Danske Bank mired in money laundering scandal

Banking & Finance
| The European | 25th September 2018
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Danske Bank is headquartered in Copenhagen, Denmark. Founded in 1871, it is currently embroiled in the Nordic region’s biggest money laundering scandal.

The Bank got distress signals from its branch operations in Estonia back in 2014, through a whistle blower. Group Internal Audit confirmed that Anti-Money Laundering (AML) controls in place at the time were deficient to serve their purpose and their might be significant operational oversights. The Bank immediately started its own investigations. However, it did not disclose any information to the media and general public at that time.

The mainstream media came to know about Danske Bank’s troubles in 2017. Bloomberg, Reuters and other media channels dissected the story for their readers.

To understand the significance of this money laundering scandal, it is important to take a look at the scope of global banking operations of Danske Bank.

Countries/Regions in which Danske Bank operates in:

Finland, Denmark, Sweden, Norway, Estonia, Latvia, Lithuania, Ireland, Northern Ireland, United Kingdom, Germany, Poland, Luxembourg, Russia and the US.

Number of Employees: 20,357

Personal Customers: 2.7 Million

Small & Midsize Business Customers: 211,000

Corporate & Institutional Customers: 2,000

The money laundering stemmed from Danske Bank’s branch in Estonia. The “Non-Resident Portfolio” was the culprit. It largely comprised of customers from Russia, Moldova and Azerbaijan.

The immediate reaction of the Bank was termination of its “Non-Resident Portfolio”. By early 2016, all accounts falling under this Portfolio were closed.

Regulatory sanctions from Estonian FSA (July 2015) and Danish FSA (March 2016) along with mainstream media coverage of the money laundering scandal forced Danske Bank to release a press statement on the 5th September, 2017.

Important excerpts from that press release were as follows:

“We have previously established that, in the period leading up to 2014, our branch in Estonia had inadequate measures in place to prevent Danske Bank from being exploited for money laundering and other illegal activities,”

“We have taken the steps necessary to remedy this. We do not in any way want to be exploited for money laundering or other illegal activities. Since 2014, we have terminated relationships with all customers that were unable to document a legitimate purpose for maintaining an account in Estonia, and we have tightened our procedures and controls significantly. In recent years, we have generally stepped up our AML measures and made a huge effort to prevent exploitation.”

“We cannot guarantee that all attempts to launder money through Danske Bank will be unsuccessful, but it has never been harder than it is now.”

The most important statement in this press release was:

“We cannot comment on specific customers or specific transfers in the present matter.”

Danske Bank also mentioned its effort in enforcing AML policies and controls and in combating money laundering.

It is pertinent to mention here that the facts and figures presented in this press release were minuscule when compared to what the mainstream media reported in following months.

Danske Bank commissioned an inquiry to determine the scope and extent of this money laundering case. The task was assigned to Bruun & Hjejle (Denmark), a leading legal and investigative firm having expertise in the banking and finance sector.

Bruun & Hjejle, after carrying out their investigation released a report. The Report (dated 19 September, 2018) is available on Danske Bank’s website. Along with the scope and extent of the investigation, this Report contains relevant financial as well as non-financial data. It also documents the shortcomings of AML controls in place at Estonian branch of Danske Bank.

Some important facts and figures detailed in that Report are given below:

➢ The “Non-Resident Portfolio” (of Estonian branch of Danske Bank) was managed by a “separate group of employees”.
➢ It consisted of 3,000 to 4,000 customers “at any time”.
➢ At the end of 2015, this Portfolio was terminated and most of the accounts were closed. Few remaining accounts were also terminated by early 2016.
➢ From 2007 to 2015, there were approximately 10,000 customers in total in the “Non-Resident Portfolio”. All of these customer accounts were made part of the scope of investigation.

(Note: There were some Non-Resident customers that did not form part of “Non-Resident Portfolio”. These customers were served by a separate group of employees. After including them in the scope of the investigation, the total number of customer accounts under scrutiny reached 15,000.)

Summing up the above information, a total of 15,000 customer accounts came under scrutiny for suspicious transactions covering a period of nine years (2007 to 2015).

A Press Conference conducted by the Bank on 19 September, 2018 states:

“The investigations have been very thorough and extensive. The scope of the investigations covers approximately 15,000 customers and 9.5 million payments in the period 2007-2015. Some 12,000 documents and more than 8 million emails have been searched, and more than 70 interviews have been conducted with current and former employees and managers, including members of the Executive Board and members of the Board of Directors. Overall, approximately 70 people have worked full time on the investigations.”

Estimated amount laundered through Estonian operations of Danske Bank

The Bank did not provide any accurate figure. However, it admitted that for all of the customers covered by the investigation, (around 15,000 customers) the total flow of payments amounted to around EUR 200 billion from Year 2007 to 2015.

Britain is one of the affected countries in this money laundering scandal. Many UK registered companies were used to launder funds in Estonian branch of Danske Bank. Reuters reported on 21 September, 2018 that National Crime Agency (NCA) is investigating this matter.

For the banking industry, the main question that arises is what steps have Danske Bank taken to prevent any such catastrophe from happening in future. There is no denying to the fact that money laundering is a serious issue and has plagued banking industry. Any scandal at one financial institution impacts the reputation of all regional banks. It does not end here. It affects the image of whole country and region.

To soothe the concerns of the banking industry, Danske Bank issued a detailed statement that contains dual approach to combat money laundering. Some significant points are noted below.

Group level control improvements

Among several steps undertaken, the most important one is that Danske Bank will train its staff to become competent in identifying money laundering activities. Danske Bank also aims to strengthen its group level internal control policies and procedures.

Improvements specific to Estonian operations

The most important measure undertaken for improving Estonian banking operations was migration of its existing Information Technology infrastructure to a single shared Information Technology platform. It will enable increased transparency and oversight. Previously, Estonian operations were on a separate Information Technology platform which was one of the reasons for not triggering group level AML controls.

Danske Bank is now facing stiff penalties. In principle, it has decided to “waive income from it Estonian operations” for the nine year period that formed part of the investigation. It has announced to contribute funds to social causes, which includes financing efforts made for combating financial crimes.

Coming from an institution which has been rattled by a mega money laundering scandal, the above steps are in the right direction. However, local charities and NGOs have announced that they will not conduct business with Danske Bank. Different countries are still investigating the impact of this money laundering case on their territory as well as on AML laws enforced in their respective countries. It appears that it will take time for the dust to settle for Danske Bank.

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