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The world's biggest money-laundering scandal had yet to be uncovered in August 2015, but management at Danske Bank were trying quietly to close down the business at the heart of it. Russian entities and others from former Soviet states had moved 200 billion euros through the Estonian branch of Denmark's biggest lender since 2007, roughly 10 times the size of the Baltic state's economy.
Then executives from Deutsche Bank, which was handling much of the cross-border payments for Danske and is itself no stranger to scandal, made an astonishing claim. They told Danske the problem was getting worse.
Despite a reduction in payments from Estonia in the previous two years, there had been an increase in the proportion of suspect cases the German lender was having to investigate from the small branch. "In [the second quarter] of 2015 alone there had been 16 cases related to such crimes as narcotics, ID stealing, etc," state the minutes of the meeting between senior managers from both banks and seen by the Financial Times.
Deutsche later that month identified 10 Danske customers who had been involved in "suspicious behavior". Danske managers complained in an internal email that Deutsche was "not allowed by the FBI and DEA [Drug Enforcement Administration] to inform us about the cases with direct links to active criminal cases".
The German bank terminated its relationship to clear US dollars for Danske out of Estonia. But it would take another three years before the story emerged of how a small branch of a mid-sized European bank became a pipeline for an enormous flow of money out of Russia, Azerbaijan and Latvia on a scale that puts other money laundering scandals in the shade.
No one comes out of it well: not Danske executives, its board nor regulators. It has cost the chief executive Thomas Borgen his job, and triggered investigations in at least six countries. And despite the bank's own report on the scandal, published in September, much remains unknown — from the source of the money to where it ended up and just what the final damage will be to Danske and even Denmark itself.
"€200bn is of a different order than anything seen thus far," says Graham Barrow, a UK money laundering expert who has reviewed thousands of transactions from Danske and others. "It sets an unwelcome benchmark for money laundering scandals."
Danske's troubles began almost immediately after buying Sampo Bank, a Finnish lender, in 2007. The Estonian branch represented just 0.5 percent of assets in Denmark's largest bank which would be badly hit by the global financial crisis. By 2008, the non-resident business in Estonia — which serviced customers from outside the Baltic country, especially from Russia — accounted for 8 percent of Danske group's DKr2.23bn pre-tax profits.
The bank's management in Copenhagen had already received warnings. In 2007, Estonian regulators and even the Russian central bank told Danske what it had got into. "Clients of Sampo Bank permanently participate in financial transactions of doubtful origin," the Russian central bank said, estimating that billions of rubles monthly were involved, according to the Danske report into the scandal.
In charge of the Estonia operation from 2009 to 2012 in his role as head of international banking was Mr. Borgen. In 2010 he talked of "expanding slowly" the non-resident business and told other executives he had not "come across anything that could give rise to concern," according to the lender's report into the scandal. That expansion saw about 6,500 non-resident customers added by Danske to the roughly 3,300 it inherited from Sampo in 2007.
By 2013 about €32bn flowed through the Estonian non-resident portfolio. JPMorgan, which handled dollar transactions for Danske in Estonia alongside Deutsche, quit in July, citing concerns about non-resident customers.
"This should have been a massive warning signal that such a large bank will not deal with you due to suspicious customers," says one person familiar with the investigations.
At a subsequent meeting, Danske's board discussed the JPMorgan decision and the non-resident business. Lars Morch, who had replaced Mr. Borgen as head of the international business, said Danske's non-resident portfolio was bigger than its rivals' and "needed to be reviewed and potentially reduced", according to minutes of the meeting seen by the FT.
Mr. Borgen, by then chief executive, "emphasized the need for a middle ground and wanted to discuss this further outside of this forum," the minutes state. Danske's own report says: "Thomas Borgen has explained that he does not recall which 'middle ground' he was referring to." But a person involved in the investigation described it as a crucial moment. "This was the point at which a decision was made not to stop this business," the person says.
Toward the end of 2013, an internal email changed everything. Entitled "Whistleblowing disclosure — knowingly dealing with criminals in Estonia branch", it was written by Howard Wilkinson, Danske's head of markets in Estonia. Its content was explosive. Detailing a "near total process failure", he referred to a UK limited liability partnership called Lantana Trade which had opened an account at Danske in Estonia the previous year.
Its account was marked "dormant" at UK Companies House and yet it had a credit balance at Danske of $965,418 on the same date. A colleague later told Mr. Wilkinson that the bank did not know who the beneficial owners were but "apparently it was discovered that they included the family of Vladimir Putin, Russia's president, and the FSB [Russia's intelligence service]", according to the email seen by the FT.
The claim is denied by the Kremlin: "President Putin has nothing to do with the mentioned bank," it said.
Danske's internal audit team was sent to investigate the Estonia operation in January 2014. Yet Mr. Wilkinson complained in a further email in April that despite his warnings "no related client account has been closed by management" and "there appears to have been no attempt by management to identify the full scope of the problem of UK LLPs submitting false accounts".
He reported that a senior executive told him "[Danske Bank] is not the police" and "[Danske Bank] has no obligation to report false client accounts to the authorities." That same day, he resigned and sent an email to Copenhagen, signing off: "Sad to say, it seems to me that things are totally broken here."
Mr. Wilkinson is now represented by the American lawyer who helped secure one of the biggest whistleblowing payouts in history under US bounty laws.
The Wilkinson emails and a critical report from Estonian regulators were discussed by both Danske's management and board throughout 2014 and by the end of the year it had terminated relationships with about a quarter of non-resident customers. By late December 2015 the non-resident unit in Estonia was closed.
It was only in the spring of 2017, when the Danish newspaper Berlingske published a series of articles, that the size and scale of the problems at Danske started to emerge. The bank was forced to launch its own investigation, recruiting Bruun & Hjejle, a law firm which had worked for it before, to produce the report published last month.
While it established a timeline of events, the report left a number of big questions unanswered. It is still not known where much of the €200bn came from. The report mentions three scandals the bank was tied up with — laundromats in Russia and Azerbaijan, scams that funneled tens of billions of dollars out of those countries, and the alleged $230m Russian fraud uncovered by lawyer Sergei Magnitsky before his death in a Russian prison cell in 2009.
Even less is known about where the money went after leaving Danske. "We have to accept that a lot of this money will be here," says London-based Oliver Bullough, whose recent book Moneyland explores how kleptocrats have exploited western financial and legal systems. "Russians tend to invest strategically back in Russia. And spend their money elsewhere, on houses and yachts. A lot of it will be in the obvious places like New York and Monaco. But the UK will be top of the list."
The second-biggest proportion of customers by geography of non-residents at the Estonian branch were UK entities, largely LLPs like Lantana flagged by the whistleblower, or similar vehicles called Scottish limited partnerships. Nominally these shell companies are registered in the UK with a named partner but these in turn can be anonymous shells in secretive tax havens, with their ultimate beneficial owners hidden under layers of corporate identities.
The UK's National Crime Agency has opened an investigation into one such LLP with ties to Danske. The ease with which LLPs and SLPs can be set up — it costs as little as £50 through an official formation agent — boosts the government's mantra that the UK is a place where it is easy to do business. But it also attracts money launderers and organised criminals, something the government has had to concede.
There are also questions about the roles of many involved in the scandal. Hermes EOS, the shareholder rights group, wants Danske's board to explore whether it should sue any senior managers. The Bruun & Hjejle report says 42 "employees and agents have been deemed suspicious" but does not name them. It clears the two employees it does name, Mr. Borgen and chairman Ole Andersen, of any breach of their employment contract.
Yet separate criminal and civil inquiries are under way in both Denmark and Estonia while the UK, Finland and Switzerland have opened their own investigations.
"It's easy to understand that there's a lot of public uproar," says Jesper Berg, head of the Danish Financial Supervisory Authority. "It's a continuation of the financial crisis. There is this sense of unmet consequences for the financial sector."
Questions have also been asked as to whether Danske received special treatment from its regulator, which was until May headed by the bank's former chief financial officer. Mr. Berg denies that was the case and points to the reopening of the FSA investigation into Danske.
The revelations come at the worst possible time for the EU, whose laxity in the policing of money-laundering has already been shown up in various cases, from Malta and Cyprus to Latvia and the Netherlands.
Technically, it is a bank's home supervisor that is responsible for checking its money-laundering controls, including foreign branches. If a bank has a foreign subsidiary — which has ringfenced capital and management — then the duty passes to the regulator in the host jurisdiction. In the case of Danske's Estonian branch, ultimate responsibility lays at the door of Danish regulators. But home regulators can only operate efficiently if they have the co-operation of hosts.
That has prompted Andrea Enria, chief executive at the European Banking Authority, to back calls for a new pan-EU body dedicated to fighting the tide of dirty money. "If you are in the single market, the strength of anti-money laundering controls can only be as high as the weakest link," he says.
For Danske, the biggest risk remains any US action. Marshall Billingslea, the US Treasury official in charge of fighting terrorist financing, told Berlingske: "We are following this case very closely." In 2012, HSBC was fined $1.9bn for laundering $881m of drug trafficking money for the Mexican Sinaloa drug cartel.
If even a fraction of the €200bn in questionable Danske flows turns out to be actual money laundering — its own report says a "large part" was suspicious — that will dwarf HSBC's problem. Analysts at Jyske have predicted a global fine of as much as $8bn for Danske if wrongdoing is proven.
But a fine may be the least-worst scenario. The US Treasury could order banks that clear dollars on behalf of Danske to stop. That is what it did in February in the case of ABLV, the largest non-resident bank in Latvia that was forced to liquidate itself earlier this year after being accused by the US of breaking sanctions against North Korea.
Rasmus Jarlov, business minister, has said Denmark is doing all it can to avoid ABLV's fate. "We're dealing with it here, and we crack down hard on money laundering, and we hope this is being noticed abroad," he said last month.
A big concern is just how far dirty money has spread. Mr. Barrow, the anti-money laundering expert, worries that large numbers of banks and law firms have made themselves vulnerable due to the amount of Russian cash flowing through the system. He told one British bank: "You need to think about a day when Putin turns against us. He will be sitting on a treasure trove of information."
At its peak in 2013, Danske had a market share of about 9 percent of non-resident money in the Baltics. As eye-watering as the sums involved in its scandal are, some wonder what more is out there. Mr. Bullough says: "We only know about Danske because Howard Wilkinson stuck his head above the parapet, but how many other banks in the Baltics were doing exactly the same thing?"