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EIB under scrutiny for failings after whistleblowing complaints

The bank falls short of EU anti-money laundering rules, internal audit reveals

Whistleblowing complaints at the European Investment Bank have revealed a disregard for anti-money laundering rules when providing billions of euros to projects around the world, according to a trove of internal documents and emails seen by the Luxembourg Times.

The EU bank has called for an inquiry into a pattern of wrongdoing, misconduct and obstruction, alleged in the whistleblowing complaints made last summer.

Group chief compliance officer Gerhard Hütz, a 20-year EIB veteran who oversaw the bank’s beleaguered compliance unit for seven years, left office just a few months after the complaints and a damning audit report.

EU finance ministers, who make up the board of governors – the bank’s highest decision-making body – were aware of failures to conduct proper “know your customer” or KYC checks. Several ministers at a board meeting in June 2019 said it was an immediate and urgent priority to “remove gaps” in anti-money laundering and counter-terrorism financing (AML/CFT) practices, according to one of the documents.

The bank confirmed that the audit report had identified “gaps”, partly related to an “incomplete adaptation” of the bank’s policies in line with the latest AML/CFT regulations. Hütz’s departure and his appointment into a new role were in line with the bank’s policy on internal mobility, a spokesperson for the EIB said.

Banks typically collect information on clients before signing off on deals to ensure that loans will be used for their stated purpose, and not to finance illegal activities such as drug trafficking, prostitution or terrorism. The Luxembourg-based EIB’s activities extend into several countries where regulatory standards are lower than in the EU.

It has invested €1.2 trillion in start-ups and larger companies in 162 countries from Fiji, Pakistan, Gabon to Argentina since it was set up 62 years ago. The bank raises its funds on capital markets – mainly by issuing bonds – and has financed 12,716 projects in telecoms, transport, waste, energy and infrastructure through loans and equity.

While the EIB is a non-profit public bank, it chooses to adhere to sound commercial and international principles. The flaws identified in the audit report do not conform with EU rules on anti-money laundering and terrorism financing, nor with best practices and standards prescribed by the Basel Committee on Banking Supervision and the world’s anti-money laundering watchdog, the Paris-based Financial Action Task Force (FATF).

The bank only adopted AML/CFT procedures – a standard market practice for decades in commercial banking – three years ago, a draft audit report published in May last year said. A few months later, it made it mandatory for clients to provide documentation, so that it could carry out due diligence at any time during the business relationship, an internal presentation showed.

At the same time, the EIB decided to review all its existing deals with nearly 4,000 counterparties, known as the ‘legacy project.’ Still, the EIB has since entered new business relationships to finance projects without the full compliance checks being carried out on the loan recipients, according to several emails Hütz sent to his team.

In January, the EIB unlocked €47 million for Volán Buszpark, a Hungarian state-owned bus company, to modernise half of its fleet and reduce carbon emissions. In September 2019, the bank granted a €220 million loan to build and maintain the A49 motorway between Schwalmstadt and Ohmtal-Dreieck in Germany, a project heavily contested by environmentalists.

In an email to his team, and referring to those projects, Hütz said: “Obviously, eventually we need to receive verification of documents and additional information”.

The internal audit process had functioned as intended, an EIB spokesperson said, adding that the shortcomings had been dealt with in a transparent way, and that there was no evidence that the bank and its clients and partners had suffered any “damage in practice”.

Skeletons on the books

The whistleblowing allegations that Hütz overlooked compliance gaps led the bank to hire PricewaterhouseCoopers for a “fact-finding exercise”. The consulting firm is currently investigating the claims that Hütz, who reported directly to EIB President Werner Hoyer, signed off on the legacy project, which was then approved by the bank’s nine-strong management committee despite Hütz’s team pointing out “huge gaps”.

The EIB said it would not comment on “any ongoing complaint”.

Last year’s internal audit report showed due diligence and risk-scoring of the existing 4,000 clients were not complete. The report found that 80% of the legacy projects were rated “low risk by default”. One in five of those cases had been given that rating despite being from countries considered to have AML standards below those of the EU. Exceptions were granted for 45% of all counterparties, allowing the bank to accept non-certified documents and not collect ID cards. Explaining the gaps, Hütz said the “EIB has been living with a non-remediated portfolio of some thousands counterparts for many years … and still all repayments [were] coming in,” according to one whistleblowing complaint.

Attributing risk scores to clients and transactions was difficult since the EIB did not have a ‘compliance risk assessment’ to set policies and procedures, which is normally required by the Basel Committee on Banking Supervision for commercial banks.

By Heledd Pritchard and Julie Edde, 21 April 2020, Published on Luxembourg Times


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