EU treaty instrument may mitigate risk of money laundering in the single market

EU treaty instrument may mitigate risk of money laundering in the single market

The European Commission is planning to use Article 116 of TFEU in order to clamp down on multinational companies using favourable tax schemes in some EU member states to their advantage. The treaty instrument is designed to mitigate the risks associated with foreign subsidies that distort competition in the single market. This may be a weapon in the EU’s arsenal that combats the issue of money laundering, which has compromised Estonia’s open post-Soviet economic transition. As Article 116 gives decision-making power to Brussels over the issue of financial regulation in member states, it may be a tool that the EU can use to shore up the integrity of the conduct of its free movement of capital.

In September, the European Commission stated that it is planning to use a treaty instrument to clamp down on multinational companies seeking to take advantage of low corporate tax rates in small EU member states. Article 116 of the Treaty on the Functioning of the European Union gives Brussels the power to consult with the member states concerned or, if that consultation does not reach agreement, to issue the necessary directives through the ordinary legislative procedure to resolve the issue of measures that threaten to distort competition in the single market.

This new policy initiative by the Commission is designed to mitigate the risks associated with the EU’s openness to foreign investment. Although creating many opportunities for economic growth, subsidies also have the effect of creating unfair competition in the single market. Currently, the EU has the capability to limit state aid to uphold a level playing field when firms or individuals receive financial contributions through subsidies. However, this power does not cover the way that inflows of investment are made from outside the EU.

Free movement of capital leaves the single market vulnerable to foreign exploitation

The Commission intends to use Article 116 to remedy this gap in the integrity of the single market. Under this treaty instrument, Brussels will have a say in the governance of tax schemes where, especially in small member states, favourable conditions set by low corporate tax rates are being exploited by foreign investors. While this may cause controversy since oversight of tax systems is usually kept at the competency of the nation-state level, the EU is clearly aiming to shore up its role in shaping how its principle of free movement of capital is conducted.

Estonia is one such small EU member state that has pursued policies aimed at encouraging foreign investment since the dissolution of the Soviet Union in 1991. As a result, the Estonian tax system has become one of the most competitive in the OECD, with a corporate tax rate of 21%. However, despite its openness to cross-border credit to align smoothly with the EU’s requirement for a functioning market economy, Estonia has left its banking system vulnerable to exploitation. The encouragement of foreign capital inflows, while boosting Estonia’s growth in GDP, has established financial conditions much to Russia’s advantage.

Encouragement of cross-border investment allowed Russia to maintain influence after 1991

Despite the collapse of the Eastern Bloc, Moscow has managed to maintain a grip on the political-economic development of its postwar sphere of influence through the use of safe investment havens in Western banks.

In 2019, the Swedish bank, Swedbank, was investigated following allegations that it may have handled more than $100 billion via its operations in the Baltic states. Estonia’s finance minister, Martin Helme, argued that the Estonian Financial Supervision Authority was the victim of dishonesty on the part of Swedbank with regard to its knowing collusion in money laundering. Helme went on to state that the Swedish bank’s choice of clients in its Baltic operations had suspicious backgrounds, some with links to the Russian security services.

Danske Bank has also been caught out by Estonian authorities in enabling Russian and other ex-Soviet money to flow through its banking system. Although the Danish bank’s executive board noted the high level of suspicious activity reported from Estonia in a meeting in 2010, they agreed that they were comfortable with substantial Russian deposits. Moreover, the detainment of 10 former Danske Bank employees for their involvement in transactions worth up to €200bn only came about several years after the onset of the scandal. The slowness of the Baltic state’s response reveals the scale in which Moscow has been able to influence the country’s open economy.

Greater EU financial regulation could shore up the integrity of the single market

Since Article 116 gives the EU the capability to intervene in how foreign investment is conducted in its member states, it may help to prevent such episodes of money laundering from occurring again. The implementation of measures designed to regulate the movement of capital either through consultation or through the ordinary legislative procedure provides Brussels with the power to mitigate the risks that free-flowing foreign subsidies pose to the functioning of the single market.

This new power is starting to take shape, as a new European Parliament sub-committee chaired by Dutch MEP Paul Tang has been set up, which aims to find ways to fight against the lack of financial transparency as well as the issue of tax avoidance within EU member states.

Although Article 116 has never been invoked before and it is controversial, since it hands power to a European level of decision-making over an area sensitive to member state sovereignty, greater financial regulation of the single market may help to protect the integrity of economies that are most prone to falling victim to financial misconduct, as the Estonian case demonstrates.

Categories: Europe, Finance

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