Danske's Tell-All Dirty Money Report Is Hardly the Final Word

(Bloomberg) -- On Wednesday, Danske Bank A/S will publish a long-awaited internal report on its involvement in one of Europe’s biggest money laundering scandals.

But there’s little to suggest that the analysis, which is based on work provided by Promontory Financial, PwC and EY, and coordinated by the law firm Bruun & Hjejle, will be the final word on the case.

Business Minister Rasmus Jarlov has already made clear that the Danske report won’t be enough to satisfy the government. He said in an interview this month he thinks it’s likely that “illegal acts” have been committed in connection with the case.

Denmark Wants 700% Jump in Laundering Fines Amid Danske Scandal

Denmark’s biggest bank faces a grueling and protracted period of doubt over its future as its laundering scandal coincides with an awareness in Europe that too little has been done to fight such crime. Both Danish and European lawmakers and regulators are now scrambling to show they’re taking a harder line in such cases.

The Copenhagen-based bank is already the target of criminal investigations in Denmark and Estonia. Danish media reported last month that U.S. authorities are also looking into the case.

Bill Browder, the Hermitage Capital founder who’s behind a criminal complaint against Danske, has now ensured the case will get even more attention by bringing his grievances straight to the Danish parliament.

The financier says he has plenty of evidence that makes it clear Danske broke the law and he’s eager to share what he knows with the Danish authorities. The bank won’t comment until Wednesday.

“Here’s a situation where you have offshore companies being managed from Russia with tens of millions of dollars flowing through them with no good explanation for the payments in companies that don’t even register any economic activity in other jurisdictions,” Browder said.

The following is a list of what’s happened and what to expect on Wednesday, and in the months that follow, as one of Europe’s biggest money laundering cases gets under way.

What Happens to Management?

  • There’s some speculation that top-level resignations may be announced. In a Bloomberg survey of six analysts, CEO Thomas Borgen is given a 33% chance of staying on through 2018. That probability falls to 25% in 2019
  • Board Chairman Ole Andersen is given a 54% percent chance of survival this year, and 29% in 2019, according to the same analysts

Denmark’s Financial Supervisory Authority says the “mean and lean” culture that Borgen cultivated put more emphasis on the execution of tasks instead of flagging problems. Borgen has repeatedly apologized for failing to react sooner to multiple red flags in the laundering scandal. He even offered to step down over the summer, but was asked to stay on by the board.

The FSA’s multiple warnings

  • Denmark’s Financial Supervisory Authority flagged as early as 2012 that Danske wasn’t doing enough due diligence on “remote” customers
  • In 2016, the FSA noted Danske was talking with Estonian authorities and had drawn up plans to mitigate risks, but still reported the bank to police for failing to comply with 2012 orders
  • Reports by the Danish newspaper Berlingske last year led to Danske’s opening a new internal investigation; the newspaper said last month that the U.S. Treasury Department was “very closely” monitoring the case, and has also reported that in early 2014, Borgen himself was explicitly informed of signs that Danske was being used for laundering
  • The Financial Action Task Force, an inter-governmental organization that sets global standards for combating money laundering and terror financing, issued a damning report on Denmark last year, singling out the “weak” implementation of rules by its financial industry

Fines?

Penalties for money laundering have been on the rise in Europe. ING Groep NV earlier this month agreed to pay about $900 million to settle a laundering case, a figure that roughly matches what analysts expect Danske may have to pay.

  • Analysts surveyed by Bloomberg in August estimated a likely fine of about $800 million, up from $670 million a month earlier
  • Danske can absorb a fine of as much as $2.3 billion and still meet its CET1 ratio target, Goldman Sachs says
  • The bank was ordered by the FSA to add at least 5 billion kroner to its regulatory capital requirement as a penalty for its AML failures
  • Aside from the cost of any potential fine, there’s the cost of the reputational damage facing Danske, and potentially the rest of Denmark’s finance industry. In a report on Sept. 14, S&P Global Ratings said it’s taking the Danske laundering case into account when considering Denmark’s AAA sovereign rating.

Nervous Investors

Since the start of the year, Danske’s market value has slumped about 30 percent, while yields on its debt have climbed as the scope of the alleged laundering more than doubled. According to Browder, as much as $9.1 billion in dirty money flowed through Danske’s Estonian unit between 2007 and 2015. The Wall Street Journal has reported that as much as $150 billion flowed through the unit in total, though analysts were quick to point out that there’s no way of knowing how much of that can be deemed suspicious.

Only Deutsche Bank AG has delivered shareholders bigger losses than Danske Bank this year, according to the Bloomberg index of European financial stocks.

©2018 Bloomberg L.P.