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Wanted: A watchdog, with teeth, to sniff out dirty money

The European Commission’s proposals to tackle money laundering run into resistance from national capitals.

The European Commission is hell-bent on creating a watchdog to enforce the bloc’s anti-money laundering rules. But skeptics fear it won’t have much bite.

Executive Vice President Valdis Dombrovskis sounded a rallying call for a European authority last week as the Brussels executive launched an action plan for tackling illicit funds flowing through the EU.

“What we should be aiming for is a strong EU supervisor, which can act in case of failure, for example, of national supervisors to act,” the Latvian European commissioner said in an interview. “We have strong, strict anti-money laundering rules, but enforcement is uneven.”

The Commission’s action plan also outlines initiatives to harmonize and update anti-money laundering safeguards across the bloc while improving communication channels among financial intelligence units, the agencies in each country that analyze information from banks and other businesses obliged to report on suspicious activities.

The plans are open for input from the public until July 29, in preparation for legislative proposals scheduled for early 2021.

Progress could prove slow, some Treasury officials and think tankers warned. National interests and general opposition to handing too much power to a European authority could stifle the Commission’s plans.

Estonia — home to multiple cases in the past two years — as well as Hungary and Poland have already dismissed the need for a new EU watchdog. More will feel the same way, according to Karel Lannoo, the Centre for European Policy Studies’ chief executive in Brussels.

“On a political level, there is lip service that they want to do this,” said Lannoo, who argues the EU would be better off harmonizing reporting requirements for supervised companies and improving communication among capitals, rather than pursuing a new watchdog.

“Look at Malta. They said they’d clean up to join the EU, and look at them today,” he continued, pointing to the island nation’s so-called golden passports that grant investors citizenship in exchange for cash. The practice creates risks of money laundering, corruption and tax evasion, Brussels has warned. Cyprus offers a similar program.

The coronavirus could also prove an obstacle, Treasury and Commission officials warned. The pandemic has political priority at the moment, and governments might be reluctant to spend money on other issues.

Dombrovskis is undeterred. A series of scandals in Denmark, Estonia, Germany, Latvia, Malta, the Netherlands and Sweden since 2018 have laid bare the EU’s lack of enforcement. The coronavirus has only pushed money laundering online, he said.

“Our experience of recent years concerning [anti-money laundering] has helped to concentrate minds,” said the 48-year-old former prime minister, speaking by phone from his office in the Berlaymont headquarters, which is operating with reduced staff to avoid spreading the coronavirus.

The Commission estimates that around 1 percent of EU wealth is involved in “suspect activity” — some €160 billion.

Governments for years have been interpreting EU directives differently when writing them into their respective national statues, leaving loopholes for criminals to exploit.

Some but not all countries require businesses such as crowdfunding platforms and diamond dealers to report suspicious transactions, according to the Commission. Limits on cash payments and the asset-freezing powers of authorities also differ by country.

The situation is exasperated by a lack of communication among national authorities, the action plan said.

Loopholes and lax enforcement have meant U.S. authorities have repeatedly had to step in to clean up the bloc’s mess — leaving EU policymakers red-faced.

It took a press release from the U.S. Treasury in February 2018 to bring down Latvia’s third-largest lender, ABLV Bank. The Treasury’s Financial Crimes Enforcement Network accused it of laundering money involved in the North Korean weapons program. A month later, U.S. authorities in New York arrested the chairman of Malta’s Pilatus Bank on charges including bank fraud and money laundering.

Supervisors at the European Central Bank were ignorant of the illicit activity because money laundering is out of their remit. EU governments kept the policing duties for themselves rather than handing it to the ECB when they put the Frankfurt body in charge of supervising lenders six years ago.

That has to change now, Dombrovskis said, calling for a watchdog that can scrutinize banks as well as national authorities for bad behavior — and punish them accordingly.

The Commission’s action plan lays out two possible watchdogs that the EU can introduce — both of which have “pluses and minuses,” Dombrovskis said.

One option involves setting an agency up from scratch, allowing legislators to design a dedicated supervisor with a mandate to investigate beyond the financial industry, into businesses such as gambling.

The setup process could take a while, the 18-page document said, leaving criminals more time to wash their illicit funds. Establishing a new body could also prove expensive, something Treasury officials say could prove a problem after governments have spent trillions of euros to prop up their economies during the coronavirus outbreak.

“That money aspect might play a role,” one skeptical official said.

The second, cheaper, option would be expanding the role of the EU’s existing banking regulator. The European Banking Authority is already staffing up its anti-money laundering team to 16 people as part of a remit to make sure national supervisors are enforcing the rules properly.

Still, industry enforcement would require many times that number. The Paris agency comes with its other problems, as well. The regulator’s board is made of up the bloc’s national supervisors, who have been reluctant to reprimand each other for their own shortcomings.

For example, the board decided last year to let Denmark and Estonia off the hook for not noticing that Danske Bank had funneled some €200 billion of suspicious funds through its Estonian branch for more than 6,000 “non-resident” clients between 2007 and 2015.

“The fact that they failed to act on one of the largest scandals in Europe … shows that there are needs for more effective governance, decision-making structure and move away from an assembly of national supervisors,” said Dombrovskis, who’s been openly critical of the decision.

The EBA would also be limited to supervising the financial sector, the action plan said, leaving “weak links in the EU supervisory network” that should cover a welter of other businesses, from casinos to art galleries to real estate agents.

The point is far from lost on EU lawmakers. “Improving the governance of the EBA is of course needed, but this does not make a banking authority a good supervisor against financial crime,” Sven Giegold, a German Green in the European Parliament, said in a statement.

The governments could still choose to stick with the EBA. France has been lobbying other capitals to strengthen the Paris-based agency since the fall — ramping up national tensions, three Treasury officials said.

“There is a feeling that anything that emanates from an institution based in Paris has a particularly French feel to it,” one of the officials said. “It would fit perfectly with French processes and systems but could be a nightmare for other member states to implement.”

A spokeswoman for France’s finance ministry rejected those claims, saying France is focused on finding the right solutions to crack down on dirty money rather than squabbling over the geographical locations of a European supervisor.

“We believe that the EBA could provide a more cost-effective option,” and it “could yield concrete results more rapidly,” she added. “It is one option, and the decision on the supervisor’s structure will only come at a later stage once we have agreed on its mandate and competence.”

Either way, countries need to put their disagreements aside, said MEP Eero Heinäluoma of Finland, who leads the Socialists & Democrats on anti-money laundering measures. He said EU citizens need to feel like politicians are working together to fight illicit financiers — especially in the current crisis.

“The impact of COVID-19 is hard to underestimate,” Heinäluoma told POLITICO.

“In such a difficult societal context, where thousands of people risk losing their jobs and/or will have seen their standard of living lowered, it is unimaginable that there will be no political willingness to step up the European cooperation against money laundering,” he said.

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