European Banking Scandals Are Undermining Transatlantic Trust

War in Ukraine brought out the multiple cracks and weaknesses in the western alliance for all to see – and exploit – not least the West’s rivals. With the pressure being exerted from outside, we cannot afford to overlook our vulnerabilities as we’ve done in the post-Cold War years. One such is the area of banking, finance, the threat to the dollar as reserve currency and the like. Dark money combined with bad oversight and its epiphenomena are a shadowy but ubiquitous threat that can buckle the system at any time because the system needs transparency to retain confidence and stability.

The banks, as we all know, have shown particular weakness of late. Example: The recent news that US investors are gearing up to sue the Swiss government for the way in which it engineered a “shot gun wedding” between Switzerland’s two largest banks. The authorities’ action wiped out $17bn investment from the bank’s AT1 bondholders, damaging transatlantic trust both in Europe’s banks and in the competence of their oversight by European governments. General elections next month in another mountainous European state could serve to further erode this relationship.

Like Switzerland, the tiny Pyrenees Principality of Andorra’s has an overweight banking sector that accounts for over 20% of its GDP. It has attracted large deposits from wealthy investors from all over the world drawn by its secrecy, light touch regulation and generous tax arrangements. We’re talking about a sovereign landlocked country of some 80,000 citizens with its own laws and political institutions – but heavily associated with both France and Spain. This ‘in it’ but not ‘of it’ status in relation to Europe has allowed all manner of murky doings in Andorra’s banking sector triggering massive media scandals in recent months, and spilling over onto the upcoming elections there on Sunday.

Elections in Andorra would usually go unnoticed by the world, were it not for the fact that Andorra (along with fellow tax havens San Marino and Monaco) is currently in advanced stages of negotiations with the EU for further integration through an association agreement. Anti-corruption expert, Martin Kreutner, in a recent highly public report, likened this to allowing a “Trojan Horse” into Europe’s financial system. Kreutner’s viewpoint carries a great deal of authority as he’s the Dean Emeritus of IACA, the International Anti-Corruption Academy, an intergovernmental agency based in Austria that teaches government officials, especially EU officials, and professionals about anti-corruption measures.

How Andorra manages its outsized banking sector will be at the heart of the elections and EU negotiations. Prime Minister Xavier Espot –who is running for re-election– is accused by investors of subverting the rule of law in an alleged abuse of power aimed at protecting Andorra’s ancient banking families from the scrutiny of US law enforcement. The scandal, which has become known in the media as Andorragate, CITE should serve as a cautionary tale for investors and policymakers alike.

In 2015, one of Andorra’s largest banks, Banca Privadad’Andorra (BPA), was forcibly nationalized by Andorran authorities following the issuance of a notice by the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), which designated BPA a foreign financial institution of primary money laundering concern. These claims were presented without evidence and never investigated by the Andorran authorities. BPA’s CEO, Joan Pau Miquel, spent two years in prison in Andorra without facing any charges. BPA’s shareholders are now pursuing a €500 million claim against the government of Andorra for the unfair and reckless takeover of the bank.

Evidence has since come to light which suggests that the government at the time was under pressure from the United States to take action against money laundering and used BPA as a scapegoat to protect other banks from scrutiny. Former Minister of the Interior of Spain, Francisco Martinez, recently claimed in a letter to the Andorran Prime Minister that the Financial Intelligence Unit of Andorra (UIFAND) may even have fed FinCEN incorrect and misleading information which led the US agency to issue the notice. At the time, US law enforcers had shown interest in an alleged money laundering operation run by a Dutch drug-trafficking ring through Credit Andorrá, another Andorran bank with close ties to the government, according to explosive allegations made this month by private investigator, Paco Marco in a Spanish TV documentary, allegations which made headlines in Spain and Andorra.

The former shareholders of BPA, Higini and Ramon Cierco, have claimed “BPA was the only bank owned by outsiders to the Andorran establishment.” Hence the bank was targeted by Andorra’s elite as a sacrifice to serve up to US authorities, so the argument goes. This alleged scenario led the shareholders of BPA to file a complaint against the Andorran Prime Minister for “fraud, influence peddling and waste of public funds” over the handling of the case.

Corruption expert Kreutner’s Andorra report, found “significant legal and regulatory weak points” in the country which clearly need to be addressed. His key concern is about the banking sector and the risks it faces from the absence of a central bank and proper oversight. Kreutner stated that “Andorra’s ability to regulate its banking sector and investigate banking scandals in a transparent and fair manner is critical if Andorra is to be allowed further EU integration.” He concludes that “improving anti-corruption and anti-money laundering regulations should be at the center of Andorra’s agenda, especially in the upcoming elections.”

This is a concern echoed by geopolitics analyst and editor of French journal Le Monde Decrypte, Gérard Vespierre. He, in a recent study of Europe’s microstates, found Andorra to be “a threat to the rule of law in Europe”. For Vespierre, the BPA case exemplifies “how failure to uphold the rule of law and apply due process to banking regulation can put both private businesses and individuals at risk.” Above all, putting at risk the wider European and indeed Western banking system, one might add. In the current climate of global tension and division between the West and the rest, that kind of weakness could prove disastrous. Especially considering the recent wobbliness of major banks in the US, UK and EU.

David Tepper, the billionaire founder of Appaloosa Management, told the Financial Times in the wake of the Credit Suisse affair “if this is left to stand, how can you trust any debt security issued in Switzerland, or for that matter wider Europe, if governments can just change laws after the fact.” Another investor referred to Switzerland as a “banana republic.” Only time will tell the solidity of Switzerland’s defense. One thing however is certain: in countries like Switzerland and Andorra, banks are a matter of national pride, and their management is inseparable from politics and the affairs of the government.

Despite being rooted in small counties, Andorran and Swiss banking services are used globally. An association agreement with the EU would only increase Andorra’s appeal for investors in search of a low tax safe haven for their savings. But a dark cloud hangs over the microstate. The Andorragate scandal suggests that banking regulation, under the current government, is more about who you know, than how you act. Even the merest whiff of clubby favoritism influencing the rule of law will have a chilling effect on potential investors, particularly in the wake of the Credit Suisse affair. For as long as this and the BPA case remain unresolved, transatlantic trust in Europe’s banks will continue to be in jeopardy.