Another Money Laundering Risk Seen Coming from Firms Providing Payment Services

By | March 20, 2019

As one avenue for money launderers is shut, another one may be opening.

In Denmark, home to Danske Bank A/S, the authorities are now taking a closer look at companies that provide payment services. The worry is that the chain of processes behind each payment is becoming so complex that criminals might be able to hide their illicit transactions.

Danish Business Minister Rasmus Jarlov says the goal is “to all the time be ahead of the criminals.” Because they’re “trying to exploit any loophole and any weakness in the financial system.”

The decision to focus on payment service providers comes as the industry’s growth catches many off guard. On Monday, markets woke up to news of a mega merger as Fidelity National Information Services Inc. agreed to combine with Worldpay Inc. for about $43 billion, including debt, marking the biggest deal ever in that sector.

September Deadline

Banks in Europe face a September deadline to give payment service providers access to their accounts. The idea is to let such third-party firms carry out transactions on behalf of customers, provided they give their consent.

Ideally, such service providers should add a layer of competition to the payments market, which has been dominated by banks. But banks in the Nordic region, many of which have been targeted by money laundering allegations that are now being investigated, are protesting. They argue that the development leaves them with less visibility over what’s flowing through their systems.

Jarlov is part of a government that is still reeling from allegations that the main bank in his home country was at the center of one of the world’s biggest money laundering scandals. Danske has itself admitted that much of about $230 billion that flowed through a tiny branch in Estonia until as recently as 2015 was probably illicit. That’s amid accusations that the bank became a European bridge for criminals from Russia to get their money into the West.

The scandal surrounding Danske, which is being investigated by the U.S. Justice Department, among others, has left Denmark in a state of shock. Jarlov, as the minister in charge of financial regulation in Danske’s home market, is now going out of his way to push some of the toughest anti-money laundering rules in Europe, including raising maximum fines eight-fold to $4.5 billion and making it easier to throw bank executives in jail.

“The financial system is so complex that there could be so many ways of exploiting it that we have not even thought of,” Jarlov said in an interview in Copenhagen this month.

Russia, Cyprus

Julie Galbo, head of risk management at Nordea Bank Abp, says she’s seen evidence that, in some cases, the money going through such providers flows “from, for instance, Russia to, for instance, exotic places that are not known for their high tax payments in the EU — Cyprus, Malta — and nice islands in the Caribbean.”

Payments can go through multiple service providers but the information “is owned” by the payment service provider, so banks can’t see all of it, Galbo said. Like banks, payment service providers must vet customers, but they don’t pass on their information to the banks, she said.

Security has become a rising concern amid efforts to establish large, cross-border systems for processing payments instantly. Nordic banks are working toward creating a region-wide network while the European Central bank launched a similar settlement system in November.

Samuel Haskins, a financial services experts at PA Consulting, points out that there are now fewer transactions being processed by single organizations as the payments industry evolves. That’s making it harder for banks to monitor suspicious behavior, he said.

“Under sanctions we can block suspicious transactions if we concretely can specify that they are violators of the sanctions list, but that is just the sanctions list,” Galbo said. “And these are not necessarily sanctioned, and we can only see part of the chains.”

“I am looking at the next problem,” she said. “There are definitely super-good payment service providers. But then there are a few bad apples, and my concern is that those bad apples have a different incentive structure than banks.”


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