Countering Russian Money Laundering: Lessons from Latvia

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1 Co hosted by: Hudson Institute s Kleptocracy Initiative Alliance for Securing Democracy, German Marshall Fund October 11 th, 2018 Charles Davidson, Hudson Institute s Kleptocracy Initiative Joshua Kirschenbaum, Alliance for Securing Democracy, German Marshall Fund Nicolas Veron, Peterson Institute for International Economics Andris Teikmanis, Ambassador of the Republic of Latvia Ilza Znotiņa, Head of Latvia s Financial Intelligence Unit Separately, for background, Forbes has an article for background, Frances Coppola s, Why The U.S. Treasury Killed a Latvian Bank

2 Ilza Znotiņa, Head of Latvia s Financial Intelligence Unit U.S. Treasury s Financial Crimes Enforcement Network (FinCEN) announced that Latvia s third largest lender, ABLV, was a money launderer The European Central Bank announced that ABLV was failing or likely to fail The regional Financial Action Task Force (FATF) assessed Latvian anti-money laundering and combating the financing of terrorism (AML/CFT) effectiveness Latvia received low FATF ratings, particularly Immediate Outcome 11 (IO 11 - financial sanctions) Latvia had been working AML/CTF but FinCEN announcement was a catalyst Sept Latvian government adopted a comprehensive action plan to implement the findings now have a common understanding of public and private sector players to work together in order to achieve success Priorities: Strengthen risk-based supervision Introduce preventive (dissuasive) measures and sanctions for violators Strengthen information exchange vertically and horizontally

3 Ilza Znotiņa, Head of Latvia s Financial Intelligence Unit ABLV went through voluntary liquidation the ECB supervised ABLV but that supervision did not include anti-money laundering responsibilities so Latvia had no basis to ask the ECB for assistance the best course was voluntary liquidation under strict control - Latvia and the EU are in discussions to determine how far future supervision shall reach Latvia is not under a time constraint so it is not rushing through the new regulatory environment - Latvia is focusing on: More involved processes to control suspicious activity reports and suspicious transaction reports (SARs/STRs) Properly funding law enforcement and prosecutors to regulate Control over bank liquidation in order to understand national and regional risks, and improve international cooperation Preventative measures Centering the AML/CFT effort Increased public awareness - not a victimless crime and consequences for guilty Funding

4 Ilza Znotiņa, Head of Latvia s Financial Intelligence Unit More information sharing is needed through partnerships, a better understanding of financial risks, a better understanding the financial crime scale and to have actionable insights

5 Joshua Kirschenbaum, Alliance for Securing Democracy, German Marshall Fund Very large-scale money laundering has occurred in many if not most EU countries ING bank in the Netherlands fined $900 million by the EU Pilatus bank in Malta had its license revoked this found that Malta was in noncompliance with European law Many Latvian banks fined for money laundering Cyprus banks and non-resident operations Danske bank (Denmark) branch in Estonia moved hundreds of billions Deutsche bank moved $10 billion dollars over several year periods Others have done the same

6 Joshua Kirschenbaum, Alliance for Securing Democracy, German Marshall Fund Recent improvement is due to increased awareness and concern Nothing new 1990s Congressional testimony highlighted Russian penetration of New York banks for money laundering purposes Counter by increasing fines, making arrests and affecting forfeitures Two consensus thoughts have emerged: Illicit money laundering, corruption and kleptocracy are no longer seen as national problems, domestic problems or development problems Inadequacy of the EU regulatory and supervisory architecture no anti moneylaundering effort exists at the EU-level Ultimately, we will never stamp out money laundering but we must have political will and an intolerance to people that build large industries around this and create a political constituency This is as much about political well as it is about technical and operational capacity

7 Nicolas Veron, Peterson Institute The EU is a single market (includes banking and financial services) and that is the core of European integration Money laundering in a single market is troublesome because once a person is in that single market, can go everywhere through investing authorities have less controls The recent banking union is within the single market prudential supervision of banks is centralized for the 19 countries of the Eurozone and the European Central Bank ECB holds all banking licenses entered into force as a banking union in 2014 Supervision of smaller and regional banks are supervised by the centralized banks Denmark and UK banks are not part of this

8 Nicolas Veron, Peterson Institute Why talk about banking scandals now? These things are not new no uptick in illicit activity it is an increase in sensitivity Increasing perception of the Russia issue Recent U.S. action with ABLV Reputational spillovers - within the EU, concern exists that the failures in ABLV supervision and enforcement negatively impacts the reputation of the ECB Now, the EU is in early discussions to increase the European banking authority which would have some coercive powers on national supervisors and the ECB Two functions to consider: Administrative supervision FIU enforcement

9 Andris Teikmanis, Ambassador of the Republic of Latvia During the Cold War, Latvia had no banks as every bank was in Moscow After the fall of the Cold War, a new banking system formed in Latvia and it soon became apparent that Latvian banks were closer to Moscow than Switzerland - Russian and CIS traces remained Previous Latvian governments did not adequately assess risk that came together with a growing banking sector non-resident deposits became the major contributor to Latvian banks (52% deposits) 2016 a complete audit of all major Latvian banks completed, by American companies 2017 guidelines established for countering money-laundering, assessing risks of shell companies and dubious transactions a zero-tolerance position established

10 Andris Teikmanis, Ambassador of the Republic of Latvia 2018 from the ABLV case, new legislation established defined shell companies, supervision and reduction of risks derived from these non-resident deposits Now, deposits are 80% Latvian, 10% EU, 5% Russia and 5% others an enormous decrease in risk Latvia s experiences highlighted the systemic gaps in the system of supervision at the European level now, abolishing these gaps Latvia is legislating to address these gaps Now, Latvian banking is re-developing and will continue as transparent as possible

11 Questions and Answers Q - There has to be some Pan-European enforcement. I see the main problem is a lack of harmonious pan-european enforcement. There is a minimal supervision in the EU and in some cases, those standards are better than the U.S. PATRIOT Act but the enforcement is lax - a hodgepodge of each country s sovereignty, FIU, interests, and resources - it is always about exchanging the dirty money for a transferable currency like the Euro or USD so if you can get into Cyprus, Latvia, Denmark, or Estonia, you got the Euro. A - all agree! Q - Do you think the upcoming Latvian election will have an impact on the resources available to tackle this issue? In twenty years, Latvia has had as many governments. A - Typically, when government tackles a big problem, political thinking evolves over six months - Latvia has a good action plan and resources will continue to be implemented through 2019 A - With tomorrow s Latvian election, there is a potential to change course so it is everyone s challenge to ensure elected leaders are informed and those who may stray into illegal activity know that they will be prosecuted A - Banks in Latvia may attempt to adopt superficial solutions or creatively interpret compliance - must remain vigilant A - Latvia may have turned the corner - FIU has visited each bank prior to the election A - Many moving pieces - at the EU-level, much effort ongoing so another level to watch

12 Questions and Answers Q - New industries are entering Latvia, what are the government s regulations and controls to prevent money laundering in other sectors A - The Latvian government is looking at new technologies to assist with regulations and this is the same at the EU-level - we are all teeth, looking for dentists A - Remain vigilant to new economic sectors like virtual currencies - currently conducting risk assessment of virtual currencies that training sessions will follow Q - Has laundered money found its way into hedge funds? A - The Ambassador mentioned that systemic gaps exist and this is one gap A - To find if the funds went through a European money laundromat and found its way to the U.S., it may or may not be visible - with hedge funds, since they are private, there is another layer of opacity - hedge fund managers (private equity and venture capital) are under SEC regulation but the are exempt in requirement to establish and maintain anti-money laundering programs, a gap for Congress to close - the USG does not have good views into who are the underlying investors in these funds or where the money is actually invested - now, it is about $12.5 trillion. Q - How do illicit funds impact technology transfers and strategic trade controls, military technologies and dual-use technologies? Adequate controls in place for front companies? A - Big gaps exist and we don t really know