A window cleaner at Canary Wharf
HSBC’s shaming over Mexican drug money earlier this decade is beginning to look like a mere preface to the crisis that banks across Europe are now facing from financial crime.
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| EUROPE’S MONEY LAUNDERING PROBLEM |
| 1. Can Europe’s banks wash themselves clean? |
| Calls to make those in charge responsible |
| 2. Why Europe can’t stop money laundering |
| Is Brexit good news for money launderers? |
| 3. Regulators find few lessons in Danske |
| 4. How privacy fears slow UK-style data sharing |
| 5. Danske wields risk axe after Estonia scandal |
Images of German police raiding Deutsche Bank’s headquarters late last year as part of an investigation related to the Panama Papers press leak on offshore tax havens reinforced a sense that this is another reason to steer well clear of European banks.
Though apparently unrelated, the raid happened just weeks after Danske Bank’s former chief executive Thomas Borgen resigned over a €200 billion money-laundering breach in its Estonian branch, for which Deutsche had acted as the main correspondent bank.
It is not just German and Scandinavian lenders. ING, Société Générale, Standard Chartered, UniCredit and HSBC – this time in a tax evasion case in Belgium and Switzerland – have all been hit by the equivalent of hundreds of millions of dollars or more in penalties for compliance failings over last year. And more is coming.
Rather than bemoaning the amount of money they need to spend, are banks across Europe finally coming to accept that building proper defences again money laundering is not an annoyance, but one of the most basic duties inherent in their licence, especially in a world of free capital movements?
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Colin Bell, HSBC |
HSBC, after the 2012 case in Mexico, shows the direction of travel. Since its deferred prosecution agreement that year, it has boosted its compliance staff from a few hundred to about 7,500. Slightly more than half of those work on anti-money laundering.
“This is fundamental to how a bank operates,” says group chief compliance officer Colin Bell, a former British Army officer. “There’s a basic legal obligation to monitor activity and report anything suspicious. It’s also a moral obligation.”
A US-imposed financial crime monitor exited HSBC in 2017, after improvements at the bank. However, ramped-up spending in the latter part of this decade has not prevented more criticism of HSBC’s past, notably in the Panama Papers scandal.
Now other banks, especially in northern Europe, are having to recognise their anti-money laundering systems have been weak.
Deutsche already earned large US and UK fines in 2017 for carrying out billions of dollars of Russian mirror trades, a preferred instrument for money launderers. Germany’s financial regulator BaFin still found it necessary late last year to send in a special representative to the bank to ensure it was tightening up its systems.
Police outside Deutsche Bank’s headquarters in November
The trend is even more obvious in Scandinavia. For Danske’s new chief executive, Chris Vogelzang, demonstrating that the bank is working to improve its anti-money-laundering systems is an all-encompassing mission.
Nordea – which has also been subject to press leaks about suspicious transfers from the former Soviet Union – has been forced to admit its financial-crime defences were inadequate, too.
“We accept that it’s the right thing for the bank to do,” says chief risk officer Matthew Elderfield, describing the €700 million it has spent on the problem since 2015.
ING’s €775 million settlement with the Dutch public prosecutor last September over money laundering lapses has necessarily coincided, similarly, with much bigger investment in what the prosecutor said was its understaffed and undertrained anti-money laundering systems.
This fine came almost at the same time as Bank of Italy banned ING from taking on new clients because of similar concerns.
Banks talk about technology as a solution, but technology offers better ways to launder money – Piers Haben, European Banking Authority
Not long after that, ABN Amro announced an €85 million provision at the end of last year to improve its customer diligence processes.
“There’s a massive investment going into the industry in this,” Ralph Hamers, ING’s chief executive, told Euromoney earlier this year. “This is something that will be part of the industry for quite some time.”
The particular concentration of scandals in Denmark and Sweden has come as even more of a shock because investors regarded Nordic banks as safe havens. They might have expected such lapses in Italy or Spain, not Scandinavia.
“That was the part of the system where this was not supposed to happen,” says Dierk Brandenburg, head of financial institutions at Scope Ratings.
Expectations of fines over money-laundering lapses have since brought Nordic banks shuddering back to earth, further shortening the list of investable European banks. All the big Nordic banks except Norway’s DNB now trade at a discount to their 10-year historic average, says Marcell Houben, banks analyst at Credit Suisse. Almost all of that differential is because of expected fines and extra compliance spending.
What’s worse, added UBS analysts recently, is that it takes between two and five years for the authorities to bring an investigation to its conclusion, preventing the return of long-only funds and leaving the matter hanging over the banks.
It is an issue that has become second only to negative euro interest rates on the list of investor concerns about European banks.
Listening to bankers at institutions that have been fined talk about how much they’ve increased their compliance investment and staff might give the impression that the problem is all in the past.
Nothing could be further from the truth.
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Piers Haben, |
“We’ve still got some way to go,” says Piers Haben, the director at the European Banking Authority, whose remit covers anti-money laundering. “We’re seeing banks spend more on compliance, but supervisors need to see if that goes up to the governance and down to the risk appetite.
“Banks talk about technology as a solution, but technology offers better ways to launder money.”
This downbeat assessment, in fact, is quite common.
“We are more aware that money laundering is going through banks, and that lawyers, accountants and estate agents have a role in enabling money laundering,” says David Lewis, secretary general of the Financial Action Task Force, the multi-lateral body that monitors countries’ anti-money-laundering frameworks. “But the number of prosecutions for money laundering and the volume of frozen assets is very low. That’s a big cause of concern.”
Banks, it seems, are still failing to prevent criminals laundering hundreds of billions of euros through their accounts. To that extent the image of Russian criminals operating in the heart of the UK’s financial industry, popularised by television programmes such as the BBC’s McMafia, is quite accurate.
Rob Wainwright, senior cyber partner at Deloitte
When Rob Wainwright (now working at Deloitte) was head of Europol, McMafia’s production team asked him to sense-check the narrative. Though fiction, and somewhat sensationalised, he suggests the programme broadly reflects the reality of how the top end of the criminal economy uses white-collar enablers to launder large sums of money through the banking sector in Europe.
“Professional money launderers understand and know the banking sector,” says Wainwright, also a former MI5 agent. “They operate with good knowledge of how to game the system, and they are able to be very successful.”
Is it really this difficult for the banks to keep a tab on the problem? It is certainly harder than it was.
“The threat is higher now than 20 years ago as business is more international and criminals got better,” says Jens Fürhoff, head of anti-money laundering at Germany’s financial supervisor, BaFin. However, bank revenues are much higher than in the 1990s, even in Europe, which should have allowed them to spend much more on countering financial crime.
Nowadays, Europe’s biggest banks have tens of millions of customers and process tens or hundreds of billions of euros in transactions every month. Much of this will not need much screening, although money launderers may try to test and game banks’ systems, for example, keeping transactions just below the size that would trigger closer checks.
“The professional end of money laundering is extremely sophisticated,” says HSBC’s Bell. “They have hundreds of millions of dollars to shift. They will look like a corporation and set up a company whose ownership is opaque. They will try to understand how banks’ monitoring systems work.”
Being sure about the clients of correspondent banks is even harder. That’s why banks have been cutting them adrift. The practices of borrowers, especially if it’s a big multinational corporate operating in a high-risk country, can cause further worry. Ensuring cleanliness in joint-venture banks in the emerging markets can be another challenge. All of which can have a knock-on effect on a bank’s reputation.
On the other hand, some of the lapses at banks recently laid bare seem easily avoidable. For example, ING allowed a firm in Curaçao purporting to be a women’s underwear trader to launder €150 million through its accounts. It should have been obvious the flows had nothing to do with lingerie, according to Dutch public prosecutors.
Nobody should be in denial – Jean Pierre Mustier, UniCredit
The classic Hollywood image of Latin American drug lords arriving at banks with sacks of dollars seems remarkably close to what happened at HSBC in Mexico in the late 2000s. More recently, part of Standard Chartered’s £102 million fine from the Financial Conduct Authority in April this year was related to a client who turned up at one of its branches in the UAE with the equivalent of £500,000 in cash in a suitcase.
Most shocking of all, non-resident customers processed about €200 billion through Danske Bank’s Estonian branch between 2007 and 2015. This fact alone, given the strong ties between Estonia and Russia, should have flagged up the money-laundering risk, especially given the high level of Danske’s share of non-resident transactions (reaching 40%) in Estonia in comparison with its share of banking assets there (about 10%).
Danske Bank’s former chief executive Thomas Borgen before a September 2018 press conference about the scandal
At Danske, as it eventually came out, more than 6,000 of those non-resident customers had suspicious characteristics, including sharing addresses with other customers; notable differences between the company’s revenues and payments at the branch; and association with publicly known money-laundering schemes.
Yet despite multiple warnings, it took Danske until 2018 to report them to the police. Even fairly basic checks should have picked up on the problems. According to the preliminary criminal charges against Danske in Denmark, the group simply lacked a top-management figure responsible for compliance for much of the period in question.
It is not just Danske. A data leak to Swedish television showed reams of clients at Swedbank in Estonia, headquartered in states such as the British Virgin Islands and Belize, transferring the equivalent of millions of dollars – often using so-called ‘company factories’ in London, where one address might house multiple different firms, often with no email address or phone number.
Banks are so big today that this belated investment in compliance systems is creating a large industry in itself. It is another reason why European banks struggle to claw back profitability. What is much worse, though, is the estimation of the gains their profits must have made by having such inadequate compliance systems.
Nordic lenders such as Swedbank were lauded as some of the most efficient lenders in Europe, if not in the world. But it is only this year, for example, that Swedbank moved towards setting up a financial crime intelligence unit.
That brings into question what other elements of bank business have been run down to boost profits.
New dent
This new dent to banks’ reputation is getting mixed up with wider public gripes. Especially in Scandinavia and the Netherlands, clients and staff have already suffered ruthless cuts to their branch networks in the name of digitalization and investor returns.
Money-laundering fines and media storms over the last year or two have only reaffirmed the sense among the public, especially in countries such as the Netherlands and Sweden, that the banks have not learnt their lessons about the prioritization of profit over morals.
At Danske, clients are now departing in their thousands because of money laundering.
Banks think they are the victims in this. After all, they are not the ones carrying out the terrorism, the drug running, or the illegal wildlife trade.
HSBC nevertheless became “the preferred financial institutions for drug cartels and money launderers”, according to the Department of Justice’s deferred prosecution agreement in the US in 2012.
Commentary around the scandal (including in a Netflix documentary last year) has subsequently caricatured the bank as effectively being part of the Sinaloa Cartel.
The crucial difference, in the eyes of the law, is between leaving the bank vulnerable, or turning a blind eye, and actively facilitating money laundering.
Allegations of the latter offence are relatively rare, especially at larger banks.
Latvia’s ABLV is an exception, in that it apparently allowed employees to orchestrate schemes to such an extent that it “institutionalised money laundering,” according to the US treasury last year.
But if banks and bankers are failing to prevent being used to launder cash – and even profiting from it – are they in fact money laundering?
I think there’s a lot more to come. It comes down to political will. When there’s political pressure, the police will do more. You will see that increase in custodial sentences – David Lewis, Financial Action Task Force
To the man on the street there may be little difference; the distinction is ultimately only to do with intent. In any case, if banks have sufficiently lax processes, there is no need to orchestrate it. Even relatively junior employees need not be actively involved.
How can banks in Europe ever hope to pull themselves out of such reputational depths?
Swedbank has given an example of what not to do. When eyes turned rapidly to other Scandinavian banks, after the full scale of potential money laundering through Danske in Estonia became clear late last September, its insistence that it did not have any similar customers in its Baltic operation gave it a short-term uplift to its share price.
Ultimately, though, it made the bank look even less trustworthy.
“We’ve checked for everything,” then chief executive Birgitte Bonnesen told analysts in its third-quarter results last year, suggesting none of the suspect clients at Danske had accounts at Swedbank, in comments then reported by Bloomberg.
A Swedish television documentary in February, however, revealed a data leak that suggested 50 suspect clients transferred almost $6 billion between Baltic accounts at Danske and Swedbank.
Swedbank’s board initially backed Bonnesen, but within weeks had to dismiss her, after Sweden’s Economic Crime Authority said it was widening an investigation into the bank’s handling of suspected Baltic money laundering.
“The information paints a picture of Swedbank appearing to have spread misleading information to the public and the market about what the bank knew about suspected money laundering within Swedbank in the Baltic States,” the authority said in a statement reported by Reuters.
By contrast, although the scale of Danske’s transactions was far bigger, the feeling in the industry is that it has lately handled the crisis better, showing greater openness and obvious contrition.
It even donated DKr1.5 billion ($222 million) – the entire gross income from the non-resident Estonian portfolio – to a foundation to combat financial crime.
Analysts think it a good idea, even if they still fear billions of euros in fines from the authorities.
Of course, the best thing is to prevent such problems from happening in the first place.
To do that, senior bankers need to understand the threat to their bank, wherever it operates, to a far greater extent than they have done before. They need to respect it, and they need to know if their systems can handle it. They should be prepared to be open about weaknesses, in public. Whistleblowers, moreover, should be given proper attention – an element that was lacking at Danske.
“Nobody should be in denial,” says UniCredit chief executive Jean Pierre Mustier.
Make the people in charge responsible
As Europe’s money-laundering scandals grow in size and frequency, so too are calls for more senior bankers to be sent to be sent to jail – even chief executives.
This is no cry from the angry fringes. One who advocates it is David Lewis, secretary general of the Financial Action Task Force, the multilateral body that monitors countries’ anti-money-laundering frameworks.
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David Lewis, |
“There need to be more custodial sentences for bankers, lawyers, and accountants, and at a higher level than has happened so far, otherwise, it’s a cost of business that’s priced-in,” he says.
Even the biggest fines against institutions, says Lewis, will never have the same motivating power as putting truly powerful bankers behind bars – chief executives and chairman, say, rather than the compliance officers who were ignored.
“Until that happens, and the impact happens on the people that set the culture of the firm, you will not see the change that you expect to see,” Lewis says.
He might not have to wait long.
According to a report commissioned by Danske Bank last September, which sparked former chief executive Thomas Borgen’s resignation, eight of its former employees have been reported to Estonian police to investigate if they colluded with suspicious non-resident clients in country.
Six months later, Danish prosecutors charged and searched the house of Borgen in connection with those clients.
Particularly in Europe, cases of bankers being sent to jail for money laundering have so far been rare, especially at the top end, says Lewis. Often police do not pursue money laundering, even as part of a wider package of charges, because it is so complex and therefore time-consuming and expensive to bring to court.
One problem is that it is difficult to prove an active involvement by senior individuals, especially on the executive board, rather than, say, a junior employee, who may have alerted the police in the first place.
Unpunished
Police will also want to avoid simply sending down sacrificial lambs – a ‘vice-president for going to jail’, as it were – that might leave more powerful bankers to carry on unpunished.
Lewis says the lack of custodial sentences for senior bankers up to now may also be because governments have been so preoccupied with financial stability. That changed in the US earlier this decade, partly thanks to calls from a Senate banking committee by senator Elizabeth Warren, now a Democratic Party presidential candidate.
In 2015, a memo from deputy attorney general Sally Yates encouraged federal prosecutors in the US to go after the individuals rather than just the institutions behind financial crime – firms would only be given credit for cooperating if they provided information on their own people.
A recent notable achievement is the case of Matthias Krull, formerly of Julius Baer in Panama, sentenced to 10 years in jail in Florida last year for joining a conspiracy to launder $1.2 billion in money embezzled from Venezuela’s national oil company (Julius Baer has not been charged and has since exited Panama).
Yet the regulatory pendulum may have already started swinging back the other way in the US under Donald Trump’s presidency. Critics accuse Yates’ successor Rod Rosenstein of watering down her memo. But police in Europe, notably in the UK, are making more effort to bring criminal prosecutions for money laundering as a predicate offence, which could end up snaring more bankers.
“I think there’s a lot more to come,” says Lewis. “It comes down to political will. When there’s political pressure, the police will do more. You will see that increase in custodial sentences.”
