Money laundering scandals, uptick in penalties in Europe spark new risk retrenchment
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 – a further expansion on broad bank de-risking away from regions that could present more anti-money laundering risk than they are worth.
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 – with recent penalties soaring into the hundreds of millions of dollars.
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 – particularly if a regulator fines a bank in a given region for not engaging in adequate anti-money laundering (AML) risk mitigation for certain clients, products or jurisdictions.
“I’m not risking my license for a correspondent banking relationship that brings €100,000 in fees,” as one western European bank chief executive tells me.
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.
More EU banks getting gun-shy on AML risk
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 percent since 2016 and had entirely shut off Moldova, for example.
That is only likely to get worse.
Commodity trade finance shrinking after flurry of fines
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.
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, (via Euromoney).
Monroe’s Musings: This is a story I knew was coming to come out at some point – it was just a matter of time.
In recent years, any time U.S. regulators and investigators heavily sanctioned a large domestic or foreign bank for AML failings – whether they are tied to certain countries, customers or products, like correspondent banking – these operations did some major soul-searching.
In short, they engaged in a major recalibration of AML risk in a bid to prove to regulators they have both strengthened overall financial crime compliance defenses while at the same time pulling away from the riskiest regions or entities.
In essence, they are reducing the throughput of higher risk funds to give a buffer to devote more resources to current customers and regions while remediating and rooting out past failings.
The problem is that these jurisdictions will still want to move money and may turn to money remitters with weaker AML standards – or even enlisting the criminal element.
That means millions or even billions of dollars may move around the globe without being scrutinized by banks and reported to authorities in customer transactions or suspicious activity reports. It also means a black hole of missed investigative intelligence.
One of the most challenging current dynamics in the global AML game is finding the right balance between regulatory oversight and enforcement and bank fincrime compliance programs and effectiveness.
At issue is examiners properly nudging profit-focused financial institutions with the right amount of force to create timely, rich and relevant intelligence for law enforcement – rather than just going through the motions to check boxes – while these selfsame investigative agencies close the validation loop by providing detailed feedback to banks on what they are doing right to close cases and what criminals are doing to game the system.