Nordic Banks, EU ignorance of US Extra-Territoriality

The current revelations and allegations surrounding Nordic banks from otherwise highly reputed, transparent jurisdictions such as Sweden, Denmark, Norway and Finland reflect a typical European reluctance to accept Extra-Territoriality.

According to Westphalian theory, the only laws which apply are those within the borders of the jurisdiction where an offence takes place. Furthermore, according to EU Blocking Statutes, US Extra-Territoriality is something that can be avoided by EU Member States. Nothing could be further from the truth.

Despite the multiple agreements by US allies in joining forces in the “War on Terror” which was invoked after the attacks on US soil of 9/11, some in the EU are still trying to pretend that they can ignore and circumvent US Extra-Territoriality. This is a particularly dangerous assumption when dealing with the very real threat of the US Sanctions & AML regime, which includes money laundering and terror financing offences.

The EU is largely to blame for causing massive confusion and major harm to its own banks and entities, in the form of massive US Sanctions and AML-related penalties. Thanks to the confusion caused by EU Blocking Statutes, which have been around since 1996, European firms were fined 5 times more than their US counterparts in the period 2008-2018.

One bank, French BNP Paribas, tried to claim that it had broken no EU nor French laws when taken to task over its Sudan and Iran activities – in breach of US Sanctions – by US authorities. The outcome? An $8.9bn fine in 2014 for the 5th largest bank in the world, whose net income for the entire year of 2013 was some $11.3bn. The massive fine was imposed after it was alleged by the US that BNP Paribas had been involved in some $190bn of illicit transactions in breach of US Sanctions.

Current allegations surrounding some of the Nordic banks – with Danske Bank from Denmark alleged to have been involved with up to $230bn or so of illicit transactions – have been dismissed in European quarters as exaggerated and without foundation. The problem? In order for the US to find fault on a US Sanctions breach, which is a far lower bar than anywhere else in the world, all they have to do – to force a major fine via settlement – is to show “apparent violations” existed. With the level of US Sanctions impact on individuals, entities and jurisdictions in Eastern Europe and Russia and the Baltic states over the past two decades, US authorities will easily be able to find that US Sanctions breaches have occurred.

Astonishingly, some European observers are trying to “cry wolf” as though there are no grounds for concern. This is not only irresponsible, but deliberately misleading and highly ignorant. US investigations – in contrast to what many have tried to claim – do represent a potential existential threat to Nordic banks who will almost certainly be found to have breached US Sanctions. There is no point citing local, national or regional EU laws on burden of proof or “money laundering” offences, as the bar for sufficient burden of proof is much lower for US authorities when dealing with their strict liability Sanctions offences. Major settlements will be exacted and the financial institutions concerned will suffer.

To date there is no feasible defence to US Sanctions, and it seems unlikely that one will be found. The US dollar represents a massive policy leveraging tool for the US – who can easily cut off US dollar access to financial institutions (a veritable death knell for financial institutions of any size) via Section 311 of the USA PATRIOT Act. It will also deal severely with non-US firms who have tried to circumvent US Sanctions using non-US geographies, non-US dollar transactions, and so on – when this applies to transactions with US-“designated” entities or individuals, even jurisdictions or governments. The US Sanctions & AML regime has a highly sophisticated playbook which goes to the substance of wide-ranging offences.

European and non-US firms, non-profits and individuals face an uncertain future with sanctions and money laundering policy so conflicting across the world. This is despite most sanctions policy being backed by UN Security Council Resolutions, and money laundering offences backed by the OECD’s FATF’s 40 Recommendations. The issue: neither multilateral UN (Sanctions) nor FATF (money laundering, terror financing) have anything like the same teeth as a sovereign jurisdiction like the US in terms of robust enforcement.

The only clear cut solution is to follow the US OFAC playbook and establish a proper OFAC compliance regime in-house, on top of existing local and regional regulatory requirements. Prioritising the US Sanctions & AML threat has become high priority, as it represents a primary business risk if it is ignored.

Failure to do so has left the following devastation over recent years:

  • 2008-2018: Total US fines 91% globally in value, or $23.52bn (KYC, AML, Sanctions)
  • 2008-2018: Total EU fines: a mere $1.7bn (KYC, AML, Sanctions)
  • 2008-2018: Total Asia-Pacific fines: a mere $609m (KYC, AML, Sanctions)
  • 2008-2018: European firms fined 5 times more than their US counterparts
  • 2014: BNP Paribas fined $8.9bn for US Sanctions breaches, which included money laundering offence types for allegedly $190bn in illicit transactions