The Big Blowback From Putting '$230 Billion' in a Headline
(Bloomberg) -- The financial regulator at the epicenter of Europe’s vast dirty money scandal says a key part of what really happened has been misunderstood.
Danske Bank A/S became the modern-day poster child for Russian money laundering after it published a report in September that revealed a shocking number: $230 billion.
Jesper Berg, the director general of the Financial Supervisory Authority in Denmark, says interpreting that number correctly has proved difficult for those looking at the case. He says that’s in part because there’s not really any precedent for a lender putting so much information out there, the way he says Danske did.
“The numbers Danske Bank published are all the flows through the non-resident accounts, because those are the numbers you have,” Berg said in an interview in Copenhagen. “Those published by any other banks are numbers narrowly identified as money-laundering related to traditional crime.”
Shares in Danske Bank opened as much as 1.8 percent higher on Monday, its best performance in more than two weeks.
Denmark’s biggest bank said last year that a large part of 200 billion euros, or just under $230 billion, that flowed through a non-resident unit in Estonia from 2007 to 2015 should probably be viewed as suspicious. Berg calls the Danske numbers “different animals” from those “in other cases, where you could pinpoint that this is from a drug lord, for example.”
Bill Browder, the Hermitage Capital Management co-founder best known for chasing money launderers, says, “Danske Bank has exposed itself and said, ‘Look, we had a big problem.’"
While that degree of transparency can come at a political cost, it may ultimately serve Danske well, according to Browder.
“The most important constituency is the U.S. regulator,” he said. “Because if the U.S. regulators see there was a pocket of problems somewhere which has been identified, dealt with, and they’re taking measures to address the problem, that will look a lot better to the U.S. authorities than to say, ‘We’re not going to tell you there’s a problem.’"
Danske’s all-encompassing number was a show-stopper that drew condemnation from politicians, investors and the general public. Its shares plunged 47 percent last year as shareholders recoiled from the scandal.
A Regulatory ControversyThe role of Danske’s regulators has triggered its own controversy. Both the Danish and Estonian financial supervisory authorities were investigated by the European Banking Authority in connection with the laundering scandal. Earlier this month, the EBA concluded that the two watchdogs didn’t breach European Union law. But an EBA draft seen by Bloomberg and other news organizations raises questions about that conclusion. The draft report suggests the FSAs didn’t live up to their obligations. But the EBA’s members, which are the bloc’s national regulators, voted against publishing that finding. Danish Business Minister Rasmus Jarlov said on Monday there was no evidence to support any breach of EU law.
It seems other banks are already learning from the experience. Swedbank AB, Sweden’s largest mortgage lender, reportedly handled over $100 billion in questionable transactions tied to the Danske case. But the revelations have all come from Swedish media.
Swedbank commissioned a report that looked into 50 accounts, but refused to provide any numbers in the redacted document it published. The bank is now planning a second report. But its acting chief executive officer, Anders Karlsson, says that “one thing that you learn from this is that it needs to be forensically evidenced, it needs to be facts.” For that reason, he says it’s not clear that Swedbank will ever disclose any numbers.
Danske’s report, which took a year to complete, identified about 9.5 million payments. Those cover transfers by external parties to non-resident customers in Estonia who, over a nine-year period, then sent the money on to recipients outside the bank. The probe estimated this “flow” at about 200 billion euros.
The number includes “everything going through these accounts,” Berg said. “A lot of it is capital flight and a lot of it is tax evasion. You don’t really know at the end of the day what’s more traditional crime.” He says there may never be any clarity on how much of the full amount was actually laundered.
Berg hinted that the decision to go for maximum transparency has in some ways backfired. He warns that the lesson that others take away from the Danske case may be that it’s safer to reveal less rather than more.
“It’s pretty evident that in terms of the resonance throughout Europe that you do not exactly receive a prize for being transparent,” Berg said.
He also notes that because of the political environment, a disproportionate chunk of the regulator’s resources need to go toward anti-money laundering processes, potentially creating vulnerabilities elsewhere. He gave cyber security as an example.
“It was much easier to pick this case and run with it because of the transparency which we have shown, and I’m not sure that that’s smart,” he said. “It gives authorities and banks incentives not to be transparent.”
Berg says that he felt there was no alternative to full transparency. “But, I think that it’s worthy of some reflections at a European level, to ask whether you’re actually creating incentives for keeping things under the lid.”
The upside now is that investors in Danske don’t need to worry, to the best of Berg’s knowledge, about more shocking revelations, because everything has already been made public.
“We haven’t had any information on any sanctions being breached,” he said. The report commissioned by Danske “to my knowledge hasn’t revealed anything and they have gone through 6,000 of the most risky accounts.”
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