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New Moldovan laws risk enabling large-scale money laundering, observers warn

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New Moldovan laws risk enabling large-scale money laundering, observers warn

A tax amnesty rule recently adopted by Moldova risks enabling money laundering in the eastern European nation, experts and foreign officials have warned.

Adopted in July in two parliamentary sessions within hours of each other, and taking effect Aug. 17, the new law will tax previously undeclared capital at 3%, allowing authorities to recognize it as legitimate if the owners apply before a deadline of February 2019.

While the text of the law says that Moldova will continue to obey norms in place to prevent criminal money from entering the banks, the U.S. and EU, as well as a host of other foreign and local organizations, have warned of the risks posed by this exemption in the country of 3 million where financial crime has long flourished.

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Furthermore, the existence of another law offering foreign investors citizenship and, implicitly, access to the tax amnesty program, has raised fears that Moldova will also attract foreign assets of uncertain provenance, with a view to preparing them for redistribution through the global financial system.

Widespread condemnation

Former Moldovan Finance Minister Veaceslav Negruta, now head of the Moldova chapter of anticorruption nongovernmental organization Transparency International, said in an interview that the law is likely to damage Moldova's reputation abroad and cast doubts over the government's efforts to reform in the wake of numerous scandals, with some European lenders present in the market also likely to be affected.

He said there are reservations around how the laws will be applied, and pointed to past situations where banking entities had their correspondent accounts suspended by foreign lenders, including from the EU.

"These are sad stories for the Republic of Moldova, which has been and still is regarded as a zone of [money] transit and of banking fraud," he said. "It is not easy to shake the reputation of a country where billions of dollars of money from Russia was laundered, [destined for] Western countries."

Soon after the measures were adopted by parliament, the U.S. embassy in Chi?inau, Moldova's capital, said it was "gravely disappointed" by the legislation, which it said "legitimizes theft and corruption" and will erode Moldova's ability to fight money laundering.

The IMF also expressed its disapproval, saying in July the measures could undermine tax compliance and pose significant fiscal risks. The World Bank, which is running several financing programs in Moldova, said it "is deeply concerned."

The amnesty law has also further shaken Moldova's partnership with the EU, with which it signed an agreement in 2014 that provides for free trade and commits it to bringing its laws in line with the wider bloc's. Moldova also benefits from EU financial aid, but in June the bloc suspended a €100 million assistance package after the result of a Chi?inau mayoral election was controversially voided.

The EU's ambassador to Moldova said the new legislation might lead to a breach of the country's commitments and could hinder efforts to combat money laundering and organized crime.

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Moldovan authorities have defended the law, with the speaker of the country's parliament, Andrian Candu, saying it is needed to revive the economy and accelerate development. He said authorities would take the necessary measures to prevent money laundering and financial crime, without mentioning specifics, and noted that other countries have adopted tax amnesties over the years.

The Moldovan government did not respond to a request for comment from S&P Global Market Intelligence.

Series of scandals

Moldova has found itself at the center of several high-profile financial scandals in recent years, including the embezzlement of $1 billion from its top three banks, leading to their collapse in 2014; the laundering of some $22 billion in Russian money of criminal origin on its way to the global financial system; and the participation of Moldovan-registered firms and banks in the defrauding of $230 million from the Russian Treasury in 2007.

Moldovan banks, which recently started to recover from the shock of 2014's massive fraud, are likely to suffer from a loss of international credibility stemming from the amnesty law, Negruta said.

He suggested that the new law could allow Moldovan banks to enable further money laundering activities, and said it was unlikely the regulator would be seen as adequately independent and robust.

"If these phenomena and schemes continue — and this law does offer such opportunities — evidently some measures might be taken by the international community to prevent contamination, including through blocking the correspondent relationships with EU banks, primarily," he said.

The largest foreign-owned banks in Moldova are the French-controlled BC Mobiasbanca – Groupe Société Générale SA, Banca Comerciala Victoriabank SA, which is owned by Romania's Banca Transilvania SA, and London-based development lender the European Bank for Reconstruction and Development.

European and U.S. banks have paid tens of billions of dollars in fines in recent years over breaches of money laundering and sanctions regulations.

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On Sept. 13, 2015, protesters in Chi?inau, Moldova, demand a probe into the hundreds of millions of dollars that disappeared from three Moldovan banks.

Source: The Associated Press

Moneyval supervises Moldova's anti-money laundering enforcement as part of the country's association agreements with the Council of Europe. Moneyval executive secretary Matthias Kloth said it has not yet reached a formal conclusion about the tax amnesty, but has noted concerns about what appears to be an unusually rapid legislative procedure — 48 hours — in which the law was adopted.

The body will conduct an inspection in Moldova in October and will publish its report in mid-2019, Kloth said in an interview. It is seeking feedback from other countries' governments should they spot any unusual activities related to the tax amnesty program.

Moldova has a weak track record in prosecuting financial crime, investor and anticorruption campaigner Bill Browder said in an interview.

Browder lost his Moscow-based hedge fund Hermitage Capital in the 2007 fraud. Much of the $230 million embezzled from the Russian Treasury through hijacking Hermitage's corporate credentials passed through Moldova, but Browder's complaint to the Chi?inau authorities was not properly investigated, he said.

"We know that they opened a criminal case, but they never contacted us for a statement," he said.

Citizenship for sale

Another new law offering citizenship to foreign investors has added to the concerns around the tax amnesty.

The Moldovan government has engaged U.K. consultancy Henley & Partners to handle applications for the citizenship-for-investment scheme, which would allow any foreign investor spending €250,000 on government bonds or a property to theoretically benefit from the tax amnesty.

Henley & Partners gained notoriety recently through their work in Malta, where they executed a similar project, dubbed "passports for sale" by journalists investigating its links to corrupt politicians. One of the journalists who most persistently scrutinized Malta's foreign investor initiative was Daphne Caruana Galizia, who was assassinated in 2017 for reasons thought to be connected to her work.

Moldova does not disclose the names of the people who used the scheme to gain citizenship.

Sergiu Tofilat, a policy analyst, former banker and current head of nongovernmental organization Watchdog.md, suggested there would be no economic reason for foreign investors to rush to secure Moldovan citizenship.

He said the reason for the amnesty law was to recover the $1 billion embezzled from the banks in 2014 and "to legalize the stolen money against a 3% tax."

But, he added, the law that allows any foreigner to "buy Moldovan citizenship by investing in real estate or acquiring state bonds" could "turn [the country] into an international hub for laundering dirty money from all around the world."

Watchdog.md has contributed to the drafting of a bill put forward by Moldova's opposition Liberal Democrat party, sanctioning those who are thought to have committed the fraud investigated by Browder's lawyer Sergei Magnitsky. The bill has not been voted on yet.