Europe’s Dirty Money Scandals Highlight Absence of Credible Cops

(Bloomberg) -- Europe’s long-standing resistance to joint policing of its financial system is coming home to roost.

A widening money-laundering scandal has exposed weaknesses that Russian criminals have exploited for years, increasing the prospect of U.S. authorities stepping in with draconian fines of their own. In Europe, a patchwork of different systems and rules has hindered the policing of money laundering, with no central agency charged with investigating crimes.

With a financial system barely recovered from a decade of serial crises, policy makers in European capitals need to strike a balance between tightening the screws on their own lenders and keeping banks on the road to sustainable profitability. Banks from Stockholm to Amsterdam face uncomfortable questions about their handling of tainted funds, with investigations under way in the Baltic nations, the U.S., the U.K. and the Nordic countries. Almost daily revelations suggest there are more surprises to come on the misconduct.

“It’s a big paradox that you have one single market with free movement for capital and services and so on, but you have 28 different anti-money laundering systems," said Jeppe Kofod, a Danish lawmaker in the European Parliament who helped in a year-long effort to investigate tax evasion and financial crime. “The financial sector is so interconnected and so transnational, it doesn’t make sense to have this kind of fragmented system.”

Suspicious Activity

Recent disclosures highlight the breadth of suspicious activity that has enmeshed banks across the continent. A picture is forming of Nordic banks that, often via their Baltic units, became hubs for Russian criminals who channeled funds to the West. Nordea Bank Abp allegedly handled about 700 million euros ($793 million) in potentially dirty money, some of it linked to the death of Russian lawyer Sergei Magnitsky, according to Finnish broadcaster YLE on Monday.

Smaller countries like Latvia say they’re overwhelmed and have called for a joint European authority to track and fight the flow of dirty money. Bigger countries like Germany are skeptical, saying national authorities are better placed, given money laundering laws haven’t been implemented evenly across the EU. The result is an effort to improve coordination within the existing framework, but that’s insufficient, according to Jose Manuel Campa, the next head of the European Banking Authority, the EU’s top banking regulator.

“The current system is nowhere near good enough to fight money laundering, we’re way too focused on the small fish,” said Klaus Fleischer, a professor specializing in finance at the Munich University of Applied Sciences. “We Europeans have been afraid to impose big fines on banks because they’re already weak and we don’t want to kill them. But banks need to know that misconduct has consequences.”

Higher Fines

European officials have started to hit banks with higher fines for misconduct, but they’re still well short of those imposed across the Atlantic. ING Groep was fined last year 775 million euros ($875 million). U.S. authorities have punished European banks more; even just the whiff of a ban from the American financial system put a Latvian bank out of business last year.

Cases like that show the stakes are high, according to Andrea Enria, who oversees the financial health of lenders at the European Central Bank. Taking a more European approach to combating money laundering is also about ensuring “the safety and soundness” of banks, he told members of the European Parliament in Brussels last month.

Even as EU officials set out to forge a banking union in the wake of the financial crisis, a pan-European enforcement agency was never seriously considered. Policing money laundering has been handled by national authorities. Calls to do more have gone nowhere.

Daniele Nouy, the ECB’s former head of supervision, has called for single agency to tackle money laundering.

“It’s easy to be strong and independent in a tower in Frankfurt in the ECB, or in a tower in Brussels,” Nouy said in a speech in October. “But when you are a small authority in a small country, with limited expertise and experience, and if on top of that you have big neighbors that are prone to do such operations that are dubious, you are in a difficult situation."

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