San Marino banking black hole raises red flags for EU Association Agreement

Over the Christmas holiday period at least €15 million in cash and valuables were stolen from a bank in the German city of Gelsenkirchen. The thieves used specialised drilling to cut through the bank’s walls and made off with the cash and other valuables. The heist grabbed the headlines. The German authorities have mounted an intensive investigation.

In October a startled investor discovered that €15 million being moved through San Marino’s banking system in relation to the purchase of bank shares had “vanished’ from a bank account – not through a hole in the bank walls but into San Marino’s opaque banking system. There were no headlines and no announcement of an investigation into where the funds have gone.

The EU is about to enter an Association Agreement with San Marino which will give the microstate’s banks access to the EU’s vast single market for financial services.

At a minimum the EU should put a halt on any further progress on the proposed Association Agreement with San Marino until the case of missing millions from one of the microstates’ banks is independently investigated and the missing monies are returned to its rightful owner, says Dick Roche.

EUalive’s columnist Dick Roche is a former Irish Minister of State for European Affairs. His columns can be found here.

Q: You will recall that I reported from a Brussels conference in November 2022 where you moderated the presentation of the Vespierre report report on how microstates had undermined EU values. As I remember you were very supportive of Europe’s microstates. Has anything changed your position?

At that time Gérard Vespierre made a very acute observation. He pointed out that we live in challenging times, where the rule of law on which modern Europe is built is under threat from aggressive rivals. He argued the EU must take all measures needed to protect this core value.

He was ahead of his time. Hybrid warfare, a term not much in use in 2022 is very much to the fore today. Hybrid warfare can come in many guises – including undermining services that are critical to Europe’s wellbeing. One of those areas where real damage could be done is in financial services.

That threat is not as Vespierre highlighted, from the micro states themselves, rather it arises from the possibility of malign players exploiting weaknesses in their lightly or poorly regulated systems.

This very point was strongly made in June 2023 by the Chairpersons of the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority.

Q: In general terms is it not the case that the big weakness of microstates is proximity – the juxtaposition of roles. In such micro-environments, the dividing line between prosecutor, the judge and the interested party can be vanishingly thin. While roles may not be filled by the same person. Or if it’s not the same person, it’s a member of the family or the extended family. Isn’t this disturbing?

Coming from a small country myself I am not unfamiliar with that view. There is an expression in Ireland about people making progress on the basis of ‘who they know rather than what they know”.

There is always a danger that the close relationships that exist in a compact society can give rise to favouritism, uneven application of the rules, corruption and criminality – sometimes perceived and sometimes real. It’s worth recalling that close relationships exist in larger countries too. Whatever the size of the country, well drafted regulations that are uniformly and objectively enforced are critical.

The problem, however, is not in drafting reforms: the challenge is in implantation and enforcement: implementation is the Achilles heel for all reform programmes. My concern is that while there has been much discussion about reform in the micro states, there is also an uncomfortable number of cases where questions arise about implementation.

Q: Discussions on an Association Agreement to allow three microstates Andorra, Monaco and San Marino to participate fully in the EU’s internal market got underway in 2010. The hopes in Brussels are that the Agreement will be ‘signed of’ shortly – have you any concerns?

The European Commission entered into this dialogue in 2010. The aim of the dialogue was to create balanced agreements with the three microstates that would allow them to participate fully in the EU’s internal market, in particular the financial market.

The fact that the negotiations have dragged on as long as they have is interesting in itself.

In September as negotiations on the agreement were moving towards their final phase the International Consortium of Investigative Journalists (ICIJ) revealed that as far back as June 2023 the Chairpersons of the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority (ESAs) wrote to the European Commission flagging “strong concerns” about the “ongoing negotiations” suggesting that the proposals posed a “fundamental risk” to the EU’s financial integrity.

The fact that the ESA chairs felt it necessary to set out their concerns in a process that had been going on for years raises questions about how the process has been conducted. The fact that it took a further two years for those concerns to become public is also concerning.

The intervention came as a setback to the Commission which regarded its proposals as a “significant milestone.”

Andorra and Monaco made no public comment at the time. Monaco made the headlines in September for another reason – on 14 September it suspended its participation in the negotiations

When the news about the concerns of the ESAs became public, they did however attract comment from San Marino. An official from San Marino’s administration commented that the letter from the ESAs had been viewed with “astonishment” by his government.

Quite why San Marino, whose banks have historically been the subject of significant negative commentary about money laundering, secret accounts and the facilitation of tax evasion, was ‘astonished’ by the concerns expressed by the ESA chairs was not spelled out in detail.

Historically San Marino has been regarded as a tax haven where money laundering and financial secrecy have been facilitated. While San Marino has introduced reforms in recent years, it continues to be seen as a jurisdiction with potential financial risks.

For a small country, San Marino has, over the years, chalked up an ‘impressive’ – if that’s the right word – list of banking and financial scandals. Rules relating to strict financial secrecy, wide scale acceptance for the use of ‘bearer instruments’ and weak due diligence have meant that San Marino’s banking sector has been particularly susceptible to money laundering in the past. While some of those issues may have been addressed – there are reasons to believe that San Marino still has some ‘demons’ to deal with.

Q: As you have mentioned San Marino, I recently published an article about a developing story about €15 million that seems to have gone missing in a banking share deal that has gone wrong there. In your view what does this developing story tell us in the context of the Association Agreement proposals?

The story broken in EUalive is by any standard extraordinary. It raises very fundamental questions about the way the banking business operates in San Marino. It is, of course, just the latest in a series of financial scandals that puts San Marino’s banking in the spotlight.

In May 2009 senior executives from San Marino’s largest bank, Cassa di Risparmio della Repubblica di San Marino (CRSM), were arrested – by the Italian authorities – on money laundering charges. A subsidiary of the bank was placed under bankruptcy proceedings resulting in CRSM having to receive significant government support to keep its head above water.

In 2011 Credito Sammarinese was subject to major investigations over deposits accepted from illegal activities. Money laundering for a crime syndicate was a central feature of the scandal. Senior management staff in the bank were arrested. In October 2011 the bank’s license was revoked and the bank was placed in compulsory liquidation.

In 2019 Banco Agricola Commerciale was subject to investigation for suspicious loans and suspected money laundering. Senior officials from the bank were forced to resign.

The Banca di San Marino (BSM) case where €15 million seems to have disappeared down a black hole suggests that there are still very valid reasons to question how much has actually changed in San Marino.

The BSM case is in a league of its own that requires independent investigation. At a minimum the EU should put a halt on any further progress on the proposed Association Agreement with San Marino until the case is fully and independently investigated and the missing €15 million found and returned to the rightful owners.

Q: You describe the case as ‘in a league of its own’ and suggest that the EU should halt negotiations on the Association Agreement. You mean San Marino shouldn’t be trusted to be associated with the EU?

The Banco Di San Marino (BSM) case raises questions not only about a specific bank that may be in trouble, but it raises red flags about the way the Central Bank and other state institutions that play a key role in overseeing San Marino’s financial services operate. An impressive list of agencies have questions to answer.

The BSM case raises questions as to whether San Marino’s financial sector oversight reforms are anything more than surface dressing.

The background to the case is intriguing. Banco di San Marino was founded in 1920. The then Cassa Rurale di Depositi e Prestiti di Faetano, was established as what we would term a rural credit union. It was established by the Catholic parish priest of Faetano, one of the nine municipalities of San Marino, and his parishioners. While not a ‘church’ entity ECF was church related promoting Catholic social tradition and the principles set out in Pope Leo XIII’s encyclical Rerum Novarum.

Over the years ECF grew and developed. In the 1970s it shifted towards full commercial operations and opened a branch network. In 2001 it changed from a cooperative to a joint stock company and changed its name to Banco di San Marino.

The majority of the shares in BSM were vested in the Ente Cassa di Faetano (ECF), a non-profit foundation also established in 2001.

In November 2024 ECF, arising from what has been described as a “period of financial and structural complications” decided to sell part of its holding in BSM.

As you described in your article, a highly successful and respected Bulgarian investor, Assen Christov made a bid for a holding in the bank. The bid received the approval of the Ente Cassa di Faetano (ECF) shareholders. After discussions between ECF and a special purchase vehicle established to complete the acquisition – discussions which involved consultations with the Central Bank of San Marino (CBSM) – an agreement for 51% of the shares in BSM was signed. A formal transaction notice was submitted to the Central Bank of San Marino, a confirmatory deposit of €1.425 M was paid to ECF and the balance of the €15 million agreed price was lodged with Banco di San Marino.

In October the Central Bank of San Marino in circumstances which are far from transparent rejected the request for the share transfer. With the deal essentially halted the purchaser asked that ESF return the deposit. The request was refused and access to the funds deposited in Banco di San Marino denied.

Q: I can’t help comparing the incomparable: the EU heads of state and government didn’t confiscate the Russian frozen assets in Euroclear, while a bank in San Marino appears to have confiscated the funds of an investor.

That is a good question. It would be interesting to have an answer from San Marino. What is clear at this point is that €15 million belonging to an EU based company has disappeared into the San Marino banking system at a time when the EU Commission is pressing ahead to ensure that the banks of the of a microstate with a very chequered history can participate in the EU’s financial services on the same basis as banks from the EU27.

As mentioned already, in their letter to the head of the Commission’s DG for Financial Services in June 2023 the chairs of the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority outlined “strong concerns” as to the direction the Commission was taking with the Association Agreement proposals.

Given the emerging details of the BSM case it would seem prudent, to say the very least, for the Commission to make it clear to San Marino that until what has been happening in relation to BSM is comprehensively and independently investigated it should ‘park’ any hopes of completing the Association Agreement.

On a separate track, any litigation could end up with heavy financial and reputational risks for BSM.

EUalive has offered the Bank of San Marino to present its views regarding the case in a follow-up publication.

Caption: Dick Roche photographed in the European quarters of Brussels [Georgi Gotev]