Correspondent Banks in Crosshairs as Danske Case Raises Alarm
(Bloomberg) -- The financial regulator of Danske Bank A/S says it’s now telling lenders to be more selective when choosing correspondent banks.
The decision comes after Denmark’s biggest bank ended up at the center of one of Europe’s worst ever money laundering scandals. Danske’s regulator says some of the bank’s employees were probably involved in “criminal” acts, and the lender may be facing hefty fines as it awaits the outcome of a U.S. Justice Department investigation.
But whistle-blower testimony last week also raised serious questions about the role played by the correspondent banks that converted suspicious funds from Danske into dollars and euros, after which the money was released into the global financial system.
Stig Nielsen, who heads the anti-money laundering unit at the Danish Financial Supervisory Authority in Copenhagen, says that “the originating bank is the first line of defense. But normally the relationship goes both ways.”
That means that from now on the regulator will require banks to be “more alert” in ensuring that their correspondent bank “has systems in place to counter money laundering and terror financing,” he said.
Howard Wilkinson, the former head of Danske’s Baltic trading desk who became a whistle-blower, says money went from clients in the former Soviet Union through four Russian banks and into Danske, before being cleansed via three correspondent banks. This went on until 2015, he says. His testimony in Brussels and Copenhagen last week was met by applause as lawmakers praised his courage for coming forward.
Wilkinson, who says he fears for his safety since his identity was revealed, didn’t name the correspondent banks. But Bloomberg and other news organizations have reported that they were Deutsche Bank AG, JPMorgan Chase & Co. and Bank of America Corp.
Probing More Banks
The head of the Danish FSA, Jesper Berg, says it’s his expectation that the supervisors of the correspondent banks would be “looking at” how those firms “may be involved.” Wilkinson said the laundering couldn’t have been completed without the involvement of the correspondent banks.
Nielsen at the FSA says that banks operating in the EU shouldn’t assume that correspondent banks based inside the bloc require fewer checks than those elsewhere.
“It’s important to make a risk assessment of correspondent banks even if they’re inside the European Union, and not just do it for foreign banks outside the European Union,” he said.
Bill Browder, the U.K. financier who has made a career of chasing laundered funds tied to the brutal death in a Russian prison of his lawyer Sergei Magnitsky, says information from correspondent banks helped him “nail money launderers” in the past.
“And if that helps us, then there’s no reason a correspondent bank can’t use their own judgment and their own analytic tools to pick up patterns of suspicious money laundering activity,” he said.
In a September report, Danske described suspicious customers whom its anti-money laundering defenses had failed to pick up. They included the following:
- Customers already identified as being associated with money laundering schemes or those with suspicious counterparties at other banks
- Customers who shared addresses, emails and phone numbers in places like the Virgin Islands, Cyprus and the U.K., where shell companies are easy to establish
- Business customers, whose payment transactions differed significantly from their publicly disclosed revenues
- Customers with “unexplained or unusual” sources of funds who transacted large amounts through their accounts over short periods
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