Money laundering scandals are likely to continue engulfing European banks over the coming years because regulators have still not carried out reforms needed to prevent criminal cash from entering the financial system, S&P Global Ratings said in a report published Oct. 16.
The agency warned that money laundering poses a threat to the credibility of the EU's banking union project, as well as to the ability of affected banks to raise capital and expand their client base. The analysts urged action from both the industry and supervisors to better prevent money laundering in the EU, highlighting several countries where it said controls continued to be lax.
"These weaknesses persist despite an active EU legislative agenda," the S&P analysts said, pointing to plans to empower the European Banking Authority to police money laundering. But the reforms could take years, and in the meantime, "European banks appear over-represented in [money-laundering] cases."
"There are few reasons to be optimistic that such problems will not recur in Europe, at least in the near-to-medium term," the report added.
The warning comes amid the ongoing fallout from several high-profile cases. As much as $200 billion was laundered through Danske Bank A/S's Estonian branch between 2007 and 2015, according to revelations earlier in 2018, with the ensuing fallout resulting in the CEO's resignation and a series of negative ratings actions, including a Moody's downgrade and negative outlooks from S&P, Fitch Ratings and DBRS.
Dutch lender ING Groep NV agreed to a penalty of €775 million in September over due diligence failings that allowed clients to use accounts at ING Netherlands for money laundering, among other things. The bank's CFO stood down a week later. And prominent anti-corruption campaigner Bill Browder on Oct. 16 asked Nordic prosecutors to look at whether suspect funds, including from Danske in Estonia, passed through accounts at Nordea Bank Abp as well.
S&P said the consequences for affected banks can be severe and long-lasting. Beyond the direct cost of bolstering compliance checks and paying hefty fines, "there could be substantial damage to a bank's franchise. This could arise from direct restrictions imposed on the banks' business activities, or else be a reputational problem that affects its credibility and client loyalty. This can spill over into a severe and sustained weakness in investor confidence, [with a] significant negative impact on the stock price," said S&P Global Ratings.
Wholesale funding could become more expensive or scarce, and "in extremis" depositors could simultaneously withdraw their funds, causing the bank's collapse, as was the case with Latvia's ABLV Bank AS in February 2018.
Although share prices have tended to recover somewhat after the scope of any penalties becomes reasonably estimable, S&P said, it remains possible that the rise of investment based on environmental, social and governance, or ESG, factors could lead markets to be "somewhat less forgiving in future."
Smaller banks in countries including Cyprus, Latvia, Estonia and Malta have also been engulfed in money-laundering scandals recently, attracting criticism about the quality of regulation in these jurisdictions. S&P Global Ratings noted that it changed its Banking Industry Country Risk Assessments for Malta and Estonia in recent months to account for a "changed perception of regulators' effectiveness."
That action highlighted the risk that money-laundering issues can pose even to banks not involved in the alleged wrongdoing, S&P added. Malta's biggest lender, Bank of Valletta PLC was downgraded because of the revised view of the Maltese banking market, even though it was not linked to the accusations against local peer Pilatus Bank.
"There appears now clear recognition among European policymakers that ... the effectiveness and enforcement power on the operational level needs a boost," the analysts wrote, noting that part of the problem lies in the uneven application of regulations adopted by the European Parliament and in the lack of cooperation between enforcement agencies in different countries.
"There is currently no pan-European supervisory body for [anti-money laundering] matters, and from previous cases, it appears that the cross-border coordination and information exchange between the authorities could be more timely, responsive, and effective," the agency added.
This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.