Finance, democracy, and sovereignty: How Europe should respond to the FinCEN Files

The FinCEN Files provide a stark reminder that protecting European companies and protecting European interests are not always the same thing. Governments should look again at the relationship between megabanks and democratic politics.


The FinCEN Files, published on 20 September, show how illicit finance disrupts the European Union’s plans to become a “sovereign” power. The files comprise more than 2,500 documents leaked from the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN), covering around $2 trillion in transactions processed by multinational banks between 2000 and 2017. Although most of these documents are suspicious activity reports – which are far from being evidence of a crime, let alone an accurate measure of the sector as a whole – many of them provide new information on publicly known cases of money laundering, sanctions busting, and terrorist financing. European firms are central to the FinCEN Files: Deutsche Bank was allegedly involved in more than half of the transactions in the documents, while their publication contributed to a fall in the share price of HSBC – Europe’s largest bank – to its lowest point in 25 years.

This comes at a time when both the EU and the United Kingdom are rebalancing the relationship between state sovereignty and the role of multinationals. The UK has only an ill-defined vision of a “Global Britain”, but it seems to have lost some of its enthusiasm for working with foreign-based giants such as Huawei. The EU appears to have concluded that, as its foreign policy chief, Josep Borrell, puts it, “restoring the strategic role of the state will be a post-crisis priority” because “Europe forgot to build collective protection” for its companies and markets.

The EU and the UK are swayed by a sovereigntist, even nationalist, impulse in which the state becomes the guardian of ‘their’ companies. This is somewhat understandable, given that heightened geopolitical competition between the United States and China threatens Europe economically and politically – and that the coronavirus crisis has underscored the continent’s reliance on foreign medical supply chains and, potentially, vaccine technology.

However, the FinCEN Files provide a stark reminder that – in the financial sector, at least – protecting European companies and protecting European interests are not always the same thing. Firms such as Huawei are among the tools the Chinese state uses in pursuit of its strategic goals. The Kremlin is equally direct in its control of Gazprom – as witnesses to Ukraine’s various gas crises, or opponents of the Nord Stream 2 pipeline, would attest. In contrast, as the FinCEN Files indicate, Western financial institutions have long been used by cross-border corruption networks behind a litany of financial crimes involving hostile states, organised crime groups, and terrorists. The forces responsible for some of Europe’s greatest strategic problems have profited from a regulatory and enforcement structure that sometimes effectively turns a blind eye to their use of international banks.

If the proverbial door between Western governments and the finance industry revolved any faster, it would fly into orbit

Changing this will require all sorts of practical reforms to corporate liability law, financial regulation, and the resources of law-enforcement agencies. But it will also require a conceptual and cultural shift.

The conceptual aspect of this seems particularly achievable. As economist Hyun Song Shin argues, the “island” economic model – in which firms’ assets and liabilities are attributed to the GDP of the country in which they are headquartered – does not adequately explain megabanks’ international role. It is more accurate to think of the global economy as “a matrix of interlocking balance sheets” that “does not respect geography”, he says. Within this matrix, a megabank headquartered in Europe may spread its assets and liabilities across the world in a manner that makes its European character almost incidental. Such firms play a vital role in the international trade that benefits Europe but, in some ways, they are no more designed to protect European interests than are the high seas. Accordingly, it is likely impossible to enlist a European megabank in a sovereigntist foreign policy project as one could a Huawei or a Gazprom. The nature of such banks is reflected in the misdeeds referred to in the FinCEN Files, involving every region of the world and actors living under political regimes of all kinds.

The cultural aspect of the shift would cut across an array of political interests and relationships. Financial crime experts and others have pointed out on several occasions that the politicians who set the rules for the finance industry, not banks, are primarily to blame for the misdeeds linked to the FinCEN Files. Nonetheless, there is enough blame to go around. In Europe and the US, politics and finance often blur into each other in unsettling ways. And severe conflicts of interest arise when there is only a thin barrier between public office and private enterprise. The problem is less apparent in the West than in countries such as Venezuela and Ukraine, but it raises the same issues of regulatory capture and profitable neglect.

Some of the most egregious examples of the indistinct line between politics and finance include former British chancellor George Osborne working for investment firm BlackRock while he was a sitting MP, José Manuel Barroso gliding from the presidency of the European Commission to the presidency of Goldman Sachs International, and various executives circulating through Wall Street to the Trump administration and back again. If the proverbial door between Western governments and the finance industry revolved any faster, it would fly into orbit.

The 2008 financial crisis forced Western governments to recognise multinational banks as “systemically important institutions” – that is, firms whose failure can destabilise entire economies. But, on financial crime –as opposed to leverage ratios, which were a major issue in the crisis – the systemically important label has not come with systemically important responsibilities. Small or medium-sized banks such as ABLV and FBME have lost their operating licences due to money laundering and sanctions violations. But megabanks appear to simply absorb even multibillion-dollar fines as the cost of doing business – and sail on. Their status damages the accountability that is supposed to underpin liberal economics in a liberal democracy. It is the status fictional billionaire Bobby Axelrod dreams of: “TBTFW – too big to fuck with”.

Adding to these problems is the issue of campaign finance. The FinCEN Files touch on the allegations of illicit foreign funding that dogged Donald Trump in his 2016 bid for the US presidency, as well some of the most prominent figures in the UK’s Vote Leave campaign. The files include references to transactions in 2012 involving Paul Manafort – who would go on to be Trump’s campaign strategist, before his conviction for fraud – and reportedly reveal payments from a Kremlin-linked oligarch to one of the biggest donors to the UK’s ruling party. As is often true in such cases, one can observe a highly unusual flow of money to politically exposed persons, but it is difficult to prove what or who – if anyone – it bought. Yet transparency and accountability in political funding are essential to the health of any democracy. They should be bipartisan issues.

In light of all this, European governments need to think carefully about the FinCEN Files’ implications for reform of the financial system as they push for greater sovereignty. They should recognise that they have had no more success by forming partnerships with financial giants on financial regulation than they would have by forming partnerships with energy giants on climate policy. More than anything, perhaps, they should dwell on the perfectly legal aspects of the finance industry’s relationship with democratic politics. So long as European countries’ political culture allows for a degree of impunity within the financial system, they will struggle to achieve their strategic goals.

The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.


ECFR Alumni · Editor

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