Europe’s Dirty Money Scandals Highlight Absence of Credible Cops

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Europe's long-standing resistance to joint policing of its financial system is coming home to roost.

A widening money-laundering scandal has exposed weaknesses that Russian criminals have exploited for years, increasing the prospect of U.S. authorities stepping in with draconian fines of their own. In Europe, a patchwork of different systems and rules has hindered the policing of laundering, with no central agency charged with investigating crimes that by one estimate may total as much as $2 trillion globally each year.

With a financial system barely recovered from a decade of serial crises, policy makers in European capitals need to strike a balance between tightening the screws on their own lenders and keeping banks on the road to sustainable profitability. Financial institutions from Stockholm to Amsterdam face uncomfortable questions about their handling of tainted funds, with investigations under way in the Baltic nations, the U.S., the U.K. and the Nordic countries. Almost daily revelations suggest there are more surprises to come on the misconduct.

“It's a big paradox that you have one single market with free movement for capital and services and so on, but you have 28 different anti-money laundering systems," said Jeppe Kofod, a Danish lawmaker in the European Parliament who helped in a year-long effort to investigate tax evasion and financial crime. “The financial sector is so interconnected and so transnational, it doesn't make sense to have this kind of fragmented system.”

Suspicious Activity

Recent disclosures highlight the breadth of suspicious activity that has enmeshed banks across the continent. A picture is forming of Nordic banks that, often via their Baltic units, became hubs for Russian criminals who channeled funds to the West. Nordea Bank Abp allegedly handled about 700 million euros ($793 million) in potentially dirty money, some of it linked to the death of Russian lawyer Sergei Magnitsky, the Finnish broadcaster YLE reported on Monday.

Others drawn into the scandal this week include Raiffeisen Bank International AG in Austria and Dutch institutions including ING Groep NV, which were tied to an extensive network of shell companies set up by Troika Dialog and used to move billions of dollars. ING was aware of the potential involvement in money laundering of one of its clients at its Moscow branch, the newspaper Trouw reported Wednesday. More than 500 transfers of funds from that network, amounting to about $150 million, were made to accounts at the Geneva branch of Credit Agricole, Switzerland's Tages-Anzeiger reported.

While the numbers are big, they're “likely only the tip of the iceberg of what's becoming a global financial threat,” Bloomberg Intelligence analyst Georgi Gunchev wrote in a report. Worldwide, the IMF estimates that as much as $2 trillion is laundered per year, about the size of the Italian economy, according to Gunchev.

Smaller countries like Latvia say they're overwhelmed and have called for a joint European authority to track and fight the flow of dirty money. Bigger countries such as Germany are skeptical, saying national authorities are better placed, given money laundering laws haven't been implemented evenly across the EU. The result is an effort to improve coordination within the existing framework, but that's insufficient, according to Jose Manuel Campa, the next head of the European Banking Authority, the EU's top banking regulator.

“The current system is nowhere near good enough to fight money laundering, we're way too focused on the small fish,” said Klaus Fleischer, a professor specializing in finance at the Munich University of Applied Sciences. “We Europeans have been afraid to impose big fines on banks because they're already weak and we don't want to kill them. But banks need to know that misconduct has consequences.”

Higher Fines

European officials have started to hit banks with higher fines for misconduct, but they're still well short of those imposed across the Atlantic. ING Groep was fined 775 million euros ($875 million) last year. U.S. authorities have punished European banks more; even just the whiff of a ban from the American financial system put a Latvian bank out of business last year.

Cases like that show the stakes are high, according to Andrea Enria, who oversees the financial health of lenders at the European Central Bank. Taking a more European approach to combating money laundering is also about ensuring “the safety and soundness” of banks, he told members of the European Parliament in Brussels last month.

Even as EU officials set out to forge a banking union in the wake of the financial crisis, a pan-European enforcement agency was never seriously considered. Policing money laundering has been handled by national authorities. Calls to do more have gone nowhere.

Daniele Nouy, the ECB's former head of supervision, has called for single agency to tackle money laundering.

“It's easy to be strong and independent in a tower in Frankfurt in the ECB, or in a tower in Brussels,” Nouy said in a speech in October. “But when you are a small authority in a small country, with limited expertise and experience, and if on top of that you have big neighbors that are prone to do such operations that are dubious, you are in a difficult situation."

The constant stream of bad news may eventually push the EU to move in this direction, according to Joshua Kirschenbaum, a senior fellow at the German Marshall Fund.

“There is dawning recognition that the problem is structural,” he said by email. “Higher fines are absolutely vital and would go a long way to addressing the problem even absent an EU-level agency. I am pessimistic, though, that we will see substantially higher fines across the board without a new agency.”

To contact the reporters on this story: Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net;Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel, Paul Sillitoe