Norwegian School of Economics Bergen, Spring 2019 Does Size Really Matter? A Study of Banking Sector Size as it Relates to Money Laundering and Anti-Money Laundering Enforcement Nicolas Gibney Supervisor: Tina Søreide A Master’s Thesis in Economics and Business Administration, International Business NORWEGIAN SCHOOL OF ECONOMICS This thesis was written as a part of the Master of Science in Economics and Business Administration at NHH. Please note that neither the institution nor the examiners are responsible − through the approval of this thesis − for the theories and methods used, or results and conclusions drawn in this work. Table of Contents PREFACE ....................................................................................................................................................... VI EXECUTIVE SUMMARY .............................................................................................................................................. VI PREAMBLE AND ACKNOWLEDGEMENTS ...................................................................................................................... VII TABLE OF TABLES .................................................................................................................................................. VIII ABBREVIATION LIST ................................................................................................................................................. IX COUNTRY ABBREVIATIONS ......................................................................................................................................... X SECTION 1 – INTRODUCTION ......................................................................................................................... 11 1.1 – MOTIVATION ............................................................................................................................................... 11 1.2 – RESEARCH QUESTIONS ................................................................................................................................... 13 1.2.1 – Specification of Research Questions ................................................................................................ 13 1.2.2 – Scope ............................................................................................................................................... 13 1.3 – Thesis Purpose .................................................................................................................................... 14 1.4 – THESIS STRUCTURE ....................................................................................................................................... 15 SECTION 2 – MONEY LAUNDERING: BACKGROUND ....................................................................................... 16 2.1 – DEFINITIONS ................................................................................................................................................ 16 2.1.1 – Money Laundering ........................................................................................................................... 16 2.1.1.1. – History of Money Laundering .................................................................................................................... 17 2.1.2 – Enforcement Action ......................................................................................................................... 17 2.1.3 – Settlement ....................................................................................................................................... 18 2.1.4 – Banking Sector ................................................................................................................................. 18 2.2 – Reasons to Launder ............................................................................................................................ 19 2.3 – MONEY LAUNDERING METHODS ..................................................................................................................... 19 2.3.1 – The Money Laundering Process ....................................................................................................... 19 2.3.2 – Method One: Mirror Trades ............................................................................................................ 20 2.3.3 – Method Two: Back-to-Back Trades .................................................................................................. 21 2.3.4 – Method Three: Trade Mis-invoicing ................................................................................................. 21 2.3.5 – Method Four: Laundering through Assets ....................................................................................... 22 2.4 – WHY IS MONEY LAUNDERING A PROBLEM? ....................................................................................................... 22 2.4.1 – Money Laundering Increases Crime ................................................................................................. 23 2.4.2 – Money Laundering Distorts the Economy ........................................................................................ 23 2.4.3 – Benefits of Strong AML Legislation .................................................................................................. 24 2.5 – MONEY LAUNDERING CASES ........................................................................................................................... 25 2.5.1 – Large Money Laundering ................................................................................................................. 26 2.5.1.1 – BCCI ($23 billion) ........................................................................................................................................ 26 2.5.1.2 – Danske Bank ($230 billion [est.]) ................................................................................................................ 26 2.5.1.3 – Deutsche Bank ($20 billion [est.]) ............................................................................................................... 27 2.5.1.4 – HSBC ($7.23 billion) .................................................................................................................................... 28 2.5.2 – Money Laundering in Small Countries ............................................................................................. 28 2.5.2.1 – Cyprus ......................................................................................................................................................... 28 2.5.2.2 – Danske Bank Associates .............................................................................................................................. 28 2.5.2.3 – Latvia .......................................................................................................................................................... 29 2.5.2.4 – Luxembourg ................................................................................................................................................ 29 2.5.2.5 – Malta .......................................................................................................................................................... 29 2.5.2.6 – Nauru .......................................................................................................................................................... 29 2.5.2.7 – Norway ....................................................................................................................................................... 30 2.6 – REGULATION ............................................................................................................................................... 30 2.6.1 – US Regulation .................................................................................................................................. 30 2.6.2 – European Union Regulation ............................................................................................................. 31 2.6.3 – Financial Action Task Force ............................................................................................................. 32 2.6.4 – Financial Intelligence Units .............................................................................................................. 33 2.6.5 – Suspicious Transaction Reports ....................................................................................................... 34 iii SECTION 3 – LITERATURE REVIEW ................................................................................................................. 37 3.1 – DETERMINANTS OF MONEY LAUNDERING .......................................................................................................... 37 3.2 – REGULATORY ENFORCEMENT .......................................................................................................................... 40 3.3 – REGULATORY EFFECTIVENESS .......................................................................................................................... 42 3.3.1 – Political Connection ......................................................................................................................... 43 3.3.2 – Regulatory Capture ......................................................................................................................... 44 3.3.3 – Self-Regulation ...............................................................................................................................