Danske Bank Estonia Laundering Timeline-Investigation US$234 Billion Scandal
28th November 2018, Bachir El Nakib (CAMS), Senior Consultant, Compliance Alert LLC (Qatar- Lebanon)
The Banks That Helped Danske Bank Estonia Launder Russian Money
Money laundering is a multi-bank phenomenon. Danske Bank Estonia has been revealed as the hub of a $234bn money laundering scheme involving Russian and Eastern European customers. But Danske Bank Estonia couldn’t do this by itself. Much of the money was paid in U.S. dollars, and for that, it needed help from other banks. Banks that had access to Fedwire, the Federal Reserve's electronic settlement system. Big banks, in other words.
The entrance to Danske Bank's headquarter at Holmens Kanal in Copenhagen, Denmark. Danske Bank admits that it has been used to launder money from companies related to Russia. Transactions valued at $234 billion flowed through its small branch in Estonia between 2007 and 2015, a large part of which are believed to have been illicit. (Photo by Ole Jensen/Getty Images)
It appears that four big banks helped Danske Bank Estonia make its dodgy transactions. J.P. Morgan, Bank of America and Deutsche Bank AG all made dollar transfers on behalf of the Estonian branch’s non-resident customers. And according to the Wall Street Journal, Citigroup’s Moscow branch may have been involved in some financial transfers in and out of Danske Bank Estonia. But how much responsibility do these banks bear for these transfers? Could they reasonably have been expected to know – or suspect - that the money was dirty?
Banks that make transactions on behalf of other banks are known as “correspondent banks”. In the past, correspondent banks often had little information about the originator or final recipient of the money they were transmitting. They simply trusted that their customer bank was acting legally and that its customers were above board. Old habits die very hard: in 2016, the correspondent banks involved in the FIFA corruption case, which include Citigroup, HSBC, Wells Fargo and Barclays, all claimed that they could not have known that the transfers were corrupt.
But these days, banks are expected to “know their customers’ customers”. They are supposed to conduct their own checks to make sure that they are not unwittingly being used to launder dirty money.
In the case of Danske Bank Estonia, one of the correspondent banks did suspect something was wrong. In 2013, J.P. Morgan terminated its correspondent banking relationship with Danske Bank Estonia because it was concerned that it was being used as a conduit for dodgy funds. Deutsche Bank, however, blithely continued to make U.S. dollar wire transfers on behalf of the Estonia branch’s non-resident customers after J.P. Morgan's departure. So did Bank of America, which replaced J.P. Morgan.
From 2014 onward, according to Bloomberg, Deutsche Bank started refusing to make transfers that looked particularly dodgy. But the transaction flow did not fall off dramatically until 2015, when Bank of America and Deutsche Bank both terminated their correspondent bank relationships with Danske Bank Estonia - Bank of America in May, and Deutsche Bank in September. A report from the Danish Financial Supervisory Authority (FSA) – Danske Bank’s regulator – says that an employee at one of these banks warned about the Estonian branch’s suspicious customers:
In that connection, a senior employee from the correspondent bank in question assessed that out of ten non-resident customers from the Estonian branch, the correspondent bank would be comfortable only with servicing one given the customers’ characteristics. The employee also warned Danske Bank against Moldovan customers and customers transferring money to Moldova.
According to the Financial Times, this was a Deutsche Bank employee.
But if Deutsche Bank employees were so aware of the suspicious nature of Danske Bank Estonia’s customers and the dodgy nature of some of the money flows, why didn't Deutsche Bank follow J.P. Morgan's example in 2013? Why was it the last to terminate its correspondent bank relationship?
At that time, Deutsche Bank was happily doing a spot of Russian money laundering itself – the “mirror trades” through its Moscow branch for which it last year paid fines totaling $630m to U.S. and U.K. regulators. I suppose it is entirely understandable that a bank that was actively laundering money for its own customers might be little concerned about money laundering by one of its customer banks. But this raises serious concerns about the adequacy of Deutsche Bank's AML processes - concerns that, as we shall see, refuse to go away.
The U.S. regulators are already sniffing round Danske Bank. If the FIFA investigation is anything to go by, their interest will not be limited to the Danish bank. They will also want to know what the correspondent banks thought they were doing. Deutsche Bank was the only correspondent bank to stay with Danske Bank Estonia throughout the period of its known money laundering, and it apparently continued the relationship despite knowing that the Estonian branch’s customers and transactions were suspicious. U.S. regulators might take a dim view of Deutsche’s behavior, especially given the $41m fine it was handed by the Federal Reserve in May 2017 for inadequate AML controls, and the “Problem Bank” designation awarded to its American subsidiary by FDIC.
It seems that BaFIN, the German regulator, thinks so too. Two days after Danske Bank released a report revealing the mammoth scale of its Estonian branch’s money laundering activities, BaFIN reprimanded Deutsche Bank for inadequate AML processes, and imposed an external supervisor to ensure it improved them. The notice on BaFIN’s website is short and to the point:
On 21 September 2018, in order to prevent money laundering and terrorist financing, BaFin ordered that Deutsche Bank AG take appropriate internal safeguards and comply with general due diligence obligations. The issued order is based on section 51 (2) sentence 1 of the German Money Laundering Act (Geldwäschegesetz – GwG).
To monitor the implementation of the ordered measures, BaFin has appointed a special representative in accordance with section 45c (1) in conjunction with section 45c (2) no. 6 of the German Banking Act(Kreditwesengesetz – KWG). The special representative is to report on and assess the progress of the implementation.
Ostensibly, this follows on from Deutsche Bank’s admission in August 2018that its AML processes were patchy to say the least. But the timing is exquisite. Could BaFIN be warning off the U.S. regulators? “This baby is ours. We will deal with it.”
Whether or not BaFIN’s reprimand is directly connected with the money laundering revelations, the fact remains that Deutsche Bank has some serious questions to answer regarding its conduct during the period of its correspondent relationship with Danske Bank Estonia.
And so too do the other banks involved. Although their correspondent relationships were of shorter duration, both J.P. Morgan and Bank of America helped to facilitate the enormous dollar flows in and out of Danske Bank Estonia. And although the exact role of Citigroup’s Moscow branch is as yet unclear, the little we know about it sounds suspiciously like Deutsche Bank’s “mirror trades”.
Investigations into the Estonian money laundering scandal are only just beginning. There is much, much more still to be uncovered. But already, an all-too-familiar familiar name has emerged. Funny, isn’t it, how whenever there is some shady activity going on, Deutsche Bank is never far away?
Danske Bank is embroiled in a money laundering scandal that has triggered criminal investigations, forced out its CEO and chairman and rattled investors in Denmark's largest bank.
An internal investigation, published in September, charted how 200 billion euro ($229 billion) flowed through Danske Bank's tiny Estonian branch from clients registered or incorporated in countries including Russia and Britain between 2007 and 2015.
Danske Bank said many of the payments were suspicious.
The following timeline summarizes developments, some of which were highlighted in an 87-page report by Danish law firm Bruun & Hjejle, which led Danske Bank's internal investigation into the allegations.
Nov. 19: Whistleblower Howard Wilkinson testifies at Danish parliament.
Nov. 11: Danske's chairman Ole Andersen and chairman of audit committee, Jørn Jensen, say they will step down, under pressure from the bank's biggest shareholder A.P. Moller Holding. A.P Moller calls for the CEO of the Confederation of Danish Industry, Karsten Dybvad, to succeed Andersen. Danske continues its search for a permanent CEO. [L8N1XH5JB]
Oct. 17: Denmark's regulator, the Financial Supervisory Authority (FSA), rejects Danske's chosen successor to departed CEO Thomas Borgen as too inexperienced.
Oct. 4: Danske says the U.S. Department of Justice has launched a criminal investigation into its Estonian branch, which could lead to a crippling fine. Many non-resident accounts were held by entities or individuals in Russia, which is the subject of U.S. sanctions.
Sept. 26: Danish newspaper Berlingske names Briton Wilkinson as the whistleblower who helped reveal the scandal. In an email to the paper, Wilkinson confirms his role.
Sept. 19: Danske publishes the Bruun & Hjejle report, revealing that payments totaling 200 billion euros had flowed through its Estonian branch between 2007-2015, many of which it says were suspicious. Borgen, who was in charge of Danske Bank's international operations, including Estonia, between 2009 and 2012, resigns. The report said he had not breached his legal obligations.
Jesper Nielsen, the head of Danske's domestic banking business, is appointed interim CEO around two weeks later.
July-August: Estonian and Danish prosecutors launch criminal investigations in the wake of a complaint by Bill Browder, the chief of asset manager Hermitage Capital. Once the biggest foreign money manager in Russia, Browder has led a vocal campaign against the Kremlin.
May 3: Denmark's FSA criticizes Danske's handling of the Estonian crisis and orders it to reassess its solvency needs, strengthen governance and review management in Estonia. It stops short of action against anyone under its fit and proper rules.
Dec. 2017: Danske fined 12.5 million Danish crowns ($1.9 million) by a Danish public prosecutor for violating anti-money laundering rules.
Sept. 21, 2017: Danske says it has "major deficiencies in controls and governance that made it possible to use Danske Bank's branch in Estonia for criminal activities such as money laundering". Follows a report prepared by US-based consultancy Promontory Financial Group. The bank expands an investigation into its Estonian branch.
March 2016: Denmark's financial regulator says it has reported Danske to the police for breaching anti money laundering rules and censures it for not having identified and reduced "significant money laundering risks" in its Estonian branch.
End-2015: Danske shuts the bulk of its non-resident portfolio in Estonia. From 2007-2015, there were around 10,000 customers in total in the portfolio, the Bruun & Hjejle report said.
Feb. 3-6, 2014: The bank conducts an on-site audit in Estonia. In draft conclusions sent by email on Feb 5, 2014, it says: "we cannot identify actual source of funds or beneficial owners", the law firm's report said.
The report adds that a branch employee had "confirmed verbally ... that the reason underlying beneficial owners are not identified is that it could cause problems for clients if Russian authorities request information."
Dec. 27, 2013: A whistleblower, working at Danske's Estonian branch, emails a first report, entitled "Whistleblower disclosure - knowingly dealing with criminals in Estonia Branch", the Bruun & Hjejle report says.
It was sent to managers on the bank's executive board, at group compliance & anti money laundering and in internal audit.
The whistleblower said the accounts of a customer at the Estonian branch were closed in Sept. 2013. "Apparently it was discovered that they included the Putin family and the FSB (Russian Federal Security Service)," the law firm quoted the whistleblower as saying in the email.
The Kremlin had not replied to repeated requests for comment about the allegations from Reuters.
The whistleblower reports more customers with "similar irregularities" to Danske's group internal audit department between Jan. and April 2014, the law firm's report says.
2013: A correspondent bank stops clearing dollar transactions out of Danske's Estonian branch because of money laundering concerns, Bruun & Hjejle report says.
Aug. 2008: Danske abandons a costly plan to migrate its Baltic banking activities onto the group IT platform. As a result, the Estonian branch does not use the anti-money laundering procedures, transaction and risk monitoring developed at group level, the Bruun & Hjejle report said.
June 8, 2007: The Russian Central Bank writes to the Danish financial regulator, voicing concerns that clients of newly-acquired Sampo Bank "permanently participate in financial transactions of doubtful origin" estimated at "billions of rubles monthly", the Bruun & Hjejle report says.
The letter is forwarded to Danske's executive board and board of directors. The Estonian regulator also issues a critical inspection report, the law firm says.
Nov. 2006: Danske buys Sampo Bank, Finland's third-largest bank, which has businesses in countries such as Estonia, Latvia and Lithuania. The acquisition is completed in Feb. 2007.
(Story by: Tommy Lund, Izabela Niemec, Joseph Birch, editing by Kirstin Ridley and Alexander Smith)
Findings of the investigations relating to Danske Bank's branch in Estonia
The investigations into Danske Bank's branch in Estonia, launched in autumn 2017, have now reached the point at which the Board of Directors can present the conclusions. The investigations comprise a thorough examination of customers and transactions in the period from 2007 to 2015 and an investigation of the course of events, including whether managers and employees, members of the Executive Board or the Board of Directors have sufficiently fulfilled their obligations. Danske Bank has previously concluded that it was not sufficiently effective in preventing the branch in Estonia from being used for money laundering in the period from 2007 to 2015.
The investigations have been led by the Bruun & Hjejle law firm, and their 'Report on the Non-Resident Portfolio at Danske Bank’s Estonian branch' is enclosed with this press release.
In this connection, the Chairman of the Board of Directors, Ole Andersen, says:
"The Bank has clearly failed to live up to its responsibility in this matter. This is disappointing and unacceptable and we offer our apologies to all of our stakeholders – not least our customers, investors, employees and society in general. We acknowledge that we have a task ahead of us in regaining their trust.
There is no doubt that the problems related to the Estonian branch were much bigger than anticipated when we initiated the investigations. The findings of the investigations point to some very unacceptable and unpleasant matters at our Estonian branch, and they also point to the fact that a number of controls at the Group level were inadequate in relation to Estonia.
It is important to us that we now have uncovered what took place. Moreover, we are committed to using the report as a basis for continued learning and improvement.
We want to stress that this case no way reflects the bank that we want to be. We take the task of combating financial crime and money laundering very seriously, and we do and will do everything it takes to ensure that we never find ourselves in the same situation again".
About the investigations by Danske Bank
The investigations have been very thorough and extensive. The scope of the investigations covers approximately 15,000 customers and 9.5 million payments. Some 12,000 documents and more than 8 million emails have been searched, and more than 70 interviews have been conducted with current and former employees and managers, including members of the Executive Board and members of the Board of Directors. Overall, approximately 70 people have worked full time on the investigations.
The investigations have been anchored in the Board of Directors and led by the external law firm Bruun & Hjejle in order to ensure that the information collected, reviewed and assessed during the investigations provides a sufficient basis for finding the investigations objective and thorough. The investigators were given a full mandate to investigate anything and everyone they have found relevant.
We have kept relevant authorities updated, are sharing and will continue to share all relevant findings with them. After today, we will continue to send reports to the authorities as we complete the remaining parts of the investigations. Although parts of the investigation have not yet been completed, we now have enough insight to present the findings and take the necessary consequences.
We are not able to provide an accurate estimate of the amount of suspicious transactions. At this point we have gone through 6,200 customers starting with the customers hitting most risk indicators first. Almost all of these customers have been reported to the authorities.
Moreover, there will be certain information that we are not permitted to or cannot disclose.
Key findings - causes and accountability
Based on the conclusions from the investigations we are presenting today, as well as the root cause analysis conducted last year, it seems clear that there were several reasons why the case developed as it did. Those include
· a series of major deficiencies in the bank´s governance and control systems made it possible to use Danske Bank’s branch in Estonia for suspicious transactions
· for a long time, from when we acquired Sampo Bank in 2007 until we terminated the customer portfolio in 2015, we had a large number of non-resident customers in Estonia that we should have never had, and that they carried out large volumes of transactions that should have never happened
· only part of the suspicious customers and transactions were historically reported to the authorities as they should have been
· in general, the Estonian branch had insufficient focus on the risk of money laundering, and branch management was more concerned with procedures than with identifying actual risk
· the Estonian control functions did not have a satisfactory degree of independence from the Estonian organisation
· that the branch operated too independently from the rest of the Group with its own culture and systems without adequate control and management focus from the Group
· there is suspicion that there have been employees in Estonia who have assisted or colluded with customers
· there have been breaches at management level in several Group functions
· there were a number of more or less serious indications during the years, that were not identified or reacted on or escalated as could have been expected by the Group
· as a result, the Group was slow to realise the problems and rectify the shortcomings. Although a number of initiatives were taken at the time, it is now clear that it was too little and too late
Of the investigation into customers in Estonia, the following can be highlighted:
· The investigation identified a total of around 10,000 customers as belonging to the non-resident portfolio. To ensure that all relevant aspects are covered the investigation covers a total of around 15,000 customers with non-resident characteristics (that is, a further 5,000 customers).
· The around 10,000 customers carried out a total of around 7.5 million payments.
· The around 15,000 customers carried out a total of around 9.5 million payments.
· For all of the customers covered by the investigation, that is, around 15,000 customers, the total flow of payments amounted to around EUR 200 billion.
· At the present time, the investigation has analysed a total of some 6,200 customers found to have hit the most risk indicators. Of these, the vast majority have been found to be suspicious. That a customer has been found to have suspicious characteristics does not mean that there is a basis for considering all payments in which the customer in question was involved to be suspicious. Overall, we expect a significant part of the payments to be suspicious.
Accountability and consequences
When it comes to individual accountability, it has been established that a number of former and current employees, both at the Estonian branch and at Group level, have not fulfilled their legal obligations forming part of their employment with the bank.
As part of the investigations, the Board of Directors, Executive Board members and a large number of senior managers have been assessed by the Bruun & Hjejle law firm. The assessments have given rise to varying degrees of serious criticism of a number of individuals in Estonia and Denmark.
The investigation into accountability has established that the Board of Directors, the Chairman and the CEO did not breach their legal obligations towards Danske Bank.
Based on the conclusions of the investigations, we have taken a number of measures against current and former employees. Management has taken all the steps necessary vis-à-vis the employees and managers involved in Estonia and Denmark in the form, among other things, of warnings, dismissals, loss of bonus payments and reporting to the authorities, but we do not comment on individuals The majority of these employees and managers are no longer employed with Danske Bank.
Gross earnings to be transferred to an independent foundation
As the bank is not able to provide an accurate estimate of the amount of suspicious transactions made by non-resident customers in Estonia during the period, the Board of Directors has decided to donate the gross income from the customers in the period from 2007 to 2015, which is estimated at DKK 1.5 billion.
To the extent not confiscated by the authorities, the gross earnings will be transferred to an independent foundation, which will be set up to support initiatives aimed at combating international financial crime, including money laundering, including in Denmark and Estonia. The foundation will be set up independently from Danske Bank with an independent board.
Improvements in the AML and compliance area at Danske Bank
"While there will always be things that need to and can be improved, when it comes to the fight against financial crime and money laundering, we are in a completely different place today than when the events investigated took place in Estonia. The events that took place in Estonia were in no way representative of the general state of affairs in the bank at the time. There were some very specific issues that allowed the problems to exist and develop, as outlined in the root cause analysis and the investigations that are presented today. We have addressed these specific issues", says Ole Andersen.
Regarding the specific issues in relation to Estonia, we have taken the following initiatives:
· The portfolio of the non-resident customers in Estonia was closed down in 2015 (a few accounts were closed at the beginning of 2016). As part of our strategy, we will serve only subsidiaries of our Nordic customers and international customers with a solid Nordic footprint.
· Governance and oversight in relation to the Baltics have been strengthened with the introduction of a new pan-Baltic management.
· The independence of control functions in the Baltics has been strengthened and processes and controls have been raised to Group level to ensure the same level of risk management and control as in other parts of the Group.
· The Baltic units have been migrated to a single shared IT platform, which enables increased transparency and oversight.
Furthermore, over the last few years we have made comprehensive efforts and substantial investments to improve our general and Group-wide efforts to combat financial crime, including money laundering. In total, the number of employees dedicated to this area has more than quadrupled and now totals 1,200 full-time employees.
In addition, we have
· initiated a comprehensive AML programme, which has led to major changes in the form of new organisational structures, new routines and procedures, as well as the implementation of new IT systems.
· strengthened and will continue to strengthen the compliance knowledge and culture across the organisation, among other things through a strong management focus and extensive mandatory training. Over the past twelve months alone, internal and external training service providers provided almost 70 different AML training courses across the organisation. Approximately 20,000 employees have been given training.
· implemented risk management and compliance in performance agreements of all members of the Executive Board and senior managers.
· strengthened the whistleblower setup by transferring the responsibility for investigating reports to Group Compliance and implementing a stronger governance setup to handle reports. Furthermore, we have increased information about the whistleblower system to all employees and introduced mandatory training.
· generally strengthened the three lines of defence, which also includes ensuring increased independence of control functions and making sure that whistleblower reports and correspondence with supervisory authorities form part of reporting to the Board of Directors.
"We still have a lot of areas where we can improve and strengthen our ability and efforts, and we will never be in a position where there is nothing more that we can do. Criminals and criminal networks are continuously testing our controls and their methods are getting more and more sophisticated. That is why we are working on a number of initiatives to improve our competencies and efforts even more", says Ole Andersen.
An important element of this work is the investment in the further development and implementation of new and robust IT systems and increased automation of work routines, generally as well as specifically in relation to AML controls. Both elements will ensure even better surveillance of transactions and a better overview of customers, and they will also reduce dependency on manual processes.
The findings of the investigations that we are presenting today are in line with the criticism and conclusions announced by the Danish FSA in its decision of May 2018. We agree with the conclusions of the FSA. We are working on implementing all of the orders through the following initiatives:
· We have recruited a new Chief Compliance Officer with broad international experience. He will become a member of the Executive Board when he joins us no later than 1 December 2018.
· We have implemented the extra Pillar II capital requirement of DKK 5 billion and have increased the target for the total capital ratio to "above 19%".
· The Group has carried out an assessment of management and governance in the Estonian branch.
· Integration of compliance as a fundamental part of our culture at all levels.
· New initiatives and procedures to ensure that indications of potentially problematic issues are sufficiently investigated escalated in a timely manner and handled effectively.
· We will establish a central unit at Group level to ensure transparency and completeness in Danske Bank’s interaction with the FSA and due, timely and qualified reporting.
We have a dialogue with the FSA on the initiatives.
1) Danske Bank - https://danskebank.com/news-and-insights/news-archive/press-releases/2018/pr19092018
2) Forbes- https://www.forbes.com/sites/francescoppola/2018/09/30/the-banks-that-helped-danske-bank-estonia-launder-russian-money/#3974e4347319
3) Reuters - https://www.reuters.com/article/us-danske-bank-moneylaundering/danske-bank-faces-u-s-criminal-inquiry-over-suspicious-estonian-accounts-idUSKCN1ME0OK