Financial institutions are at greater risk for money laundering losses than ever before. The Danske Bank scandal reveals that even institutions in law-abiding nations have a high risk of money laundering losses.
For example, launderers reportedly used 15,000 accounts at Denmark’s largest bank for suspicious transactions. Disturbingly, the suspicious activity at Danske Bank’s Estonian branch went on for nine years from 2007 to 2015. Tellingly, Danske Bank made that revelation in a press release.
The suspicious transactions involved €200 billion ($235 billion). In particular, investigators labelled the “vast majority” of 6,200 Danske Bank customers in Estonia suspicious.
Lax Anti-Money Laundering procedures
“Danske Bank has previously concluded that it was not sufficiently effective in preventing the branch in Estonia from being used for money laundering in the period from 2007 to 2015,” the bank itself admits.
Lax Anti-Money Laundering (AML) procedures and limited enforcement of AML laws created the risks at Danske Bank, CNN Money reports. “Fragmented and inconsistent” regulation makes money laundering easy in Europe despite strict EU AML laws.
All launderers need to do to evade AML is put money into one bank account in any EU country. Launderers target lesser institutions, like Danske Bank in smaller countries like Estonia, because of weak AML regulations.
Risks from AML Failures are growing
The risks from AML failures are growing dramatically because penalties for money laundering are increasing.
For example, Denmark’s parliament increased fines for AML violations by 80%, The Guardian reported. Significantly, Danske Bank is already facing a £475 million fine in Denmark.
The European Union is expanding its definition of money laundering, Global Compliance News reports. For instance, the latest Anti Money Laundering Directive (AMLD) covers digital wallets, prepaid cards, cryptocurrencies, digital wallets, and art as well as bank accounts.
Therefore, the EU could prosecute cryptocurrency exchanges, digital wallet operators, issuers of prepaid cards, and even art dealers for AML violations. For example, it could prosecute Apple if launderers moved money through Apple Pay.
The AMLD creates new markets for AML insurance products. Providers of cryptocurrencies, digital wallets, e-commerce platforms, and even comic-book or art dealers might require AML insurance or bonding.
The EU is promising to increase the powers and capabilities of Financial Intelligence Units (FIUs) to better enforce AML laws. The FIUs are law enforcement units set up specifically to fight money laundering.
How AML is changing banking
AML regulations are dramatically changing banking. The latest AMLD eliminates anonymity for bank accounts and safety deposits in EU countries.
The same directive requires banks to report information on real estate owners to authorities. The same AMLD makes ownership details of EU-based companies’ publicly available information.
The AMLD could lower risks for insurers by requiring AML due diligence at financial institutions. In particular, the EU could require enhanced AML due diligence on transactions from “high-risk” countries.
They do not identify the high-risk countries, but the EU is preparing a list of nations that are “politically exposed to corruption,” Global Compliance News reports. Presumably that means countries with high-levels of corruption or money laundering.
It will require enhanced AML due diligence for transactions from high-risk countries. Under the regulations, EU members may require greater AML measures. It will allow only transactions from countries or institutions that comply with EU AML laws.
How Money Laundering threatens Insurers
The Danske Bank scandal proves that money laundering and AML are becoming grave risks to financial institutions. Insurers had better take notice because it will target them for AML enforcement at some point.
An obvious way to head off such enforcement will be to apply AML measures to all claims and premium payments. That would reduce the risk of launderers using insurance policies to get around AML laws.
A launderer could buy an insurance policy on a vehicle and deliberately crash it to generate a claim, for example. Such fraud is likely if the EU AML crackdown is successful.
Performing AML due diligence on clients and policies from high-risk nations could reduce the risk of such fraud. Stronger AML enforcement will force launderers to find new ways to move money.
The Danske Bank scandal shows how money laundering creates risks and opportunities for the insurance industry. Insurers that understand AML can avoid losses and exploit new opportunities created by money laundering.