Botswana victim of AML double standards

Last month I reported in this paper how the listing by the Financial Action Task Force (FATF) of Botswana as being of high risk to money laundering and terrorism financing was an insult to country.  The designation of Botswana as being a high-risk country by the FATF arose following the 2016 Mutual Evaluation of Botswana which found that the country had serious strategic deficiencies in its anti-money laundering and counter-financing of terrorism laws and framework.  Readers may recall that I put forward a cogent argument outlining how the decision by the FATF was wrong as no strategic AML/CTF deficiencies were identified in relation to Botswana. 

I also posited that it was FATF members that posed the biggest risk to global financial systems.  In this second part, I offer an example from Europe to support my claim, and there are many cases involving European institutions from which to choose.  The most recent major money laundering scandal involves Danish Danske Bank which has shocked European financial systems and regulators. Denmark is a FATF member.  Many in Europe are now saying it could be Europe’s biggest money laundering scandal ever.  While investigations have commenced not only in Denmark and Estonia but also in the UK and the USA.  The scandal dwarfs the recent case involving Dutch bank ING Groep NV which has admitted that criminals had been able to launder money through its accounts.  That bank has agreed to pay 775 million euros (USD900 million) to settle the case. The Netherlands is another member of the FATF.

The recent scandal involves the Estonian branch of Danske Bank, which is Denmark’s largest financial institution.  The Danske Bank in Estonia has over a period of 8 years been used to conceal approximately €200 billion in suspected illegal money.  Or approximately 2,394 billion Pula. This equates to over half the size of Denmark’s annual GDP of €324 billion.  This is an enormous amount of money by any measure.  The alleged money laundering commenced in 2007 and wasn’t discovered until an employee blew the whistle in 2013 on what was occurring inside the branch.  Yet it took the bank board until 2017 to launch an investigation.  Denmark which is one of only 36 FATF members; had its Mutual Evaluation on-site inspection in November 2016 with the final report published in 2017.  The Danish Mutual Evaluation report makes no mention of the scandal which raises very serious questions about the quality of the mutual evaluation, the competence of the assessors and the effectiveness of the entire AML/CFT framework.

Danish law firm Bruun & Hjejle was commissioned by Danske Bank to investigate the scandal.  It makes very interesting reading.  Though some of the findings has been questioned by the bank’s shareholders.  The law firm found that anti-money laundering procedures at the Danske Bank Estonian branch had been manifestly insufficient and inadequate. 

The whistle-blower, an English executive working for Danske Bank in Estonia had reported as early as 2013 that the bank had breached numerous regulatory requirements and had behaved unethically.  Given that the Danish mutual evaluation report does not mention the Danske Bank scandal; there are many questions that should now be asked including:

·      Did Danske Bank officials meet with the FATF assessors in November 2016 and if so, did they disclose their knowledge of the reports received by them that something was not right in their branch in Estonia?

·      What information did Danske Bank disclose to the Financial Supervisory Authority (“FSA”) of Denmark and did that organisation disclose to the FATF assessment team information about the scandal?

·      Did the FATF assessment team ask the FSA and Danske Bank if it met with the latter, what disclosures of impropriety had been received from whistle-blowers?  And if they didn’t ask, then why didn’t they?  A mutual evaluation is similar to an audit and it is usual to ask about internally reported incidents during a financial crime audit.

In a press release of 21 September 2017, Danske Bank acknowledged that it was “major deficiencies in controls and governance that made it possible to use Danske Bank’s branch in Estonia for criminal activities such as money laundering”. 

According to the whistle-blower, a major problem confronting the bank in Estonia was the difficulty in identifying the true owner of funds that moved through the bank. The problem arose with the 10,000 customers from the banks “Non-Resident Portfolio”.  Non-resident means not living in Estonia. Many of these customers were associated with suspicious transactions.  Customers of the Non-Resident Portfolio were recorded from 90 different countries, with their non-Estonian status being determined by their address, which comprised a postal address for individuals and for corporate entities, their country of incorporation.  Not surprisingly, the three main countries associated with non-resident customers were Russia, the United Kingdom and the British Virgin Islands.  All three jurisdictions are high risk for money laundering and terrorism financing for various reasons.  Now as anyone in the AML/CFT compliance industry knows, non-resident customers can be of high risk to money laundering and terrorism financing.  Higher AML/CFT monitoring controls should be applied to them.  Add to that mix the customers being resident in higher risk countries, then even greater AML/CFT monitoring and ongoing reviews should be applied. This is not rocket science.  This aspect of AML/CFT compliance is common sense.  But when big money is involved one of the first casualties is often internal control procedures. 

In relation to the UK, the customers were UK limited liability partnerships and Scottish liability partnerships.  These partnerships are not required to publish details of the real owners, known as the beneficial owners.  The real owners of the funds therefore were able to hide behind the partnerships.  The whistle-blower has been quoted as saying that the role of the United Kingdom in the scandal is a disgrace.  A lack of transparency in companies formed in Botswana was one of the so called “strategic risks” identified during its mutual evaluation and used by the FATF to list the country as being of high risk to money laundering and terrorism financing.  Yet here we have an example not of a country offering legal entities that could be of risk to being used in money laundering but which have actually been used.  This is a significant difference. Botswana gets listed as being of high risk when there is no real risk of any legal entity being used.  Yet when institutions in the UK are used to launder money, the FAFT takes no action.

The Fifth Anti-Money Laundering Directive (MLD5) entered into force in July 2018. MLD5 updates the legal framework under the Fourth Anti-Money Laundering Directive (MLD4) and must be implemented by the EU member states by January 2020.  A major provision of MLD5 is the requirement for countries to “increase transparency with respect to the beneficial ownership registers, which EU member states are required to establish under MLD4”.  What MLD5 tells us is that in Europe there is a serious problem in establishing the true owner of accounts, funds and assets.  But has any European country been listed as being high risk to money laundering and terrorism financing as a result? The answer is no. 

Denmark, a wealthy European country, was found compliant with only 4 of the 40 FATF Recommendations during its 2016 mutual evaluation.  While Botswana was found complaint with none. That is only a marginal difference.  But keep in mind, the ratings are very subjective. The FATF graded Botswana as being of high risk to money laundering.  But the big difference between the two countries is that while Botswana is perceived to be of high risk to money laundering and terrorism financing; Denmark is more than a money laundering risk, it is actually laundering money internationally.  And unlike Botswana, Denmark was not listed as a country of being high risk to money laundering and terrorism financing by the FATF. 

The Danske Bank scandal revealed serious strategic deficiencies in the AML/CFT systems of the bank.  Why are they strategic?  Because they impact on other countries and the global financial system.  The deficiencies have allowed suspect money derived from crime, particularly corruption, to be leached into the global financial system.  Something that no institution in Botswana has ever done. 

Is it right to label a country as being of high risk to money laundering due to the actions of one bank?  In normal circumstances no.  But this case is different.  According to Bruun & Hjejle, the FSA considers Danske Bank to be one of six systemically important financial institutions in Denmark. Systemically important means it is a financial institution which amongst others, is deemed essential to the financial system of Denmark!  And unlike Botswana, Denmark is a major financial centre with over 65% of its GDP being derived from financial services. While Botswana has a more diversified economy built on the three pillars of agriculture, mining and tourism. The financial services sector is a small component of the economy.  A diversified economy and one not sustained largely by financial services substantially reduces the risk of it being used to launder large amounts of money.  And while not suggesting that it occurred during the mutual evaluation of Denmark, an economy built on financial services increases the risk that FATF assessors might feel pressured to go easy on such a country to avoid the substantial damage that could result if it was listed as being of high risk to money laundering. An economy that comprises 65% from financial service industry needs to get a clean bill of health about is systems and processes.  Any listing of the country as being high risk to money laundering and terrorism financing would have a detrimental impact on the country.

Denmark is also of high risk to terrorism financing. Since 2012 over 150 Danish citizens have joined militant religious movements in Syria and Iraq.  Some of those militants have returned to Botswana.  What weight if any was placed by the FATF on Denmark’s home-grown terrorists when undertaking the mutual evaluation?  While Botswana does not have a problem with terrorism and the risk from terrorist activities would be regarded as very low.    

And what has been the public response of the FATF and the World Bank to the scandal?  A search of their websites for Danske Bank revealed nothing in relation to the scandal.  These peak international bodies were quick to condemn Botswana but have not publicly condemned any of the players in the scandal. 

What the FATF must do now is given the size of the scandal, the size and interconnection of their financial systems to global economies, list both Denmark and the UK as being of high risk to money laundering and terrorism financing.  And the FATF must order a new mutual evaluation of Denmark with assessors demanding answers to the questions posed above.  While any planned mutual evaluation of the UK should occur as soon as possible.  The current method of planning mutual evaluations is out of date and is not responsive to major money laundering scandals.  The world cannot wait until Denmark and the UK are subject to the usual round of mutual evaluations. Denmark and the UK must be listed as being of high money laundering and terrorism financing risk now to protect the global financial system.

Finally, the FATF should conduct an internal investigation to determine what was or wasn’t disclosed to the evaluation team during the 2016 on-site visit in Denmark and make changes where needed to its procedures, including the selection and/or training of assessors.  If the FATF does not respond immediately and implement the above measures, then its relevance and leadership should be questioned.  If Botswana was a European country and a FATF member with a large financial services industry, would it have been listed as being of high risk to money laundering and terrorism financing.  I highly doubt it. 

Botswana has a right to feel cheated by the European dominated FATF. Clearly double standards are being applied – One for FATF members and another for African countries. Botswana is not the FATF’s punching bag. And every citizen of Botswana should demand that its country be removed from the FATF’s list of high-risk jurisdictions. 

Chris Douglas is the Director for Malkara Consulting in Australia and a Director of Africa AML & Financial Services (Botswana). He is a former Australian police officer with the elite Australian Federal Police (AFP) for 31 years. Whilst there, he was involved in drug trafficking, people smuggling, human trafficking, corruption, money laundering, organised crime and fraud investigations. His extensive experience in the investigation of money laundering and corruption including the tracing and recovery of funds laundered offshore has made him a sought-after trainer and consultant in the field of money laundering and corruption around the world.