Money-laundering scandals spark new risk retrenchment

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By:
Dominic O’Neill
Published on:

As Europe’s financial conduct authorities get tougher, banks will be even less likely to support trade between the EU and states that are small and poor.

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Ever since the 2008 financial crisis, US financial misconduct fines have led the world.

However, defenders of Europe’s more collegiate approach to tackling banks’ money-laundering shortcomings say US banks also lead the world for de-risking, shunning some of the globe’s poorest countries from access to the dollar system.

Now a spate of money-laundering scandals is hardening the determination of European regulators to prove they are just as tough as their American equivalents.

And it will have the same effect of turning banks further away from fragile nations, and even charities in their home markets, if the profit is not big enough.

“I’m not risking my licence for a correspondent banking relationship that brings €100,000 in fees,” as one western European bank chief executive tells me.

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Source: Financial Stability Board


HSBC holds an indication of what is coming. It withdrew from about 20 countries and 100 business lines under Stuart Gulliver’s leadership in the early and mid-2010s, partly because of money-laundering risks, after a $1.3 billion deferred prosecution agreement in the US.

“The easiest way to avoid financial crime is not to engage in risky business,” comments Colin Bell, HSBC’s chief compliance officer.

Other European banks are heading the same way.

Deutsche Bank could be at least five years behind HSBC in terms of its hold on financial crime issues, says one prominent figure in London’s anti-money laundering (AML) community.

But even as Deutsche becomes more reliant on business such as German trade finance, a €200 billion Danske Bank scandal in Estonia will discourage it from dealings with poorer countries.

At a European Parliament hearing this year over Deutsche’s role as the main correspondent bank to Danske in Estonia, according to Reuters, its head of anti-financial crime Stephan Wilken said the bank had already cut correspondent banking relationships by 40% since 2016 and had entirely shut off Moldova, for example. That is only likely to get worse.

Commodity trade finance

Dutch banks, too, gained a bigger share of commodity trade finance, which touches some of the world’s most volatile nations, due to BNP Paribas’s greater circumspection after a $9 billion sanctions-busting fine in 2014.

Yet Dutch commitment to this product, and others like it, is in greater question after a record €775 million Dutch AML penalty against ING late last year, which has sparked more wariness about the issue at ABN Amro too.

In France, after BNP Paribas, Société Générale – another big commodity trade finance bank – is facing more questions from jittery investors about its commercial banking network in eastern Europe and Africa.

These are some of SocGen’s most profitable and fastest-growing businesses.


Providing access to the international financial system is at the heart of commerce and prosperity in the countries where we operate 
 - Patricia Sullivan, Standard Chartered

During the past year, SocGen has exited all but the biggest Balkans except Romania. The choice of buyer, Hungary’s OTP, in part reflects money-laundering concerns at bigger western European banks.

The new trend is most obvious in Scandinavia.

Earlier this year, after the full scale of suspicious flows through Danske’s Estonian branch became clear, the bank said it was exiting operations across the Baltics and Russia, and not just in Estonia, as the local supervisor demanded.

Nordea has made a similar move, again largely out of money-laundering concerns.

During the past weeks, Danske has been reviewing its correspondent network, with a view to de-risk. It would be surprising not to find a similar move at Swedbank, whose former chief executive Birgitte Bonnesen resigned earlier this year after a press leak about Baltic offshore clients.

As Danske chief compliance officer Philippe Vollot says, Nordic banks need global correspondents for Nordic clients adding: “The question is are they the right ones, and do we need all of them?”

Russian risk

The effect will be felt hardest in countries less vital to home-market corporate clients – in other words, much smaller economies than Russia, which is the main origin of most of these scandals.

This has been seen recently, for example, at Commerzbank, which has carried out a dramatic de-risking exercise in the wake of a $642 million deferred prosecution agreement in the US in 2015, partly over due-diligence failures on correspondent banks.

Commerzbank has cut the number of banks it works with, mainly for trade finance, from about 5,500 to about 2,500 since 2015.

But in Russia it still has about 50 correspondent banks or more, while in other high-risk countries – though it maintains representative offices in states such as Angola and Iraq – Commerz keeps a much small number of correspondent banks, and in some cases none.

“The question is the risk of de-risking,” says Commerz’s chief compliance officer Armin Barthel. “One of the results is that certain areas of the world, such as Africa, are not as connected as in the past.”

Standard Chartered is a possible counter-example, even if by necessity, as it is an emerging market specialist.

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StanChart's Patricia Sullivan, global co-head of financial crime compliance


Patricia Sullivan, global co-head of financial crime compliance, says its approach is “de-risking through education”. It has held 70 correspondent-banking academies in places such as Africa and the Middle East, often in cooperation with multilateral agencies.

Commerz is involved in such schemes, though more as a follower.

StanChart has some 1,500 dollar correspondent-banking relationships around the world, and the number has remained relatively stable during the past five years. It held onto its African commercial banking network, even after Barclays’ exit in 2016.

“Providing access to the international financial system is at the heart of commerce and prosperity in the countries where we operate,” says Sullivan.

It’s not without its risks, though. AML breaches in StanChart’s London correspondent business and UAE branch operation resulted in a £102 million fine from the Financial Conduct Authority this April.