Published on ir.lv
It has become fashionable to accuse banking‑sector supervisors (and even former prime minister K. Kariņš, who merely passed by the sector) of being excessively harsh toward the non‑resident business, money‑laundering schemes, and other lucrative activities. The claim is that we have driven from one ditch — the one filled with massive money‑laundering volumes — straight into another, where even a perfectly normal company supposedly cannot open an account. Now, it is said, we must steer back to the middle of the road. Many expect a kind of relaxation that could be delivered through “friendlier” regulations here in Latvia. However, there is no basis for such expectations, because the principles and criteria guiding banks are not developed or approved here.
BANKS ARE REDISTRIBUTING RESOURCES
Occasionally reading the views and forecasts of the Bank for International Settlements one can get a clearer picture and become prepared for the inevitable future. During the crisis that began in 2008, national governments used the fiscal and monetary tools at their disposal. As the crisis unfolded, many companies went bankrupt, yet — as the bank’s experts point out — there is a time lag: the wave of insolvencies tends to begin a couple of years after GDP declines (R. N. Banerjee et al.). After that, another few years pass before new companies replace those that have fallen. For this reason as well, banks are currently even more conservative when it comes to lending.
Redistribution of resources is becoming increasingly important in order to allocate them to sectors with a more reliable potential for growth — not merely to those that can “barely survive” without prospects. Of course, one could give every sector a few pennies so that many of them could “keep breathing,” but one could also give to a select few a full “pound,” stimulating sustainable growth. The question is whether governments in their respective countries are capable of making such selections and choices. The views and experience of private investors seem more important for distinguishing viable firms and allocating funds to them. Governments, in turn, should ease the work of banks in carrying out this resource‑redistribution function.
WHEN IMPLEMENTING THE DECISIONS OF THE “GREEN DEAL”
The European Green Deal is the right course. The European Union has allocated one trillion euros specifically to the European Investment Bank (EIB), enabling it to become a true “climate bank” at the forefront of the fight against climate change. The bank could finance projects focused on biodiversity, climate‑friendly solutions, and sustainability. Conversely, it could stop financing projects related to fossil energy — coal, oil, and gas. Fossil‑energy projects, especially gas, are viewed unfavourably by the European Ombudsman. E. O’Reilly has concluded that the European Commission failed to take climate risks into account when deciding on its priority energy projects.
EIB President Werner Hoyer already announced in November 2019: “We are stopping the financing of fossil fuels and launching the most ambitious public climate‑investment strategy of all time.” A similar statement was made earlier this year by Larry Fink, head of the global investment company BlackRock — under its new climate strategy, the company will invest seven trillion dollars, and fossil fuels will be left behind.
Commercial banks will not be an exception — they too will follow this example and align themselves with the goals of climate and sustainability policy. Banks in EU countries have already begun evaluating their client portfolios in terms of clients’ sustainability or “greenness,” and they will welcome those clients who can demonstrate how — and with what results — they are fighting climate change. This will be one of the ways for banks themselves to become “greener,” that is, more sustainable, and it will matter from a competitiveness standpoint. The more climate‑friendly a bank is (also thanks to its clients), the cheaper money will be in that bank and, accordingly, the more clients it will attract. It remains to be seen how this intended market redistribution will unfold in the coming years.
About a month ago, the head of Citibank in the United States said that we at Citibank must talk to our clients and help them become more climate‑friendly. Despite the impression that President D. Trump tries to avoid climate policy — and the criticism that he is dutifully serving the interests of fossil‑energy sponsors — there is little confidence in the success of so‑called “climate denial.” And if Joe Biden fulfils the duties of the presidency, progressive policy is likely to surge, with climate protection becoming one of the priorities alongside gender equality and minority rights.
Experts at many countries’ central banks — among others — have for some time been discussing the criteria that should be used in the commercial‑banking sector to define which bank clients are “green,” which are “black,” and which fall somewhere in between — the “brown” category.
The details are gradually becoming clearer, and the general direction is well‑defined — including the use of EU structural funds. These investments must largely be dedicated to achieving climate goals. The signal for market redistribution has been unmistakable: if the EIB and major financial‑market leaders like BlackRock have already spent at least a year operating in the light of climate policy, the shift is real. Companies that still do not care about climate impact risk falling out of supply chains — and will have only themselves to blame. Banks, too, will play a leading role in this “green” aspect of resource redistribution.
LICENSES FOR MONEY LAUNDERING
Money laundering has long and repeatedly been described as an activity that is not only extraordinarily profitable but also requires a special “license” — one that becomes harder to obtain and maintain with every passing decade. The fate of several banks in our region confirms this. Meanwhile, a group of Angolan government members has for many years maintained a sizeable financial‑flow network to siphon off hundreds of millions of dollars from their country. The money has mostly ended up in banks in Portugal and elsewhere in the European Union. Despite the fact that sector supervisors in Portugal described this scheme a few years ago, pointing to highly suspicious transactions, the network still exists (see Mark Anderson). Perhaps Portugal, like others, is not far from needing a full‑scale overhaul of its financial sector — and the Americans may well be the ones to organize it.
One of the earliest warnings about money‑laundering risks in Latvia was issued by U.S. regulators back in 2005, whereas European regulators — for example, in Germany — at that same time considered Latvian banks to be clean. Only thirteen years later did the Americans intervene with active measures in Latvia’s banking sector.
By contrast, the scale in the United States is, of course, entirely different. This autumn, the International Consortium of Investigative Journalists (several hundred journalists from nearly one hundred countries) revealed a small part of the iceberg by analysing documents from U.S. financial‑sector supervisors on how often — and for what amounts — banks had submitted suspicious‑activity reports. The study covered the period from 2011 to 2017 and less than one percent of all suspicious transactions. Researchers calculated that the reports concerned transfers totalling at least two trillion dollars, which bank employees themselves had flagged as suspicious (more than twelve million reports were submitted to supervisors during that time). Deutsche Bank emerged as the leader with more than one trillion dollars, followed closely (in those years) by JP Morgan, Standard Chartered, and HSBC. Naturally, none of these are ordinary, small‑scale banks.
Despite the fact that U.S. regulators have fined these banks for conducting suspicious transactions on an especially large scale — and despite the banks’ promises to stop — they have not abandoned this lucrative business. The fines have reached billions, yet the banks have paid them without loud protest. Estimates from the United Nations Office on Drugs and Crime show that every year, around 2.4 trillion dollars are laundered. The agency believes that supervisory institutions detect only about one percent of all illegal transactions. With such vast flows of easy and profitable money, the appeal of lending to metal‑processing, woodworking, or other ordinary industries simply cannot compete.
FIGHTING MONEY LAUNDERING
A few months ago, two researchers on organised crime from the University of Bristol described how the now global fight against money laundering came about (M.A.Young, Mich.Woodiwiss). They analysed previously classified British government documents in the National Archives, which gave an insight into how, in the late 1980s, that is, in the very beginning, responsible officials constructed anti-money laundering policy (or AML for short) in the interests of their country and the business growth of the American financial sector. The trick was also that these officials “cut” the whole so-called AML topic so convincingly that many researchers and experts “grabbed” this topic and then voluntarily justified the need to expand this fight in the “right” direction, while at the same time receiving bonuses in their academic and expert careers.
Thus, over time, public rhetoric has been shaped to promote the view that money laundering is primarily the domain of “traditional” organized crime — a threat to democracy. As the years passed, institutions and international cooperation mechanisms were created to fight money laundering intensively, yet the head of FATF, the anti‑laundering body based in Paris, D. Lewis, still admits that “everyone is still performing unsatisfactorily.”
The study by the two university lecturers is already six months old, but it is possible that it will be supplemented with more precise facts.
THE LEGEND OF CREDIT
Every year on December 9, many representatives of the banking sector quietly mark an anniversary known by the name of American lawyer Jerome Daly. In 1968, in Minnesota, he won a first‑instance court case against a bank that sought to take over his real estate because he had not repaid his mortgage loan. Daly argued that the bank had not actually lent him any money — it had merely recorded the credit in its accounting books. And if the bank had provided him with no real “value,” then it had no grounds to seize a house that was unquestionably a “value.” In other words, to paraphrase: the bank had created “money out of nothing,” out of “thin air.” And if it came from “nothing,” why should one give up a house in exchange for “nothing”? Naturally, the bank appealed the judge’s ruling the very next day, carried out the necessary “educational work,” and ultimately prevailed — allowing the entire episode to acquire the aura of a legend.
Today, of course, such disputes would be out of place, no matter how much new money central banks “create” and issue to consumers. Banks and investment firms continue to perform the essential function of resource redistribution.
