THE EXORCISTS OF FINANCIAL GHOSTS (2005.06.17)
Daiva Vilkelytė, Verslo žinios, Nr. 117 (2021)
The representatives of 15 banks from Lithuania, Latvia and Estonia on June 6th gathered together in Riga, in the seminar that was organized by three strategic partners, namely SAS Institute, Accenture, and UAB "Paspara". During the seminar, they tried to solve the classical puzzle of how to move a wolf, a goat, and a cabbage over the river, or to put it into the context, how to align Baltic banking system with the rules set by the European Union, as well as how to comply with the stringent USA anti-money laundering requirements, and at the same time boost the profitability of the banking operations.
“The Baltic banks are swiftly converging with the European banking system, and it seems that they tend to forget that after the 9/11 attacks, it was not only regulations of airports and administration of immigration that were tightened in U.S. On October 24, 2001, U.S. Congress also passed the “USA Patriot Act”, and section 311 of this act grants the Secretary the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transactions, or type of account is of “primary money laundering concern”, to require domestic financial institutions and financial agencies to take certain “special measures” against the primary money laundering concern,” – during the seminar explained Rowan Bosworth-Davies, Director of Anti-Money Laundering and Fraud Prevention at SAS.
Lawyer by education, Mr. Davies has spent 25 years of his professional career in New Scotland Yard as an investigator and prosecutor of financial fraud and white-collar crime. He ranks money-laundering experts as being exceptionally inventive and strong adversaries: “In essence, money laundering is an illicit use of the world’s commercial, professional, transactional payment and financial delivery systems to move criminally-tainted money. Remaining as closely as possible to traditional payment routes and maintaining ordinary commercial transaction activity is the best and hardest to beat defense against being uncovered as money launderer.”
According to Mr. Davies “it is perfectly possible to take two identical sets of transactions, withdraw the proceeds from the same bank account, move them through the same financial products, use them for the same financial investments, and then liquidate their proceeds and route them through the same offshore jurisdiction, to reappear in the same end-user bank account, and one could be a criminal transaction and the other the legitimate one.”
He yet suggests that nowadays, Baltic banks should defend themselves not only against financial criminals, but also against custodians of financial system:
“These special measures can intimidate employees of even the most respected institutions. They grant U.S. banking supervisory authorities with a vast range of options that can be adapted – from requiring a thorough recordkeeping and reporting of certain financial transactions to actual prohibition on the opening or maintaining of correspondent or payable-through accounts within U.S. jurisdiction territories.”
“Read that Act and you will see by yourselves,” – explains Mr. Davies, - “that a bank or any other financial institution can ultimately be trapped in being sued in personal capacity for breach of fiduciary duty towards shareholders, in trials by beneficial owners of property for failure to protect their interests, and finally, in penalty settlements for the criminal breach of Money Laundering Regulations in both European Union and U.S. This is indeed very serious. Even for a stable bank it can embody the death of business.”
Caught in Latvian Banks
Money laundering, which seemed to be a far forgotten history for the Baltic bankers, was brought back into the scene on 19 April 2005, when the U.S. Treasury Department singled out two Latvian banks – “Multibanka” and “VEF banka” – as two institutions of “primary money laundering concern”.
An immediate response of the FDIC under the U.S. Treasury Department was a proposal to adapt rules that would prohibit U.S. financial institutions’ from opening, maintaining, or administering any correspondent accounts with these banks within U.S. territory.
One of the banks reported an abrupt drop in assets of €11.4 million when the news went public. The lawyers of “VEF banka” from New York chamber “Breschel & Rubin LLP” immediately disseminated a statement, in which they communicated willingness of “VEF banka” to work closely with U.S. Treasury Department and Latvian banking regulators to tighten banking procedures, “particularly as they relate to the identification and documentation of non-resident and web-based accountholders”.
Prior to these events, the net profit of “VEF banka” for the first quarter of 2005 was 231.304 LVL. The April profit share was 47.312 LVL. As of this fatal April, the asset value of the bank (that was established back in 1992) was 26.8 million LVL, the loans issued were 11.9 million LVL, and deposits amounted to 21.3 million LVL (http://www.vefbank.com).
According to the FDIC report April 26th 2005, the bank laid itself open to accusations as soon as it was discovered that “”VEF banka” offers confidential banking services to its non-Latvian customers and therefore the bank may have been involved in money laundering”.
This diagnosis, however, was a gentle one, as compared to the sentence that was passed by the same institution with regard to “Multibanka”. According to the information that is in U.S. supervisory authorities’ possession, “a significant portion of its [“Multibanka”] business involves wiring money out of the country on behalf of its account holders. The bank has been suspected of being used by Russian and other shell companies to facilitate financial crime”.
“Multibanka” is the oldest commercial bank in Latvia. Its predecessor was Latvian branch of the Foreign Economic Relations bank of the USSR, but in 1991 the Republic of Latvia nationalized it, and the bank became the Foreign Operations Department of the Bank of Latvia. In 1994, it was again privatized and the Joint Stock Company “Multibanka” was founded. During the first quarter of 2005 “Multibanka” earned 817.006 LVL of net profit. As of the end of 2004, the bank has issued 41.758.000 of loans, its deposits amounted to 144.307.000 LVL, and its asset value was 146.470.000 LVL (http://www.multibanka.com).
With or Without Courts?
Latvian Prime Minister Mr. Aigars Kalvitis during public debates at once acknowledged that money-laundering activity is prolific in Latvia. In fact, Mr. Kalvitis believes the problem is so widespread, that the country could see its admission into Eurozone suspended. Nevertheless, none of the money-laundering cases has ever reached Latvian courts.
According to Mr. Petras Moscinskas, the Director of UAB “Paspara”, money-laundering prevention needs not to be exercised by courts. He strongly believes that if Latvian and some of the Lithuanian banks implemented more sophisticated financial reporting and technological monitoring systems that comply with both European and U.S. requirements, as well as minimized human factor risks and concentrated not on the single monetary transactions, but on the atypical financial behavior as a whole, they would definitely escape from the danger of international sanctions. Hence, he proceeds, “Accenture”, “SAS Institute”, and UAB “Paspara” have formed a strategic partnership that offers a flexible but robust solution that meets the individual bank’s business-driven requirements.
According to the International Monetary Fund, 800 billion USD - 2 trillion USD, obtained from criminal activity, are laundered each year around the world, and these numbers are increasing. Hence it comes as no surprise that governments, while being unable neither to assess the clearance flows of illegal money nor smash the global trends of commercialization of various criminal activities, end up with tightening banking procedures in this Internet and terrorism century.