28 Nov 2019
It is said that if you place a frog in water and slowly raise the temperature to boiling, it will fail to act until it is too late. I don’t know if this is true; I’d certainly never wish to test the theory. But the metaphor is apt for what is currently occurring in the world of European anti money-laundering and financial crime fighting.
Over the past couple of years, the inadequacy of financial crime supervision across EU member states has been brutally and repeatedly revealed. What was once – perhaps reassuringly – assumed to be an Anglo-Saxon problem confined to the City of London and the towers of Canary Wharf has been exposed as a continent-wide affliction. From north to south, the failings of financial institutions and the serial deficiencies of their regulators have become increasingly visible. As the European Commission notes, in a number of money laundering cases, ‘supervisors only intervened after significant risks had materialised or in the face of repeated compliance and governance failures’, further observing that ‘in many cases, primary compliance failures kept recurring over years before being picked up by supervisory activity or before the bank reported on them’. The evaluations of the Financial Action Task Force (FATF) – the global anti-financial crime standard setter and watchdog – have likewise illuminated systemic failings. As night follows day, more revelations are likely to emerge via leaks, investigative journalism and (hopefully) supervisory activity.
Despite proposals for action and rare ad hoc interventions by the European Central Bank, European authorities seem paralysed – much like our frog in the increasingly bubbling pot. The Commission has diagnosed the problem and has called for ‘deeper reflection’ on responses, but engendering meaningful action appears to be far more challenging for the Eurocrats.
Since scandal engulfed, among others, Malta’s Pilatus Bank, Latvia’s ABLV, Denmark’s Danske Bank, the Netherlands’ ING, Sweden’s Swedbank and Germany’s Deutsche Bank, the focus of attention has been on the failure of national supervisors. Certainly, the FATF’s evaluations have made uncomfortable reading for supervisors in countries like Denmark.
Some have argued for the expansion of staff and powers at the European Banking Authority (EBA), the independent EU authority which ‘works to ensure effective and consistent prudential regulation and supervision across the European banking sector’. It would certainly seem that the EBA is currently deficient when it comes to meeting the second element of its mission, and its capacity and resources to act with any sort of authority to ensure effective EU member state financial crime supervision are all but absent. Its decision to reject its own report on the supervisory failings in Denmark and Estonia connected with the Danske Bank scandal suggests the EBA still has a very long way to go if it wants to become an effective EU-wide supervisor of supervisors. Given the systemic importance of many of the banks implicated in money laundering scandals, the European Central Bank also has a prudential role to play to ensure that money laundering does not threaten the stability of the EU’s financial system.
More recently, talks have reportedly focused on the creation of a new independent EU enforcement body with ‘direct powers’, seemingly bypassing national supervisors; a group of concerned EU member states has also floated the idea of a more active EU-level supervisor.
Clearly, effective supervision and enforcement are important elements in enhancing the integrity of the EU’s financial system. To date, both have been absent; a dereliction brought into sharp relief by the repeated action taken by US authorities against EU financial institutions. But a third important – and thus far, seemingly overlooked – element completes the triumvirate needed to achieve the necessary radical overhaul, namely intelligence. Importantly, as almost all of the EU’s money laundering scandals underline, this must include the sharing of intelligence between countries to combat the transnational nature of large-scale financial crime activity.
While it may not be welcome advice in the current Brexit environment, EU policymakers might do well to look across the English Channel to the reforms underway in the UK led by the Office for Professional Body Anti-Money Laundering Supervision (OPBAS). As detailed in a 2018 RUSI Occasional Paper by Helena Wood et al., better intelligence sharing between supervisors – and between supervisors and law enforcement – is a critical element to advancing the response to money laundering. What the authors term ‘intelligence-driven supervision’ aims to inform supervisory activity via the collection and analysis of intelligence to provide a strategic overview of threats and deficiencies against which supervisors can then act.
An EU-level supervisor may well gain a picture of the supervisory activity across the EU, but a failure to integrate intelligence gathering into the plans being considered by the EU may simply mean that member state supervisors end up pursuing ineffective forms of supervision more efficiently, rather than more effectively combatting money laundering.
This failure to place intelligence gathering and sharing at the heart of a renewed EU-wide financial crime response is all the more surprising given the increasingly effective roles played by Europol in dismantling cross-border criminality from human trafficking to cybercrime and in running the FIU.net; a mechanism via which financial intelligence units across the EU can exchange information whilst also drawing on the other intelligence sources available via Europol. This capability should be enhanced and expanded to benefit the activities of supervisors at both a national and EU-wide level.
In summary, to create the step-change needed to ensure the integrity of the EU’s financial system, three elements are required. First, uniformly competent national supervisors are needed. This can be achieved via the creation of an active and empowered supervisor of supervisors not afraid to call out failures that undermine the integrity of the national and EU-wide financial system. Second, a centralised enforcement capability with genuine authority should be prepared. National supervisors seem unwilling to take any sort of meaningful punitive action – if this won’t change, then this must be undertaken at the EU level. And finally, underpinning all of this is the need for better intelligence, threat assessments and situational awareness; a role that Europol is ready-made to play.
For too long, the approach taken by most EU supervisors has been passive – this must be addressed at the EU’s upcoming Economic and Financial Affairs Council meeting in December. Where failings are identified, enforcement action is weak. And in the main, procedural compliance has been favoured over a dynamic and proactive model; one that seeks to strengthen the integrity of the EU’s financial system via the identification and targeting of illicit activity and the enabling of systemic weaknesses.
The list of scandals is too long to ignore. These are not isolated cases, they are instead reflective of systemic EU-wide failings that must be urgently addressed.
By Tom Keatinge, Director of the Centre for Financial Crime and Security Studies, RUSI
Read the original article here
RiskScreen: Eliminating Financial Crime with Smart Technology
You can claim CPD minutes for this content, by signing up to our CPD WalletFREE CPD Wallet