Financial Crime Highlights: 25th Feb-1st March

March 1, 2019 6 minute read

Head of Financial Crime, Livia Benisty shares her financial crime highlights from the week that’s past. 

1. EU Commission defeated over money laundering watchlist.

Turns out the US Treasury weren’t the only ones who didn’t like the blacklist. 27 out of 28 countries blocked its publication, on the basis of how it was drawn up.

Last week the the US came out strongly against the list over concerns with how it was compiled, its undermining of FATF as the global watchdog, and obvious upset over 4 US territories being on there. The inclusion of Saudi Arabia also raised diplomatic eyebrows. Washington’s ambassador to the EU said the way it was handled was ‘despicable’ and denounced the political motives behind it.

Two points to mention:

Firstly, the EU historically has been viewed as leading on financial crime regulation. However, it is testament to the importance of effective supervision and oversight that this comes in the middle of calls for the Parliament to have greater powers, following a series of (well-documented) scandals of late. A report issued on Wednesday (27th February) calls for a targeted police force, an AML watchdog and a phase out of the Golden Visa scheme, among other measures. There is an inherent conflict in the body being called on to do more, and members showing the limits of the Commission’s powers on the same day.

Secondly, there’s an issue around how to really extract political motives from most areas of regulation or guidance around financial crime. Sanctions are explicitly a tool of foreign policy. The US denouncing the list was largely driven by the inclusion of its territories. Lobbying from the UK against the list had much to do with concerns over relations with Saudi Arabia and the economic fallout which could result. Even the FATF Mutual Evaluation assessments are influenced by lobbying and FATF priorities are set by the President, who oversees the execution of those priorities by the Secretariat. It’s worth noting the current President is American Marshall Billingslea, soon to be succeeded by Xiangmin Liu of China.

I’m interested to see where this goes from here.

2. Scope of Swedbank’s money laundering woes widens

Following its implication in the Danske scandal last week, Swedbank is now also being investigated for possibly funneling money for the exiled former president of the Ukraine, Viktor Yanukovich.

The bank had commissioned Ernst & Young (EY) to conduct an external investigation into the allegations. Within a week Swedbank replaced EY with Forensic Risk Alliance, apparently due to EY being under Danish investigation for links to the Danske scandal. Swedbank lost more than a fifth of its market capitalisation in the two days following being linked to the Danske case.

3. Venezuelan sanctions program causing problems for US Financial Institutions

As sanctions against Venezuela mount, the WSJ reported on the issues this is causing for banks. The measures target the government, the state-owned oil giant (Petróleos de Venezuela SA, or PdVSA), and its subsidiaries in particular. Economic ties between the two countries are rooted in the oil and gas industry, which feeds into cars and heavy machinery manufacturing. As we saw with Russian sanctions on aluminium, the application of sanctions is never simple when it targets structurally important, sprawling industries; the banks are tasked with untangling long chains of financial transactions with subsidiaries and third party vendors who could be covered by restrictions.

This isn’t only the case with sanctions. Global financial flows are intrinsically complex, and uncovering the risk inherent in a supply chain is a large area of focus in regulation right now, including for bribery and corruption and modern slavery.

4. Barclays have frozen a bunch of student bank accounts over fears of money laundering

The accounts belong mainly to Chinese students at UK universities. The 95 accounts contain an estimated £3.6m of suspicious funds. Additional money passed through the accounts with some of it being used to buy luxury goods to send back to China.

The report says that some of these account holders might not understand exactly what they were being used for, or the severity of the crime. The investigation is focusing on informal money transfer networks used by organised crime groups.

This news came out yesterday (28th February), but I’ll be watching to see how this case is ‘marketed’. Money mules is a very hot topic on the financial crime stage at the moment. Account Freezing Orders were applied for by the NCA, HMRC, City of London Police and other forces nationally; these powers were introduced a year ago by the Criminal Finances Act (of Unexplained Wealth Orders fame). The action was co-ordinated by the National Economic Crime Centre, set up last year.

Why do I say all of this? As RUSI noted at a recent event discussing the UK’s Mutual Evaluation Report, many people in the industry wondered quite how such high marks were attained, given London’s involvement in so many of the recent large money laundering cases, particularly through the real estate market. The MER focussed on the last three years of effectiveness. These measures and bodies introduced more recently will have played a part in the high rating and the UK will be keen to demonstrate their value before the follow up assessment.

Secondly, as my colleague Isabella Chase pointed out to me this afternoon, money-muling is usually associated with vulnerable and low income students. This doesn’t appear to be the case here. Infact this points more to a wider story around Chinese organised crime (see stories about BBVA freezing 5,000 accounts belonging to Chinese nationals and Caixabank being investigated last year).

5. Revolut…oh dear

News reported that Revolut switched off their sanctions screening system for three months after they got too many false positives. Nik Storonsky tried to ‘set the record straight’ in the Revolut blog saying the system that was switched off had been implemented in addition to existing controls (which remained switched on) and at no point were there any breaches.

It’s hard to know what to believe around this, especially following a series of ‘confusing’ moves by the company recently, the chain of compliance and risk officers that have left the company, and last year’s news that they self-reported to the FCA. I wrote in an article last year following the self-reporting that without more information we couldn’t really know if their controls were lacking, but the fact they picked up on something and reported was a positive act not replicated by many banks. I may be forced to eat my words. What we can safely predict are the news stories which will come talking about FinTech playing loose with compliance and debating whether technology is the root of, or the solution for, our banking pains. It is unfortunate that the industry will be tinged with the experience of one, particularly controversial company.