Banks and money-laundering
American regulators wield a big stick, but not always fairly
LIKE politicians, financial regulators know that late on a Friday is a good time to slip out bad news.
The Financial Crimes Enforcement Network (FinCEN), part of America’s Treasury, chose February 19th to announce it had rescinded a devastating finding against a European bank suspected of facilitating money-laundering. The withdrawal, less than a year after the designation, looks like a climbdown.
In March 2015 FinCEN branded Banca Privada d’Andorra (BPA) as a “primary money-laundering concern”, saying its top managers had moved cash for criminal groups. This so-called “311” measure (after the relevant section of the Patriot Act of 2001) is usually crippling for the bank concerned, because in effect it cuts it off from the American financial system and any banks that participate in it.
BPA was no exception: the government of Andorra, a mountainous financial haven nestled between France and Spain, ended up taking over the bank despite objections from its majority shareholders, the Cierco family; its Madrid-based wealth-management arm was liquidated.
The Ciercos, insisting there was no legal basis for FinCEN’s move, sued in the American courts.
FinCEN’s explanation for its reversal was that Andorra had taken steps to protect BPA from money-laundering risks, and the bank therefore no longer poses a threat. The Ciercos are having none of this. They argue that it was instead a “blatant effort to avoid judicial scrutiny” of the 311 measure. They point to the timing: the court was to hear a motion to dismiss the case next month. That would have required much more detailed evidence to be aired in support of the 311 action.
The Americans wanted to avoid this because their case was flimsy, critics say. The Ciercos have argued from the start that it was based on cases of suspected money-laundering which the bank itself had reported to Andorran regulators and had brought in KPMG, an accounting firm, to investigate.
If BPA was already cleaning up its act, why go after it at all? Some suspect the bank was a pawn in a tussle between governments: miffed that Andorra was slow to adopt American-style anti-money-laundering rules, including limits on cash transactions, America decided to show who was boss by selecting a bank to pick on. There is some evidence to support this sacrificial-lamb theory. In unscripted comments last year, for instance, an American diplomat suggested that America chose to “use the hammer” on BPA as a way of resolving wider concerns about Andorra. (FinCEN referred questions from The Economist to the Department of Justice, which declined to comment on the ground that lawsuits are under way.)
The Treasury has been challenged in another 311-designation case. FBME Bank of Tanzania sued it after being accused of servicing all manner of bad guys. Last autumn an American court issued an injunction blocking the government’s action until the bank received more information about why it was deemed a threat to the financial system. The case continues.
Meanwhile, FBME’s operations have been severely disrupted: it has sought an injunction to stop the authorities closing an important subsidiary in Cyprus.
These cases highlight two problems with FinCEN’s money-laundering cudgel. The first is double-standards. It tends to go after only small banks in strategically unimportant countries; its use of 311 has been likened to using a sledgehammer to crack nuts. The second is its lack of openness. It faces no requirement to make detailed evidence public, or even available to a court, at the time of action.
By the time any challenge is heard, it may be too late for the bank in question.
BPA is not dead, but it is seriously wounded. Much of the value may have already vanished from a bank that was worth €600m ($680m) before the debacle—though there are substantial assets left thanks to a freezing order. The Ciercos want the Andorran authorities to halt the disposal of its assets and enter into “remedial negotiations”. They have hailed FinCEN’s about-face as a “momentous victory”. But will it be a hollow one?