Recent scandals in the finance sector have re-focused attention on the enormity of the challenge that remains in the fight against corruption. Global Insight makes the case for greater cooperation, disclosure and global standards.

In October, one of Europe’s most respected financial institutions closed its branch in Estonia, slamming the door on one of the world’s biggest money-laundering scandals. The €200bn scheme involving Danske Bank has already taken its toll, causing CEO Thomas Borgen and other top executives to resign. Criminal probes into the activities of both the bank and its senior executives have been launched in Denmark, Estonia, France and the United States. Other major multinational banks have also been implicated.

Danske Bank’s chairman, Karsten Dybvad, conceded in a statement that the bank had done ‘too little, too late’, but said the bank was already working on ways to ensure history wouldn’t repeat itself. ‘The case has caused us to strengthen business procedures, monitoring and controls, and we have invested many resources in anti-money-laundering [AML] measures, staff training and IT infrastructure upgrades.’

A string of money laundering investigations involving banks across the European Union suggest the continent remains something of a black hole for dirty money. Stepping up regulation, legislation and compliance mechanisms to tackle illicit financial flows is clearly a long overdue requirement. But there’s an additional ongoing challenge: whatever laws and regulations are in place, enforcement agencies are failing to hold the corporate world adequately to account.

Eva Joly is a former anti-corruption magistrate, French MEP and was Vice-Chair of the Commissions of Inquiry on Luxleaks and the Panama Papers. She says such leaks have exposed the extent of the corruption still lurking in the financial system. ‘It’s showed that it’s an industry,’ she says. ‘That people are earning money from money laundering and that they are setting up what the law obliged them to set up, but that they find ways not to comply.’

Recent money laundering scandals have provided a big wake-up call for business. ‘With the impact of the Danske Bank situation we have seen companies being a lot more alert to money laundering, particularly where people are investing in very small correspondent banks,’ says Lorynn Demetriades, Director of Control Risks’ forensic investigations practice in Europe and Africa. ‘A lot of companies are trying to clean up their frameworks because they know it gives them an auditable or traceable way to resolve these issues if they do happen. There are moves now to look under the hood of some of the smaller banks across Europe from an AML perspective.’

In September, the European Parliament adopted a resolution urging the European Commission to revive a blacklist of non-EU countries that it claims are unwilling to cooperate in combating money laundering. In October, the bloc put forward plans for a new, centralised AML authority to oversee AML compliance at financial institutions. The European Banking Authority’s capacity to tackle money laundering was already given a boost earlier this year when it was granted new powers to force national authorities to investigate cases of suspected breaches of AML rules.

These moves suggest some concerted efforts are being made to address the huge disparity in skills, resources and appetite to tackle corruption across the EU’s 28 Member States. However, it’s unclear whether a Europe-wide regulatory agency would do much to ramp up enforcement on a national level, says Robert Amaee, Director of Amaee Law and former head of Anti-Corruption & Proceeds of Crime at the UK’s Serious Fraud Office (SFO). ‘I don’t think anybody would argue against closer cooperation and coordination on such matters,’ he says. ‘It seems to me that this idea is at a very early stage of gestation and, assuming it develops further, its effectiveness or otherwise will depend on the details and mechanisms that can be agreed to by the many EU nations with their own national interests and disparate AML regimes.’

Robert Barrington, former head of Transparency International’s UK Chapter, argues there are strong grounds for having an overarching regulator to keep Europe’s financial institutions in check. ‘One of the missing things at the moment if you deal with money laundering solely at a domestic level is it leaves it vulnerable to people taking advantage of inconsistencies and loopholes in different jurisdictions,’ says Barrington. ‘Honestly, one of the failures of the UK system is that there are still over 25 different bodies responsible for regulating money laundering. Some of these have an overarching supervisor, but there’s still an inconsistency there and what you also get is certain professions self-regulating.’

New pan-European efforts

Other efforts to fight corruption at a Europe-wide level are also gaining momentum. The European Anti-Fraud Office (OLAF) was established 20 years ago to fight fraud affecting the EU budget and investigate corruption by staff working at EU institutions. However, it has no authority to prosecute these crimes. Consequently, the European Public Prosecutor’s Office (EPPO) was established in 2017, due to be operational in late 2020.

In October, Romanian prosecutor and anti-corruption crusader Laura Kövesi was appointed as the first European Chief Prosecutor. During her five-year tenure as Chief Prosecutor at Romania’s National Anti-Corruption Directorate (DNA) she secured convictions against hundreds of public officials, including former Prime Minister Victor Ponta who was indicted in 2015 for tax evasion and money laundering. Kövesi’s success in fighting the murky world of political lobbying and corruption drew praise internationally, but was met with considerable resistance at home. She was ousted in July 2018, but the DNA’s work goes on. Liviu Dragnea, the leader of the ruling Social Democratic party when Kövesi was forced from office, was sentenced in May 2019 to three and a half years in prison on corruption charges.

Despite domestic opposition, all but five of the 22 Member States that have signed up to the EPPO voted in favour of Kövesi’s appointment. Jitká Logesova, partner at Wolf Theiss in Prague and Co-Chair of the IBA Anti-Corruption Committee, says she was surprised, but welcomed Kövesi’s appointment. ‘She is very brave and I believe it was a very good decision to choose her, especially because of what she has achieved and taking into account that she was facing certain pressures for what she has been able to achieve in Romania,’ she says.

The new pan-European institution will be based in Luxembourg. It will investigate, prosecute and pass judgment on financial crimes with EU funds, such as fraud, corruption and serious cross-border VAT fraud.

But, six Member States are yet to sign up to the EPPO, including Hungary, Ireland, Poland, Sweden and the UK. The Lisbon Treaty exonerates Denmark from participating. Although the EPPO will not have jurisdiction over these countries, Joly is convinced it will provide a significant judicial avenue for tackling corruption across the continent. ‘It has gone rather unnoticed, but it’s a first important breakthrough,’ she says. ‘We have never, ever in the world had a public prosecutor with supranational powers and this is the first time that we can coordinate inquiries across these 22 countries. I’m confident that if it works… we will end up with a supranational justice for transnational economic crime.’

Drago Kos, Chair of the Organisation for Economic Co-operation and Development (OECD) Working Group on Bribery in International Business Transactions, agrees that the EPPO and Kovesi’s appointment mark a significant step forward. ‘Fraud for the European Union is just the other side of the coin of corruption,’ he says. ‘Just the establishment of this European Prosecutor in the position – with an excellent candidate I have to say – means that Europe is aware of the problems of being in the single market and having so many things in common. The time has also come to start unifying, if not the law, at least, let’s say the enforcement, or basic EU legal provisions, in a similar manner. This is the right step in the right direction.’

In July, another significant development saw the Council of Europe accept the EU’s request to become an observer to the Group of States against Corruption (GRECO) – the Council of Europe’s anti-corruption monitoring agency. The First Vice-President of the European Commission, Frans Timmermans, said the move would ‘strengthen the rule of law and fight against corruption across Europe’.

However, Kos, a former GRECO chairman, says the impact will be limited as long as the EU resists becoming a fully-fledged member, meaning its own anti-corruption efforts are not subject to GRECO’s scrutiny. He still believes the EU could be doing much more to counter corruption: ‘The EU is facing so many important and difficult challenges over the past year that I would understand that they’re preoccupied with those challenges – the immigration crisis, Brexit, the Turkey-Syria crisis. I do understand that there are sometimes more important issues for them to deal with than corruption, but you see, corruption is the underlying problem that makes all the other issues worse.’

The high-profile money laundering scandals at Dankse Bank, Latvia’s ABLV, Malta’s Pilatus Bank and other European banks have exposed glaring compliance failures across the continent. It’s not just the banks that are to blame. Research points the finger increasingly at a small subset of advisers – namely auditors and law firms – that are falling foul of basic AML regulations (see box: Lawyers under the spotlight).

The question remains whether the EU will wield its power to force countries to fall in line. ‘Naming and shaming doesn’t work anymore,’ says Kos. ‘What countries are really sensitive to is the financial consequences of their actions or omissions. For countries that don’t want to fight corruption, they will have to start facing economic consequences. The EU is the first one that can apply such measures.’

Tax havens and loopholes continue to be the EU’s Achilles heel. In 2017, the European Parliament backed proposals requiring multinationals to report how much tax they pay on a country-by-country basis. EU Member States voted on the proposed legislation in November 2019, but it failed to garner the necessary 16 votes to move it forward.

Joly, who left political office in May 2019 after ten years as an MEP, hopes the European Commission’s new President, Ursula von der Leyen, will adopt a stronger stance on tax avoidance than her predecessor and give a much-needed boost to tax transparency in the EU. ‘She doesn’t have an interest in keeping up the tax havens in Europe because Germany is suffering from the tax havens like France,’ says Joly. ‘The public pressure is there. The Parliament wants it. This is now totally a transpolitical issue and I think the Parliament is still very dedicated to this, so maybe we’ll see during Ursula von der Leyen’s tenure that now it will happen.’

The Panama Papers and other leaks exposed the ease with which the offshore world – what Joly labels the ‘black holes of capitalism’ – conceals the beneficial ownership of companies. The EU’s 5th Anti-Money Laundering Directive obliges all EU Member States to set up public beneficial ownership registers for corporate and other legal entities by 10 January 2020. Joly is also working on developing a Global Asset Registry with Thomas Piketty, Joseph Stiglitz and others, and is optimistic about its prospects.

Long-awaited legislation protecting the rights of whistleblowers finally made inroads in 2019. In October, the European Council adopted the Whistleblower Protection Directive, establishing a Europe-wide standard to protect people who report breaches of EU law. Member States have a two-year window to incorporate the Directive into their domestic legislation.

Protecting whistleblowers is ‘paramount to discovering corruption,’ says Joly. ‘That was the last thing we did in April when I was a Member of the Parliament. We voted for the protection of whistleblowers and this protection is now very good. You are [no longer] obliged to go internally before you go to other institutions. I think that’s a very strong protection.’

However, Kos says the proof will be in its implementation. ‘It’s one thing to issue directives, but what is arguably even more important is to take care that those legal provisions are implemented. The problem with whistleblowing is that all countries are saying they protect whistleblowers, although we all know that at a certain level, or for certain information, protections cease to exist. To have a good legal document in place without strict monitoring of how it is implemented will not change anything.’

Clamouring for clarity

Clearly, consistent and transparent rules, and safeguards around disclosing corruption are still sorely needed. Peter Solmssen learnt this the hard way in 2007 when he was appointed General Counsel at Siemens after it became embroiled in a series of high-profile bribery, corruption and price-fixing scandals that led to the company paying millions of dollars in fines to the US and German authorities.

Solmssen, who was previously General Counsel at GE Healthcare, was brought in to ‘clean up’ the company and was instrumental in the settlement negotiations. ‘The Siemens case was sort of a miracle,’ Solmssen tells Global Insight more than a decade on. ‘It was the largest and, by some metrics, is still the largest foreign corruption case ever, but it was settled simultaneously with all the major players in a way that allocated penalties and damages and worked out for everybody.’

He says this outcome didn’t come easily and relied on considerable ‘jurisprudential acrobatics in some countries’, exposing the pressing need for clarity in this area. ‘It was the first time this sort of settlement had been done very publicly and it wasn’t entirely clear that there was a legal framework within which to do it,’ he says. ‘Afterwards we did a few small self-disclosures that worked as we had hoped, largely because we had a track record, we could be trusted, and the prosecutors had a precedent to work from.’

Solmssen now chairs the IBA Non-trial Resolutions of Bribery Cases Subcommittee. He has spent the best part of the past decade developing a clear framework to encourage voluntary disclosure of bribery and the appropriate leniency the disclosing company can expect. ‘There are published policies in some countries,’ says Solmssen. ‘But even in the US, which has the most specific policies and the longest history, there have been some complaints about whether they’re sufficiently clear. We knew that whatever rules we wrote had to be something that had at least a European, if not a global feeling to them.’

Together with Norwegian law and economics professor Tina Søreide, he established The Recommendation 6 Network, which has harnessed the collective insight of lawyers, prosecutors, academics and representatives from civil society to establish a set of universal rules that will give necessary clarity for companies and prosecutors and provide the necessary incentives to encourage employees to self-disclose corruption. The rules were presented to the OECD Working Group on Bribery in October 2017. Next year the Working Group is expected to recommend publishing guidance to OECD member countries on how to apply and use non-trial resolutions in international bribery cases.

Such rules could prove particularly helpful in the UK, where deferred prosecution agreements (DPA) have failed to gain much traction since they were first introduced through the Crime and Courts Act 2013. The SFO has since concluded four DPAs with Standard Bank, XYZ Limited, Tesco and Rolls Royce, but as Amaee points out, no prosecutions have been secured against any individuals in these cases. ‘The way the law on corporate criminal liability stands, that’s a pretty uncomfortable place to be for all concerned, because for a company to accept criminal liability, it is in effect saying that an identifiable person in a senior position was culpable,’ he says.

‘It’s just not credible that major crimes of bribery can take place and the judge condemns them and nobody is found responsible – that’s a big challenge for the SFO,’ agrees Barrington. Lisa Osofsky was appointed Director of the agency in June 2018, pledging to lead ‘an emboldened SFO’. A former US federal prosecutor with an extensive career spanning the US Department of Justice, the FBI and an investment bank, her reputation preceded her. However, a string of failed prosecutions and a dip in conviction rates have cast the agency’s progress in an unflattering light.

‘Many people had an expectation that she would bring a sense of aggression from the US towards wrongdoing and we would see more cases and tougher actions,’ says Barrington. ‘Since that hasn’t happened, it begs the question of what is it in the system that prevents this from happening?’ When approached by Global Insight, a spokesperson for the SFO said its caseload ‘can vary significantly’, but declined to comment directly on the outcomes of cases where DPAs may have been applicable.

Solmssen says the issue of culpability is important if the private sector – and society as a whole – stands a chance of driving out corruption for good. ‘I’ve seen variations on this theme in my own experience where senior people are very careful to make sure that junior people end up holding the bag, and the evidentiary standards for holding the senior people accountable in some countries are very high,’ he says. ‘That’s something for prosecutors to figure out, and it’s important. The more information that companies can generate and turn over, the more likely it is the truly culpable will be held accountable.’

There’s growing pressure on the UK to follow the US, where DPAs and non-prosecution agreements (NPAs) are increasingly used. ‘There has for some time been a gentle drumbeat towards changing the law on corporate criminal liability,’ says Amaee. ‘Either to a US-style vicarious liability model or a UK Bribery Act style all-encompassing “failure to prevent economic crime” offence model.’ Amaee says this would be an ‘enormous game-changer’ for the UK and make it ‘infinitely more straightforward for prosecutors to make out corporate criminal liability and push for more DPAs.’

Other European countries could stand to benefit from the rules put forward by The Recommendation 6 Network, says Logesova. ‘Perhaps there are a few exceptions, but generally speaking in Central and Eastern Europe we don’t have regimes that would incentivise companies to voluntarily self-report misconduct, including corruption.’ She says the use of non-trial resolutions could also help alleviate a judicial system that is severely overloaded: ‘It could free up the system, especially the most complex cases that will be there for many years before the courts – these could be effectively solved in those proceedings. That could help everybody.’

As well as consistent guidelines, Solmssen believes strong engagement with the private sector, including lawyers and IBA members, will be key to cracking corruption. ‘If you believe that bribery is the scourge that I believe it is, then doing something against it is a good thing to do,’ he says. ‘This is the most powerful weapon I can think of to make progress in fighting corruption, which is to empower and enable and include the private sector in enforcement. The private sector sees it first; the outstretched hand is aimed at us. And we have far more people on the ground than law enforcement does, so we should be its eyes and ears when it comes to bribery.’

Ruth Green is Multimedia Journalist at the IBA and can be contacted at ruth.green@int-bar.org