Blog Post

Latvia’s money laundering scandal

Latvia’s third largest bank ABLV sought emergency liquidity from the ECB and eventually voted to start a process of voluntary liquidation, after being accused by US authorities of large-scale money laundering and having failed to produce a survival plan. What does it mean for the ECB?

By: Date: April 9, 2018 Topic: Finance & Financial Regulation

The US Treasury Department’s Financial Crimes Enforcement Network said on February 13th 2018 that it was seeking restrictions on ABLV bank, on suspicion of involvement in money laundering and helping clients violate United Nations sanctions on North Korea. Separately, central bank chief Ilmars Rimsevics was detained on Saturday on suspicion that he solicited a bribe. Shaun Richards has a good summary of the events, with relevant news quotes that you may want to read. This Reuters summary is also very good to catch up with the basic facts.

A piece in Politico Europe points out that the ECB has been quick to avoid responsibility over the ABLV case. In a statement, Danièle Nouy, chair of the ECB’s supervisory board, said that “breaches of anti-money laundering can be symptomatic of more deeply rooted governance deficiencies within a bank but the ECB does not have the investigative powers to uncover such deficiencies.”

But the Politico piece finds that the ECB itself seems to be split-minded about taking on such a role. In an interview with a Latvian publication in March 2017, Nouy rejected any calls for the euro-zone central bank to take on money-laundering-related responsibilities, saying: “The Single Supervisory Board cannot take on such a responsibility, because we already have many tasks which require our full attention.” But in a letter to Green MEP Sven Giegold five months later, she admitted that conduct risk – which includes money laundering – is “one of the key risks for the euro area banking system.”

Richard Milne writes for the FT that Latvia’s banking scandal leaves Europe’s regulators red-faced and that the forced liquidation of ABLV is a humiliation for both the Baltic country and European authorities. Of all the embarrassing things about the Latvian banks’ money laundering scandal, perhaps the most striking is the fact that the problems were laid bare not by local or European authorities but by Americans.

The affair has revealed serious deficiencies in how Europe fights money laundering. Competence for checking breaches of anti-money laundering rules lies with national authorities, not with the ECB, which was the banking supervisor of ABLV. ABLV also raises awkward questions for the ECB. Even though it has no competence for money laundering, the ECB’s supervision arm – the Single Supervisory Mechanism – scrutinises the business models and governance of banks.

Ferdinando Giugliano and Clive Crook at Bloomberg think that the ECB is the euro zone’s most powerful policy-making institution; but even so, the failure of the Latvian bank shows that the ECB doesn’t have all the powers it needs. Gaps remain, and they put Europe’s financial system at risk. They point to the decision of the Single Resolution Board (SRB) that ABLV was too small to pose a systemic danger, and was therefore to be liquidated under national insolvency procedures.

Meanwhile, a Luxembourg court rejected calls from yet another national regulator to close ABLV’s local branch, saying it was financially strong, which flatly contradicts the ECB’s assessment. This ongoing muddle calls the credibility of the euro zone’s top financial regulator into question. The ECB is in charge of prudential supervision, but not money laundering: so long as this is left to member states, banks will be watched more closely in some countries than in others. That undermines the supervisory system and makes it harder to build a single capital market for the euro zone. Responsibilities over money laundering should be handed to a European institution.

Frances Coppola looks at the chain of the events that led to the liquidation, and argues that ABLV would have died anyway: even if there had not been a bank run, the bank would not have survived the action that the US Treasury proposed to take against it. FinCEN’s accusation hangs on the fact that ABLV has – or had – very high levels of non-resident deposits and an extremely large and risky non-resident customer base. FinCEN says that 90% of its customers are “high-risk per ABLV’s own risk rating methodology” and are “primarily high-risk shell companies registered in secrecy jurisdictions”, some of which are connected to sanctioned individuals and companies. Most damning of all, FinCEN alleges that the bank not only facilitated transactions for North-Korea-sanctioned entities, but also that it lied about doing so. ABLV, therefore, was not just laundering money, it was systematically breaking sanctions all over the world.

Coppola thinks this also explains why the ECB imposed a moratorium on payments. A high proportion of ABLV’s non-resident deposits were of dubious provenance, and those were the deposits that ran the moment FinCEN made its announcement. The ECB’s emergency liquidity assistance would have facilitated the movement of money suspected of being laundered. The only question is why it took the ECB six days to impose the moratorium, given the seriousness of FinCEN’s allegations and the fact that the involvement of Latvian banks in international money laundering networks has been an open secret for years

Joshua Kirschenbaum points out that, meanwhile, Estonia’s financial regulator announced on March 26th that the ECB, acting at Estonia’s request, had revoked the license of Versobank AS, a small Estonian bank catering to clients based in Russia and Ukraine. The bank had been involved in a variety of money laundering schemes, including the infamous “Russian Laundromat” in Moldova. Recent developments in Latvia and Malta – as well as long-standing issues in Cyprus – have started a much-needed discussion about whether money laundering supervision in Europe should be entrusted to a central authority that could proactively revoke or restrict licenses without needing to wait for national authorities to submit a recommendation.

This policy discussion presents an opportunity to evaluate which national regulators need to be further strengthened, how to deepen European information-sharing to combat illicit financial activity, and whether there needs to be a more assertive role for European law enforcement in combatting Russian money laundering. For the first time, the ECB has now taken explicit, unequivocal action to shut down a bank for money laundering violations. This precedent gives the ECB and European national regulatory authorities a new and powerful tool to combat Russian illicit financial activity in Europe. The more aggressive stance also augurs well for enhanced US-EU cooperation.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF
 

External Publication

How Can the European Parliament Better Oversee the European Central Bank?

This paper, written at the request of the Committee on Economic and Monetary Affairs, assesses how the European Parliament holds the European Central Bank accountable. The same exercise is done for the Bank of Japan, in order to identify possible lessons for the ECB and the European Parliament.

By: Grégory Claeys and Marta Domínguez-Jiménez Topic: European Macroeconomics & Governance, Global Economics & Governance Date: September 23, 2020
Read article More on this topic
 

Blog Post

Boosting the resilience of Europe’s financial system in the coronavirus crisis

Europe has a heavily bank-based financial structure, but bank-based financial structures are associated with higher systemic risk than market-based financial structures. The higher level of systemic risk in Europe suggests caution when pursuing policies that stimulate risk taking and debt creation by banks, especially in the wake of COVID-19. Priority should be given to financial diversification and equity finance.

By: Joost Bats, Aerdt Houben and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: July 17, 2020
Read article Download PDF
 

Policy Contribution

Is the COVID-19 crisis an opportunity to boost the euro as a global currency?

The euro never challenged the US dollar, and its international status declined with the euro crisis. Faced with a US administration willing to use its hegemonic currency to extend its domestic policies beyond its borders, Europe is reflecting on how to promote it currency on the global stage to ensure its autonomy. But promoting a more prominent role for the euro is difficult and involves far-reaching changes to the fabric of the monetary union.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 5, 2020
Read article More on this topic
 

Opinion

The Independence of the Central Bank at Risk

The ruling of the German Federal Constitutional Court (GFCC) of May 5 on the ECB’s monetary policy affects not only the relation of Germany to the European Central Bank (ECB) and the Court of Justice of the European Union (ECJ) but also the constitutional foundations of monetary policy.

By: Peter Bofinger, Martin Hellwig, Michael Hüther, Monika Schnitzer, Moritz Schularick and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 2, 2020
Read article Download PDF
 

Policy Contribution

COVID-19’s reality shock for external-funding dependent emerging economies

COVID-19 is by far the biggest challenge policymakers in emerging economies have had to deal with in recent history. Beyond the potentially large negative impact on these countries’ fiscal accounts, and the related solvency issues, worsening conditions for these countries’ external funding are a major challenge.

By: Alicia García-Herrero and Elina Ribakova Topic: Finance & Financial Regulation, Global Economics & Governance Date: May 28, 2020
Read article Download PDF More by this author
 

Policy Contribution

European Parliament

The European Central Bank in the COVID-19 crisis: whatever it takes, within its mandate

To keep the euro-area economy afloat, the European Central Bank has put in place a large number of measures since the beginning of the COVID-19 crisis. This response has triggered fears of a future increase in inflation. However, the ECB's new measures and the resulting increase in the size of its balance sheet, even if it were to be permanent, should not restrict its ability to achieve its price-stability mandate, within its legal obligations.

By: Grégory Claeys Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: May 20, 2020
Read article More on this topic More by this author
 

Opinion

The message in the ruling

The German Constitutional Court's ruling on the ECB's asset purchase programme is open to much criticism but it can hardly be blamed for raising an important question.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: May 12, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

An analysis of the German Constitutional Court's ruling on the ECB QE programme

The German Constitutional called today on the ECB to justify its bond-buying program. What does today's ruling of the German Constitutional Court mean for the ECB's QE program? Could such a decision open a precedent when it comes to contesting EU law? Today, Giuseppe Porcaro and Guntram Wolff are joined by Franz Mayer, chair of Public Law at the University of Belefield, to analyse the German Constitutional Court's ruling.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 5, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: An analysis of the German Constitutional Court ruling on the ECB QE programme

What does today's ruling of the German Constitutional Court mean for the ECB's Quantitative Easing programmme

Speakers: Franz Mayer, Giuseppe Porcaro and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2020
Read article More on this topic
 

Opinion

Monetisation: do not panic

The extraordinary operations that are under way in most countries in response to the COVID-19 shock have raised fears that large-scale monetisation will result in a major inflation episode. This column argues that so far, there is no evidence that central banks have given up, or are preparing to give up, on their price stability mandate. While there are obviously some reasons to worry, central banks are doing the right thing and the authors see no reason to panic.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: Finance & Financial Regulation Date: April 14, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: The macroeconomic policy response to the COVID-19 crisis

Which macroeconomic policy response is the best option to deal with the crisis currently unfolding and will ensure that the recovery will be as quick as possible?

Speakers: Grégory Claeys, Giuseppe Porcaro, Lucrezia Reichlin and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
Read article Download PDF More on this topic
 

External Publication

Facing the lower bound: what will the ECB do in the next recession?

In responding to the global financial crisis, the ECB has pushed its monetary policy into unchartered territories . Today, it appears increasingly constrained by persistently low interest rates. This paper seeks to understand this challenge and assess whether its toolkit would allow the ECB to weather a European recession.

By: Aliénor Cameron, Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance Date: March 27, 2020
Load more posts