Blog Post

The European Union must change its supervisory architecture to fight money laundering

Money laundering scandals at EU banks have become pervasive. The authors here detail the weaknesses the current AML architecture's fundamental weaknesses and propose a new framework.

By: and Date: February 26, 2019 Topic: European Macroeconomics & Governance

Money laundering scandals at EU banks, often linked to Russia, have become pervasive. Reform of antimoney laundering (AML) supervision is urgent. Illicit actors have repeatedly moved billions of dollars through individual banks. This flow sustains the Kremlin’s patronage system at home by serving as an outlet for elites while it simultaneously corrodes institutions, commerce, and politics in Europe.  

The current system, which leaves AML enforcement to national authorities, is broken. As we explained in a recent paper, a new EU agency tasked solely with AML supervision is the antidote. Without dramatic change, the problem will continue to fester.

The existing architecture has three fundamental weaknesses. First, national AML supervisors have no efficient way to communicate and coordinate, neither with one another nor with the European Central Bank, which has overall responsibility for bank oversight in the euro area. Second, the system leaves supervisors in very small countries on their own, with relatively limited capacity and resources, in the face of a sophisticated transnational threat. Third, it encourages the growth in ‘weak link’ countries of financial sectors catering to suspect clients of Russian and other origin. The outcome is undue political influence and sometimes even capture.

A dedicated European-level AML agency would solve coordination problems, develop strong capability and deep expertise, and enjoy sufficient political independence. This would result in more proactive supervision, more aggressive fines, and the establishment of credible deterrence.

Recent cases have touched Cyprus, Denmark, Estonia, Germany, Latvia, Malta, the Netherlands, and the United Kingdom. In the most dramatic case, €200 billion was pumped through the Estonian branch of Danske Bank, Denmark’s leading lender. At Danske Bank’s branch in Estonia, non-resident shell-company clients moved massive sums through a concentrated number of accounts, generating huge fees. Management knew that the clients represented unknown sources of money from Russia and the Commonwealth of Independent States, but they failed to act for years.

No one can say with certainty whose money transits these banks, and that is part of the problem. Professional facilitators set up opaque channels precisely to obscure the ultimate purpose of these transactions. Sometimes the proceeds of corruption may be used to purchase luxury real estate. Other times, the flow may stem from, or facilitate, organised criminal activity. And there is no reason that the Russian government could not tap these same networks to carry out interference activities in the West. The flow likely contains elements of all of these, and more.

Since 2012, the European Central Bank has been the prudential supervisor of all banks in the euro area, overseeing governance, capital adequacy, and lending practices. But AML supervision is excluded as a ‘business conduct’ issue, which remains the sole province of national authorities. Meanwhile, financial services are passported across the entire Single Market, and fines for AML violations have generally been small – although they have recently begun to increase in some member states.

As was the case with prudential supervision before 2012, today’s AML architecture leads to perverse supervisory incentives. It leaves too many avenues for untoward political and regulatory influence on the part of those who benefit from a reliance on money of dubious provenance, creating a vicious circle of supervisory failure in the more vulnerable countries. Even if some member states have effective AML supervisory regimes, the failure is systemic from a European perspective because there is always a weak link.  

The fix, unavoidably, is a strong central authority at the European level. The European Union has recently decided to enhance the AML responsibilities of the European Banking Authority (EBA), but this change is too incremental to fix the problem. The EBA can only intervene too late and not forcefully enough. Under the soon-to-be-enacted legislation, it will be unable to do much until after a failure of national authorities has been established, and even then there would be no meaningful penalties.

Instead, a new agency should serve as a single information hub and a unitary decision-making body that takes proactive measures. The central authority may then re-delegate certain tasks and decisions to national agencies, as has happened with competition policy enforcement, or indeed prudential supervision, for example.

A new, dedicated EU AML agency should supervise banks and non-banks alike across the Single Market. It should not be the European Central Bank, because its authority would be limited to the banking sector and only within the euro area, leaving scope for weak links at non-bank institutions or in noneuro-area countries. As the US experience demonstrates, fragmentation of AML supervision across segments of the financial sector impairs its efficiency. In a first phase, at least, financial intelligence units would remain scattered at the member-state level, but the European AML supervisor can be equipped to interact with all of them in an efficient way.

To be sure, the creation of a new agency would increase the complexity of the EU supervisory landscape and should not be taken lightly. But the critical importance of AML supervision to the integrity of Europe’s financial system justifies the effort. It would also demonstrate to the general public that the European Union is able to address its most serious challenges credibly and not just tinker at the edges. AML reform is a top priority from a European financial sector and security perspective. It would be good European politics, too.


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 More on this topic More by this author
 

Opinion

Europe’s recovery gamble

Next Generation EU, was rightly hailed as a major breakthrough: never before had the EU borrowed to finance expenditures, let alone transfers to member states. But the programme and its Recovery and Resilience Facility amount to a high-risk gamble.

By: Jean Pisani-Ferry Topic: Finance & Financial Regulation Date: September 25, 2020
Read about event
 

Past Event

Past Event

The Sound of Economics Live: The State of the Union going forward

In the first Sound of Economics Live episode after summer we look at the State of the Union address delivered by Ursula von der Leyen.

Speakers: Giuseppe Porcaro, André Sapir, Guntram B. Wolff and Alicia García-Herrero Topic: Energy & Climate, European Macroeconomics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 16, 2020
Read article More on this topic More by this author
 

Opinion

Without good governance, the EU borrowing mechanism to boost the recovery could fail

The European Union recovery fund could greatly increase the stability of the bloc and its monetary union. But the fund needs clearer objectives, sustainable growth criteria and close monitoring so that spending achieves its goals and is free of corruption. In finalising the fund, the EU should take the time to design a strong governance mechanism.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 15, 2020
Read article More by this author
 

Opinion

The EU’s Opportunity to Turn Its Markets Toward the Future

Meeting the fiscal demands of COVID-19 will require the European Union to borrow on capital markets more than ever, and for European pension funds and households to look more widely for ways to build their nest eggs safely. The EU should take the challenges of the pandemic and Brexit as a chance to get its financial infrastructure house in order.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 16, 2020
Read about event More on this topic
 

Past Event

Past Event

Tackling too-big-to-fail banks: have the reforms been effective?

Evaluation of the global reforms implemented to deal with "too-big-to-fail banks".

Speakers: Alexandre Birry, Claudia M. Buch and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 9, 2020
Read article Download PDF More on this topic
 

Policy Contribution

Should Denmark and Sweden join the banking Union?

Though outside the euro area, Denmark and Sweden could benefit from joining the European Union’s banking union. It would provide protection in case of any need to resolve at national level a large bank with a Scandinavian footprint, and would mark a choice in favour of more cross-border banking. But joining the banking union would also involve some loss of decision-making power.

By: Dirk Schoenmaker and Svend E. Hougaard Jensen Topic: Finance & Financial Regulation Date: June 24, 2020
Read article More by this author
 

Podcast

Podcast

Rebooting Europe: a framework for post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 15, 2020
Read article More by this author
 

Opinion

Save markets to save the single market

It’s time for the EU to make quick and indispensable progress in forming a capital markets union.

By: Maria Demertzis Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 15, 2020
Read article Download PDF
 

Policy Brief

Rebooting Europe: a framework for a post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance Date: May 13, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Banks and Loan Losses in the Pandemic Turmoil

At this online event we will record an episode of the Sound of Economics, Bruegel's podcast series. In this episode, we discuss the implications of the coronavirus crisis on financial stability and credit availability.

Speakers: Giuseppe Porcaro, Nicolas Véron and Guntram B. Wolff Topic: Finance & Financial Regulation Date: March 25, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

Can the European Green Deal kill the single market?

The European Green Deal is one of the landmarks of Ursula von der Leyen's Commission. But, without an ambitious investment behind it, what could be its potential implications for the EU? Could it go as far as to threaten the EU's single market? This week, Renew Europe's vice-president, MEP Luis Garicano, joins Guntram Wolff and Maria Demertzis to discuss not only the European Green Deal but also the EU Budget and the Banking Union. Disclaimer: this episode was recorded on the 20th of February, before Bruegel hosted the event "The Ressurection of the European Banking Union".

By: The Sound of Economics Topic: Energy & Climate Date: February 25, 2020
Read about event More on this topic
 

Past Event

Past Event

The resurrection of the European Banking Union

At this event, Luis Garicano, member of the European Parliament, presented his two proposals to resurrect the European Banking Union: "a Safe Portfolio" and "a Single Resolution Board +".

Speakers: Tom Dechaene, Luis Garicano, Michala Marcussen and Guntram B. Wolff Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 20, 2020
Load more posts