Simon Nixon | The Times
Something is rotten in the European financial system. Britain’s status as the global capital of money-laundering is once again back in the spotlight after the poisoning of the former Russian spy Sergei Skripal and his daughter in Salisbury.
The British government has blamed Russia and the affair has revived concerns about the UK’s remarkable openness to the mysteriously amassed fortunes of oligarchs with links to President Putin and the extraordinary role that companies registered in the UK have played in some of the biggest money-laundering scandals of recent years.
The focus on London follows a series of disturbing stories from across the Continent that have exposed the dark underbelly of the European financial system. In October the Maltese journalist Daphne Caruana Galizia, who had been investigating corruption in the country, was blown up by a car bomb. Last month Latvia’s third largest bank collapsed after the US Treasury accused it of “institutionalised money-laundering”. A few weeks ago a Slovakian investigative journalist and his girlfriend were shot dead in what police said was likely to have been revenge for his investigation into alleged links between politicians and the Italian mafia.
These stories raise uncomfortable questions about the extent of organised crime in three eurozone countries. The collapse of Latvia’s ABLV is particularly alarming because it was supervised directly by the European Central Bank. The fact that ABLV’s alleged moneylaundering was exposed by an American agency rather than a European authority raises questions about the EU’s ability to police its own financial system. Mario Draghi, the ECB president, acknowledged this week that the central bank had suffered reputational damage from the crisis.
The truth is that the EU is particularly vulnerable to organised crime and money-laundering. It has created a single market and single financial system in which capital and people can move freely between member states.
This has created healthy competition and reduced financing costs for European businesses and households. Yet responsibility for policing that system lies squarely at national level. The EU has introduced a single rulebook to cover customer protection and anti-moneylaundering, but it is up to member states to transpose the rules into national law and it is up to domestic agencies to ensure that the law is enforced. As in the EU migration crisis, where the inability of a few countries properly to manage their own borders exposed the entire bloc to risks, so the inability of a few countries adequately to manage their financial systems exposes the entire European financial system to risk.
The EU is vulnerable because of the opportunities it offers to money-launderers. In smaller EU countries, particularly in the east and south, oligarchs have been able to amass vast fortunes by exploiting their connections to the state, whether through privatisations, public money or public procurement. At the same time, poorly supervised banking systems have offered opportunities for outright theft For example, more than $1 billion was stolen from three Moldovan banks in 2014 and at least $5.5 billion disappeared from Ukraine’s Privatbank in 2016. Typically this money then finds its way into the EU financial system, where it is legitimised and invested — often in British assets, which benefit from the jurisdiction’s legal protections.
The EU has, of course, been trying to tackle these deficiencies in its financial system. The EU’s fourth anti-money-laundering directive came into force last summer and a fifth is on its way, with new measures to close down loopholes exposed by the Panama Papers. Much of the European effort is focused on promoting transparency about the ultimate ownership of assets and to ensure that banks and finance professionals know their customers and report suspicious activity.
But while Brussels has powers to ensure that member states do implement the rules — at present it is taking infringement action against 20 member states over the latest directive — it has no powers to ensure that member states actually enforce them. At the same time, strict protocols govern what information can be shared between institutions, limiting cross-border cooperation. Remarkably, the ECB has no powers to investigate money-laundering related to legal systems go to the heart of national sovereignty. Powerful vested interests in countries with large financial centres or with high levels of corruption and organised crime are reluctant to hand the EU greater powers.
The UK, for example, has fought a rearguard action to exempt non-tax paying trusts from transparency rules, leaving what Transparency International calls a “backdoor” for money-launderers. The UK has also refused to order British crown dependencies to fall into line with EU transparency rules. Meanwhile, poorly paid national bureaucrats inevitably struggle to keep pace with a richly rewarded global legal sector.
Nonetheless, if the EU is to maintain a single market in financial services, let alone a single currency, then a single rulebook is unlikely to be enough: it will need a single cross-border investigatory agency with wide-ranging enforcement powers. After all, the lesson of the migration crisis is that if some EU member states are unwilling or unable to fulfil their obligations under EU law, then either powers will have to be transferred to a new institution. How post-Brexit Britain might fit into a cleaner European financial system is another question.