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Dysfunctions Last Updated: Mar 26, 2019 - 3:38:31 PM


Russia and money laundering in Europe
By Anders Aslund, EU Observer, 25/3/19
Mar 25, 2019 - 4:10:55 PM

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Why are minor middlemen punished rather than the chief culprits, the big Russian state banks?

Something is seriously wrong with international banking regulation.

In the recent big money laundering scandal Danske Bank in Estonia had processed €200bn, which is deemed a serious crime.

But why are all these intermediaries punished and not the actual culprits, the big state banks in Moscow that drive the illicit flows of money?

Awaiting possible fines from the US Treasury, the stock prices of Danske Bank have fallen by half, and other Nordic banks involved, such as Nordea and Swedbank, have seen their stocks fall by one-fifth.

As a consequence of this money laundering that ended in 2015, both Estonian and Latvian banks have lost correspondent banking in US dollars, which is vital for a bank that wants to pursue international activities.

A year ago, the US Treasury named ABLV Bank of Latvia, the third biggest bank in Latvia, an 'institution of primary money laundering concern'.

It prohibited "the opening or maintaining of a correspondent account in the United States for, or on behalf of, ABLV Bank."

Although it was perfectly solvent, within two weeks ABLV had to close down.

These radical developments raise serious questions.

 

Follow the money

First, where did the money come from?

While some money came from Azerbaijan, Kazakhstan, and Ukraine, overwhelmingly the laundered funds came from Russia.

Strange as it may sound, but since 2003 Russia is a member of the ruling global body for money laundering, the Financial Action Task Force (FATF), which is headquartered at the Organization for Economic Cooperation and Development (OECD) in Paris.

It praises Russia for having rapidly implemented and enhanced its anti-money laundering system.

But how can that be the case, if Russia is the main money-laundering risk for small EU countries, such as Cyprus, Malta, Estonia, Latvia, and Lithuania?

Estonia and Latvia have successfully fulfilled the rigorous legal standards of the OECD, while Russia has not.

This makes no sense.

Why are minor middlemen punished rather than the chief culprits, the big Russian state banks?

The absurdity becomes even greater when you check the details.

In 2015, Estonia and Latvia lost their last correspondent banking relation in dollars with Deutsche Bank.

Their national banks were left with no choice but to turn to Moscow for correspondent banking in dollars.

The prime beneficiary was VTB, a state bank that tends to be involved in all big scandalous bank operations. VTB is Russia's second largest bank after the also state-owned Sberbank.

This shows that the essence of the global anti-money-laundering regime is about size rather than legality. VTB has a couple of hundreds of billions of dollars on its balance sheet, so it can get away with anything, although few banks have been involved in more scandals than VTB.

In April 2016, the Panama Papers were published.

They revealed that VTB's subsidiary on Cyprus, RCB, had given an offshore company belonging to Putin's childhood friend, cellist Sergei Roldugin, a loan of [€572m], which was clearly not supposed to be paid back.

As if to cover the tracks, the biggest private bank in Russia, Bank Otkritie, bought this subsidiary from VTB.
Bank collapse

In the autumn of 2017, Bank Otkritie collapsed.

It was known that VTB owned 10 percent of Bank Otkritie, but Financial Times found out that Bank Otkritie had covertly bought up 20 percent of VTB on the market. These purchases aimed at boosting VTB's flagging stock price and were a major reason for the failure of Bank Otkritie.

In December 2014, Otkritie and VTB helped the state-owned oil company Rosneft refinance a foreign loan of $7.6bn.

As Max Seddon of Financial Times put it: "In 2014, Otkritie, already Russia's largest privately held bank, doubled its assets overnight in a repo deal organised by VTB to navigate western sanctions and refinance oil group Rosneft's debt."

As a consequence of this oversized financial operation, the ruble exchange rate plummeted and Russia ended up in a severe currency crisis.

On 3 October, 2016, a sudden change occurred in the Russian central bank management for the first time in several years, as two deputy governors in charge of bank regulation were removed.

The apparent reason was that they had closed down banks that were actually in good shape and participated in the raiding of their financial resources, though needless to say nobody was prosecuted.

One week after the chief regulator, deputy central bank governor Mikhail Sukhov had been sacked from the Central Bank, he was hired by VTB as vice president.

While Sberbank has a highly respectable market capitalisation on the London Stock Exchange of almost $70bn, VTB with half as large banking assets has fallen to a market value of merely $8bn.

In short, VTB is a financial disaster. Without state support, it would have gone bankrupt repeatedly.

Andrei Kostin has been CEO of VTB since 2002 and his tenure seems safe, but that indicates that VTB is not really a bank but a Kremlin slush fund that is supposed to provide financing for whatever aim the Kremlin might suggest.

The chairman of its supervisory board is finance minister Anton Siluanov, who naturally is obliged to obey Kremlin orders.

Since July 2014, VTB has been sanctioned by the US Treasury as part of its sanctions on Russia because of its military aggression in eastern Ukraine.

When a major problem arises, such as money laundering from Russia, the focus should be on the root problem, the big crooked state banks.

Western banking authorities should go after the real culprits of money laundering, such as VTB rather than mosquitoes such as ABLV.

Given the public record reported above, the US Treasury should deprive VTB of the rights of corporate banking in US dollars and EU banking institutions should do the same.

As long as Russia is too crooked to qualify for OECD membership, it should no longer be accepted as a member of FATF.

Both the US and the EU need to abandon the principle in bank regulation that it is all right to be a crook as long as you are big.


Source:Ocnus.net 2019

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