ANALYSIS-Nordic trust tarnished by money laundering scandal

* Denmark and Sweden hit by money laundering scandal

* Denmark tightens rules ahead of elections

* Sweden considers break with liberal, trusting stance

STOCKHOLM/FRANKFURT, April 3 (Reuters) - Money laundering allegations involving Sweden and Denmark have shattered faith in the open Nordic business culture, prompting demands for tighter controls on the banks held responsible.

Ranked among the least corrupt countries by anti-graft campaign group Transparency International, Sweden and Denmark have been rocked by investigations into Danske Bank and Swedbank, knocking billions off their value.

Politicians, regulators and investors now want closer policing and more stringent penalties, unwinding a system where the state largely trusted banks to keep themselves in check.

"Openness is key in our society. This is a system built on trust and that trust has decreased quite substantially," Swedish financial markets minister Per Bolund told Reuters.

"It's not enough to fire one person," Bolund said of Swedbank's dismissal last week of Birgitte Bonnesen as chief executive, adding that an overhaul of its controls was needed, in a clear signal of future government action.

"That has to go all the way from the top to the bottom."

Sweden has yet to announce substantial reforms following the emergence of money laundering allegations against Swedbank which originated in Europe's Baltic states of Latvia and Estonia.

Latvia, a former Soviet state with a large Russian-speaking minority, had modelled itself as a financial bridge for Russians moving money to Europe. Similar profitable activity took place in Estonia, but has now become a reputational liability.

Danske Bank has been ejected from Estonia after admitting 200 billion euros ($225 billion) of suspicious money movements flowed through its branch there between 2007 and 2015. And it is also pulling out of neighbouring Baltic states.

Danish academic Gert Svendsen, author of 'Trust', says the scandals risk undermining a central tenet of Nordic culture.

"People become happier if you can do things based on trust. That explains why Swedes and Danes are quite happy," he said.

WIDER WAVES

The money laundering scandals, which have been growing week by week, are shaking politics as well as the boardroom.

In Denmark, which was first to be hit by Danske Bank, the scandal bolstered support for a left-wing opposition bloc that some polls suggest could oust the right-wing coalition in elections expected by June.

In response, the Danish government plans to create what one minister dubbed a "more aggressive financial regulator", doubling the officials fighting money laundering to 24, allowing it to fine banks for breaches or insert an observer on a board.

"In the case of Danske Bank, we've seen how authorities send letters back and forth for seven or eight years before it was stopped," Danish business minister Rasmus Jarlov said, announcing the shift towards U.S.-style controls.

Sweden may follow suit, with prime minister Stefan Lofven last week saying he could "strengthen legislation" following criticism that regulators have been too lax.

Last year the management of Sweden's financial watchdog went against its own experts' recommendations that it should sanction several of the major bank for insufficient money-laundering controls, opting instead to send warning letters.

The FSA also had to tighten rules requiring banks to set aside more funds for home loan losses after the central bank said it was being too generous.

And Joacim Olsson, head of the Swedish Shareholders' Association has criticised it for being tough on smaller banks but softer on large ones.

"We in Sweden as a whole, and other regulators, have done too little. That is the conclusion from Danske Bank," Swedish FSA head Erik Thedeen told reporters last month.

Louise Brown of Transparency International said Sweden needed to reform, adding: "We need to upgrade both regulatory execution and corporate governance".

REGULATORY RELATIONS

The Danske Bank and Swedbank scandals have also raised questions about often close relationships between regulators and the banks the oversee.

Former Danish FSA chairman Henrik Ramlau-Hansen, who had served as finance chief at Danske Bank for five years before joining the FSA in 2016, stepped down in May last year.

Denmark now prohibits the chairman and deputy chairman to have worked at financial institutions for five years prior.

Sweden's FSA boss Thedeen had in previous roles worked with Swedbank's board member Peter Norman, although there is no suggestion of wrongdoing by either.

The FSA has said that Thedeen earlier recused himself from the Swedbank investigation due to the conflict of interest, and that money laundering supervision, including the probe, were being handled by his deputy.

For some, such closeness is inevitable. "Sweden is quite a small country," said Torbjorn Hallo, an economist at the Swedish Trade Union Confederation. "Most people know each other."

And some investors say it is time for change.

"We have had some concerns about the Nordic model ... for some time. Often boards lack industry experience, and are instead pulled from a local pool," the head of corporate governance at one London fund manager said, adding that the management often goes unchallenged as a result. ($1 = 0.8892 euros) (Additional reporting by Teis Jensen in Copenhagen and Simon Jessop in London; Writing by John O'Donnell; Editing by Alexander Smith)