Banks have an obligation to act as gatekeepers to the European financial world. The obligations are codified in EU legislation as well as in laws and regulations in the respective Member States. Heavy fines of hundreds of millions of euros have been issued to non-compliant Financial Institutions (FI).
Not only banks, but also individual responsible bank employees can be criminally investigated in case of non-compliance. Where Know Your Client (KYC) information has been insufficiently gathered, or incorrectly reported to the proper authorities, high-level banking officials can choose the tactical defense of not having been informed by lower-level employees, thus deflecting a personal knowledge of the bank’s shortcoming.
Aside from the EU Directives and national legislation, global banks such as Goldman Sachs and HSBC pride themselves on “going the extra mile” combating money laundering and terrorist financing by agreeing on KYC principles, training staff of individual banks and promoting research (www.wolfsberg-principles.com). The principles agreed to by the global banks have no legal status but claiming to act against them would obviously put a participating bank in an awkward position.
Thirdly, many countries have implemented “long-arm justice” legislation to combat money laundering or terrorist financing. Recently, China has seen the introduction of such laws. By all means, the champion of long-arm justice is the USA, which has made the mere use of its currency sufficient basis for American jurisdiction, thus covering any transaction in US dollars in any country in the world.
The basis of the EU regulations is that FIs not merely go through the motions of KYC by creating paperwork but that an ongoing assessment is made of the actual risks of money laundering or terrorist financing. These assessments have to be made based on external factors but certainly also on issues of internal governance and internal reporting. In the EU, a defense offered by seniors claiming to be unaware of knowledge in the possession of juniors, would be self-incriminating evidence on breaking the law on matters of governance and internal reporting. In other words: bankers would have to be pretty desperate to use this tactic of denial in Europe.
It is interesting that the global banks’ initiative has similar rules. The “substance over form” approach where paperwork or procedures are less prioritized and the norms of transparency and individual bankers’ responsibility to combat financial crime by effective risk management are favored, is taken here as well. A “risk-based approach” as opposed to “standard procedure” is the underlying principle. In depth, risk in a risk-based approach includes not only outside risks, posed by customers or correspondent banks: also internal risks, such as a (temporary or permanently) incapable banker, must be addressed with adequate governance, internal communication including whistleblower protection and simple measures such as a “four-eyes principle”. It therefore follows that the global banks have agreed to principles that are parallel to EU regulations, making it impossible for a high-level global bank employee to use the tactic of denial as a sane line of defense.
An individual very senior banker is currently under investigation for (grossly) failing to run a compliant bank. Ralph H. Was, at the time of the supposed criminal act of failing to comply with anti-money-laundering regulations in 2018, CEO of ING in the Netherlands. Incidentally, Mr Ralph H. is currently CEO of UBS in Switzerland. The case reads as follows: ING, a Dutch bank, was not compliant in 2018 and was fined EUR 775 million. Subsequently, the fundamental question arose whether management can walk away from criminal acts if their bank has paid a fine. Remarkably, at the time the record 775 million fine was imposed (and paid!) after Dutch-style plea bargaining by ING, the Dutch public prosecutor who had negotiated the fine explained “there was insufficient evidence to prosecute Ralph H.”. Members of the public complained about this, and the The Hague Court of Appeal instructed the public prosecutor to launch an investigation in December, 2020. In the The Hague Appeal Court procedure, the public prosecutor (indeed!) also used the tactic of denial on behalf of the CEO /banker.
I refer to Administrative Acts 008 and 009. We have to conclude from these that the organization was continuously subject to reorganizations and was faced with cutbacks, a silo mentality, insular divisions, fragmentation, that they suffered from insufficient intercommunication, which was exacerbated by constant changes of staff and sluggish systems, as a result of which issues could not be properly registered and reported. The lines of defense did not function well in relation to each other, which meant that the signals did not reach the Executive Board in full, let alone the Chair of the Executive Board. We can also see from [defendant]’s statement that he did not know about the ‘toppings’ and that also in the CAS report that point had only been made in 2017 to the extent that no ‘sufficient’ was issued.
The Court of Appeal does not agree with the prosecutor: insufficient internal communication is no proper excuse. On the contrary, if a senior fails to communicate with juniors, or establish communication lines, this in itself can be seen as elements of criminal behavior.
In view of the above, in the opinion of the Court of Appeal the conclusion is justified that ING’s top management was aware of the shortcomings of the ING compliance policy in the period covered by the Houston investigation. As CEO, the accused was authorized and reasonably obliged to take measures to prevent the criminal conduct of ING NL. However, he not only failed to do so and thereby facilitated the conduct, but he also knowingly accepted a significant likelihood that the prohibited conduct would occur.
In this case the tactic of denial has clearly failed with the The Hague Court of Appeal.
International long-arm jurisdiction has no clear basis in UN law or Treaties giving general principles on measures to be used or evidence to be judged. It is therefore up to principles of national law to come up with answers on the validity of the tactic of denial. It is safe to assume that most experienced judges will frown upon senior bankers blaming their juniors for criminal acts performed on the senior’s watch.
By Dr. Victor Meijers
Lecturer at Leiden University and civil-law notary in The Hague
Dr. Meijers’ main interests are corporate law and non-governmental organizations (NGOs), incorporated partnerships, and the trade register of the Chambers of Commerce. Victor Meijers was appointed by the Crown as civil-law notary by Royal decree on July 4th, 2005.
Dr. Meijers set up Civil Code on May 20th, 2005 as a Dutch public limited liability company (N.V.). DeHeng Civil Code is a dedicated Dutch law firm with Chinese roots that specializes in Dutch corporate law. DeHeng Civil Code can assist clients from all over the world in M&A work and corporate work governed by Dutch law or with Dutch law implications.
The opinions expressed in this article are those of the authors and do not reflect the opinions of InHouse Community Ltd, or it’s employees.