Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

No Hope: The Nation States are Killing the EU

Posted by hkarner - 16. März 2018

Date: 15-03-2018
Source: The Wall Street Journal By Simon Nixon
Subject: The Dark Underbelly of Europe’s Financial System

The EU has rules to guard against money laundering, but members must ensure the law is enforced

The EU has introduced a single rule book to cover customer protection and anti-money laundering, but it is up to domestic agencies to ensure the law is enforced

Something is rotten in the European financial system.

The U.K.’s status as a global capital of money laundering is once again back in the spotlight following the attempted murder of former Russian spy Sergei Skripal and his daughter, which the British government has blamed on Russia. The scandal has revived concerns about the U.K.’s remarkable openness to the mysteriously amassed fortunes of Russian oligarchs with links to Russian President Vladimir Putin and the extraordinary role that U.K.-registered companies have played in some of the biggest money-laundering scandals that have surfaced in Europe in recent years.

But the current focus on London follows a string of disturbing stories that has exposed the dark underbelly of the financial system across the continent.Last October, the leading Maltese investigative journalist Daphne Caruana Galizia —who had been investigating high-level corruption in the country—was blown up in a car bomb. In February, Latvia’s third largest bank collapsed after the U.S. Treasury accused it of “institutionalized money laundering.” Last month, a Slovak investigative journalist and his girlfriend were shot dead in what police say is likely to have been revenge for his investigation into alleged links between top Slovak politicians and the Italian mafia.

These stories raise uncomfortable questions about the extent to which three eurozone countries have been captured by organized crime. The collapse of Latvia’s ABLV Bank is particularly alarming because it was supervised directly by the European Central Bank. The fact that ABLV’s alleged money laundering was exposed by a U.S. agency rather than a European authority raises doubts about the EU’s ability to police its own financial system. ECB President Mario Draghi this week acknowledged that the ECB had suffered reputational damage from the ABLV crisis. ABLV has said it isn’t guilty of money laundering.

The truth is that the EU is particularly vulnerable to organized crime and money laundering. It has created a single market and single financial system in which capital and people can move freely between member states. This has created healthy competition and reduced financing costs for European businesses and households.

Yet responsibility for policing that system lies squarely at the national level. The EU has introduced a single rule book to cover customer protection and anti-money laundering, but it is up to member states to transpose the rules into national law and it is up to domestic agencies to ensure that the law is enforced.

As in the EU migration crisis, where the inability of a few countries properly to manage their own borders exposed the entire EU to risks, so the inability of a few countries adequately to manage their financial systems exposes the entire European financial system to risk.

The EU is also vulnerable because of the opportunities it offers to money launderers. In some smaller EU countries, particularly in the east and south, oligarchs have been able to amass vast fortunes by exploiting their connections to the state, whether through privatizations, public money or public procurement.

At the same time, poorly supervised banking systems in EU neighboring countries have offered opportunities for theft: for example, more than $1 billion was stolen from three Moldovan banks in 2014 and at least $5.5 billion disappeared from Ukraine’s Privatbank in 2016. Typically this money then finds its way into the EU financial system, where it is legitimized and invested—often in British assets, which benefit from U.K. legal protections.

The EU has been trying to tackle these deficiencies in its system. The EU’s fourth anti-money-laundering directive came into force last summer—and a fifth is currently on its way, with new measures to close down loopholes exposed by the Panama Papers.

Much of the EU effort is focused on promoting transparency about the ultimate ownership of assets and ensuring that banks and finance professionals know their customers and report suspicious activity.

But while Brussels has powers to ensure that countries implement the rules—it is currently taking infringement action against 20 member states over the latest directive—it has no powers to ensure that they enforce them.

At the same time, strict protocols govern what information can be shared between institutions, limiting cross-border cooperation. Remarkably, the ECB has no powers to investigate money laundering.

Yet it is hard for the EU to go further. Questions related to legal systems go to the heart of national sovereignty. Powerful vested interests in countries with large financial centers or with high levels of corruption are reluctant to hand the EU greater powers.

The U.K., for example, has fought to exempt non-taxpaying trusts from transparency rules, leaving what Transparency International calls a “backdoor” for money launderers. The U.K. has also refused to order British overseas dependent territories such as the British Virgin Islands and Cayman Islands to fall into line with EU transparency rules.

Meanwhile, poorly paid national bureaucrats inevitably struggle to keep pace with a richly-rewarded global legal sector.

Nonetheless, if the EU is to maintain a single market in financial services, let alone a single currency, then a single rule book is unlikely to be enough: it will need a single cross-border investigatory agency with wide-ranging enforcement powers to ensure confidence in the integrity of the system.

After all, the lesson of the migration crisis is that if some EU member states are unwilling or unable to fulfill their obligations under EU law, then either powers will have to be transferred to a new EU institution or trust will break down.

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