March 2. 2024. 1:52

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Protecting the EU from financial Trojan horses

The EU and its taxpayers should insist that international standards be implemented and scandals resolved by embedded microstates before the Union becomes a general guarantor in various fields, writes Martin Kreutner.

The rule of law and democracy are among the key principles of the European Union. Along with these come requirements such as the separation of powers, systems of checks and balances, adherence to international norms and standards, and upholding transparency and accountability.

All such frameworks allow for and further the Union’s four freedoms, i.e. free movement of goods, people, services, and capital.

They also enable and foster legal certainty and social, political, economic, and financial integration and solidarity. Therefore, it is a common understanding that Europe shall undertake all steps necessary to uphold these achievements and defend its reputation as a lighthouse of such principles and freedoms.

Against that backdrop, three European microstates may represent a considerable challenge. Cases of a gross miscarriage of justice, weak separation of powers, and a long history of non-transparent corporate tax havens pose severe risks to them and the European Union.

Andorra, the sixth smallest European state, is a landlocked co-principality bounded by France and Spain. The Andorran financial sector is one of the main pillars of its economy, representing approximately 20% of the country’s GDP. In 2011, Andorra concluded an agreement with the EU, making the euro its official currency.

However, Andorra also runs a fractional reserve banking system, like almost all countries worldwide.

As such, banks that take deposits from the public must hold a proportion of their deposit liabilities in liquid assets as a reserve. In short: banks borrow short and lend long.

So far, so fair. Yet, banks may find themselves in a shortfall situation when, for example, depositors wish to withdraw more funds than the reserves held by the bank. In such an event, the bank may borrow short-term funds in the interbank lending market, or the national central bank may provide funds to cover that shortfall as a ‘lender of last resort’ (LOLR).

Regarding the official eurozone, the national central banks and the European Central Bank share the role of LOLR, offering the ultimate safety net for banks that cannot get funding elsewhere.

However, unlike almost all countries worldwide, Andorra has no central bank and, therefore, no one to act as LOLR – unless Europe steps in, despite not being part of the European Union.

Official negotiations on subject association agreements between the EU and Andorra, Monaco, and San Marino have been ongoing since March 2015. As for Andorra, both sides recently announced they would “further accelerate the pace of their talks”, expecting results by July.

However, the road ahead looks challenging. The head of the Andorran government recently dissolved parliament and announced elections for 2 April.

Andorra has also seen various banking and financial scandals in the not-too-distant past, as disclosed in the Panama and Pandora papers investigations.

The International Consortium of Investigative Journalists (ICIJ) revealed that one of the biggest banks in Andorra, commonly known as Andbank, was allegedly liaising indirectly with lawyers in Panama to set up structures that eventually contributed to bringing forward a huge international tax evasion and money laundering scheme.

Andorra’s ability to properly regulate its banking sector was further questioned when one of its largest banks, Banco Private Andorra (BPA), was issued with a legal notice from the US Department of the Treasury.

Consequently, BPA was nationalised, and the bank’s assets were sold to a US private equity fund for a fraction of their reported value – even though the US Treasury had fully withdrawn its notice less than a year after the designation.

Court proceedings brought by BPA’s shareholders against the authorities have revealed that, apparently, no wrongdoing had been committed by the bank or its employees. Still, the case has not yet been effectively resolved.

The scandal could cost the Andorran taxpayer hundreds of millions of euros, as the government may be forced to compensate the bank’s shareholders for the losses incurred. If worse comes to worst, it may trigger questions of national liquidity – and who might then act as its transnational financial guarantor (LOLR).

However, even more troubling: Andorra is among the few countries globally that have not yet ratified the 2005 UN Convention against Corruption (UNCAC).

The country has not yet become party to the 1999 OECD Bribery Convention and the 1999 Council of Europe’s Civil Law Convention against Corruption; further, Andorra lacks the existence of a truly independent anti-corruption authority.

Moreover, Andorra desperately needs up-to-date whistleblowers protection legislation, as required by the Council of Europe (GRECO) since 2006. The disturbing icing on the cake is Andorra’s low ranking in international anti-money laundering and anti-financing of terrorism standards.

Andorra, along with other European microstates, is seeking shelter under the EU’s financial safety net.

Given the outlined bothersome picture and recalling the advanced status of current bilateral negotiations, it seems more than reasonable that the EU applies certain conditionalities via-à-vis these countries: Full ratification by those microstates of the thematic international legal instruments; within the respective state’s architecture, sound separation of powers, solid checks and balances, and granting the necessary independence for their investigative and judicial authorities.

They should also include implementing up-to-date whistleblower protection legislation (in line with the 2019 EU Whistleblower Directive) – and, finally, full and effective legal resolution of the pending banking scandals.

Financial sheltering must not come for free as the European Union also has obligations towards its constituency: to keep the house and yard free from potential financial Trojan horse(s) and protect its taxpayers from potential undue monetary consequences.

Monaco’s anti-money laundering system inadequate, risks name-and-shame

A Council of Europe report published on Monday highlights key vulnerabilities in Monaco’s measures against money laundering and the country risks being placed under intense scrutiny by the Financial Action Task Force.