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The West needs to fix its money-laundering problem


THE money-laundering scandals keep rolling in, most recently in Estonia, where a subsidiary of Danske Bank reportedly processed some 200 billion euros (S$305 billion) in suspicious payments from around the region in recent years.

Nonetheless, the United States and the European Union (EU) have yet to muster a coordinated response to the problem. On the contrary, the US Department of the Treasury recently chastised the EU Commission for including four US territories (American Samoa, Guam, Puerto Rico and the US Virgin Islands) on a list of jurisdictions with "weak anti-money laundering and terrorist financing regimes". Instead of blaming each other, the US and the EU should be working together to develop a new consensus on how to address the issue.

Money laundering, in its current form, is relatively new. Starting in the late 1980s, financial liberalisation around the world led to a substantial increase in tax evasion. But the problem wasn't really on policymakers' radar until the attacks of Sept 11, 2001, which revealed the connection between money laundering and terrorist financing. Shockingly, though, the US Supreme Court's decision in the Citizens United versus Federal Election Commission case allowed unlimited amounts of so-called dark money to pour into the country's elections. And since Russia's attacks on the 2016 US presidential election, money laundering has again become a matter of national security.

Europe, too, has been subjected to Russian election meddling. But it also faces different problems from those encountered by the US. Because its banking system is fragmented and not well policed, Northern European financial institutions apparently are not always aware of illicit activities occurring under their noses. The US banking system, by contrast, is very well policed. Yet, the US has effectively legalised practices outside of the banking system that should be prohibited.

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After the US adopted the 2001 Patriot Act to combat terrorist financing, US banks were required to know their customers, or risk draconian fines. And in the five years after the 2008 financial crisis, banks operating in the US paid some US$230 billion in fines for various violations. The result was that US banks are terrified of wading into legal trouble, and have therefore established powerful internal compliance departments.

The Patriot Act was effective in cleaning up banking and expelling anonymous shell lenders from the international financial system. The problem is that it applies only to the financial sector. Since 2002, the real-estate sector has been exempted from the law's key anti-money laundering provisions, as are countless shell corporations "headquartered" in Wilmington, Delaware, and law firms, which can transfer money under the protection of attorney-client confidentiality.

These loopholes have had profound implications. The US Department of the Treasury estimates that as much as US$300 billion is laundered domestically each year. And, as at June 2018, US$1.7 trillion in US securities were held in the Cayman Islands, which is more than are held in China (and second only to Japan).

As for Europe, there are similar laws against money laundering, but the situation differs in important ways. The EU takes ownership transparency seriously. Its fifth anti-money laundering directive, adopted in June 2018, goes much further than the Patriot Act by requiring public reporting of beneficiary ownership for all assets across sectors, not just in banking.

Yet, Europe has been too timid in policing cash flows into and out of banks. The fines for money laundering have been so small that they create no real deterrent. Banks themselves view the preventive measures in place as merely a bureaucratic nuisance, and have no incentive to develop the kind of strong compliance departments that one finds in the US.

To establish the appropriate incentives, European financial authorities should follow the US example and start imposing severe fines for banking violations. But another problem is that Europe lacks a powerful anti-money laundering agency on a par with the US Financial Crimes Enforcement Network. As Joshua Kirschenbaum of the German Marshall Fund and Nicolas Véron of the Peterson Institute for International Economics have shown in a recent article, Europe desperately needs a new central body to focus solely on this problem.

The Danske Bank illustrated this shortfall. As a major EU-based bank, it is supervised by the European Central Bank (ECB). But the ECB's remit does not include policing money laundering. That responsibility falls on the Danish financial regulator. But it is not as though Denmark's banking authorities can keep themselves constantly informed of Danske Bank's activities in Estonia. And even when Estonia's banking regulator raised warnings, Danish authorities were slow to react, suggesting that Denmark's dominant bank may in fact be too big to regulate.

For its part, the US needs to stop allowing ultimate beneficiary owners of US assets to hide their identities. The Secretary of the Treasury can end the temporary exemption for real-estate assets with the stroke of a pen. Abolishing anonymous companies and prohibiting law firms from operating as banks, however, will require federal legislation. Fortunately, the new Democratic chair of the House Financial Services Committee, Maxine Waters, has reportedly put these issues at the top of her agenda.

The US and Europe should stop bickering, each take a page from the other's book and fix the glaring flaws in their enforcement regimes. In a global economy, that is the only way to beat the bad guys. PROJECT SYNDICATE

  • The writer 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.

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