Why a Money-Laundering Case Hits Denmark Close to Home

(Bloomberg) -- Denmark’s status as one of the world’s least corrupt nations is being challenged by allegations that its biggest bank, Danske Bank A/S, was a central pipeline for channeling billions in illegal funds across Europe from Russia, Moldova and Azerbaijan. An internal report published Wednesday said the bank had failed to live up to its responsibilities. Its chief executive officer has resigned. The biggest money-laundering scandal in modern Danish history won’t end there. Danske faces criminal investigations, Danish lawmakers are calling for tougher penalties, and European authorities are citing the case as evidence of vulnerabilities in the region’s defenses against criminals.

1. How could this happen in Denmark?

In a literal sense, it didn’t. The suspicious funds were funneled through Danske’s branch in Tallinn, Estonia, from 2007 to 2015, the bank has conceded. (Danske acquired the branch in 2007, the same year Estonian authorities identified problems with non-resident accounts.) The head of Denmark’s financial regulator said it appears Danske had a culture of “mean and lean” that departed from the typical Scandinavian approach in which people “challenge and bring bad decisions up the chain" for the sake of “frank discussions and reaching a consensus."

2. How much trouble is Danske in?

Denmark’s Financial Supervisory Authority in May ordered the bank to increase regulatory capital by at least 5 billion kroner ($783 million) to guard against possible losses, concluding in a scathing report that Danske had failed on multiple counts to heed repeated signals of possible laundering. It stopped short of bringing action against managers based on their fitness to operate the bank but left open the possibility of more measures. Danish and Estonian prosecutors opened criminal investigations after receiving complaints, including from Bill Browder, founder of Hermitage Capital Management. He’s leading a campaign to track down $230 million in laundered funds that he says can be traced back to transactions linked to the death of his lawyer, Sergei Magnitsky, in a Russian prison. Danske may face fines of more than $800 million, particularly if U.S. authorities become involved, according to analysts.

3. Have bank executives been held to account?

Chief Executive Officer Thomas Borgen is to leave the company as soon as a replacement is found. Analysts had estimate Borgen’s chances of finishing out the year at 33 percent. Danske has reported record profits under the leadership of Borgen and Chairman Ole Andersen.

4. How is the bank responding?

It’s pledged to donate profits from the Estonian business at the heart of the money laundering -- which it estimates at 1.5 billion kroner ($235.6 million) -- “to the benefit of society.” Borgen and Andersen have repeatedly apologized for failing to respond more swiftly and replaced the management team in Estonia. In April, the bank announced that Lars Morch, the executive in charge of business banking, including international and Baltic operations, from 2012 would stop work “as soon as possible.” (He’ll continue to draw a salary through October 2019.) Danske increased the number of employees in compliance and now has more than 1,000 assigned to monitor and prevent financial crime.

5. How much money may have been laundered, and why?

Laundering is about taking money that’s been generated from criminal activities such as fraud and funneling it into the financial system so that it can be used without a trace. The value of suspicious transactions at Danske’s Estonia branch was initially estimated at around $3.9 billion by the Danish newspaper Berlingske last year. Estimates doubled to roughly $8 billion as more information surfaced. Browder has put the figure at more than $9 billion. The Wall Street Journal reported that $150 billion in transactions flowed through the Estonian branch from 2007 into 2015. How much was legitimate and how much stemmed from criminal activities is difficult to calculate, as launderers work hard to disguise the origin of their money. Danske acknowledged that the issues raised by what’s known as the non-resident portfolio are “significantly larger” that first thought and said a total of about 200 billion euros ($234 billion) flowed through the Estonian unit during the period in question.

6. How did all this come to light?

Denmark’s financial watchdog flagged as early as 2012 that Danske’s defenses against being used by criminals to launder money had holes. The case really took off in 2017, when local media led by the newspaper Berlingske reported that Danske had for years been used to launder money out of Azerbaijan, citing thousands of transaction records to which it had been given access. That triggered Danske to re-open an investigation into its Estonian operations and led the FSA to launch its own investigation.

7. What’s been the impact on markets?

With every new revelation Danske’s share price has taken a beating. It’s down almost 30 percent this year, twice the decline registered by peers. Compared with its all-time high, in May 2017, the stock has plunged almost 50 percent. Yields on the bank’s debt likewise have risen, and the cost of insuring against Danske defaulting has doubled in the past weeks.

The Reference Shelf

  • Danske has been trying to reassure customers.
  • A look at Borgen’s severance package should he lose his CEO job.
  • Nasdaq braced for Danske volatility ahead of the report on laundering.
  • Danske’s internal report will hardly be the final word.
  • The European Union has a dirty-money problem, says a Bloomberg View editorial.

©2018 Bloomberg L.P.