International efforts to combat money laundering, which latterly have been closely connected with frustrating tax evasion, aggressive tax avoidance and to staunch the supply of money to terrorist organisations, have been coordinated by the Financial Action Taskforce.
They have resulted in various FATF Recommendations and Special Recommendations.
This body of knowledge as to how to run a regime for anti-money laundering/countering the finance of terrorism (AML/CFT) has firstly been converted into law, for example via the EU Anti-Money Laundering Directives and its subsequent transposition into EU Member State law, an example of the latter being the UK’s 2017 Money Laundering Regulations.
Secondly, it has been used to set up national financial crime organisations to receive and investigate Suspicious Activity Reports (‘SARs’), to monitor the compliance of those firms with responsibilities under AML/CFT - known as ‘obliged entities’ - when measured against applicable law and regulation, and to impose sanctions on those that have failed to run a compliant regime.
Thirdly, it has been used to create implementation guidance for obliged entities through international organisations like the Wolfsberg Group and national ones like the UK’s Joint Money Laundering Steering Group.
In the process, a grey area has been created that should not exist. In a proper legal system, the enforcer of a law must be bound by it as much as the subject, and the same penalty must be imposed upon two different organisations committing the same offence.
Equally, the subject of such a penalty must have rights of representation, of transparency, of appeal and of redress, enabling them to continue as if the authorities had not intervened if it should turn out that the actions of the authorities were unwarranted.
This is not the situation as it has emerged for obliged entities, where breaches of the AML/CFT regime have been suspected.
In February 2018, Rabobank, a California unit of the Dutch co-operative bank, was reported to have agreed to pay over US$368 million for processing funds likely tied to drug trafficking and other illicit activity and it pleaded guilty in court to conspiring to obstruct regulatory oversight. It continued in business, however.
In May 2015, BNPP was sentenced to five years’ probation by a U.S. judge at the time the bank agreed to pay US$8.9 billion to settle claims that it violated sanctions against Sudan, Cuba and Iran.
It continued in business and in June 2017 it was reported as having been fined €10 million by the French AML/CFT regulator ACPR for inadequate anti-money laundering controls.
In 2012, HSBC paid US$1.9bn to the US authorities to settle allegations that it allowed terrorists to move money around the financial system. It signed a Deferred Prosecution Agreement, which involved agreeing to the Department of Justice delegating an official to monitor HSBC’s progress at a reported cost of US$20 million annum.
In late 2017, the UK’s Financial Conduct Authority commissioned a so-called "166 report" into HSBC after the Department of Justice official raised concerns about the degree of progress.
These are examples of the penalties imposed upon major banks in the Western world, two of them being ‘Global Systemically Important Banks’ according to the Financial Stability Board, where the banks have continued in business.
By contrast, the authorities have been very quick to act in cases where banks are small and non-systemic, and to stop them doing business.
On March 21, 2018, Malta’s regulators imposed a freeze on the business of Pilatus Bank after its chairman was arrested on charges of breaking US sanctions.
ABLV in Latvia was closed down by the Latvian authorities immediately after it was served a notice 311 by FinCen – the financial crime arm of the US Treasury Department – on February 13, 2018, naming it as an institution of prime money laundering concern, and applying the fifth special measure to it, which forbids US banks from running a correspondent account for ABLV and from handling its payments on a pass-through basis.
Versobank in Estonia was closed down on March 26 by the Estonian authorities due to AML/CFT failings allegedly linked to the Russian elite and intelligence services.
The Estonian branch of Danske Bank - the major Danish and Nordic institution - was investigated by the Estonian Financial Supervision Authority around the same events as resulted in the closure of Versobank, but Danske’s Estonian branch remains open.
This has been the pattern when dealing with smaller banks, and the test case for this approach remains that of FBME, the small and foreign-owned bank branch in Cyprus which was “resolved” in 2014 by the Central Bank of Cyprus (“CBC”).
FBME had had a 311 Notice issued against it by FinCen, imposing the same fifth special measure.
CBC used the 311 Notice as its trigger to stop FBME doing business and take it over. In the four years since this occurred, however, CBC has not corroborated the validity of any of the cases of alleged money laundering that gave rise to FinCen’s 311 Notice.
There were no court cases involved in these examples.
Authorities took swift actions and closed banks, creating a fait accompli against which there could be no adequate redress for the owners of these banks, even had they had an adequate right to receive redress. The banks were taken over, their ability to do business nullified and their reputation destroyed.
The rights of the subject to proper representation during the legal process, to transparency of process, and to a right of appeal have been duly bypassed.
On April 13, 2018 it was reported that the US authorities were considered taking action against China Construction Bank and Agricultural Bank of China for alleged violations of international sanctions against North Korea. In other words there was evidence to hand that these banks were routing payments to and from North Korea, although not necessarily in dollars.
Given that the US authorities acted so quickly against FBME, ABLV and others, a 311 FinCen Notice imposing the fifth special measure would then have been expected.
The US authorities must have had a body of evidence against these Chinese banks, but they apparently have significant latitude in deciding how to apply that evidence and, indeed, whether to use it at all.
It seems that the idea of taking any action was quickly shelved, primarily because of fears that punishing banks of that size might send shock waves through the global financial system. Indeed, both China Construction Bank and Agricultural Bank of China are amongst the 30 Global Systemically Important Banks.
So, what we have here in the AML/CFT area is not an example of the law acting as it should - blind justice - but of laws that are applied or not applied, and of available penalties that are varied as regards severity and timing, in accordance with the offender and not the offence.
Instead, the authorities make up their own mind - frequently behind closed doors - as to which banks to apply the law to and when, and which penalties to apply to a given situation.
There is significant recourse to extra-judicial processes, where the evidence is not made public and where the subject can only see it third-hand, by having a judge review the evidence; neither the subject nor their legal representative can be present.
Since FATF itself acts as the ultimate court of arbitration by issuing - without contradiction - its Recommendations and Special Recommendations that lawmakers convert into laws and supervisory regimes, the entire edifice has gone outside democratic control.
The edifice may claim to have been successful in reducing money laundering and blocking terrorist financing, but there is no factual evidence what has actually been achieved and what could have been achieved by different means.
Instead we have the prima facie evidence that the worst breaches by the largest banks can go unpunished, that other large banks are fined, supervised, fined again and the breaches continue, but that the roof is brought down on the smaller banks.
That does not sound like an ecosystem in which money laundering and the financing of terrorism have been successfully eliminated, or one in which justice is blind to expedience and commercial prejudices.
* Robert Lyddon is director of international banking consultancy, Lyddon Consulting.