Focus on the original culprits to clean up money laundering

On March 28, Swedbank fired its CEO, Birgitte Bonnesen, after Swedish state television reported on an internal document that detailed “major breaches of anti-money laundering obligations.”

Swedbank is one of Sweden’s four big banks. Another Nordic bank, Nordea, has already been fined by Luxembourg’s financial supervision for breaches detailed in the Panama Papers.

Late last year, Danske Bank, the large Danish bank, was reported to have “failed for years to prevent suspected money laundering involving thousands of customers” through its Estonian subsidiary, leading to the resignation of CEO Thomas Borgen.

Swedbank’s share prices have fallen by 40 percent and Danske’s by half.

{mosads}Banking is not supposed to work like this, but the problems involving alleged money laundering are many. We need to sort them all out. The fundamental question is where does the problem originate?

Dubious money that has been extracted through organized crime, corruption or extortion, in the case of Europe, often comes from Russia, Ukraine, Kazakhstan and Azerbaijan.

Next, money transfers proceed through increasingly decent channels, starting in soft EU countries like Cyprus, Malta, Latvia, Lithuania or Estonia. Then, they allegedly move on to more widely acceptable European banks, such as Danske, Nordea and Swedbank. The pattern is clear: Dirty money moves gradually to ever cleaner fields.

We should focus on the origin of the dirty money, while the public concern is focusing on later and lesser culprits. Strangely, Russia is a member of the Financial Action Task Force (FATF), the ruling global body for money laundering that is headquartered at the Organization for Economic Cooperation and Development (OECD) in Paris.

If Russia is the main source of money laundering in Europe, as is allegedly the case, Russia should be expelled from FATF.

The absurdity does not stop there. At present, most countries in the world are excluded from correspondent banking in U.S. dollars. The reason is the draconian Patriot Act of 2001, which swiftly and effectively cleaned out shell banks from the global banking system.

The U.S. dollar rules the world, and each U.S. dollar passes through one of the three big-money banks in New York: JPMorgan Chase, Citibank and Bank of New York Mellon.

Thus, the United States has jurisdiction over all global transactions in U.S. dollars. Since all the big U.S. banks have been forced to pay multibillion-dollar fines to U.S. financial authorities, they have developed large and strong compliance departments that have gained the authority to stop virtually any transaction by their banks. In effect, they are policing the U.S. banking system for the Treasury at their own expense.

The irony is that the big Russia state banks that are alleged to be involved in dubious business, get a pass because they are so big, and they enjoy correspondent banking in U.S. dollars.

Smaller Baltic banks, by contrast, are punished because they are too small. The U.S. should balance the international playing field by denying dubious big-state and crony banks from correspondent banking in U.S. dollars. Focus on the original culprits, rather than the intermediaries.

Needless to say, European banks are also responsible. Just as the U.S. banks did after the adoption of the Patriot Act, European banks need to develop large, strong compliance departments.

But they will only do so if they have strong incentives, and the incentives are multibillion-dollar fines similar to the ones paid by U.S. banks. The stock prices of the banks involved have fallen over costly verdicts by the U.S. Treasury.

The EU’s institutions are too weak to combat money laundering. The union needs to develop a joint European agency, akin to the U.S. Treasury’s Financial Crime Enforcement Network (FinCEN), as Nicolas Véron of the Peterson Institute for International Economics and Joshua Kirschenbaum of the German Marshall Fund have sensibly concluded in a recent paper.  

{mossecondads}The ultimate problem, however, is that banks do not know with whom they are dealing. The many money-laundering scandals show how difficult it is.

The best cure is to force all companies to reveal their ultimate beneficiary owners. For banks and other financial intermediaries, this greatly reduces their costs of transparency and their risk of malfeasance.

The European Union adopted its fifth anti-money-laundering directive in June 2018, which demands that all member countries make public all ultimate beneficiary owners. The United States should adopt similar legislation, as is currently discussed in the House Financial Services Committee.

Danske Bank, Nordea and Swedbank were not the last alleged culprits. The hunt will go on. It will move to increasingly innocent banks that were far away from the original transactions. Those involved are not all innocent, but we should focus on the original, big alleged culprits: the large Russian state banks. 

Anders Åslund is a senior fellow at the Atlantic Council and author of the forthcoming book “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.” Follow him on Twitter @anders_aslund.