Danske Thrown Out of Estonia After Country Is Drawn Into Probe

(Bloomberg) -- It’s not every day that a bank gets thrown out of a country. But on Tuesday, Estonia took the extraordinary step of telling Danske Bank A/S to get out.

Within two hours, Danske did the country’s financial watchdog one better: the harassed Danish lender announced a retreat from the entire Baltic region as well as Russia. It’s the latest dramatic twist in a $230 billion money laundering scandal that erupted last year.

The case has not only shocked Europe but also led to acrimonious finger pointing between the supervisory authorities in Estonia and Denmark over who should have done what, and when, in their oversight of Danske. The European Banking Authority said this week it has launched a formal investigation into both supervisors.

The U.S. Justice Department is among those to have started criminal investigations into Danske, after it admitted in September that much of the dirty money that flowed through its tiny Estonian operations should probably be treated as suspicious in origin. The bank also faces a separate class-action lawsuit from investors, and is facing fines potentially in the billions of dollars.

“We acknowledge that the serious case of possible money laundering in Estonia has had a negative impact on Estonian society, and we acknowledge that the Estonian FSA, against this background, finds it best that Danske Bank discontinues its Estonian banking activities,” said Danske’s interim chief executive officer, Jesper Nielsen.

Danske shut down the Estonian non-resident accounts at the heart of the scandal in 2016. Last year it said it would limit its services there to the subsidiaries of its Nordic and international corporate clients.

Kilvar Kessler, head of the Estonian Financial Supervisory Authority, said his country wants Danske out completely because of the “serious and large-scale violations of the local rules.”

The Danske case “has dealt a serious blow to the transparency, credibility and reputation of the Estonian financial market, while the supervisory authority of the home country has handled the bank softly,” he said.

The Estonian unit at the heart of the scandal allegedly became the go-to bank for crooks in the former Soviet Union to channel their money into the West until as recently as 2015. Danske took over the operations as part of a much larger deal in 2007, when it bought Sampo Pank from Sampo Oyj. Before Sampo owned the unit, it was majority owned by the central bank of Estonia.

Danske’s shares have tumbled about 50 percent over the past year, shaving more than $18 billion off its market value. Bondholders have also demanded a premium to buy Danske’s debt.

Danske still has about 238 employees in Estonia. As recently as December, Danske’s website showed that the Tallinn-based operations were being serviced by Bank of America for correspondent banking.

According to Danske’s fourth-quarter report, it employed more than 3,200 people across the Baltics and Russia at the end of 2018. By far the majority of those are in Lithuania, where the bank said its shared services center will continue operations. Danske said the decision won’t affect its guidance for 2019.

Danish Business Minister Rasmus Jarlov, who in the past has defended the Danish FSA, said on Tuesday that “there’s no doubt that both the Danish and Estonian authorities ought to have tackled the case much more aggressively 10 years ago.” His ministry will on Wednesday present a new set of proposals designed to strengthen the Danish FSA, he said.

Denmark has already passed laws that raise fines for money laundering by 700 percent and added the specter of prison sentences to the list of penalties executives may face if caught breaching the rules.

--With assistance from Steven Arons.

To contact the reporters on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net;Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net;James Hertling at jhertling@bloomberg.net

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