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Scope: EU banks easier targets for money launderers than US peers


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According to Market Intelligence, April 2023

Scope: EU banks easier targets for money launderers than US peers

European banks are considered an easier target by money launderers than their U.S. peers, as EU supervision in that area is "underwhelming" compared to the tougher U.S. regime, Scope Insights said May 28.

The EU has a good regulatory framework on anti-money-laundering, especially after recent enhancements, but the enforcement of the rules and supervision leave something to be desired, Sam Theodore, managing director at Scope Insights told analysts in a conference call.

Scope Insights is the research division of credit rating group Scope.

Fragmented supervision

Money laundering has quickly become a top concern for investors in European banks, after it emerged in 2018 that billions of dollars in dubious transactions originating in Russia and certain ex-Soviet states had passed through Danske Bank A/S' Estonian subsidiary. Many other large European banks have been linked to the scheme, dubbed the Russian Laundromat.

However, the scheme was not exposed as a consequence of supervisory foresight, but "solely as a consequence of whistleblowing and sharp investigative reporting," Theodore said.

Currently, there is no pan-European approach to the supervision of anti-money-laundering, which is split between the EU and country-level regulators, known as national competent authorities or NCAs.

The European Central Bank and the Single Supervisory Mechanism are not authorized to supervise money laundering specifically and limit themselves to prudential supervision, Theodore noted.

Supervision relating to combating financial crime is still in the hands of the NCAs, and across the EU not all of them are equally strong and proactive, he noted.

Many NCAs fall short in how they deal with money laundering cases and often impose fines that are too low, although the U.K.'s Financial Conduct Authority is an exception, Scope believes. There are also very few criminal investigations on money laundering across EU jurisdictions, it said.

Pan-European approach

The supervisory guidance on combating money laundering and terrorism financing should therefore be made sharper and clearer, Theodore told S&P Global Market Intelligence.

The European Banking Authority should update its supervision rulebook, with the aim of bringing EU rules closer to the more stringent regime in the U.S., he said in an emailed comment. National supervisors should also be given more enforcement powers on countering money laundering and terrorism financing, similar to the FCA's in the U.K., he added.

Furthermore, the EBA should be given more powers to enable it to take a leading role in AML supervision, in order to guarantee better enforcement on an EU level, Theodore said.

The EBA is dependent on data provided by national supervisors for its assessment. Another potential weakness is governance; its board is composed of the heads of national supervisors of EU member states, so reaching a decision on risks at a bank in a specific country can prove challenging, he said.

On the other hand, creating a new EU AML supervisory authority from scratch would require time and a lot of red tape, Theodore said.

Reliable metrics

Regardless of the challenges, more guidance and coordinated action by regulators is necessary to prevent money laundering- and terrorism financing-related risks at European banks.

Such risks, like those coming from cyberspace and climate change, are hard to quantify but can no longer be disregarded, Scope Insights said in its report. Investors and analysts need reliable metrics to be able to assess those risks going forward which could be essential for banks, the report said.

Creating AML metrics is inherently tricky because misconduct comes as a result of human decisions and actions, which often remain hidden and are not the result of objective developments, Theodore said. Furthermore, money laundering risk measured on the basis of geography would immediately be challenged, he noted.

A potentially useful approach would be to make public anonymized money laundering and terror financing data, so the market is more aware of the relative magnitude of the problem, Theodore said. The challenge here would be that such data cannot be released for individual institutions, he said.