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Magnitsky’s Memory Part 2: Closing the Global Money Laundering Loopholes Photo Courtesy of Chris Potter on Flickr

Magnitsky’s Memory Part 2: Closing the Global Money Laundering Loopholes

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Next week marks the tenth anniversary of Sergei Magnitsky’s death, the Russian lawyer whose anti-corruption work implicated Kremlin officials in a $230 million tax fraud scheme. As we remember Magnitsky, it’s important to examine the current state of international money laundering, because as it stands now, the people who continue to profit from the crimes exposed by Magnitsky have not yet been brought to justice. While the U.S. has proclaimed support for Magnitsky through the Magnitsky Act, our government should do more to close the glaring loopholes that allow dirty money to flow from Russia into the West.

Magnitsky’s former employer Bill Browder is calling for banks to be held accountable for their roles in the scheme that led to the lawyer’s death. Browder has filed complaints with countries including Estonia, Latvia, and Lithuania, but justice continues to evade him, in part due to the deficiency of the EU’s anti-money laundering enforcement mechanisms.

A New Foreign Investment Screening Regulation

In March 2019 the EU passed legislation to establish “a framework for screening of foreign direct investments into the Union.” Member states have until October 2020 to comply with new requirements, which include annual reporting and information sharing. The legislation is a step forward in weeding out dirty money flows, because it provides a way for member states to voice concerns about investments and share information throughout the Union. However, the screening regulation is painfully insufficient to address the structural deficiencies in the EU’s anti-money laundering regime.

In order to avoid prolonged internal debates, the law was significantly watered down from the original version proposed by France and Germany in 2017. Nordic and Baltic countries allied with Portugal, Greece, Ireland, and Spain to resist the original proposition, which included legislation to create a blocking mechanism for suspicious foreign investments. Due to this resistance, the final version of the law (passed with 26 out of 28 votes and two abstentions from UK and Italy) merely includes an analysis mechanism. Furthermore, currently only half of all member states actually have local screening systems, and the new regulation does not call for the other 14 countries to institute systems of their own. The dilution of the legislation underlines a central obstacle to combating European money laundering: the problem is rampant, but countries are reluctant to prioritize enforcement over profit.

Europe’s Vulnerability to Money Laundering

The weakness of the new legislation points to the broader issue of fragmentation within the EU. Lacking a central agency charged with investigating financial crimes, the EU is rife with opportunity for foreign financial criminal misconduct, since differences in member states’ systems prevents general oversight.

The new regulation essentially defers to member states, relying on local enforcement capabilities to screen for criminal acquisitions entering their jurisdictions. The decision to screen any particular investment remains the sole purview of each member state, since opinions from others are non-binding. This patchwork solution reveals the paradox at the heart of EU attempts to combat money laundering. While operating within a single integrated market, there are nonetheless 28 different enforcement systems, making reform seem like a “whack-a-mole” endeavor. The result is at best a lack of coordination, and at worst policy incoherence.

The Role of the Baltics

The Baltics (particularly Estonia, Latvia, and Lithuania) demonstrate the flaws in the current EU anti-money laundering system. They have been the sites of widespread criminal activity recently, with Russian money launderers using Baltic units of Nordic-based banks to funnel money into the West. After the USSR’s collapse, Baltic countries were active in servicing flows of capital out of Russia and other post-Soviet States. As a result, Baltic banking industries specialize in “non-resident portfolios,” and are consequently prime targets for money launderers. For example, Danske Bank channeled $230 billion out of Russia through its Estonian branch over the course of 2007-2015. Disclosure of this fraud has caused a loss of nearly $12.8 billion in market capital. Danske is one of the banks suspected of being involved in the massive scandal exposed by Magnitsky.

While the Baltics operate as passageways for Russian dirty money into Europe, they lack the necessary resources to prevent high-level crime, and are becoming overwhelmed. This makes them an attractive for international money launderers, who consistently home in on weak links— small countries where watch-dogs are incapable of effectively executing enforcement.

The U.S. Interest

These vulnerabilities in the EU’s enforcement system are not irrelevant on this side of the pond. The U.S. has a reputation as the toughest anti-money laundering regime worldwide due to imposition of huge fines against complicit banks, but this is not sufficient. Focusing on banks has left an un-guarded “back door” in the form of private investment funds, electronic payments companies, and securities firms. The rise of these alternative systems combined with the weakness of European regulation makes money laundering a global problem.

The U.S. has an opportunity to live up to its reputation by working with international partners to ensure that global markets become cleaner, rather than allowing dirty money to run rampant.

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