We keep hearing about money laundering ‘hotspots’ in the news and it’s clear this signals danger ahead. But what exactly does a country have to do to win itself this questionable title?
We look at three cases to help us make sense of this.
Kenya
The US government listed Kenya as among top global hotspots for drug trafficking and money laundering in the 2019 International Narcotics Control Strategy Report. As a financial hub in East Africa with proximity to Somalia, Kenya is ‘an attractive location for laundering piracy-related proceeds, and a black market exists for smuggled and grey market goods,’ according to the report.
Since 2014, Kenya is no longer subject to the FATF (Financial Action Task Force) Monitoring Process, whereby a jurisdiction works with the FATF to address deficiencies in its anti-money laundering framework. So it is recognised that Kenya is working towards full compliance with the FATF Recommendations – at the moment, it is deemed Compliant for one and Largely Compliant for 24 of the Recommendations which govern global AML and CFT efforts.
Key takeaway: updating your legislation to be fully compliant with international standards is the first step towards creating a culture of zero tolerance for money laundering and terrorist financing.
The bad boys of the EU: Cyprus and Malta as examples
Marketing citizenship and residency permits to wealthy foreigners is pretty common practice, with 20 of the EU’s 28 member states engaging in some form of this. But two states in particular have been regularly in the headlines and have even recently faced calls to ‘phase out’ their golden visa schemes: Cyprus and Malta. What is it about their behaviour that has European lawmakers so worried?
The key issue is that very little due diligence is applied to the process of acquiring citizenship (as well as to processes of granting residency in these and other EU member states). A recent report by Transparency International and Global Witness, reveals some shocking figures:
| Through the sale of citizenship, Cyprus has raised €4.8 billion since 2013, while Malta has reaped about €718 million in foreign direct investment since 2014.
Business executives implicated in Brazil’s Car Wash corruption scandal were able to secure access to Europe through Portugal’s golden visa programme. … billionaire Russian oligarchs and Ukrainian elites accused of corruption had acquired EU citizenship through Cyprus’s passport-for-sale scheme (European Getaway Report, 2018).
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While financial services firms have been living up to significant scrutiny from regulators on money laundering, it is worrying to see that the same principles of Knowing Your Customer have not been carried over to the equally serious processes of granting citizenship and real estate.
Key takeaway: The EU seems to be facing up to the challenge of creating an international regulatory body to crack down on money laundering within the EU at least. Part of this will have to be tightening the rules on ‘citizenship for sale’ schemes.
‘Tax havens’
TAX3’s report also singled out European member states like Luxembourg, Cyprus, Malta, Belgium and the Netherlands as sharing some characteristics of ‘tax havens’. It points out the example of the Netherlands, which ‘by facilitating aggressive tax planning, deprives other EU members states of EUR 11.2 bn(£9.6bn) of tax income.’ The key issue seems to be the lack of political will among European member states to tackle financial crime, and suggests establishing an EU-wide financial police force and an EU-wide financial intelligence unit, as well as an EU anti-money laundering watchdog.
Although the report singled out several European banks which were involved in the Russian ‘Troika laundromat’, it is also worth remembering that the problem reaches beyond the financial sector as well. For example, in the UK Parliament’s Treasury committee has found that money laundering was ‘of particular concern where property and company formations were concerned’:
| The agency that registers UK firms, Companies House, is not required to carry out anti-money laundering checks, and the committee said this weakened the UK’s system for preventing economic crime (Guardian). |
The recent news that Countrywide, an estate agent group, had been fined by HMRC for money-laundering failures can thus be seen as good news and a sign that perhaps sectors vulnerable to money laundering are realising the threats it poses to them and their society.
Key takeaway: There is still catching up to do, but that is part of the game when it comes to fighting money laundering!