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Danske Bank Money Laundering

February 15, 2019

Beyond H.C Andersen, Carlsberg, and LEGOs, the one thing which sets Denmark apart from the rest of the world is the concept of ‘hygge’. Hygge explains a cosy state of being, a feeling of contentment and well-being; it is your hands wrapped around a hot cup of chocolate, or a late-night get-together with your friends on the beach sharing stories over an open-fire. This notion of hygge is proudly painted across the streets and homes of the ‘happiest country in the world’. However, following recent revelations, the directors at Danske Bank will probably not see much ‘hygge’ in the near future.

 

The major Danish Bank ‘Danske Bank’ managed, what is estimated to be, the largest money laundering operation of all time, through their Estonian branch between 2007 and 2015. During that period several warning-signals would go off; JP Morgan and Deutsche Bank disengaged from handling Danske’s dollar transactions, a whistle-blower emerged, and the Estonian watchdog flagged for potential money laundering activities in 2014. Yet, the story would not brake at large-scale until reports emerged in 2018. Following the reports made by the Financial Times, Mr. Borgen, the former CEO, stepped down from his position, and the bank disclosed how they washed up to €200bn of mainly Russian money during the 8-year period. These revelations imply that Danske Bank are currently sitting on the largest money laundering scandal in history, with several investigations opened against them, including the US, UK, and most recently; France.

 

Having acquired a small Finnish bank – ‘Sampo’ – in 2007, Danske were now stuck with an Estonian branch that possessed a large non-resident portfolio. Having inherited this seemingly fraudulent part of the business, the Danish bank decided not to shut-down any of these Estonian accounts.

 

To get a grasp of the sheer size of this operation, Danske bank managed to move funds at almost eight times the size Estonia’s GDP, which was measured at €29bn in 2017. Of the €200bn the Danes managed to scrub clean, about 58% is reckoned to stem from Russia, Estonia, and Latvia. These non-residential clients utilized the UK to set up so called shell-companies. By pushing their cash to Estonia through UK-based LLP’s, no information about the eventual owners would need to be disclosed, making it difficult to identify the real owners of the customers in the Danske portfolio.

 

Following the recent revelations, the Danish financial regulators (FSA) have come under fire for their actions; or rather, the lack thereof. The organisation which up until May of last year was led by a former Danske director, was targeted by the whistle-blower Howard Wilkinson who claimed that they were trying to protect the Danish bank. They have received further criticism from their Estonian counterpart who argue they did not step in when clear warning-signals were present. When the FSA claimed they had met their obligations regarding the bank’s Estonian operations, the Estonian watchdog found themselves enraged, creating a conflict between the two. Rather than cooperating, the two have found themselves squabbling over who is to carry responsibility.

 

In the post-financial crisis era, there has been no shortage of financial scandals, including the recent 1MDB Goldman Sachs scandal, the HSBC money laundering case, and the ever-revealing Panama Papers. As these multi-national banks deal across jurisdictions, watchdogs and authorities get

squeezed, and it becomes unclear who carries the larger responsibility for stepping in when the tell signs of dodgy operations appear. The Estonian authorities caught wind early but failed to intervene. Meanwhile, the Danish authorities were dormant and gave the bank a light slap on the wrist. What this scandal has shown is the necessity for better cross-border cooperation on financial regulation and supervisory.

 

As finance grows ever more international, its regulators must follow suit. In this case neither the Danish nor the Estonian authorities intervened due to a coordination failure rooted in confusion regarding who is to bear ultimate responsibility. As a result of this fallout, the governments of the European Union have collectively agreed to strengthen bank supervision via the European Banking Authority. Given the cross-border nature of money laundering, the EU should also consider establishing its own watchdog, set to prevent financially related crimes and coordinate the respective national authorities for improved cooperation. Furthermore, the forming of an international financial supervisory organisation should not be ruled out, considering how interconnected the financial system is.

 

In 1989 the G7 group countries formed the ‘Financial Action Task Force on Money Laundering’. An inter-governmental body set up with the purpose of setting global standards on money laundering prevention and facilitating effective implementation of legal measures for combatting the issue. The effectiveness of this group can be heavily questioned given the current state of money laundering. The UK National crime agency estimates that up to 5% of the global GDP is laundered globally each year. Furthermore, little is done for the G7 taskforce’s credibility when a bank is able to operate the world’s largest money laundering scheme for eight years with a watchdog who is complacent at taking action, in what is perceived to be the least corrupt country in the world. Transparency International has consistently ranked Denmark one of its top-two countries on its ‘Corruption Perception Index’; something they might rethink for the 2019 edition.

 

While the G7 initiative should be recognized as a step in the right direction, it is clear that not enough work is done to prohibit international money laundering, and that little is done on the front of facilitating cooperation.

 

Being a country with iconic city architecture, world-renowned beers, and beloved Hollywood actors, it is clear to see who Denmark’s ugly duckling is. But, contrary to the fairy-tale, this duckling might not see a happy ending as billion dollar fines are looking to be levied against it.

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