Can collaboration & technology help remedy the Dutch money laundering crisis?
The Netherlands is widely regarded as one of the most peaceful and law-abiding nations on earth. The Dutch are very rarely exposed to violent crimes of any sort. Even the modern specter of terrorism has a very low threat level in the nation.
But shift the focus to non-violent, white-collar crimes and the picture changes, dramatically so. Money laundering has become a particularly serious concern in recent years. And as a result, the Dutch banking sector finds itself in a tight spot in 2019.
The two Dutch banks at the center of the current crisis
ABN Amro and ING, two of the biggest banks in the country holding assets worth over €1 trillion between them, have been at the center of financial scandals. In 2018, ING was fined a record figure of $900 million for its failure in spotting widespread instances of money laundering and bribery payments to officials in foreign countries.
This year, it was the turn of ABN Amro, which is part-owned by the Dutch government, to face the ire of prosecutors. Investigations were launched in March 2019 into alleged funneling of billions of dollars worth of illegal funds from countries like Russia.
The charges leveled against the bank are serious – prosecutors allege that ABN Amro did not undertake due diligence in checking suspicious clients, or in reporting such transactions to the Dutch authorities.
Predictably, the shares of ABN have tumbled this year, falling from a peak of 28 euros in January. The stock has lost a reported 40% of its value due to the scandal, and the ongoing uncertainty surrounding the quantum of fines.
The true scale of money laundering in the Netherlands
Money laundering is not a new phenomenon in the Dutch banking and finance system. According to government figures released by the Finance Minister Wopke Hoekstra, the Dutch banks launder an estimated 16 billion euros ($17.8 billion) worth of illegal money each year.
Similar figures have been cited by official sources over the last decade, which would put the conservative estimate of total money laundered through Dutch banks in that period at over $170 billion. That figure is equivalent to 2% of the total GDP of the country.
To be fair, that figure only represents a fraction of the global figure, which according to UN estimates from 2009, linger around $2 trillion. Given the secretive nature of criminal enterprises, all these figures are rough estimates of course.
But experts suggest that money laundering accounts for between 2-5% of the total global GDP. In the Netherlands, illegal sources of money include drug trafficking, financial fraud, and inflow from external criminal enterprises from countries like Russia and China.
Why the Dutch cannot be held culpable in isolation
It would be grossly myopic to view this in isolation. The Dutch crackdown on ING in 2018 was not the only scandal of its kind that year, nor was it the biggest. That distinction belonged to Danske Bank, whose Estonian branches were used to funnel over $226 billion worth of suspicious money from Russia and Eastern Europe.
In neighboring Latvia, also on the Baltic region bordering Russia, one of its biggest banks – the ABLV – was forced to close down after US authorities charged it for similar criminal activities. Another bank based in the region, Swedbank AB – Sweden’s oldest bank – was found guilty of failing to curb money laundering worth $135 billion.
The magnitude of these scandals and their geographical spread point towards wider systemic issues within the European Union. Given its unique hierarchy, with multiple legislative authorities and agencies, you cannot blame any single entity.
Why does Europe have a problem with money laundering
Money laundering is not a new threat. It has a history that is as long as the modern tax system and the rise of criminal enterprises. So why has it become such a huge issue in recent years, particularly in Europe? There are two main reasons:
- The 9/11 attacks on the US showed a potential nexus between money laundering and terrorism funding
- The fall of the Soviet Union has led to an unprecedented rise in financial crimes in Russia, and something along similar lines happening in liberalized China
Ever since 9/11, the US has been at the forefront of tackling money laundering and other financial crimes. In stark contrast, the EU has not been able to mount a credible defense against such financial crimes.
Between 2012 and 2018, EU banks were forced to pay a record $16 billion in fines for charges related to money laundering. Over 75% of those were levied by the American authorities like the Department of Justice and the Department of Treasuries.
The EU’s problem with this is five-fold, as explained by Patrick Jenkins in The Financial Times:
- No clear vision regarding the EU Anti Money Laundering (AML) directive
- Lax enforcement by EU authorities
- Lack of coordination between member nations
- Lack of a central database for information
- Certain nations have built their economies around off-shore deposits and have a dislike towards extra scrutiny
Potential solutions and the importance of technology
There is no silver bullet that can make a pernicious problem like money laundering disappear overnight. In the case of the Netherlands and the EU, it is quite clear that there are systemic problems. Both the EU parliament and member nations need to come together to create an effective regulatory framework.
But enforcement alone will not solve the issue. Stiffer fines are only a part of the solution. Strict regulations raise the cost of compliance, which is a bitter pill for any business organization, let alone banks that face adverse market conditions these days.
For example, in the aftermath of the ING scandal, ABN spent 200 million euros for anti-money laundering operations, involving over a thousand dedicated staff. According to the Dutch banking association, NVB, over 6000 bank staff are involved in similar operations across the entire industry.
Collaboration and cooperative working between financial institutions can help remedy the situation. Creating and maintaining a central database of data related to clients and transactions would make a huge difference. Five prominent Dutch banks are already pooling their resources together for something along these lines.
Better access to data, combined with machine learning and AI-based technologies can lead to accelerated operational processes, involving less manpower and reduced costs.
Fintech and Regtech companies that develop enterprise-grade software for AML and KYC processes in the banking sector could see a huge rise in demand in key markets like the EU shortly. Along with governments and the banks themselves, they will have a huge role to play in combating financial crimes like money laundering.
Journalist/Writer – Published in WIRED, World Economic Forum, Times of India, Economic Times, The Huffington Post and Business Insider.