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The Danske Bank Scandal Is the Tip of the Iceberg

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Last month, the CEO of Danske Bank, Thomas Borgen, stepped down, and both Denmark’s Financial Services Authority and the European Banking Authority opened investigations into the bank’s illegal activities at its Estonian branch, reported Foreign Policy (US).

Bruun & Hjejle, general practice attorneys hired by Danske Bank, released a chilling report revealing how over 200 billion euros, about $230 billion, were illegally laundered through its branch in Estonia over a nine-year period. Despite this negligence, the report cleared Borgen and the board of directors of any kind of legal responsibility. While it is by no means the first money laundering exposé in recent years, it may be the largest one.

Money launderers seek to disguise criminal behavior and the money generated by it as legitimate. In 2017, the IMF and the United Nations Office on Drugs and Crime estimated that $2.1 trillion dollars is being laundered by criminals annually—with their techniques growing in sophistication. One of the most common strategies for money laundering is creating shell companies, fake companies that take cash in exchange for fake goods or services, in essence operating as money transfer operations.
With increasingly complex schemes to conceal money laundering, it can often be difficult for banks to detect and thwart these criminal activities. Banks have created transaction monitoring systems that target suspicious behavior, such as depositing large sums of cash, rapid money transfers, or complex transactions designed to escape detection.

But because anti-money laundering procedures are automated and rely on predictable patterns of behavior by criminals, money launderers who are experienced and sophisticated will manage to avoid detection by such software. When a customer engages in suspicious behavior that triggers the automated system, in theory, an internal investigator is then alerted and reviews the transaction. However, even in the banking industry, 95 percent of these alerts are considered false positives, and almost none of them result in a formal report of suspicious activity.

The current scandal began in 2007, when Danske Bank acquired the Finland-based Sampo Bank, which also had an Estonian branch. At this particular branch during the period 2007-2013, 44 percent of all deposits came from non-residents of Estonia—approximately 10,000 of the branch’s customers. Between 2007 and 2015, these same customers conducted 7.5 million transactions (not including transfers between customers). In total, that flow of money added up to about 200 billion euros. Because the Estonian branch had its own IT platform and many documents were written in Estonian or Russian, Danske Bank did not have the same amount of insight into this branch’s activity and simply assumed it was taking appropriate anti-money laundering procedures.

The report published by Bruun & Hjejle explains that this was not the case. The bank knew neither enough about its customers nor enough about their controlling interests. What makes matters more interesting is that 42 employees and eight former employees may have been colluding with criminals to maintain this money laundering activity. According to the report, two of the main perpetrators were the Russian and Azerbaijani “Laundromat” operations.

The breadth of suspicious activity by customers was vast. Some of these customers had shared addresses or held other properties that were suspicious. Others had significant differences between their revenue and payment activities. Still others were publicly associated with money laundering and had made payments with suspicious counterparties in other banks. They were, of course, likely assisted by the 50 employees who are now suspected of collusion. These employees were involved with the suspicious payments, made significant cash deposits, had personal relationships with customers, or were involved in suspicious payments with other employees.

One of the many whistleblower reports about the Estonian branch even mentioned that “the bank knowingly continued to deal with a company that had committed a crime. Even more troubling, after said whistleblower shared concerns about false financial reports with a supervisor, the fake accounts were replaced with new accounts that were equally false.

The Russian and Azerbaijani Laundromats were central to the fraud taking place at Danske Bank’s Estonian branch. The Laundromats were criminal financial vehicles that helped to launder money worldwide through shell companies by using fraud, the rigging of state contracts, and customs and tax evasion. The Russian Laundromat worked between 2011 and 2014 by creating 21 “core” companies in the United Kingdom, Cyprus, and New Zealand.

These companies generated fake debt, then obtained a Moldovan court order that required 19 Russian companies pay these debts to Moldova-based Moldindconbank and Latvia-based Trasta Komercbanka. Once out of Russia, the money was transferred all around the world, accounting for 26,746 payments totaling $20.8 billion to 5,140 companies with accounts at 732 banks in 96 countries. At Danske Bank, 177 customers received payments from these core companies.

Similarly, the Azerbaijani Laundromat used a series of shell companies to disguise the origin of $2.9 billion that is suspected to come from the family of Azerbaijani President Ilham Aliyev. This Laundromat worked as a slush fund to pay off politicians, siphon off private funding, and launder money. While much of this scheme is still under investigation, 75 customers of Danske Bank are implicated, and the Estonian branch handled the accounts of all four major companies involved in the Azerbaijani Laundromat.

Despite all of this suspect activity and a chorus of whistleblowers, Danske Bank did nothing. As early as 2007, the Estonian Financial Supervision Authority came out with a critical report on the bank’s activities. Then, in 2013, the first whistleblower came forward to disclose that the Estonian branch was knowingly dealing with funds from the family of Russian President Vladimir Putin and the Russian security service, the FSB. However, these claims were not properly investigated and faded into the woodwork.

Updating the branch’s anti-money laundering system to Danske’s company standards was apparently too expensive to justify. This is despite the fact that at the time of the report’s publication, 6,200 of the customers hitting the most risk indicators had been screened, and almost all of them were deemed to have engaged in suspicious activity. Over-reliance on automated systems has meant that less time is spent actually analyzing suspicious transactions and is instead focused on increasing profit.

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Reporter: Denes Osvalt
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Category: Business, Crime
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