The Unexplored Nexus between Money-Laundering and Humanitarian Needs

Lys Kulamadayil
SNSF Postdoctoral Researcher, University of Amsterdam
Research Associate, Global Governance Centre, The Graduate Institute

Synopsis: What can our governments do to address the crisis in Venezuela? Stop banks from money-laundering.

Keywords: humanitarianism, money laundering, sanctions, Venezuela

Because of the deep economic and political crisis, Venezuelan people are in dire need of humanitarian action. This year alone, the United Nations Office for the Coordination of Humanitarian Affairs (OCHA) estimates that $762.5 million are required, to provide life-saving services to approximately 7 million Venezuelans. Tragically, humanitarian organizations struggle to reach those in need due to the sweeping sanctions regime that is in place and also because humanitarian access is granted only selectively. Many donor states have been hesitant in directing funds to this crisis citing their commitment to not see core humanitarian principles being undermined by the Venezuelan government.  As a result, only 9.4% of the overall amount required has been raised so far, making the crisis in Venezuela among the most underfunded ones in the world. Given these immediate and grave problems less tangible questions receive far less attention than they should. For instance how is it that 3.7 million people are undernourished in one of the world’s richest countries in terms of resources? Given half a century worth of large-scale oil extraction that has generated plenty of public revenue for a state with a comparatively small population of 28.87 million (2018), where did all of this money go and could things have been different?

Resource Curse theorists tie Venezuela’s economic collapse on the plummeting of the market value for oil combined with a number of terrible economic policy decisions such as the over-reliance on petroleum exports. They also point to decades of excess government spending and borrowing and lack of long-term investments or savings. In 2014, oil and gas exports accounted for 86% of all economic activity and were the main source of public revenue. So, when the price per barrel dropped from $90 in 2014 to $50 in 2017, the immediate impact was dramatic and brought all public institutions, including the state-owned oil company Petróleos de Venezuela S.A. (PDVSA) on the verge of bankruptcy.

…there is a pressing need for the international community to find less invasive means to solve the problem of unlawful capital extraction…

Targeting this vulnerability on 24 August 2017 the United States through Executive Order 13808 imposed sanctions stopping U.S. financial institutions from granting new loans to PDVSA and the Venezuelan government, and from purchasing Venezuelan state bonds and securities. The sanctions were imposed in order to put pressure on President Maduro’s government in response to its human rights violations, the undermining of democratic institutions, rampant public corruption and repression of the political opposition. The measures quickly pushed an already over-indebted state into bankruptcy. Barely two months after the order was issued the Venezuelan government, no longer able to finance its debt-payments with new loans defaulted on two of its loan payments. The toll of the measures on the population however has been high. The sanctions and subsequently imposed ones form a so-called comprehensive economic sanctions regime that has exacerbated the humanitarian crisis in Venezuela. The country is almost entirely reliant on food imports, with the farming and fishing sectors accounting for only 5% of the country’s GDP (2010). The comprehensive economic sanctions regime severely limits the import of food and other essential goods. Despite this, Juan Gerardo the leading opposition figure has voiced his support for the U.S. sanctions citing that “Venezuelan capital has flooded the world economy” and that the magnitude of theft from the Venezuelan people amounts to at least $300 billion, which has become part of a money-laundering circuit.

Given the extreme proportions of state funds that remain unaccounted for, Gerardo’s position invites some sympathy. If all of that capital had been retained and if it had been invested wisely, or saved e.g. in a sovereign wealth fund, maybe Venezuela would not find itself in its current position. However, sanctions can only limit further capital extraction from public funds and not restore what has already been lost. Sanctions are also not a long-term solution and most importantly, the price that the population is paying is far too great. With no immediate alternative political solution in sight, there is a pressing need for the international community to find less invasive means to solve the problem of unlawful capital extraction from Venezuelan state resources. One important component for such a solution must be more rigorous legislation, implementation and enforcement of anti-money-laundering legislations in the world’s banking capitals. Grand theft requires not only access to capital that one can steal, but instruments to steal it and places to hide it.

Almost all of the capital unlawfully extracted from Venezuela in the last decades passed through banks established in Europe or North America, particularly through purported investments in financial products. More recently, significant amounts were unlawfully extracted from state coffers through currency exchange schemes and laundered abroad. The financial policy of fixing a state-guaranteed foreign currency exchange rate to stop the domestic currency’s hyperinflation was instrumental in the success of such schemes. This policy prevented the Bolivars from losing their free market value and by 2014, the government’s exchange rate varied dramatically from the free market one. One could exchange $10 million for 600 million Bolivars on the free market and then convert it back to $100 million using the government fixed exchange rate. However, while this practice drained public resources, the international financial market offered many other possibilities for laundering stolen funds well before this particular method became so lucrative.

If the anti-money-laundering safeguards that already exist are implemented effectively, the immediate and long-term aims of stopping capital drain from Venezuela that Mr. Gerardo highlighted can be achieved to a large extent.

Many international and national anti-corruption and money-laundering instruments seek to address this problem. They criminalize money-laundering and call on national law enforcement agencies to cooperate with one another on exchange of information on suspected money-laundering schemes. They require states that discover the proceeds of corruption and money-laundering in their jurisdictions to seize such assets and return them to their lawful owner. Importantly, they also mandate other important measures including the implementation of know-your customer policies in the banking sector. Such policies require banks to verify the purported use of large transfers and to pay particular attention to financial transactions of so called politically exposed persons. If the anti-money-laundering safeguards that already exist are implemented effectively, the immediate and long-term aims of stopping capital drain from Venezuela that Mr. Gerardo highlighted can be achieved to a large extent.

Recent cases support this claim. The Floridian authorities uncovered a scheme involving sophisticated false-investments and foreign currency exchange where $1.2 billion were embezzled from PDVSA. Eight men were involved, including the former executive director of PDVSA and the former managing director and vice-chairman of the Swiss bank Julius Baer. The banker, as the legal proceedings showed, was specifically charged with advertising the bank’s services to Venezuelan clients. In a plea agreement that he reached with the Floridian authorities, he admitted that the necessary infrastructure for laundering this sum had been provided for by a network of professional money-launderers in banks, investment and brokerage firms in the United States and abroad. Since the investigations into this particular case and potentially related ones are under way, the reach of the money-laundering ring and all the associated financial institutions are not yet public knowledge. It is also not clear whether the $1.2 billion stolen in this particular scheme has been recovered.

Following up on the connections of Julius Baer to this money-laundering scheme the Swiss Financial Market Supervisory Authority FINMA took a closer look at the bank and concluded earlier this year that bank had systematically failed to comply with domestic anti-money-laundering laws. More specifically, Julius Baer failed to properly implement know your customer requirements and special duties of due diligence by not collecting sufficient information about their clients’ sources of wealth and by continuing to process large-sum transfer orders for persons who were being investigated for financial crimes. FINMA found that these transgressions were not the exception. They were promoted by the bank’s management that measured performance only based on profits generated and gave out promotions and bonuses based on their “high performers” even if payments they effected overtly violated banking regulations. Just earlier this month, FINMA reported that another Swiss bank, Banca Credinvest had violated domestic anti-money-laundering regulations in connection to clients linked to PDVSA. In response, FINMA has taken a number of measures designed to affect a change in the compliance culture of the two banks. Such measures include a temporary ban from processing risk transfers or accepting politically exposed persons as clients. They also require the banks to change the ways in which they access performance to incentivize compliance. And, apparently criminal indictments against individual employees of the banks may still follow. Unfortunately, there is no information available on the amounts that may have passed through the banks, nor on whether or not the assets are recoverable. It is also not clear whether investigations into other banks relating to money-laundering of PDVSA funds are still ongoing.

Overall, there is also a significant question of fairness, when it comes to distributing the costs for banks’ non-compliance with anti-money-laundering laws.

The FINMA proceedings are undoubtedly a crucial step in achieving a much-needed change in the banks’ institutional culture of aiding financial crime. As the agency admits the Swiss financial services industry has been caught up in several global corruption cases in recent years (and probably also in not so recent years), which is why FINMA now wants to focus on the involvement of Swiss financial institutions in global anti-money-laundering cases. At the same time, the cases also showed that banks were demonstrably able to operate well outside the scope of anti-money-laundering law for almost one decade and that they were not regularly monitored. In fact, it seems as if the implementation and oversight of anti-money-laundering is moved primarily by public shaming and information gathered in other jurisdictions. Corruption and anti-money-laundering allegations against two prominent clients of Julius Baer were widely reported on by mid-2015, yet it took FINMA more than three years to launch investigations. Anti-money-laundering oversight does not seem to work in a preventive manner as intended by the laws, but rather after.

Overall, there is also a significant question of fairness, when it comes to distributing the costs for banks’ non-compliance with anti-money-laundering laws. Under Swiss law, the profits of such non-compliance can be kept by the banks. Holding them accountable under civil law e.g. for the payment of restitutive damages does not seem to be an option. This does not seem fair. After all, the costs for the adverse effects of their transgressions are then collectivized and born by all tax payers, or, as it is the case for Venezuela, translated into human suffering. The idea of such a form of liability is not that farfetched. In the U.S., Goldman Sachs recently reportedly agreed to pay $3.9 billion for its involvement in fraudulently diverting significant billions from Malaysia’s state-owned company 1MDB. The Goldman Sachs settlement was paid directly to the current government of Malaysia, but in a case such as that of Venezuela that is suffering through a severe, ongoing and underfunded humanitarian crisis, is should be considered whether a portion of any damage payments could not also be directed to a humanitarian fund.

Of course, not all funds stolen from the Venezuelan state would have otherwise been used for the welfare of its people. However, it is important to recognize the nexus between the spectacular sums stolen from Venezuelan state coffers, the fiscal policies that facilitated this theft and the devastating economic impact of this nexus that brought the economy of this resource-rich country to its knees. Theft of such proportions not only requires access to state resources, but also access to a transnational financial market place, in which the costs for non-compliance with anti-money-laundering regulations are too low and the rewards for such behavior too high. Stolen Venezuelan public funds were harbored in the jurisdictions of many humanitarian donor states for decades. With a more consequential enforcement of their existing anti-money-laundering regulations, stricter oversight mechanisms and the imposition of sanctions and penalty payments on non-compliant financial institutions, rather than individuals state donors, could have done their part to alter or even prevent the making of crisis such as this.

This article also appears on the taz blog “Riches and Laws” which shares insights from Dr. Kulamadayil’s SNSF-funded research project “Depleted Fortunes”.

Image by Steve Buissinne from Pixabay

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