Why the EU anti-money laundering list is so short

The EU, last week, told a black-and-white tale of 20 sinful states who posed a money-laundering threat to Europe's law-abiding single market.

But the real story of the EU and money laundering is more complicated.

And the EU's new dirty-money blacklist revealed more by its omissions than by its inclusions.

The 20 countries that posed a "high risk" of injecting criminal or terrorist funds into the single market were named and shamed by the European Commission on 7 May.

They included Afghanistan, a leading heroin exporter.

The EU also stigmatised Panama, exposed in the 2016 Panama Papers leak as a global clearing house for shady money.

The other 18 sinners were: the Bahamas, Barbados, Botswana, Cambodia, Ghana, Iraq, Jamaica, Mauritius, Mongolia, Myanmar/Burma, Nicaragua, Pakistan, Syria, Trinidad and Tobago, Uganda, Vanuatu, Yemen, and Zimbabwe.

It meant EU banks ought to do enhanced due diligence on transactions.

The listing automatically excluded the 27 EU states themselves, plus Iceland, Liechtenstein, and Norway, under the EU law that governed the process.

The blacklist was based on a purely technical, 59-page commission methodology, officials said.

It was also based on the decisions and methodology of the Financial Action Task Force (FATF), an intergovernmental anti-money laundering body in Paris.

But the claim the EU lists, which are updated each year, are purely forensic was given the lie by last year's political exclusion of Saudi Arabia.

The commission, last January, said the petro-kingdom had met criteria for listing, on the basis of a detailed and confidential document.

But EU states, a few weeks later, vetoed the move anyway, to protect the West's geopolitical ally.

They also vetoed the commission's listing of four protectorates of Europe's principal ally on the world stage, the US - American Samoa, Guam, Puerto Rico, and the US Virgin Islands.

And the story of political interference goes back further.

The commission, in 2018, said 54 countries merited a risk assessment.

That long list included China and Chinese protectorates Hong Kong and Macau, Russia, and the US itself, where the state of Delaware is a fiscal paradise.

It named UK protectorates, such as the British Virgin Islands (BVI) and the Cayman Islands, as well as some of the EU's closest friends: Andorra, Monaco, San Marino, and Switzerland.

It also named EU oil supplier Azerbaijan and US ally Singapore.

None of these were ever listed in the end, the EU commission says, for methodological reasons.

But all of them are known as money-laundering hotspots by experts in the field.

"Almost all the recent EU money-laundering scandals come from Russia or the former Soviet region," Panicos Demetriades, the former president of the Central Bank of Cyprus, who now teaches economics at Leicester University in the UK, told EUobserver.

The City of London in the UK and Liechtenstein were also hotspots, Michel Koutouzis, a former FATF inspector, who writes books on money laundering, said.

"If the objective is to clean up the financial system, the [EU] list is weak and unhelpful," Bill Browder, the CEO of UK hedge fund Hermitage Capital, who has investigated Russian money laundering ever since mobsters raided his firm in Moscow in 2008, also said.

"It's more significant who's not on the [EU] list than who's on it," Browder said.

The fact EU states gave themselves an automatic pass from the blacklist was also telling, the experts said.

Austria, Cyprus, Estonia, Germany, Latvia, Lithuania, Luxembourg, the Netherlands, and Malta also had banking sectors known for money laundering.

"Cyprus and the Baltic states were the main transit countries in most Russian money laundering," Browder said, after following a thread of €200m of embezzled Russian funds via various jurisdictions, which led to the €200bn Danske Bank affair in 2018 - the biggest money-laundering scandal in EU history.

One reason why the EU or FATF lists were "weak", was because they lacked ambition, Koutouzis, the former FATF inspector, said.

The lists were designed "to put pressure on small countries to turn down the tap a little" on mafia money, not "to clean up the financial system", he said.

"We give fiscal paradises like the BVI a choice: 'If you make a small effort to control drugs and prostitution money, we will close our eyes to larger fiscal fraud'," he said.

"We give them a choice to launder the money of large companies instead of small traffickers. Some play the game and some don't," he added.

"Russia could never be on the [EU] list. It's too big a morsel to swallow and Russian banks are present everywhere in the world," Koutouzis said.

"Why not name Hong Kong? It's the same thing, because we don't want a fight with China," he added.

But the main reasons why the EU and FATF blacklists were so weak were systemic, the French expert said.

The really big criminal money was impossible to trace or stop using lists because of bond markets, he noted.

And EU countries, just like China, Russia, or the US, needed fiscal paradises to enable the free flow of capital into their economies, he added.

The bond market scam operates when a bank in China, for instance, buys corporate or sovereign bonds using a few million dollars of legitimate money mixed with, for instance, its gangster clients' opium income.

"The bank creates a new pot, and by the creation of the pot, we lose the identity of the constituent funds," Koutouzis said.

The money is even harder to trace after the bank trades the mixed pot/bond for other financial instruments on Asian markets.

These instruments are traded again when Middle East markets wake up and once again when the sun rises over the City of London, a favoured final destination for mafia funds.

The top fiscal paradises were also too important for the functioning of the world economy for them to be shut down, Koutouzis said.

"You must remember, offshore banking centres were created by states, not by the mafia, or money launderers. They were created so that the thousands of billions of dollars that flow through them can be reintroduced into normal economies," he said.

"We can't condemn what we invented, just because the mafia uses it too," he added.

"If we had a real [money laundering] blacklist, half the countries of the world would be on it," he said.

The system has created a culture in some EU states in which money laundering is so routine and so profitable, that banks simply set aside parts of their annual budget to pay fines, while the general public does not care even if they are caught red-handed.

"In most places, we close our eyes, banks pay their fines, and everybody's happy. Do you think Dutch people really care if some bank is fined for money laundering?", Koutouzis said.

For his part, Demetriades, the former Cypriot bank chief, broadly agreed with Koutouzis' crooked narrative of how things worked.

Demetriades saw first hand, one day in 2013, how Russians inserted dodgy money into the EU when he objected to suspicious goings on at a Cypriot bank and he got a phone call from Cypriot president Nicos Anastasiades.

Anastasiades "exerted pressure" on his then central banker to drop his objections, using "colourful language and explicit threats", Demetriades previously told EUobserver.

"The real problem [on money laundering] is at [EU] member state-level", he said.

But for Demetriades, who recently wrote an academic paper on EU financial governance, things could be a bit cleaner if more individuals were held accountable despite the political and systemic complexities.

"We should use the law to impose sanctions on individuals," Demetriades said, referring to top bankers caught in the act.

"What's the point of imposing fines on big financial institutions, if the banks just set aside more money in their budget for that, and keep doing what they're doing?", he added.

"In the financial crisis [in 2008], not enough people were charged. We would have fewer of these problems if we had more personal accountability," Demetriades said.

The EU should take a more targeted approach by "going after the [criminal] money trail, not the fiscal paradises," Koutouzis advised.

It should also impose visa bans and asset freezes on foreign individuals guilty of egregious corruption, Browder has advocated.

For its part, the commission said it was "aware that there are still weak links in the EU's anti-money laundering regimes, despite a lot of progress being made ... particularly in the Nordic-Baltic region".

Last week's EU blacklist was unveiled by Latvia's commissioner, Valdis Dombrovskis, who was "personally" pushing to clean things up, the commission said.

But amid the calls for more accountable leadership, Dombrovskis' track record made him look less like an EU knight in shining armour.

The 48-year old was Latvian prime minister between 2009 and 2014.

He oversaw the controversial bail-out of a Russian mafia-linked lender called Parex Bank.

Allegations later emerged that Latvia's central bank chief was taking bribes from Russians while Dombrovskis was in office.

And at least €200m of criminal Russian money entered the EU via Latvia between 2008 and 2014, according to bank documents seen by Browder.

No one has charged Dombrovskis personally with wrongdoing, but when asked by EUobserver if he took any political responsibility for the fiascoes on his Latvian watch, the commission washed its hands of his past.

Dombrovskis "has been a member of the college of commissioners since 2014. He has, therefore, not been linked with the Latvian government since then", it said.