October 23, 2019

October 23, 2019

Subscribe to Latest Legal News and Analysis

October 22, 2019

Subscribe to Latest Legal News and Analysis

October 21, 2019

Subscribe to Latest Legal News and Analysis

The EU’s Efforts to Combat Money Laundering, the Financing of Terrorism and Corruption Seem to Overlook a Very American Approach: Prosecute People

A Modest Proposal

The European Union (“EU”) recently has grappled with a series of massive money laundering scandals and strategized about how to more effectively combat international money laundering and corruption. Generally, the EU has continued to issue a series of reports identifying systemic vulnerabilities to money laundering and suggest process-based recommendations for how to address future threats. These recommendations typically mirror the same range of process-based improvements set forth in earlier reports: from enhancing cross-border information sharing to increasing resources for adequate implementation and enforcement of anti-money laundering (“AML”) and counter financing of terrorism (“CFT”) policies implemented by EU member states and financial institutions. Noticeably absent from these recommendations is one of the most powerful deterrents available – and a distinctly American approach – prosecuting the bad actors.

Although many of the recent EU money laundering scandals rest on conduct occurring years ago, the recurring waves of scandals strongly suggest that the EU – like the U.S. – has a serious problem with money laundering that is not going away any time soon. They likewise indicate that the EU’s financial system will continue to be abused by bad actors who appear to be unfazed by any potential consequences. The EU therefore should consider emulating – at least in part – the American approach of more aggressively investigating and prosecuting individuals, including the corrupt politicians, kleptocrats, drug dealers, fraudsters, and other criminals from around the globe who are laundering sometimes massive amounts of funds through European financial institutions.

Very recently, in a different but related context, the Chairman of the U.S. Securities and Exchange Commission (“SEC”), Jay Clayton, delivered a speech during which he bemoaned his perception that his foreign counterparts failed to rigorously enforce their own anti-corruption laws. Specifically, Chairman Clayton asserted the following:

Corruption is corrosive. We see examples where corruption leads to poverty, exploitation and conflict. Yet, we must face the fact that, in many areas of the world, our work may not be having the desired effect. Why? In significant part, because many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws.

Granted, the above comments pertained specifically to enforcement of the Foreign Corrupt Practices Act (“FCPA”), and arguably the comments were in furtherance of a pro-American message regarding international competition between countries. The comment nonetheless exemplifies a certain American perception: the U.S. aggressively prosecutes individuals, whereas Europe does not. Obviously, this issue entails a lot of cultural baggage on both sides.

Although there are viable criticisms of the U.S. approach (both in theory and in practice), and although the EU’s strong focus on process and institutions’ AML and CFT systems is critical, any government’s enforcement “tool bag” must include targeted prosecutions of the people responsible for the laundering violations. Otherwise, few bad actors around the world will think twice about continuing to turn to EU institutions for their laundering needs. This blog post explores this idea.

Recent AML Scandals Erupting in Europe

In the past year, several high-profile international money laundering schemes have rocked the EU and caused it to re-examine how to prevent and address money laundering in the future. We will note some of them here; we do not purport to provide a full inventory of these emerging scandals.

The highest-profile of these scandals is undoubtedly the colossal Danske Bank scandal: in the fall of 2018, an internal investigation revealed that Danske Bank processed approximately $234 billion in suspicious transactions by thousands of non-resident customers from 2007 to 2015. According to this report, the Estonian Danske Bank branch failed to implement adequate AML procedures and the parent Danske Bank Group failed to detect and address numerous red flags. Recent European reports have stated that Danish prosecutors charged several former Danske Bank employees in sealed indictments for breaching the country’s money laundering laws. Reports indicate that individuals charged include: (1) Thomas Borgen, Danske’s former CEO; (2) Henrik Ramlau-Hansen, the bank’s former financial director and, until recently, Denmark’s Chair of the Financial Supervisory Authority; (3) Lars Morch, a member of Danske’s executive board and head of business banking; and (4) Flemming Pristed, former Group General Counsel. But these prosecutions appear to be an exception to the EU norm – focusing on addressing systemic vulnerabilities rather than rooting out the money launderers themselves.

Moreover, it appears that authorities have not charged any of the bank’s former customers. Allegedly, the misconduct is attributable primarily to a series of already-identified U.K. and Russian shell companies which held accounts set up through the single Estonian branch. Consequently, identifying at least some of the alleged criminals who laundered their considerable sums of dirty funds through this branch presumably would be possible.

One example of this phenomenon is the scandal concerning Dutch bank ING N.V. which, in September 2018, agreed to pay a record $899.8 million fine for failing to detect and address money laundering and other criminal activities using the bank’s accounts. Dutch prosecutors claimed that from 2010 to 2016, ING’s Netherlands branch failed to sufficiently implement the Dutch Anti-Money Laundering and Counter-Terrorism Financing Act because the bank failed to respond to known weaknesses in customer due diligence policies and to report suspicious transactions. Notably, Dutch authorities did not prosecute any individuals employed by the bank, nor anyone associated with the underlying criminality.

In yet another Nordic scandal, Swedish public television reported this year that Stockholm-based Swedbank, which is the largest bank operating in Estonia, purportedly processed gross transactions of up to $22 billion per year from 2010 to 2016 through Estonia and from high-risk residents primarily from Russia. As we previously blogged, financial supervisory authorities from Sweden, Estonia and Denmark announced that they were opening investigations into the bank and working with authorities in Lithuania, Latvia and Estonia to trace the Danske Bank transactions. The Swedish Financial Supervisory Authority, which plans to publish the conclusions of its probe into alleged money laundering in the Baltics, recently announced that its report will not be published until the beginning of next year. Just today, Swedbank issued a press release stating that it has answered questions posed to it by the Financial Supervisory Authorities in both Sweden and Estonia, and admitting that the bank’s AML program has had, and still has, “certain shortcomings.”


Stockholm

Further examples are possible but unnecessary. The clear question is, what can be done going forward?

The EU’s Response: Focus on Process and Financial Institutions’ Policies and Programs

The ability of criminals and terrorists to swiftly transfer funds between bank accounts enables them to more easily prepare their acts of terror or to illegally launder the proceeds of crime across different EU member states. To address this challenge, the EU has developed a solid regulatory framework for countering money laundering and terrorist financing, in line with international standards adopted by the Financial Action Task Force (“FAFT”). FAFT, about which we have blogged here and here, is an inter-governmental policymaking body focused on establishing international standards and policies to combat money laundering and the financing of terrorism. Since its creation in 1989, FATF has issued 40 recommendations to fight money laundering and 9 special recommendations to fight terrorist financing.

On July 24, 2019, the European Commission adopted a Communication to the European Parliament and Council summarizing a series of reports concerning the EU’s implementation of the AML and counter-terrorist financing framework from 2012 through 2018. These reports included: (1) a Supranational Risk Assessment Report; (2) a report on publicly known money laundering cases concerning EU banks; (3) a Financial Intelligence Unit Report; and (4) a report on the interconnection of central bank account registries.

The reports’ findings largely mirrored previous FAFT recommendations and directives issued by the EU. For example, these new reports found, among other weaknesses, that public authorities intervened in money laundering only after significant scandals occurred or repeated compliance and governance failures. The Commission considered a variety of approaches to best address money laundering risks, including whether to turn the EU’s AML rules into directly applicable regulations. Absent from these reports, however, was any discussion about whether to focus on deterring money laundering through prosecutions of individuals engaged in the underlying criminal activity.

This Communication was preceded by the European Parliament’s adoption, on April 19, 2018, of the European Commission’s proposal for an expansive Fifth Anti-Money Laundering Directive (“AMLD5”) to address recent trends in money laundering and terrorist financing, including the Panama Papers and recent terrorist attacks in Europe. The AMLD5 emphasized five key goals for its member states to achieve by the end of 2019:

  • Enhancing transparency about the beneficial owners of companies operating in the EU by making public central registers for legal entities;

  • Guaranteeing that all member states have centralized national bank and payment account registers or central data retrieval systems;

  • Expanding the authority of the EU Financial Intelligence Units\, increasing their access to centralized bank account registers, and facilitating their cooperation across nations through interconnected registers;

  • Addressing the risks of virtual currencies and pre-paid cards being used for terrorist financing and money laundering; and

  • Enhancing safeguards for financial transactions involving high-risk, non-EU countries.

Achieving these goals is undoubtedly important to the detection of future crime. But the AMLD and subsequent reports, directives, and the Communication are silent on how member states should deter bad actors, including through prosecutions of such individuals.

We concede that there may be ongoing criminal investigations by individual EU member states of which we are unaware. Nonetheless, the clear import of the above is that the EU tends to focus very strongly – if not almost exclusively – on process-based fixes for money laundering risks. These fixes are obviously critical. However, and with the exception of the Danske Bank prosecutions, any discussion of individual prosecutions appears strikingly absent.

A Different Style: the U.S. Approach

In recent years, the U.S. Department of Justice (“DOJ”) has aggressively prosecuted foreign defendants for alleged international money laundering and corruption. The following examples illustrate this approach, which tends to target foreign individuals committing foreign crimes that have an alleged effect on the U.S. financial system.  It is hardly a comprehensive list.

  • In June 2019, a grand jury in the Southern District of Florida returned an indictment against two former Venezuelan officials who headed the country’s energy department and state-owned electricity company, Corporacion Electrica Nacional, S.A. The indictment, which we have blogged about here, charged the officials with seven counts of money laundering and one count of money-laundering conspiracy arising from their alleged receipt of bribes and kickbacks, including wire transfers from a bank in the Southern District of Florida.

  • On March 29, 2019, the DOJ charged Aleksandr Musienko, a Ukrainian national, with one count of money laundering conspiracy and two counts of money laundering (among other charges). Musienko purportedly partnered with overseas cybercriminals who hacked into and stole funds from online bank accounts belonging to a large number of individual and corporate victims in the U.S. Musienko employed a network of “money mules” based in the U.S. to assist his cybercriminal partners in transferring stolen funds outside of the country. He directed his “money mules” to use their own bank accounts to receive and then transfer proceeds from the compromised bank accounts overseas. As alleged in the indictment, Musienko’s operation laundered at least $2.8 million in stolen funds from 2009 to 2012.

  • The DOJ in December 2018 brought charges under seal against Chinese technology giant Huawei Technologies and its chief financial officer, Meng Wanzhou, ranging from money laundering to bank fraud and obstruction of justice. Certain banks were reportedly misled by Huawei into funneling illicit payments from Iran. Huawei purportedly used a small Hong Kong-based technology company as an intermediary to channel payments between Huawei and Iran. At the request of U.S. authorities, Wanzhou was arrested during a layover in Vancouver on December 1, 2018. This unusual case has ongoing repercussions, both legal and diplomatic.

  • On December 5, 2018, a federal jury in New York City convicted Chi Ping Patrick Ho, based in Hong Kong, of international money laundering and conspiracy to commit international money laundering (in addition to other charges). Ho headed a nongovernmental organization based in Hong Kong and Arlington, Virginia, the China Energy Fund Committee. Among other claims, the DOJ alleged that Ho caused a $500,000 bribe to be paid, via wires transmitted through New York, to government officials in Uganda in an effort to secure unfair business advantages on future projects in the country. Ho was sentenced to three years in prison for his crimes.

  • Also in December 2018, the U.S. Attorney’s Office for the Southern District of New York unsealed an indictment charging a lawyer, asset manager, and accountant — along with their client – with an alleged tax evasion scheme arising out of the international Panama Papers scandal. Notably, the indictment included one count of conspiracy to launder money that relied on the “international” money laundering provision which, as we have blogged, does not require that the relevant financial transactions involve the proceeds of underlying criminality – so long as the transactions are designed to promote a criminal scheme.

  • One month earlier, in November 2018, Alejandro Andrade Cedeno, a Venezuelan citizen residing in Florida and the former Venezuelan national treasurer, was sentenced to 10 years in prison after pleading guilty the previous year to one count of conspiracy to commit money laundering. As part of his guilty plea, Andrade admitted to receiving over $1 billion in bribes from co-conspirator Raul Gorrin Belisario and other co-conspirators in exchange for selecting them – in his official capacity as national treasurer – to conduct currency exchange transactions at favorable rates for the Venezuelan government. As part of his plea agreement, Andrade agreed to forfeit $1 billion and all of the assets implicated by the scheme, including real estate, vehicles, horses, watches, aircraft and bank accounts.

For better or for worse, many of these prosecutions involve primarily or completely foreign conduct by non-U.S. actors. That is, sometimes none of the defendants are American, and sometimes the underlying criminal conduct occurs entirely abroad. The jurisdictional hooks for U.S. prosecutors and courts, however tenuous, are often financial transactions incidental to the primary conduct or laundering activity, typically occurring through transfers involving correspondent bank accounts in New York. More substantially, sometimes the jurisdictional hook involves the use of dirty money earned abroad to conduct real estate transactions in New York, Miami or other high-end markets. Although it is impossible to know with precision whether or how much these prosecutions truly deter future bad actors from looking to the U.S. financial system to launder their money, it is hard to conclude that they have no effect whatsoever.

In theory, at least, a focus on individual prosecutions has become a priority for the DOJ. In September 2015, the DOJ released its “Yates Memorandum,” which announced its priority in seeking individual accountability for corporate misconduct. As the DOJ explained, “[o]ne of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” Although this principle is easy to state, and seems intuitively correct, the U.S. arguably has not always followed its own advice, as suggested by the relative dearth of recent prosecutions of U.S. executives and other individuals involved in financial crime.

However, the U.S. does not appear to be alone in its approach. Certain Asian countries appear more than willing to prosecute individuals, including foreigners allegedly committing financial crimes which affect the financial system of the home country. For example, Malaysia recently prosecuted 17 current and former Goldman Sachs executives arising from their role in raising $6.5 billion from 2012 – 2013 for IMDB, the Malaysian sovereign wealth fund. According to Malaysian authorities, fund officials and the former Malaysian prime minister, Najib Razak, looted $4.5 billion from the fund. The DOJ is also investigating the bank for its role in the fund.

A Modest Proposal

Given the above, we suggest a modest proposal: as part of their enforcement tool bag, countries in the EU should prosecute at least some individuals, including not just bankers located in the country at issue, but also bad actors located in other countries who have abused the home country’s financial institutions to launder their money. And, to be clear, these people should be imprisoned. As an example, perhaps Denmark could prosecute some Estonian or Russian money launderers.

Interestingly, and in a recent guest blog, the authors of the Basel AML Index 2019 noted that, according to the FATF Mutual Evaluation Report of 2016, the U.S. received a higher level of performance in AML effectiveness (67%) than in technical AML compliance (63%). Stated otherwise: one thing that the U.S. is relatively good at, at least when compared to other countries, is actually enforcing the AML already on its books, even if those laws are not perfect.

We are aware of many counter-arguments and potentially numerous competing legal and practical considerations, including the following:

  • The EU lacks a uniform prosecutorial body;

  • EU countries lack a robust framework for sharing AML information;

  • Legal and practical issues, including data privacy concerns, create obstacles for cross-border investigations;

  • EU respect for national sovereignty counsels against cross-border prosecutions;

  • Prosecuting cross-border bad actors does not represent a comprehensive or long-term solution, because other bad actors will just take the place of the prosecuted;

  • Any suggestion that the solution to a societal problem is to jail more people is, unfortunately, all-too-American (and the U.S. suffers from both a high crime rate and mass incarceration);

  • The strong willingness of the DOJ to prosecute foreign officials, executives and companies is arguably xenophobic; and

  • The U.S. government is hypocritical and should focus on its own AML enforcement problems – particularly as to the issue of beneficial ownership, in which the U.S. lags behind much of the globe in regards to imposing sufficient requirements.

Duly noted. Nonetheless, the apparent lack of such prosecutions in the EU stands out. As the DOJ at least has articulated in theory via the Yates Memorandum (if not acted on, in a consistent and meaningful manner), a key to defeating business crime is to punish individual bad actors. Otherwise, criminal enterprises will just shift their efforts from bank to bank, and from country to country – seemingly immune from any real deterrence. Prosecutions are only one tool among many to address the global problem of money laundering and corruption. They are also imperfect and must be used in concert with other efforts. Indeed, U.S. enforcement authorities acknowledge the need to focus on process and the integrity of institutions’ BSA/AML policies, and accordingly expand compliance obligations and pursue related enforcement actions against institutions. But the apparent near non-existence of individual prosecutions in the EU – including as to underlying criminal schemes – is hard to understand.

Copyright © by Ballard Spahr LLP

TRENDING LEGAL ANALYSIS


About this Author

 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax
Partner

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He...

215.864.8838
Mary Treanor Lawyer Ballard Spahr
Associate

Mary Treanor focuses her practice on representing energy and commodity companies, financial institutions and trade associations in a variety of regulatory, compliance, litigation, and transactional matters. Her work includes representing clients in enforcement matters before the Commodity Futures Trading Commission, Federal Energy Regulatory Commission and Chicago Mercantile Exchange, as well as advising on regulatory matters and assisting with transactions.

202 862 2392
Juliana Carter, Litigator, Civil, Criminal Disputes, Philadelphia, Ballard Spahr Law Firm
Associate

Juliana B. Carter is an associate in the Litigation Department. Ms. Carter has trial experience with a range of civil and criminal disputes. She has also defended clients in tort litigation and arbitration proceedings.

Ms. Carter completed internships in the offices of the Philadelphia District Attorney, the Education Law Center of Pennsylvania, and the Southeastern Pennsylvania Transportation Authority (SEPTA). Ms. Carter was also appointed a mediator within the Philadelphia Municipal Court, helping to facilitate the settlement of small-claims and landlord-tenant disputes between...

215-864-8112