The EBA places deposit protections in the AML spotlight, the fallout from the Baltic money laundering scandal continues to unfold, and the US spares banks from Hong Kong-related sanctions.
We share our financial crime regulatory highlights from the week of 14 December 2020.
The EBA Proposes Changes to Deposit Protection Payouts
The European Banking Authority (EBA) this week called on the European Commission to strengthen the legal framework around identifying and dealing with money laundering risks, particularly as it relates to deposit protection.
In its opinion, published December 14, the EBA set out several proposals aimed at changing the current framework to prevent bad actors from getting paid by deposit guarantee schemes (DGS) when financial institutions fail. The proposals focus on information sharing between Deposit Guarantee Schemes Designated Authorities (DGSDAs) and AML/CFT authorities, as well as improving the process and bringing greater transparency to DGS payouts.
Among them, the EBA recommends establishing a legal basis for such information sharing, both during the usual course of business and leading up to any potential DGSA intervention or payout. Further, if a bank were to fail, the failed institution would need to supply the relevant FIU with a list of high-risk customers. In cases where the FIU determines there is a legitimate AML/CFT risk, the EBA recommends establishing a legal basis for deferring or suspending payouts to those depositors.
In addition, while the EBA stopped short of recommending a particular method, the regulator commented on the need to ensure traceability of any funds paid out to depositors as a result of a DGS action.
The EBA also offered guidance to national authorities on actions they can take without waiting for — and perhaps in anticipation of — amendments to the current AML/CFT and DGS framework. These actions include ensuring that DGSAs receive information about depositors charged with money laundering offenses, deposits subject to governmental restrictions, and other depositors that should potentially not receive a DGS payout.
Finally, the EBA recommended that national authorities take care to notify depositors of the potential for exclusion — by providing general information on websites as well as direct communication to the individual depositors — and offered suggestions for ensuring consistent messaging.
While there is no legal weight to these recommendations at this time, financial institutions operating within the EU’s jurisdiction should take note: the European Commission is likely to consider incorporating some or all of these proposals into future legislations.
US Probes Nordic Banks Over AML Failures
The Department of Justice, FBI, and other US authorities are probing SEB, Swedbank, and Danske Bank for possible AML violations and fraud, according to a December 15 report by the Swedish newspaper Dagens Industri. The newspaper linked the investigation to the massive failures in the banks’ AML controls that led to the Baltic money-laundering scandal — which broke in 2018 and has already resulted in fines from local regulators for all three banks. It confirmed that US investigators had formally reached out to Sweden for help.
Dagens Industri did not offer information on its sources, and US authorities have not responded to requests for comment. But while the FBI’s involvement and allegations of fraud may be new developments, the investigation itself isn’t: all three banks have already confirmed that US authorities have been investigating possible violations of anti-money laundering regulations.
What has become possibly the largest money-laundering scandal in Europe first involved just Danske Bank, which failed to detect the movement of over €200 billion of illicit funds through its Estonian branch between 2007 and 2015. It had also failed to identify around 15,000 customers that should have raised flags and warranted additional due diligence. The probe into those failures later expanded to encompass Swedbank, which reportedly processed suspicious payments related to those flowing through Danske Bank. Finally, SEB was identified by Swedish regulatory authorities as having similar compliance gaps during the period from 2015 to 2019.
It’s also worth noting that at least some of the illicit money flows linked to the Baltic scandal have been traced to Russian money launderers, raising the possibility of US sanctions violations — and the US is not known for being lenient with those fines. In 2019, for example, Standard Chartered and UniCredit Group each paid over $1 billion in fines due to sanctions violations.
So while the US authorities’ investigation into the Baltic scandal and any findings will remain under wraps for now, the latest report from Dagens Industri is simply a reminder that the scandal isn’t in the rearview mirror for any of these three banks just yet.
Banks Spared from Hong Kong-Related Sanctions
The US government hasn’t yet found evidence that any foreign financial institution “knowingly” did significant business with Chinese individuals sanctioned in response to China’s enforcement of a controversial national security law in Hong Kong, the Treasury Department announced on December 11.
The announcement was a highly anticipated follow-up to the Hong Kong Autonomy Act passed by Congress in July and the subsequent sanctions placed on 11 officials — including Hong Kong Chief Executive Carrie Lam, and Hong Kong’s police commissioner, Chris Tam — in August over their roles in implementing the law. In October, the State Department issued a report that singled out 10 of those individuals and put foreign banks on notice that any found to be doing business with them would be subject to secondary sanctions. It would specify those banks within 60 days.
The threat of secondary sanctions seems to have worked: since then, many major financial institutions that operate within China and Hong Kong, including Citigroup, HSBC, Bank of China, and Standard Chartered, have taken steps to sever ties with the sanctioned individuals. Hong Kong’s Carrie Lam, for instance, admitted that her salary is being paid in cash and that she’s been keeping “piles of cash at home” since her bank accounts were closed earlier this year.
Nevertheless, the news comes as only a small reprieve. The US Treasury intends to continue monitoring for noncompliance with US sanctions and is expected to take action in the event significant business activity is detected.
Yet financial institutions are feeling pressure from Beijing too. Earlier this year, HSBC faced criticism from Hong Kong’s former chief executive for staying silent on Beijing’s national security law. The bank’s Asia-Pacific chief executive signed a petition supporting the legislation just a few days later — a decision that was lambasted by US Secretary of State Mike Pompeo.
With US-China relations continuing to deteriorate, more financial institutions will need to tread carefully lest they also find themselves caught in the geopolitical crossfire in the coming months.
A Year in Review: 2020 AML & Anti-Financial Crime Highlights
As we close the books on 2020, we took a look back on an intense year of sanctions, designations, money laundering, cyber crime, fraud and the key trends in AML & anti-financial crime compliance from this year.