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.

View comments
Read article More on this topic

Opinion

China's dual banking system: consolidation as the final solution for weak small banks

There are fundamental solvency and liquidity issues for some small Chinese banks, widely influencing both the bond market as well as the broader financial sector. Given the difficulties in creating a level playing field between small and large banks, there is an expectation that small banks will continue to under-perform.

By: Alicia García-Herrero and Gary Ng Topic: Finance & Financial Regulation Date: September 16, 2019
Read article Download PDF

Policy Contribution

European Parliament

Hybrid and cybersecurity threats and the European Union’s financial system

The authors document the rise in hybrid threats and cyber attacks in the European Union. Exploring preparations to increase the resilience of the financial system they find that at the individual institutional level, significant measures have been taken, but the EU finance ministers should advance a broader political discussion on the integration of the EU security architecture applicable to the financial system.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: September 12, 2019
Read article More on this topic More by this author

Opinion

Economic priorities for new EU leadership

Europe is no longer in crisis mode. However, it remains vulnerable; it is unprepared and it is procrastinating. Following European elections this May, new leaders are about to take their positions at the main European institutions for the next 5 years. They have the power in their hands to take action. But more importantly, they have the power to convene 28 states, which, if united, can play a significant global role. What are the urgent challenges that require collective European action?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: September 10, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: How much further reform is needed for the new financial sector?

Backstage at the Bruegel Annual Meetings, Rebecca Christie talks with Nicolas Véron on the new financial sector.

By: The Sound of Economics Topic: Finance & Financial Regulation Date: September 5, 2019
Read article

Blog Post

How long is the head table?

An empirical assessment of concentration in global collective action

By: Jan Mazza and Jean Pisani-Ferry Topic: Energy & Climate, Global Economics & Governance Date: August 28, 2019
Read article More on this topic More by this author

External Publication

La Banca centrale europea

This external publication delves into the new responsibility given to the European Central Bank: supervision on banks in the euro-area. It tells its history and illustrates its functions, structure and responsibilities and the exceptional answers to respond to the "perfect storm" of the crisis.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: July 31, 2019
Read article More on this topic More by this author

Blog Post

Croatia’s path into the banking union

Croatia seems a suitable candidate for euro area accession: there is a tight peg to the euro, high public debt is coming down, and the banking sector is already dominated by euro area banks. But the Eurogroup has rightly targeted reforms of the state’s role in the economy as a precondition for participation in ERM II and the banking union. None of the announced reform plans are new or easily concluded within the timeframe that has now been agreed.

By: Alexander Lehmann Topic: European Macroeconomics & Governance Date: July 18, 2019
Read article More on this topic

Blog Post

Talking about Europe: Die Zeit and Der Spiegel 1940s-2010s

An on-going research project is seeking to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. A first snapshot screened more than 2.8 million articles in Le Monde between 1944 and 2018. In this second instalment we carry out an analogous exercise on a dataset of more the 500 thousand articles from two German weekly magazines: Die Zeit and Der Spiegel. We also report on the on-going work to refine the quantitative methodology.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: European Macroeconomics & Governance Date: July 18, 2019
Read article Download PDF More on this topic

Policy Brief

The European Union energy transition: key priorities for the next five years

The new members of the European Parliament and European Commission who start their mandates in 2019 should put in place major policy elements to unleash the energy transition. It is becoming economically and technically feasible, with most of the necessary technologies now available and technology costs declining. The cost of the transition would be similar to that of maintaining the existing system, if appropriate policies and regulations are put in place.

By: Simone Tagliapietra, Georg Zachmann, Ottmar Edenhofer, Jean-Michel Glachant, Pedro Linares and Andreas Loeschel Topic: Energy & Climate Date: July 9, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Priorities for the new ECB president

In this Director's Cut of 'The Sound of Economics', Guntram Wolff talks to two of the authors of Bruegel's memo to the new ECB president, Maria Demertzis and Grégory Claeys, to specify the most important issues at the beginning of this eight-year cycle and to clarify the parameters within which the new incumbent will have to work.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 4, 2019
Read article Download PDF

Policy Brief

The threats to the European Union’s economic sovereignty

Memo to the High Representative of the Union for Foreign Affairs and Security Policy. The authors describe the current context and the increasing interlinkages between economics and power politics and the role to play in reinforcing and defending Europe’s economic sovereignty.

By: Jean Pisani-Ferry and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: July 4, 2019
Read article Download PDF More on this topic

Policy Brief

Preparing for uncertainty

Memo to the president of the European Central Bank. Grégory Claeys, Maria Demertzis and Francesco Papadia present the challenges that the next ECB president will face during the upcoming mandate, reinventing monetary policy in a system riddled with uncertainties.

By: Grégory Claeys, Maria Demertzis and Francesco Papadia Topic: European Macroeconomics & Governance Date: July 3, 2019
Load more posts