Danske's 402% Return Should Have Raised Red Flag, FSA Says

(Bloomberg) -- Top management at Danske Bank A/S should have known something was wrong when returns at the lender’s Estonian unit shot through the roof, according to Denmark’s financial supervisor.

Return on allocated capital hit 402 percent in 2013 for the Estonian unit’s non-resident portfolio, the Copenhagen-based Financial Supervisory Authority said in a report this month. Investigations have since shown that the unit was used to launder billions of dollars in illicit funds over several years.

“These weren’t capital-intensive operations, because they were basically payment services and deposits, which by their nature don’t require capital,” Jesper Berg, director general at the Danish regulator, said in an interview. Still, the return “was clearly well beyond what you would normally make,” he said.

Danske Bank Chief Executive Officer Thomas Borgen has apologized for failing to stop the bank from becoming a laundromat. According to the Berlingske newspaper reports that triggered the FSA’s probe, alleged criminals channeled billions of dollars from Russia, Azerbaijan and Moldova through Danske’s Estonian branch between 2010 and 2014.

Outsized returns in 2013 at an undersized operation

Danske’s experience shows that “you should be as alert when you make a lot of money as when you lose money in a dramatic fashion -- whether you’re not sufficiently aware of the risks or something is going on,” Berg said.

The Danish government has called Danske’s role in the scandal “unforgivable,” and is looking into whether it’s possible to seize some of the profits the lender made from the money laundering operation. The central bank says the case has put the whole country’s reputation at risk.

Increased focus on the Estonian operations by regulators in Estonian and Denmark and by Danske Bank over the past six years had a marked effect on the unit’s returns: They fell by by more than 80 percent, according to Danske reports. At the same time, deposits shrunk roughly two-thirds.

Profits plunge at Estonian unit as alarm bells start to go off

--With assistance from Ott Ummelas and Aaron Eglitis

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net.

To contact the editors responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net, Patrick Henry

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