Europe Needs Money Laundering Penalties That Hurt

2018-09-13T17:43:12+00:00
September 12, 2018
Senior Fellow, Alliance for Securing Democracy
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The Netherlands Public Prosecution Service announced on September 4 that ING Bank, the country’s largest financial institution, had reached a settlement worth the equivalent of $900 million for money laundering violations committed between 2010 and 2016.1 According to Dutch prosecutors, ING clients used accounts at the bank to launder hundreds of millions of dollars, including the payment of $55 million in bribes to Gulnara Karimova (the daughter of the then-president of Uzbekistan) by the Dutch telecommunications company VEON, formerly known as Vimpelcom. VEON is owned by Russia’s Alfa Group, whose Dutch bank, Amsterdam Trade Bank, was raided by the Fiscal Information and Investigation Service as part of a criminal money laundering probe in December.

With this action, the Netherlands has imposed by far the largest fine on a European Union bank for money laundering violations in history. Until the September 4 settlement, the largest anti-money laundering (AML) penalties in the EU had been meted out in the United Kingdom. In 2017, the U.K.’s Financial Conduct Authority levied an approximately $200 million fine against Deutsche Bank for its role in a $10 billion Russian money laundering scheme. The agency also fined Barclays approximately $100 million in 2015 for violations related to the handling of politically exposed persons. With the exception of these two British actions, European money laundering fines have generally been in the double-digit millions, as in France or Germany, or in the single digits, as in everywhere else. Against that backdrop, this penalty is of a sufficient severity that the management of every financial institution in the country will think twice before allowing a similar situation to develop. Banks in other EU countries will look to see whether their regulators emulate the new, muscular Dutch posture.

Recent money laundering scandals in smaller EU jurisdictions such as Cyprus, Estonia, Latvia, and Malta — all of which involved Russia — have prompted an overdue policy debate in Brussels about how to strengthen the system. The current system — which leaves money laundering supervision to national authorities even inside the eurozone — creates cross-border barriers to the sharing of information, relies on the smallest and most poorly-resourced jurisdictions to serve as the first line of defense, and creates the risk of political and regulatory capture in those countries. A forthcoming report drafted by the European Commission, European Banking Authority, and European Central Bank will present options to fix the situation. As Danièle Nouy, the head of supervision for the Single Supervisory Mechanism,2 has stated, the answer is a more centralized, coordinated approach to combating illicit finance.3

In the words of the chairman of the European Banking Authority, Andrea Enria, “If you are in the single market, the strength of anti-money laundering controls can only be as high as the weakest link. So if you have a weak authority, then the criminal money may enter the single market.” What this critical debate misses, though, is that the problem is not only the weakest links. Even a centralized, coordinated, and well-resourced AML effort will fail if the consequence of being caught is a slap on the wrist.

Dutch authorities have now shown the way on enforcement, and their EU neighbors would be wise to follow suit. In doing so, they will borrow a page from the American playbook, where fines for money laundering and sanctions violations have long totaled hundreds of millions and even billions of dollars. The EU enjoys significant advantages over the United States when it comes to AML rules and financial transparency. It is in far better shape with respect to both beneficial ownership (the U.S. still does not track the owners of companies in a central registry) and oversight of managers of private investment funds including hedge funds and private equity firms (the U.S. does not impose AML requirements on these managers). On the other hand, the U.S. AML regime is stronger than Europe’s in two important respects. First, all sizeable U.S. banks are subject to the supervision of strong, competent, and independent regulators.4 Second, U.S. banks operate under the certainty that the penalty for getting caught will hurt, as it should. The Dutch fine signals European recognition of the importance not just of rules, but of deterrence.     

As technical AML violations may facilitate more potent threats — including corruption, kleptocracy, organized criminal activity, and even foreign political interference — the effectiveness of one’s AML regime, and of the deterrence embedded within it, is about more than the integrity of the financial system. It is, ultimately, about national security.

The views expressed in GMF publications and commentary are the views of the author alone.

  1. ING’s offenses included both criminal violations of its anti-money laundering compliance program requirements (adherence to which is overseen by the Dutch National Bank) and “culpable money laundering,” meaning the bank admitted to laundering criminal proceeds through negligence. These charges mirror U.S. law, under which a bank can be fined for AML program violations by its regulator by an administrative process, charged criminally for willful violations of its AML program obligations by the Department of Justice, and/or criminally prosecuted for knowingly facilitating transactions involving criminal proceeds (the commonly understood meaning of “money laundering”).
  2. The Single Supervisory Mechanism is responsible for the prudential supervision of eurozone banks. It is a joint body of the European Central Bank and member state regulators. The SSM  is not responsible for AML supervision, which is within the sole purview of member states.
  3. See Nouy’s May 2018 letter to Member of the European Parliament Sven Giegold, in which she writes, “Looking forward, a more European approach to combatting money laundering should be considered, for example, through enhanced cooperation and exchanges of information between supervisory and AML authorities. As anti-money laundering concerns both the supervisory and criminal/judicial spheres, reviewing the Directive may not suffice to ensure cooperation is smooth and all-encompassing. Establishing a European AML authority could bring about such a degree of improved cooperation.”
  4. There are some minor exceptions, particularly in Puerto Rico.
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