American demands of European banks now cause them to suffer

American demands of European banks now cause them to suffer
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Over the last decade, the alliance between the United States and one of our largest trading partners, the European Union, has been tested as a result of systemic efforts by authoritarian countries like Russia to divide the North Atlantic Treaty Organization and increase their regional power through military action, election tampering, and disinformation.

Yet an often undiscussed but equally important test of the relationship between the United States and the European Union revolves around the global banking sector. With the dollar strongly dominating international transactions, American regulators have been uncompromising in forcing European banks to comply with American demands for transparency. Indeed, these demands are grounded in fears of the money laundering activities that emanate predominantly from former Soviet states.

While this unforgiving stance from the American authorities is perhaps reluctantly accepted by European regulators, it could have unwelcome consequences for the banks themselves. When a European bank is faced with a suspicion of money laundering from American authorities, then it at once finds itself excommunicated from the global financial network, and no other institutions will risk dealing with the possible perpetrator.


Purely national banks or funds could possibly remain active, but any of the institutions with an international business could hardly survive the United States Treasury Department announcing a new investigation into money laundering. A case in point here is the conviction of ABLV Bank of Latvia for laundering 900 million euros and its subsequent liquidation, along with death threats to the chief executive officer. More concerning was the criminal investigation of Danske Bank, where Danish authorities charged the chief executive officer, who was ultimately driven to suicide.

The authorities also charged his replacement and then eventually most of the management board with one of the most explosive money laundering scandals in the world. European regulators reeled as prosecutors exposed more than $224 billion slipping through the Estonian branch of Danske Bank between 2007 and 2015. Indeed, international cooperation between financial authorities is growing and the monitoring mechanisms are now being bolstered. But history often repeats itself and European regulators are rather determined to avoid further embarrassment at any cost.

Moreover, this threat stretches far beyond former Soviet states to China, as well as countries in the Middle East. In China, some state owned banks, such as the China Construction Bank and the Industrial and Commercial Bank of China, are developing at a rapid pace. Anxiety has been growing because should another financial crisis occur, structural and regulatory differences between the American and European financial sectors have made the European financial sector more vulnerable to Chinese and Middle Eastern investments that are rich in sovereign wealth funds.

When black market money reaching American shores from the European Union led to concerns for American financial stability, the United States started a clampdown on tax evasion in Switzerland, leading to reciprocity and the coordination of information exchange. The consequences have included the beginnings of a fundamental improvement within financial stability both in the United States and the European Union. Indeed, the last decade has seen a systematic decline in the ability of Swiss private banks to offer secure tax free havens for “unexplained” foreign funds.

Ever since the 2008 financial crisis and following recession, American policymakers have taken a more flexible approach to regulation than has the European Union, which has focused on a more rigorous supervisory regime to reflect the single market supervisory resolution mechanisms. As the United States and the European Union have such different systems of financial supervision, their application in the international arena is bound to contrast. Unfortunately, the absence of common standards has beset the American and European banking partnership with inconsistencies.


Twelve years on from the 2008 financial crisis, the business outlook is strong for American financial institutions in both the investment and the corporate banking sectors, but European banks struggle with stringent regulation and the debt crisis across the continent, while Brexit has cast further doubts on financial stability. European lawmakers are certainly nervous, as banking scandals are shaking the industry. It is unsurprising that European regulators have been forcing reform through the industry, and European rules are becoming much more stringent each year.

It is easy to understand why the United States wants to protect an already fragile financial system from funds originating in former Soviet states and laundered through European banks. However, it will be difficult for each side to agree on mutual standards from a risk regulation perspective, and surely a lack of common international financial standards needs to be addressed, as these contrasting regulatory requirements are causing irreversible damage to the prospects for global financial stability.

Douglas Schoen is an adviser to Michael Bloomberg and a former pollster for President Clinton. Ana Nacvalovaite holds a doctorate in the regulation of sovereign wealth funds from Oxford University and conducts research on responsible and alternative investment funds for a forthcoming book.