US and Europe must team up to tackle money laundering
US, Europe should form a coordinated response to the issue and fix glaring flaws in their enforcement regimes
The money-laundering scandals keep rolling in, most recently in Estonia, where a subsidiary of Danske Bank reportedly processed some €200 billion (S$305 billion) in suspicious payments in recent years.
The US and the European Union have yet to muster a coordinated response.
The US Department of the Treasury even recently chastised the EU Commission for including four US territories on a list of jurisdictions with "weak anti-money laundering and terrorist financing regimes".
Instead of blaming each other, the US and the EU should be working together to develop a new consensus on how to address the issue.
Money laundering, in its current form, is relatively new.
Starting in the late 1980s, financial liberalisation around the world led to a substantial increase in tax evasion.
The problem was not on policymakers' radar until the 9/11 attacks, which revealed the connection between money laundering and terrorist financing.
Shockingly , the US Supreme Court's decision in the Citizens United versus Federal Election Commission case allowed unlimited amounts of so-called dark money to pour into the country's elections.
Since Russia's attacks on the 2016 US election, money laundering has again become a matter of national security.
Europe, too, has been subjected to Russian election meddling. But it faces different problems from that of the US.
Because its banking system is fragmented and not well policed, northern European financial institutions are not always aware of illicit activities occurring under their noses.
The US banking system, in contrast, is well policed. Yet, the US has effectively legalised practices outside of the banking system that should be prohibited.
After the US adopted the 2001 Patriot Act to combat terrorist financing, US banks were required to know their customers, or risk fines.
And in the five years after the 2008 financial crisis, banks in the US paid some US$230 billion (S$310 billion) in fines for various violations. The result was that US banks are terrified of wading into legal trouble and have established powerful internal compliance departments.
The Patriot Act was effective in cleaning up banking and expelling anonymous shell lenders from the global financial system. The problem is it applies only to the financial sector.
Since 2002, the real estate sector has been exempted from the law's key anti-money laundering provisions, as are countless shell corporations "headquartered" in Delaware, and law firms, which can transfer money under the protection of client confidentiality.
These loopholes have had profound implications. The US Department of the Treasury estimates as much as US$300 billion is laundered domestically each year. As of last June, US$1.7 trillion in US securities were held in the Cayman Islands.
As for Europe, there are similar laws against money laundering, but the situation differs in important ways.
The EU takes ownership transparency seriously. Its fifth anti-money laundering directive goes further than the Patriot Act, requiring public reporting of beneficiary ownership for all assets across sectors.
Yet, Europe has been too timid in policing cash flows into and out of banks. The fines for money laundering have been so small they create no deterrent.
The US and Europe should each take a page from the other's book and fix the glaring flaws in their enforcement regimes. In a global economy, that is the only way to beat the bad guys.
The writer is a senior fellow at the Atlantic Council and author of upcoming book Russia's Crony Capitalism: The Path From Market Economy To Kleptocracy. This is an edited version of an article that was published in The Business Times on April 11.
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