Finance Monthly April 2019 Edition

The how and the why As Gregory White explains for Bloomberg, the transition to capitalism in Russia and its neighbouring countries set off a wave of hundreds of billions of dollars flooding out of the ex-Soviet Union. In most cases, the money was routed through offshore zones with restricted controls which predisposes for difficulties in telling the difference between legitimate business and illicit flows from criminal activity. This, in turn, led to some of this cash being moved to prominent international banks. What is interesting is that most of the banks accused of laundering Russia’s dirty money are either Baltic banks or Nordic banks that have Baltic units; in the case of Danske Bank, for example, $230 billion of suspicious transactions were allegedly handled by the bank’s branch in Tallinn, Estonia. On the one hand, financial institutions that operate across border tend to find themselves linked to suspicious activity oftentimes due to the difficulties they face when creating platforms and handling funds in foreign countries where a number of issues such as language differences could result in various complications. However, why is the wrongdoing so heavily focused on the Baltics? After the dissolution of the Soviet Union in 1991, the banking industries in all Baltic nations were thriving, partially because they began servicing flows of Russia and the rest of the former Soviet Union nations. According to regulators, a lot of banks started opening accounts for individuals and companies based in other countries (called ‘non-residential portfolios’), not questioning who the individuals were or where the cash came from. Due to tighter regulations, over the past decade banks have ceased doing business with clients who are believed to be dodgy, but past practices have left their mark on the Baltics’ banking industry. Estimating the scale of the criminal activity is a difficult task due to launderers’ hard work to disguise the origin of their money and the fact that not every transaction that looks questionable is actually illegal. A team of researchers estimated in 2017 that Russians’ offshore wealth is about $1 trillion, or the equivalent to three-quarters of the country’s GDP in 2015. 20 www.finance-monthly.com SPECIAL FEATURE - MONEY LAUNDERING