Danske Charge Sheet Shows How Bad It Is Not to Know Your Client

(Bloomberg) -- This week, Danske Bank A/S’s laundering scandal entered a new stage after the first criminal charges were filed. The main takeaway is that police zeroed in on the bank’s failure to screen its customers, potentially leaving it vulnerable to prosecution in more jurisdictions.

Danske failed when it came to compliance and failed to ensure its non-resident clients weren’t “politically exposed,” according to the charge sheet. It also didn’t know who its non-resident clients were, and didn’t adequately monitor what those clients were doing.

The key question is how prosecutors in the U.S. will look at the case. Danske is already the target of a criminal investigation by the U.S. Justice Department amid allegations that billions of dollars were laundered over several years via its branch in Estonia.

Elliott Stein, a senior analyst in litigation at Bloomberg Intelligence in New York, says an important element when it comes to potential U.S. charges against Danske is the extent to which it intentionally concealed information.

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.

Read the full story of the first criminal charges to be filed against Danske here, including a definition of what a preliminary charge is under Danish law.

In other news on Danske this week:

  • Denmark’s central bank warned that the scandal could hurt the whole finance industry in Danske’s home market amid risks that investors and customers lose confidence in the sector. The story is here.
  • Bloomberg Intelligence published an estimate for a U.S. fine and says the number is “under $1 billion,” based on the profits Danske made at its Estonian branch. See BI’s research on Danske here.
  • There was yet another client survey that showed Danske lagging behind Nordic peers. But a separate survey showed corporate clients aren’t leaving the Danish bank.
  • Estonia’s FSA has adopted new anti-money laundering guidelines and the country’s government has approved legal measures that would allow police to freeze suspicious assets.
  • Under the category “lessons learned,” Denmark’s regulator said it’s now telling lenders to be more selective when choosing correspondent banks. Read the full story here. And this is a story about lawmakers wanting investigations currently focused on Danske to include more banks.
  • On the subject of correspondent banks: It’s no secret that Deutsche Bank was involved in some of Danske’s Estonian transactions. The German lender’s offices were raided this week, but prosecutors said the action wasn’t linked to the Danske case. Shares in the Danish bank still fell as investors panicked. More here.

Next week

  • Danske holds an EGM at which Chairman Ole Andersen will officially be pushed out, after the bank’s biggest shareholder made clear his continued presence was untenable. He’ll be replaced by Karsten Dybvad, the head of the Danish Confederation of Industry. The meeting is set to take place on Friday, at 3:30 p.m. in Copenhagen.

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