Emerging Europe, Newest EU Members Still Weak On Fighting Money Laundering

This month, the major economies of the world, led by the U.S. and European Union, backed the first ever global tax plan. If implemented, it would create a floor for how low countries can set their corporate tax rate (sorry Apple
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in Ireland) in an effort to discourage tax avoidance. The G20’s approval came shortly after 130 of the member states that are part of the Organization for Economic Cooperation and Development agreed to the blueprint for the global tax plan.

It’s easy going after the fat cats. They have few friends, outside of some members of Congress here who think this will hurt U.S. companies because, of course, the emerging markets – led by China – will have no part of this.

Over the years, investigations by the specialist news intel operations like the International Consortium of Investigative Journalists published their Paradise Papers and Lux Leaks reports that showed the extent in which well known companies, A-list business leaders, and the not-so-well known ones of Eastern Europe, Russia and the Middle East, in particular, like to hide their cash. Some of it from illicit gains. A lot of it from outright tax fraud.

It is unclear if a global minimum tax will stop any of this, especially if the poorer nations of Europe have never signed onto it. There, oligarchs running everything from mining operations, to used car lots, to banks, will do whatever they can to avoid paying taxes to governments many of them partially control.

Last December, Congress passed anti-money laundering legislation known as the Corporate Transparency Act. It was designed to thwart the use of U.S. shell companies by foreign businesses dealing in illicit goods, or just breaking their home tax laws. If they want to be American, for financial purposes, such as access to our financial markets and easy to set up offshore accounts, they have to report their true owners to the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN. It was supposed to end anonymous shell companies from setting up “offshore” (like in Delaware), tied to some ubiquitous, nefarious business/government operator usually making money somewhere east of Vienna.

Financial crimes, including tax crimes, threaten the strategic, political and economic interests of both developed and developing countries and undermine confidence in the global financial system, the OECD reported in 2015, one of the first looks at anti-money laundering, tax evasion, and the need for powerful countries to tag team this rather than make up their own rules on it.

Despite all of this, the black market grows, tax evasion grows, and governments where this is a popular occurrence, are both losing the battle and losing their patience.

From the Baltics to Ukraine: One Mess after the Next

Most of the time the tech firms in the Baltics operating above board. However, Latvia and Estonia have long been known as the favorite Baltic nations for Russian businesses to wash cash. It is the fancy footwork of Russian shell games and smaller countries where the fusion of politics and private business results in the 21st century equivalent of good old highway robbery.

Danske Bank branch in Estonia was used to launder billions of euros over a 9-year period beginning in 2007. The scandal rocked the European banking industry and was Europe’s largest money laundering scandal ever.

The Latvian banking system was closely connected to a 2014 financial scheme in Moldova which nearly destroyed that tiny nation’s banking system. And there was more.

Ilmars Rimsevics, Latvia’s Central Bank Chairman, was accused of bribery in 2018, and in 2019 it was supposedly discovered that he was using the port town of Riga as a transit hub for illicit goods and money laundering, The New York Times reported at the time. Police reportedly pressured witness accusations against him, Bloomberg reported this year.

The Latvian legal system appears overwhelmed, with judges with no prior bench experiences hearing or complicated financial litigation chops hearing dozens of multi-million dollar cases.

“There are many cases, especially in connection with ABLV Bank,” says Vija Kalnina, a judge at Latvia’s Court of Economic Affairs. “We are looking at very complex criminal and civil cases,” she says in an interview published in Latvian in July on LV Portal in Riga. “They require a lot of time, and a lot of resources and insight,” she says in an English translated version. She said the resources for anti-money laundering cases are severely limited.

Despite no major scandals to date, the head of the Financial Investigation Agency of Latvia, Ilze Znotina, was caught instructing judges to “disregard evidence and witnesses” in the interest of an expedient trial. The former Soviet state, now full fledged member of the eurozone and the EU, has had it.

Being tough on financial crime does not mean a court should be a rubber stamp for the law enforcement which often tramples on laws and a country’s constitution. Latvian courts recently acquitted two men allegedly involved in the largest bribery scandal in the country.

“The Soviet Union was dismantled in hope to establish the democratic governance and a fair trial. Instead, today we end up with corrupt courts that threaten the rule of law in a guilty until proven innocent push,” says Valentyn Nalyvaichenko, a center-right Member of the Ukrainian Parliament, and Secretary  of the Parliamentary Committee for Ukraine’s integration into the European Union. He is the former Heard of the Ukrainian Security Service (SBU).

“Judges should be independent of political influence and pressure. The foreign investors, business community and the public in general should be able to observe the transparency and impartiality of the judiciary process and have complete confidence that the rule of law is guaranteed to all,” he says.

Global corporate tax evasion is equal to around $420 billion a year, worldwide, according to the Tax Justice Network.

But that’s chump change compared to money laundering flows missing from tax collectors (and, in turn, public schools, public hospitals, public pensions, etcetera etcetera).

The United States estimates that more than $1 trillion is laundered each year, much of it thanks to the illicit narcotics trade. Banks around the world spend around $8 billion on anti-money laundering compliance annually, according to research firm WealthInsight. And, like Danske Bank and HSBC, have forked out $321 billion since 2008 on money-laundering fines, estimates the Boston Consulting Group.

Many of these countries were part of the old Soviet bloc. And now, some 30 years after the demise of the Soviet Union and its court system, the new European model isn’t working for these countries just yet. Some say it is far from even workable.

Ukraine is the best example due to its size and their desire to join NATO and the European Union.

Ukraine has continued to suffer at the hands of corrupt officials, despite the “help” of Western institutions. Increased funding and western cooperation has not done much to move the needle on Ukraine’s government-private sector bribery schemes, all schemes that fund offshore shell operations, London luxury real estate, and crazy capital flowing into American assets – whether into startups, or housing.

Ukraine’s judicial branch is likened by some as a “criminal syndicate”, writes Mykhailo Zhernakov, a former Ukrainian judge writing for UkraineAlert on The Atlantic Council’s website.

Actor-turned-President Volodymyr Zelensky’s best efforts to keep his campaign promises to root out corruption have been lackluster. According to a survey by the American Chamber of Commerce in March 2021, lack of rule of law (66%), corruption (54%), and lack of any reform agenda (45%) were the top-three reasons businesses were uninterested in investing in Ukraine’s future.

It doesn’t matter if you’re a woman.

Harvard-educated, pro-western, pro-EU, Maia Sandu is now the Moldovan President but the country continues to struggle with corruption. It has a long fight ahead to clean the judicial and anti-corruption agencies that were captured by oligarchs, who are currently fugitives from justice. Faith in the country’s economic system has yet to recover from the 2014 scandal, where the country lost approximately 12% of its GDP in a complex bank fraud scheme.

It doesn’t matter if you’re LGBT.

Ana Brnabić has been the prime minister of Serbia since 2017. She is the first woman and first openly gay person to hold the office.

Citizens of Serbia continue to perceive corruption as one of the top three problems in the country (12% of respondents in all three years), alongside low wages (15%) and unemployment (15%). More than half of the respondents (53%) say corruption – governments and private sector oligarchs often colluding to raid industry, avoid taxation, and pull money out of the country – has a negative impact on society, a 2020 survey by the United States Agency for International Development said.

The Magnitsky Act has marked the entire country of Belarus as untouchable to U.S. institutional investors, as most major businesses are allegedly linked to the government somehow and therefore face sanction risks. 

Corruption: Guilty ‘Til Proven Innocent?

Corruption is part of human nature. Black markets are a way to make money off the part of us that likes to break the rules. All of this is separate from the global tax plan, designed to reign in corporate interests to avoid taxation and keep more for themselves, and their shareholders. Money laundering, in itself, is more minute. It’s for a tight knit collection of friends, family, and expensive lawyers in Panama and Channel Islands — not a corporate behemoth and BlackRock
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mutual fund investors who benefit from the lower tax overhead of the companies they’re invested in.

Just as new tax rules require tax lawyers and compliance experts, so does anti-money laundering regulations require a similar workforce. It’s an industry now. It’s getting bigger. It’s getting more complicated. This isn’t the 1980s when you could just hide your money in Miami real estate.

“The anti-money laundering profession has become more complex and demanding. Regulations and requirements are changing dynamically, threats are always on the rise, funds are moving faster, and tracing them is growing to be more difficult,” Wael Saikaly, head of anti-money laundering (AML) regulations at  CreditBank SAL, said in an interview with a company called Sanctions Scanner, which grew up out of the need to help banks with AML rules worldwide.

Corruption is proven to hurt countries in the long run. Corrupt nations are less competitive on the global stage as the bottom of Transparency International Index shows. The instability and unpredictability of these countries make long-term investment and business decisions almost impossible, and – perhaps even worse – keep them stuck in a cycle of opulence and poverty.

The impact that corruption has on these countries is reflected in their rankings on ease of doing business, published annually by the World Bank. The Gordian knot of fighting corruption in these nations must be taken care of if governments are serious about the twin-fights of big corporate tax evasion and money laundering by smaller, lesser known names from the emerging markets.

The rub is whether the European powers are going to hold up to their traditional view of justice being served by impartial courts, or rather by impatient, frustrated, and angry government officials and law enforcement officers from the old Soviet Union taking a “find me the crime and I’ll find you the person” approach.

There is a serious money laundering problem in Europe. The new European Union members in the Baltics are far behind the rest of the EU. But that doesn’t mean the EU is clean. Swedish Svedbank and Austrian Raiffeisen and of course Deutsche Bank has also been a hotbed of bad financial actors, not all of them Russian.

“If the system is tweaked and abused for either political goals and gains or just to expedite ‘justice’, it could certainly backfire and create the results that are exactly the opposite of what the intention was of the reformist actors in terms of fighting money laundering,” says Igor Munteanu, a former ambassador for Moldova in the U.S., and currently a member of parliament. “Europe and market reforms are not only about trade and benefits. They are mainly about reforming the lingering and abusive legacies of the old system…and winning victories for the rule of law and human dignity.”