Denmark’s Poor Performance in the Fight Against Financial Crime Shows Why European Regulation is Needed

Whether you are The Guardian, London’s Mayor Sadiq Khan or this author, it is fashionable to criticise Britain and its capital for the key role they play in global money laundering. The UK has all the professional and financial services needed to construct the elaborate schemes used by organised crime, kleptocrats and oligarchs looking to hide and enjoy their ill-gotten gains and has been slow to recognise and address the criminal consequences of its years of light-touch financial regulation.

This week in Paris, the evaluation of the UK conducted by the Financial Action Task Force (FATF) – the global standard-setter for anti-money laundering and counter-terror finance – is on the agenda. The report on this evaluation will be made public in a couple of months’ time, but whatever it says (and I hear it is not as bad as many – including this author and his colleagues – feared), the UK should be credited for the way in which it has used the FATF evaluation as the motivation for introducing a string of improvements as it responds to financial crime: new laws – most notably the Criminal Finances Act; a transparent companies’ register; and more investment and resources. To be sure, there is plenty more to be done. Greater focus, commitment and accountability is needed; the UK’s financial intelligence unit (FIU) – a central element of every country’s financial crime-fighting architecture – remains under-resourced and under-used and the country’s overseas territories and onshore partnerships (notably Scotland) need taming. Reversing 15 years of neglect cannot be achieved without sustained commitment but at least a discernible effort is being made.

In contrast, elsewhere in Europe, a string of revelations and scandals suggests that the UK is far from unique in facing shortcomings in its response to financial crime. In recent months across Europe – from north to south – repeated evidence has emerged of a failure of countries to grasp that it is not only big financial centres like London that are open to abuse as money laundering centres. Malta’s regulator has faced intense criticism for money laundering failures; Germany’s FIU, a central element of every country’s financial crime-fighting architecture, has been in turmoil; and a review of the FATF reports of those countries that have been evaluated over the past few years reveals consistent and worrying failings. Austria is a typical case, with an under-resourced response and a mixed and incomplete understanding of its money laundering risks.

And this failure to properly grasp the threats posed by money laundering and thus to invest the necessary financial and human resources in developing regulatory and law-enforcement responses can be seen most clearly in Denmark.

In August 2017, the evaluation of anti-money laundering and counter-terror financing (AML/CTF) measures of Denmark was published by the FATF. Little did Shakespeare suspect – as he penned Hamlet over 400 years ago – that his description of Denmark would still be so apt today, for the FATF’s review indeed revealed ‘an unweeded garden … rank and gross in nature’. The country lacked a national AML/CTF strategy; national objectives and activities were not coordinated; the effective functioning of its FIU was hampered by its lack of human resources; serious money laundering was not actively pursued; there was an inadequate understanding of risk and weak implementation of AML/CTF measures in almost all segments of the financial sector. The picture painted by the FATF is indeed tragic creating an environment of hygge for any criminal or kleptocrat seeking to obscure his or her financial tracks safely.

In highlighting the numerous and systemic failings of the anti-money laundering regimes in place across the EU’s member states (with more reviews to follow in the coming 2–3 years) the FATF and its regional body Moneyval (covering those countries of the Council of Europe that are not members of the FATF) have provided a valuable service, alerting – we would hope – financial sector regulators, law enforcement and policymakers to the failings that need to be addressed.

Yet despite this constant flow of evidence that Europe’s capitals – not just the UK’s – are failing to take seriously the risks they all pose and the opportunities they all offer to those seeking to recycle and disguise illicit finance, precious little has been done to respond to these clearly identified vulnerabilities. The European Banking Authority (EBA) reportedly commits only 1.8 full-time-equivalent staff to overseeing anti-money laundering activity across the 28 member states.

Belatedly, the EU has realised that relying on member states to effectively implement its directives and address the failings identified by the FATF is unlikely to succeed in strengthening the integrity of the EU’s financial system. While the FATF reviews shine a welcome light on gaps and vulnerabilities, these evaluations are undertaken only once a decade (the UK was last evaluated in 2007). Countries – the UK is a case in point – tend to ‘cram’ legislative and administrative measures prior to their evaluation; a consistent focus on ensuring responses to financial crime evolve to meet the ever-changing financial crime landscape is lacking.

In September, the European Commission noted that ‘recent cases involving money laundering in some EU banks have raised concerns that [money laundering] rules are not always supervised and enforced effectively across the EU’, requiring ‘decisive action’. It rightly proposes that the EBA should become the supervisor of supervisors, ensuring that national regulators are operating effectively with the aim of improving the AML framework and reducing risk. Current evidence suggests that national regulators cannot be left to this job unsupervised.

The enforcement action taken against banks such as HSBC and Standard Chartered has engendered significant improvements in AML awareness and controls at those banks and their peers. Those such as Danske Bank, which perhaps thought money laundering was but an Anglo-Saxon affliction, need to reassess their positions urgently. That the EU is taking seriously the fact that money laundering is a systemic risk across the continent is welcome, yet the failure for so long to grasp the scale of the threat means that, for the foreseeable future, scandals and revelations will continue to emerge.

Tom Keatinge is Director of RUSI's Centre for Financial Crime and Security Studies.

BANNER IMAGE: Copenhagen's skyline. Courtesy of JensPeter

The views expressed in this Commentary are the author's, and do not necessarily reflect those of RUSI or any other institution.