North Korea money laundering in Russia puts European banks at risk

Elvira Nabiullina, the governor of the Russian Central Bank, has reportedly been reforming the bank sector and cracking down on financial institutions engaged in illicit behaviour.

“Nabiullina’s has made some impressive achievements in cleaning up the banking system, which include better monitoring of large banks and withdrawal of licenses from smaller institutions involved in a variety of shady and semi-legal operations,” Vladimir Tikhomirov, the chief macroeconomist at BCS Financial Group in Moscow, told New Europe. “In most cases, the latter were cash and FX dealings with criminal connections.”

Some Russian banks have reportedly been accused of assisting North Korea in evading international sanctions, putting Russian banks and their European customers at risk.

On 19 June, the United States sanctioned Russian Financial Society for allegedly helping North Korea evade financial sanctions by assisting a company linked to Pyongyang’s primary foreign exchange bank, Reuters quoted the US Treasury Department as saying. American officials targeted the Russian financial institution and accused it of opening multiple bank accounts for Dandong Zhongsheng Industry & Trade Co. Ltd, which is owned and controlled by North Korea’s Foreign Trade Bank.

“Treasury continues to enforce existing US and UN sanctions against individuals and entities in Russia, and elsewhere, who facilitate illicit trade with North Korea,” the news agency quoted Sigal Mandelker, US Treasury’s Under Secretary for Terrorism and Financial Intelligence, as saying.

Justin Urquhart Stewart, director at Seven Investment Management in London, told New Europe on 16 August that the DPRK allegedly uses deceptive tactics to launder money through Russia.

“It’s not just the Russian banks that are doing this high-risk stuff and the Russian banking system is not renowned for its security. I suspect we’re lucky to find a financial system in North Korea, but what is fascinating is that now it has changed over the past few years in terms of the attitude towards Russian companies investing elsewhere. The level of trust is so low and the control of money-laundering operations so tight, that the Russians will find it increasingly difficult to invest in the EU,” he said, adding that some Russian financial entities may be involved in high-risk operations in North Korea, putting Russian banks and their customers at risk.

“It’s shaky, but you have to understand that most Russian banks are effectively being supported by the state. I think it’s highly likely that the Russian banks will act a little like the German banks and allow the government to step in to force a merger or something. They are not developed Capitalists to the extent of being able to manage losing banks. It would not be orderly. It would be very disorderly, so I think they have to be very careful with that,” Urquhart Stewart said.

Russian officials have reportedly taken steps against the DPRK, but the job remains incomplete. “It’s an interesting issue to see what action the authorities will take. The answer I suspect will be very little. What we need to be aware of in the West, in terms of the Russian banks, is that this is only going to get higher, so we could be in a position where we’re heading for another credit crunch. This time around, we don’t have the rescue facilities that we had in 2008. Could we do another round of quantitative easing on that scale, the answer is probably not. That means that if a Russian bank is used, the story is not so much about the banks themselves, but about the effect it would have on the rest of the markets. It’s relatively small, but if it’s handled badly you could end up with a Lehman-type style meltdown,” Urquhart Stewart said.

With some Russian government support, Nabiullina has been reportedly reforming the banking sector, which is critically important. “If they were taking action against other banks that would actually further tarnish the Russian image on lack of compliance and control, the question then would have to be, ‘Do they have the ability to do this in a managed manner to be able to handle this?’, or ‘Do they and let it go?’ The latter would be very dangerous for Europe and the banking system,” said Urquhart Stewart.

When it comes to US sanctions against Russian financial institutions who are allegedly helping North Korea launder money through the Russian and European banking system, the London-based analyst added, “The Russians are masters at that and, of course, they’ve got more alternatives and pipelines now.”

Urquhart Stewart argued that Moscow and Beijing may boost joint “Sino-Russian linkages to combat what they see as an aggressive US policy, but also an aggressive, unreliable, and some times illogical America. They can’t judge the Americans because they don’t know what he is going to do next, which you can say is a good way to try to manage it, but it will destroy the one word that runs any economy – particularly economies trying to recover from 2008 – and that is ‘confidence’. If they don’t have confidence in the banking system structure, and your counterpart’s risk in the banking system is not secure, that’s how you end up with a sudden crisis developing almost overnight.”