30 Apr TAX3 Hearing on “Combating Money Laundering in the EU banking system” revealed nothing new
On 26 April 2018, the TAX3 Special Committee held a public hearing on “Combat of Money Laundering in the EU banking system”, with two panels, the first devoted to examining the money laundering risks in the EU banking sector through selected examples of financial institutions which have recently raised concerns of money-laundering, and the second to evaluating the way in which checks and controls should be strengthened at EU and national level to reduce money-laundering risks. Representatives of European institutions, such as the European Banking Authority, the Single Resolution Board and the Supervisory Board at the European Central Bank, of national financial supervisors and financial intelligence units, and of banks presenting money-laundering concerns, were invited to take part at the hearing.
The first part of the hearing hosted the Maltese financial authorities (including the Director of the Financial Intelligence Unit of Malta and the Director General of the Financial Services Authority) answering questions relating to the Pilatus Bank case; and the Latvian authorities on the ABLV Bank case.
In the first case, it should be noted that the matter was uncovered, among other things, thanks to the investigations of the journalist Daphne Caruana, murdered in October 2017; and that there was a recent detention (in March 2018) in the United States of the Director of said bank, Ali Sadr Hashemi Nejad.
In the case of the Latvian Bank, it is an institution that is today liquidating its activities after the United States denounced that the ABLV Bank was systematically involved in money laundering activities, and was insolvent.
Both cases show several things: the difficulties in controlling and monitoring financial authorities in the current European framework, the lack of coordination between different national authorities, and very often the complicity with criminal practices of the national political authorities.
The hearing, however, was quite frustrating, as in both the Latvian and Maltese case, the authorities took refuge either in the “confidentiality rule” or, in the secrecy of summary, to not go further of what had already been published by the media.
However, several relevant issues that represent relevant problems and that can and should be addressed in this Commission were highlighted:
- The problem of cooperation between financial authorities at European level. This is a significant element, that is highlighted in the report on financial authorities carried out by EPRS in 2017 that hinders their ability to perform their work better.
- The problem related to the different competences of the FIU that poses enormous difficulties of coordination, of effectiveness in the fulfilment of its objectives and of coherence in the research process.
- A final problem related to the FIU refers to the allocation of economic and human resources to perform their work, well below the needs.
- The problem of financial control over the deposits of non-residents, which increases the possibilities of opacity in banking activity and collusion between political power and financial power.
Stelios Kouloglou (Syriza) was GUE/NGL speaker, and during the hearing he demanded a reply from Ms Marianne Scicluna, Director General, Malta Financial Services Authority (MFSA), and Mr Kenneth Farrugia, Director of Maltese FIAU, regarding the supervisory activity performed in the Pilatus Bank after the revelations of Daphne Caruana Galizia on Politically Exposed Persons (PEP) using such bank, and even more, after her brutal assassination.
Even when Ms Marianne Scicluna and Mr Kenneth Farrugia replied that an investigation of all accounts, and all transactions from Pilatus Bank was being conducted, they could not provide any details on the results of such investigation, or at least regarding any preliminary observations, as the investigation was said to have started in February 2018 and to be still on-going.
The second part of the meeting discussed the proposal submitted by the European Commission on April 17, 2017 for:
- Direct access to bank account information contained in national, centralised registries by law enforcement authorities and Asset Recovery Offices, enabling the authorities to identify in which banks a suspect holds accounts, in specific cases of serious crime or terrorism.
- Better cooperation: the Directive provides for better cooperation between national law enforcement authorities and the national Financial Intelligence Unit (FIU) as well as between Member States. This includes the possibility for law enforcement to request financial information or analysis from FIUs – including data on financial transactions, as well as the possibility for FIUs to request law enforcement information from their competent national authorities.
Mr Piers Haben, Director of Banking Markets Innovation and Consumers at the European Banking Authority (EBA), commented ahead of the meeting that the EBA’s Chair and directors have, on several occasions over the last years, highlighted the need for AML/CFT supervisors and prudential supervisors to exchange information and work together more in the fight against Money Laundering/Terrorist Financing.
GUE/NGL’s speaker in this part was Martin Schirdewan (Die Linke), GUE/NGL’s Coordinator for the TAX3 Committee, who pointed out that even when the European Parliament has recently adopted the 5th money laundering directive, this new legal framework does not seem to be yet good enough to tackle the problem. Moreover, not all the national authorities are showing a particular interest on their duties to implement the money laundering provisions. Finally, a question was made to the ECB representative regarding what sort of legal restrictions are hampering the ECB from reducing money laundering.
Mr Piers Haben, noted that he was indeed concerned about robust application of the anti-money laundering directive at national level; while Mr Roberto Ugena, Deputy Director General of Legal Services from the Supervisory Board at the European Central Bank (ECB) noted that in order for the ECB to act they would need to have access to the information coming from the anti-money laundering authorities, as such information is not currently available to the ECB.
The video of the meeting is accessible here.
Photo courtesy of the European Parliament’s Multimedia Centre
A short briefing on each of the cases discussed is presented underneath:
Non-resident banking in Latvia allows offshore companies, including shell companies, to hold accounts and transact through Latvian banks. The Latvian banking system’s reliance on non-resident deposits for capital exposes it to increased illicit finance risk.
ABLV is a commercial bank located in Riga, Latvian. ABLV is the second largest bank in Latvia by assets, with the equivalent of roughly $4.6 billion as of March 31, 2017. The majority of ABLV’s customers are high-risk shell companies registered outside of Latvia. Though the published financial information indicates that the bank was well capitalized and profitable, the shareholders of ABLV decided at an extraordinary meeting on 26 February 2018 to voluntary liquidate the bank as a result of the following events:
- On 12 February 2018, the Financial Crimes Enforcement Network (FinCEN) at the US Treasury proposed to ban ABLV from having a correspondence account in the United States due to money laundering concerns raising severe doubts about the soundness of the bank’s business model. After the FinCEN statement, clients started pulling out deposits from ABLV, which eventually resulted in an acute liquidity shortage. ABLV does not adequately conduct know-your-customer (KYC) checks or customer due diligence (CDD) on a number of its customers, does not collect or update supporting documentation from its customers to justify transactional activity, and uses fraudulent documentation in some of its CDD files.
- Moreover, through 2017, ABLV executives and management have used bribery to influence Latvian officials when challenging enforcement actions and perceived threats to their high-risk business.
- FINCEN understood that there were reasonable grounds to believe that ABLV executives, shareholders, and employees have institutionalized money laundering as a pillar of the bank’s business practices. Bank executives and employees are complicit in their clients’ illicit financial activities, including money laundering and the use of shell companies to conceal the true nature of illicit transactions and the identities of those responsible. This was understood as ABLV management permits the bank and its employees to orchestrate and engage in money laundering schemes; solicits the high-risk shell company activity that enables the bank and its customers to launder funds; maintains inadequate controls over high-risk shell company accounts; and seeks to obstruct enforcement of Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) rules in order to protect these business practices. ABLV’s business practices enable the provision of financial services to clients seeking to evade financial regulatory requirements.
- On 18 February 2018, the Latvian banking supervisor – the Financial and Capital Market Commission – imposed a temporary restriction on payments, following the ECB’s respective instruction, in order to allow for a stabilisation of ABLV’s financial situation.
- On 23 February 2018, the ECB determined that ABLV Bank ‒ as well as its subsidiary in Luxembourg ‒ was failing or likely to fail due to the significant deterioration of its liquidity situation, and was to be wound up under the insolvency laws of Latvia and Luxembourg.
- On 24 February 2018, the Single Resolution Board (SRB) decided that it would not take resolution action.
- On 9 March 2018, the Luxembourg Commercial Court, however, decided to refuse the request to place the subsidiary in Luxembourg ‒ ABLV Bank Luxembourg, S.A. ‒ in liquidation. That entity shall now be sold to new investors.
The fact that non-resident banking in Latvia allow offshore companies, including shell companies, to hold accounts and transact through Latvian banks, is an example of the problems encountered in the 3AMLD as well as the 4AMLD, and even the 5AMLD, as this would still be allowed in any of these cases. After hearing at the ABLV case, the first think that comes to our mind is how come FINCEN in the US is able to first raise serious doubts on the soundness of ABLV Bank’s business model, before any other EU institution? Didn’t the Latvian Financial and Capital Market Commission foresee any of the money laundering problems? In this respect, Ms Nouy, Chair of the Supervisory Board of the European Central Bank (ECB), recently pointed out in a public statement on 22 February 2018 that even when breaches of anti-money laundering can be symptomatic of more deeply rooted governance deficiencies within a bank -something that has systemic effects on all the EU economy-, the ECB does not have the investigative powers to uncover such deficiencies, that being a task of national anti-money laundering authorities. Shouldn’t the local and EU institutions involved in anti-money laundering, anti-tax evasion and tax avoidance and financial and monetary control, work together to attack a problem that generates numerous effects in the economy?
The EU is a common market, where controls have been lifted in order to privilege the free movement of capital. This liberation for the benefit of capital is just providing the framework for recurring financial crisis to take place. The example of ABLV is only one of them, and the US has identified it as such not only for its money laundering risk, but basically due to the effect it has in the soundness of the bank’s business model. Ms Nouy mentioned in February 22 that this is a task of national anti-money laundering authorities. If the role of the ECB, together with national Central Banks is not to prevent such crisis -and the prevention of the movement of illicit financial flows through the banking system-, then what is its role?
However, other aspects of the AMLD appear to have been repeatedly violated by the fact that ABLV did not adequately conduct know-your-customer (KYC) checks or customer due diligence (CDD) on a number of its customers, did not collect or update supporting documentation from its customers to justify transactional activity, and uses fraudulent documentation in some of its CDD files. Therefore, that makes us wonder, what is the level of implementation of the 3AMLD and 4th AMLD in Latvia. And what is the level of control that European institutions have on the banking system.
2. Information on the Pilatus Case
According to information received before Mission to Malta of November 30, 2017, the Malta Financial Services Authority (MFSA) received an application for a banking licence from Seyed Ali Sadr Hasheminejad (known as Ali Sadr), the Chairman and main shareholder of Pilatus Bank, in December 2013, and Sadr got the licence in January 2014. Sadr is Iranian, and so should not have been given a banking licence due to international sanctions and risk/compliance procedures on Iran and Iranians. However, Sadr acquired in 2009 a St Kitts & Nevis passport from Henley & Partners, which has a monopoly over the sale of Maltese passports, and used this passport when applying for a banking licence with the MFSA. In May 2014, the US Treasury Department’s Financial Crime Enforcement Network (FinCEN) issued a public advisory warning against Iranians using St Kitts & Nevis passports for financial crime as well as to circumvent international sanctions.
During the Mission to Malta of last November, the representatives from Pilatus Bank, Mr. Hamidreza Ghanbari, Chief Executive Officer; Dr. Claude-Anne Sant Fournier, Head of Legal and Compliance and Mr Luis Felipe Rivera, Chief Operating Officer, observed that they had enlisted the assistance from KPMG to set up the bank in 3 different jurisdictions: UK, IE or MT.
The MFSA and the Maltese FIAU conducted an on-site inspection in March 2016. They stayed 5 days and sent a report in April 2016 to the Bank’s board of directors, who were asked to comment on factual mistakes. Pilatus Bank then engaged KPMG MT for an audit of their activities which concluded only to the need of minor corrections regarding their obligations to prevent money laundering. Following the KPMG Malta audit, transmitted to the FIAU in June 2016, a second onsite visit was planned for August. Pilatus Bank received a letter in September 2016 confirming all issues raised were closed and there were no shortcomings regarding the Due Dilligence (DD) for new costumers and the ongoing monitoring of existing clients.
Asked about the allegations about Azerbaijani clients of the Bank, Mr. Ganbhari explained that Azerbaijan is not considered a high risk country by FATF, but they nonetheless apply enhanced DD to clients from this country.
Asked about the number of STR’s filed to the FIAU, Pilatus Bank mentioned during the Mission to Malta that there were zero in 2016 and in 2017, 4 or 5, but several were related to one client.
On January 16, 2018, the MEPs from the Mission to Malta of November 30, 2017 held after the Maltese resolution, sent their mission report to the President of the ECB, since part of the recommendations required action on the part of the ECB. In particular, the Mission outlined in the report that the ECB and the EBA “should investigate whether the fact that Pilatus Bank continues to hold a license to operate in the EU warrants ECB/EBA intervention”.
As has been mentioned in the report to the ECB, under Article 18 of the CRD IV, credit institutions in the EU may be subject to withdrawal of authorisation when they no longer fulfil the conditions under which authorisation was granted, or when they commit one of the breaches referred to in Article 67 (1) of the same Directive. In particular, Article 14 §2 CRD IV requires competent authorities to “refuse authorisation to commence the activity of a credit institution if, taking into account the need to ensure the sound and prudent management of a credit institution, they are not satisfied as to the suitability of the shareholders or members, in particular where the criteria set out in Article 23(1) are not met.” In addition, Article 91 of CRD IV specifies the fit and proper requirements for the management body, which should be of “good repute and possess sufficient knowledge, skills and experience to perform their duties.”
In line with Maltese national law, the MFSA decided to impose a freeze on the business of Pilatus Bank, including all deposits and withdrawals and any disposal of the bank’s assets. The Regulator also ordered the removal of Mr. Ali Sadr as bank director, suspended his voting rights as a shareholder of the bank and ordered him to refrain from exercising legal and judicial representation of the bank.
3. Information on the Danske Bank and Versobank AS cases
Following a series of Russian and other money laundering scandals at the Estonian branch of Denmark’s Danske Bank that came to a head in 2014, Estonia moved quickly to reduce the amount of non-resident accounts in the banking system, thereby lowering the risk of money laundering through opaque foreign shell companies.
Versobank has been involved in a variety of money laundering schemes, including the infamous “Russian Laundromat” in Moldova. The Laundromat was said to have moved approximately $20 billion out of Russia, primarily through the following route: companies banking at Moldinconbank in Moldova held fake “debts,” which were “paid” by Russian companies moving money out of Russia on behalf of a variety of Russian clients, including wealthy, politically connected businesspeople. Versobank accounts reportedly received $200 million related to the scheme. After a series of four onsite inspections and proposed remediation, Finantsinspektsioon grew disillusioned with Versobank’s prospects for reform. It submitted its recommendation to the ECB in February.
Under the ECB’s Single Supervisory Mechanism, established in 2014 in response to the eurozone crisis, the ECB possesses the sole authority to grant or withdraw a banking license, not the financial regulators of participating European Union member states. The ECB is also responsible for direct “prudential” supervision of banks that have been determined to be “significant entities” on the basis of their size and systemic importance (“prudential” supervision refers to monitoring of things like capital adequacy and lending practices). Prudential supervision of “less significant institutions” is delegated to national competent authorities. At the same time, supervision of compliance with anti-money laundering requirements at banks of all sizes is the responsibility of national regulators. Thus, the ECB has had limited insight into any illicit financial activity occurring at European banks or the risks of such incidences occurring owing to inadequate controls. And, until Versobank, the ECB had never pulled a license on the explicit grounds of money laundering violations.
ECB’s action against Versobank comes just weeks after the targeting in February of Latvia’s ABLV Bank by the U.S. Treasury Department under Section 311 of the USA PATRIOT Act.
During the PANA Committee it was seen that anti-money laundering authorities (financial intelligence units-FIUs) in different EU countries work quite differently. Some have more powers than others when confronted to money laundering cases, as some only have intelligence powers, while others can disseminate information with prosecutors, tax administration or other authorities.
 Notes extracted from the MISSION REPORT following the joint ad-hoc Delegation to Malta (30 November – 1 December 2017) -LIBE and PANA- and other information available at the time of the Mission.
 Ms. Efimova handed herself to the Greek police after arrest warrants were issued by Malta and Cyprus.
 DIRECTIVE 2013/36/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC
 Article 23 §1 CRD IV stipulates that the competent authorities shall assess the suitability of the proposed acquirer in accordance with the certain criteria, inter alia “the reputation of the proposed acquirer” and “whether there are reasonable grounds to suspect that, in connection with the proposed acquisition, money laundering or terrorist financing within the meaning of Article 1 of Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing is being or has been committed or attempted, or that the proposed acquisition could increase the risk thereof.”