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Dirty Money Creates a Schism in Europe’s Banking System

Lionel Laurent
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Dirty Money Creates a Schism in Europe’s Banking System

(Bloomberg Opinion) -- The dirty money scandal engulfing Europe’s post-crisis banking champions is leading to a lot of finger-pointing inside the bloc. The EU’s bank supervisors are investigating possible regulatory failures at the national level, but national supervisors are pushing back.

The latest evidence of local muscle-flexing comes from the Italian central bank, which has asked ING Groep NV to stop taking on new clients in Italy because of apparent weaknesses in the Dutch lender’s internal controls. This is not a happy development if Europe wants to restore trust in its financial system. A unified approach is needed.

ING certainly deserves to be under serious scrutiny, after Dutch prosecutors fined it 775 million euros ($878 million) over issues including money-laundering and corrupt practices. But the Bank of Italy seems a little late to the party. Its demand is the result of a four-month inspection that began on Oct. 1, one month after ING was fined in its home country. While the Dutch bank says it will take the necessary steps to satisfy the Italians, it stressed that it had already announced extra steps back in September to improve its controls.

National supervisors do have boots on the ground, and the critical responsibility of policing local bank branches – unlike the ECB’s fairly young regulatory arm, which doesn’t have a remit to enforce money-laundering rules. But relying on local regulators creates the risk of fragmented decision-making in the EU, rather like playing Whac-A-Mole. Criminals often just move on to another country, meaning the danger of illicit money flows is still there. Europe has a single market but 28 different anti-money laundering systems, as one lawmaker told Bloomberg News.

The other consequence of a muddled country-by-country approach is the fostering of distrust within Europe’s finance system, which has moved toward building a banking union but still has a long way to go. There’s a lot of fragmentation along national lines: Only 1 per cent of European households have a loan through a bank outside their home country, and the figure for non-financial corporations is 9 per cent, according to Deutsche Bank research. The statistics for cross-border deposits are equally meager. Eight per cent come from corporations, with almost none from households. If other countries follow Italy’s example, this might get worse.

Whether in the name of strengthening the banking union, or protecting EU member states from continent-wide security threats, a more supranational approach surely makes sense. Extra powers could be handed to the ECB, or the European Banking Authority. The Brussels-based think tank Bruegel suggests a focus on improving the consistency of fines and increasing their size, as well as the transparent publication of anti-money-laundering rulings. Bigger penalties would help. In the U.S. between 2009 and 2016, the total fines collected by regulators from banks were $179 billion, versus $20 billion in the EU, according to research conducted for the European Parliament.

Given all of this, you can't fault Italy’s bank supervisors for taking unilateral action. But, in the end, it is again just shutting the stable door after the horse has bolted. With 28 different stables to deal with across Europe, a more coordinated cleanup is necessary.

To contact the author of this story: Lionel Laurent at llaurent2@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Opinion columnist covering Brussels. He previously worked at Reuters and Forbes.

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