Estonia Banks Did $500 Billion in Cross-Border Flows

(Bloomberg) -- Danske Bank A/S has become almost synonymous in Denmark with laundering. But there are growing signs that it only represents a slice of Europe’s dirty money machine.

For the Scandinavian country’s biggest bank, the scandal started in Estonia, where Danske has admitted that much of $235 billion in non-resident flows between 2007 and 2015 can be deemed suspicious. Though a huge figure, it represents less than half the cross-border transactions that passed through the country at the center of the dirty money saga, according to figures provided by the central bank in Tallinn.

“The fact that other banks may be conducting their business in a similar way hardly detracts from Danske’s guilt,” said Mark Galeotti, an organized crime expert and senior researcher at the Prague-based Institute of International Relations.

Yet it does speak to more of a systemic issue for the Baltics, according to Sven Stumbauer, managing director for New York-based consultancy AlixPartners.

The region was keen to become a private banking center for eastern Europe, he said. “Instead of more traditional private banking, they started doing more transactional banking, meaning the money comes in and goes out more or less immediately,” he said.

Between 2008 and 2015, banks doing business in Estonia handled about 441 billion euros, or $507 billion, in incoming cross-border payments by clients, and 446 billion euros in outgoing payments (the central bank couldn’t provide comparable data for 2007).

In a statement, the central bank said it’s not possible to equate non-resident accounts with cross-border transactions, but said it couldn’t provide an estimate for the share of non-resident flows.

Not all non-resident flows are suspicious, though in the Danske case, money launderers allegedly singled out such accounts.

Swedish banks operating in Estonia said they have taken numerous steps to ensure they’re not used by money launderers.

"We have worked continuously throughout the years together with authorities and correspondent banks, to secure that we have thorough systems and processes connected to AML," Swedbank AB, whose local unit is Estonia’s largest lender, said in an emailed statement. It added that it was a low-risk retail bank.

"SEB never had, and does not have the idea to serve non-residential customers in the Baltic countries," Frank Hojem, a spokesman for the bank in Stockholm, said in an email. He added that the bank had conducted a review of its operations and transactions and was confident that its anti-money-laundering processes were working satisfactorily.

The scale of international flows through a country whose 2017 GDP was just 23 billion euros raises questions about the extent to which Russian capital has been flowing through Estonia. The country was ranked last year among the three least risky of the 146 included in a study by the Basel Institute on Governance. That assessment now seems at odds with Estonia’s connection with the Danske laundering case.

The Danske scandal has stunned Europe as the region comes to grips with clear signs of wide-spread abuses in which high-profile banks repeatedly turned a blind eye to the movement of suspicious funds. Deutsche Bank AG, ING Groep NV and BNP Paribas SA are among lenders that have had to pay fines for compliance failures.

Of the roughly $1 trillion in total cross-border payments into and out of Estonia that were handled by banks operating there between 2008 and 2015, almost $400 billion was in the form of dollar transactions, for which correspondent banking services are a prerequisite.

John Horan, senior associate at Maze Investigation, Compliance and Training Ltd. in Belfast, says money laundering is a Europe-wide problem. “I’ve worked on AML in the Baltic states, and I haven’t seen anything worse there than I’ve seen elsewhere,” he said.

Kilvar Kessler, the head of the Financial Supervisory Authority in Estonia, said in August that it “shouldn’t be a surprise that all suspicious transfers didn’t go just through Danske.”

The country’s prime minister, Juri Ratas, says he wants “the whole truth” uncovered, which includes finding out just how widespread money laundering was for all banks that had operations in Estonia.

According to Galeotti, “The problem is not a witch hunt, in my opinion, but rather that for bankers, whether in the Baltic states, or London, or Delaware, or Frankfurt, the rewards from turning a blind eye to shady business still outweigh the risks.”

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net;Alan Katz at akatz5@bloomberg.net

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