By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In Europe nary a day seems to go by without some mention or rumor of a bank run or bank closure. Ground Zero of the current troubles is Greece, whose broken financial system is now wholly dependent on regular infusions of euros from the ECB. The moment those infusions stop – something the ECB has warned could happen at any time – the country’s banking system collapses. On Wednesday Greek banks saw deposit outflows of €300 million, the highest in a single day since a February deal with the euro zone that staved off a banking collapse.
But it’s not just on Europe’s periphery that banks are experiencing problems. At the beginning of this month, Austria sent shockwaves throughout the old continent’s financial markets when the Austrian government refused to grant the scandal-tarnished, “bottomless pit” bank Hypo Alde another taxpayer-funded bailout. Instead, bondholders, even those with bonds guaranteed by the Austrian state of Carinthia, were made to eat the losses in one of the first cases of bank bail-ins since sweeping changes to EU-wide legislation last year [It was a “long-yearned-for shock of liberation” for taxpayers; read… Austria ‘Pulls Ripcord’ on Bailouts, Lets ‘Bottomless Pit’ Hypo Alpe Bank Drag State of Carinthia into Bankruptcy].
A Rich Man’s Mini-Bank Run
In recent days the mayhem has spread to Spain’s capital, Madrid, and Andorra, a tiny mountain-ringed tax-haven perched between France and Spain. The initial trigger of the panic was an accusation from the US government of money laundering and a host of other unsavory practices taking place at Andorra’s third largest bank, Banca Privada d’Andorra (BPA). Fears quickly escalated that the bank would be unable to pay the sort of fine that the US treasury might impose, setting off a mini-bank run that culminated in the imposition of capital controls at Andorran branches of BPA as well as the seizure of deposits of 15,000 account holders of the bank’s Banco de Madrid subsidiary.
For the moment Spain’s government, regulators and central bank have shown little interest in bailing out Banco de Madrid. After all, this is an election year and rescuing a private bank that some now accuse of helping clients evade taxes or launder the proceeds from criminal activities is unlikely to go down well with cash strapped voters. Even the option of selling the bank to a competitor has been rejected, at least publicly, for the simple reason that few buyers would be willing to assume the potential costs of a US fine, which could well run into billions of dollars.
Granted, in the general scheme of things neither BPA nor Banco de Madrid are big fish. As such, the bankruptcy of Banco de Madrid is unlikely to set off a far-reaching contagion effect. Of the 15,000 depositors whose accounts have been embargoed, only 500 held funds with the bank in excess of the €100,000 maximum sum offered by Spain’s deposit insurance scheme. For them, getting back all their money will be an almost impossible task. As for the rest of depositors they will have to weather months, if not years, of litigation before being reunited with their savings.
Where things are more likely to get complicated is in Andorra, which is not part of the EU but has (or at least had) a thriving banking system relative to its economy. According to official estimates the country’s financial sector, which is dominated by private banking interests, accounts for close to 20% of the economy.
The question is: could the entire sector now be at risk?
Paying the Price for Serving the Wrong Customers
In the wake of the Cyprus bail-ins of 2013, it doesn’t take much to spook high net worth investors these days. According to recent reports by El Economista and El Confidencial, funds are already seeping out of Andorran banks in pursuit of safer shores, with most of them heading for Spanish banks.
Such jitters are understandable: BPA is one of five banks based in Andorra and it is unlikely to be the only one to have engaged in dodgy dealings with tax evaders and organized criminals – after all they are the mainstay of so-called “low-tax jurisdictions”.
In the case of BPA, it is accused by the US Treasury’s Financial Crimes Enforcement Network (FinCEN) of handling the proceeds of organized crime in Russia and China, as well as processing transactions as part of a $2 billion money laundering scheme connected to Venezuela. In sum: Russian gangsters, Chinese mafia and money-laundering Venezuelan politicians… hardly the sort of customers that will endear you to U.S. authorities.
What’s more, as confirmed by the recent revelations from an investigation by Spain’s Commission for the Prevention of Money Laundering and Monetary Offences (SEPBLAC), most of those activities were conducted not only with the implicit knowledge of the bank’s board but with its direct approval. Sitting on that board was BPA’s president, José Peréz, who before joining the bank was in charge of supervision for Spain’s central bank, the Bank of Spain. What better place to learn the tricks of the trade?
As for BPA’s CEO, Joan Pau Miquel Prats, he’s currently languishing in an Andorran jail cell. Among other offenses, he’s accused of personally liaising with senior figures of Chinese organized crime groups and executing cash transfers on their behalf.
The moral of the story is clear: with the U.S. government taking an increasingly proactive approach to its role as global financial policeman, European banks would do well to conduct their activities and select their customers with greater care. There may also be an ulterior agenda at work: namely, to sow the seeds of fear and unease among the customers of European tax havens.
Looking Closer to Home
Although it violates the basic principle of non-intervention in other states’ affairs, the U.S. authorities’ zealous pursuit of global tax evaders, money launderers and the banks that facilitate their crimes may well be a necessary evil. After all, tax havens like Switzerland, Luxembourg, Cyprus and Andorra cost governments in Europe and elsewhere, especially in the developing world, trillions of dollars in public revenues, precisely at a time of increasing budget restraints.
And most European governments – including Spain, France, Italy, Germany and the UK – are far too compromised (that is, owned by their domestic banks) to clean up their own mess. As for the governments of tax havens like Andorra or Luxembourg, the less said the better.
One can’t help but wonder when, if ever, U.S. authorities will begin training their sights on the banking cartels operating closer to home, not to mention the Big Four accountancy firms that often facilitate their activities. Or, for that matter, when they might begin investigating the world’s most egregious tax haven, the City of London, and the huge, secretive financial web it casts around the globe, as I reported earlier.
In the meantime, Banco de Madrid’s luckless depositors, many of whom are perfectly law-abiding, tax-paying citizens, begin their long wait to be reunited with their savings, while in Andorra the country’s government and banks prepare for the worst. By Don Quijones, Raging Bull-Shit.
In the new spirit of austerity, the ECB has outdone itself. Read… ECB Inaugurates Hyper-Luxury Super-expensive Way-Over-Budget HQ, While Frankfurt Burns