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Friday, 29.03.2024, 16:06
DBRS: Is the European Framework against Money Laundering Effective Enough?
Increase in cases of money laundering involving European banks
In 2018, there has been an increase in the number of
instances of alleged money laundering involving banks that are directly
supervised by the European Central Bank (ECB). This paper focuses on European
banks that have breached money laundering, terrorist financing or sanction
laws, and got sanctioned between 2010-2018.
The range of cases includes two categories in DBRS’s view.
The first category refers to lack of controls or breaches in internal controls,
as well as failure to Know Your Customer (KYC), generally including banks
lacking effective systems to detect and prevent money laundering over a defined
period. The second category includes cases of violations of sanctions (the most
common being violations of US sanctions imposed on countries such as Iran,
Sudan, Cuba, and Russia) over a defined period.
The number of cases (AML and sanction violations) in Europe
increased to 7 cases in 2018 compared to less than 2 cases on average each year
between 2010 and 2018 (see exhibit 1). Of the 7 cases in 2018, 6 cases fell
under the first category (Cooperative
Rabobank UA, ING Groep NV, Danske Bank A/S, A/S, Versobank AS, Pilatus Bank Plc
and ABLV Bank, AS). In Denmark, Danske
Bank A/S (Danske)’s investigation is still ongoing.
European framework being strengthened but not centralised
DBRS notes that while the ECB possesses the sole authority
to grant or withdraw a banking license for the banks it regulates, the
responsibility for the supervision of compliance with Anti-Money Laundering (AML)
requirements at banks of all sizes falls under the respective national AML
supervisory authorities in each of the 28 EU countries.
However, money laundering supervision can be less effective
than if dealt with under a central authority. Nevertheless, efforts have been
made to strengthen the European framework. In December 2018, following a number
of money laundering issues in Europe, most notably with Danske that disclosed an unprecedented amount of suspicious
transfers from its Estonian branch (please see DBRS: Deficiencies in Controls
Damage Danske Bank’s reputation), the
European Council adopted an action plan to enhance monitoring across European
jurisdictions. DBRS observes this plan is aiming at improving the national
European supervisory authorities’ capacity to make better use of existing
powers and tools.
Among the eight key objectives is the importance of
improving the exchange of information and collaboration between prudential and
national AML supervisory authorities, as well as clarifying aspects related to
the withdrawal of a bank’s authorisation in case of serious breaches. In
addition, the European Council’s position on a proposal reinforcing the role of
the European Banking Authority (EBA) was agreed. Giving more powers to the EBA
aims to ensure that AML rules would be effectively applied in all member states
and that all authorities cooperate closely with each other; and that, if
needed, the EBA would be able to address decisions directly to individual banks
as a last resort. As a result, DBRS views that cooperation should improve
through the development of common standards, and coordination between different
national supervisory authorities.
However, DBRS considers that, given the large number of
different European jurisdictions and disparity in resources allocated, AML
supervision is unlikely to be as effective as if dealt with under one central
authority. In particular, legal differences between European countries will
remain, as demonstrated for example in Estonia. While tighter AML regulation
took place in Estonia late 2018, with the government approving a draft law
which established stricter penalties in its financial system and introduced
reverse burden of proof on suspicious assets, this move only affected one
country.
Penalties in case of failure to comply vary between jurisdictions
Banks are expected to know their customers, as well as to
respect international sanctions when dealing with certain countries. While DBRS
observes large European banks have taken significant measures to boost
compliance work since 2013, penalties for failures to report suspicious
activities to relevant authorities will continue to vary and depend on each
European jurisdiction's legal framework. Whether there could be clearer and
stricter penalties for money-laundering in Europe remains un-addressed.
European banks have been subject to penalties imposed by US
authorities and their signal seems to be clear that the failure to report
suspicious activity will result in severe penalties. Among various examples,
the latest one was Société Générale SA
that was fined USD 1.34 billion in November 2018 reflecting US penalties for
illegal transactions to parties in countries subject to embargoes during a
period between 2003 and 2013. Other cases prior to 2018 included BNP Paribas SA which got the largest
fine to date for US sanction breaches - USD 9 billion in 2012 - highlighting
how large US penalties can be. DBRS notes US authorities are investigating the Danske case also including Deutsche Bank AG (DB) for its role as a
correspondent bank, looking at whether DB adequately monitored funds
transferred from Danske’s Estonian
branch.
Beyond financial penalties, US authorities have also
demonstrated a draconian approach in handling AML breaches when they denied
access to US dollars to a bank based in Europe that was accused of large scale
money laundering. Early 2018, ABLV Bank, AS, a small Latvian bank, was found
guilty of violating sanctions on North Korea and using bribery to influence
Latvian officials. Seeking to impose penalties, the US Treasury Department’s
Financial Crimes Enforcement Network of Money Laundering denied the bank
funding in dollars, which resulted in the bank liquidating itself in February 2018.
In Europe, there has been a recent increase in the number of
penalties for bank breaching AML rules and violating sanctions, although the
financial penalties have been much lower than in the US. Money laundering cases
have recently risen and are increasingly being targeted by European national
authorities. In September 2018 for instance, ING Groep NV had to pay EUR 775 mln to the Dutch AML authority (the
Netherlands Public Prosecution Service) due to violations related to
shortcomings in customer due diligence. DBRS also notes there can be higher
regulatory requirements as a result. In Denmark, the Danish FSA imposed on
Danske a Pillar II capital add-on of DKK 10 billion following the shortcomings
in governance at the bank. There has also been a political agreement to tighten
AML legislation in Denmark as well as to increase the ceiling for financial
penalties in the Autumn 2018. So far though, Danske has not been fined by the
Danish authorities. Considering the fact that Danske’s balancesheet represents
more than 1.5 times Denmark’s GDP, the magnitude and severity of potential
penalties may be politically more sensitive than if dealt with at a
supranational level. At the same time, on January 29, 2019, the Danish FSA
published 23 separate initiatives to tighten the Danish AML supervision. And
DBRS notes one pillar considers “tougher consequences when a bank’s management
fails to recognise its responsibility”, including the use of higher penalties
for banks and their senior managers.
In 2018, DBRS notes the ECB withdrew the authorisation to
operate for three small European banks following requests from the respective
national authorities, in Latvia, Malta and Estonia. Yet, the Latvian and
Maltese cases were initially brought to attention by the US authorities. In
Estonia, Versobank AS had total
assets of only EUR 293 mln at end-2017 compared to the country’s GDP of 19.2
billion at end-2017.