Danske Bank Money-Laundering Probe Involves $150 Billion of Transactions
Transactions uncovered at the bank’s Estonian branch highlight the growing concern about illicit money flows from the former Soviet Union
Investigators at Denmark’s largest bank are studying around $150 billion of transactions that flowed through its Estonian outpost between 2007 and 2015 as part of an internal money-laundering probe, according to people familiar with the matter.
Much of that figure, which dwarfs Estonia’s total deposits, came from companies with ties to Russia and the former Soviet Union.
Danske Bank DNKEY 1.87% has been criticized by its regulator for lax oversight of illicit money flows. The bank’s investigators haven’t determined if all $150 billion handled by non-Estonian entities should be deemed suspicious. But such a large flow of money suggests that roughly $8 billion of suspected money-laundering transactions previously reported by a Danish newspaper could grow higher.
The $150 billion figure, which has been presented to the bank’s board of directors, is a substantial sum considering Estonia’s entire banking system reports total deposits of €17 billion ($19 billion). Even in the context of Russia, the suspected source of some of the funds, the figure would represent more than a year’s worth of the country’s corporate profits. The flows would have stayed in the branch for only a short time before leaving Estonia, according to a person familiar with the investigation, so wouldn’t fully show up in official statistics.
“Any conclusions should be drawn on the basis of verified facts and not fragmented pieces of information taken out of context,” Danske Bank Chairman Ole Andersen said in a statement. “As we have previously communicated, it is clear that the issues related to the portfolio were bigger than we had previously anticipated.” The bank says the results of its probe are being finalized.
Danske’s Estonian branch is the subject of criminal investigations in Denmark and Estonia, prosecutors in the countries said. The Danish Financial Supervisory Authority reprimanded the bank for weak controls in May and ordered Danske to hold about $800 million more in capital, but didn’t issue a fine.
The problems at Danske highlight the growing concern among authorities about how illicit money flows—especially from Russia—are channeled through European-regulated banks to the West.
Shell companies, including many registered in the U.K., controlled most of the accounts in question, and many of the accounts had links to people in Russia and former Soviet Union countries, people familiar with the matter said. The U.K.’s Financial Conduct Authority isn’t probing the bank, according to a person familiar with the matter.
Estonia, a former Soviet Republic of 1.3 million people, became a European Union member in 2004 and joined the euro in 2011. Like its Baltic neighbor Latvia, it quickly became a way station for funds from other former Soviet states.
The U.S. Treasury has expressed frustration with European authorities over money laundering. In February, the Treasury declared Latvia’s ABLV bank an “institutionalized money laundering” operation where weapons dealers and corrupt politicians from former Soviet Union countries sent their money into Europe. ABLV denied knowingly laundering money and later collapsed.
At Danske, clients would typically move funds among several companies with accounts at its Estonia branch before transferring the money to accounts in banks in Turkey, Hong Kong, Latvia, the U.K. and other countries, one of the people familiar with the investigation said.
Danske’s management dragged its feet dealing with the issue, according to a report filed by Danish regulators this year, ignoring complaints from correspondent banks and internal whistleblowers. Estonian regulators complained to Danish counterparts as early as 2012 and compiled a 200 page report in 2014 detailing the local branch’s extensive failures to obtain even basic information about the source of its clients’ income.
“There were many red flags,” said Kilvar Kessler, chairman of the management board of the Estonia’s banking supervisor, the Finantsinspektsioon.
It was only after another bank refused to deal with Danske’s Estonian unit that the bank shut down “non resident” Estonian accounts in 2015.
Danske Chief Executive Thomas Borgen was in charge of international banking—including in Estonia—during part of the period under investigation. He was promoted to run the bank in 2013. He declined to comment.
Denmark’s Berlingske newspaper earlier reported around $8 billion of illicit money went through the Estonian branch. The Financial Times reported this month that some $30 billion flowed through the Estonian branch in the year 2013.
Danske’s investigation is overseen by the bank’s legal counsel and assisted by forensic accountants at PricewaterhouseCoopers LLP and consultants at Ernst & Young LLP. Both firms didn’t immediately respond to requests for comment. Promontory Financial Group, a unit of International Business Machine Corp. , and Palantir Technologies Inc., also helping in the probe, declined to comment.
Such large sums were able to slip by European regulators’ watch for years largely because of a series of design flaws in the Continent’s anti-money-laundering systems, said James Oates, the founder of Cicero Capital, a financial adviser in the Estonian capital of Tallinn.
“Everybody was looking the other way because they thought they were covered, and it turns out they weren’t,” said Mr. Oates.
Danske Bank’s Estonia branch isn't directly supervised by the European Central Bank, which in any case lacks the authority to investigate money-laundering cases. Estonian authorities, meanwhile, say that because Danske operated as a branch—and not a subsidiary with a legal entity based in Estonia—they had limited authority and incomplete information.
Parent bank Danske said in a September 2017 statement that the Estonia branch “operated very much as an independent unit, with its own systems, procedures and culture regarding anti-money-laundering measures.”