Azerbaijan's embezzlement case: Implications for Luxembourg's financial industry

Luxembourg's financial sector recently found itself in the spotlight following a high-profile embezzlement case involving Banque Internationale à Luxembourg (BIL). This scandal, which spanned a decade from 2005 to 2015, saw millions of euros siphoned off from the state-owned International Bank of Azerbaijan (IBA), leading to a six-year investigation by the UK's National Crime Agency (NCA). What are the main takeaways of this case for Luxembourg and its financial industry?

Key facts and the Azerbaijan Laundromat

Currently serving a 16-year prison sentence in Baku for embezzling nearly EUR 3 billion, former IBA chairman Jahanger Hajiyev is one of the key people involved in this case, as his wife Zamira Hajiyev has agreed to forfeit a house in Knightsbridge worth approximately GBP 14 million and a golf club in Ascot, following a National Crime Agency (NCA) civil recovery investigation into the acquisition of the properties in the UK.

Hajiyev would act in this scheme through his right hand Khagani Bashirov, who facilitated the extraction of funds via multiple businesses and approximately 470 bank accounts. Hajiyev’s assets include a villa and vineyards in Sardinia valued at around EUR 10.7 million, a private jet worth more than EUR 30 million and a golf course, the purchase of which was disguised through different legal structures.

During Hajiyev’s 14-year term as chairman of the IBA, the bank also became a central part of what was known as the Azerbaijani Laundromat, a money-laundering scheme and slush fund that handled almost EUR 3 billion over a two-year period through four shell companies registered in the UK.

Among recipients of said scheme were at least three European politicians, businessmen and a journalist who praised the government in the midst of a human rights crackdown that threw opposition politicians and journalists into prison on politically motivated charges. This case also involved the Estonian branch of Danske Bank, which handled the accounts of all four companies, allowing billions to pass through it without further investigating their property.

The Luxembourg connection

Although the court in the UK has not made a ruling on BIL’s alleged role in the scheme, the funds totaling an estimated EUR 500 million are suspected to have passed through the bank (through Luxembourg companies opened by Bashirov) and funneled into ventures including real estate investments.

The bank had already been fined EUR 4.6 million in 2020 by Luxembourg’s Financial Sector Supervisory Commission (CSSF) for inadequate money-laundering controls in a sample of clients from the Community of Independent States (which includes Azerbaijan), following on-site inspections in 2017 and 2018 in which procedural weaknesses were identified. In a press release following the sanction, BIL stated that “no money laundering or terrorism financing activity was identified” and that the bank subsequently remediated the weaknesses by updating its AML Risk Appetite Statement and related Wealth Management Compliance Guiding Principles.

Following the Panama Papers scandal that erupted in 2016, the CSSF had launched a large-scale investigation that also ended up in sanctions for CA Indosuez Wealth, DNB Luxembourg, Nordea Bank, Banco Novo and five non-banking financial entities for severe deficiencies in their AML policies and procedures.

Read more:How millions of dollars were embezzled in Luxembourg from Azerbaijan

The NCA investigation

From the UK side, this investigation was possible under the provisions of the Criminal Finances Act of 2017. In 2018, the NCA had applied for unexplained wealth orders (UWOs, the first ever granted in the UK) in relation to two UK properties, as well as interim freezing orders to prevent them from being sold. According to NCA Deputy Legal Director Simon Armstrong, the agency was able to litigate using a range of legal powers introduced by the act, successfully recovering the assets.

Luxembourg takeaways

The BIL embezzlement case, which involves not just Luxembourg but one of its flagship financial institutions founded in 1856, highlights both the progress and the challenges facing Luxembourg’s financial industry. While significant strides have been made in strengthening AML controls, the scandal underscores the need for ongoing vigilance and adaptability in regulatory practices.

Transparency, cooperation and a commitment to ethical banking are essential for maintaining Luxembourg’s status as a trusted financial hub. As the industry moves forward, the lessons from the past missteps will be crucial in shaping a more resilient and compliant financial landscape.
 
Nicolas Orrico is a Dr. at Law and Social Sciences, Certified Anti-Money Laundering Specialist and Senior Legal Counsel at Newgate Group.

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