EVOLUTION OF BANKING SECTOR MONEY LAUNDERING REGULATIONS IN EUROPEAN UNION FROM 2010 TO 2019

Table of Contents

The Introduction 3
Literature Review 6
Methodology 15
1. Trends in Money Laundering Regulations of EU in 2010 18
1.1 Theoretical Approach on the Global Regulation 18
1.2 The description of the FATF 2004 40 Recommendations 19
1.3 The implementation of the European Union 3rd AMLD of 2005 26
1.4 The key outcomes 32
2. The money laundering scandals and their outcomes between 2010 33
and 2019
2.1 The main focus of FATF 2012 40 Recommendations 33
2.2 The changes between the 3rd and the 4th Directives 35
2.3 The trend in the money laundering regulation of EU in 2012- 38
2019 period
2.4 The influence of the Russian and Azerbaijani Laundromats 39
2.5 The echo of the Danske Bank Scandal 41
2.6 “The Panama Papers” case 42
2.7 The consequences of the money laundering scandals 43
2.8 The key outcomes 44
3. Trends in Money Laundering Regulations of EU in 2019 45
3.1 The changes between the 4th and the 5th Directives 45
3.2 The trends mentioned in the EU reports in 2019 46
3.3 The key outcomes 52
Conclusion 53
Reference List 55

Literature Review

Conducting the research, I found out that not only the AML in the

banking sector is not the subject for the scholars' researchers, but also the whole

topic of the money laundering regulations lack the secondary sources and this is why my work is mainly based on the primary sources. To understand the evolution and the key changes in the AML of the European Union banking sector we need to focus on the two main institutions that perform as the regulators on the international arena in terms of the money laundering regulation: the Financial Action Task Force (FATF) and the European

Parliament. The FATF calls itself the «global watchdog» in the field of the

money laundering and terrorist financing. From now on I will mainly avoid mentioning the terrorist financing, as it is not the scope of my work, however, all the regulations that will be described further will relate to this issue as well as to the money laundering.
...

Methodology

The object of my research is the anti-money laundering regulations, as

the problem of the money laundering on the macro level is urgent and is needed

to be addressed properly. Despite the fact, that such powerful and well-structured international organizations as the United Nations and the FATF are dealing with the issue of the money laundering, and their norms, recommendations, and regulations are always revised, the problem of the money laundering still occurs in the international arena. The example of the system failure may be the Danske Bank scandal, where the suspicious payments
were made in 32 different currencies and by more than 10,000 customers. The

further investigation revealed the potential links to the so-called "Azerbaijani Laundromat" and the "Russian Laundromat", that were the money laundering schemes of the more than $ 22 bln. The Danske Bank case was of great importance for the European Union financial sector and the global AML policies.
...

1.1 Theoretical Approach on the Global Regulation

The conflict of interest between the transnational companies and the government often leads to the destabilization in the financial sector as a whole. This issue needs to be addressed properly by the international community, as there is no single state or even such the union of states as the EU that could
handle the money laundering. That is the reason for the existence of such

international organizations like FATF.

The globalization made the world to become more interconnected place and the global financial sector each of the states is closely tighten with the other jurisdictions’ financial sectors. To influence the whole system, the states need to create the universalized set of regulations with the chance for the states to change these regulations so they would fit one particular state.
There are two main approaches that exist in the anti-money laundering

regulation, that were mentioned by Levi and Reuter (2006).
...

1.3 The implementation of the European Union 3rd AMLD of 2005

Now we need to focus on the European Union’s Anti-Money Laundering Directive (AMLD) that was submitted in October 2005 and is

believed to be guided by the FATF’s 40 recommendations that we have just

discussed. The European Union Directive was adopted after the revision of the Financial Action Task Force recommendation in 2004, as the European Parliament states, that it is crucial to follow the international standards.

The main focus of the introduction lies in the money laundering problem as a whole and the agency of the countermeasures. The main effort of the AMLD is not to penalize the criminals and to conduct the investigations on
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the money laundering cases (but it is also crucial in the fight against it), but it is to prevent the money laundering itself.
...

1.4 The key outcomes

I have conducted the analysis and the comparison of the 40 Recommendations by FATF in 2004 edition and the 3rd Anti-Money Laundering Directive by the European Union and in conclusion, I establish that
the Recommendations have the direct influence on the financial policies of the

European Union and all the changes in the 40 Recommendations should be followed by the certain changes in the policies of the European Union. The FATF leaves the right for the states to slightly change the recommendations to implement them in their jurisdiction but the total discrepancies are not allowed. The European Union followed the recommendations of FATF, however, the policies in the Member States were not universalized and the banking sector
was fragmented.
33

2.
...

2. The money laundering scandals and their outcomes between 2010 and 2019

Discussing the changes that occurred in the AML in the European Union I will analyze the changes between the 3rd and 4th AMLDs and make a review of the new version of the FATF's 40 Recommendations. However, this analysis would be insufficient, if we wouldn't discuss the largest money laundering scandals that happened in this period, including the Danske Bank scandal, the Russian and Azerbaijani Laundromats and the Panama Papers scandal of 2016. The analysis of these events would provide us with the possible reasons for the changes in the AML policies of the European Union and will help us to understand the whole picture of the money laundering schemes, that evolved during the set period.

2.1 The main focus of FATF 2012 40 Recommendations

In comparison to the previous edition, the FATF's 40 Recommendations have the new structure of the document itself.
...

2.2 The changes between the 3rd and the 4th Directives

While according to the 3rd AML Directive some of the states, that are not the Member States, but have the similar Anti-Money laundering systems, could be the subjects for the so-called «simplified customer due-diligence», the
36

4th AML Directive does not have the permission for such states to fall in the category for the simplified due diligence procedures. Therefore, as there are

no concessions for certain states, the possibility for the financial institutions

from the Member States or the 3rd states to fill the simplified customer due diligence is not so simple anymore. According to the 4th AML Directive all the financial institutions, despite being the subject to the similar AML procedures, as mentioned in the Directive, should control the level of the money laundering risk that may be aggravated by the customer before the due diligence procedure.
...

2.3 The trend in the money laundering regulation of EU in 2012-2019

period

For the analysis of the trend in combating the money laundering in the European Union, I want to provide the evidence from the Basel Institute on

Governance (BIG). The BIG conducts the research on the risk of the money

laundering in every state of the world. They publish the independent annual rating, giving each of the states their position in contrast to the other states and their score from 0 to 10 (where 0 is no risk at all and 10 is the highest risk possible). The highest-ranked country of the European Union in 2012 was Greece (6,78 out of 10) and the lowest-ranked in that year was Estonia (3,27 out of 10). The highest-ranked country in 2019 was Cyprus (5,01 out of 10) and
the lowest-ranked was Estonia (2,68 out of 10).

I took all the European States’ overall score in each ear from 2012 until 2019, summed it up, and divided to the number of the European States for each year.
...

2.4 The influence of the Russian and Azerbaijani Laundromats

The so-called “Russian Laundromat” was the vast money laundering scheme that was revealed in 2014. The total amount of the laundered money was more than 20 billion dollars from 19 Russian banks, that were transferred to the bank accounts in 732 banks some of which were the European banks. The scheme was as follows: the Russian businessmen opened 2 companies

outside Russia and one of his firms signed the papers that it gave the loan to the

other company (however, no real loan was established) and the guarantor of this loan was the Russian company of this businessman, and one of the participants of this relationship was the Moldavian citizen. When one of the companies claimed that it could not return the loan (that never existed) the trial started and it took place in the corrupted Moldavian courts, as one of the participants was the citizen of Moldova.
...

2.5 The echo of the Danske Bank Scandal

The Danske Bank scandal is believed to be one of the largest money

laundering scandals in the European Union history. As we could see from the previous passages, the Russian and Azerbaijani Laundromats had direct links with the Danske Bank’s branches in the European Union. The scandal itself started with the whistleblower report from one of the workers of the bank, which said in his report, that the illegal transactions are made through the Estonian branch of the Danske Bank. The Danske Bank itself is one of the
42

biggest banks in the European Union and its Estonian branch opened after the absorption of the Sampo bank in 2007. In the 2007-2014 period, the total

number of the non-resident customers was approximately 15,000. The

investigation on the whistleblower report started in 2014 and resulted in the closure of the non-resident portfolio in 2016.
...

2.7 The consequences of the money laundering scandals

The three money laundering scandals happened in the European Union

at the same time and the connections between them were revealed. This train

of the scandals questioned the efficiency of the AML practice in the European Union and raised the urgency of the counteractions. The main problem of the AML regulations in the EU was the fact that these policies relied on each of the Member States’ authorities separately. As I have already mentioned, the level of development in each state of the European Union is different and because of it, some states cannot follow the policies from the AMLDs sufficiently.
...

1.4 The key outcomes

I have conducted the analysis and the comparison of the 40 Recommendations by FATF in 2004 edition and the 3rd Anti-Money Laundering Directive by the European Union and in conclusion, I establish that
the Recommendations have the direct influence on the financial policies of the

European Union and all the changes in the 40 Recommendations should be followed by the certain changes in the policies of the European Union. The FATF leaves the right for the states to slightly change the recommendations to implement them in their jurisdiction but the total discrepancies are not allowed. The European Union followed the recommendations of FATF, however, the policies in the Member States were not universalized and the banking sector
was fragmented.
33

2.
...

3.1 The changes between the 4th and the 5th Directives

The 5th Anti-Money Laundering Directive can be seen as the renovation of the previous Directive, as most of the changes are the updates. As I have already mentioned before, the limit that was set by the 4th AMLD in
terms of the transactions to the anonymous prepaid cards was 250 Euro per

month. Now, after the implementation of the 5th AMLD this limit was lowered to the amount of 150 Euro. This does not mean that the customers are not allowed to transfer more than 150 Euro to the prepaid cards with the unknown card holder, but this regulation makes the firms to present the identity checks for the card holders that have more than 150 Euro on their prepaid cards. When we mention the prepaid cards from the non-member states, these cards are
allowed to be used on the territory of the European Union if the legislative

system in that 3rd state is similar to the norms that are set on the territory of the European Union.
...

3.2 The trends mentioned in the EU reports in 2019

This part refers to the changes in the ANL mentioned in the “Report from the commission to the European Parliament and the council on the assessment of the risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities” (European Commission, 2019a).
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The total amount of products and services that are believed to be vulnerable to the ML risks grew from 40 in 2017 to 47 in 2019. These products
and services can be separated into the 11 sectors of the economy, 10 of which

have already been mentioned in the 4th AML directive.

The report states that there is the ongoing trend of the common refuse of the cash as the payment method, however, cash remains the main instrument for the criminals to transfer and launder their money.
...

1.4 The key outcomes

I have conducted the analysis and the comparison of the 40 Recommendations by FATF in 2004 edition and the 3rd Anti-Money Laundering Directive by the European Union and in conclusion, I establish that
the Recommendations have the direct influence on the financial policies of the

European Union and all the changes in the 40 Recommendations should be followed by the certain changes in the policies of the European Union. The FATF leaves the right for the states to slightly change the recommendations to implement them in their jurisdiction but the total discrepancies are not allowed. The European Union followed the recommendations of FATF, however, the policies in the Member States were not universalized and the banking sector
was fragmented.
33

2.
...

Conclusion

The threat of the money laundering existed for decades and the

international community have been developing the regulations since 1990. The

money laundering became associated with the terrorism financing after the 9/11 attack. This event made the international society to move their attention from single money laundering issue to the complex issue of the illegal transactions between the states.

The European Union succeeded in some aspects of the anti-money laundering regulations. In the observed period the EU authorities reduced the

barriers between the states and made the data exchange between them easier.

The activity of the Financial Intelligence Units was optimized in the recent decade and their influence in the monitoring of the financial sector raised. The Units were forced to create the new communication systems between them and the obliged entities.

The European Union tightened the regulations of the politically exposed persons.
...

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