Bronner, Nikos Chrysoloras, Nicholas Comfort, Kitty Donaldson, Aaron Eglitis, Milda Seputyte, and Frances Schwartzkopff

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