Multilateral Development Banks and Money Laundering in Eastern Europe

by John Emerich

The role of the European Bank for Reconstruction and Development (EBRD) in the murky world of Moldovan banking underlines the ways in which multilateral investment banks, by prioritising a growth ‘at any cost‘ model, are allowing themselves to be used as conduits for money-laundering by failing to adequately screen their business partners.

Laundering the proceeds of crime into the ‘clean’ financial sector has always been the challenge for criminal organisations. The days of driving into Switzerland with suitcases stuffed full of cash may well be over, but the modus operandi of illicit enterprises merely evolves – new routes are established, new connections opened, jurisdictions shift in importance as groups probe the integrity of the financial system and search for weak entry points. The scale, scope and complexity of operations are fluid and mirror developments in technology. But one constant will always remain – the complicity of the banking sector.

In 2012 HSBC, one of the world’s largest banks, handed over $2bn to the U.S. Justice Department as punishment for its role in laundering money for the Mexican Sinaloa drugs cartel. Shortly thereafter, BNP Paribas forfeited a colossal $9bn for its role in violating sanctions and money laundering regulations. In fact, a cursory search through the recent history of the world’s leading banks shows their regular involvement in high profile money laundering cases. The new norm, therefore, must be to expect such activities rather than to see them as isolated cases or as individual “compliance failures.”

The EBRD is no different, but worryingly, it uses public funds to finance its activities and therefore any involvement in money laundering means a public subsidy. Set up in 1991 by the governments of 40 market economies (later expanded to 65), along with two institutions (the European Union and the European Investment Bank), its immediate remit was to build markets and promote the emerging private sector in the countries of the former Eastern bloc and ease the transition into western style capitalist states.

Billed as one of the world’s premier development banks, the literature on the Bank’s website points to its “zero tolerance on corruption” and its participation in several global anti-corruption initiatives. However, the EBRD’s involvement in projects that have, by their own admission, featured money laundering poses more questions than it answers – does the Bank knowingly contradict its own procedures and guidelines in its operations? Or, is the Bank merely lax in enforcing such guidelines? Is this tension between governance and implementation sufficient to explain how the EBRD comes to be involved in projects that involve money laundering?LocationMoldova02

One such case is the EBRD’s involvement in financing Viktoriabank – Moldova’s third largest bank with assets of €618 million, total equity of €97 million and €368 million in net loans. Originally given a banking licence in 1989 by the USSR, Viktoriabank survived the events of 1991 and in 1995 received its first tranche of EBRD support. Viktoriabank fits the profile of an EBRD project – a recently privatised financial institution that can be moulded into a western style bank, and one that can be used as a symbol of the new spirit of enterprise in the region.

Until recently the EBRD’s interest in Viktoriabank stood at 15% – a substantial holding, but not enough to give the impression it was controlling the bank. After all, the EBRD’s mission is to create markets, not to control companies. Unexpectedly, in January 2016 the Bank announced plans to take a 50% share of the bank in order to “restore governance.” Clearly something seismic had happened.

In the announcement made by the EBRD head in Moldova, attention was drawn to the potential for criminal infiltration:

Transparency and governance problems in the Moldovan banking sector, coupled with a weak judicial system, have negative implications for investment and financial sector stability. We will continue to work closely with the Moldovan government and regulators to ensure that only transparent, reputable and sound investors can hold shares in Victoriabank and in the country’s banks in general. The banking sector should benefit the Moldovan economy, not the interests of opaque special interest groups.”1

Furthermore, in the same press release the EBRD admits to “a series of non-transparent transactions” in bank shares, and promises to end lending to banks with non-transparent ownership. A brief inspection of Viktoriabank’s previous shareholders reveals a series of characters revolving around a shell company in Cyprus – Insidown Limited, which still owns 39% of shares in the bank. Documents deposited at Cyprus’ chambers of commerce suggest the beneficial owner of Insidown Limited was even at one point a German dentist named Paul Fisher. Quite how a dentist came to own the controlling share in Moldova’s third largest bank via a shell company in the notorious tax haven of Cyprus, must set the alarm bells ringing even to the casual observer. Viktoriabank’s annual report of 20152 lists Sergey Lobanov – a Russian businessman – as the controller of Insidown Limited. For a bank of the EBRD’s stature to admit “serious non-transparent transactions” we can safely assume their magnitude. However, these revelations come a full 9 years after the EBRD admitted that control of Victoriabank’s Supervisory Board had passed to non-transparent shareholders.

The exact ownership of Viktoriabank and the EBRD’s continued support, now for 21 years in total, throws up many questions – why did it take a full 9 years from the point of acknowledging the problems over ownership for the EBRD to do something and seek control of the bank? When the EBRD originally took the decision to fund Viktoriabank, was it aware of the beneficial ownership then? Did it monitor the changing ownership profile? To what extent does the bank’s due diligence procedures prevent it from entering into such transactions that are at risk of money laundering? The questions that could be leveled at the EBRD are numerous. But, as students of criminology, what does this affair have to tell us?

In the rush to “make markets,” powerful international financial institutions such as the EBRD are undoubtedly leaving the door open to abuse by money launderers. Good governance procedures are seen as a cost or burden on the functioning of the financial system and are fought against by the financial services lobby. The global financial architecture established post WW2 (the Bretton Woods System) has, sadly, not been an issue with which criminology has found much meaningful engagement. Parochial in its concerns, criminology has often saved its energies to pursue the crimes of the powerless, whilst leaving the network of the global financial elite relatively untouched.

The case of the EBRD, Viktoriabank and the Moldovan banking sector on the surface may at first seem distant – but it touches on many themes that have come to shape globalisation itself; emerging markets, the interplay between public and private sector, capital flows from East to West, secrecy and transparency and the ever-increasing ways in which the financial services sector mediates our lives. All these processes that shape our world have a relationship with crime and should be afforded more attention by criminologists. Our challenge should be to critically engage with what is happening in front us, to inspect finance and financial intermediaries and to offer a public counter-narrative. Only then can criminology claim to be a credible and progressive pursuit.

1 http://www.ebrd.com/news/2015/ebrd-seeks-a-larger-stake-in-moldovas-victoriabank.html

2 http://www.victoriabank.md/uploads/default/0001/01/bf1bb1f14769300b8673692a0b9c128f4c1112e5.pdf

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