Danske Charges Raise Questions on Risk of Sanctions Breaches

(Bloomberg) -- As Danske Bank A/S is investigated for money laundering, a key question remains whether it was used by anyone on U.S. sanctions lists.

Denmark’s biggest bank has so far said there’s no evidence sanctions were breached. But it’s also acknowledged that the risk can’t be ruled out. Last week, Danish police filed the first criminal charges against Danske, zeroing in on its failure to screen clients, including those defined as “politically exposed.”

Elliott Stein, a senior analyst in litigation at Bloomberg Intelligence in New York, says the wording of the charge sheet against Danske raises questions about potential sanctions breaches, which U.S. prosecutors have historically viewed particularly severely.

“The bank’s failure to screen against lists of politically exposed persons, which the bank conceded in its Sept. 2018 report, and Danish prosecutors listed in their Nov. 28 charges, raises the risk that the bank conducted transactions involving sanctioned individuals or entities,” Stein said in an emailed note. “As of Sept. 19, however, Danske said it had not uncovered any evidence of any violations of sanctions.”

A Chairman’s Comments

Danske Chairman Ole Andersen said in September that “at this point, the screening against the sanctioned list has not uncovered any evidence of any violations of the sanctions, but the investigation is still ongoing,” according to the transcript of an analyst call. Andersen has since been ousted by Danske’s biggest shareholder, and will step down in connection with a shareholder meeting on Dec. 7.

Danske Charges Raise Questions on Risk of Sanctions Breaches

Denmark is the first country to have filed criminal charges against Danske, but investors are most worried about what the U.S. Justice Department might uncover and what sort of fines may follow. The Danish financial regulator has ordered Danske to hold an extra $1.5 billion in capital to serve as a buffer against possible penalties.

Even if Danske wasn’t actively involved in laundering money, its failure to live up to basic compliance requirements may make it culpable, according to lawyers familiar with the subject.

“If you ignore requirements to know your customer, then you risk some very serious consequences for your business,” said Jesper Hjetting, a director at Lundgrens, who specializes in corporate law. Hjetting declined to comment on the Danske case and spoke in general terms.

Stupid Faith

“You can act in good faith, or bad faith, or even stupid faith, if you turn a blind eye to something you should clearly have identified,” Hjetting said by phone. The upshot is that negligence to track what’s going on can also leave a firm “culpable,” he said.

Danske is at the center of a $230 billion scandal in which money from the former Soviet Union was allegedly funneled into four Russian-based banks, from where it was sent to three Danske units. The main one was a branch in Estonia. But whistle-blower testimony also points to Lithuania and Denmark. From there, the money was sent to three correspondent banks, after which it was injected into the global financial system. This is alleged to have continued into 2015.

“Failing to comply with any part of anti-money laundering legislation sets a firm up for punishment,” Hjetting said. “Failing beyond that just adds to the severity.”

The scandal has cost the jobs of numerous top-level Danske employees, including the CEO and the chairman. Several staff members who were based in Estonia have been reported to the police. The Danish regulator is itself under investigation for failing to stop the suspicious transactions sooner.

On Monday, Denmark’s bankers association will hold its annual meeting in Copenhagen and the discussion is bound to center on money laundering. The lobby group, whose head, Ulrik Nodgaard, ran the financial regulator for much of the period while money was allegedly being laundered through Danske, has created a task force designed to underpin the “fight against money laundering.” Part of the proposed measures will include better technology and better cooperation with the relevant authorities, as well as better “self-regulation,” the association said on Monday.

U.S. Law

Stein at Bloomberg Intelligence says the U.S. Money Laundering Control Act “requires showing intent to conceal the source, ownership or control of funds. Danske will likely argue that its failures were unintentional lapses,” he said.

“One problem for the bank, though, will be that intent can likely be shown with circumstantial evidence or willful blindness,” Stein said. “A large volume of unusual transactions could probably be used as circumstantial evidence that people at the bank knew what was going on but turned a blind eye. U.S. authorities are pretty good at digging up evidence of intent and establishing jurisdiction.”

Danske has said it will “of course cooperate” with prosecutors and make itself, and the information it has, “available in relation to the ongoing investigation.” That apparent willingness to cooperate is likely to help the bank “avoid severe penalties,” according to Stein. He estimates potential U.S. fines won’t exceed $1 billion.

©2018 Bloomberg L.P.