Does the EU’s anti-money laundering strategy ignore the (Russian) elephant in the room?

With Europe’s parliament having now approved the European Commission’s new “high-risk” list of third countries deemed a threat to the bloc’s anti-money laundering (AML) efforts, several high profile critics are already voicing fears that it will do little to prevent illicit funds from being washed through Europe’s banks. This is particularly true for the Baltic states, whose vulnerability to money laundering networks based in neighbouring Russia remains an acute problem for the region.

The list of high-risk countries includes primarily African, Asian and Caribbean nations, which according to the EU “pose significant threats to the financial system of the Union”.

Yet according to the Tax Injustice Network’s financial secrecy index for 2020, these countries represent just 7.4 per cent of the world’s secret financial transactions. In 2018, the Commission cited a total of 54 countries which merited a risk assessment, yet the vast majority of these have been left off the list for what the EU calls “methodological reasons”.

Critics have been quick to denounce the list as little more than a geopolitical gesture. Bill Browder, an American-born British financier and political activist, and a fierce critic of Russia’s dirty money network whose lawyer, Sergei Magnitsky, died in a Moscow jail in 2009, discredits the EU’s list as “an embarrassment that obscures the larger narrative”.

These thoughts are echoed by Chris Raggett from the European Council for Foreign Relations, who points to the “willingness to veto the inclusion of certain states”, in what can be labelled as a lowest common denominator spiral.

As such, a look at those countries and territories excluded from the list reveals a great deal. Well-known offshore jurisdictions and tax shelters such as the Cayman Islands, the British Virgin Islands, and even the US’s own more opaque territories, such as the state of Delaware, are notably missing. Then there is the gaping hole left by Russia’s exclusion.

On closer inspection, a clear narrative appears. The EU’s list is more reflective of political lobbying than tangible threats to the body’s financial institutions. “It is more or less a carbon copy of the Financial Action Task Force (FATF) black and grey list, with all the distortions this incorporates,” explains Michele Riccardi, senior researcher at Transcrime, the joint research centre on transnational crime of the Università Cattolica del Sacro Cuore in Milan. The FATF has previously been labelled by many as suffering from an inherent western-focused subjectiveness.

Mr Riccardi explains that, “the list does not identify countries producing illicit proceeds, but rather those attracting them. This is the reason why some ‘supplier’ countries, such as Russia, are not covered. The problem with the EU list is related to its methodology and evaluation criteria, which are still not fully clear.”

Moreover, many of the countries that appear on the FATF grey list, and many of whom are hence on the EU’s list, are currently working with the task force to address the gaps in their systems. According to the FATF, nations like Botswana and Mauritius have made “good progress in addressing most of the deficiencies”, and have both been re-rated. Currently the task force does not call for enhanced due diligence to be applied to these jurisdictions, unlike the EU. This discrepancy is even more apparent with Trinidad and Tobago, which has made so much progress that the FATF has removed it from its monitoring entirely. Nevertheless, it remains on the EU’s high risk list.

“The EU looks only at the statutory dimension of AML, such as what countries have or make on paper – or, better to say, what they do not have and do not make. But the lack of formal compliance is not enough to classify a country as attractive for dirty proceeds. There are weaknesses which would emerge only from an analysis of empirical evidence,” Mr Riccardi adds.

Moreover, in March 2019, when Saudi Arabia, Guam, and the US Virgin Islands – amongst others – appeared to meet the criteria for inclusion on the list and were set to be added, 27 of the EU’s then 28 member states vetoed their inclusion: a move which critics labelled as ally-pleasing.

As for Russia’s exclusion, Mr Browder blames anything from “political pressure to bribery”. Similarly, Sven Giegold, an MEP who proposed amendments to the list and an accompanying European Parliament resolution, tells Emerging Europe that, “objectively, Russia should be on the list. If it was committed to credible change this would be another matter.”

Russia’s exclusion also defies the admission last year of Pedro Felicio, a top Europol official, that “huge inflows of criminal money” are coming into Europe primarily from Russia and China.

After the former communist country’s chaotic transition into capitalism, billions flowed into offshore zones erected by powerful networks orchestrated through former and current members of the Russian security services. This, coupled with the alleged willingness of business leaders close to the Kremlin to fund covert operations, means that Russia very much constitutes a high risk, despite some commendations of their central bank’s recent hardline approach.

“The EU and its member states have to weigh the benefits of embarrassing countries by including them on the list against all sorts of economic costs and strategic concerns,” explains Mr Raggett.

It is in this climate that the Baltic states have become most vulnerable to Russia’s money-laundering activities, often acting as a bridge between former Soviet republics and the EU. Last year saw Estonia dragged into a major scandal after branches of Danske Bank and Swedbank in the country were found to have facilitated the flow of dirty money into the country between 2007 and 2015. The two Nordic banks have since been ejected from the country, and both ousted their chief executives as part of a major overhaul of the region’s financial system. Similarly, ABLV, one of the largest private banks in the Baltic states, headquartered in the Latvian capital Riga, was effectively shut down in 2018 after being exposed for institutionalised money laundering, primarily of funds coming out of North Korea.

However, it is not just the Baltic states which are at risk. Ultimately, money laundering is a cross border crime, in which some of the biggest scandals involve multinational banks and run institutionally deep. It is also the engine of criminal activity, powering Europe’s criminal networks. In 2015, Europol estimated that 98.9 per cent of criminal profits are not confiscated, but rather remain in the system, powering the engine. Dirty money could account for as much as nearly one per cent of the EU’s GDP.

As Mr Riccardi notes, many myths continue to surround territories such as the Cayman Islands that have earned a reputation as tax havens. However, “the jurisdictions with the highest money laundering risk, exploited by Europe-based criminals, are those inside Europe, and even inside the EU,” he says. This makes the list enormously problematic, with Europe restricting its ‘risk’ to third countries. “So, who evaluates if, say, Germany is at higher risk than Malta? Is this left to FATF only?”, asks Mr Riccardi.

As Mr Raggett explains, “it is unclear whether the list – which appears to be subject to political considerations, despite claims to the contrary – is an effective tool for combating money laundering.” Rather, the problem requires a standardised joint effort, across EU member states and within the EU itself. Instead, the EU has been left with anaemic directives, which critics have labelled as “dysfunctional” and of “whack-a-mole” quality.

“The EU has had relatively good rules since 2007,” Mr Giegold explains, but adds that “these have not been implemented in reality.” As the quality of the individual member states’ financial investigation units vary, and the EU has little jurisdiction over them, cross- communication can be difficult, and often non-existent.

“The main problem is the EU is supposed to be a joint body, but when it comes to money laundering, it is all disconnected with no effective cooperation,” Bill Browder tells Emerging Europe. “It takes a week for money launderers to complete their operations and two-five years for the EU to unravel them, and by that point many statutes of limitations have already expired.” This has led Europol to admit that money laundering in the EU is a “high profit, low risk” activity.

Moreover, for the Baltic states, preventing money-laundering is particularly hard due to the cross-border nature of the crime.

“These flows are not always direct from Russia to Baltic areas, but they are at times mediated by institutions and corporations set up in other EU countries (such as Cyprus and Greece), third countries (including Moldova and Ukraine) or some Caribbean jurisdiction. Therefore it is not easy to intercept all of these flows of money and trace the beneficial ownership the funds,” explains Mr Riccardi.

The Latvian finance ministry, which believes the list is transparent, nevertheless tells Emerging Europe that “in recent years, cooperation and the institutional framework at the European Union level has proved insufficient”. However, the ministry is encouraged by both Latvia’s and the EU’s harmonisation and strengthening of supervisory controls, which have notably stepped up of late.

The recent improvements of the EU’s AML efforts, however, have come in spite of its “high-risk” list and rather as a result of rigid and standardised regulation enforcement. Since the recent Baltic scandals broke, both Estonia and Latvia have attempted an overhaul of their financial systems, and just this month, Europol established the European Financial and Economic Crime Centre (EFECC) with the aim to “enhance the operational support provided by EU member states.” Promisingly, another Scandinavian bank, SEB, received a large fine by regulators in June, over its weak AML controls in the Baltics.

Mr Giegold’s cross-party amendments to the European Parliament’s resolution further aims at strengthening harmonisation and cooperation of the EU’s efforts. “The debate around the list is exaggerated, the real issue is actual effective implementation of EU regulations,” he says. “I am proud to take this resolution to the Commission to set it straight, as it calls mainly for stronger enforcement.”

According to Mr Browder, however, while institutions like Europol are fundamentally a good idea, they require that prosecutors work together, meaning an entire system overhaul. This shouldn’t be impossible. With technological advances and tighter regulations, he argues that any suspicious transaction should be proven innocent or otherwise confiscated. This kind of across the board rigidity is paramount when treating Europe’s endemically murky money cycles.

However, while the EU passes its new regulation, Mr Raggett explains that it can lead to a dangerous false sense of security, “when, for instance, the European Commission claims that the EU “has developed a solid regulatory framework for preventing money laundering” – as it did a year ago.” Rather, he explains “it will take a coordinated effort by EU institutions and European countries to establish deterrence against large-scale money laundering networks.”

Therefore, initiatives like the EU’s high-risk list are problematic in more ways than one. Not only do they lack legitimate methodology, or political objectivity, they encourage an environment of security which is anything but secure. Rather, the list is deficient of any effectiveness, fittingly in line with much of the EU’s broader anti-money laundering efforts, in which big fish like Russia are ignored while less diplomatically influential countries are scapegoated.

Furthermore, money laundering goes far beyond the opaqueness of a country’s financial regulations, and regulation needs to follow.

“Nowadays, some financial institutions are even more powerful than national governments in the sense that they deploy across different states and are able to benefit from the asymmetries across countries, and take advantage of the loopholes and lack of coordination among supervisory authorities of individual EU member states,” concludes Mr Riccardi. “The EU should seek a much greater harmonisation and coordination among all its parts. This is the best antidote for making the EU, and each of its regions, including the Baltics, genuinely money laundering proof.”

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