ZOiS Spotlight 33/2018

Money laundering in Moldova

by Sergiu Gaibu 04/10/2018
Trolley bus in Chișinău, Moldova. FO Travel / Alamy Stock Foto

Developing countries are more vulnerable than developed ones to money laundering because of high corruption, poor institutional processes, and weak controls in state institutions. Moldova is no exception. In recent years, the country has become well known for two major events. The first was Moldova’s central involvement, in particular through its law courts, in the Russian Laundromat scheme, in which over $20 billion was transferred from Russia to Western countries between 2010 and 2014. The second was the theft of $1 billion—approximately 12 per cent of Moldova’s GDP—from the country’s banking system in late 2014. Because of the complex money-laundering schemes employed, the money has still not been recovered.

An assessment team from MoneyVal, the European Council’s anti–money laundering monitoring body, started a mission in Moldova on 2 October 2018 to evaluate the government’s anti–money laundering measures and is expected to present a summary of its findings on 13 October. The previous evaluation was conducted in 2013, and the Moldovan parliament since adopted a Law on Anti–Money Laundering and Countering the Financing of Terrorism (AML/CFT) in December 2017. According to the Association Agreement between Moldova and the European Union (EU), the law must be aligned with EU directives—and it is an important focus for the MoneyVal experts.

Why is the Moldovan case so important? The Russian Laundromat scheme has shown how state institutions can be directly involved in money laundering by giving a green light to important flows of money from unknown sources. The episode revealed how weak state institutions in immature democracies and corrupt states can be at the forefront of money-laundering cases.

In 2014, Rise Moldova, a community of investigative journalists, carried out a thorough analysis of the Russian Laundromat case. Rise Moldova revealed that judges had played a key role in the scheme by recognising fake debts and issuing court decisions that hid the true nature of the transactions, allowing shelter companies to transfer money based on legal court decisions. In 2017, a new investigation by the Organised Crime and Corruption Reporting Project, another team of journalists, exposed in detail the destinations of the Russian Laundromat flows, which included financial institutions that promote Russia’s agenda in EU countries.

Anti–money laundering reform in Moldova

In 2015, the Moldovan Office for AML/CFT, with the support of the World Bank, initiated a national evaluation of the risks from money laundering and terrorist financing. This step was required by the recommendations of the Financial Action Task Force (FATF) and EU directive 2015/849 on the prevention of the use of the financial system for money laundering or terrorist financing. As a result of extensive analyses and consultations, the office issued a report in 2017 that mentioned the Russian Laundromat case but not the involvement of state institutions. The office made no proposals to prevent these risks in the future.

As a consequence, the new law has a series of shortcomings. Because the 2015 national risk assessment was superficial and did not identify measures to address new money-laundering schemes, the 2017 reform failed to cover new high-risk cases. The main concern was a lack of measures to address the involvement of corrupt state institutions, especially the judicial system, in facilitating money laundering.

Moldova’s anti–money laundering reform also looks disproportionate in relation to measures to tackle other crimes. While the 2017 law incorporates many new means to prevent money laundering, there are no corresponding steps to combat related crimes, such as trafficking of human beings and organs, drug trafficking, and corruption. Until the entire legal framework related to organised crime is updated, measures to prevent money laundering will be minimal and ineffective.

International implications

In a globalised world with cross-border financial transactions, poor legal frameworks in one country may pose risks to crime-prevention efforts in others. The international community has been developing conventions and standards to fight illicit financial flows such as corruption, money laundering, tax evasion, and the financing of terrorism. The EU has been at the forefront of this fight, for example by adopting the Fifth Anti–Money Laundering Directive and a framework for the automatic exchange of information. However, low levels of enforcement and compliance in high-risk countries may have dire consequences for the effectiveness of the whole prevention framework.

In that context, Moldova is a typical example. The EU’s efforts to improve the country’s anti–money laundering regulations have proven insufficient to build an effective national anti–money laundering mechanism. It is no surprise that the reforms lacked a holistic approach and put too much emphasis on the private sector without proposing structural reforms to fight corruption, increase transparency, and foster international cooperation.

Another important conclusion from the case of Moldova is that state institutions may be key players in money laundering. The FATF recommendations, and many other international standards and conventions, rely on state officials being honest and compliant with the law. They require the private sector to perform due diligence and other preventive processes, while state institutions must merely supervise the private sector and cooperate with other countries.

It may be argued that state institutions should also be required to improve their legal framework. One approach to achieve this is to implement structural changes to fight corruption, for example by increasing transparency, encouraging the international exchange of information, and ensuring the independence of state institutions. Another approach is to consider specific money-laundering prevention measures for the public sector.

Anti-corruption measures

MoneyVal is in charge of evaluating whether Moldova’s new regulatory framework complies with FATF recommendations and will prevent the money-laundering risks that have materialised in Moldova in the last five years. In Eastern Europe and other regions where criminal activity is closely interlinked with state authorities, regulators should carefully analyse the involvement of state institutions in money laundering. The MoneyVal evaluation report should become an incentive for further measures and FATF recommendations to prevent this malpractice.

For this purpose, specific controls and risk-evaluation mechanisms should be put forward to stop or at least diminish the effect of state involvement in money laundering. An international team of experts should be convened to assess this new phenomenon and develop tailored proposals to build efficient regulations to prevent its spread. FATF should review and enhance its recommendations to stop state institutions, especially the judicial system, from being attracted by money-laundering schemes. Otherwise, court systems, state procurement agencies, and state privatisation agencies may facilitate, rather than prevent, these activities.

Sergiu Gaibu is programme director of the Financial and Banking Sector at Expert-Grup, a think-tank specialised in economic and public policy research based in Moldova. His research focusses on macroeconomics, economic development, financial sector, investments and the ICT sector.