Banca Privada d’Andorra: a solvent private bank brought down by money laundering allegations. What happens next for depositors?
One thing that’s been keeping us rather busy for the last few weeks is following and updating our personal consulting clients on a very small, but nonetheless important, banking crisis – this time in Andorra: a small, mountainous principality, located between France and Spain, better known for its skiing. For those of you who have not been following news from the Pyrenees, we are talking about the curious crisis surrounding the Banca Privada d’Andorra.
Banca Privada d’Andorra, usually referred to as BPA, had quietly become rather popular in recent years in the offshore/expat banking scene. Many websites have recommended it as a secure, discreet home to park cash for currency diversification purposes.
Andorra in general, and BPA in particular, is/was attractive because of its true multi-currency banking facilities and high solvency ratios, not forgetting the fact that Andorran banks can still open accounts for offshore companies, trusts and the like with American beneficial owners. BPA was also known as being the bank that would accept the small guys, whereas its main competitors Credit Andorra and Andbank typically fix entry level for account opening at at least half a million euros.
The third largest by assets of the small country’s five banks, BPA was publicly accused by FinCEN of Money Laundering last month. The allegations were wide ranging, involving Venezuela, Russia and China: according to FinCEN, “corrupt high–level managers and weak anti–money-laundering controls have made BPA an easy vehicle for third–party money-launderers”.
This announcement was effectively the kiss of death – within just a few hours, banks around the world closed Banca Privada’s correspondent accounts, leaving it able to function only locally in Andorra.
This led to a crisis of confidence in the bank. The Andorran government, despite being in the midst of a change of leaders following elections, sprung into action – first sending staff to oversee the bank, then within a couple of days they took BPA into administration and imposed a withdrawal limit of EUR 2,500 per week on all account holders.
This restriction, currently still in place, only allows for withdrawals in cash or local card payments within Andorra. The bank is completely disconnected from the international financial system.
What is going on now?
Obviously, the prime concern for most depositors is the security of their funds. (I say “most” because, if the FinCEN allegations are true, there might be a few clients whose primary concern at this time is keeping out of jail.)
The good news is that BPA is, by all evidence we have seen so far, highly solvent. This was one of the reasons for non-residents to invest in the bank in the first place. There is enough money to pay out the depositors. Branches are open and working “normally” for small transactions. There is a possibility that the bank might yet continue in business, with a new owner.
More good news came on April fools’ day in the form of a press release from the US Consulate in Barcelona (only available in Spanish), clarifying that BPA will not be subject to any fines. This eliminates one of the major concerns: that BPA might have been bankrupted by a fine of up to a billion dollars similar to those recently imposed on BNP Paribas, HSBC and the like. Depositors’ money would likely have gone to pay such a fine.
Frankly we must certainly credit the Andorran government’s behind-the-scenes diplomatic efforts for having obtained this reassurance from the US – it certainly means all depositors can breathe a little easier.
Of course, however, BPA has staff and bills to pay and no income. There are high-priced lawyers and auditors working there now who will certainly want to be paid by somebody. If this situation continues indefinitely, even a bank with BPA’s solvency could be in trouble.
Have there been any similar cases in the past?
Yes. This case has obvious parallels with that of FBME Bank. That bank, operating in Cyprus and Tanzania, was also taken over by the regulators – in that case the Central Bank of Cyprus – after being accused of money laundering by FinCEN.
In the case of FBME, the Cypriot Central Bank made a real pig’s ear of the case. Even to this day, depositors’ funds are tied up and are only seeping out little by little.
The FBME example is definitely the “worst case scenario” of what could happen in the case of BPA. If you are a BPA account holder of a nervous disposition, do not visit the following link. Everyone else who wants to read more about the FBME case, go here: FBME Limited website
What is the Andorran government doing about it?
This situation is, without doubt, a major crisis for Andorra. After tourism (a category which curiously includes tobacco sales), banking is the Principality’s second source of income. The government has to tread very carefully. The other banks, while scared of tarnishing their images by touching the ‘dirty’ BPA assets, and livid at being pressured to bail out a competitor, definitely have a vested interest in a swift resolution to this crisis that does not see any losses for depositors.
Clients and prospective clients frankly don’t distinguish much between one Andorran bank and another. If depositors lose money in an Andorran bank, it will mean the end of business for the others, and the loss of billions of dollars they have spent in recent years on aggressive international expansion.
The crisis has now led Standard & Poor’s to downgrade Andorra’s credit rating and put other Andorran banks on negative watch. “The risk profile of Andorra’s financial sector, which is large relative to the size of the domestic economy, has increased beyond our expectations,” says S&P. “The absence of a central bank or a lender of last resort in the Andorran financial system exacerbates the risks… ” S&P point out that the Andorran government, with its total budget of around €400m a year, would have almost no chance of supporting BPA, with assets of more than €3bn.
The government’s reaction has been to pass emergency legislation, allowing it to transfer assets into a new state-run agency where they will be managed. This agency is likely to be up and running within the next fortnight, and it will then take over the running of BPA.
What Happens Next?
The tense moments for the bank’s depositors and staff will continue over the Easter holidays and beyond. One thing is nearly certain: for the next couple of weeks the current situation, with limited withdrawals, will continue.
Once the BPA business has been transferred into the new agency, it will be up to that agency to decide what to do with the assets in such a way as to protect the interests of all concerned. There are two likely scenarios:
- The accounts will selectively be sold to other Andorran banks. They might for example sell different local branches one by one, or even individual accounts. There will certainly have to be some political horsetrading here to avoid the other banks cherry-picking the desirable business and leaving the risky or loss-making accounts with the government.
- A foreign bank might come in and buy the business. Foreign banks are basically prohibited from operating in Andorra at the moment, but in recent years other sectors of the economy have been liberalized and this episode might well be the precursor to foreign banks being allowed in.
Another possibility is a hybrid solution involving bits of all of the above, or even a worker’s cooperative taking over the bank.
What about BPA’s assets outside Andorra?
Although it has a number of representative offices and interests in insurance, wealth management and the like, BPA has two significant subsidiaries: a bank in Panama, and the Spanish bank Banco Madrid.
Banco Madrid has already filed for bankruptcy in Spain as it did not have liquidity to pay out all its depositors. Most of the deposits there are guaranteed by the European Union laws on deposit protection. The situation with Banco Madrid has turned into something of a political scandal in Spain, but the depositors are a relatively small number of relatively wealthy Spaniards.
The future of the Panamanian bank, Banca Privada d’Andorra (Panama) S.A. is less certain and more of interest for the purposes of our readers, who might have accounts there. The Panamanian regulators are currently running that bank. Nearly of all of its assets are tied up in the parent company in Andorra. Therefore, it’s really a question of wait and see – the Panama regulators can do little until the situation in Andorra is fully clarified.
Are other Andorran banks safe?
The US regulators have, in private, indicated that they are not concerned about the practices of other Andorran banks. In my opinion, the Andorran government seems to be doing the right thing in the circumstances, albeit rather slowly. We believe that their efforts to avoid other banks being affected will be successful. Nonetheless, money is fickle and in the short term a lot of capital has already left for places like Switzerland and the Caribbean.
The other banks are Andbank, Credit Andorra, MoraBanc and Banc Sabadell d’Andorra. The first two have been much more aggressive in international expansion. Both have subsidiaries in Panama, which are now under intense pressure from the Panamanian regulators to bring more assets under Panamanian as opposed to Andorran control.
What is the conclusion?
We think this will be sorted out so that the account holders at BPA will not lose money. But, what does the future of Andorran banking look like?
The irony of this whole situation is that it really doesn’t make any difference if the FinCEN allegations were true or not. It’s unlikely that this will ever reach trial. We are reminded that two words, “money laundering”, published on the internet by a US government agency can lead to a solvent bank imploding within hours with no right of defence.
The Andorran banking system will, in future, become much more European. The Andorra we know, a haven outside the EU with highly solvent banks operating in an environment where banking privacy is still respected, has gone forever. It will be replaced by something that looks more like the Spanish system. We will miss the old-style Andorran banks.
The only thing we can recommend is to follow the Q Wealth mantra: diversify, diversify and diversify. Whatever bank your money is in, anywhere in the world, there is no guarantee that it won’t be targeted just like BPA was. I would always advise dividing your banked assets across different banking groups in different jurisdictions. Check out the 2015 edition of Q Wealth’s Private Offshore Banking Guide for more detailed advice and recommendations.
And even more importantly, keep significant portion of your assets outside the banking system altogether, in things like precious metals, real estate and other hard assets.
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By Peter Macfarlane, Offshore Banking Consultant, for Q Wealth Report