Wall Street Journal, May 24 2005

  In Europe, Finance Lobby Sways Terror-Funding Law

  Legislators With Close Ties To Industry Water Down Money-Laundering Rules

  By Glenn R. Simpson

  The Wall Street Journal Europe via Dow Jones

  BRUSSELS -- A bid to cut off funds for terrorism by tightening financial-crime laws has been watered down in the European Parliament with the help of legislators with close ties to the financial industry, including one lawmaker who is chairman of a hedge-fund firm and another who is a top executive at a bank being investigated for money laundering.

  Since last fall, the finance industry and its lobbyists have waged a fierce behind-the- scenes campaign to weaken the European measure. Several lawmakers with industry ties have pushed amendments favoring the financial industry. The effort has been aided by ethics rules that are much weaker than those of the U.S. Congress and allow lobbyists and lawmakers to keep private much of their activity. The full Parliament is expected to begin considering the amended version tomorrow.

  Top figures in the German Parliament were forced out of office this year for holding outside jobs, and European Commission President Jose Manuel Barroso currently is grappling with conflict-of-interest allegations for taking a free trip while he was Portugal's prime minister. The European Parliament -- which plans to grill Mr. Barroso tomorrow for accepting the free trip -- has yet to apply such scrutiny to its own members or to the thousands of lobbyists who walk its halls.

  The European Parliament, the European Union's only directly elected institution, lacks the tight restrictions on outside income of many other political institutions, including the European Commission and all three branches of the U.S. government. Officials of those institutions can't work at a bank or serve on a corporate board. Assets and investment income must be disclosed. The European Parliament allows members to accept unlimited amounts of private funds and name only their source, not the amount.

  In Washington, lobbyists must file detailed accounts of their income and their contacts with government officials, and identify their clients. In Brussels, lobbyists are required to gain accreditation but don't have to disclose their clients, income or contacts with decision makers.

  Based on a model written by the world's top finance regulators, the EU's "Third Money Laundering Directive" commits member nations to criminalize money laundering, monitor cash transactions, raise standards for disclosing ownership of trusts and other financial mechanisms often used to shield transactions from scrutiny, and force their banks to use extra safeguards for international transactions.

  One venue for critics of the legislation is a policy-discussion forum run by top Brussels banking lobbyist John Houston and funded by many of his clients. The group's chairwoman and several other members are EU legislators. Some of them introduced amendments to the bill that were almost identical to drafts circulated by a banking trade group whose members include several clients of Mr. Houston, Parliament records show.

  The process led to an unusual protest by legislators on one committee, half of whom abstained on the amended measure. Too many Parliament members introduced "amendments which had been dictated to them by the bankers," said Socialist legislator Vincent Peillon of France.

  In an interview, Mr. Houston acknowledged that several of his clients are also members of the discussion forum he runs, the European Parliamentary Financial Services Forum, but said the group is separate from his lobbying practice. "You are barking up the wrong tree," he said. Mr. Houston runs a new association of lobbyists now leading the opposition to calls in Brussels for more disclosure of lobbying activity, saying there is no evidence of abuses.

  The money-laundering measure is widely unpopular in the European banking and legal industries for its bookkeeping burdens, though the industry says it supports the aims. A key critic of the legislation is the City of London -- Europe's Wall Street -- which is anxious to protect its lucrative trade in loosely regulated financial vehicles. "It's easy to talk up the threats from criminal tax-evaders, money-launderers and even terrorists, but we must also guard against the medicine being worse than the illness," said Michael Snyder, policy chairman of the Corporation of London, a client of Mr. Houston.

  In September, a finance-industry umbrella group called the European Banking Industry Committee, most of whose members help fund and attend the policy forum run by Mr. Houston, began circulating criticisms of the legislation. In January, it circulated a list of 16 amendments it preferred most. Among those who took up the industry group's cause was Parliament member John Purvis of Scotland, a member of Mr. Houston's discussion forum who leads a firm that manages a hedge fund in the tax haven of Luxembourg. He offered half-a-dozen amendments to loosen disclosure requirements and provide other exemptions, several of which were incorporated in some form.

  In annual filings with Parliament, Mr. Purvis discloses his role at the hedge fund and in other private businesses, but not the amount of his income from them, which isn't required. In an interview, he said he earns a "nominal" fee of 7,000 euros to 10,000 euros a year as nonexecutive chairman of Belgrave Capital Management Ltd. Filings with British corporate regulators show he received another 7,000 euros last year from a fund called European Utilities Trust PLC. Mr. Purvis said he also gets income from a business consultancy.

  "That's as clear an example of a conflict of interest as you get," said Olivier Hoedeman of the Corporate Europe Observatory, a privately funded nonprofit group in Amsterdam that contends the EU needs stronger rules on ethics. "That parliamentarian is not defending the public interest, he is clearly defending his own interest and the interest of his industry."

  Mr. Purvis said he has complied with parliamentary rules, and said it is only natural for him to be involved in banking policy. "What about a farmer being involved with agriculture?" he asked. "I think you are climbing up a gum tree." In December 2003, Mr. Purvis shepherded through Parliament a study on hedge funds that called for "a light-handed regulatory regime" on them.

  A Finnish legislator who serves as chairman of Mr. Houston's discussion group and was a leader in the drive to weaken the legislation, Piia-Noora Kauppi, submitted amendments that borrowed word-for-word from the European Banking Industry Committee. Ms. Noora Kauppi acknowledged getting help from the group in writing her amendments, but added, "I don't remember which ones came from EBIC and which came from other sources."

  Parliament member Jean-Paul Gauzes of France offered similar amendments on trust disclosure. He works in Paris as director of legal and tax affairs for Dexia Credit Local, the municipal-bond unit of Franco-Belgian retail banking powerhouse Dexia Group, which is currently being investigated in Belgium for suspected money laundering, Belgian prosecutors say. Dexia said in a statement that the charges "do not mean guilt" and is confident its executives did nothing wrong.

  Mr. Gauzes doesn't disclose the amount of salary he gets from Dexia. He wrote in an email that it is "commensurate with the work," and added that he wasn't the originator of amendments on trust disclosure, pointing to British legislators. He is listed in Parliament's records as co-author of two amendments offered on that front, including one raising the threshold for owners of trusts to be disclosed. "I exercise my mandate as a member of Parliament in all independence and I do not believe that, in principle, there is a conflict of interest," he wrote in the email.

  The money-laundering legislation would require EU countries to criminalize money laundering and make businesses report suspicious transactions, investigate their customers and restrict financial vehicles used for money laundering such as hedge funds and trusts. "Before, you had absolutely nothing" to regulate those vehicles in Europe, said Alain Dumais, executive director of the international regulators' group, the Paris-based Financial Action Task Force.

  Trusts, long a feature of Anglo-Saxon law, are essentially written agreements on the ownership and management of assets, typically exempt from taxes and most standard corporate registration requirements. They also bind the managers of the assets, the trustees, to confidentiality. Trusts have legitimate uses including bond issues and protecting family assets, but they also are the mainstay of the U.K.'s booming offshore-banking industry and are under attack by regulators for their role in financial crime. "Unfortunately, trusts which hide the identity of the grantors and the beneficiaries have become a standard part of money-laundering arrangements," says a 1998 United Nations report on bank secrecy and offshore tax havens.

  The EU legislation originally proposed that anyone who owns more than 10% of a trust be identified in legal records that can be obtained by police and regulators. That threshold was amended to 25%, making it easier to remain outside the disclosure rule. Mr. Purvis said smaller stakeholders are difficult to track down.

  Another change won by the industry involves the international relationships known as correspondent banking. Under the original proposal, banks were required to keep close tabs on all their correspondents for signs of money laundering.

  The amended version says they need only look at correspondents outside the EU. That means banks in Romania, Latvia, and other EU member states with money- laundering problems won't face extra scrutiny by their brethren in the U.K., France and other countries. A similar change relaxes a ban on ties between EU banks and "shell banks" -- entities with offices that are merely used to mask the identities of their customers. Originally, both direct and indirect ties to shell banks were banned. Under the updated version, EU banks would need only to take "appropriate measures" to avoid working with them.