The Egmont Group of Financial Intelligence Units (FIUs) has since 1995 coordinated the anti-money laundering (AML) efforts of countries worldwide. Another Egmont Group, a Danish media company, has since 1948 published Kalle Anka & Co., a bestselling Swedish magazine of Disney character comics starring Donald Duck (“Kalle Anka” in Swedish). So perhaps it was pre-destined that the eponymous and largest banks of Denmark and Sweden, Danske Bank and Swedbank, would become central to an international money laundering scandal that has made the international AML regime appear comically inept.
The ongoing investigations of Danske Bank and Swedbank have shocked public opinion in their home countries and have spread to banks in other countries, including the United States. Significant problems with global AML efforts remain despite a quarter of a century of ostensibly concerted action by organizations responsible for supervising AML compliance by banks and investigating money laundering.
It’s a High-Risk AML World After All
The billions of dollars of suspicious transactions that allegedly moved through Danske Bank and Swedbank had their origins in the widely known and massive outflows of funds from Russia and other former Soviet states after 1991.
The flight of capital and proceeds of corruption has utilized the paths of least resistance to Europe, the United States, and other safe jurisdictions around the world, and certain countries have become regarded as havens for laundering these flows of money. The Baltic States have been among them, with Latvia especially scrutinized for more than two decades since the 1990s. Entering these small markets to serve as an intermediary between the large sources of funds in the former Soviet states and the large financial centers and property markets of Western Europe and the United States presents a temptingly lucrative line of business for a financial institution willing to accept AML risks.
Danske Bank and Swedbank took on those risks during the 2000s. Swedbank entered Estonia, Latvia, and Lithuania by acquiring Estonia-based Hansabank in 2005 and rebranding its Baltic State branches in 2008. Danske Bank opened branches in Estonia, Latvia, and Lithuania by acquiring Sampo Bank of Finland in 2006 and reorganizing the Baltic State subsidiaries as its own branches.
Regional expansion around the Baltic Sea opened new markets to each bank, including providing lending and other banking services to the populations of Estonia, Latvia, and Lithuania, which totaled 7 million in 2005 compared to the populations of Denmark and Sweden of 5.4 million and 9 million respectively. However, moving funds from Russia and other former Soviet states for non-residents of the Baltic States presented an opportunity difficult to resist.
The risks of violating domestic and international AML standards in the Baltic States became publicly apparent starting in 2017. In the cases of both banks, investigative reporters with a domestic media outlet— not national or international regulatory or law enforcement authorities—uncovered evidence of money laundering.
On September 4, 2017, the Danish newspaper Berlingske and the Organized Crime and Corruption Reporting Project (OCCRP) revealed $2.9 billion of suspicious transactions by the “Azerbaijani Laundromat” through Danske Bank, after the OCCRP reported use of Danske Bank by the far larger “Russian Laundromat” in March 2017. Denmark, regarded as the least corrupt country in the world by Transparency International, responded immediately. Danske Bank announced an internal investigation on September 5, and Danish government authorities began investigations as well.
In Danske Bank’s own words on its explanatory webpage, its internal investigation found “reprehensible conditions” at the bank’s branch in Estonia and its Copenhagen headquarters. The official independent investigator report, released on September 19, 2018, found that the Estonian branch had maintained a portfolio of thousands of non-resident customers from Russia and other former Soviet states from 2007 to 2015. Inherited from Sampo Bank, the portfolio had grown from 27% of the branch’s total deposits in 2007 to 44 percent in 2013.
Danske Bank had failed to understand AML risks and procedures at its Estonian branch until a whistleblower came forward in late 2013, and even then it undertook insufficient corrective actions until Estonia’s Financial Supervision and Resolution Authority (FSA) issued a highly critical inspection report in December 2014. Closing the portfolio was not completed until the second half of 2015.
Danske Bank disclosed that the worst case for the scale of money laundering transactions through these non-resident accounts was around $230 billion, a large number that shocked media and the public but is unlikely to consist entirely of illicit transactions. The internal investigation found that 9.5 million payments totaling €200 billion, or approximately $230 billion, had flowed through the non-resident accounts and probably should be viewed as suspicious. Media reports widely misinterpreted the $230 billion figure as representing entirely money laundering rather than a combination of legal and illicit transactions.
Swedbank initially denied similar exposure to money laundering in the Baltic States. Swedbank CEO Birgitte Bonnesen, who had run Swedbank’s Baltic banking operations in 2011–14 before being named CEO in 2016, declared that Swedbank had a domestic customer base and normal retail banking operations in the Baltic States instead of accounts for non-residents. On February 20, 2019, SVT (Swedish public television) began broadcasting an investigative reporting series (Part 1, Part 2) finding that those assertions were false.
Swedish and Estonian authorities announced an investigation on February 21, and Swedbank fired its CEO on March 28. Insider trading allegations also entered the mix, as Swedish police raided Swedbank headquarters on March 27 to investigate whether the bank had given its largest shareholders advance notice of the SVT report.
Swedbank’s AML failures are still under investigation, but the SVT report and other early releases of information indicate that the bank enabled billions of dollars of money laundering and may have allowed funds from some of the most significant financial crimes of the post-Soviet era to move through it.
Based on a single leak of Swedbank data in Latvia, SVT found more than $4 billion of suspicious transactions through shell company accounts at Swedbank, including $26 million connected to the death of Sergei Magnitsky. A Swedbank internal report from 2018, made public in mid-March 2019, found more than $10 billion in suspicious transactions, and media reports have alleged that the total could be over $100 billion.
Moreover, SVT found evidence indicating that former President of Ukraine Viktor Yanukovych, prior to being ousted in the 2014 Euromaidan Revolution, had used Swedbank’s branch in Lithuania to launder money looted from Ukraine, and that he used Swedbank to send payments to Paul Manafort, the 2016 campaign manager for Donald Trump.
101 Financial Watchdogs
The surprise of finding money laundering in leading banks of Scandinavian countries, universally considered to be the world’s least corrupt, raises questions about the effectiveness of the relevant anti-money laundering authorities—“financial watchdogs,” as news reports invariably call them.
The main financial watchdogs of a country’s banks are its financial regulator(s) and its FIU, the national center for gathering and analyzing information on money laundering and the financing of terrorism, such as the U.S. Financial Crimes Enforcement Network (FinCEN). The Egmont Group is an international body for the exchange of expertise and financial intelligence between FIUs, whose members numbered 101 at the time when money laundering through Danske Bank and Swedbank began in 2007. The relevant financial watchdogs in this case appear to have been more like the friendly and harmless 101 Dalmatians than crime-sniffing bloodhounds or deterrent Dobermans.
Denmark’s FIU and financial regulator, the Money Laundering Secretariat and Financial Supervisory Authority (FSA), appear to have lagged behind the country’s investigative reporters in discovering money laundering through Danske Bank. They also lagged behind Estonia and even Russia in warning the bank about risks in the Baltic States.
Estonia’s FSA had attempted to warn Danske Bank’s Estonia branch about its high-risk non-resident portfolio as early as 2007, issuing a critical inspection report in 2007, conducting a follow-up investigation in 2009, and eventually issuing the “highly critical” inspection report in December 2014 that helped to persuade Danske Bank to close the non-resident portfolio in 2015. Russia’s Central Bank sent warnings to Danske Bank—through the Danish FSA—about tax and customs evasion and other criminal activity and money laundering in 2007.
The Danish FSA did respond rapidly after Berlingske’s exposure of money laundering through Danske Bank in September 2017; it eventually charged Danske Bank with violation of the Danish Anti-Money Laundering Act on November 28, 2018, and issued a report on its supervision of Danske Bank in January 2019.
Sweden’s Finanspolisen and Finansinspektionen similarly lagged behind Swedish public television, and Swedish media and public opinion have criticized the financial watchdogs along with Swedbank. The Director General of Finansinspektionen publicly supported the Swedbank CEO’s statement that Swedish banks did not have non-resident accounts in their Baltic branches in a television interview on September 19, 2018 (see Part 1 at 15:00). The apparent lack of scrutiny has resulted in criticism in Sweden of personal connections between the Director General and large shareholders of Swedbank, and of how relationships between the regulators and their regulated institutions may have influenced bank supervision.
Denmark and Sweden were weak links in the chain of national AML regimes that allowed large volumes of suspicious transactions to flow through their banks to banks in other countries. As a result, European and U.S. authorities are now scrutinizing Danske Bank, Swedbank, and transactions involving them, including at Deutsche Bank, which was involved as both a clearing bank and receiving bank for transactions by Danske Bank.
William Browder, the former American investor in Russia whose Hermitage Capital employed Sergei Magnitsky and who campaigned for the U.S. Magnitsky Act after Magnitsky’s death, has filed lawsuits against Danske Bank, Swedbank, and other banks or called for criminal investigations of them in multiple countries in Europe. These many legal actions may dog Danske Bank, Swedbank, and the other banks for years to come.
Donald Duck and His Friends Wish You Many Corrective Actions
The allegations of massive money laundering through Danske Bank and Swedbank have rocked Denmark and Sweden, and the political impact is likely to lead to significant corrective actions in both countries. An indication of the depth of the crisis is that Swedbank has been considering former Swedish Prime Minister (1996–2006) and Finance Minister (1994–96) Goran Persson as its next chairman of the board to lend credibility to the remediation efforts of the new CEO and senior managers whom it is also in the process of selecting. Regulatory authorities and legislators in Scandinavian countries and the European Union are considering measures to prevent similar AML failures in the future.
Failures to address these issues could lead to political consequences ranging from a resurgence of Swedish votes for the Donald Duck Party (Kalle Anka Partiet), a traditional protest write-in vote in Sweden (where Disney’s 1958 Donald Duck and His Friends Wish You a Merry Christmas is a national institution that has aired every Christmas Eve since 1959) to protest votes for anti-establishment candidates reminiscent of another Donald.
Denmark and Sweden are not alone in now facing the consequences of years of inattention toward money laundering from Russia. Related problems involving the United States will be the subjects of Parts II through IV of this series.