Mason Wilder, CFE
ACFE Research Specialist
A money laundering scandal involving an Estonian branch of Danske Bank, the Danish financial institution, led to the resignation of CEO Thomas Borgen on September 19, but the fallout from what could end up being the largest money laundering scandal in European history is far from over.
A report released shortly after Bergen’s resignation detailed the initial findings of an investigation into money laundering allegations that Danske commissioned from Danish law firm Bruun & Hjejle, including the massive scale of the activity in question. The transactions referenced in the investigation report occurred from 2007, when Danske purchased the Finnish As Sampo Bank and inherited its customers, until 2015 when the bank terminated its non-resident portfolio. Investigators examined approximately 15,000 nonresident, or foreign, customers of the Estonian bank branch, found more than 9.5 million payments totaling $236 billion, and indicated that “a significant part” of them appeared to be suspicious. The report also stated that 42 employees and agents of the bank seemed to have been involved in suspicious activity. Among the almost 6,200 customers deemed suspicious, were accounts linked to the Russian Laundromat and Azerbaijani Laundromat scandals.
When Borgen resigned, he made sure to state that he himself had been cleared of any legal wrongdoing while accepting ultimate responsibility for the bank’s failure to prevent the laundering of money through its Estonian branch, which was chronicled in the report.
In 2007, shortly after Danske Bank entered the Baltic market for the first time through the As Sampo acquisition, Estonian financial regulators issued a critical inspection report of the bank. The Russian Central Bank provided information pointing to possible tax and custom evasion, and money laundering to Danish financial regulators, who passed it along to Danske leadership. No actions resulted from this information.
In 2008, Danske Bank Group opted against migrating its Baltic banking activities onto the primary IT platform because of the associated cost and resource requirements. As a result, the Estonian branch did not benefit from anti-money laundering procedures such as customer systems and transaction and risk monitoring developed and adopted at the Group level. The report did not mention the estimated cost of that migration.
In 2013, a correspondent bank ended its relationship with the Estonian branch on anti-money laundering grounds, prompting a business review initiated by Danske Bank Group. Before the review could be completed in 2014, a whistleblower within the Estonian branch and an internal audit highlighted anti-money laundering control deficiencies, which, according to the investigation report, prompted action at the Group level, although that action was not specified.
It wasn’t until the second half of 2015, when another correspondent bank terminated its relationship with the Estonian branch, that the bank initiated a runoff of its nonresident portfolio. Danske Bank Group never reported any of the accounts or activities to authorities.
The fallout begins
Several news stories mentioned the Estonian branch in 2016 and 2017 in connection with the aforementioned Russian and Azerbaijaini money laundering scandals, prompting Danish financial regulators to request information from Danske Bank.
It took an official complaint from Bill Browder, the CEO of Hermitage Capital and anti-corruption activist, in July of this year before Estonian and Danish authorities announced official investigations of the branch’s involvement in money laundering in August.
Although the official investigations have not concluded, the repercussions of the scandals can already be felt by Danske Bank, its home country Denmark and the greater European financial community itself. Thus far, Danske Bank, aside from losing its CEO, has reportedly announced the donation of profits from Estonian business (an estimated $235 million) to unspecified beneficiaries and its stock has fallen almost 30% in 2018, and almost 50% from its all-time high in May 2017.
More penalties are possible, as Danish and Estonian authorities could fine the bank or issue criminal charges. Additionally, the U.K.’s National Crime Agency recently announced an investigation into the use of U.K.-registered companies for money laundering involving the Estonian branch, and the U.S. could launch an investigation into whether the bank violated U.S. sanctions.
Beyond the potential consequences for Danske Bank itself, the scandal has tarnished Denmark’s reputation as an exemplary country in terms of anti-corruption efforts. Meanwhile, the European Commission responded to reports of the scandal by recommending banking supervision changes, indicating that reactionary regulation could result from the scandal.
The failures to appropriately implement anti-money laundering procedures have already had grave consequences for Danske Bank, and as the fallout continues, the scandal will only be further cemented in its status as a cautionary tale for other financial institutions.