Danske, Deutsche Ignored Estonia Risks in Lucrative Setup

Danske Bank A/S and Deutsche Bank AG brushed off years of warnings that money flowing from Russia through an Estonian branch was suspicious.

According to a consent order made public by the New York State Department of Financial Services, Deutsche Bank only pulled out more than half a decade after its own staff pointed to the risk of money laundering at Danske’s Estonian unit, for which Deutsche was a correspondent bank.

Deutsche agreed this week to pay New York’s banking regulator $150 million for compliance violations that related to convicted sex offender Jeffrey Epstein, but also included breaches tied to Danske and another correspondent banking relationship.

The consent order shows Deutsche staff sought to draw management’s attention to the risks involved in dealing with the Danske Estonia branch. The transactions ultimately engulfed the Danish lender, and marked the epicenter of Europe’s biggest money laundering scandal.

“As we have already said, we should never have had the portfolio of customers and the setup we had in Estonia,” Stefan Singh Kailay, head of media relations at Danske, said in an emailed comment. “The portfolio was closed down in 2015, but in general there is no doubt that we did too little, too slowly in this case. We cannot comment on these matters, while we are under investigation, and as we have said all along, the bank is cooperating fully with investigating authorities.”

Deutsche raised its risk ranking for Danske’s Estonian branch to show that interactions posed the maximum threat. But it took years before the German bank’s top management heeded warnings from employees on the ground, according to the consent order.

Deutsche Bank Chief Executive Officer Christian Sewing encouraged staff to read the consent order: “It is our duty and social responsibility to ensure that our banking services are used only for legitimate purposes,” he said in a memo published on the company’s website.

Danske Bank is being investigated in the U.S. and Europe, with several former executives facing preliminary criminal charges. The bank admitted in 2018 that much of 200 billion euros ($225 billion) in transactions through its now shuttered Estonian unit were suspicious.

Danske Senior Bail-In Bonds Widest After Deutsche

“Danske Bank’s Additional Tier 1, Tier 2 and senior non-preferred bonds have rallied hard since mid-March but may stay wide of peers until there’s some clarity about the magnitude and timing of fines for past money-laundering issues, as well as the virus impact on earnings and capital,” says Jeroen Julius, a senior credit analyst at Bloomberg Intelligence. “Its senior non-preferred curve in dollars is wider than all European banks’ except Deutsche Bank.” Click here to read the full report.

Russian Money

Almost 60% of payments that the Estonian unit cleared through Deutsche were from Russia and other former Soviet states. According to the consent order, the unit cleared more than $267 billion through Deutsche over eight years; of that, $150 billion was from Russia and other former Soviet states.

During those years, Deutsche identified 340 transactions tied to Danske Estonia’s dollar correspondent accounts as suspicious. The German bank identified another 87 suspicious accounts, before shutting down the relationship in October 2015.

According to the consent order, Deutsche identified Danske’s Estonian unit as high risk after entering into a correspondent contract in 2007, shortly after Danske acquired the unit.

Red Flags

In 2008, during a meeting in New York, Danske “assured” Deutsche that the Estonian unit was “moving away from its non-resident client portfolio,” the consent order showed.

But not much changed in the years that followed. The number of suspicious transactions climbed and law enforcement began investigating them in 2010. Meanwhile, Danske failed to rein in the unit, and Deutsche raised its risk rating to nine, before ultimately assigning it the maximum risk level of 10, in 2010.

It took Deutsche another five years to stop doing correspondent business with Danske Estonia. According to the consent order, Deutsche was worried that dropping Danske’s Estonian business might jeopardize its broader relationship with the Danish bank.

In September 2014, a “high-ranking” Deutsche compliance director recommended the account with the Estonian unit be closed if the situation worsened, according to the consent order. A year later, that recommendation was followed.

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